May 2014 Giant On A Pinhead A Profile of the Cocoa Sector 29 June 14 Advisory Team Doug Hawkins [email protected] Yingheng Chen [email protected] 2 29 June 14 Table of Contents Executive Summary....................................................................................................... 5 Shaky Foundations ........................................................................................................ 8 Chocolate Confectionery – A $120bn Global Sector ...................................................... 8 A Long Term Structural Deficit in Supply ...................................................................... 10 Sustainability of Supply Is In Doubt .............................................................................. 11 Potential For Value Creation ........................................................................................ 13 Value Potential In Upstream Production ...................................................................... 14 The Global Cocoa Supply Chain ................................................................................... 17 Growers ........................................................................................................................ 18 Origination, Handling & Trading ................................................................................... 21 Origination ............................................................................................................... 22 Logistics .................................................................................................................... 23 Grinding & Processing .................................................................................................. 23 The Brand Owners ........................................................................................................ 25 Supply Chain Services Companies ................................................................................ 26 Cocoa Trading: System and Influences ........................................................................ 37 Relationship between butter and powder ................................................................... 38 Stock : Grindings Ratio .................................................................................................. 39 A Sustainable Cocoa Economy .................................................................................... 40 Certification .................................................................................................................. 45 Sustainability & Sector Structure.................................................................................. 48 Cocoa Producing Regions ............................................................................................ 50 Africa ............................................................................................................................ 50 Ivory Coast................................................................................................................ 53 Ghana ....................................................................................................................... 54 Nigeria ...................................................................................................................... 56 Cameroon ................................................................................................................. 57 Caribbean & South America ......................................................................................... 58 Ecuador .................................................................................................................... 58 Brazil ......................................................................................................................... 59 Asia & Oceania .............................................................................................................. 60 Indonesia .................................................................................................................. 60 Cocoa Processing ........................................................................................................ 61 Cocoa Bean Flavour ...................................................................................................... 61 Processing For Cocoa Commodities ............................................................................. 62 Fermentation ........................................................................................................... 62 Drying & Storing ....................................................................................................... 63 Packing & Transporting ............................................................................................ 64 Roasting .................................................................................................................... 64 Processing ................................................................................................................ 64 Definitions ................................................................................................................ 65 3 29 June 14 Cacao – The Crop ........................................................................................................ 66 Genus ............................................................................................................................ 66 Origins .......................................................................................................................... 67 Description ................................................................................................................... 67 History .......................................................................................................................... 68 Varieties ........................................................................................................................ 69 Forastero .................................................................................................................. 69 Criollo ....................................................................................................................... 69 Nacional ................................................................................................................... 70 Trinitario ................................................................................................................... 70 CCN-51 ..................................................................................................................... 70 Other New Ecuadoran Varieties ............................................................................... 71 Fine Flavour Varieties ............................................................................................... 71 Agronomy ..................................................................................................................... 71 Suitable Cultivation Conditions ................................................................................ 71 Farming Practices ..................................................................................................... 72 Disease & Pest .............................................................................................................. 72 Insect Pests ................................................................................................................... 74 Breeding ....................................................................................................................... 75 Budding or Grafting .................................................................................................. 75 Marcotting................................................................................................................ 75 Cuttings .................................................................................................................... 75 Disclaimer ................................................................................................................... 76 4 29 June 14 Executive Summary Some of the most valuable brands in commerce have secured the loyalty of their customers by exploiting a commodity first popular with the ancient cultures of Mesoamerica. Archaeological evidence from various sites across Central and South America reveals that regional cultures were using cocoa for making beverages as early as 1900 BC. Today derivatives of the cocoa bean are found in confectionery with a global sales value that is expected to be in the order of $120bn in 2014. The chocolate confectionery sector has produced brands that are instantly recognised across the globe: Nestlé, Mars, Cadbury, Ferrero, Lindt & Sprüngli and many more. Amongst the listed sector stocks, the valuation of pure chocolate play Lindt & Sprüngli at 3.8x revenues underscores the value of brands built on cocoa. Applying the average multiple of revenues for the leading listed brand owners (2.9x) to 2014 expected global chocolate confectionery sales, suggests the sector has a value of some $350bn. Surprisingly, all this rests on the production annually of some 4m metric tonnes of cocoa beans by smallholder farms, typically of less than 5 hectares (ha) each, and mostly located in West Africa. A giant FMCG sector is balanced precariously atop a system of simple agriculture that has changed little since the 19 th century and which produces a subsistence income that leaves nothing for farm investment.