Venezuela agribusiness report q2 2012

High import prices and a drop in domestic production are likely to constrain beef consumption in the short term, and we currently forecast demand to grow by 0.9% y-o-y in 2011/12 to 538,

Q2 2012 www.businessmonitor.com

agribusiness report

VeneZueLa

INCLUDES BMI'S FORECASTS

Business Monitor International

85 Queen Victoria Street

© 2012 Business Monitor International

All rights reserved

All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher

DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as

AGRIBUSINESS REPORT Q2 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: April 2012

CONTENTS

BMI Industry View 5

SWOT Analysis 8

Venezuela Agriculture SWOT 8

Venezuela Political SWOT 9

Venezuela Economic SWOT 10

Venezuela Business Environment SWOT 10

Supply Demand Analysis 11

Venezuela Livestock Outlook 11

Table: Venezuela Poultry Production & Consumption, 2011-2016 12

Table: Venezuela Pork Production & Consumption, 2011-2016 13

Table: Venezuela Beef & Veal Production & Consumption, 2011-2016 13

Table: Venezuela Poultry Production & Consumption, 2008-2012 16

Table: Venezuela Pork Production & Consumption, 2008-2012 16

Table::Venezuela Beef & Veal Production & Consumption, 2008-2012 16

Venezuela Grain Outlook 17

Table: Venezuela Wheat Production & Consumption, 2011-2016 19

Table: Venezuela Corn Production & Consumption, 2011-2016 19

Table: Venezuela Wheat Production & Consumption, 2008-2012 23

Table: Venezuela Corn Production & Consumption, 2008-2012 23

Venezuela Coffee Outlook 23

Table: Venezuela Coffee Production & Consumption, 2011-2016 25

Table: Venezuela Coffee Production & Consumption, 2008-2012 28

Commodity Price Analysis 29

Corn 29

Rice 29

Soybean 30

Wheat 31

Monthly Softs Update 32

Cocoa 32

Coffee 32

Palm Oil 33

Sugar 34

Downstream Analysis 35

Food 37

Total Food Consumption 37

Table: Venezuela Food Consumption Indicators - Historical Data & Forecasts, 2009-2016 37

Canned And Prepared Food 38

Table: Canned Food Value/Volume Sales - Historical Data & Forecasts, 2009-2016 38

Table: Fish, 2009-2016, 2009-2016 39

Edible Oil 40

Table: Oils And Fats, 2009-2016 40

Confectionery 41

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2009-2016 41

Mass Grocery Retail 42

Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 42

Table: Sales Breakdown by Retail Format Type 42

Trade 43

Table: Food & Drink Trade Balance - Historical Data & Forecasts 43

Economic Analysis - Massive Growth Challenge Beyond The Election 43

Table: Venezuela - Economic Activity 46

Country Snapshot: Venezuela Demographic Data 47

Section 1: Population 47

Table: Demographic Indicators, 2005-2030 47

Table: Rural/Urban Breakdown, 2005-2030 48

Section 2: Education And Healthcare 48

Table: Education, 2002-2005 48

Table: Vital Statistics, 2005-2030 48

Section 3: Labour Market And Spending Power 49

Table: Employment Indicators, 2001-2006 49

Table: Consumer Expenditure, 2000-2012 (US$) 49

Global Food & Drink View 50

Food & Drink Roundup Q112: Core Views 50

Table: Core Views 61

BMI Forecast Modelling 62

How We Generate Our Industry Forecasts 62

BMI Industry View

BMI View: Data for 2011 from the Ministry of Agriculture and Lands demonstrate mixed results for the

first year of President Hugo Chávez's government's two-year plan for the agricultural sector, the Plan Bienal para la Producción de Alimentos 2011-2012 The plan aimed to improve access to capital for small- and medium-scale producers, and, according to the ministry's data, 75,000 producers received VEF2.7bn (US$627.9mn) in order to boost production The first year has met with some success:

production of beans, cotton, yucca and some vegetables increased However, yellow corn production reached only 62.1% of the target of 1.39mn tonnes for 2011; white corn, soy oil and pulses production hit only 50.0%, 38.3% and 42.1% respectively of official targets Overall crop area fell by 7.8% year-on- year (y-o-y), and unemployment in the agricultural sector also increased by 5.8% over the year

Agricultural production was hard hit by heavy rains which caused significant damage to both crops and infrastructure In addition to extreme weather conditions, Chávez's Gran Misión Agro Venezuela (Great Venezuelan Agricultural Mission) has also been held back by shortages of technical staff and equipment, delays in financing to farmers and inefficient production techniques Despite the plan's failure to reach its first-year targets, in late January, Chávez announced the relaunching of the Gran Misión Agro Venezuela

on his radio and television show 'Aló, Presidente' As part of the relaunch, Chávez announced the creation

of the Organo Superior de Agricultura, a new body which will be headed by Chávez himself, along with Elías Jaua, vice president and new minister of agriculture One of the main goals of the Organo Superior will be to increase land for livestock production, which currently stands at just 800,000 hectares, with the aim of growing the national herd to 20 million heads by 2019 Chávez called for the cooperation of local government to achieve these goals He also pledged a further VEF114mn (US$26.5mn) in investment to improve the agricultural transport network

Key Forecasts

ƒ BMI forecasts that GDP will increase by 2.5% y-o-y in 2012 and 2.2% in 2013, with growth

driven primarily by the oil sector However, with presidential elections in October 2012, attempts to keep domestic demand elevated will see inflation levels remaining high We currently forecast end-2012 inflation of 26.0%, the highest in Latin America

ƒ In 2010/11, we estimate that corn production rose by just 4.7% y-o-y on the low 2009/10 harvest

to 1.71mn tonnes In 2011/12, we see production increasing by 4.5% y-o-y to 1.79mn tonnes as the area harvested increases to an expected 450,000 hectares Out to the end of our forecast period in 2016, the level of production will be highly reliant on the government's ability to support the agricultural sector Without continued support, much of the newly opened farmland will very likely return to fallow Despite this risk, we expect output to continue to rise and forecast production to grow by 27.4% on the 2011 level to reach 2.18mn tonnes

ƒ Poultry production has been hit by high input costs, farmgate price controls and increasing competition from imports We estimate that output fell by 3.8% y-o-y in 2010/11 to take production to 625,000 tonnes and we forecast a further decline of 3.0% in 2011/12 to 606,000 tonnes Out to 2016, we see production increasing by 4.5% on the 2011 level to reach 653,000 tonnes, still some way below the level seen in the early years of the 21st century

ƒ In 2010/11, the reliance on imports continued to shore up beef consumption and we estimate that consumption increased by 2.0% y-o-y to 533,500 tonnes High import prices and a drop in domestic production are likely to constrain beef consumption in the short term, and we currently forecast demand to grow by 0.9% y-o-y in 2011/12 to 538,300 tonnes Out to 2016, demand for beef is forecast to grow by 7.4% on the 2011 level to 573,000 tonnes

Key Trends And Developments

ƒ Vice President Elías Jaua was appointed as the new minister of agriculture and lands in late January after Juan Carlos Loyo resigned from the post, citing ill health New appointments have also been announced for senior positions within the Ministry of Agriculture Faiez Kassen Castillo was named vice minister for agricultural economics; Tatiana Pug was appointed president of the National Institute for Agriculture Research; Pedro Moreno Montes was named

as the new president of the Institute for Comprehensive Agricultural Health; Javier Ramos was made acting president of the National Institute for Rural Development; and Eduardo Hurtado León will head the Venezuelan Agricultural Bank

ƒ Also in late January, President Hugo Chávez stepped up pressure on banks to grant loans to small- and medium-sized producers He stressed that he would consider nationalising the banks

if they fail to observe Venezuelan law, which states that banks must grant agricultural loans Chávez also announced that rather than being granted directly to producers, agricultural loans would now be transferred to the executive office to establish a new fund, which small- and medium-sized producers will be able to access The announcement has not been universally welcomed within the agricultural sector Pedro Rivas, president of the National Confederation of Agricultural Products (Fedeagro), expressed fears that the new fund may exclude private producers

ƒ There were widespread food shortages in 2011, including basic food items such as powdered milk, oil and beef There was restricted availability of coffee, precooked corn flour and margarine for the second half of 2011 According to economic research firm Datanálisis, the shortage index for December 2011 was 24.8%, in comparison with 8.0% at the beginning of the year

ƒ In March 2012, it was reported in the local press that the Supreme Court had granted an application seeking to annul the expropriation of agricultural supply company Agroisleña In late

September 2010, the Chávez government announced the seizure of Spanish-owned Agroisleña, the largest private agricultural supply distributor in Venezuela Following its nationalisation, Agroisleña was renamed Agrotiendas and managed by the Agricultural Inputs, Supplies and Services Trading Company (Ecisa), which is part of the Ministry of Agriculture and Lands Despite Ecisa's goals to strengthen the distribution model for the agricultural sector, Ministry of Agriculture data indicate that Agrotiendas has been hit by limited supply owing to lack of transportation equipment and poor cold storage facilities This has represented a 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; cocoa especially is sought after by producers of premium chocolate

ƒ

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 investing in increasing production

ƒ

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, including financing and subsidies, to help small holders increase production

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

ƒ

Venezuela Political 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

ƒ

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

ƒ

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)

ƒ

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

ƒ

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)

ƒ

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)

ƒ

Supply Demand Analysis

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 by 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; some formerly productive ranches have seen production evaporate under the direction of inexperienced new managers

In 2009/10 we estimate that beef 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 as high energy and feed costs led to a consequent lack of profitability for producers Furthermore, heavy rains and mudslides from February-May 2011 flooded pasture lands in north-west Venezuela, affecting livestock production We therefore estimate that output fell by 3.7% year-on-year (y-o-y) to 335,000 tonnes in 2010/11 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 Venezuela now depends on imports for

an estimated 51% of beef consumed, according to Instituto Nacional de Estadística, the national statistics institute 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 makes efforts to lessen the reliance on imports However, the recovery will be slow, and we forecast production increasing by just 4.8% on the 2011 level to reach 351,000 tonnes in 2016

Poultry production has weathered the storm of Chávez's 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 poultry industry 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 the increasing competition from imports from Brazil and Argentina Producers continue to be affected by the state-controlled price regime, which

is squeezing profitability The state-regulated price for poultry was increased in March 2010 to

VEF13.83/kg; this provided some relief for producers but has done little to stem the downwards spiral

We estimate that output fell by 3.8% y-o-y in 2010/11 to take production to 625,000 tonnes and we forecast a further decline of 3.0% in 2011/12 to 606,000 tonnes Out to 2016, we see production

increasing by 4.5% on 2011 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 2011 level over our forecast period to reach 130,000 tonnes in 2016

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 2011, annual per capita consumption stood at an estimated 25.5kg for poultry, 18.50kg for beef and 4.85kg for pork While price controls have increased demand, they have worked against investment in production and led to 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 12.0% y-o-y to 780,600 tonnes in 2011 on the back of lower production as well as a 38.8% y-o-y decrease in exports We see consumption growing by just 1.0% in 2012 to 788,400 tonnes Out to 2016, we forecast that demand for poultry will grow by 9.9% on the low 2011 level to reach 857,500

In 2010/11, the reliance on imports continued to shore up beef consumption and we estimate that

consumption increased by 2.0% y-o-y to 533,500 tonnes High import prices and a drop in domestic production are likely to constrain beef consumption, and we therefore currently forecast demand to grow

by 0.9% y-o-y in 2011/12 to 538,300 tonnes Out to 2016, demand for beef is forecast to grow by 7.4%

on the 2011 level to 573,000 tonnes

Pork consumption is much lower than that of poultry and beef Consumption grew by 3.1% from

2006-2011 to reach 134,000 tonnes We forecast growth of 3.9% between 2006-2011 and 2016, fuelled primarily by population increases, to take consumption to 139,000 tonnes at the end of our forecast period

Table: Venezuela Poultry Production & Consumption, 2011-2016

Table: Venezuela Pork Production & Consumption, 2011-2016

2011 2012 2013 2014 2015 2016

Pork Production, '000 tonnes 1 125.0 126.0 128.0 129.0 129.0 130.0Pork Consumption, '000 tonnes 1 134.0 134.8 135.5 136.7 137.8 138.9

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

Table: Venezuela Beef & Veal Production & Consumption, 2011-2016

2011 2012 2013 2014 2015 2016

Beef & Veal Production, '000 tonnes 1 335.0 337.0 341.0 344.0 347.0 351.0Beef & Veal Consumption, '000 tonnes 1 533.5 538.3 546.3 556.2 564.5 573.0

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

Chávez Unveils Plans To Increase Livestock Production

In late January 2012, Chávez announced the relaunching of the Gran Misión Agro Venezuela, his

government's plan to boost agricultural production and improve food security in Venezuela As part of the relaunch, Chávez announced the creation of the Organo Superior de Agricultura, a new body which will

be headed by Chávez himself, along with Elías Jaua, the vice president and new minister of agriculture One of the main goals of the Organo Superior will be to increase land for livestock production, which currently stands at just 800,000 hectares (ha), with the aim of growing the national herd to 20 million heads by 2019 Chávez called for the cooperation of local government to achieve these aims He also promised a further VEF114mn (US$26.5mn) in investment to improve the agricultural transport network

Increased investment in the sector is expected to provide some relief to producers, who have been hit by

high prices and competition from imports However, BMI believes that it will also be necessary to

address structural problems within the sector if significant gains in production are to be made In

particular, farmgate price controls and high input costs are severely impacting the profitability of the sector and providing significant disincentives for producers

Chávez Orders Further Vestey Land Seizures

On November 1 2011, Chávez announced the immediate expropriation of 290,000ha of farmland in 11

ranches owned by Agroflora, a subsidiary of the British beef producing firm Vestey Group The

company is owned by Lord Vestey's family, who first began trading in Venezuela in 1909 Agroflora is engaged in the production of cattle, beef and buffalos 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 said that the forced expropriation came following the breakdown in negotiations with Agroflora over a compensation agreement for the land

Previously, in October 2010, Chávez ordered the seizure of 300,000ha of land and 120,000 head of cattle

owned by Compañía Inglesa, the Venezuelan arm of Vestey Group The announcement was made on

Chávez's weekly programme, 'Aló Presidente', and came just days after his United Socialist Party of Venezuela failed to maintain his powerful two-thirds supermajority in local elections owing 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

The Vestey Group was also targeted by Chávez's government in 2005, when four farms were

nationalised, including the 33,600-acre Charcote estate south of Caracas, with 13,000 head of cattle

Beef Price Rise Brings Some Relief For Producers

The Venezuelan livestock sector continues to be held back by the government-controlled price regime, which is squeezing profitability and holding back production The mandated price for beef was last reviewed in 2008; with input costs rising, producers have long been pressing for the maximum sale and retail prices to be increased In June 2011, the government announced an increase of 29.2% in the cost of

a kilo of prime beef, from VEF17.60 to VEF22.74 The maximum prices of second- and third-class beef, live cattle and carcass meat were all raised The news will be welcomed by producers; however, some producers' representatives have argued that the price adjustments do not go far enough to restore

profitability to the sector

Improved Relations With Colombia Ease Beef Supply Restrictions

The long-running trade dispute between Chávez and former Colombian president Álvaro Uribe posed difficulties for Venezuela's beef supply for much of 2009/10 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 the country 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 Fuerzas Armadas Revolucionarias de Colombia 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 late 2009, with Venezuelan troops reportedly blowing up foot bridges between the two countries in mid-November

While we do not believe exports completely ground to a halt - even if official trade is completely stopped,

a lucrative smuggling industry remains - the fall in trade 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% Venezuela was forced to seek imports from other countries in the region, including Brazil, Argentina, Paraguay and Nicaragua

However, in August 2010, newly elected Colombian President Juan Manuel Santos met with Chávez and agreed to restore diplomatic relations between the two countries The two presidents agreed to reinforce security along their shared border to clamp down on terrorist groups and drug trafficking Venezuela also agreed to pay debts amounting to some US$800mn to Colombian exporters The agreement paves the way for the restoration of trade relations between the two countries, which promises to ease supply shortages of beef on Venezuelan shelves

Subsequently, in April 2011, the two governments reached an agreement to restore trade relations

following a meeting in Cartagena The deal opens the way for Colombia to export 6,500 head of cattle in addition to 3,000 live cattle and 3,500 pregnant cows to increase Venezuela's breeding stock The deal also included the offer to export 60,000 day-old chicks and 100,000 hatching eggs Quantities of chicken meat and table eggs are yet to be agreed This bodes well for Colombia's livestock sector and is expected

to provide much-needed relief for the food shortages and spiralling prices that have gripped Venezuela

Butchers Behind Bars

Controversy hit the beef sector in 2010 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 at the time allowed 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 said that they have to pay around VEF14 for the meat, leaving them unable to cover the costs of running their business Eight butchers have been found guilty, fined US$3,000 and put on parole; they also must 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

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

Militia Fears Spook Ranchers

Government-supported farm invasions by the rural poor have been a regular occurrence under the rule of Chávez Venezuela's wealthy ranchers have therefore been particularly perturbed by the announcement of the formation of armed peasant militias The Associated Press reported that Chávez said that poor farmers

needed protection from gangs loyal to wealthy landowners The government has said that 300 poor farmers were killed by the gangs over the past decade, a claim the ranchers deny Ranchers in turn said that they have been the target of kidnapping and extortion by gangs supportive of the government While poor farmers have undoubtedly become the victims of predatory landlords in the past, the spectre of armed mobs with government sanction is a worrying one for Venezuela's already struggling cattle

ranching industry The move to arm the groups, if followed through, is likely to see a rise in violence in rural areas and will inhibit investment by ranchers worried that their land or livestock could fall victim to the militias This would slow any recovery in beef production

Table: Venezuela Poultry Production & Consumption, 2008-2012

2008 2009 2010 2011 2012

Poultry Production, '000 tonnes 1 695.0 680.0 650.0 625.0 606.0Poultry Consumption, '000 tonnes 1 1,047.0 861.0 887.0 780.6 788.4

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

Table: Venezuela Pork Production & Consumption, 2008-2012

2008 2009 2010 2011 2012

Pork Production, '000 tonnes 1 125.0 125.0 125.0 125.0 126.0Pork Consumption, '000 tonnes 1 133.0 129.0 134.0 134.0 134.8

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

Table::Venezuela Beef & Veal Production & Consumption, 2008-2012

With Chávez in February 2009 winning a referendum to scrap the term limits for presidents, he could be

in power for some time to come The government's highly interventionist stance towards food production and supply in Venezuela means that meat production will be highly dependent on government policy If

prices are subjected to further controls as Venezuela's economy contracts, production could fall further as more operators leave the sector Another factor that will have a great influence over demand for livestock

is the price of oil With Venezuela so reliant on its hydrocarbons exports, funds for government schemes

to increase production and provide affordable meat to the masses will be dependent on oil revenues being sufficient If the price of oil falls again, demand for meat would likely be hit

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, with the vast majority grown in the central states of Barinas, Portuguesa and Guárico While the area planted to corn has risen by around 50% since the end of the 1990s, Venezuela's agricultural sector remains relatively undeveloped, and there is still plenty of room for further expansion Around 65% of the area planted is white corn for human consumption; the remainder is 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

Following droughts, heavy rains in December 2010 hit the 2010/11 harvest In response to the widespread flooding, in January 2011 President Hugo Chávez unveiled the Gran Misión Agro Venezuela (Great Venezuelan Agricultural Mission), which formed part of his government's two-year plan for the

agricultural sector, the Plan Bienal para la Producción de Alimentos 2011-2012 The plan set out

ambitious plans for agricultural production, including boosting white and yellow corn by 61% and 110% respectively over the course of two years

The goals for the first year of the project were not met, however Further rains caused damage to crops, and the sector has continued to be held back by shortages of technical staff and equipment, delays in financing to farmers and inefficient production techniques In 2010/11, we estimate that corn production rose by just 4.7% year-on-year (y-o-y) on the low 2009/10 harvest to 1.71mn tonnes In 2011/12, we see production increasing by 4.5% 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 2016, the level of production will be highly reliant on the

government's ability to support the agricultural sector Without continued support, much of the newly opened farmland will very likely return to fallow Despite this risk, we expect output to continue to rise and forecast production to grow by 27.4% on the 2011 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

arepa, a flat unleavened bread Total corn consumption rose by an estimated 97.1% from 2006 to 2011,

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

In 2010/11, we estimate that corn consumption registered an increase of 1.5% y-o-y to 3.45mn tonnes, owing to stronger demand from the livestock sector We forecast that demand will grow at a similar rate

in 2011/12 to reach 3.51mn tonnes Out to 2016, we believe consumption will continue to increase, 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 than during the previous five-year period; out to 2016 we forecast demand rising by 12.7% on the 2011 level to take consumption to 3.90mn tonnes

Wheat 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 3.2% y-o-y in 2011 to 1.50mn tonnes

We forecast growth will pick by up 2.0% in 2011/12 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

2011 2012 2013 2014 2015 2016

Wheat Consumption,

'000 tonnes 1 1,500.0 1,530.0 1,582.0 1,639.4 1,697.5 1,756.2

Notes: f BMI forecasts Sources: 1 USDA

Table: Venezuela Corn Production & Consumption, 2011-2016

2011 2012 2013 2014 2015 2016

Corn Production, '000 tonnes 1 1,710.0 1,786.3 1,872.3 1,973.6 2,075.9 2,178.3Corn Consumption, '000 tonnes 1 3,450.0 3,505.2 3,592.5 3,699.4 3,798.8 3,889.8

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 Felipe Calderón, 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 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 of that year, 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 2010, the government announced the expropriation of Monaca following

accusations that Gruma had refused to sell flour during a national shortage 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

Gran Misión Agro Venezuela Programme Fails To Deliver

In January 2011, Chávez's government launched Gran Misión Agro Venezuela, a new programme

designed to support the country's agricultural production as part of a two-year plan for the sector The programme aims to boost domestic production and lessen reliance on imports, thus improving

Venezuela's food security Misión Agro Venezuela was designed to 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) was committed to the programme

During 2011, data from the Ministry of Agriculture and Lands indicate that 75,000 producers received VEF2.7bn (US$627.9mn) in order to boost production However, data also showed that the Gran Misión had failed to reach its objectives for its first year of operation with regards to grain production Yellow corn production reached only 62.1% of the target of 1.39mn tonnes for 2011, and white corn production hit only 50.0% of official targets

Agricultural production in 2011 was hard-hit by heavy rains which caused significant damage to both crops and infrastructure However, in addition to extreme weather conditions, Chávez's Gran Misión Agro Venezuela has also been held back by shortages of technical staff and equipment, delays in financing to farmers and inefficient production techniques

Despite the plan's failure to reach its first-year targets, in late January Chávez announced the relaunching

of the Gran Misión Agro Venezuela on his radio and television show 'Aló, Presidente' Chávez called for the cooperation of local government to bring disused agricultural land back into production He also promised a further VEF114mn (US$26.5mn) in investment to improve the agricultural transport network

Coca Growing Hits Corn Production

The diversion of fertiliser from legal crops to coca growing is damaging Venezuelan corn production, according to a December 2010 report by the Miami Herald Urea, the nitrogen-rich fertiliser used to grow corn and other agricultural produce, is being sold through the black market to coca growers As a result, farmers say, they do not have sufficient fertiliser, particularly during the main planting season beginning

in May On paper, Venezuela produces at least twice as much fertiliser it needs, with the government subsidising its use to the tune of US$100mn per year, according to a Miami Herald report However, farmers in the main growing regions of Portuguesa and Guárico say that a lack of access to fertiliser is damaging their harvest The negative impact of the drugs trade upon grains production is a further

obstacle to Venezuela's corn producers, who have also been hampered by land expropriations, farmgate prices and extreme weather conditions in recent years

Government To Centralise Wheat Imports

In March 2011, the Venezuelan Ministry of Food requested private companies to provide information about their requirements for wheat for the subsequent nine months in order to authorise imports Requests totalled 1.40mn tonnes The move is part of the government's plan to centralise imports of a number of food products, including raw milk, wheat, sugar and oil The decision has been criticised by the industrial sector, with some arguing that the government's priority should be revising food price controls which are impacting heavily on profitability as input costs continue to rise Many sectors of Venezuelan

agroindustry are becoming increasingly reliant on imports to meet domestic demand as production

continues to fall in the face of lack of investment, poor management and high production costs

Chávez Authorises Further Corn Price Increase

In May 2011, the Venezuelan government approved a 30% increase in the farmgate prices of corn, rice and soybeans, which will come into effect on August 15 Producers' associations had been petitioning the government to raise the controlled prices since the beginning of 2011 in order to counter the rise in input costs that have hit farmers The price of white corn will rise from VEF1.15 to VEF1.50 per kilo, while yellow corn will increase from VEF1.02 to VEF1.33 per kilo

However, the increase has not been sufficient to satisfy producers In July 2011, Lorenzo Mendoza, the

owner of Empresas Polar, Venezuela's largest food and drinks company, called for the government to

increase corn flour price caps by 40% to keep pace with the rising cost of corn Previously, in September

2010, the 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 had 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

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, a government office which 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

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 the problems facing the 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

Government Seizes Agroisleña

In late September 2010, the government of Hugo Chávez announced the seizure of Spanish-owned Agroisleña Agroisleña was 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 country's 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

Following its nationalisation, Agroisleña was renamed Agrotiendas and managed by the Agricultural Inputs, Supplies and Services Trading Company (Ecisa), which is part of the Ministry of Agriculture and Lands Despite Ecisa's goals to strengthen the distribution model for the agricultural sector, Ministry of Agriculture data indicates that the Agrotiendas have been hit by limited supply, owing to lack of

transportation equipment and poor cold storage facilities This has represented a further obstacle for Venezuela's grain producers, who are already struggling to cope with rising prices and farmgate price controls

In March 2012, it was reported in the local press that the Supreme Court had granted an application seeking to annul the expropriation of Agroisleña

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 in 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, by 28% in September 2010 and by 30% in May

2011 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 2011/12, corn imports are forecast to reach at

1.60mn tonnes, a similar total to that seen in 1997/98 In addition, Venezuela is expected to import some 1.55mn tonnes of wheat

Table: Venezuela Wheat Production & Consumption, 2008-2012

2008 2009 2010 2011 2012

Wheat Consumption, '000 tonnes 1 1,500.0 1,550.0 1,550.0 1,500.0 1,530.0

Notes: f BMI forecasts Sources: 1 USDA

Table: Venezuela Corn Production & Consumption, 2008-2012

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, the 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 owing to the decreased profitability of coffee production We estimate that production declined by a further 4.8% y-o-y to 690,000 bags, with domestic demand expected to outstrip supply for the third successive year The 2011/12 harvest, however, is likely to benefit from the renewal of fertilisation programmes as part of the government's agricultural plan We currently forecast a y-o-y increase of 16.2% to take output to 802,000 bags

Government support for smallholder 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 currently see production reaching 912,000 60kg bags, 32.2% 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 most 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 38.6% over 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 a 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 14.1% 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 38.6% to 1.20mn bags in 2011 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 6.6% y-o-y to 1.14mn bags in 2012 Out to

2016, we see demand growing by 8.8% on the 2011 level to 1.33mn bags

Table: Venezuela Coffee Production & Consumption, 2011-2016

2011 2012 2013 2014 2015 2016

Coffee Production, '000 60kg bags 1 690.0 802.0 835.0 868.0 892.0 912.0Coffee Consumption, '000 60kg bags 1 1,220.0 1,139.5 1,190.4 1,247.1 1,293.2 1,326.9

Notes: f BMI forecasts Sources: 1 USDA

Price Controls Hit Profitability

Since 2003, the prices of coffee have been subject to government controls and have 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 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

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 farmgate 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 have 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 an estimated 465,000 bags in 2010/11 and a forecast 350,000 bags in

2012 Much of this has come from Brazil and Nicaragua This has further exacerbated tensions in the sector, with producers claiming that the government is effectively subsidising foreign coffee producers, as the price paid for imported coffee can be more than 50% more than the fixed price for domestic

producers

Venezuela And Colombian Announce Binational Coffee Plan

In March 2011, it was announced that officials from the Colombian and Venezuelan governments are developing a joint plan 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

Despite the Chávez administration's goal to attain self-sufficiency in food production, government

mismanagement of the sector, as well as adverse weather conditions, have seen production dwindle and 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 2010/11, imports increased to an estimated 465,000 bags, primarily from Brazil and Nicaragua

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's 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, 2008-2012

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

Commodity Price Analysis

Corn

Front-month corn had a volatile March, with prices ultimately ending the month below where they started Downgrades to Argentina and Brazilian supply should continue to provide some support for prices, but the anticipation of a massive planting season in the US (combined with the potential for early plantings) should put further downward pressure on prices in the short term Given our expectation for an improvement in US supply, we forecast another global surplus of 1.4mn tonnes in 2012/13, compared with 4.8mn tonnes in 2011/12 This underpins our view for lower average prices in both 2012 and 2013 at USc600/bushel and USc575/bushel respectively

Topped Out

Front-Month CBOT Corn, USc/bushel (Weekly Chart)

Source: BMI, Bloomberg

Rice

Front-month rough rice traded higher in March but failed to retest the psychologically significant

US$15.00/cwt level Fundamentally, the market is well supplied especially on the back of non-traditional players such as India and Pakistan supplying the market in a big way However, the Thai government's decision to extend the rice procurement programme beyond the initial 29 February deadline to June 30 should keep prices supported in the near term Our forecast is for the global rice production balance and stocks-to-use ratio to rise to a high of 9.2mn tonnes and 25.0% respectively On this basis, we maintain our forecast for prices averaging lower at US$14.50/cwt in 2012

Ample Supply To Keep Prices In Check

Front-Month CBOT Rough Rice, US$/cwt (Weekly Chart)

Source: BMI, Bloomberg

Soybean

Resistance In Place

Front-Month CBOT Soybean, USc/bushel (Weekly Chart)

Source: BMI, Bloomberg

Front-month soybean continued to outperform the grains complex in March, as severe droughts during plantings in South America have resulted in losses in output However, we believe prices will not break through long-term resistance at USc1,280/bushel and average slightly lower at USc1,250/bushel in 2012 and USc1,200/bushel in 2013 This is because we expect the global market to move from a 7.3mn tonne

deficit in 2011/12 to a 3.3mn tonne surplus in 2012/13 Indeed, we forecast a strong US crop in 2012/13, which should loosen supply on the market after the harvest starts in September Also, we believe import demand from China will moderate in the coming months on high domestic stocks

Wheat

Front-month wheat ended March with a lower spot price than the start, with some volatility in the middle

of the month The global wheat market will continue to be buffeted by supply concerns in North Africa (specifically Morocco) and the EU (namely Spain, France and the UK) while also seeing production improvements from the Black Sea region Elsewhere, production in the southern hemisphere is forecast to

be relatively strong Ultimately, we forecast another strong surplus of 20.0mn tonnes in 2012/13,

compared with 23.1mn tonnes in 2011/12 In line with this, we forecast prices averaging lower at

USc575/bushel in 2012 and USc560/bushel in 2013

Short-Term Upside Risks

Front-Month CBOT Wheat, USc/bushel (Weekly Chart)

Source: BMI, Bloomberg

Monthly Softs Update

Cocoa

Front-month cocoa traded sideways in March as the potential for significant changes in supply until the mid-crop comes online in May is minimal Also, there is remaining uncertainty over price reforms in Côte d'Ivoire, which could limit traders' involvement in the country's auctions in the coming months However, any further gain in prices will be capped as output from both Ghana and Côte d'Ivoire is set to be strong

in 2011/12 We forecast another surplus of 33,000 tonnes in 2011/12, compared with 383,000 tonnes in 2010/11 This should leave the global stocks-to-use ratio at 43.0% - higher than the five-year average of 40.0% On the back of this, we forecast prices to average lower at GBP1,450/tonne in 2012 and

GBP1,275/tonne in 2013

No Sustained Recovery Ahead

Front-Month LIFFE Cocoa, GBP/tonne (Weekly Chart)

Source: BMI, Bloomberg

Coffee

Front-month coffee continued to move lower in March, breaking the lower side of the trend channel at around USc185/lb This has come on the back of a massive selling of Brazilian government stocks in recent months Also, as the country is entering the up-year of its biennial cycle in May, we believe

significant supply will come on global markets in the coming months However, because prices have come a long way and are now approaching long-term support at USc170/lb, we do not see much more room for downside - especially as uncertainty remains over the progress of replanting programmes in Colombia Thus, we forecast prices averaging USc200/lb in 2012 and USc180/lb in 2013