Flavor of the Month: Don't take Chocolate for Granted

Facing the fallout of political anxiety and doubled wholesale prices confectioners and chocolate manufacturers are learning how sweet it isn't.

By Diane Toops, News & Trends Editor

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No one is taking the cacao or cocoa plant for granted these days. Chocoholics and chocolate manufacturers everywhere are anxious about the political turmoil in the Ivory Coast, the West African nation that produces nearly 40 percent of the world's raw cocoa, valued at about $3.8 billion.

Cocoa prices should come down by another $100, but not more, as there is a logistics nightmare waiting for the supply chain on the ground -- banking, storage, trucking, workers, cash. No one will return until the guns are silenced.

– Luis Rangel, ICAP Futures

Alassane Quattara, the winner of the Ivory Coast's November presidential election, suspended all cocoa and coffee exports for 30 days to cut off funds to incumbent President Laurent Gbago, who refused to leave office after a run-off election and who threatened to take over the purchase and export of cocoa.

While 68 companies are licensed to export cocoa from the Ivory Coast this season, the market is dominated by major international firms, such as Cargill, Archer Daniels Midland and Barry Callebaut AG. Among them, they bought 630,371 tons of cocoa during the 2009-10 season, more than half of the tonnage registered.

Cargill Inc.'s Ivory Coast unit honored the ban and suspended purchases. ADM told Dow Jones it was evaluating the situation, as did Barry Callebaut, adding it had sufficient cocoa stocks to cover its processing needs.

Even before the ban, the wholesale price of cocoa doubled in the previous four years as global demand increased, particularly in Asia. Uncertainty of supplies -- and British commodity trader Anthony Ward's attempt at cornering the cocoa market last year -- led to cocoa powder prices holding at historical highs in 2010, and it appears volatility will continue to put pressure on prices.

Cocoa bean futures prices shot to one-year highs on news of the ban, then eased slightly when most processors said they had adequate supplies to carry them through the 30-day ban. But then they rose higher, particularly in Europe, which sources most of its cocoa beans and products from the Ivory Coast. Many U.S. suppliers source beans from Indonesia and Ghana (which has a plentiful crop), but the cash market came to a near standstill on the uncertainty of future availability, and futures cocoa powder prices advanced in December, according to U.S. Commodity Futures Trading Commission data.

When Gbagbo threatened to take over the country's signature crop, futures rose as much as 35 percent. French ground forces and troops loyal to Ouattara intervened, and in April, Gbagbo was captured and taken into custody. Cocoa bean futures rose to $3,078.47 on April 12 at ICE Futures U.S. in New York.

"Cocoa prices should come down by another $100, but not more, as there is a logistics nightmare waiting for the supply chain on the ground -- banking, storage, trucking, workers, cash," Luis Rangel, a vice president at ICAP Futures LLC in Jersey City, N.J., told Bloomberg. "No one will return until the guns are silenced."

There were expectations that the lifting of EU sanctions would allow for the resumption of trade, but traders suggest that it could be weeks before shipments normalize; plus it appears there are concerns of product degradation given the disruption.

Mars Inc. said cocoa exports would not affect production in the near term, good news for candy consumers. The outlook comes as Hershey expects "meaningfully higher" costs, but the company says it can hold adjusted margins steady through cost cuts and other measures to improve productivity.

Nestle CEO Paul Bulcke said the Swiss food giant would raise chocolate prices only if it found that the underlying long trend in cocoa prices had risen and its actions to contain that were not enough to "keep the substance of its business… It's not a one-to-one reaction. The market won't absorb that," Bulcke told Barron's at the sidelines of the World Economic Forum in Davos, where he was a co-chair this year. "Our job is to react to underlying trends, not hiccoughs." And he added that this went for all commodities used in its food production.

Hershey, meanwhile, faces tough competition from larger rivals Mars Inc. and Kraft Foods Inc., which bought Cadbury about a year ago. The majority of Hershey's sales are in the U.S., where growth has been slow, so one of its challenges is to grow international sales.

"As cocoa prices fluctuate, manufacturers are challenged to find new, creative ways to meet the demand for their cocoa and chocolate products," says Neil Widlak, director of product services and development at ADM Cocoa, Milwaukee. He also notes customer interest in additions to chocolate or compound coatings that improve the nutritional profile of the product or provide a health benefit, for instance ADM's Fibersol-2, which can be added to coatings to help deliver a good source of fiber to finished products. "Additionally, we have seen growing interest in chocolate and coatings with no added sugar or no added salt to meet consumer demand for healthier food choices," he adds.

Packaged Facts forecasts the U.S. chocolate market will increase an average 3 percent annually through 2015, when sales will top $19 billion, up 10.4 percent from $17.3 billion in 2009. Since the U.S. chocolate market is a mature, differentiated and exacting market, distinguishing their products is a challenge to marketers of chocolate products.

Chocolate marketers today are drawing inspiration from other segments of the food & beverage industry in an effort to boost sales -- chocolates that feature super fruits, functional ingredients, savory touches and ethnic flavors. And chocolate product trends that worked in the past -- single-source cocoa, high cocoa content, for example - may not be effective techniques for driving sales in the future.  

"For many chocolate-loving Americans it's more about the experience than it is about mere consumption," says Don Montuori, publisher of Packaged Facts. "To meet this demand, premium chocolatiers are setting off on culinary adventures, discovering new layers of flavor and textures by experimenting with umami flavors or developing products to match consumers' moods.

"This may be a mature market, but it's also one that isn't afraid to innovate, whether that means using savory influences such as bacon and cheese or ethnic flavors such as curry and chipotle," he continues. "This bold creativity effectively provides chocolate products that satisfy diverse consumer palates at reasonable prices."

"While traditionally considered an ingredient for sweets, chocolate can be found in a variety of culinary applications," says Courtney LeDrew, marketing manager for Cargill Cocoa and Chocolate, Lititz, Pa.

"Chocolate is, and always has been, a top flavor in bakery. Consumers are purchasing chocolaty, indulgent, comforting baked goods such as whoopie pies, chocolate chip cookies and brownies.  The flavors bring back warm childhood memories and satisfy that sweet tooth."  

LeDrew also notes the increase in chocolate and savory combinations. "This can range from cocoa nib-encrusted scallops seared in cocoa butter to chocolate raspberry vinaigrette on a green salad," she explains. "Savory chocolate bars and confections are more common: Not only can you find a bacon chocolate bar in your local candy shop, you might also see a chocolate porcini mushroom truffle or a basil thyme confection."

Cargill, which carries a full line of chocolate and cocoa ingredients under multiple brands, can assist manufacturers in developing products to meet this need. "We recently launched a new product in our Peter's Chocolate product line: 62 percent cocoa solid gourmet chocolate chips," she says. "They are bittersweet chips with a smooth, rounded flavor and intense chocolate impact that's perfect for a rich ganache or high quality baked goods."

Asked what food categories he expects to be opportune for cocoa and chocolate products this year, Hans Vriens, chief innovation officer for Barry Callebaut chose two. "The bakery and ice cream segments will be in the limelight this year. Manufacturers in the two different segments will have to find unique ways to differentiate themselves by focusing on creating indulgent product offerings with unique flavor profiles."

Vriens says Barry Callebaut has developed several products to help food manufacturers provide a distinctive taste and look for baked goods and ice cream products. "Callebaut Crispearls are tiny, pearl-shaped toasted biscuit kernels (measuring 2-3ml in diameter) that have been enrobed in the finest Callebaut white or dark couverture," he explains. "They add a surprising crunch to any recipe. In fact, Crispearls can be used to add texture and a refined look to finished desserts, or they can be mixed into creamy and frozen components such as ice cream, crème brûlée, or mousse, while remaining crunchy."

Another option is Callebaut Decorations. "It's our line of high-quality, ready-made chocolate decorations that are ideal for pastry chefs and chocolatiers, as well as food manufacturers looking to add a finishing touch to products in the post-production stage," adds Vriens. "The product line of specialty decorations includes chocolate shavings, blossoms, cups, truffle shells, pencils and other original shapes made from 100 percent real Callebaut dark, milk and white chocolate."

Sustainability and fair trade also are keen issues in cocoa. With that in mind, Barry Callebaut in January launched Terra Cacao, "a direct result of Barry Callebaut's commitment to fostering sustainability in the cocoa industry by forging close ties with West African local farming organizations," says Sofie De Lathouwer, marketing director for food manufacturers-Western Europe at Barry Callebaut. "The specialized cultivation of cocoa beans and fermentation process used to manufacture Terra Cacao, which is exclusive to Barry Callebaut, results in a chocolate range offering the finest texture, aroma and purity in taste that will allow food manufacturers to enhance the quality and flavor profile of their products."

And on the beverage front, Wixon Inc., St. Francis, Wis., puts a new spin on salty rimmers. Chocolate Chili Drink Rimmer salt has it all -- a little heat to balance out the sweet and saltiness of this chili and chocolate combination. They add a fashionable embellishment to a cold drink and an unexpected but tasty twist to beer -- perfect for brown ales or pale ales.

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