Venezuela agribusiness report q1 2012

We forecast only marginal growth of 0.6% y-o-y in beef production in 2011/12 as the sector continues to be held back by a lack of profitability due to high input costs and government pri

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AGRIBUSINESS REPORT Q1 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2012

CONTENTS

Executive Summary 5

Key Forecasts 5

SWOT Analysis 7

Venezuela Agriculture SWOT 7

Venezuela Political SWOT 8

Venezuela Economic SWOT 9

Venezuela Business Environment SWOT 9

Supply Demand Analysis 10

Venezuela Coffee Outlook 10

Venezuela Coffee Production & Consumption 11

Venezuela Grain Outlook 15

Venezuela Wheat Production & Consumption 16

Venezuela Corn Production & Consumption 17

Venezuela Wheat Production & Consumption 19

Venezuela Corn Production & Consumption 19

Venezuela Sugar Outlook 20

Venezuela Sugar Production & Consumption 21

Venezuela Sugar Production & Consumption 23

Venezuela Livestock Outlook 24

Venezuela Poultry Production & Consumption 25

Venezuela Pork Production & Consumption 26

Venezuela Beef & Veal Production & Consumption 26

Venezuela Poultry Production & Consumption 28

Venezuela Pork Production & Consumption 28

Venezuela Beef & Veal Production & Consumption 28

Venezuela Cocoa Outlook 29

Venezuela Cocoa Production & Consumption 30

Venezuela Cocoa Production & Consumption 32

Commodity Price Analysis 33

Monthly Grains Update 33

Corn 33

Rice 34

Soybean 35

Wheat 36

Monthly Softs Update 37

Cocoa 37

Coffee 38

Palm Oil 39

Sugar 40

Industry Forecast Scenario 41

Macroeconomic Forecast 44

Venezuela - Economic Activity 46

Industry Trend Analysis 47

Soft Drink Firms Targeted By New Price Cap Laws 47

BMI Forecast Modelling 49

How We Generate Our Industry Forecasts 49

Executive Summary

BMI View: The agricultural sector is set to see a boost in funding in 2012 Venezuela's budget bill for

2012 contains provision for an increase in spending of almost VEF3bn (US$697mn) to boost agricultural production and improve food security Much of the additional funding would be directed towards the government's Misión AgroVenezula programme, which was established in early 2011 with the aim of boosting agricultural production by providing low-cost loans and technical assistance to small-scale farmers The increased financing would be used to improve infrastructure, including roads and irrigation systems, and to boost investment in machinery, warehouse storage and national seed production In total, the 2012 budget bill sees government spending increase to almost US$70bn, up from US$47.7bn in 2011, with the transportation infrastructure and energy sectors also set to receive increased funding

Key Forecasts

BMI believes that increased government spending in the run up to the October 2012 presidential elections

will drive private consumption growth to 3.0% in 2012 through more social transfers, with overall real GDP growth forecast at 2.3% However, the country continues to battle with steep inflation, which we see remaining elevated at 26.0% in 2012, down from an estimated 29.0% in 2011

We now believe that demand for poultry fell by 3.0% y-o-y in 2011 as production fell and exports were also down on the previous year We see consumption remaining static in 2012 Out to 2016, we forecast that demand for poultry will grow by 5.4% on the 2011 level to reach 910,000

We forecast only marginal growth of 0.6% y-o-y in beef production in 2011/12 as the sector continues to

be held back by a lack of profitability due to high input costs and government price controls, along with increased competition from imports from Brazil and Nicaragua Out to 2015/16, we see production increasing by just 4.8% on the 2010/11 level to reach 351,000 tonnes

Imports of coffee are forecast to fall by around 115,000 bags in 2012, with domestic production unlikely

to make up the difference As a result, we see coffee consumption dipping by 2.2% y-o-y to 1.13mn bags Out to 2016, we see demand growing by 13.9% on the 2011 level to 1.31mn bags

As a result of rising wheat prices on the international market, we estimate that consumption declined by 3.0% y-o-y in 2011 to 1.50mn tonnes We forecast growth will pick up 2.0% in 2012 to 1.53mn tonnes as prices fall back Out to 2016, we see consumption growing by 17.1% on the relatively low 2011 level to reach 1.76mn tonnes

Key Trends And Developments

In early December 2011, the Chávez government announced that it would enter into partnership with

Mexican firm Gruma, the world's largest producer of corn flour for tortillas The Venezuelan government had previously stated its intention to nationalise the assets of Gruma subsidiary Monaca The

announcement, which resulted from a meeting between Chávez and his Mexican counterpart President Felipe Calderón held in Caracas, will see the establishment of two joint ventures, one focusing on the production of corn flour and rice, and the second producing pasta, wheat flour and oatmeal The move was welcomed by President Calderón as providing a stronger legal platform for encouraging other

Mexican firms to invest in Venezuela

On October 6, the Venezuelan government signed bilateral agreements worth an estimated US$8bn at a meeting in Caracas between President Hugo Chávez and the Russian Deputy Prime Minister Igor Sechin The agreement is a further indication of the deepening strategic relationship between the two nations The agricultural sector is set to benefit, as the agreement opens the way for the export of Venezuelan cocoa and flowers to Russia, as well as setting out a joint project to grow and export Venezuelan plantains The areas of development, technical and military cooperation and energy are also set to benefit from the new bilateral accords

The Law for Fair Prices and Costs, first signed into law in July 2011, came into effect on November 22 The law aims to combat Venezuela's spiralling inflation, which is estimated to come in at 29% in 2011,

by stabilising prices, introducing price caps, combating speculation and hoarding and guaranteeing access

to goods The government is now beginning to implement the law by setting maximum prices for

personal hygiene, food and household products A second phase of implantation will begin in January

2012 and will see revised pricing structures for medical products

Expropriations continue to hit the agroindustrial sector On November 1, President Chávez announced the

immediate expropriation of 290,000 hectares of farmland in 11 ranches owned by Agroflora, a subsidiary

of the British beef producing firm Vestey Group Agroflora is engaged in the production of cattle, beef

and buffalos President Chávez announced the news during a live broadcast on state television channel Vive, claiming that under the terms of the Food Security and Sovereignty Law, land is 'social property' Chávez claimed that the forced expropriation came following the breakdown in negotiations with

Agroflora over a compensation agreement for the land

Italian dairy firm Parmalat could be the next company to see its assets nationalised In November,

President Chávez accused the firm of monopolising milk supplies and hoarding produce, following the discovery of 210,000 tonnes of powdered milk in a warehouse in the northwestern state of Mérida Swiss

processing company Nestlé was fined almost US$90,000 for hoarding 260,000 tonnes of milk in early

December There have been shortages of powdered milk at government-regulated prices for much of 2011 and the Institute for the Defence of People's Access to Goods and Services (Indepabis) has stepped up its efforts to prevent hoarding and price speculation Powdered milk, coffee and other products can be found

on the black market, but costs are often twice the government-legislated price

SWOT Analysis

Venezuela Agriculture SWOT

agricultural products

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

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

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

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

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

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 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

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

interdependencies

Venezuela Economic SWOT

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

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

benefit from increased competitiveness

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

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

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

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

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)

Supply Demand Analysis

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 However, as with other agricultural sectors, 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 Producers have also faced competition from imported coffee, leading many to abandon the sector in favour of more lucrative areas such as cattle ranching In recent years, the number

of coffee-growing families has fallen from an estimated 80,000 to less than 50,000

There had been hopes that the 2010/11 harvest would see a significant increase in output; however, heavy rains at the beginning of 2011 disrupted the flowering process, leading to lower yields Furthermore, the area harvested declined by an estimated 12% year-on-year (y-o-y) to 180,000 hectares, due to the

decreased profitability of coffee production We now see production declining by a further 4.1% y-o-y to 695,000 bags, with domestic demand expected to outstrip supply for the third successive year The 2011/12 harvest should, however, benefit from the renewal of fertilisation programmes as part of the government's Agricultural Plan We currently forecast a y-o-y increase of 15.4% to take output to 802,000 bags

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 2015/16, we see production reaching 912,000 60kg bags, 31.2% higher than the low level seen in 2010/11 This, however, will be dependent on government policy, particularly price controls If the government relax price controls further, 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: Coffee consumption has shown strong growth in recent years, rising by an

estimated 19.1% from 2006-2011 The vast majority of coffee consumed is roasted ground coffee, with soluble instant coffee accounting for only around 1% of total consumption Coffee is included in the government's basic food basket and is available in government food stores at controlled prices This has allowed more low-income Venezuelans to afford it, leading to strong increase in demand

Demand growth has, however, at times led to severe supply shortages and a booming black market Wealthier consumers are able to buy their coffee at cafes or street stalls, but poorer consumers are often unable to afford the high prices The government has 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

Supply shortages and food price inflation saw coffee consumption fall by an estimated 13.7% y-o-y to 880,000 bags in 2010 Supply shortages were, however, eased by a sharp rise in imports to an estimated

465,000 bags in 2011, up from just 85,000 bags as recently as 2009 (see below for further analysis)

Correspondingly, we estimate that domestic consumption shot up by 31.0% to 1.15mn bags Imports are forecast to drop to around 350,000 bags in 2012, with domestic production unlikely to make up the difference As a result, we see consumption dipping by 2.2% y-o-y to 1.13mn bags Out to 2016, we see demand growing by 13.9% on the 2011 level to 1.31mn bags

Table: Venezuela Coffee Production & Consumption, 2011 - 2016

Coffee Production, '000

60kg bags 1 695.0 802.0 835.0 868.0 892.0 912.0Coffee Consumption,

'000 60kg bags 1 1,152.8 1,127.4 1,177.8 1,234.0 1,279.5 1,312.9

Notes: f BMI forecasts Sources: 1 USDA

Price Controls Hit Profitability

Since 2003, the price of coffee has been subject to government controls and has not been adjusted

upwards at the same rate as rising production costs On November 5 2010, the Venezuelan government announced an increase of 27% in the fixed price paid to producers for green coffee The move saw the government-mandated price rise from VEF585 to VEF747 per quintal (45kg) and is backdated to October

1 2010 The increase brought 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 did not lead to a rise in production for the 2010/11 harvest

Subsequently, in December 2010, the government announced that the fixed price at consumer levels for different presentations of ground coffee and coffee beans would also rise by 29% This was the first increase in price since November 2008 The price of a kilogramme of coffee beans or ground coffee rose from VEF18.45 to VEF23.88, excluding VAT The price increase was, however, less than the coffee processing industry had hoped for The sector has seen its profitability eroded through increases in the prices of packaging, parts and the increase in the farm-gate price for green coffee However, the

expropriation of the two main coffee-producing companies, Fama de América and Café Madrid, will

enable production to continue, despite the squeezed profit margins

The price increases are unlikely to lead to significant increases in profitability High coffee prices on the international market led to a huge discrepancy between what producers receive and the cost of coffee on global markets While the price of a quintal of domestic coffee is fixed at US$174 (VEF747), in

neighbouring Colombia, a quintal of Venezuelan coffee is sold at US$465-698 This gulf is proving a strong disincentive to producers and has discouraged investment in coffee production

As a result of falling domestic output, the government has had to resort to increased imports to guarantee supply, with imports rocketing to 310,500 60kg bags in 2009/10 and 465,000 bags in 2010/11 Much of this came from Brazil and Nicaragua This further exacerbated tensions in the sector, with producers claiming that the government was effectively subsidising foreign coffee producers, as the price paid for imported coffee can be more than 50% the fixed price for domestic producers

Venezuela And Colombia Announce Binational Coffee Plan

In March 2011, it was announced that officials from the Colombian and Venezuelan governments are developing a joint plant to support coffee growers on both sides of the Colombia-Venezuela border in areas that have been hard hit by the long-running conflict in Colombia The Binational Plan for the Perija Mountain Range will benefit coffee cultivators in Colombian departments of Cesar and La Guajira and in the Venezuelan state of Zulia As well as boosting coffee production, the plan also aims to improve food security, housing improvements, educational infrastructure, energy infrastructure and internet access The binational plan marks a further step forward for collaboration between the two countries, following an extended suspension in diplomatic relations during the premiership of former Colombian president Alvaro Úribe

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 interventions responsible for the collapse of the coffee industry as strict price controls have eroded the sector's profitability

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

'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

In mid-November 2009, 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 In January 2011, the Dutch Longreef Investment Group , which was a shareholder in

Fama de América, announced that it would sue the Venezuelan government for failing to pay

compensation for the expropriated assets The complaint was lodged at the International Center for Settlement of Investment Disputes in Washington DC

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 Café 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 through our forecast period as price controls continue

Table: Venezuela Coffee Production & Consumption, 2007 - 2012

Coffee Production, '000

60kg bags 1 862.0 900.0 900.0 725.0 695.0 802.0Coffee Consumption,

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 sell 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 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 Around 65% is white corn for human consumption and the remainder yellow corn for both human consumption and for feed 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

The most severe droughts seen in 37 years hit the 2009/10 harvest and production was also 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, have added to the difficulties facing producers The heavy rains in December 2010 hit the 2010/11 harvest, and we estimate that corn production rose by just 4.4% year-on-year (y-o-y) on the low 2009/10 harvest to 1.71mn tonnes Production is, however, aided by increased government investment through the Comprehensive Agricultural Development Plan 2011-2012, which has set ambitious targets to boost white and yellow corn by 61% and 110% respectively over the course

of two years In 2011/12, we see production increasing by 4.8% y-o-y to 1.79mn tonnes as the area harvested increases to a forecast 450,000 hectares

Out to the end of our forecast period in 2015/16, 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 27.7% on the 2010/11 level to reach 2.18mn 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 1.47mn tonnes in 2011 In

March 2011, wheat was added to the list of goods classified by the government as essential or staple, which will expedite import procedures

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 21st 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 by an estimated 97.6% from 2006 to 2011,

outstripping growth in production and leading to a surge in imports from the US

In 2011, we estimate that corn consumption registered an increase of 1.7% y-o-y to 3.46mn tonnes, owing

to stronger demand from the livestock sector We forecast that demand will grow at a similar rate in 2012

to reach 3.51mn tonnes Out to 2016, consumption will continue to increase as corn is one of the cheapest foods available and the price is kept down by government controls Growth will, however, be more moderate than during the previous five-year period and out to 2016 we see demand rising by 12.7% on the 2011 level to take consumption to 3.90mn 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 As a result of rising wheat prices on the international market, we estimate that consumption declined by 3.0% y-o-y in 2011 to 1.50mn tonnes We forecast growth will pick by up 2.0% in 2012 to 1.53mn tonnes as prices fall back Out to 2016, we see consumption growing by 17.1% on the relatively low 2011 level to reach 1.76mn tonnes

Table: Venezuela Wheat Production & Consumption, 2011 - 2016

Table: Venezuela Corn Production & Consumption, 2011 - 2016

Corn Production, '000

tonnes 1 1,705.2 1,786.3 1,872.3 1,973.6 2,075.9 2,178.3Corn Consumption, '000

tonnes 1 3,458.0 3,513.3 3,600.8 3,707.9 3,807.5 3,898.8

Notes: f BMI forecasts Sources: 1 USDA

Chávez Government Enters Gruma Partnership

In early December 2011, the Chávez government announced that it would enter into partnership with

Mexican firm Gruma, the world's largest producer of corn flour for tortillas The Venezuelan government had previously stated its intention to nationalise the assets of Gruma subsidiary Monaca The

announcement, which resulted from a meeting between Chávez and his Mexican counterpart President Felipe Calderón held in Caracas, will see the establishment of two joint ventures, one focusing on the production of corn flour and rice, and the second producing pasta, wheat flour and oatmeal The move was welcomed by President Calderón as providing a stronger legal platform for encouraging other

Mexican firms to invest in Venezuela

The relationship between the Venezuelan government and Gruma was a turbulent one throughout 2010

In January, Chávez announced that his government would temporarily take control of Gruma's unit, following the arrest of one its major shareholders under charges of financial irregularities Subsequently,

in May, 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

Grain Producers Receive Boost From Agro Venezuela Programme

In January 2011, the government of Hugo Chávez launched Mission Agro Venezuela, a new programme designed to support the country's agricultural production The programme aims to boost domestic

production and lessen reliance on imports, thus improving Venezuela's food security Mission Agro Venezuela will provide low-interest loans, machinery and technical assistance to the country's agricultural producers - from small to large-scale landowners VEF9.9bn (US$2.3bn) has been committed to the programme As part of the programme, a census is also being carried out of Venezuela's agricultural sector By mid-April, 586,000 growers had registered for the programme, according to government data

In April 2011, over 20,000 producers received government assistance of VEF554mn (US$129mn)

through the Mission Agro Venezuela programme at an event at Municipio Ture, in Portuguesa State According to Juan Carlos Loyo, the Minister for Agriculture and Lands, the funds will support the

development of an additional 150,000 hectares of farmland for the cultivation of rice and white and yellow corn

Government Sparks Empresas Polar Controversy

In September 2011, Empresas Polar, Venezuela's largest food and drinks company, struck back at

government accusations that its Harina Pan pre-cooked corn flour is no longer a Venezuelan brand José Villalba, the president of the Autonomous Service for Intellectual Property (SAPI), a government office that registers trademarks and invention patents, had previously stated that the Harina Pan brand, which is

emblematic of the production of the traditional arepa dish, is no longer Venezuelan, as the company had

sold the rights to the Canadian firm Deutsche Tran Trustee Inc (DTTI) In response, Empresas Polar

published a press release countering the claim and stating that, 'Harina Pan has always been and always will be a Venezuelan product.' The company claimed that the government was seeking to create confusion among the product's customers in order to detract attention from problems facing producers of white corn, who are struggling to source domestic raw materials, as well as the difficult situation facing

manufacturers of pre-cooked corn flour, who are incurring losses as a result of the government's price controls The dispute highlights the widespread discord surrounding the lack of profitability resulting from the fixed price regime, as well as the politics of nationalism that continue to exert a strong force over the agro-industrial sector

Mixed Results For Chávez's Production Drive

Since Hugo Chávez came to power in 1999, corn 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 was to relax import permit procedures in order to reinforce its

'food security' policy and avoid domestic food shortages In 2009/10, corn imports were estimated at 1.30mn tonnes, a similar total to that seen in 2008/09, of which 300,000 tonnes are expected to have been 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 have imported some 1.6mn tonnes of wheat

Table: Venezuela Wheat Production & Consumption, 2007 - 2012

Wheat Consumption,

'000 tonnes 1 1,697.0 1,500.0 1,550.0 1,550.0 1,503.5 1,533.6

Notes: f BMI forecasts Sources: 1 USDA

Table: Venezuela Corn Production & Consumption, 2007 - 2012

Corn Production, '000

tonnes 1 2,000.0 1,800.0 1,800.0 1,634.0 1,705.2 1,786.3Corn Consumption, '000

Venezuela Sugar Outlook

BMI Supply View: 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 Since then, however, the sugar sector has declined and the country has been facing severe sugar shortages 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 disincentivised producers The lack of profitability has deterred investment and many mills now stand idle Adverse weather conditions, including both heavy rains and severe droughts, have caused further declines in production

We estimate that production grew by just 1.5% year-on-year (y-o-y) in 2010/11 to 492,300 tonnes, having dropped by 27.1% y-o-y the previous year as land expropriations and price controls took their toll Some relief for beleaguered producers came with the June 2011 announcement of an increase in the

government-controlled price of sugar from VEF3.73 per kilo to VEF4.89

Over our forecast period to 2015/16, we expect sugar production to increase by 13.3% on the low 2010/11 level to reach 558,000 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 seizure of sugarcane plantations continues and the new co-operatives created to run them are unable to sustain production, the managers of the new mills being built may find 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 2006 to 2011, consumption increased by 36.6%, as rising per capita incomes allowed consumers, particularly from poorer segments of society, to increase the amount they spent on food 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%

High food price inflation and supply shortages have, however, countered this strong growth in recent years With domestic production covering only a fraction of consumption in recent years, 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

Large increases in imports since 2009 have helped ease shortages, allowing consumption to continue to rise In 2011, consumption grew by an estimated 3.0% y-o-y to reach 1.30mn tonnes, with imports

accounting for around 800,000 tonnes in 2011 However, as food price inflation continues to rise, we see the growth slowing and consumption increasing by just 0.7% y-o-y in 2012 Out to 2016, we expect sugar consumption to grow by 3.9% on the high 2011 level to reach 1.35mn tonnes

Table: Venezuela Sugar Production & Consumption, 2011 - 2016

Sugar Production, '000

tonnes 1 492.3 493.5 507.7 525.0 542.1 558.0Sugar Consumption, '000

tonnes 1 1,297.6 1,307.3 1,322.1 1,329.6 1,338.5 1,348.8

Notes: f BMI forecasts Sources: 1 USDA

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 have remained reluctant to devote acreage to sugar or to invest further in the sector A further price increase in June 2011 from VEF3.73 per kilo to VEF4.89 may prove insufficient to reverse the sector's decline: producers had requested for the regulated price to rise to VEF6.40 per kilo

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 180,000 tonnes in 2008 to

an estimated 800,000 tonnes in 2010, according to data from the US Department of Agriculture (USDA) Imports, therefore, outstripped domestic production of an estimated 485,000 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

Sourcing affordable imports is set to become increasingly difficult in light of the unification of the official exchange rate at VEF4.3/US$ in January 2011 Throughout 2010, Venezuela used two exchange rates for

US dollars: VEF4.3 and VEF2.6, depending on the category of the product Sugar was one of the

commodities that benefited from the preferential exchange rate; hence, sugar imports will be considerably more expensive going forward The sugar shortages experienced in recent months could, therefore, continue to hit the Venezuelan market unless the government relaxes its restrictive policies

Threat Of Seizures Continues

In March 2011, the Venezuelan government ordered an inspection of the El Palmar sugar mill and has threatened to expropriate it, according to a report by El Universal newspaper The government is currently

in control of eight sugar mills, which were expropriated following accusations of hoarding or putting profits ahead of the national good Just six mills remain in private hands

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 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, 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

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 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 Chávez is hoping to boost production by turning over land judged as unproductive to landless farmers The project, however, has been met with mixed results with some formerly productive ranches seeing production evaporate under the direction of inexperienced new managers

In 2009/10 we estimate that production grew as imports from Colombia were suspended, giving a boost

to local producers However, we believe that production dropped back once again in 2010/11, due to high energy and feed costs and consequent lack of profitability for producers Furthermore, heavy rains and mudslides from February-May 2011 flooded pasture lands in northwestern Venezuela, impacting

livestock production As a consequence, we estimate that output fell by 3.7% y-o-y to 335,000 tonnes We forecast only marginal growth of 0.6% y-o-y in 2011/12 as the sector continues to be held back by a lack

of profitability due to high input costs and government price controls, along with increased competition from imports from Brazil and Nicaragua Having been close to self-sufficient in beef as recently as 2002, Venezuela now depends on imports for an estimated 51% of beef consumed, according to INE (institute for national statistics) The government has promised credits to cattle ranchers in 2012 and, if granted, this could provide a much-needed boost to the sector Towards the end of our forecast period we expect production to begin to rise again as the government tries to limit its reliance on imports However, the recovery will be slow and we see production increasing by just 4.8% on the 2010/11 level to reach

351,000 tonnes in 2015/16

Poultry production has weathered the storm of Chávez' reforms somewhat better than the cattle-rearing sector The sector accounts for an estimated 30% of total agricultural GDP and almost 50% of animal production The sector is vertically integrated and efficient and producers are constantly working to modernise and improve their production methods Despite these strengths, the sector has been hit by the poor economic climate, continued high input costs and increasing competition from imports from Brazil and Argentina Producers continue to be hard hit by the state-controlled price regime which is squeezing profitability The increase in March 2010 to the state-regulated price for poultry to VEF13.83/kg provided some relief for producers but has done little to stem the downwards spiral We estimate that output fell by 3.5% y-o-y in 2010/11 to take production to 627,000 tonnes and we forecast a further decline of 2.0% in 2011/12 to 615,000 tonnes Out to 2015/16, we see production increasing by 4.1% on 2010/11 output to reach 653,000 tonnes, still some way below the level seen in the early years of the 21st century

Venezuela produces only small quantities of pork Output has remained stable at around 125,000 tonnes

in recent years We see production increasing by 4.0% on the 2010/11 level over our forecast period to reach 130,000 tonnes in 2015/16

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

In 2010, annual per capita consumption stood at an estimated 39kg for poultry, 24kg for beef and 10kg for pork While the price controls have increased demand, they have worked against investment in

production and an increasing reliance on imports In 2012, imports are forecast to reach 175,000 tonnes for poultry and 200,000 tonnes for beef

We now believe that demand for poultry fell by 3.0% y-o-y in 2011 as production fell and exports were also down on the previous year We see consumption remaining static in 2012 Out to 2016, we forecast that demand for poultry will grow by 5.4% on the 2011 level to reach 910,000

In 2011, the reliance on imports continued to shore up beef consumption and we estimate that

consumption increased by 0.5% y-o-y to 526,000 tonnes High import prices and a drop in domestic production are likely to constrain beef consumption going forward and we currently forecast demand to grow by 0.6% y-o-y in 2012 to 526,000 tonnes Out to 2016, demand for beef is forecast to grow by 7.3%

on the 2011 level to 564,000 tonnes

Pork consumption is much lower than poultry and beef Consumption grew by 3.1% from 2006-2011 to reach 134,000 tonnes Growth is forecast at 3.9% from 2011-2016, fuelled primarily by population increase, to take consumption to 139,000 tonnes at the end of our forecast period

Table: Venezuela Poultry Production & Consumption, 2011 - 2016

Poultry Production, '000

tonnes 1 627.4 615.0 622.0 632.0 644.0 653.0Poultry Consumption,

'000 tonnes 1 860.4 860.4 873.3 866.0 887.6 909.8

Notes: f BMI forecasts Sources: 1 USDA