The following article is from our May 2009 issue.

Bittersweet Globalization A German chocolate maker tries to bypass the global cocoa market - By Hannes Koch

For entrepreneur Alfred Ritter, there are two reasons to directly import organically grown cocoa beans from Nicaragua: to liberate his company from commodities speculators while helping local farmers expand production and secure their livelihoods.

The global market can be pretty stressful. Alfred Ritter sat on his white veranda, sweating. The muggy Nicaraguan weather was oppressive as the light-skinned chocolate entrepreneur delivered a speech. Afterward, the cocoa farmers asked many questions and presented him with gifts. Their faces showed their pride at their achievements so far, mixed with anxiety over what the future may bring.

It was a red-letter day in the town of Matagalpa, a 90-minute drive northeast from the capital Managua. Ritter, with John Lennon glasses, wavy hair down to his collar and a yellow cord with a red pendant around his neck, had been buying cocoa from Central American farmers for almost 20 years but was visiting his suppliers for the first time. Born in 1953, the heir and boss of Ritter Sport, one of the largest chocolate factories in Germany, was dedicating the new collection station, nestled among green hills and surrounded by palm trees and hibiscus.

A new office building with columns and an imposing staircase lorded atop the slope, over the extensive complex. Two large warehouses provided space for thousands of sacks of raw cocoa beans. The blue logo with the "Ritter Sport" lettering on the facade was dazzling. Ritter made a statement by constructing this complex in a region where foreign investment is scarce. Even the German ambassador came for the occasion. The Nicaraguan national anthem was sung. Ritter, the host of the proceedings, said: "We need more chocolate - we would like to exponentially increase the quantities delivered."

Ritter is not ramping up production for fun: a big experiment is underway in Germany right now. The company is the first mass producer to attempt to sell organic chocolate - four different types - in supermarkets. The organic boom is in full swing in Germany and throughout Europe. If the plan succeeds, the company will need much more cocoa - especially from Nicaragua. Ritter buys much of the high-quality, organically cultivated cocoa that grows in only a few areas of the world from there.

For years, the project refused to take off. Ritter sent a project manager from Germany and donated millions of euros but the farming cooperative's production levels just wouldn't increase. There are many reasons for that, two of which are very simple. Nicaragua is a full day's journey from Germany, so keeping track of developments is easier said than done. And, Ritter is a medium-sized family business. In a company that employs 800 people and posted almost ?300 million ($390 million) in sales in 2008, there are no resources to fund the kind of big international relations department that huge corporations have. At Ritter in the quiet town of Waldenbuch in southwestern Germany, many people take care of many things at the same time.

Ritter is typical of German companies. Too big and strong for just the domestic market, it aspired to grow internationally. The company sells its chocolates in Russia, the U.S. and China. However, the global market is full of surprises and a midsize company without an extensive bureaucracy needs time to come to grips with them.

Ritter's current pet peeve is wrangling over patents and licenses. Particularly in China, Germans keep on finding products with packaging that deceptively imitates the original. Complicated, lengthy and costly litigation is often the consequence.

Commodity prices are also a thorny issue. Because the share of commodity costs in chocolate production is higher than for other products, fluctuations in the global price of cocoa can have a big impact on chocolate factories. Ritter explained that the price of cocoa affected the retail chocolate price last year: He had no choice but to raise it.

Normal, seasonal changes and those caused by the weather do not hurt companies to the same extent. Ritter has gotten used to the fact that harvest yields in the West African countries of Ivory Coast or Ghana, which supply large quantities of cocoa, expand and contract. But the appearance of a new factor has nearly doubled the price of cocoa since 2003.

In the past few years, as Ritter found out, hedge funds and other investors have entered the markets for agricultural commodities. With vast amounts of capital, they influence prices in a way that become incalculable for manufacturers. Traditional instruments such as futures contracts, which Ritter uses to safeguard his production against dramatic price fluctuations, seem to be losing their effectiveness. The global financial market has made the company dependent in a new way.

In view of the situation, Ritter's Nicaraguan cocoa project has taken on a new significance. After the early death of his father, Ritter and his sister hit on the idea of buying cocoa in the Latin American country to show their political sympathies for the Sandinista revolutionaries who overthrew the dictatorship there in 1979. The development project in Nicaragua was an attempt to bring the inherited but foreign world of chocolate production in line with their personal alternative-leftwing and ecological leanings.

Another aspect in addition to supplying today's market with organic chocolate has emerged. By buying directly from farmers, the company is bypassing the commodities market and its middlemen. The purchase price remains within agreed limits - even though the detrimental effects of a global market price driven by speculators cannot be neutralized completely.

The company is attempting to apply its direct purchasing strategy to other goods such as milk, raisins, filberts and almonds. It's a good idea that is still grappling with hard reality. "Frankly, the amount of cocoa that we procure from Nicaragua is less than 10 percent of our total demand," Ritter said.


Picture above: A commitment to Central America: Chocolate maker Alfred Ritter buys part of his cocoa beans directly from a farmers' collective in Nicaragua.