(Repeats for wider distribution.)

* Mondelez-Hershey merger would be world’s largest cocoa consumer

* Barry Callebaut is key supplier of cocoa, chocolate products to both

* Market concentration could squeeze middlemen’s margins further

By Luc Cohen

NEW YORK, July 1 (Reuters) - When Olam International agreed to buy rival Archer Daniels Midland Co’s cocoa processing business in December 2014, catapulting it into the top echelon of bean buyers, confectioners worried about its outsized power over prices.

Now, Mondelez International Inc’s audacious bid on Thursday for Hershey Co, to create by far the world’s largest cocoa buyer, could hand the bargaining chips in the volatile niche market back to the candy makers. With more buying power, candy makers could demand lower prices from traders already operating on thin margins.

Hershey’s board of directors unanimously rejected Mondelez’s $23 billion takeover bid on Thursday.

Even so, the combined company would cushion Mondelez from wild swings in prices of key ingredients. Soaring cocoa, dairy and nut prices forced some in recent years to raise prices, but the sticker shock for sweet-toothed shoppers hurt sales.

But the bid also raised the specter of consolidation among chocolate makers, which could create larger buyers of commodities including cocoa and sugar, worrying middlemen who have already seen their margins squeezed.

The additional pricing power of the new entity would be “concerning,” a veteran cocoa buyer said.

Mondelez is already the world’s largest cocoa consumer, and after a tie-up with Hershey it would consume 650,000 tonnes per year, 50 percent more than the No. 2 consumer, Nestle SA , according to the Cocoa Barometer publication by nonprofit industry watchdog VOICE Network.

Global cocoa demand totals around 4 million tonnes annually.

“You create a huge giant as far as cocoa consumption is concerned,” said Antonie Fountain, VOICE managing director.

The most immediate questions raised by the potential deal concern the companies’ relationships with Swiss processor Barry Callebaut AG, which became the world’s largest manufacturer of chocolate and cocoa products after a 2013 purchase of Petra Foods’ cocoa business.

In 2007, Barry Callebaut reached a deal to supply Hershey with chocolate through 2022. Three years later, it agreed to supply Kraft Foods - which spun off Mondelez in 2012 - with the majority of its cocoa products and industrial chocolate globally. It remains a top supplier after the spinoff, sources said.

The fact that Barry Callebaut supplies both companies reduces its risk of being squeezed out, but a combined company would likely look for alternatives and exert some leverage on prices, four industry experts each with decades of experience said.

“If it were me, I would look to diversify away from Barry,” said one of the sources. They spoke only on condition of anonymity because they are not authorized to comment to the press.

Representatives of Barry Callebaut and Cargill Inc both declined to comment. Cocoa processor Blommer did not immediately respond to a request for comment.

Growing purchasing power in the downstream sector would squeeze already-tight margins among processors, one trade source said. Grinders and processors have consolidated in response to tight competition amid stagnant demand.

“This makes them one more powerful buyer in an already consolidated industry,” said a sugar trader with a global firm.