Olam's $1.3B deal to buy rival Archer Daniels Midland's cocoa processing business may reduce liquidity in the cocoa bean trade, raising concerns about volatile prices and a potential shake-up of customer relationships.
Olam buys around 500K tonnes of cocoa annually, and it said it will increase its processing capacity to more than 700K tonnes, or 16% of world supply, with this deal.
This could force users supplied by Olam to look elsewhere for many of their beans, putting a strain on prices.
With the growing demand of chocolate across Asia, and new processing facilities in India and China, cocoa prices have shot through the roof. In the last five years, demand for the beans rose in Asia by 29%, although European demand fell by 1% for the same period.
ICE September cocoa rose 3.2% to $3,128 a tonne yesterday, its highest level since 2011. The price on cocoa beans has soared by over 40% over the past year, with cocoa butter rising more than 70%.
El Niño has a reputation for triggering sharp run-ups for prices in markets as diverse as nickel, coffee and soybeans, and commodities investors, traders and analysts are bracing for impact at a time when global supplies of many raw materials already are stretched.
Global food prices - which at the start of 2014 were expected to be largely flat this year - could easily climb 15% to record highs in as a little as three months after an El Niño occurs, says World Bank economist James Baffes.
But Société Générale analysts say it is miners, not farmers, who have the most to worry about; since 1991, nickel prices rose the most (13.9%) during El Niño years among commodities the bank tracks.