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Can Solazyme Score a Big, Chocolately Win?

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Nothing gets your taste buds going quite like algae and chocolate. Am I right or what? Alright, well you won't have to choose between the two, but one of the most important ingredients contributing to chocolately goodness across the globe will one day soon be made by the heterotrophic algae (don't worry, they aren't included in the final product) employed by industrial biotech firm Solazyme (NASDAQ: TVIA  ) . A soon-to-be-announced megafudge sundae of a deal in the cocoa business nearly guarantees it. What does it mean for the company?

Bye bye competitive cocoa market?
Global agricultural processing giant Archer Daniels Midland (NYSE: ADM  ) is currently listed as one of the largest cocoa players in the world, with manufacturing and operational capabilities on five and six continents, respectively. It sources beans from farmers across the globe; grinds them into cocoa liquor, cocoa powder, and cocoa butter; and distributes them to food manufacturers. Essentially, the company is a one-stop-shop for chocolate's raw materials.

Cocoa butter doesn't look that appetizing after all. Photo: David Monniaux / Wikimedia Commons.

That is about to change, however. ADM threw its cocoa business up for sale late last year. In the past week rumors have been swirling that a $2 billion deal with Cargill, already one of the world's largest cocoa distributors, is in the final stages. That would create one of the largest cocoa businesses in the world -- second only to Switzerland's Barry Callebaut. Industry analysts are concerned the two companies -- combining for over 50% of global capacity -- would effectively control supply and set pricing. 

That's bad news for chocolate lovers everywhere, but it could be good news for Solazyme.

The opportunity
How does all of this affect Solazyme? Doesn't the company make fuels and lubricants and other industrial chemicals? While that may be true, the disruptive nature of synthetic biology allows the company to disrupt multiple unrelated industries with the same platform. Sugar goes in, and, depending on the engineered pathway of the strain of algae utilized, high-value oil comes out.

The company has developed a novel oil profile that mimics -- perhaps even improves upon -- cocoa butter and can thus be used as a substitute in the market. So when Cargill and Barry Callebaut are growing beans, shipping them to grinding facilities, and grinding them into cocoa butter, Solazyme simply has to complete a several-week growth cycle in its industrial fermenters and deliver its product to customers. If all goes according to plan, production really could be that simple.

Source: Solazyme, Jefferies Industrials Conference Presentation

Industry consolidation isn't the only trend befriending Solazyme's future. The global demand for cocoa beans has doubled in the last 30 years. While supply has largely kept up with the market's needs, short-term constraints are keeping prices high. In fact, poor growing conditions in Africa have pushed European cocoa butter prices from roughly $3,800 per metric ton (MT) in October of last year to $7,500 per MT at the end of September, according to the International Cocoa Organization. Dismal harvests are expected for next year's growing season as well. So while I am not sure Solazyme's product gets full market prices make no mistake about it: the trend is most certainly the company's friend.  

Can Solazyme stabilize the cocoa butter market?
Fellow industrial biotech company and synthetic biology pioneer Amyris (NASDAQ: AMRS  ) has already stabilized two global markets with its disruptive platform: that for malaria drug artemisinin and the rare, high-value emollient squalane. Unfortunately, there are many differences between the two and cocoa butter. Although Amyris' technology will supply one-third of global artemisinin demand, total annual production from Sanofi's manufacturing plant will amount to just 60 metric tons. Squalane represents a much bigger opportunity, but when the next-best sourcing options are shark liver and olive farms, you can bet the market isn't too large.

Investors will still be quick to note the elephant in the room: Solazyme and ADM are collaborating on a commercial scale facility in Clinton, Iowa. Adding to the speculation is the fact that the agricultural giant is divesting its business due to shrinking margins caused by swelling cocoa processing capacity. Solazyme's technology can surely improve upon those margins. However, there doesn't seem to be a viable connection between the impending sale and budding partnership. The gap to fill is just too big to Solazyme's developing technology.

Consider that the Clinton facility will have a capacity of just 20,000 MT in mid to late-2014. There are preliminary plans in place to expand to 40,000 MT and 100,000 MT in the future, which would represent a single-digit chunk of the global market if dedicated solely to cocoa butter. But it seems unlikely that management would cast aside its diversification strategy to roll the dice on one product, even one with incredibly high selling prices.

Foolish bottom line
Luckily, Solazyme doesn't have to supply a sizable amount of the world's cocoa butter to take advantage of the trend. Filling a small portion of its initial production capacity -- be it 5,000 MT or 10,000 MT -- could pay tremendous dividends as production ramps and company wide capacity expands. It isn't unrealistic to think that the company could eventually become a major supplier of sustainable cocoa butter alternatives, although it will take quite some time to take a significant slice of the market away from established players. The good news is that the world's growing appetite for cocoa products isn't going anywhere soon. Step aside cocoa farm, synthetic biology is on its way. 

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Read/Post Comments (9) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2013, at 5:14 PM, centerroad wrote:

    I fail to see the logic behind ADM selling their cocoa butter business, and at the same time teaming up with szym to make cocoa butter.

    A more logical conclusion would be that ADM is selling because they looked into szym's claims and found them to have little future. If in fact there was even a slim hope szym could produce cocoa butter, would ADM forego the opportunity to corner the world's cocoa butter market? They happen to be one of the most intelligent and well run companies in the world so draw a reasoned conclusion.

    I recently heard someone else using what I will now refer to as szym logic, they claimed szym produces a lot of biomass, paper companies use a lot of recycled paper, therefore szym will profit heavily from the recycled paper business. He went into extreme detail about the savings taking place in the recycled paper business, but never made the case for how szym would capture any portion of it.

    The ethanol industry produces a lot of corn husks, but they are not in the paper recycling business.

    Fortunately stock players are not buying any of these hyperbolic leaps in logic.

  • Report this Comment On October 09, 2013, at 7:02 PM, techpatriot wrote:

    @ centerroad

    "A more logical conclusion would be that ADM is selling because they looked into szym's claims and found them to have little future."

    I fail to follow your logic train at all here. Further, the author likely said the events were not related.

    If you were a large gold mining concern, and mined gold all day, and it became too hard, and you sold your mine, might you not be interested if someone came to you and said "I have an easy way to turn lead into gold, no mining needed"?

    Anyway, I found this to be a well written article, well above the usual MF promote and hook article. Let's hope SZYM will start delivering on the promise of their technology in 2014.

  • Report this Comment On October 09, 2013, at 7:35 PM, taxiqnotincome wrote:

    FWIW, Solazyme's arificial cocoa butter is made from Gene Modified Organisms (GMO's). It has not been given FDA certification as being generally recognized as safe (GRAS) and therefore is very unlikely to find buyers until it has (SZYM a year ago said this could be a 2 to 3 year process).

    Also consider that there are many cocoa butter substitutes and they must be so label on the packageing. Thus they sell for about 30% below the real thing.

    Having a clean label is a big deal. GMO'd cocoa butter will have a challenging future.

  • Report this Comment On October 09, 2013, at 7:56 PM, MichalTod wrote:

    While I doubt the two are connected, ADM selling its cocoa processing facilities that process cocoa from beans would make sense if they planned to replace that output with what SZYM produces. The only other alternative would be to shutter the facilities. However, it looks like it will be years before SZYM can even make a dent in the industry, so its far more likely ADM is tired of crappy margins because of high bean prices.

  • Report this Comment On October 09, 2013, at 8:30 PM, centerroad wrote:

    "turning lead into gold"

    I have not read a single report of anyone seeing or tasting this cocoa butter. However, Roquette has cancelled their food line commercialization agreement with szym and ADM is NOT in a joint development agreement with szym at Clinton, they instead are leasing the facility to szym, quite telling I think for the prospects of szym cocoa butter.

  • Report this Comment On October 09, 2013, at 10:05 PM, EmFetch267 wrote:

    Good article. Nice shout out to Amyris too!

  • Report this Comment On October 10, 2013, at 12:08 AM, TheDinger wrote:

    Indeed. Thank you for the article, Maxx. Producing a cocoa butter substitute is a plausible goal for SZYM, given existing market conditions. We shall see how events unfold.

  • Report this Comment On October 10, 2013, at 10:10 AM, blizz83 wrote:

    I don't know why the assumption is made that any cocoa butter produced under Solazyme's process necessarily has to be for consumption. There are a number of other uses especially in the personal care space.

  • Report this Comment On October 10, 2013, at 8:46 PM, 275GTB4 wrote:

    It won't be cocoa butter for consumption, it will be for personal care etc.....

    Smaller market higher margins.

    Szym can deliver high value mimic with 4x the desired oil percentage.

    Now I don't have to crack off what I don't need.

    I just wanna make soap.

    That's the part your missing , it's not the cocoa butter's an entirely new paradigm.

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