Venezuela agribusiness report q2 2013

In January 2013, in a bid to ease widespread sugar shortages, the Venezuelan government ordered sugarproducers to sell 70% of their production to retails outlets and the rest to local in

Q2 2013 www.businessmonitor.com

VENEZUELA

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2013

Business Monitor International

© 2013 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 ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 9

Agribusiness 9

Business Environment 11

Industry Forecast 12

Livestock Outlook 12

Table: Venezuela Beef & Veal Production & Consumption, 2012-2017 14

Table: Venezuela Pork Production & Consumption, 2012-2017 14

Table: Venezuela Poultry Production & Consumption, 2012-2017 14

Table: Venezuela Beef & Veal Production & Consumption, 2007-2012 17

Table: Venezuela Pork Production & Consumption, 2007-2012 17

Table: Venezuela Poultry Production & Consumption, 2007-2012 18

Grains Outlook 18

Table: Venezuela Corn Production & Consumption, 2012-2017 20

Table: Venezuela Wheat Consumption, 2012-2017 21

Table: Venezuela Corn Production & Consumption, 2007-2012 24

Table: Venezuela Wheat Consumption, 2007-2012 24

Coffee Outlook 25

Table: Venezuela Coffee Production & Consumption, 2012-2017 26

Table: Venezuela Coffee Production & Consumption, 2007-2012 31

Commodity Strategy 32

Monthly Softs Update 32

Table: Select Agricultural Commodities - Performance & BMI Forecasts 42

Table: BMI Commodity Strategy 43

Monthly Grains Update 43

Table: Select Agricultural Commodities - Performance & BMI Forecasts 51

Upstream Analysis 53

Americas GM Outlook 53

Americas Machinery Outlook 58

Americas Fertiliser Outlook 63

Downstream Analysis 70

Food 70

Food Consumption 70

Table: Food Consumption Indicators Historical Data and Forecasts 2010-2017 71

Canned and Prepared Food 71

Table: Canned Food Volume/Value Sales Historical Data and Forecasts 2010-2017 72

Table: Fish Volume Sales, Production and Trade Historical Data and Forecasts 2010-2017 72

Oils and Fats 74

Table: Oils and Fats Volume Sales, Production and Trade Historical Data and Forecasts 2010-2017 75

Confectionery 77

Table: Confectionery Value/Volume Sales Historical Data and Forecasts 2010-2017 77

Drink 78

Alcoholic Drinks 78

Table: Alcoholic Drinks Volume/Value Sales Historical Data and Forecasts 2010-2017 79

Soft Drinks 80

Table: Soft Drinks Value Sales Historical Data and Forecasts 2010-2017 81

Hot Drinks 81

Table: Hot Drinks Value Sales Historical Data and Forecasts 2010-2017 82

Mass Grocery Retail 82

Table: Mass Grocery Retail Sales by Format Historical Data and Forecasts 2010-2017 83

Table: Sales Breakdown by Retail Format Type 83

Competitive Landscape 84

Table: Main Agribusiness Companies 84

Demographic Forecast 85

Table: Venezuela's Population By Age Group, 1990-2020 ('000) 86

Table: Venezuela's Population By Age Group, 1990-2020 (% of total) 87

Table: Venezuela's Key Population Ratios, 1990-2020 88

Table: Venezuela's Rural And Urban Population, 1990-2020 88

Methodology 89

BMI Industry View

BMI View: Our outlook for Venezuela's agricultural sector is cautious given the country's uncertain

political and economic outlook The country has significant growth potential, but the government's policies

of expropriation have seen production of key crops decline and a growing reliance on imports Although the poultry section, for example, is well integrated, arable production and cash crops such as cocoa or coffee have been poorly managed Following the death of president Hugo Chávez, we anticipate a new

presidential election within months and believe that interim president Nicolás Maduro of the ruling Partido Socialista Unido de Venezuela will win and will continue the interventionist policies of Chávez's era However, we believe the pace of reforms may be more moderate and see significant potential for economic growth over our forecast period This will, however, be dependent on the improvement of infrastructure and the adoption of more market-friendly policies.

Key Forecasts

■ Corn production growth to 2017: 45.7% to 2.04mn tonnes Despite ongoing challenges including a

lack of fertiliser and low profitability, we believe that corn output will expand strongly on the low 2012levels

■ Coffee consumption growth to 2017: 4.7% to 1.38mn bags After surging by 48.3% from 2007-2012

owing to a steep rise in imports, our demand forecast for the coming five years is more moderate

■ Poultry production growth to 2017: 4.0% to 697,000 tonnes Although the poultry sector is well

organised and efficient, production growth is constrained by high input costs and the state-controlledprice regime, which is squeezing profitability

■ BMI universe agribusiness market value: US$4.61bn in 2013 (down from US$4.68bn in 2012;

forecast to grow annually by 1.7% on average to 2017)

■ 2013 real GDP growth: 2.6% (down from 5.6% in 2012; forecast to grow annually by 3.4% on average

between 2012 and 2017)

■ 2013 consumer price index: 30.0% year-on-year (y-o-y) (up from 20.1% in 2012; forecast to grow

annually by 22.9% on average between 2012 and 2017)

■ 2013 central bank policy rate: 15.5% (up from 15.0% in 2012; forecast to increase to 16.5% in 2014).

Key Revisions To Forecasts

■ Corn consumption in 2012/13 revised up by 10.8% to 3.80mn tonnes While consumption is forecast

to decline in y-o-y terms, we have revised up our outlook due to an increase in demand from the livestocksector

■ Poultry consumption in 2012/13 revised down by 2.1% to 867,000 tonnes Consumption is expected

to fall due to high costs

Industry Developments

The supply shortages that have plagued Venezuela in recent years became more acute during the first fewweeks of 2013 Staples including cooking oil, coffee, rice, sugar, wheat flour and, most importantly, cornflour have been in extremely short supply It is widely agreed that the shortages are at their most severesince 2008 The shortages have been exacerbated by serious distortions in the economy, primarily rocketinginflation rates, a drop in oil revenues and a black market dollar rate that is more than four times the officialexchange rate On February 8, the government devalued the bolívar by 32% to VEF6.3/US$, the fifthdevaluation in nine years It is hoped that the move will ease the country's fiscal deficit, which almosttripled in 2012 However, there are fears that the devaluation will further accelerate annual inflation rates

In January 2013, in a bid to ease widespread sugar shortages, the Venezuelan government ordered sugarproducers to sell 70% of their production to retails outlets and the rest to local industry The majority must

be packaged in bags of 5kg or less Also in January, the government announced that it would

expropriate PepsiCo's warehouses in northern Vargas state The company is accused of hoarding sugar, but

the firm argues that the goods were imported with government authorisation

In February 2013, Nicolás Maduro announced VEF7.81bn funding to support the goals of Gran MisiónAgroVenezuela in 2013 VEF3.0bn are to be spent on improving farm roads Gran Misión AgroVenezuela

is designed to improve Venezuela's food security by boosting domestic production and reducing reliance onimports

In February 2013, data from Colombia's National Administrative Department of Statistics and Office ofTaxes and Customs demonstrated that trade between Colombia and Venezuela increased by 40% y-o-y toUS$3.28bn The figures demonstrate the continued improvement in diplomatic relations between the twocountries, since the suspension of bilateral trade in 2009 Colombian exports to Venezuela accounted for81.8% of total trade, with cattle and confectionery goods key export products The improvement in cross-border trading is particularly welcome given the ongoing food shortages in Venezuela

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

left Venezuela a major food importer

■ High food price inflation and frequent supply shortages have dampened growth infood consumption

■ Price controls in place since 2003 squeeze the profits of producers and are adisincentive to investing in increasing production

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

years of decline

subsidies, to help small holders increase production

■ Falling oil revenue is bringing more attention to increasing agricultural production toreduce the cost of food imports

SWOT Analysis - Continued

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

Business Environment

SWOT Analysis

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

■ Home to some of the largest oil reserves in the world, the Orinoco region will provideopportunities for large-scale investment

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

political environment, could undermine the long-term growth outlook

■ Privatisation ground to a halt under the administration of former President HugoChávez, with the government instead preferring production-sharing agreements toencourage foreign direct investment

Opportunities ■ 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 forsmall- and medium-sized businesses

Threats ■ 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

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

Industry Forecast

Livestock Outlook

BMI Supply View: After strong growth in the 1990s and the first few years of the 21st century, Venezuelanbeef production has gone into reverse in the past few years Venezuela was self-sufficient in beef in 2003,but in recent years the country has become increasingly reliant on imports to meet domestic demand Acomplex system of price controls imposed by the government in 2003 has restricted the profitability oflivestock production in the country The government has aimed to boost production by turning over landjudged as unproductive to landless farmers The project, however, has had mixed results: some formerlyproductive ranches have seen production evaporate under the direction of inexperienced new managers

The sector is held back by a lack of profitability due to high input costs, inflation and government pricecontrols, along with increased competition from imports from Brazil, Colombia and Nicaragua Includinglive animal imports for slaughtering, Venezuela depends on imports for more than half of beef consumed,according to Instituto Nacional de Estadística The lack of profitability is leading producers to leave thesector, and the national cattle herd is estimated to have shrunk by 4.7% year-on-year (y-o-y) in 2011/12 to12.1mn head We estimate that production remained static at 345,000 tonnes that year, and expect output todecline by 1.2% in 2012/13 to 341,000 tonnes

Towards the end of our forecast period, we expect production to increase as the government makes efforts

to lessen the reliance on imports However, the recovery will be slow, and we forecast production to reachjust 358,000 tonnes in 2016/17, up by 3.8% on the 2012 level

Poultry production has weathered the storm of the government's reforms better than the cattle-rearingsector It accounts for an estimated 30% of total agricultural GDP and almost 50% of animal production.Poultry is the most significant component of Venezuela's agricultural output, accounting for 24% in valueterms The poultry industry is organised, vertically integrated and efficient, and producers are constantlyworking to modernise and improve their production methods Despite these strengths, the sector has beenhit by the poor economic climate, high input costs and increasing competition from imports from Brazil andArgentina Producers continue to be affected by the state-controlled price regime, which is squeezingprofitability The state-regulated price for a whole chicken was increased in July 2011 to VEF15.61/kg Thisprovided some relief for producers We estimate that output increased by 7.2% y-o-y in 2011/12 to 670,000tonnes However, we believe that high input costs and squeezed profitability will see output fall back by2.2% y-o-y in 2012/13 to 655,000 tonnes Through to 2016/17, we see production expanding by 4.0% onthe 2011/12 level to 697,000 tonnes

Venezuela produces only small quantities of pork Output has remained stable at around 125,000 tonnes inrecent years We see production dipping by 2.4% y-o-y to 122,000 tonnes in 2012/13, owing to high inputcosts Over our forecast period, we see production increasing by 4.8% on the 2011/12 level to reach 131,000tonnes in 2016/17.

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 controlsmaking staple foodstuffs more affordable After falling sharply in 2003, poultry consumption grew by morethan 50% by 2008 Beef consumption grew by almost 40% between 2004 and 2008 In 2011, annual percapita consumption stood at an estimated 28.7kg for poultry, 19.2kg for beef and 5.1kg for pork Whileprice controls have increased demand, they have worked against investment in production and led to anincreasing reliance on imports In 2012, imports reached an estimated 230,000 tonnes for poultry and255,000 tonnes for beef

An increase in imports of 30.8% y-o-y helped to boost beef consumption in 2012 We believe that demandincreased by 7.0% y-o-y to 599,200 tonnes High import prices and a drop in domestic production are likely

to constrain beef consumption through our forecast period We see demand falling by 3.0% y-o-y in 2013 to581,200 tonnes Out to 2017, we forecast that demand for beef will grow by 4.7% on the 2012 level to627,300 tonnes

We estimate that poultry consumption grew by 3.0% in 2012 to 884,800 tonnes We see consumptiondipping by 2.0% y-o-y in 2013 owing to higher costs and reduced supply By 2017, we forecast demand forpoultry will grow by 7.5% on the 2012 level to 951,400 tonnes Although moderate, the pace of

consumption growth for poultry is still faster than for pork or beef owing to the comparatively lower cost

Pork consumption is much lower than that of poultry and beef Consumption grew by 9.8% over 2007-2012

to 141,700 tonnes We see consumption falling by 2.0% y-o-y in 2013 to 138,900 tonnes owing to a dip indomestic production and high input costs Out to 2017, we see consumption increasing by 1.3% on the 2012level to reach 143,500 tonnes, fuelled primarily by population increases

Table: Venezuela Beef & Veal Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Beef & Veal Production, '000 tonnes 1 345.0 341.0 350.0 352.0 355.0 358.0 Beef & Veal Consumption, '000 tonnes 1 599.2 581.2 592.8 604.1 615.6 627.3

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

Table: Venezuela Pork Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Pork Consumption, '000 tonnes 1 141.7 138.9 140.1 141.2 142.4 143.5

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

Table: Venezuela Poultry Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Poultry Production, '000 tonnes 1 670.0 655.0 665.0 674.0 685.0 697.0 Poultry Consumption, '000 tonnes 1 884.8 867.0 886.1 907.3 929.1 951.4

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

Land Expropriations Continue

In Q412, data published by National Land Institute (INTI) indicated that the Venezuelan government hasaccelerated its policy of land expropriations More than 1.1mn hectares (ha) have been expropriated sincethe beginning of 2011 A total of 350,000ha had been approved for 2012, although this figure is likely tohave been significantly exceeded For 2013, the budget has been approved for 397,000ha, a y-o-y rise of13.4% It is estimated that more than 4mn hectares have been expropriated since 2005 The lands are thenredistributed back to smaller farmers or used to form farmers' collectives on state-owned land, as part of thegovernment's policy of 'agrarian socialism'

Although the policy is intended to bring unproductive and underused land back into use, the Ministry ofAgriculture has been criticised for expropriating productive land and farms The acceleration of the

expropriation programme is likely to continue under Agriculture Minister Juan Carlos Loyo, who was alsoreappointed as head of the INTI in October 2012 The National Federation of Cattle Ranchers (Fedenaga)opposed the reinstatement of Loyo, claiming that the land expropriation programme that he championscreates insecurity and has led to declines in production 'Government intervention of productive farms forpolitical reasons has significantly decreased production,' said Manuel Cipriano Heredia, president ofFedenaga 'We have proof of farms that were at their maximum capacity and after being taken over havebeen destroyed.'

Large areas of land used for cattle farming have been subject to government expropriation In November

2011, the government announced the immediate expropriation of 290,000ha of farmland at 11 ranches

owned by Agroflora, a subsidiary of the British beef-producing firm Vestey Group, that is engaged in the

production of cattle, beef and buffalo The company is owned by Lord Vestey's family, who first begantrading in Venezuela in 1909 Previously, in October 2010, the government 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 Vestey Group was also targeted by the government in 2005, when four farms were nationalised,including the 33,600-acre Charcote estate south of Caracas, with 13,000 head of cattle

Plans To Increase Livestock Production

In late January 2012, former president Hugo Chávez announced the relaunch of the Gran Misión AgroVenezuela, the 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 One of themain goals of Organo Superior will be to increase land for livestock production, which currently stands atjust 800,000ha, with the aim of growing the national herd to 20mn head by 2019

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 it will also be necessary to address

structural problems in the sector if significant gains in production are to be made In particular, farmgateprice controls and high input costs are severely affecting the profitability of the sector and providingsignificant disincentives for producers

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 andretail prices to be increased In June 2011, the government announced an increase of 29.2% in the cost of akilo of prime beef, from VEF17.60 to VEF22.74 The maximum prices of second- and third-class beef, livecattle and carcass meat were all raised The news will be welcomed by producers, though some producers'representatives have argued that the price adjustments do not go far enough to restore profitability to thesector

Improved Relations With Colombia Ease Beef Supply Restrictions

The long-running trade dispute between Chávez and the previous Colombian president, Álvaro Uribe, poseddifficulties for Venezuela's beef supply for much of 2009/10 In 2008, Venezuela imported about 200,000tonnes of beef from Colombia, in addition to live cattle However, at the end of July 2009, Chávez frozediplomatic relations with Colombia in response to the country allowing US troops to operate out of its bases

in their fight against drug production While we do not believe exports completely ground to a halt (even ifofficial 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 whopping97.6% y-o-y in October 2009, according to Colombia's statistics agency DANE, with total imports fromColombia for the month falling by 70.4% Venezuela was forced to seek imports from other countries in theregion, including Brazil, Argentina, Paraguay and Nicaragua

However, in August 2010, Colombian President Juan Manuel Santos met with Chávez and agreed to restorediplomatic relations between the two countries The two presidents agreed to reinforce security along theirshared border to clamp down on terrorist groups and drug trafficking Venezuela also agreed to pay debtsamounting to some US$800mn to Colombian exporters The agreement paves the way for the restoration oftrade relations between the two countries, which promises to ease supply shortages of beef on Venezuelanshelves

In April 2011, the two governments reached an agreement to restore trade relations following a meeting inCartagena The deal opens the way for Colombia to export 6,500 head of cattle in addition to 3,000 livecattle and 3,500 pregnant cows to increase Venezuela's breeding stock The deal also included the offer toexport 60,000 day-old chicks and 100,000 hatching eggs

Then in April 2012, the Venezuelan Minister of Foreign Affairs Nicolás Maduro and his Colombiancounterpart María Holguín signed a partial bilateral trade agreement, at the sixth Summit of the Americas inCartagena, Colombia The agreement establishes a new model for trade relations between the nations,covering preferential trade agreements, sanitary norms, technical norms, rules of origin, trade protection andthe mechanism for the settlement of disputes The agreement also includes plans to increase joint

infrastructure and agricultural production The pact, which came into force in October 2012, signals thecontinued improvement of diplomatic relations between the two countries The pact is expected to providemuch-needed relief for the food shortages and spiralling prices that have gripped Venezuela

In February 2013, data from Colombia's National Administrative Department of Statistics and Office ofTaxes and Customs demonstrated that trade between Colombia and Venezuela increased by 40% y-o-y toUS$3.28bn

Table: Venezuela Beef & Veal Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Beef & Veal Production, '000 tonnes 1 365.0 305.0 290.0 348.0 345.0 345.0 Beef & Veal Consumption, '000 tonnes 1 547.0 615.0 508.0 523.0 560.0 599.2

Notes: e BMI estimates Sources: 1 USDA.

Table: Venezuela Pork Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Pork Consumption, '000 tonnes 1 129.0 133.0 129.0 134.0 141.0 141.7

Notes: e BMI estimates Sources: 1 USDA.

Table: Venezuela Poultry Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Poultry Production, '000 tonnes 1 740.0 695.0 680.0 650.0 625.0 670.0 Poultry Consumption, '000 tonnes 1 903.0 1,047.0 861.0 887.0 859.0 884.8

Notes: e BMI estimates Sources: 1 USDA.

Chávez's death creates an uncertain political and economic landscape Our current forecast is that thegovernment's interventionist stance towards food production and supply will continue; thus, meat

production will be highly dependent on government policy If prices are subject to further controls asVenezuela's economy contracts, production could fall further as more operators leave the sector Anotherfactor that will have a great influence over demand for livestock is the price of oil With Venezuela soreliant on its hydrocarbons exports, funds for government schemes to increase production and provideaffordable meat to the masses will be dependent on oil revenues being sufficient If the price of oil fallsagain, demand for meat would likely be hit

Grains 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 isVenezuela's major grain crop, with the vast majority grown in the central states of Barinas, Portuguesa andGuárico While the area planted to corn has risen by around 50% since the end of the 1990s, Venezuela'sagricultural sector remains relatively undeveloped, and there is still plenty of room for further expansion.About 65% of the area planted is white corn for human consumption; the remainder is yellow corn for bothhuman consumption and for feed The viability of corn production in Venezuela is heavily dependent ongovernment policy In the 1980s, the country's agricultural sector was heavily regulated, and high tariffswere 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 Since then, theintroduction of regulated farmgate prices and retail prices has hit profitability and seen output decrease

further Poor weather conditions, 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 thedifficulties facing producers

In 2011/12, we estimate that corn production fell by 18.1% year-on-year (y-o-y) to 1.40mn tonnes as poorweather, poor agricultural policies, a lack of fertiliser and low profitability hit output Production continued

to be held back by shortages of technical staff and equipment, delays in financing to farmers, inefficientproduction techniques and unreliable supplies of materials and agrochemicals

In 2012/13, we forecast that corn output will recover by 17.9% y-o-y to 1.65mn tonnes Output is expected

to be aided by the government's announcement that it will assist corn producers through the winter crop

cycle by providing fertiliser and seeds via the state-owned Agropatria chain of agricultural supply shops.

We anticipate a small increase in the area harvested from 420,000 hectares (ha) to 430,000ha Risks are tothe downside, however, as poor weather and a lack of agrochemicals could limit production

Out to the end of our forecast period, the level of production will be highly reliant on the government'sability to support the agricultural sector In 2012, the government set ambitious targets to boost domesticgrain production by 70% by 2018 However, this will be highly dependent on government policies to aidincreases in output Without continued support, improved production techniques and improved profitability,much of the newly opened farmland will very likely return to fallow Despite this risk, we expect forecastproduction growth of 45.7% on the low 2012 level to reach 2.04mn tonnes in 2017

Wheat production in Venezuela is negligible, as the country does not have a suitable climate for growingwheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming fromthe US (42%) and Canada (52%) In March 2011, wheat was added to the list of goods classified by thegovernment as essential or staple, which helps to expedite import procedures Venezuelan wheat importstotalled an estimated 1.69mn tonnes in 2011/12 and are forecast to remain at a similar level in 2012/13.However, importers have faced problems related to rising international prices, limitations on accessingforeign currency and delays in obtaining import approval

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 63.3% from 2007 to 2012,

outstripping growth in production and leading to a surge in imports from the US Import controls for feed

corn have been relaxed, and imports grew from just 152,000 tonnes in 2006 to an estimated 2.57mn tonnes

in 2012

We estimate that demand grew by 12.0% y-o-y in 2012 to reach 3.92mn tonnes, due primarily to increaseddemand from the livestock sector Yellow corn for feed is estimated to account for around 2.4mn tonnes,with the remainder for human consumption We see consumption dropping back to 3.80mn tonnes in 2013,

as demand for feed falls back Out to 2017, we believe consumption will increase, as corn is one of thecheapest foods available and the price is kept down by government price controls Growth will, however, bemore moderate than during the previous five-year period; out to 2017 we forecast demand rising by 8.0% onthe 2012 level to take consumption to 4.23mn tonnes

Wheat has gained in popularity since the beginning of the 21st century, as Venezuelan consumers have hadmore money to spend on food Consumption of both baked goods and pasta has been rising Price controlsmean pasta has become far more affordable and per capita consumption has now risen to around 14kg Themajority of pasta produced is lower grade and must be sold at a government-set price Some high gradepasta is also produced that can be sold at market prices Pasta imports increased to an estimated 8,600tonnes in 2011, up from an average of 3,490 tonnes in 2007-2010 As a result of rising wheat prices on theinternational market, we believe that consumption remained stable in 2011/12 at 1.50mn tonnes However,the expansion in production of two major millers and pasta manufacturers is likely to lead to increasedavailability and higher consumption We see demand growing by 3.0% to 1.55mn tonnes in 2012/13; out to

2017, we believe consumption will grow by 15.4% on in 2012 level to 1.73mn tonnes

Table: Venezuela Corn Production & Consumption, 2012-2017

Table: Venezuela Wheat Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Wheat Consumption, '000 tonnes 1 1,500.0 1,545.0 1,591.3 1,637.5 1,683.3 1,730.5

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

Further Corn Price Increase Authorised

On August 1 2012, the Venezuelan government raised the farmgate prices of corn and rice The price ofyellow corn increased by 42.9% from VEF1.33 to VEF1.90 per kilo, while white corn rose by 46.6% fromVEF1.50 to VEF2.20 However, the increase has not been sufficient to satisfy producers, who argued thateven with the price rise they cannot cover production costs, which have risen dramatically Antonio Pestana,the vice president of Fedeagro, argued that the cost of producing a kilo of white corn stands at VEF2.40,VEF0.20 higher than the new government mandated price He also warned that a failure to invest in

improving crop irrigation and drainage poses threatens the recovery of domestic grain production, leavingthe crops vulnerable to drought and flooding

Subsequently, in November 2012, Venezuelan Agriculture Minister Juan Carlos Loyo announced a 46%increase in the price of pre-cooked corn flour from VEF4.06/kg to VEF5.93 (US$1.38)/kg However, theVenezuelan corn processing industry had argued that an increase of 66% would be necessary to coverproduction costs and ensure a small profit In addition to the 47% increase in farmgate corn prices, freightrates have also risen by 20% Industry representatives argued that the lack of profitability could underminecompanies' viability and potentially threaten food production Nonetheless, we expect the increase in thefarmgate prices and the consumer price gaps to go some way towards encouraging an increase in the areaplanted to grains in the coming year

Government Enters Gruma Partnership

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

Gruma, the world's largest producer of corn flour for tortillas The government had previously stated its

intention to nationalise the assets of Gruma subsidiary Monaca The announcement will see the

establishment of two joint ventures, one focusing on the production of corn flour and rice, and the secondproducing pasta, wheat flour and oatmeal

The relationship between the Venezuelan government and Gruma was a turbulent one throughout 2010 InJanuary of that year, Hugo Chávez announced that his government would temporarily take control ofGruma'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 accusationsthat Gruma had refused to sell flour during a national shortage the previous month The move came as thegovernment 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'sassets, it was considering forming a joint venture with the Mexican company

Gran Misión Agro Venezuela Fails To Deliver

In January 2011, the government launched Gran Misión Agro Venezuela, a new programme designed tosupport 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 tothe country's agricultural producers, from small to large-scale landowners, with VEF9.9bn (US$2.3bn)committed to the programme

Data from the Ministry of Agriculture and Land indicate that during 2011, 75,000 producers receivedVEF2.7bn (US$627.9mn) in order to boost production However, data also showed that the Gran Misiónhad failed to reach its objectives for its first year of operation with regards to grain production Yellow cornproduction reached only 62.1% of the target of 1.39mn tonnes for 2011, and white corn production hit only50.0% of official targets

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

Despite the plan's failure to reach its first-year targets, in late January 2012 Chávez relaunched the GranMisión 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 furtherVEF114mn (US$26.5mn) in investment to improve the agricultural transport network

There are signs that the government is becoming more responsive to the needs and views of producersassociations when developing agricultural policies In Q312, Fedeagro, the National Confederation of

Associations of Agricultural Producers, announced that agricultural production during H112 was morepositive than the same period in previous years, with increased area planted to cereals and rice.

In January 2013, Vice President Nicolás Maduro relaunched Gran Misión AgroVenezuela for 2013-2019.Shortly afterwards, he announced that funding had been approved to support the programme's objectives for

2013 In total, VEF7.81bn will be available for 2013, of which VEF3.0bn will be dedicated to improvingfarm roads

Coca Growing Hits Corn Production

The diversion of fertiliser from legal crops to coca growing is damaging Venezuelan corn production Urea,the nitrogen-rich fertiliser used to grow corn and other agricultural produce, is being sold through the blackmarket to coca growers As a result, farmers say, they do not have sufficient fertiliser, particularly duringthe main planting season that begins in May

On paper, Venezuela produces at least twice as much fertiliser it needs, with the government subsidising itsuse to the tune of US$100mn per year, according to a Miami Herald report However, farmers in the maingrowing 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 cornproducers, who have also been hampered by land expropriations, farmgate prices and extreme weatherconditions in recent years

Mixed Results For Chávez's Production Drive

Agricultural production in Venezuela increased during Hugo Chávez's time as president After risinggradually in the first half of last decade, production rose rapidly from 2005 as the oil wealth pouring into thecountry allowed more investment in agriculture From 2004 to 2008, corn production grew 56.5% to2.00mn tonnes This was driven by a large increase in the area planted under the government's NationalSowing Plan Chávez's stated aim is to not only end Venezuela's reliance on imported corn, but to build up asurplus for export Since coming to office, Chávez has redistributed millions of hectares of land to the poorand invested billions of dollars in agriculture While the rise in production shows that the policy has enjoyedsome success for grains, there are still problems Many of the people granted rights to farmland have littleexperience in agriculture There have also been complaints that promised training and inputs such as seedand 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 forcesince 2003 on around 100 products considered to be basic necessities Producers are also given directsubsidy payments and access to cheap fertiliser Despite this, farmers have long complained that the

farmgate price is too low, threatening future production

The aim of achieving self-sufficiency is a long way from being realised, and Venezuela is still heavilyreliant on grain imports to fuel domestic demand, both for human consumption and for the livestockindustry Indeed, in 2010 the government relaxed import permit procedures in order to reinforce its 'foodsecurity' policy and avoid domestic food shortages In 2012/13, corn imports are forecast to reach 2.0mntonnes, compared to 1.16mn tonnes in 1997/98 In addition, Venezuela is expected to import around 1.7mntonnes of wheat

Table: Venezuela Corn Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Corn Production, '000 tonnes 1 2,000.0 1,800.0 1,800.0 1,634.0 1,710.0 1,400.0 Corn Consumption, '000 tonnes 1 2,400.0 2,700.0 3,200.0 3,400.0 3,500.0 3,920.0

Notes: e BMI estimates Sources: 1 USDA.

Table: Venezuela Wheat Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Wheat Consumption, '000 tonnes 1 1,750.0 1,500.0 1,550.0 1,550.0 1,500.0 1,500.0

Notes: e BMI estimates Sources: 1 USDA.

Risks To Outlook

As mentioned above, growth in Venezuela's grain production will be reliant on the continued support of thegovernment With government revenues severely reduced by the fall in oil prices, funds to the agriculturalsector could dry up This would see corn production undershoot our forecasts On the demand side,

consumption will be reliant on the continued subsidisation of the price of staple foods and the ability of thegovernment to source sufficient grain supplies on the export market If the government allowed grain prices

to rise, consumption would be hit On the other hand, if oil prices rise faster than we expect, a recovery ingovernment revenues could see increased investment in agriculture and stronger-than-expected growth inthe production and consumption of grain.

Coffee Outlook

BMI Supply View: The highest quality 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 pace with increasing costs amid rocketing inflation has hurt theprofitability of 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 havealso 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 fallenfrom an estimated 80,000 to fewer than 50,000

After a decline of 13.8% year-on-year (y-o-y) in 2010/11, we estimate that production recovered by 36.0%

in 2011/12 to 850,000 60kg bags The harvest benefited from the renewal of fertilisation programmes aspart of the government's agricultural plan The increase in farmgate and retail prices in November 2011 andnew legislation allowing the coffee industry to have 30% of production in non-regulated products also aidedthe sector We believe that if weather conditions remain favourable, production will increase by a further2.9% y-o-y in 2012/13 to reach 875,000 bags In September 2012, the government announced an average33% increase in farmgate prices However, producers have argued that this is insufficient to counter

rocketing inflation and input costs

Government support for smallholder coffee growers, which make up the majority of farms, could seeproduction grow further over the later years of our forecast period We forecast production to reach 940,000bags in 2017, 10.6% higher than the 2012 level This, however, will be dependent on government policy,particularly price controls If the government relaxes 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 toother less tightly controlled crops

BMI Demand View: Coffee consumption has shown strong growth in recent years, rising by an estimated

66.5% over 2007-2012 The vast majority of coffee consumed is roasted ground coffee, with soluble instantcoffee accounting for only about 1% of total consumption Coffee is included in the government's basic

food basket and is available in government food stores at subsidised prices This has allowed more income Venezuelans to afford it, leading to a strong increase in demand.

low-However, demand growth has led to severe supply shortages at times and a booming black market

Wealthier consumers are able to buy their coffee at cafes or street stalls, but poorer consumers are oftenunable to afford the high prices The government has blamed the shortages on unscrupulous suppliershoarding 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 payfor beans and for how much they are allowed to sell of the finished product

A steep increase in imports has helped to ease supply restrictions Imports reached an estimated 606,000bags in 2011/12 and we see consumption increasing marginally to reach 1.32mn bags in 2012 We seeconsumption growing again slightly to 1.33mn bags in 2013 Through to 2017, we forecast demand growing

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

Producers Deem New Price Rises Insufficient

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 However, in November 2011 the government announced anincrease of 60.6% in the fixed price paid to producers for 'good washed A' green coffee, from VEF747 perquintal (45kg) to VEF1,200/quintal 'Good washed B' rose by 56.3% from VEF691 to VEF 1,080, and 'goodwashed C' was increased by 57.3% from VEF623 to VEF980 The retail prices for both coffee beans andground coffee was increased by 55.7% to VEF18.45/kg, from VEF11.85 previously

Then, in September 2012, the government announced a further increase of an average 33% in fixed coffeeprices The price for 'good washed A' green coffee rose from VEF1,200 to VEF1,600/quintal; 'good washedB' rose from VEF1,080 to VEF1,400, and 'good washed C' increased from VEF980 to VEF1,350 Lower

quality coffee prices also rose, with 'good natural' rising from VEF940 to VEF1,240, and 'natural standard'increasing from VEF820 to VEF1,090 In addition to the price increases, the Ministry of Agriculture andLand announced that it would open 35 purchase points to serve producers in Lara, Barinas, Portuguesa,Trujillo, Mérida, Táchira and Monagas It will also open nine roasters, five of which will purchase directlyfrom farmers in order to eliminate middlemen.

The changes have disappointed producers, who argue the price increases are insufficient to cover the rapidincrease in production costs Manuel Morillo, director of the Association of Venezuela Coffee Producers,said the organisation had worked for months to demonstrate to the Ministry of Agriculture and Land that thetrue costs of production are VEF1,700-2,200/quintal The expropriation of the two main coffee-producing

companies, Fama de América and Café Madrid, has enabled production to continue despite the lack of

profitability

High coffee prices on the international market have led to a huge discrepancy between what producersreceive and the cost of coffee on global markets While the price of a quintal of 'A' grade domestic coffee isnow fixed at US$279, in neighbouring Colombia, a quintal of Venezuelan coffee is sold at US$465-698.Although average prices of coffee on the global market are forecast to remain lower through 2013, the gap

is still considerable and has discouraged investment in coffee production

Producers and processors will, however, be supported by a new regulation allowing the coffee industry tohave up to 30% of production in non-regulated products This opens up the possibility for producers toexplore gourmet or flavoured coffees, which are not subject to government price controls

As a result of falling domestic output, the government has had to resort to increased imports to guaranteesupply, with imports rocketing to an estimated 622,000 bags in 2010/11 and estimated to have reached606,000 bags in 2012 Much of this has come from Brazil and Nicaragua This has further exacerbatedtensions in the sector, with producers claiming that the government is effectively subsidising foreign coffeeproducers, as the price paid for imported coffee can be more than 50% more than the fixed price for

domestic producers

Minister Offers Reassurances Over Coffee Supply

The supply shortages that have plagued Venezuela in recent years became more acute during the first fewweeks of 2013, with coffee widely reported to be one of the staple goods in scarce supply on the shelves ofVenezuelan shops Endings stocks are forecast to fall in 2013, with imports expected to fall from 606,000bags in 2011/12 to 400,000 bags and domestic production unlikely to compensate In a move to reassure the

public, in February 2013, food minister Carlos Osorio announced that the public and private coffee

distribution networks have more than 1.8mn quintals, sufficient to meet domestic demand for the next 10months Since rules on importing coffee were relaxed in 2009/10, domestic coffee consumption has

accelerated by around 50% However, accelerating inflation and a lack of access to US dollars in the markethave disrupted supply chains in recent months

Venezuela And Colombia Announce Bi- Coffee Plan

In March 2011, officials from the Colombian and Venezuelan governments developed a joint plan tosupport coffee growers on both sides of the Colombia-Venezuela border in areas that have been hard-hit bythe long-running conflict in Colombia The Binational Plan for the Perija Mountain Range will benefitcoffee 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 plan marks a further step forwardfor collaboration between the two countries, following an extended suspension in diplomatic relationsduring the premiership of former Colombian president Alvaro Úribe

Factors Impacting 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 thecountry's exports Since then, however, its significance has fallen, particularly after the discovery of oil led

to other industries being crowded out Venezuela accounts for less than 1% of world coffee productioncurrently

Despite the government's goal to attain self-sufficiency in food production, mismanagement of the sector, aswell as adverse weather conditions, have seen production dwindle and forced the government to turn toimports to meet the requirements of Venezuela's processing industry and supply domestic demand Since2002/03, Venezuelan coffee imports had been negligible, totalling 0-13,000 bags per year However, in2011/12, imports increased to an estimated 606,000 bags, primarily from Brazil and Nicaragua

Although the government continues to blame the private sector for the failures of the economy, coffeeproducers hold the government's interventions responsible for the collapse of the coffee industry, as strictprice controls have eroded the sector's profitability

The difficulties faced by the sector have led to falls in consumption and the quality of production Lowinvestment in coffee farms has left most with old trees well past their peak production and vulnerable toattack 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 formerlevel, falling from 3kg per capita in 1990 to just over 1kg at the beginning of the 21st century, beforecreeping back up to its current 1.9kg per year as incomes rose and the government controlled the retailprice Unless the government alters its restrictive policies and relaxes control over the sector, we see littlepotential for the coffee industry to reach the 3mn quintal target that the government envisages If pricecontrols 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 purportedexploitations 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 the administration's socialist policies A diagram on the wallshows customers how the different prices are reached, outlining the costs of labour, overheads and rawmaterials, Reuters has reported 'Made in Socialism' badges decorate posters and menus The affordableprices have been a success with customers; however, critics claim that the move is a further populistgimmick designed to distract attention from the spiralling inflation, food shortages and economic

contraction that continue to plague the country

Nationalisation Of Coffee Sector

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

processing firm Fama de América and take a 50% share in 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 tohave been sparked by an announcement by the companies that they were running out of coffee supplies andhad enough left to meet only a few days of demand The government claimed the companies had beeninvolved in illegally exporting coffee to Colombia to take advantage of the higher prices The governmentinitially claimed the seizures would be temporary But a few days after the occupation of the plants, Chávezspoke 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 Netherlands-based Longreef Investment Group, which was a shareholder in

Fama de América, announced that it would sue the Venezuelan government for failing to pay compensationfor 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 byboth companies) the seizures and the looming shortages that motivated them highlight all that is wrong withthe Venezuelan coffee industry The farmgate prices for coffee fixed by the government are well below thelevel in neighbouring Colombia With Colombia suffering its own shortage of coffee in 2009 owing to apoor crop, demand for coffee from neighbouring countries is high It is inevitable that Venezuelan coffeewill find its way over the border given the difference in prices on offer The low prices offered are alsocausing yields to fall as growers complain that they are unable to hire enough labourers or invest in

improving tree stock We see Venezuela becoming increasingly reliant on imports in the future as domesticproduction is unable to meet demand

The government is in control of 80% of the country's coffee roasting capacity, with the remaining 20%owned by small private companies The government is hoping to use its new power in the coffee sector toguarantee 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 notexpect the going to be easy, however, particularly for the remaining private roasters According to data fromthe Superintendent of Silos, Warehouse and Agricultural Storage, reported El Universal, only 99 of the 145coffee roasters active in 2008 were still working in 2009 We expect the tough operating environment tocontinue through our forecast period as price controls continue

In June 2012, the government announced the creation of a new coffee supply and distribution company

called Venezuela Coffee: Shops and Services The new chain will be an affiliate of the Venezuelan Coffee

Corporation and will be responsible for facilitating and coordinating economic activities relating to thecoffee industry, including cultivation, processing, sales and exports

Table: Venezuela Coffee Production & Consumption, 2007-2012

On the upside, the dramatic fall in oil prices over the second half of 2008 and the doldrums since could lead

to more interest in developing agriculture as a major export earner again At the end of July 2008,

Venezuela-owned petrol station chain CITGO Petroleum Corporation said it would sell Venezuelan

coffee at its forecourts in the US While production is not yet large enough to meet domestic demand andsupport an export industry, if Venezuelan coffee could find popularity on world markets as Colombiancoffee has done, then investment in the sector could increase

Commodity Strategy

Monthly Softs Update

■ We have turned bullish palm oil due to fundamental and technical factors, and have added a bullish palmoil view to our key views table

■ We believe sugar and coffee will maintain key technical support over the short term despite a relative glut

of supply in both markets This will be due to disease concerns in the coffee market and substitutioneffects with ethanol in the sugar market

■ We expect cocoa to continue drifting lower in the coming weeks as supply from West Africa remainsstrong and European grindings remain weak

Cocoa: Weighed Down By Supply

We expect front-month cocoa to drift lower in the coming weeks as supply from West Africa remains strongand global demand (particularly European grindings) remains weak Supply from Indonesia, the world'sfifth largest producer, also looks strong in the short term Until mid-February there had been supply

concerns in West Africa pertaining to diseases and the seasonal Harmattan winds, which usually occur atthe beginning of the calendar year and bring dry weather to the region Now that those concerns havedissipated, the progress of region's mid-crop will become increasingly important over the next few months

Weakest In A Decade

Europe - Year-On-Year Q4 Grindings (% Of Previous Year)

Sources: BMI, ECA

Although we see few significant downside risks to global cocoa supply over the short term, we continue toexpect the global market to remain in a small deficit in the 2012/13 season This is based on our expectationthat supply will only marginally improve for the top producers Nonetheless, we continue to forecast cocoaprices to average close to 2012 levels at GBP1,550/tonne in 2013 and GBP1,500/tonne in 2014

Drifting Lower

Front-Month LIFFE Cocoa, GBP/tonne, (weekly chart) & RSI (below)

Sources: BMI, Bloomberg

Coffee: Disease Concerns Surfacing

We are bullish coffee on a short-term basis, and believe that prices will break multi-month resistance thatcurrently comes in around USc140/lb in the coming weeks on the back of supply concerns (particularlydisease worries) in East Africa and Central America Global coffee prices have fallen significantly sinceQ312 largely due to destocking and despite the Brazilian crop entering its down year in 2013/14, the harvestfor which begins in April Although we forecast Brazilian production to approach record highs for a down-year, and expect the global market to remain in a surplus of 5mn bags in 2013/14, we believe the diseaseproblems in Latin America will keep coffee prices supported over the short term

Hanging On

Front-Month ICE Coffee (USc/lb, weekly) & RSI (below)

Sources: BMI, Bloomberg

Over the longer term, we continue to see coffee as one of the best supplied markets within the agriculturalcomplex, projecting surpluses out to 2015/16 This is mainly a function of improving supply from Brazil,which will continue to grow on a biennial basis despite lower average coffee prices Global coffee demandgrowth is also forecast to be low by the standards of other commodities, since coffee consumption is wellestablished in several key emerging markets Ultimately, we are forecasting lower average coffee prices in

2013 at USc170/lb and 2014 at USc150/lb

Coffee Glut

Brazil - Coffee Production ('000 60 kg bags) & Growth (%)

Production (LHS) Growth (RHS)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 0

25,000 50,000 75,000

-50 0 50 100

f = BMI forecast Sources: BMI, CONAB

Sugar: Brazilian Millers To Favour Ethanol

Like other softs markets, we believe the long-term supply picture for sugar is very strong, although weanticipate prices breaking above its current wedge pattern Like coffee, the strong supply prospects for sugarlargely come down to Brazil, for which we forecast record production in 2012/13 Prospects for other keyproducers such as Thailand and Australia also look strong in 2012/13, and global sugar consumption growth

in 2013 is expected to come in below the 10-year average at around 1.1%

Reaching The Apex

Front-Month ICE Sugar (USc/lb, weekly)

Sources: BMI, Bloomberg

Although the long-term supply picture is strong, we anticipate sugar prices averaging higher than spot levelsfor 2013 This is based on our view that Brazilian sugar production growth will fall year-on-year in 2013/14given that the ethanol/sugar ratio in Brazil is at five-year highs, encouraging Brazilian mills to devote moresugar cane to ethanol than they have in previous years Spot sugar prices are also very close to break-evenlevels for many Brazilian sugar mills We also believe tightness in the Indian sugar market due to a decline

in production in 2012/13 to 24mn tonnes will help prices maintain technical support Overall, we forecastsugar prices to average around current levels at USc21.50/lb in 2013 and USc20.00/lb in 2014

Shifting More Cane To Ethanol?

Brazil - Ethanol Production (mn litres, LHS) & Global Sugar Prices (USc/lb)

f = BMI forecast Source: UNICA, Bloomberg

Cotton: Upward Momentum To Wane

We expect upward momentum on cotton prices to wane in the coming weeks, as the weekly relative

strength index is close to overbought territory Also, non commercial net long speculative positions havesurged to a five year-high, which is likely to limit upside risks for prices in the short term

Breaking Higher?

Front-Month ICE Cotton (USc/lb, weekly) & RSI (below)

Sources: BMI, Bloomberg

We maintain our average cotton price forecast at USc78.00/lb in 2013 and USc85.00/lb in 2014 We expectprices to eventually break current resistance at USc85.00/lb on the back of tightening output from majorproducers and rising import demand, mainly from China After a decrease in global production in 2012/13,

we expect only a slight recovery in output in 2013/14 as lower prices are continuing to discourage plantings

In all major producers, farmers have shifted area towards more profitable crops On the other hand, demand

is expected to recover at a stronger pace, leaving the global surplus around 2.3mn bales in 2013/14 and4.2mn bales in 2014/15 At that point, we expect consumption growth to start stabilising, enabling theglobal market to see widening surpluses out to 2017

Increasing Supply

Global - Cotton Production Balance ('000 bales) & Stocks-to-use ratio (%)

f = BMI forecast Source: USDA, BMI

Palm Oil: Turning Short-Term Bullish

Three-month palm oil prices look poised to maintain their current upward momentum in the coming weeks,and we have added a bullish palm oil view to our key views table based on a sustained break of diagonalresistance around MYR2,500/tonne with a target of around MYR2,700/tonne We believe palm oil priceswill be supported by falling stocks from Malaysia, which are expected to fall for the first time in severalmonths Furthermore, seasonal factors (such as a decline in production from Asia over Q1 combined withincreased demand from India and China) will help boost prices