What is Cacao and Why Invest In It?

In case you don’t recognize “Cacao” it’s the seed from which chocolate is made!  The rugby-shaped cacao fruit ranges from 6 to 12 inches long and has 20 to 40 seeds per cherelle, or pod.  The pods take 5 to 6 months to ripen.  The seeds, also called beans, are fermented, dried and then ground into the powder that goes into your hot chocolate, pastries, liqueurs and candy.  It takes approximately 400 cocoa beans to make a pound of chocolate.

The Aztecs placed a high value on cacao.   They believed it was the food of the gods and as a result, consumption was generally confined to priests and the ruling class.  So valuable were the cacao beans that they were even used as a form of currency.

Most of all cacao beans come from West Africa:  Côte d’Ivoire (Ivory Coast), Ghana, Nigeria and Cameroon.  The balance comes mainly from Indonesia and Central America.  Growing the cacao tree requires lots of rain and warm temperatures, so most cacao is grown in humid climates within 25 degrees of the equator.  At about 8.5° North and with the high humidity and abundant rain typical of this area of the Caribbean, the Chiriquí Grande District in Panama is well suited to growing cacao.

Like any agricultural product, there are different varieties of cacao and wide differences in quality.  In general, cacao grown in Panama has always been prized for its superior quality. 

     Demand and Marketing

 Chocolate is a $200+ billion industry and growing.  You might think of chocolate as a non-essential luxury good, but the demand for premium varieties actually increased during the 2008 recession.  Those that had the means to buy higher quality chocolate, especially dark chocolate, did so and seemingly without regard to price. 

Dark chocolate has been increasingly touted as having strong health benefits and since dark chocolate has a higher concentration of cacao, demand has soared.  If you’re a chocoholic like me, you’ll be glad to know that cacao is high in flavanol, an antioxidant compound.  So, the next time you have a hankering for chocolate, remember… it’s a health food!

Changes in the west African climate and mismanagement of large swaths of cacao-growing land have created a new supply phenomenon; both the size and quality of harvests are going down.  There is a growing shortage of quality cacao.   In 2016, nearly 50% of bean exports from Côte d’Ivoire were rejected for being too small and acidic due to poor nourishment of the trees prior to harvesting.

That’s good news for those who invest in this Panamanian cacao project, but at the same time, somewhat irrelevant.  Why?  Because 100% of the cacao harvest goes to the company’s in-house specialty chocolate maker, Mahogany Chocolate.  While it’s possible they may export in future expansions, the current business model is to sell exclusively to Mahogany Chocolate.

That makes this a somewhat unusual offer in that there is no marketing and sales operation because not only do you have a built-in buyer, you are the direct supplier to an established, growing chocolate maker that is expanding its exports and can’t keep up with demand.

Mahogany Chocolate is made in 2 locations: Toledo, Belize and Boquete, Panama.  The Toledo operation is supplied by the company’s 167 acres of cacao in the area around Punta Gorda, Belize and they buy additional beans from a 150-member Mayan co-op.  Boquete is about two hours away from the cacao-growing region in the Bocas del Toro Province of Panama.  Boquete is also the location of the company’s 14 coffee farms and their primary processing center.

     The Crops

The majority of the cacao grown by the company is a premium variety called Trinitario, a hand-grafted hybrid of the Criollo and Forastero varieties.  The result is a hardier, high-producing tree that is resistant to disease and a bean known for its excellent flavor.  The saplings are acquired locally from a company using varietals already adapted to the Caribbean Panama climate.

Because the company is both the producer and the consumer, they are very picky about the cacao quality since it directly impacts the bottom line of Mahogany Chocolate.

Unlike most field-grown products, cacao trees flower and bear fruit year-round.  A significant benefit is that the workers who do the upkeep and picking are full-time employees and the company doesn’t depend on seasonal employees.

Most permaculture crops, cacao included, take a few years from planting to begin producing the fruit on a commercial level.  From planting to first harvest, it takes roughly 3 years for your trees to produce.  In most operations, it takes longer, but since the Trinitario variety is grafted, they get a head start in the nursery.  Cacao trees can live over 100 years but are commercially productive for about 25 to 30 years. 

In about year 20 or 21, a new nursery will be built and new saplings grown from the seeds of their own trees.  The saplings will be planted between the rows of the adult trees.  The babies will grow safe in their shadow, then as they reach production, we rotate to the older trees, and the entire farm is regenerated for another 25 years. 

About 450 to 500 trees are planted on each acre and the plantation is a balanced eco-system that includes inter-cropping, shade trees and local wildlife.  There is no room for monoculture on their farms.  Proper soil, plenty of rain and a favorable climate all have a positive effect on cacao’s flavor. 

Indigenous Panamanians grew Cacao more than 2,000 years ago, so it’s only fitting that modern-day Panama should be reviving the crop on a commercial scale.  Cacao is still a cash crop for Mayans in Panama, Belize, Nicaragua and Guatemala.  In fact, the company buys cacao fruit from Mayan farmers in southern Belize in the Punta Gorda area.

     Growing and Processing

After picking the ripe cacao pods, traditional growers remove the seeds including the surrounding pulp called the placenta.  The seeds are then fermented.  Natural enzymes, yeast and bacteria eat the pulp, breaking it down into sugars and carbon dioxide.  The beans will produce acids and alcohol as they heat up from fermenting and this begins to intensify the flavor of the bean.  The quality of the cacao bean owes most of its flavor to the fermentation process.  Next comes the drying step.

Cacao beans are dried slowly; drying them too quickly yields a bitter, lower-quality product.  The drying process takes anywhere from 5 to 10 days and the beans are dried until they reach a moisture content of 6.5%.  After the beans are dry, they are finally roasted and coarsely ground into cacao nibs, which is the product that is generally sold to companies that then grind it into powder to make chocolate bars or other delicacies.

The company manages the process from beginning to end using fermenting and drying sheds that are manually operated to produce the perfect end product.  The beans are visually inspected to get rid of foreign matter and broken beans, and then a sample is taken from each bag to ensure they are properly dried.

The land is adjacent to Highway 11, so there is easy access for transporting the dried beans to the chocolate factory.

      Risk Factors

Although this is a new venture in Panama, the company has years of proven experience growing cacao on 3 farms in Belize as well as providing guidance to the growing co-op there.  In addition, they have 14 coffee farms in the area of Boquete, Panama, just a few hours from the cacao farms.

Cacao trees require both a lot of moisture and shade in order to grow.  The obvious problem is that they can be susceptible to damage from fungus.  The good news is that there are actually good funguses that eat the bad fungus, allowing for a totally organic means of stemming disease.  This has been successfully done on their Belize farms and will be implemented in Panama as well.

In fact, research conducted by the Smithsonian Tropical Research Institute has found that a combination of beneficial fungi and appropriate shade trees is substantially more effective than pesticides.

     Environment & Social Responsibility

Western African countries, mostly Ghana and the Ivory Coast, supply about 70% of the world’s cocoa.  Sadly, much of Africa’s cacao production is done using unethical child labor practices and, historically, even slavery.  Despite the bad publicity surrounding these practices, they have not been eliminated, especially child labor.  In recent years, evidence has come to light that both of these practices have been employed on many cacao farms in Brazil.

By contrast, your Panamanian cacao is not only grown using ethical means but the farm workers’ cacao growing experience is highly valued.  Historically impoverished, the farmworkers are paid an actual living wage and are also provided medical and pension benefits, schooling and assistance in improving living conditions.  For the first time in their families’ history, they see a path to upward mobility.

Add to that the fact that the company relies on predominantly natural means to mitigate environmental risks, and you have an investment model that you can be proud to own.

     The Company

The company has been in business since 2014 and has been laser-focused on growing and processing two products: cacao and coffee.  Their business model pairs the two products in their marketing efforts since both are premium varieties that command a high price in the market.  The company’s early years involved raising private investor capital to acquire and “rehab” old, under-performing coffee farms in Boquete, Panama.  Looking to diversify, cacao and chocolate making were added to the portfolio and they now have over 204 hectares (600 acres) under production.

Based on the supply and demand issues related above, Mahogany Chocolate has a critical need to lock in a safe and secure supply of high-quality, ethically produced cacao for its growing national and international chocolate sales program.

This is the 18th farm the company will own, building on a stellar reputation as a grower and processor of quality products.  The Panama management team and staff of 45 are very familiar with the development and operations of specialty agriculture farms in Central America.  In addition to the existing farms, they also own and operate two post-harvest processing facilities and the two chocolate factories in Belize and Panama. 

Additional team members have been assembled to manage this new project, beginning with 15 locals with extensive cacao farming experience.

The company offers professional, turnkey management with established expertise in cacao farming, processing and creating specialty artisanal chocolate products.  Mahogany Chocolate is an already established brand, experienced in manufacturing, marketing and sales, and recently expanded to the U.S. market.

     The Offer

This is a syndication or subscription offer.  The company is seeking $2,250,000 in financing for a maximum of 225 units.  Based on previous offers from this company, I suspect it will sell out by the end of the year if not sooner.

You don’t own the land directly; you and the rest of the 225 subscribers collectively own the land and you split the net profits with 75% going to the subscribers and 25% to the company.  The company takes care of land development, planting, pruning, harvesting and processing.  The cost of building fermentation and drying sheds is built into the price.

Distributions begin in the third year that trees reach production and continue in perpetuity.  Note that doesn’t say year three of your investment.  If there is a delay, your returns could start a year later.  In agriculture, everything works in cycles, and if you miss your window, you can delay your first crop by an entire year.  As the company president likes to say, “Mother Nature waits for no man!”

That said, the company has already acquired the land (September 2021) and since that time has developed a 75,000-sapling nursery from scratch, prepared the land and by the end of August 2022, 100% of the farm will be fully planted with healthy cacao rootstock saplings.  The grafting will be done in the field and once completed the farm will be fully operational.   

This means that when you purchase your cacao units, you are buying an already fully functional farming operation – not the promise of future actions.  You are buying a lucrative farming opportunity at the same price other investors paid when the project was first announced in 2021.

A word about harvest pricing.  The price is based on the world market price for premium specialty cacao, plus an extra premium for Mahogany Chocolate being able to lock in the long-term supply.  Mahogany Chocolate can afford to pay a premium over the market price to ensure its long-term supply because the middlemen like exporters and importers who add cost but little value are cut out of the process.  The prices then increase over time based on inflation and projected increasing costs of production.

It is important to note that the company currently holds free title to the land.  This is important because many countries in Latin America have both titled and right-of-possession (ROP) land.  The latter has typically been owned by indigenous peoples and rarely has a clean title.

In year 22, a new nursery will be built and baby saplings will be grown in the shade of the adult cacao trees.  When the saplings have reached production age, the old trees will be removed and the entire farm renovated for another 25 years of production.

Each of the 225 units is priced at $10,000 each, with a minimum purchase of 3 units.  The prospectus lists the IRR at 10.5% however, this is one of those offers where the IRR downplays the profit potential.  Because cacao trees take a few years to reach their full potential, the IRR seems understated.  Here is a sampling of the ROI projections by harvest year:

• Year 1 – 3%
• Year 3 – 10%
• Year 5 – 13%
• Year 10 – 18%
• Year 20 – 32%

As you can see, the trees become substantially more productive over time.  Remember, around year 25 the whole farm is replanted and the process begins all over again.

     The Bottom Line

Investing in this cacao project is a great opportunity at a great price point.  The 400%+ ROI over 20 years is just the beginning since production in the out years only increases. 

You have the assurance that the operating company is not only experienced in growing this specific crop but has a proven track record of meeting deliverables and making money for their investors.

The crop is already pre-sold to their in-house chocolate manufacturer.  Risks are known and manageable.  This is a strong investment in social responsibility yielding a continuous passive income stream in year 3.

     This opportunity is perfect for people: 

• Who understand the value and importance of sustainable farming
• Seeking lower entry point farm ownership opportunities
• Who are forward-thinking investors focused on their long-term financial health
• Building a portfolio that is not correlated to the stock and bond markets
• Looking to create a hedge against inflation while minimizing financial risk
• Seeking off-shore investment opportunities
• Seeking a recurring passive income revenue stream