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: SZYM). 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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Fool contributor Maxx Chatsko has not liked chocolate since early childhood (making Halloween especially fun for his older sister) and has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on biopharmaceuticals, industrial biotech, and the bioeconomy.

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