Venezuela agribusiness report q1 2011

13 Table: Venezuela – Corn Production, Consumption & Trade .... 16 Table: Venezuela – Corn Production, Consumption & Trade .... ƒ On November 5 2010, the Venezuelan government announced

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REPORT Q1 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Production Date: February 2011

CONTENTS

Executive Summary 5

SWOT Analysis 8

Venezuela Agriculture SWOT 8

Venezuela Political SWOT 9

Venezuela Economic SWOT 10

Venezuela Business Environment SWOT 11

Industry Forecast Scenario 12

Venezuela Grain Outlook 12

Table: Venezuela – Wheat Consumption & Trade 13

Table: Venezuela – Corn Production, Consumption & Trade 13

Table: Venezuela – Wheat Production, Consumption & Trade 16

Table: Venezuela – Corn Production, Consumption & Trade 16

Venezuela Coffee Outlook 17

Table: Venezuela – Coffee Production & Consumption 18

Table: Venezuela – Coffee Production & Consumption 21

Venezuela Sugar Outlook 23

Table: Venezuela – Sugar Production, Consumption & Trade 24

Table: Venezuela – Sugar Production, Consumption & Trade 26

Venezuela Cocoa Outlook 28

Table: Venezuela – Cocoa Production, Consumption & Trade 29

Table: Venezuela – Cocoa Production, Consumption & Trade 30

Venezuela Livestock Outlook 32

Table: Venezuela – Poultry Production, Consumption & Trade 33

Table: Venezuela – Pork Production, Consumption & Trade 34

Table: Venezuela – Beef & Veal Production, Consumption & Trade 34

Table: Venezuela – Poultry Production, Consumption & Trade 37

Table: Venezuela – Pork Production, Consumption & Trade 37

Table: Venezuela – Beef & Veal Production, Consumption & Trade 37

Venezuela Dairy Outlook 39

Table: Venezuela – Milk Production, Consumption & Trade 40

Table: Venezuela – Butter Production, Consumption & Trade 40

Table: Venezuela – Cheese Production, Consumption & Trade 41

Table: Venezuela – Whole Milk Powder Production, Consumption & Trade 41

Table: Venezuela – Milk Production, Consumption & Trade 44

Table: Venezuela – Butter Production, Consumption & Trade 44

Table: Venezuela – Cheese Production, Consumption & Trade 44

Table: Venezuela – Whole Milk Powder Production, Consumption & Trade 45

Competitive Landscape 46

Table: Agricultural Commodity Producers & Traders 46

Table: Agribusiness Suppliers 47

Table: Integrated Agricultural Producers 48

Commodity Price Analysis 49

Monthly Softs Update 49

Cocoa 49

Table: Cocoa 49

Coffee 50

Table: Coffee 50

Milk 51

Table: Milk 51

Sugar 52

Table: Sugar 52

Grains Update 53

Corn 53

Table: Corn 53

Rice 54

Table: Rice 54

Soybean 55

Table: Soybean 55

Wheat 56

Table: Wheat 56

Downstream Supply Chain Analysis 57

Industry Forecast Scenario 57

Consumer Outlook 57

Food 59

Total Food Consumption 59

Table: Venezuela Food Consumption Indicators - Historical Data & Forecasts 59

Canned Food 60

Table: Canned Food Value/Volume Sales - Historical Data & Forecasts 60

Confectionery 61

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts 61

Mass Grocery Retail 63

Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 63

Table: Sales Breakdown by Retail Format Type 64

Trade 64

Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 65

Macroeconomic Forecast 66

Table: Venezuela - Economic Activity, 2008-2015 68

BMI Forecast Modelling 69

How We Generate Our Industry Forecasts 69

Executive Summary

BMI View: Severe rains hit the northern and Andean regions of Venezuela from September through to

December 2010, causing widespread damage, particularly to vegetable crops The floods have also led to severe disruption to distribution of food products throughout the country: both the country's road network and port operations have been affected by the rains, leading to an estimated reduction of 70-80% in the distribution of products The floods led the government to declare a state of emergency in the states of Falcón, Miranda, Vargas and the Capital District, including Caracas Subsequently, in mid-December, President Hugo Chávez requested special powers to legislate by decree for a period of one year in order

to deal with the emergency caused by the heavy rains, which have left more than 130,000 homeless and affected up to 500,000 people Chávez has stated that he would use the special decree powers to increase Venezuela's sales tax rate from the current level of 12% to additional revenue to be spent on housing and infrastructure projects to help victims of the flooding He did not reveal the extent or duration of the tax increase

Critics have, however, accused Chávez of seeking the emergency powers to undermine the gains made by opposition parties in the local elections in September 2010 The opposition parties came together as the Mesa de la Unidad Democrática (MUD) coalition and stood against Chávez's ruling Partido Socialista Unido de Venezuela (PSUV) The MUD made significant gains, with around 47% of the vote The PSUV won a majority of seats under the first-past-the-post system, but lost the two-thirds supermajority that it had previously enjoyed New legislators are to take power on January 5 2011, with 41% of seats held by opposition parties

Key Forecasts

ƒ 2009/10 was a difficult year for Venezuela's corn producers as the harvest was damaged by the most severe droughts seen in 37 years Production is estimated to have dropped by 23.3% year-on-year (y-o-y) to 1.38mn tonnes Output is forecast to rise by 7.6% y-o-y in 2010/11 to 1.49mn tonnes However, production will continue to be held back by regulated farmgate and retail prices, high production costs and rising inflation

ƒ Coffee production is estimated to have fallen by 17.3% y-o-y to 744,000 60kg bags in 2009/10,

as dry weather related to El Niño-Southern Oscillation in the Pacific damaged crops We forecast production to fall by a further 7.0% y-o-y in 2010/11 to 692,000 bags, as the failure of

government-mandated prices to keep a pace with increasing costs continues to lead farmers to turn towards more profitable crops Domestic demand is expected to outstrip production for the third successive year, as consumption continues to grow, leading to an increased reliance on imports Demand increased by an estimated 4.7% y-o-y in 2010 and we forecast a further rise of 1.5% y-o-y in 2011 to 983,500 bags Out to 2015, we see demand growing by 10.0% to 1.07mn bags

ƒ We now estimate that poultry production declined for three successive years from 2008-2010, due to rising feed costs and strict price controls that have damaged profitability In 2010, we estimate that output fell by 6.9% y-o-y to 653,500 tonnes and forecast a further 3.2% y-o-y fall

in 2011 to take production to 623,300 tonnes Demand has, however, begun to recover, after falling by 17.8% y-o-y in 2009 as the economy contracted We now estimate that poultry consumption grew by 7.1% y-o-y in 2010 to 922,000, as imports from Brazil and Argentina eased supply restrictions In 2011, we see poultry consumption stabilising at 926,000 tonnes

ƒ With stronger opposition in Venezuelan politics, we believe that Chávez will be keen to reduce consumer price inflation (CPI) in the run up the 2012 presidential election, in order to increase his support High levels of inflation have been very unpopular of late, while serving as a key obstruction to economic expansion due to the consequent lack of private credit growth As a result, we expect 'inflation reduction' to remain a key policy focus over the next two years, and are forecasting CPI to fall from 27.6% y-o-y in October to 25.0% by end-2010 and 20.0% by end-2011

Key Trends And Developments

ƒ Relations continue to improve between the Colombian and Venezuelan governments following the long-running dispute that led to the suspension of trade in July 2009 Colombian President Juan Manuel Santos met with Chávez in Caracas in November 2010 to discuss a free trade agreement (FTA) that will govern trade between the two countries following Venezuela's withdrawal from the Community of Andean Nations (CAN) in April 2011 The meeting was the first of six planned rounds of negotiations

ƒ In October 2010, Chávez unveiled plans to turn Venezuela into a leading power in cocoa production and exportation Declaring cocoa a 'strategic product' of the national economy, Chávez revealed plans to increase cocoa production to 30,000 tonnes by 2012 and 60,000 tonnes

by 2019 In order to achieve these ambitious goals, Chávez proposed rescuing abandoned plantations and requested Venezuela's Executive Vice President Elias Jaua to carry out research into suitable additional land for cocoa production Chávez also urged small plantation owners to band together as producers associated to the state In addition, Chávez announced that the government was in the process of building a chocolate plant with processing capacity of 25,000 tonnes

ƒ On November 5 2010, the Venezuelan government announced an increase of 29% in the price paid to producers for green coffee The move will see the government-mandated price rise from VEF585 to VEF747 per quintal (45kg) and is backdated to October 1 2010 The increase will bring some relief to coffee producers who have seen their profit margins slashed by rocketing

inflation and rising production costs However, the increase is less than they had been hoping for and is unlikely to lead to any significant rise in production for the 2010/11 harvest

ƒ In November 2010, French dairy producer Leche Pascual announced plans to build a yoghurt factory in Venezuela through a joint venture with local food producer Empresas Polar The two

firms will invest US$104mn in the facility and have set a goal of gaining 50% market share over the next 10 years The factory is to focus on solid and liquid yoghurts and will be distributed by

a new joint venture named Pascual Andina Leche Pascual and Empresas Polar have stated that

their yoghurts will attempt to appeal to the country's middle and lower classes by offering

long-life products that do not require refrigeration BMI cautions, however, that the move by Leche

Pascual carries with it significant risks With the Venezuelan economy in the grip of runaway inflation and disposable incomes increasingly tight, the new joint venture may struggle to persuade consumers to spend on what is perceived to be something of a luxury item In addition,

Pascual Andina will face stiff competition from large state-owned companies Parmalat and Lacteos los Andes, which put downward pressure on prices

ƒ In October 2010, Chávez ordered the seizure of 300,000 hectares (ha) of land and 120,0000 head

of cattle owned by Compañía Inglesa, the Venezuelan arm of British food company the Vestey Group The company is owned by Lord Vestey's family, who first began trading in Venezuela in

1909 The move forms part of the Chávez government's 'Socialist Revolution' to bring large swathes of land and industry under state control It is not the first time that the Vestey Group has been targeted by Chávez' government In 2005, it nationalised four farms owned by the Vestey Group, including the 33,600-acre Charcote estate south of Caracas, with 13,000 head of cattle

ƒ In late September 2010, the government announced the seizure of Spanish-owned Agroisleña

Agroisleña is the largest private agricultural supply distributor in Venezuela, with a large network of rural stores supplying pesticides, fertiliser, tools and machinery etc It also controls around a third of the country's grain storage capacity Chávez argued that Agroisleña had become an oligopoly in the market of agriculture inputs, contrary to the provisions of the Constitution He stated that the seizure would further the progress of his agricultural reform programme and would further his government's ambitions to improve food security and lower production costs However, should the services provided by Agroisleña become disrupted or fall foul to state mismanagement, the expropriation may compromise the output of domestic producers who have been reliant on Agroisleña's provision of goods and services The move may prove one further obstacle for Venezuela's grain producers, who are already struggling to cope with rising prices and farmgate price controls

SWOT Analysis

Venezuela Agriculture SWOT

Strengths ƒ Venezuela's tropical climate allows for production of a diversified range of

agricultural products

ƒ Venezuelan cocoa and coffee are known for their high-quality and cocoa especially is sought after by producers of premium chocolate

Weaknesses ƒ Despite having large areas of fertile arable land, lack of investment in agriculture

has left Venezuela a major food importer

ƒ High food price inflation and frequent supply shortages have dampened growth in food consumption

ƒ Price controls in place since 2003 squeeze the profits of producers and are a disincentive to invest in increasing production

Opportunities ƒ The government has shown interest in revitalising coffee and cocoa production

after years of decline

ƒ The government has introduced a number of programmes to help small holders increase production including finance and subsidies

ƒ Falling oil revenues are bringing more attention to increasing agricultural production to reduce the cost of food imports

Threats ƒ The threat of land seizures and nationalisation inhibits investment in agriculture in

Venezuela

ƒ Falls in the oil price will severely limit the amount of money the government will be able to spend on agriculture

Venezuela Political SWOT

Strengths ƒ Setting Venezuela apart from its neighbours, the country has enjoyed a long

tradition of democracy, with elections held regularly since 1959

ƒ A consistently high electoral turnout points to a strong level of public participation

in politics

Weaknesses ƒ The military has traditionally played a dominant role in politics and possible future

intervention by disgruntled officers - especially following the attempted coup in

2002 - is not beyond the realms of possibility

ƒ The meltdown of the traditional party structure has left something of a political vacuum where the opposition should be

ƒ Relations between President Hugo Chávez and the US remain strained, as Chávez has accused Washington of interfering in Venezuela's domestic affairs and threatened to cut off oil supplies to the US

Opportunities ƒ Given prudent investment, areas such as infrastructure and education could

flourish thanks to the fiscal windfalls brought by devaluation of the bolivar and elevated oil prices, bringing longer-term stability to the economy and diminishing the risks of civil turbulence

Threats ƒ President Chávez's ability to rule by decree continues to undermine the country's

interdependencies

Venezuela Economic SWOT

Strengths ƒ Venezuela is rich in natural resources In particular, it has huge oil and gas

reserves (it is the world's fifth largest crude producer) and is one of the main suppliers to the US

ƒ The oil boom has allowed the government to accumulate international reserves

Weaknesses ƒ Although oil is one of the country's strengths, a high level of dependence on the

energy sector makes the economy increasingly vulnerable to economic shocks in the long term

ƒ The lack of transparency in the government's fiscal accounts is a source of concern

Opportunities ƒ Following the devaluation of the bolivar in January 2010, the non-oil sector has an

opportunity to benefit from increased competitiveness

Threats ƒ Inflation remains dangerously high despite the extensive price control system and

successive interest rate hikes Further erosion of domestic productive capacity is likely to raise inflationary pressures in the economy, possibly bringing on

hyperinflation

ƒ The sustainability of economic growth will depend on boosting private investment, rather than relying on oil and public investment (both of which are dependent on high oil prices)

Venezuela Business Environment SWOT

Strengths ƒ Venezuela is an important supplier of oil to the US and is a member of OPEC

ƒ Home to some of the largest oil reserves in the world, the Orinoco region will provide opportunities for large-scale investment

Weaknesses ƒ A lack of domestic and international investment, largely as a result of the uncertain

political environment, could undermine the long-term growth outlook

ƒ Privatisation has ground to a halt since President Hugo Chávez took office, with the administration instead preferring production-sharing agreements to encourage foreign direct investment

Opportunities ƒ Government support for businesses, through a range of low interest rate loans, is

available The government fund for industrial credit provides large sums of money for small- and medium-sized businesses

Threats ƒ The implementation of stringent foreign currency controls has hit the business

community hard This has restricted import growth, as businesses lack the currency to purchase raw materials

ƒ State expropriation of 'idle' plants and proposals for land reform will act as a disincentive for prospective investment (domestic and foreign)

Industry Forecast Scenario

Venezuela Grain Outlook

BMI Supply View: Venezuela is a major net importer of grain Though production rose rapidly through

the first decade of the 21st century, consumption has also risen, fuelled by oil-driven economic growth Corn is Venezuela's major grain crop The vast majority of Venezuela's corn is grown in the central states

of Barinas, Portuguesa and Guárico While the area planted to corn has risen by around 50% from the end

of the 1990s, with Venezuela's agricultural sector relatively undeveloped there is still plenty of room for further expansion The viability of corn production in Venezuela is heavily dependent on government policy In the 1980s, the country's agricultural sector was heavily regulated and high tariffs were imposed

on grain imports This saw corn production more than double in the second half of the 1980s With little competition from imports, however, productivity remained low

When the market was opened up in the 1990s, domestic farmers found it hard to compete with imports and production fell Production climbed back up, reaching an estimated 2.00mn tonnes in 2006/07 However, production has since fallen again, mainly as a result of unfavourable weather conditions Output fell to 1.8mn tonnes in 2007/08 and remained at the same level in 2008/09 The most severe droughts seen in 37 years hit the 2009/10 harvest and production is estimated to have dropped by 23.3% year-on-year (y-o-y) to 1.38mn tonnes In addition to the extreme weather conditions, production has also

been affected by regulated farmgate prices and retail prices (see below for further comment) Land

expropriations and the seizure in October 2010 of Agroisleña, the main private sector distributor of

agricultural inputs, agricultural services and financing, will add to the difficulties facing producers In 2010/11, we forecast corn production rising by just 7.6% y-o-y on the low 2009/10 level to 1.49mn tonnes

Out to the end of our forecast period to 2015, the level of production will be highly reliant on the ability

of President Hugo Chávez's government to support the agricultural sector Without continued support, much of the newly opened farmland would return to fallow Despite this risk, we do expect output to continue to rise and are forecasting production to grow by 41.4% on the low 2010 level to reach 1.95mn tonnes

Wheat production in Venezuela is negligible as the country does not have a suitable climate for growing wheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming from the US and Canada Venezuelan wheat imports totalled an estimated 1.60mn tonnes in 2010

BMI Demand View: Demand for feed corn has risen rapidly since the economic recovery began in 2004

Through the end of the 1990s and the first couple of years of the 20th century, demand for corn shot up, driven by the expansion of the poultry sector As the economy went into meltdown in 2002, however, demand for corn collapsed as poultry output fell almost 25% in the space of a year Since then, feed

consumption has climbed back up Demand for corn for food has also risen strongly in the past few years

as Venezuela's economy has grown Corn is a staple food in Venezuela and corn flour is used to make

arpea, a flat unleavened bread Total corn consumption rose 87.1% from 2005 to 2010, outstripping

growth in production Imports come primarily from the US We forecast that demand will continue to grow, as corn is one of the cheapest foods available and the price is kept down by government price controls Growth will, however, be more moderate and out to 2015 we see demand rising by 15.4% on the

2010 level to take consumption to 3,78mn tonnes

Wheat consumption has gained in popularity since the beginning of the 21st century as Venezuelan consumers have had more money to spend on food Consumption of both bakery goods and pasta has been rising Price controls mean pasta has become far more affordable and per capita consumption has now risen to around 14kg The majority of pasta produced is lower grade and must be sold at a

government-set price Some high grade pasta is also produced which can be sold at market prices The high prices on the world market in 2007/08 saw consumption fall by 10.1% y-o-y to 1.53mn tonnes, and demand grew only marginally in 2008/09 As a result of rising wheat prices on the international market,

we now believe that consumption fell slightly in 2009/10, dropping by 1.4% y-o-y to 1.54mn tonnes We see demand beginning to pick back up in 2010/11 and have pencilled in a y-o-y increase of 1.2% to take consumption to 1.56mn tonnes Out to 2015, we see consumption growing by 20.5% on the 2010 level to reach 1.85mn tonnes

Table: Venezuela – Wheat Consumption & Trade

Wheat Consumption, '000 tonnes 1 1,536.8 1,555.8 1,622.6 1,692.5 1,771.0 1,851.7Wheat Net Trade Balance, '000

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

Table: Venezuela – Corn Production, Consumption & Trade

Corn Production, '000 tonnes 1 1,379.8 1,485.4 1,590.7 1,699.8 1,822.8 1,951.2Corn Consumption, '000 tonnes 1 3,273.4 3,281.1 3,389.5 3,500.7 3,642.1 3,778.4 Corn Net Trade Balance, '000

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

Chávez Authorises Corn Price Increase

In September 2010, Hugo Chávez's government announced that it would authorise increases in the price

of corn, rice and sunflower seeds at the production stage, in order to encourage planting of these crops for the 2010/11 harvest The move came following sustained complaints from Venezuelan agricultural producers that the regulated farmgate prices had not been adjusted in line with rising costs, which have been driven upwards by high inflation

On September 1, the price for a kilogram of yellow corn increased by 27.5% from VEF0.80 to VEF1.02, while a kilo of white corn rose by 27.8% from VEF0.90 to VEF1.15 The price rise will come as welcome relief to grain producers who have struggled to keep a pace with the increasing input costs in the face of rocketing inflation However, producers have argued that even with the increased prices they are unable

to cover production costs, so the price increase may not prove sufficient to provide the hoped-for boost to domestic production

Government Suspends Corn Imports

In mid-September 2010, the Venezuelan government suspended the issuance of licenses to private

companies for imports of white and yellow corn for the remainder of 2010 The move was designed to ensure that domestic corn producers would have a market for the crops harvested during Q410 The announcement will be welcomed by domestic corn producers, who have long raised concerns that

competition from imports was damaging their profitability However, domestic production will not be sufficient to meet demand, so imports will continue to be needed for the foreseeable future to cover the shortfall

Government Seizes Agroisleña

In late September 2010, the government of Hugo Chávez announced the seizure of Spanish-owned Agroisleña Agroisleña is the largest private agricultural supply distributor in Venezuela, with a large network of rural stores supplying pesticides, fertiliser, tools and machinery etc It also controls around a third of the country's grain storage capacity Chávez argued that Agroisleña had become an oligopoly in the market of agriculture inputs, contrary to the provisions of the Constitution He stated that the seizure would further the progress of his agricultural reform programme and would further his government's ambitions to improve food security and lower production costs However, should the services provided by Agroisleña become disrupted or fall foul to state mismanagement, the expropriation may compromise the output of domestic producers who have been reliant on Agroisleña's provision of goods and services The move thus may prove one further obstacle for Venezuela's grain producers, who are already struggling to cope with rising prices and farmgate price controls

Mixed Results For Chávez's Production Drive

Since Hugo Chávez came to power in 1999, production has increased After rising gradually in the first half of last decade, production rose rapidly from 2005 as the oil wealth pouring into the country allowed more investment in agriculture From 2004 to 2008, corn production grew 56.5% to 2.00mn tonnes This

was driven by a large increase in the area planted under the government's National Sowing Plan Chávez's stated aim is to not only end Venezuela's reliance on imported corn, but to build up a surplus for export Since coming to office, Chávez has redistributed millions of hectares of land to the poor and invested billions of dollars in agriculture While the rise in production shows that the policy has enjoyed some success for grains, there are still problems Many of the people granted rights to farmland have little experience of agriculture There have also been complaints that promised training and inputs such as seed and equipment has been slow to materialise, leaving land fallow

Another brake on the expansion of grain production is controlled farmgate prices, which have been in force since 2003 on around 100 products considered to be basic necessities The farmgate price of corn was raised by 30% in April 2008, by 24% in July 2009 and by 28% in September 2010 Producers are also given direct subsidy payments and access to cheap fertiliser Despite this, farmers have long

complained that the farmgate price is too low, threatening future production

Chávez's aim to attain self-sufficiency is a long way from being realised and Venezuela is still heavily reliant on grain imports to fuel domestic demand, both for human consumption and for the livestock industry Indeed, in 2010 the government is set to relax import permit procedures in order to reinforce its 'food security' policy and avoid domestic food shortages In 2009/10,corn imports are forecast to total 1.30mn tonnes, a similar total to that seen in 2008/09, of which 300,000 tonnes are expected to be white corn, which is largely for human consumption, and a further 1.0mn tonnes of yellow corn for animal feed, according to data from the US Department of Agriculture (USDA) In addition, Venezuela is expected to import some 1.6mn tonnes of wheat

Chávez Backs Down Over Gruma Takeover

The relationship between the Venezuela government and the Mexican firm Gruma, one of the world's

largest producers of corn flour for tortillas, has been a turbulent one throughout 2010 Gruma's

Venezuelan operations accounted for 18% of total sales in September 2009 In January 2010, Chávez

announced that his government would temporarily take control of Gruma's Monaca unit, following the

arrest of one its major shareholders under charges of financial irregularities

Subsequently, in May 2010, the government announced the expropriation of Monaco, following

accusations that Gruma had refused to sell flour during a national shortage in the previous month The move came as the Chávez government tightened its control on the supply chain in the face of national shortages and rocketing inflation However, in July 2010, the government retracted and announced that rather than seizing Gruma's assets, it was considering forming a joint-venture with the Mexican company

Table: Venezuela – Wheat Production, Consumption & Trade

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

Table: Venezuela – Corn Production, Consumption & Trade

Venezuela Coffee Outlook

BMI Supply View: The best Venezuelan coffee comes from the Maracaibo region, in the far west of the

country, along the border with Colombia Favourable growing conditions led to a comparatively good coffee harvest in Venezuela in 2007/08, with production rising by 4.4% year-on-year (y-o-y) to 900,000

60 kilogramme (kg) bags We now believe that production remained at that level in the 2008/09 coffee year However, production is estimated to have fallen off in 2009/10, due to dry weather related to El Niño-Southern Oscillation in the Pacific The failure of government-mandated prices to keep a pace with increasing costs in the face of rocketing inflation has hurt the profitability of coffee production in

Venezuela, leading farmers to turn towards more profitable crops In addition, lack of producer unity and the government's expropriation of two main coffee processors have made the sale of coffee more

complicated for producers, providing a disincentive to continue production As a result, we estimate that production sank to 744,000 bags, down by 17.3% y-o-y Production is forecast to fall by a further 7.0% y-o-y in 2010/11 to 692,000 bags, with domestic demand expected to outstrip supply for the third

successive year

Government support for small-holder coffee growers, who make up the majority of farms, could see production grow once again over the late years of our forecast period In 2014/15, we currently see production reaching 873,000 60kg bags, 17.5% higher than the low level seen in 2010 This, however, will be dependent on government policy, particularly price controls If the government responds to the current demands from millers and producers to relax price controls, interest in investing in production of Venezuela's high-quality coffee would likely increase, leading to greater production than we are currently expecting Conversely, if price controls continue to squeeze profits, farmers may switch to other less tightly controlled crops

BMI Demand View : While Venezuelans consume a fair amount of coffee, per capita consumption at

1.9kg per year is some way below other Latin American countries, such as Brazil and Argentina, where per capita consumption is 4.6kg and 4.0kg, respectively However, consumption has shown strong growth

in recent years, rising by 38.4% from 2005-2010

Consumption in 2007/08 grew 8.9% y-o-y to 860,000 bags and expanded again in 2008/09 growing 7.6% y-o-y to 925,000 bags The vast majority of coffee consumed is roasted ground coffee, with soluble instant coffee accounting for only around 1% of total consumption While controls on the retail price on ground coffee have allowed more low-income Venezuelans to afford it, they have also led to severe supply shortages and a booming black market Wealthier consumers were able to buy their coffee at cafes

or street stalls, but poorer consumers are often unable to afford the high prices The government has, as usual, blamed the shortages on unscrupulous suppliers hoarding their stock, rather than selling it at the mandated prices The Venezuelan Coffee Industry Association, however, has blamed the shortages on the strict control of how much coffee roasters must pay for beans and for how much they are allowed to sell

the finished product Until this situation is resolved, growth in coffee consumption will be hindered by the supply shortages and the disincentives to invest in the sector that come from price controlling

The supply restrictions have, however, been eased to a certain extent by the increase in imports in 2010

(see below for further analysis) As a result, we have revised up our estimate for 2009/10, and now see

demand growing by 4.7% y-o-y to 968,500 bags With imports set to grow again in 2010/11, we forecast demand to continue rising by 1.5% y-o-y to 983,500 bags Out to 2014/15, we see demand growing by 10.0% to 1.07mn bags

Table: Venezuela – Coffee Production & Consumption

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

Government Announces Coffee Price Rise

On November 5 2010, the Venezuelan government announced an increase of 29% in the price paid to producers for green coffee The move will see the government-mandated price rise from VEF585 to VEF747 per quintal (45kg) and is backdated to October 1 2010 The increase will bring some relief to coffee producers who have seen their profit margins slashed by rocketing inflation and rising production costs However, the increase is less than they had been hoping for, and is unlikely to lead to any

significant rise in production for the 2010/11 harvest

Coffee Crisis

Venezuela was once among the world's largest producers of coffee At the beginning of the 20th century, coffee production was the mainstay of the Venezuelan economy accounting for more than 80% of the country's exports Since then, however, its significance has fallen, particularly after the discovery of oil led to other industries being crowded out Today Venezuela accounts for less than 1% of world coffee production Government mismanagement of the sector in recent years has seen production dwindle to the point where the country is now reliant on imports from Brazil, El Salvador and Nicaragua In 2009/10, Venezuela imported around 310,500 bags in order to meet domestic demand

Although the Venezuelan government continues to blame the private sector for the failures of the

economy, coffee producers hold the government's intervention in the sector responsible for the collapse of the coffee industry Since 2003, coffee has come under price controls with the retail price for ground coffee and the farmgate price for green coffee set by the government In December 2005, the government almost doubled the price roasters must pay farmers for their beans Many roasters then refused to sell

their product, claiming they would lose money if they did This led to an increase in tension with Chávez' government, as the army seized coffee stocks from roasters and Chávez threatened to nationalise the

industry (see below for further analysis) In November 2008, the problem had still not been solved and

coffee was once again disappearing from shop shelves In that month the government raised the retail price of coffee to VEF18.85/kg from VEF11.45 to try and spur production

In 2004, the government announced plans to invest US$156mn in the sector as part of its ambitious 'Coffee Plan', so production could more than double to 3mn quintals (2.3mn bags) by 2007 The area planted with coffee was to increase by 50,000 hectares, and the government would plant new trees and build new roads in coffee growing areas Despite considerable investment, the plan has been a failure and the area planted to coffee has actually decreased to around 200,000 hectares Growers were dissuaded from investing in production increases by unappealing government-fixed farmgate prices which have failed to increase in line with rises in production costs, decreasing the profitability of coffee As a result, farmers have increasingly turned towards more profitable crops, complaining that the price they received for coffee did not cover production costs

The difficulties faced by the sector have led to falls in consumption and the quality of production Low investment in coffee farms has left most with old trees well past their peak production and vulnerable to attack by pests This means that average yields from coffee farms in Venezuela are less than half those seen in Brazil and less than a third of those seen in Colombia Consumption is also only a fraction of its former level, falling from 3kg per capita in 1990 to just over 1kg at the beginning of the 21st century, before creeping back up to its current 1.9kg per year as incomes rose and the government controlled the retail price

Unless the Chávez government alters its restrictive policies and relaxes control over the sector, we see little potential for the coffee industry to reach the 3mn quintal target that the government envisaged If price controls are not loosened, farmers will continue to abandon coffee growing and the degradation of plantations will continue, continuing the country's import dependence

Government Forced To Turn To Imports As Production Dwindles

Despite the Chávez administration's stress on attaining self-sufficiency in food production, poor

management as well as adverse weather conditions have forced the government to turn to imports to meet the requirements of Venezuela's processing industry and supply domestic demand

Since 2002/03, Venezuelan coffee imports had been negligible, totalling 0-13,000 bags per year

However, in 2009/10, imports increased to an estimated 310,000 bags: 182,580 bags came from Brazil, 121,348 bags from Nicaragua and 6,957 bags from El Salvador With domestic production forecast to decline once again, the country's heavy reliance on imported coffee set to continue into 2010/11

'Socialist' Or 'Capitalist' Coffee On Offer In State-Run Chain

In November 2010, the state-run coffee chain Café Venezuela began offering customers parallel price

lists - 'socialist' and 'capitalist' - to demonstrate the benefits of a state-controlled economy over the

purported exploitations of the free market The 'socialist' list offers coffee at half the price of its capitalist counterpart, in a move designed to boost the popularity of Chávez' controversial socialist policies A diagram on the wall details for customers how the different prices are reached, outlining the costs of labour, overheads and raw materials, as reported by Reuters "Made in Socialism" badges decorate posters and menus The affordable prices are proving a hit with customers, as have other food price subsidies introduced by the Chávez regime However, critics claim that the move is a further populist gimmick designed to distract attention from the spiralling inflation, food shortages and economic contraction that continue to plague the country

Coffee Plants: Victims Of Nationalisation

At the beginning of August 2009, the Venezuelan government announced that it would expropriate two

coffee processing companies: Fama de América and Café Madrid The action was taken as the

government claimed that the companies monopolised the market and encouraged smuggling activities Together, the two companies controlled around 80% of the coffee market in Venezuela The move seems

to have been sparked by an announcement by the companies that they were running out of coffee supplies and had enough left to meet only a few days of demand The government claimed the companies had been involved in illegally exporting coffee to Colombia to take advantage of the higher prices The government initially claimed the seizures would be temporary But a few days after the occupation of the plants, Chávez spoke of permanently expropriating them This move seemed increasingly likely in September after Commerce Minister Eduardo Samán said in a speech that he would recommend for the companies' assets to be expropriated following the expiration of the initial intervention order used to take control of the plants In mid-November, the government finally announced the official expropriation of Fama de

América as well as Cafea, a smaller roaster based in Táchira State In May 2010, Venezuelan officials

seized control of a Fama de América processing plant in the state of Carabobo after talks to agree a price for the plant broke down, as reported by Associated Press It was unclear whether Fama de América would receive compensation At the time of writing, the government was still in discussions with Cafe Madrid over the formation of a joint venture

Regardless of whether the allegations of illegal export of coffee are true - they are strenuously denied by both companies - the seizures and the looming shortages that motivated them highlight all that is wrong with the Venezuelan coffee industry The farmgate prices for coffee fixed by the government are well below the level in neighbouring Colombia With Colombia suffering its own shortage of coffee in 2009 owing to a poor crop, demand for coffee from neighbouring countries is high It is inevitable that

Venezuelan coffee will find its way over the border given the difference in prices on offer The low prices offered are also causing yields to fall as growers complain that they are unable to hire enough labourers or invest in improving tree stock The added instability in the sector following the seizures will only make matters worse as investors In August, just after the seizures, Venezuela imported 25,000 bags of coffee

from Brazil, the first imports from that country since 2004 We see Venezuela becoming increasingly reliant on imports in the future as domestic production is unable to meet demand

Now, including the plants of Cafe Madrid, the government is in control of 75% of the country's coffee roasting capacity The government is hoping to use its new power in the coffee sector to guarantee a constant flow of supplies to all areas of the country, with half of the nation's capacity provided by the government-operated plants and the remaining half in the hands of smaller private players We do not expect the going to be easy, however, particularly for the remaining private roasters According to data from the Superintendent of Silos, Warehouse and Agricultural Storage (SADA) reported in El Universal, only 99 of the 145 coffee roasters active in 2008 were still working in 2009 We expect the tough

operating environment to continue into 2010 and beyond as price controls continue

Premium Coffee Controls Hit Imports

In January 2009 speciality coffee was brought under government price control along with regular coffee Previously, premium brands had been exempt from the controls This saw the official price for many brands fall by up to 50% This obviously made official imports of many brands of high-quality coffee

unprofitable Colombian coffeemaker Café Oma told Reuters that its total exports fell by almost 80%

y-o-y in the first 11 months of 2009, primarily due to the collapse in demand from Venezuela, its major export market In total, the value of Colombian coffee and tea exports to Venezuela plummeted from US$1.77mn in the first 10 months of 2008 to US$54,450 in the same period of 2009 The fall was caused

by both the price controls imposed on specialist coffee, as well as the general fall in trade between

Venezuela and Colombia owing to the on-going spat between the countries' leaders Some low-grade Colombian coffee is reportedly still being imported by Venezuela to make instant coffee To make up for the fall in Colombian coffee, importers have turned to other markets such as Brazil In the longer term, we expect Colombian coffee to re-establish itself in the Venezuelan market The election of new Colombian President Juan Manuel Santos should present a good opportunity to reset relations between the two countries and normalise trade relations

Table: Venezuela – Coffee Production & Consumption

Risks To Outlook

With state involvement in the economy at such a high level, government policy will continue to be the major factor influencing the success of coffee production in Venezuela If the government and coffee producers cannot come to an agreement on prices acceptable to both sides, investment in production will not be forthcoming The threat of nationalisation still worries potential investors in the sector Coffee growing has also been hit in other ways by the encroachment of the state Agricultural labourers are reportedly becoming harder to find and more expensive, as workers choose employment with government projects instead of the private sector

On the upside, the dramatic fall in oil prices over the second half of 2008 and the following doldrums since could lead to more interest in developing agriculture as a major export earner, once again At the

end of July 2008, Venezuela-owned petrol station chain Citgo Petroleum Corporation announced that it

would begin selling Venezuelan coffee at its forecourts in the US While production is not yet large enough to meet both domestic demand and support an export industry, if Venezuelan coffee could find popularity on world markets as neighbouring Colombian coffee has done, then investment in the sector could increase

Venezuela Sugar Outlook

BMI Supply View: The Venezuelan sugar sector has declined dramatically in the past 24 months and the

country has been facing severe sugar shortages Sugar production rose rapidly between 2003/04 and 2007/08, growing by 41.8% to reach 780,000 tonnes This growth was driven by improving efficiency of production, as the area under sugar cane cultivation saw no significant increase over the period In

2008/09, however, heavy rains followed by severe droughts saw yields fall and production dropped by 14.7% year-on-year (y-o-y) to an estimated 665,000 tonnes In addition, the uncertain investment climate and marginal profitability of the sugar sector has seen the area planted to sugar fall, as land seizures and government price caps have deterred producers As a result, we estimate that production fell by a further 9.9% y-o-y in 2009/10 to 599,100 tonnes We see production increasing only marginally in 2010/11 to 608,500 tonnes as land expropriations and price controls continue to take their toll

Over our forecast period to 2014/15, we expect sugar production to increase by 16.6% on the 2010 level

to reach 698,500 tonnes This will be achieved with new mills coming on line We warn, however, that this will be dependent on the policies of President Hugo Chávez' government In 2008, a number of sugar cane plantations were seized by the government If the seizure of sugar cane plantations continues and the new co-operatives created to run them are unable to sustain production, then the managers of the new mills being built may find that there is not enough cane to supply them

BMI Demand View: Sugar consumption has seen strong growth over the last few years, spurred by the

economic recovery from 2004 From 2005 to 2010, consumption increased by 37.4% to 1.19mn tonnes,

as rising per capita incomes allowed consumers, particularly from poorer segments of society, to increase the amount they spent on food Countering this in the last couple of years, however, has been high food price inflation and supply shortages With domestic production covering only around three-quarters of consumption in 2008, imports have had to be found to supply the remainder The Chávez government has been criticised by industry bodies for not acting more quickly to ensure that enough sugar was available

to meet demand Conversely, Chávez has blamed the shortages on producers hoarding their output and illegally exporting it to neighbouring countries such as Colombia

In an attempt to boost domestic production, the government raised the official price of sugar in October

2009 and again in March 2010, to VEF3.73/kg We expect this to have only a moderate impact on

consumption, with supply restrictions a more likely constraint A large increase in imports in 2010 helped ease shortages, allowing consumption to continue to rise Around 60% of sugar is destined for the

industrial sector and used in soft drinks, snacks and confectionary Domestic consumption accounts for the remaining 40% We see imports remaining around 700,000 tonnes in 2010/11, which will continue to support domestic consumption We see the growth rate slowing to 0.6% y-o-y to reach 1.20mn tonnes Out to 2015, we expect sugar consumption to grow by 9.3% on the 2010 level to reach 1.30mn tonnes

Table: Venezuela – Sugar Production, Consumption & Trade

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

Price Rise Fails To Revitalise Sugar Sector

Venezuelan sugar production has fallen dramatically since 2008 Large amounts of sugar-producing land have been expropriated in the states of Aragua and Carabobo under the government's 'Land and Free Men' programme to 'liberate' land from private control The expropriations have had a negative impact on Venezuelan sugar production and the area planted to sugar has fallen Sugar cane growers have also been discouraged from planting from the shrinking profit margins in the sector Despite two increases in the official cost of sugar on the domestic market in October 2009 and March 2010, producers are still

reluctant to devote acreage to sugar or to invest further in the sector Of the market price of VEF3.73 per kilogram, cane producers were receiving just VEF1.20 per kilogram delivered to the processor; far short

of the production cost of VEF2.60 per kilogram In addition, cane producers are yet to receive

government subsidies granted to them in 2009, further deterring them from planting

The negative production margins bode ill for Venezuela's sugar sector going forward BMI sees little

hope of much needed investment in the sector through 2011 and anticipates that an increasing amount of domestic demand will be satisfied through imports Imports shot up from just 150,000 tonnes in 2006 to

an estimated 700,000 tonnes in 2010, according to data from the US Department of Agriculture (USDA) Imports, therefore, outstripped domestic production of an estimated 600,000 tonnes The majority of imports are raw sugar from neighbouring Brazil However, the tight caps placed on refined sugar prices

by the government for the domestic market make sourcing imports difficult and reduce profitability on the domestic market The sugar shortages experienced in recent months could, therefore, continue to hit the Venezuelan market unless the government relaxes its restrictive policies

Seizures Continue Into 2010

In the first quarter of 2010, the government took control of another two of the country's sugar mills On March 9, the government moved in to run Santa Elena mill in Potuguesa and the Santa Clara mill in Yaracuy for a period of 90 days The moves were motivated by allegations of irregularities in supply - the authorities claim that 4,000 tonnes of sugar were being hoarded in a warehouse by the Santa Elena mill

The owner of the two mills, a Guatemalan businessman, has denied any wrongdoing, according to an Associated Press report The government has been encouraging citizens' groups to keep an eye on mills and sugar processing plants to watch out for any suspicious practices With the cost of imports high and Venezuelan mills unable to meet demand, we would not be surprised if the government permanently seizes the mills owing to expected continued difficulty in keeping the country supplied with sugar

The March moves came only a few months after the government seized two sugar mills in the western border states of Táchira and Zulia in October 2009 El Universal reported that the Ministry of Agriculture and Lands said the seizures were needed as the mills' owners had put the desire for excessive profits before the needs of their workers and the general public The owners of the Zulia mill had raised the ire of the government in September by declaring a temporary shutdown leaving around 1,000 employees out of work The seizures mean that six of Venezuela's 15 sugar mills are under government control, according

to El Universal The agriculture ministry has vowed to raise sugar production at its mills, but we believe this will be difficult without considerable investment Years of price controls of sugar have worked as a disincentive to investment in milling technology The rise in the price of sugar will do little to solve the problem - millers wanted the price to be raised to VEF4.40/kg claiming that at before the most recent rise they received only VEF1.20/kg against costs of VEF2.60/kg, according to the USDA The government has offered subsidies to encourage investment, but many millers complain that payment of the subsidies has been irregular There is now little excess milling capacity available to increase sugar production This will not be easy to turn around The performance records of food production units seized by the

government have been highly mixed The government often lacks experienced managers to replace the outgoing former owners leading to difficult transitions We therefore do not expect to see a major increase

in production from the seized mills any time soon

Seizures Alone Cannot Drive Production

In April 2008, Venezuelan soldiers seized 32 sugar plantations in the north-western state of Lara The plantations were expropriated on orders from the National Land Institute which claimed they were

unproductive and could therefore be seized under the Land and Agricultural Development Law The president of the institute was quoted in press reports as saying that only 20% of the total 2,460 hectares seized was productive The local sugar producers association, however, reportedly claimed that 80% of the land was under cane cultivation and protests followed which the police dispersed with teargas The seized land has been transformed into a state co-operative called a Social Production Unit (SPU) SPUs have been popping up on expropriated land across the country, but it is still too early to say whether the hoped for gains in production can be achieved and sustained over the long term

Despite the dramatic news of land seizures and protests (with more than 80% of sugar cane grown by independent farmers on plots averaging only 45 hectares according to USDA data) just as much attention will have to be given to assisting smallholders as to pressuring large plantation owners Measures

introduced to help cane growers include subsidies for every kilogram of cane produced, zero income tax, cheap fuel and finance

These measures will only help relieve future sugar supply shortages if the milling capacity is built up to match any increase in sugar cane production The government has begun work on new sugar mills, but construction has been delayed and the projects have been hit by corruption allegations The most

infamous problems have been with the Ezequiel Zamora Agro-Industrial Sugar Complex in Chávez's home state of Barinas In early 2006, 17 people, including members of the military, were arrested amid accusations that millions of dollars had gone missing from the project The delay in bringing new mills online has led to cane being left in the field, owing to a lack of processing capacity

Shortages Force Changes In Consumption

Refined sugar is one the basic food staples for which the price is controlled by the government While this has insulated consumers from the high food price inflation seen over 2007 and much of 2008, the

government has often been unable to get enough sugar to the market at the official rate, leading to long queues at its Mercal-branded supermarkets The black market has been quick to fill the gap left by

shortages for those who can afford to pay a premium, with street stalls selling refined sugar at three or four times the official price Other consumers have turned to less favoured types of sugar such as bars of brown sugar and fruit lactose products, which are not covered by price controls In March 2009, the government signed into law new regulations stipulating that 70% to 95% of output from companies producing basic food products such as sugar must be products that come under the price control system This could restrict supply of alternatives to refined sugar

Table: Venezuela – Sugar Production, Consumption & Trade

The introduction of ethanol production could also threaten sugar production, as sugar cane would have to

be diverted to make the fuel In July 2008, Chávez said that he planned to build 14 ethanol plants in

Venezuela, with the first four to be completed by the end of 2009 Unless sugar cane production can be significantly raised, this will put further pressure on the countries already face tight sugar supplies

Venezuela Cocoa Outlook

BMI Supply View: Cocoa, like coffee, was once a mainstay of the Venezuelan economy Since the

middle of the last century, however, interest in the commodity has waned as focus turned to oil and production declined Venezuela now produces only around 0.5% of total world output, and the majority

of that is consumed domestically, leaving little left for exports In 2008, Venezuela produced 19,000 tonnes of cocoa In 2008/09, we estimate production to have risen by 18.4% year-on-year (y-o-y) to 22,500 tonnes as producers took advantage of the high world cocoa prices In 2009/10, however, we estimate that production declined owing to the impact of the long drought that has afflicted parts of Venezuela We see growth returning in 2010/11, particularly if President Hugo Chavez' government

implements plans to revitalise the sector (see below for further comment ) We are currently forecasting

growth of 8.9% y-o-y to 23,920 tonnes

However, for production to be significantly increased, a number of obstacles must be overcome Yields at only 0.34 tonnes per hectare are very low by international standards and farms have been starved of investment for years Renewing cocoa trees and improving infrastructure in cocoa growing areas will take

time and a concerted investment effort While BMI is forecasting cocoa production to increase by 20.7%

on the 2010 level over our forecast period to 2014/15, we do not see the large gains that the government is hoping for being achieved

BMI Demand View: A young population and rising incomes have driven demand for chocolate in

Venezuela over recent years With the recovery of the economy beginning in 2004, demand for cocoa rose rapidly in 2004 and 2005 as consumers had more money to spend on non-essential food Since then, however, high food price inflation has once again strained consumers' food budgets and consumption growth has stagnated, falling 2.2% y-o-y to an estimated 14,180 tonnes in 2008 We believe that

consumption fell by a further 1.7% y-o-y in 2010 as Venezuela suffered a second successive year of economic contraction With food prices still rising, consumers' budgets are likely to remain tight, and we see consumption stagnating in 2011 Out to 2014/15, we forecast cocoa consumption increasing by just 1.3% on the 2010 level to 13,990 tonnes

Table: Venezuela – Cocoa Production, Consumption & Trade

Notes: f BMI forecasts Sources: 1 International Cocoa Organisation, BMI

Cocoa Declared 'Strategic Product Of The Nation'

In October 2010, President Hugo Chávez unveiled plans to turn Venezuela into a leading power in cocoa production and exportation Declaring cocoa a 'strategic product' of the national economy, Chávez

revealed plans to increase cocoa production to 30,000 tonnes by 2012 and 60,000 tonnes by 2019 In order to achieve these ambitious goals, Chávez proposed rescuing abandoned plantations and requested Venezuela's Executive Vice President Elias Jaua to carry out research into suitable additional land for cocoa production Chávez also urged small plantation owners to band together as producers associated to the state In addition, Chávez announced that the government was in the process of building a chocolate plant with processing capacity of 25,000 tonnes

The news was welcomed by Alexander Prósperi, president of the Venezuelan Cocoa Chamber (Capec), Prósperi underlined the importance of boosting domestic production in order to guarantee supply to the processing sector and avoid the need for imports, which would compromise the certification of origin of Venezuelan cocoa, which is highly prized on world markets In addition, he ruled out the possibility of the government nationalising or expropriating land in order to boost cocoa production, arguing that the majority of cocoa farmers are small-scale producers on low incomes

This is not the first time that the government has announced plans to revitalise the country's cocoa sector: similar strategies were revealed in 2000 and again in 2005, when cocoa growers and grinders were granted credit from the government to increase production In 2008, the government also declared cocoa a priority for agricultural development

Coveted Chuao Beans Premier On US Market

Despite its current low fortunes, Venezuelan cocoa beans are still regarded as some of the finest in the world and sell at a premium on the world market, often commanding prices of two to three times above those achieved by cocoa from other growing regions If production can be increased, Venezuelan cocoa would likely find a willing market in the premium chocolate sector due to its world-renowned Criollo cocoa, which is far superior in quality to the mass-produced cocoa of West Africa The varietal is among

the most sought after and expensive in the world and is highly sought after by international chocolatiers for its aromatic flavours Chuao criollo beans - named after the plantation and geographical area in which they are grown - are considered Venezuela's finest beans and among the best in the world The 140-hectare plantation is located in Northern Venezuela inside one of Latin America's oldest national parks, the Parque Nacional Henri Pittier Rancho Grande Farmers from the village of Chuao have cultivated cocoa for over 300 years and maintain traditional farming, which guarantees the beans' unique flavour Beans are famously sun-dried on the patio of the village's centuries-old colonial church, rather than dried

in kilns In addition, the region's unique soil conditions and humid, the wet equatorial climate creating optimal production conditions for the cocoa bean Cocoa production is managed by the community's

cooperative, the Empresa Campesina de Chuao, Since 2000, the Chuao bean has been protected by an

appellation of origin, which helps the cooperative to command high prices for their produce

Due to its low production volume, the Chuao cocoa bean is notoriously difficult to source and is highly prized by international chocolate producers The rare bean made a splash on the US market in June 2010

when Utah-based Art Pollard, owner of Amano Artisan Chocolate, unveiled a 2-ounce Chuao chocolate

bar at the Summer Fancy Food Show in New York City For the past few decades, Italian chocolate

company Amedei has had exclusive rights to the bean Pollard succeeded in purchasing the Chuao beans

through his close relationship with cocoa growers in Venezuela

The prestige of Chuao beans demonstrates the rich potential of cocoa production in Venezuela However, for this potential to be realised, greater investment will be needed to preserve genetic lines and revitalise plantations that have suffered from years of neglect The underdevelopment of many plantations and the traditional techniques of many produces has, however, aided the development of organic cocoa farming, a further niche market with huge promise for the Venezuelan cocoa sector, due to the large premium commanded by organically grown beans on the international market

Table: Venezuela – Cocoa Production, Consumption & Trade

to be unproductive will be a worry for producers and a disincentive to invest in cocoa production

Agricultural workers have also become harder to employ as people have moved into state employment Funds for investment will now likely be harder to come by as oil prices have fallen so far, starving the government of funds

The fragile world economy could continue to hit demand for Venezuela's high-quality cocoa as

consumers in high-income countries are forced to cut back on non-essential products such as premium chocolate At present, however, cocoa prices are bucking the trend for falling commodity prices and at the time of writing were still above US$3,000 per tonne

So far Venezuela's cocoa has been largely free of the witch's broom fungus which devastated cocoa farms

in neighbouring Brazil However, with much of Venezuela's stock of cocoa trees fairly old, it remains vulnerable to the disease which would severely hamper attempts to revitalise the sector

Venezuela Livestock Outlook

BMI Supply View: After strong growth in the 1990s and the first few years of the 21st century,

Venezuelan beef production has gone into reverse in the past few years Venezuela was self-sufficient in beef in 2003, but in 2009 imports accounted for an estimated 52% of domestic consumption A complex system of price controls imposed by President Hugo Chávez in 2003 has restricted the profitability of livestock production in the country Prices have not risen since August 2008, despite spiralling inflation and the increase in production costs The threat of land seizures has also inhibited investment in

expanding production In 2007, as feed costs began to rise rapidly, many producers left the sector as they were unable to sell their produce at a profit Production slumped 7.6% year-on-year (y-o-y) in 2007 and 16.3% y-o-y in 2008, according to figures from the US Department of Agriculture (USDA) Increasing demand has led to shortages of meat in the shops In August 2008, the government raised the price of beef

to try and spur production, but farmers complained that it wasn't enough The fall in production has left Venezuela, which in the first few years of this decade was all but self-sufficient in beef, having to import more than half its beef

Chávez is hoping to boost production by turning over land judged as unproductive to landless farmers The project, however, has met with mixed results with some formerly productive ranches seeing

production evaporate under the direction of inexperienced new managers In 2009, production fell again, dropping by a further 5.6% y-o-y to 288,000 tonnes In 2010 we expect to see a moderate recovery as imports from Colombia continue to face restrictions, giving a boost to local producers We estimate that production grew by 13.1% y-o-y to reach 327,900 tonnes However, we see production dropping back once again in 2010/11, due to the lack of profitability for producers Towards the end of our forecast period we expect production to begin to rise again as the government makes efforts to lessen the reliance

on imports However, the recovery will be slow, and we see production increasing by just 2.1% on the

2010 level to reach 335,000 tonnes in 2015

Poultry production has weathered the storm of Chávez' reforms somewhat better than the cattle rearing sector Production fell sharply in 2003 as Venezuela's economy was hit by recession The sector has recovered since that year, despite the price controls, though output is still way below the level seen in

2002 The poultry sector is well developed with many large, vertically integrated players This has helped producers continue to squeeze a profit despite rising feed costs Growth in production would surely have been much higher if it weren't for the price controls In 2008, as feed costs soared, production fell by 6.1% y-o-y to 695,000 tonnes For 2009, there was a small contraction in production of 2.2% y-o-y owing

to the economic difficulties and continued high input costs These conditions continued into 2010 and we now believe production declined once again, with output further dented by the increasing competition from imports from Brazil and Argentina The increase in March 2010 to the state-regulated price for poultry to VEF13.83 per kilo provided some relief for producers, but has done little to stem the

downwards spiral We estimate that production fell by 6.9% y-o-y to 653,500 tonnes and forecast a further 3.2% y-o-y fall in 2011 to take production to 623,300 tonnes Out to 2015, we see production

increasing by 5.1% on 2010 output to reach 686,900 tonnes, still some way below the level seen in the early years of the 21st century

BMI Demand View: Meat consumption soared in Venezuela's boom years from 2004 to 2008 The rise

in demand was driven by a combination of strong oil-fuelled economic growth and government price controls making staple foodstuffs more affordable After falling sharply in 2003, poultry consumption had grown by more than 50% by 2008 Beef consumption also grew by almost 40% between 2004 and 2008 While the price controls have increased demand, they have, as discussed above, worked against

investment in production This has often left consumers unable to buy meat, at least not at government prices Poultry imports reached 352,000 tonnes in 2008 while 320,000 tonnes of beef were imported as domestic production was unable to meet demand In 2009, with Venezuela's economy contracting by 2.5%, there were large falls in consumption, with demand for poultry and beef falling by 17.8% y-o-y and 4.9% y-o-y, respectively In 2010, despite a further 2.0% contraction in real GDP, we believe that meat consumption began to recover somewhat due to the availability of imports In addition, while price controls have placed a strain on production, they have, however, helped to boost consumption We now believe that poultry consumption grew by 7.1% y-o-y in 2010 to 922,000, as imports arrived from Brazil and Argentina Beef grew by more moderate 1.1% y-o-y to reach 513,400 tonnes In 2010/11, we expect the reliance on imports to continue to shore up demand, and see poultry consumption stabilising at 926,000 tonnes, while beef consumption is forecast to increase by 1.5% y-o-y to 520,900 tonnes Out to

2015, poultry demand is forecast to grow by 10.7% on the 2010 level, while beef is project to rise by 13.3% Pork consumption is much lower than poultry and beef Consumption grew by 6.1% from 2005-

2010 to reach 126,300 tonnes Growth is forecast at 5.5% from 2010-2015 in line with population

increase to take consumption to 133,200 tonnes at the end of our forecast period

Table: Venezuela – Poultry Production, Consumption & Trade

Table: Venezuela – Pork Production, Consumption & Trade

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

Table: Venezuela – Beef & Veal Production, Consumption & Trade

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

Chávez Orders Vestey Land Seizures

In October 2010, President Hugo Chávez ordered the seizure of 300,000 hectares (ha) of land and

120,0000 head of cattle owned by Compañía Inglesa, the Venezuelan arm of British food company the Vestey Group The company is owned by Lord Vestey's family, who first began trading in Venezuela in

1909 The move forms part of the Chávez government's 'Socialist Revolution' to bring large swathes of land and industry under state control The announcement was made on Chávez's weekly programme, 'Aló Presidente', and came just days after his United Socialist Party of Venezuela (PSUV) failed to maintain his powerful two-thirds supermajority in local elections due to inroads made by a coalition of opposition parties In response, Chávez called for an acceleration of the agrarian reform programme, and vowed to clamp down on foreign landholding

It is not the first time that the Vestey Group has been targeted by Chávez' government In 2005, the government nationalised four farms owned by the Vestey Group, including the 33,600-acre Charcote estate south of Caracas, with 13,000 head of cattle

Butchers Behind Bars

Controversy hit the beef sector in Q210 as at least 40 butchers were arrested in early May on charges of selling meat at higher prices than authorised by the government's strict price control system The

government currently allows beef to be sold at VEF17 (US$4) per kilogram, but the butchers are accused

of charging VEF24-40 per kilo, depending on the cut Butchers have complained that they have to pay around VEF14 for the meat, leaving them uenable to cover the costs of running their business The price controls have remained unchanged since 2008, despite rocketing inflation that has led to steep increases

in costs Eight butchers have been found guilty, fined US$3,000 and put on parole, and are obliged to check in with the court every two weeks, according to Dow Jones A further 32 butchers are yet to be tried; if convicted, they too face heavy fines or between two and six years in prison

However, President Chávez has criticised the butchers' arrest, arguing that officials from the government's consumer rights defence institute, Indepabis, should instead scrutinise the activities of the distributors and big businesses in the beef industry Chávez insisted that if they are found to be violating price controls their assets should be expropriated

The arrest of the butchers is indicative of the extreme difficulties caused by the rigid controls imposed by Chávez's government in its move towards an ever more centralised, state-controlled economic model Despite strong demand, domestic beef production is falling dramatically, as government restrictions drive producers and retailers out of the market, leading to a scarcity of beef on the domestic market As in other areas of the Venezuelan economy, a once profitable sector has been crippled by Chávez's campaign against capitalism

Thawing Relations With Colombia To Ease Beef Supply Restrictions

The long-running trade dispute between Venezuelan President Hugo Chávez and former Colombian president Álvaro Uribe has posed difficulties for Venezuela's beef supply for over a year In 2008,

Venezuela imported about 200,000 tonnes of beef from Colombia, in addition to live cattle However, at the end of July 2009, Chávez froze diplomatic relations with Colombia in response to its neighbour allowing US troops to operate out of its bases in their fight against drug production Chávez was also angered by Colombian protests over anti-tank missiles found in the possession of FARC guerrillas that apparently originated from the Venezuelan army Following the dispute, Chávez vowed to cut trade with Colombia and find alternative sources of vital imports Tensions continued in Q409 with Venezuelan troops reportedly blowing up foot bridges between the two countries in mid-November

While we do not believe the exports have completely ground to a halt - even if official trade is completely stopped, a lucrative smuggling industry remains - the fall in trade has placed strain on Venezuela's meat supply The value of imports of meat and offal from Colombia fell by a whopping 97.6% y-o-y in

October 2009, according to Colombia's statistics agency DANE, with total imports from Colombia for the month falling by 70.4% In late October, Venezuela's minister of food told newspaper El Universal that

no permits to import meat from Colombia had been issued since before September The minister said the