UPDATE 1-Cargill explores purchase of ADM's cocoa unit -source
* Cargill did due diligence on cocoa unit last month
* Cargill, ADM, Barry Callebaut dominate global cocoa grinding
* Deal could raise competition concerns
(Updating with comment throughout)
NEW YORK, July 2 (Reuters) - Cargill Inc, one of the world's leading cocoa traders, has explored the possibility of buying Archer Daniels Midland Co's cocoa business, a source familiar with the situation said. Such a purchase would create a global giant in the sector.
Privately held Cargill performed due diligence on the ADM business last month, the source said.
It is unclear whether Cargill, one of the world's biggest argibusinesses, has placed a bid for ADM's unit, which is estimated to be worth $2 billion, or that it intends to do so.
Combining two of the world's top cocoa merchants and bean grinders would create a company big enough to compete with Zurich-based Barry Callebaut, the world's biggest maker of industrial chocolate products.
ADM declined to comment beyond its bare-bones statement in June that it was in discussions about a potential sale of the business.
A spokesman for Cargill would not comment on the company's ADM interest but said in an email the company continues to assess initiatives.
Barry Callebaut on Monday sealed its $860 million acquisition of the cocoa ingredients division of Petra Foods .
ADM, Cargill and Barry Callebaut account for as much as 40 percent of world cocoa bean grinding capacity and also dominate exports from the top producing nations, according to a United Nations report on the global cocoa industry from 2008.
Just 10 companies account for two-thirds of global grinding, the report said.
For ADM, a sale would continue a shift toward the grains sector as it finalizes its $3 billion takeover of Australia's GrainCorp, the largest bulk grain handler on Australia's east coast.
ADM also wants to cut its exposure to reduced profit margins that are resulting from rising cocoa processing capacity, traders said.
Cargill, which runs cocoa plants in No. 1 growing region West Africa, Brazil, Indonesia and in major consuming countries in Europe, has instead invested in the sector, betting on rising long-term demand as consumers in emerging markets develop a taste for chocolate.
It bought German cocoa grinder Kakao Verarbeitung Berlin in 2011 and in May began building a $100 million cocoa processing facility in Indonesia.
ADM has cocoa processing facilities in the United States, Ivory Coast, Ghana, Singapore and Brazil.
Some analysts and bankers have cautioned that competition concerns would arise, particularly in Ivory Coast and Ghana, the world's top two growers, where both companies own processing plants. That could prevent Cargill from making a bid.
"There's not a lot of people who could buy something of that size and not have antitrust issues," said a second source familiar with the process.
Other suitors may still join the fray, either looking to enter the market or to expand existing operations.
"This is a big chunk on a balance sheet and there are only a few global players who would have an inclination (to buy)," said Sterling Smith, softs and grains market specialist for Citigroup.
(Additional reporting by Soyoung Kim; Editing by Steve Orlofsky)