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ANALYSIS-Soft commodity dealmaking quickens with COFCO's Noble buy

NEW YORK, April 6 (Reuters) - China's growing appetite for staples like soybeans and corn seems the likely driver behind state trader COFCO's deal to buy a majority stake in Noble Group's agriculture business, yet the move has as much to do with soft commodities.

For $1.5 billion, the state-owned trader is also securing a sizeable slice of the soft markets, including Brazilian sugar mills, cocoa-bean grinding facilities in Indonesia and West Africa, and coffee processing in Brazil, alongside a vast logistics and storage network.

It is the latest in a series of acquisitions and potential sales that are transforming the industry, just as the prices of some commodities including coffee and sugar are bouncing back from multiyear lows.

While consumption growth is slowing in many developed nations, demand for luxury items such as chocolate bars and lattes is growing among consumers in emerging economies such as China and India.

Experts say the latest softs consolidation phase has only just started.

"2008 was big cotton companies. Last year was grains. You haven't seen it in coffee, cocoa and sugar and now we're seeing it," said Joe O'Neill, an independent consultant on softs trading and former executive at ICE, NYBOT and the NY Cotton Exchange.

Until the COFCO deal, other acquisitions have been incremental, strategic add-ons for more established players.

In March, one of the market's oldest sugar merchants Sucres et Denrees (Sucden) bought a coffee and cocoa trader to secure a foothold in North America.

In November, Switzerland's Ecom Agroindustrial Corp was opportunistic in scooping up London-based Armajaro Trading as it faced a cash crunch. That takeover handed it one of the world's largest cocoa trading houses.

Giving it a foothold in the world's biggest sugar-consuming nation, Singapore's Wilmar International invested $145 million for a major stake in India's Shree Renuka Sugars Ltd .

Other big prizes are yet to be won. Archer Daniels Midland Co is still trying to close a deal to sell its cocoa business, one of the three largest in the world estimated to be worth as much as $2 billion. In November, Bunge Ltd put its loss-making sugar mills under review for potential sale.

SIZE MATTERS

The six deals so far have one factor in common: size and scale to boost squeezed margins.

"It is almost impossible nowadays to function as a pure trader of raw commodities. As margins are wafer-thin, you need to trade massive volumes in order to turn a profit," said Edward George, head of soft commodities research for Ecobank.

After the sector's ferocious expansion over the past 15 years as newcomers such as Armajaro entered the fray looking to feed emerging economies with crucial raw materials, experts say consolidation was logical.

Hefty capital requirements to finance inventory, volatile prices, intense competition for raw materials have made it a tougher market to navigate and forced many to seek out more of the supply chain.

In COFCO, Noble gets a partner with deep pockets to take over its smallest business division that brought in almost $17 billion in revenue but lost $100 million in 2013.

"You're going to continue to see movement in terms of capital changing hands and players coming in to consolidate the sector," said Philippe de Laperouse, managing director of consultancy HighQuest Partners and a former Bunge executive.

Until 2003, he was in charge over Bunge North America's business development, overseeing the agribusiness' move into Mexico and the Caribbean Basin.

It is unclear how the reshuffling of the deck will play out.

Cargill Inc has been in talks to buy ADM's cocoa business and many traders expect Olam International Ltd , revitalized and recapitalized by its new owner the Singapore sovereign wealth fund Temasek, will look at expanding beyond its home Asian market.

COSTS OF SUSTAINABILITY

Many point to the cocoa market as an example of how a fragile industry is retrenching due to higher costs and tighter margins.

Futures prices hit 2-1/2-year highs above $3,000 per tonne last month on forecasts that demand will outpace supply for a second straight season in 2013/14.

Farming is still relatively unorganized, with growers in West Africa, the world's biggest growing region, often operating independently on small farms. That appeals to merchants who spot opportunities in fragmented markets.

In the long term though, a push toward sustainability is increasing expenses for merchants operating in some of the world's most volatile regions at the same time as profits have dwindled as result of increasing cocoa processing capacity.

The industry is also under more scrutiny than other food commodities for its environmental impact and sourcing of raw materials.

"In the softs trade, scale and volume are the keys to success.

"As the trading houses get ever larger, the consolidation of the sector becomes inevitable, with the biggest players gobbling up their smaller competitors," said George.

(Editing by Jonathan Leff and Lisa Shumaker)