A take on chocolates

Known as the ‘Food of the Gods’ in the age of the Aztecs, cocoa remains a prized commodity for its health benefits and its role as the core ingredient of every chocophile’s fixation: chocolate.

This savoury commodity has also been known throughout history for its association with pleasure, passion and energy. What’s even more interesting is recently, scientific theories have popped up on the correlation between chocolate consumption and winning the Nobel Prize.

In a paper published in the New England Journal of Medicine, the dietary flavonoids commonly found in plant-based foods have been scientifically proven to improve cognitive function.

“Specifically, a reduction in the risk of dementia, enhanced performance on some cognitive tests, and improved cognitive function in elderly patients with mild impairment have been associated with a regular intake of flavonoids which are highly present in chocolates,” the paper reported.

Biscuit Cake Chocolate and Confectionery Association (BCCCA), in a cocoa health fact pamphlet distributed by the International Cocoa Organisation (ICCO), also said cocoa beans, like other plant-based products, contain many naturally occurring compounds which exhibit biological activity and these have been the subject of numerous scientific studies.

Previous studies have shown that flavonoid-rich foods might offer cardiovascular benefits. Nevertheless, the paper published in the New England Journal of Medicine notes that it remains to be determined whether the consumption of chocolate is the underlying reason for improved cognitive function.

BCCCA further reported that chocolate consumption can be truly beneficial to human health as the greater the proportion of cocoa solids, the greater the benefits seem to be.

“The evidence backing the health benefits of chocolate continues to become stronger as researchers learn to understand better the positive health and nutritional attributes of cocoa and chocolate,” it added.

Whatever the benefits this commodity might offer, these theories have completely changed the perceived health benefits of the consumption of cocoa and chocolate.

In Malaysia, according to the ICCO, cocoa is the third commodity of economic importance in the country, contributing to more than RM3 billion in earnings.

In its Cocoa Market Situation report, ICCO observed that based on statistics by the Cocoa Association of Asia (CAA), grindings grew by 5.2 per cent in the three largest cocoa processing countries in the region (Indonesia, Malaysia, and Singapore) in the second quarter of 2014. This confirms reports that demand for chocolate has been strengthening in emerging markets, it viewed.

The association further highlighted that the upward trend in consumption in Asia has been the main contributor to the demand for cocoa beans, with cocoa and chocolate companies expanding processing capacity in the Asia Pacific area.

 

Rise of the Asian chocoholics

Olam Interntainal Ltd was quoted as saying, Asia, home to more than half the world’s population, could be the next consumption “powerhouse” for cocoa and chocolate. Hardman & Co’s research arm Hardman Research Ltd (Hardman Research) in a report, highlighted that chocolate confectionery sales are booming in the big emerging economies such as China and India.

Demand from these new markets is driving global sales growth for the category by some six per cent.

 

 

“The European region (East and West) accounts for as much as 50 per cent of global chocolate confectionery sales, with the Americas representing almost 30 per cent, led by North America at 18 per cent, but with double digit growth in Central and South America.

“Euromonitor International reports that Brazil is expected to register a compounded annual growth rate (CAGR) in chocolate consumption of seven per cent (in constant value terms) between 2013 and 2018.

“Asia and Oceania account for another 15 per cent of global sales, but these regions are recording very fast growth lead by China and India,” it said.

Euromonitor was quoted as saying that the consumption of chocolate confectionery in the Asia-Pacific region averaged 200 grammes per person last year, which was less than the Middle East and Africa and demand expanded 4.5 per cent, the fastest rate in the world and almost six times the global increase of 0.8 per cent.

According to Euromonitor, Asia-Pacific’s chocolate confectionery market is expected to US$16.3 billion by 2018.

 

The challenge to cultivate cocoa

With great demand, comes the need for supply. “The Asia market is growing very fast as people are very fond of chocolates,” said Philippe Daue, a fourth-generation Belgian chef at Godiva’s Beijing-based Pacific Rim chef chocolatier in a Bloomberg report.

“The availability of cocoa beans to meet the growing demand for chocolate will become all chocolatiers’ biggest challenge worldwide,” he added.

For the cocoa commodity, the process of bean to product is more complicated compared to producing commodities for other agriculture based industries.

According to World Cocoa Foundation, the cultivation of cocoa is a delicate process as the trees are susceptible to changing weather patterns, diseases, and insects. Furthermore, a majority of cocoa comes from small, family-run farms and have limited organisational leverage.

In Malaysia, for example, based on MCB’s statistics, a majority of cocoa cultivated areas are owned by small-holding companies. Last year, out of 16,145 hectares of cocoa, a whopping 95 per cent or 15,318 hectares are owned by small-holders.

The lack of funds and industrial practices to mass produce has made it a challenging to meet the growing demands worldwide; hence, the current problem in the global cocoa market: a supply deficit.

This supply deficit has also led to the current spike in cocoa prices which has significantly affected the global chocolate and cocoa-based product industry.

In a PwC research with natural resource tracking company GeoTraceability, John Hawksworth, chief economist at PwC said: “Cocoa prices are highly volatile; they often spike upwards significantly due to supply disruptions from weather, disease and politics in the tropical countries where production is concentrated.”

Take for example, last year, cocoa processing dropped in Asia as high cocoa prices, driven by supply deficit, curbed demand. Bloomberg had reported that in the fourth quarter of last year, cocoa processing in Asia dropped in the fourth quarter driven by slowing global growth and a surge in prices.

“Cocoa prices could strengthen over the next few years as continued growth in demand for chocolate and other cocoa products from the US, Latin America, Europe and Asia again causes supply constraints in key producers like Ivory Coast and Ghana,” Hawksworth noted.

Furthermore, Bloomberg reported that Cocoa in New York jumped to the highest since March 2011 in September as the Ebola outbreak in Africa threatened the world’s top cocoa grower; Ivory Coast.

“Europe and America are pretty mature markets for chocolates,” said Jonathan Parkman, co-head of agriculture at Marex Spectron Group was reported as saying by Bloomberg. “So it’s unlikely we’re going to get any massive growth in those areas, but the emerging markets, particularly Asia, hold the key to increasing demand over the next 10 years.”

According to Euromonitor, while demand for chocolate in Asia was ranked the world’s lowest per capita in 2013, the market will grow at almost twice the global rate over the next few years.

Euromonitor data also showed that the market size for chocolate confectionery in the Asia Pacific region might expand 4.5 per cent in 2015 which is more than the global increase of 2.6 per.

Looking at the bright side, as chocolate prices rise in tandem with cocoa prices, demand have now slowed down slightly for chocolates. Bloomberg reported last month that the slowing global economies have caused consumers to be more wary about their spending, and hence, the slowing demand for things or food/beverage for pleasure such as chocolate.

It explained that cocoa for March delivery declined by 1.1 per cent to US$2,686 per metric tonne on January 29 on ICE Futures US in New York and this price is down 20 per cent from its US$3,371 settlement on September 24, meeting the common definition of a bear market.

It noted, Asian consumers have led the global demand growth for cocoa which led to the surge in cocoa futures prices by 38 per cent for the past three years, eroding inventories.

Nevertheless, industry experts cautioned that 2015 could challenging year for the cocoa industry as global volatility have yet to subside and cocoa prices remain high.

Made in Malaysia cocoa products

In Asia, Malaysia has been identified by industry experts as one of the few countries in the region that has the potential to be a large cocoa producer and exporter of cocoa downstream products.

While not as famed for its cocoa products and chocolate treats as its European counterparts, Malaysia’s cocoa-based product manufacturers have set the standards of their cocoa products to be of global standard.

Minister of Plantations and Commodities Datuk Amar Douglas Uggah Embas said in his speech during the launch of Malaysia Cocoa and Chocolate Day 2014, Malaysia’s cocoa processing industry is now one of the largest cocoa grinding countries in Asia Pacific and the fifth largest in the world, after Netherlands, Cote d’Ivoire, US and Germany.

Some of Malaysia’s cocoa products such as cocoa powder, cocoa paste, cocoa-based confectioneries and others have been reported to be exported to more than 100 countries, which includes US, the European Union, China and countries in Asia.

 

Guan Chong

For Bursa Malaysia-listed cocoa grinding company Guan Chong Bhd (Guan Chong), not spared from the recent increase in cocoa prices and growing scarcity of global cocoa beans, the group had acknowledged that of late, the cocoa market has generally turned more challenging.

Of note, Guan Chong, which markets its cocoa products under the brand name ‘Favorich’, is one of Malaysia’s largest cocoa grinder.

According to the group’s website, Guan Chong has facilities worldwide including in countries such as Indonesia and US. It also said its clients also comprises of famous chocolate manufacturers.

Other than the grinding process, Guan Chong is also involved in other cocoa related industries such as the blending and mixing businesses which include the production of sugar cocoa preparation and via its subsidiaries, the group is involved in producing chocolates and chocolate beverages.

In its Annual Report 2013, Guan Chong chairman Datuk Dr Mohamad Musa Md Jamil said overall, the global cocoa industry faced a rather competitive and turbulent year in 2013 as there is prevailing uncertainties in the global cocoa solids market, whereby cocoa powder dampened demand which resulted in excess supply and declining of average selling prices (ASP).

“While the industry faced headwinds for cocoa powder, cocoa butter continued to edge up in terms of ASP and demand, as economies of the developed countries gradually recovered. In spite of cocoa butter sustaining its performance during volatile times in the financial year 2013, higher demand for this cocoa butter could not alleviate the negative impact on many cocoa grinders.

“The divergent trends in terms of ASP and demand for cocoa powder and cocoa butter have placed much stress on cocoa processors globally,” he added.

Mohamad Musa also noted that Guan Chong’s weak group topline was impacted by lower sales of cocoa solids – cocoa powder and cocoa cake; the revenue increase for cocoa butter however could not mitigate the decline in revenue contribution from cocoa solids.

“The weak demand coupled with the dip in ASP for cocoa solids resulted in the group’s hampered performance in FY13. This was compounded by the weakening ringgit and a write-down of inventory amounting to RM43.6 million during the year under review.”

Nevertheless, he said, the group foresee the progressive recovery in the cocoa industry and hence, he noted that Guan Chong will strive to implement key strategies to hasten the group’s turnaround.

Meanwhile, early last year, to meet the global demand for chocolates or processed cocoa products, Guan Chong had invested RM55 million in capital expenditure (capex) for its new industrial chocolate factory in Port of Tanjung Pelepas to meet the growing international demand.

“Worldwide, there is a growing appetite for chocolate consumption, propelled by increasing affluence in emerging markets and more sophisticated consumer tastes. Furthermore, consumers have heightened awareness of the benefits of eating chocolate.

“We believe that this venture opens up new opportunities for us in the local and international fronts, as we would leverage on our existing strong relationships with our clients,” said Brandon Tay Hoe Lian, managing director and chief executive officer (CEO) of Guan Chong.

Guan Chong in a statement said, in a recent report, Euromonitor International indicated a growing appetite for chocolate, with global sales expected to gain by two per cent annually for the next two years.

“Of this, emerging markets present the highest growth potential, with chocolate demand in China alone expected to grow 11 per cent per year to 2018, in view of increased affluence and more sophisticated consumer tastes.

“Chocolate consumption in Brazil is expected to grow 13 per cent and India 22 per cent in the same timeframe. By 2020, Asian is set to become the world’s largest chocolate-consuming region,” it added.

Cocoaland

Another confectionery and chocolate company, listed under the Main Market, Cocoaland Holdings Bhd (Cocoaland), has been making headways in the market with its wider variety of products.

Its wide product range has made it less susceptible to the volatility in the cocoa market. Its products include the very successful gummy candies, chocolate, candy, snacks, wafers, soft drinks, jelly, and many more. These products include brands under Lot100, Cocopie, Koko Jelly, Mum’s bake and others.

According to AmResearch Sdn Bhd (AmResearch) analyst Tan Ee Zhio, in the financial year 2013 (FY13), the group’s fruit gummy became its key revenue driver, followed by beverage (32 per cent), chocolate (22 per cent), snacks (six per cent) and hard candy (five per cent).

In the third quarter of FY14 (4QFY14), AmResearch noted that Cocoaland recorded higher revenue year-on-year mainly due to stronger demand of gummy for both local and export markets, particularly in China, accounting for 17 per cent of the group’s first nine months of FY14 total export revenue (proprietary brands only), after Indonesia of 18 per cent.

“We expect contributions from China to continue growing underpinned by its aggressive expansion as evidence by its recent advertisement campaign on China’s MTR stations.

“The other key export market for Cocoaland is Indonesia where the group is in the midst of obtaining the required license,” the research firm said.

Hershey

Aside from that, global chocolate, confectionery and cocoa-based product manufacturers are also looking to leverage on the expected influx in demand for cocoa-based food and beverage products.

In 2013, aware on the rising demand in Asia, world renowned North American chocolate maker The Hershey Company made its foray into the region with the opening of its plant in Malaysia to cater to the growing demand for its product in its fastest-growing region.

“Consumers across Asia are discovering a range of Hershey confectionery products, and China, in particular, is growing faster than any other market,” said Terence O’Day, senior vice president and chief supply chain officer of The Hershey Company.

“We are investing heavily in the region as the middle class continues to grow and consumers increasingly want chocolate and new confectionery products,” said Peter Smit, senior vice president, Asia, Europe, Middle East and Africa, The Hershey Company.

According to a statement, The Hershey Company has invested RM816 million, or US$250 million, to build one of its largest facilities in the company’s global network across 700,000 total square feet. The plant is expected to start operations in 2015.

Late last year, The Hershey Company announced that it has officially collaborated with Malaysian biscuit brand Julie’s, owned by Perfect Food Manufacturing Malaysia Sdn Bhd (Perfect Food Manufacturing), to expand its product line into the baking category.

With this partnership, The Hershey Company and its brand, Hershey’s, and Perfect Food Manufacturing’s Julie’s launched six new cookie variants and these products are expected to be launched in phases across Asia and all Asean countries, Mongolia and Taiwan by early 2015.

Challenging industry

Like every other cocoa producing country, Malaysia faces its own challenges in producing cocoa.

While Malaysia is one of few countries in Asia which has the environment that can be said as ideal for the cultivation of cocoa fruits or cacao plants, ICCO in its country report of Malaysia, pointed out that several factors affect the cocoa production in the nation.

These include pest and disease infestation, competition with other commodities, and increasing agricultural input prices.

“Cocoa pod borer (CPB), vascular streak dieback (VSD) and black pod (BP) diseases have been the more problematic disease causing pests but they are manageable with good agricultural practices.

“Competition with other agricultural commodities is mainly for land use, while increases in costs of agricultural inputs have increased the production cost,” it explained further.

Nevertheless, Malaysia’s government is continuously looking for ways to improve the country’s cocoa productivity.

In addition, Malaysia’s government had signed an International Cocoa Agreement 2010 in 2013 in a bid to uphold its commitment towards the progress of the national cocoa industry through sustainable cocoa production and consumption.

The new agreement is expected to lead to an increase in the income of cocoa farmers as well as support cocoa producers in improving the functioning of their cocoa economies.

The new agreement is also expected to deliver cocoa of better quality, taking into account food safety standards and the social, economic and environmental dimensions of sustainability so that farmers are rewarded for producing cocoa that meets ethical and environmental standards.

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