Barry-Callebut (Swiss)

This is the second post since I restarted the blog last week. I'm going to try to post at least once a week.

I have been long Barry-Callebut (BARN) for several years. Currently it's a 3% position. Earlier this year it was 5%, but I took some off. I still love the company and am looking for a place to add back.

BARN is the premier industrial chocolate maker in the world. By "industrial" I mean that BARN has almost no confectionery business; it sells its chocolate to candy manufactures and to the upscale food service industry. Because of its size, BARN can produce chocolate at lower cost than the candy makers themselves. The outsourcing phenomena that business has seen in so many industries is true here as well. In recent years, BARN has done business with companies that used to totally control their own processes, including Hershey and Nestle.

So BARN is the low cost producer - a situation I like to see in commodity businesses. Market growth will be a continuation of increased outsourcing and final demand growth in EM. BARN will be a leader in both of these.

BARN usually hedges all its cocoa and sugar buys and sells. In other words, the BARN customer takes the futures price risk of the soft commodities. OK, so where is the commodity story? It's in the long run. Because of its storage costs, cocoa is a commodity that is very hard for "financial buyers" to take control of. That trick was played a year or so ago, and it ended badly for the hedge fund in question. This means that cocoa is likely to continue to be available at reasonable cost for the indefinite future. Prices have gone up somewhat, but that's a positive for increasing production. I believe there is a risk premium in BARN (and in many commodity-consuming stocks) because of the worry of the commodity bubble.

This is a risk I am willing to take. If you don't agree, you can create a partial hedge by buying cocoa futures. I do play cocoa from the long side, especially when the commitments of traders shows managed money net short. These guys generally don't know anything about cocoa, and are easy pickins for a short squeeze. In fact, it looks like one of these events is occurring as I write this!

If you want to invest in BARN, you should be aware that it is priced in Swiss Francs. Also, the company just had its debt upgraded to investment grade and may be planning a bond issuance.