Cocoa is coming home.
United Cacoa, with aims to be the world’s biggest supplier
of cocoa, is in Peru where the tree originated – developing a plantation which
is set to deliver its first beans next year.
And the homecoming is being welcomed by investors, to judge
by the spurt in the shares on their first day of trading, above their flotation
price of 128p.
“It’s nice to see there is some interest in something we
hope will deliver value for investors, into the long-term,” Dennis Melka, the United
Cacoa chairman and chief executive, told Agrimoney.com as the shares touched
143p.
Tycoon in trees
It helps that Mr Melka, one of the few people able to call
himself a serial plantations entrepreneur, has a record of making money for shareholders,
having been the driving force behind Asian Plantations, the Malaysia-based palm
oil group.
Asian Plantations, which listed in London in 2009 with a
market value of £20m, completed its sale last month for £110m to Malaysia’s Felda
Global Ventures, having delivered investors an annual internal rate of return
of 24%.
Like United Cacao, whose flotation gave it a stockmarket value
of £23m, Asian Plantations also started with a few thousand unplanted hectares
which it grew to a 24,000-hectare holding at the time of sale, and with a palm processing
mill on top.
Big money?
However, Mr Melka believes there is more than repeat
business behind investor interest in Asian Plantations, with simple mathematics
indicating the potential for profiting from cocoa.
The business plan, in back-of-the-cigarette-packet terms, goes
as follows.
“Comparing cocoa with palm oil, for palm oil, you will get
about 6 tonnes of oil per hectare, which, at a price of about $600 a tonne at
the moment, gets you to revenues of about $3,500 per hectare,” Mr Melka said.
“For cocoa, you produce about 3 tonnes per hectare, but at
about $3,000 per tonne, meaning revenues of $9,000 per hectare.”
With costs of about $8,500 per hectare to develop plantations,
and with trees remaining at peak output for about 30 years before regrafting, the
margins indeed appear significant.
United Cacao is working on a base case of net income of $6,500
per hectare at maturity which, with the group initially targeting 3,250 hectares
of cocoa plantings, and with plantations groups typically trading at 15 times
earnings equates to a market value of, well, some $300m (£190m).
‘Extortionist export
taxes’
Why such an opportunity has opened up is in part thanks to
the focus on palm oil in many of the equatorial areas in which oil palm, cocoa
and rubber trees compete for largely the same land.
Indeed, it is testament to the fragmentation of the industry
that United Cacao can aim at being the world’s biggest supplier with a targeted
plantation area of 3,250 hectares, besides being the first stockmarket-listed, pure-play cocoa producer.
“Malaysian production is down, Indonesia is now importing
cocoa,” although this is a reflection too of a growing domestic processing
industry too.
And in Africa, where Ivory Coast and Ghana between them
produce 60% of world cocoa output, the incentive for producers to expand and
exploit higher prices is being muted by the existence of state buying
monopolies, besides what United Cacao terms “extortionist export taxes, which
confiscate 40% of revenues in the 2014 growing season”.
Mr Melka said: “Producers have to sell to the government. The
only buyer is the state,” opening up what he termed an “arbitrage” for growers
able to tap world market prices directly.
‘Porsche of cocoa’
Latin America – where Peru, where United Cacao is based, offers
zero export taxes and, where the group operates, no corporate income taxes
either – offers the natural outlet for developing cocoa plantations, he said.
Indeed, he termed Peru and neighbouring Ecuador the “Silicon
Valley of cocoa” for their research into the bean, and development of varieties
such as the CCN 51 type used by the group which is a “game changer”.
“CCN 51 is the Porsche of cocoa,” Mr Melka said, with good yield
potential, and resistance to the diseases which have plagued some South
American cocoa operations in the past.
‘No such thing as a
shortage’
And there is demand for extra cocoa production too, he said,
flagging the potential for a step change if Chinese consumers gain the same
sweet tooth as Western peers.
Chinese consumption, in cacao terms, at 0.05 kilogrammes per
year, is 2% of that in the US, and 1% of that in Belgium or Switzerland, and is
poised to make some attempt at a catch-up, rising 40% between 2013-18,
Euromonitor believes.
Not that this means that the world will run out of cocoa, as
recent headlines have warned of, prompting a warning from the International
Cocoa Organization.
“There is no such thing as a shortage,” Mr Melka said.
“What will happen is that the price will adjust to make the
market in balance.”
That would mean higher prices, of course, making United
Cacao’s business plan appear even more lucrative.