NEW YORK This past summer, European authorities took just six weeks to approve Barry Callebaut's $950 million purchase of Petra Foods' PEFO.SI cocoa business, a deal that created the world's largest cocoa company with a quarter of the $10 billion market.
The European Commission decided the deal did not require deeper look partly because two other firms provided stiff enough competition in the niche industry.
Now, those two rivals, Cargill Inc CARG.UL and Archer Daniels Midland Co (ADM.N), are hammering out the final terms of a deal in which Cargill would buy ADM's cocoa operations, sources said.
The move threatens to concentrate at least half of the global 4-million tonne market in the hands of Callebaut and Cargill.
Acquiring ADM's cocoa operations, which span Abidjan in Ivory Coast to Singapore, would put Cargill roughly on par in size with the newly expanded Callebaut.
That has dealers, grinders and confectioners worrying the combination of Cargill and ADM's cocoa operations may exert too much influence over the prices it pays for beans and how much it charges for its products.
It would be a "formidable prospect" for independent grinders and merchants, said Jeff Rasinski, corporate director of procurement for Blommer Chocolate Co, the biggest grinder in North America, in an email to Reuters.
Another wave of consolidation may raise antitrust flags too. While Callebaut's merger sailed through the European Commission, Cargill is unlikely to be so fortunate, legal experts say.
Regulators are likely to take a deep look at the firms' bean processing operations in Europe, by far the biggest region for grinding beans to make butter and powder that go into chocolate bars and cookies.
"I would think that there's a reasonable prospect that whichever agency takes it would give it a second request and give it a serious look," Robert Skitol, a senior antitrust partner in Drinker Biddle & Reath LLP said.
Scrutiny would likely center on the Netherlands and Germany, where almost a quarter of global grinding output takes place and the combined company would have nine production facilities, market participants say.
In contrast, Callebaut's Petra Food deal gave it a share of the Asian market, where there is still ample room to grow.
Unlike the farming sector that is still fragmented with many small holder growers operating in Asia, Africa and South America, grinding is already dominated by about ten players.
Removing one of the biggest players could force Cargill to sell some assets to placate regulators, market participants said.
Olam International Ltd (OLAM.SI), Cemoi Chocolatier and Ecom Agroindustrial Corp Ltd would be Cargill's nearest rival in terms of bean grinding, but they only account for a fraction of grinding volume, data shows.
The deal would also increase the gap between other big dealers such as Noble Group (NOBG.SI).
"Big is not necessarily better and could lead to more aggressive pricing strategy and approach to the market," Blommers' Rasinski said.
The deal is significant by any measure: in ADM, Cargill will nearly double the estimated volume of beans it handles a year to about one million tonnes, enlarge its grinding footprint in Europe and the United States and nab a second plant in Asia, the fastest-growing region measured by demand.
Confectioners like Hershey Co (HSY.N) and Mars may be big enough players in their own right to protect themselves from any undue influence over prices, but small- and medium-sized buyers may struggle to maintain market share.
"Less competition means they can dictate prices to suppliers and customers alike," said one cocoa buyer.
"They can turn on or switch off capacity to influence prices without worrying about the competition."
The deal comes as the highly volatile market is in the throes of its biggest turnaround in over a year. Bean prices on ICE Futures U.S. hit 13-month highs on Wednesday at $2,733 per tonne on concerns about a shortage in the 2013/14 season.
Confectioners in Asia and the United States are already paying the highest prices in five and eight years respectively for butter as they pick up the pace of buying after drawing down stocks.
GRAINS VS COCOA
For ADM, the departure from cocoa would cement a shift towards the grains sector as it finalizes its $3 billion takeover of GrainCorp (GNC.AX), the largest bulk grain handler on Australia's east coast.
After investing heavily in recent years, Cargill appears to be betting on rising long-term demand as consumers in emerging markets develop a taste for chocolate.
A growing appetite for chocolate in Asia and Latin America is expected to spur an annual 2 percent rise in global retail volume demand until 2017, according to a report by Euromonitor International Ingredients published in July.
Some dealers have questioned why Cargill wants to expand in the highly cyclical industry, but small dealers and processors see even greater competition.
"When there is excess capacity, the goal of every dominant firm is to drive firms with fewer financial resources and less diversification out of its industry," said Steven Haws, analyst at Commodities Risk Analysis based in Bethlehem, Pennsylvania.
(Additional reporting by Diane Bartz in Washington; Editing by Josephine Mason)