Venezuela agribusiness report q2 2014

Growth in Venezuela will continue to be constrained in 2014, as soaring inflation impacts householdpurchasing power, oil production stagnates, and private sector investment remains wary

Q2 2014 www.businessmonitor.com

VENEZUELA

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2014

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BMI Industry View 7

SWOT 10

Agribusiness 10

Business Environment 12

Industry Forecast 13

Livestock Outlook 13

Table: Venezuela Beef & Veal Production & Consumption, 2013-2018 15

Table: Venezuela Pork Production & Consumption, 2013-2018 15

Table: Venezuela Poultry Production & Consumption, 2013-2018 15

Table: Venezuela Beef & Veal Production & Consumption, 2008-2013 17

Table: Venezuela Pork Production & Consumption, 2008-2013 17

Table: Venezuela Poultry Production & Consumption, 2008-2013 18

Grains Outlook 19

Table: Venezuela Corn Production & Consumption, 2013-2018 20

Table: Venezuela Wheat Consumption, 2013-2018 21

Table: Venezuela Corn Production & Consumption, 2008-2013 26

Table: Venezuela Wheat Production & Consumption, 2008-2013 26

Coffee Outlook 28

Table: Venezuela Coffee Production & Consumption, 2013-2018 29

Table: Venezuela Coffee Production & Consumption, 2008-2013 34

Commodity Strategy 35

Monthly Grains Update 35

Table: Select Commodities - Performance & Forecasts 43

Table: BMI Commodities Strategy 44

Monthly Softs Update 45

Table: Select Commodities - Performance & BMI Forecasts 52

Table: BMI Commodities Strategy 53

Upstream Analysis 54

Americas Machinery Outlook 54

Americas GM Outlook 60

Americas Fertiliser Outlook 65

Downstream Analysis 71

Food 71

Food Consumption 71

Table: Food Consumption Indicators - Historical Data & Forecasts, 2010-2017 72

Canned and Prepared Food 72

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2010-2017 73

Fish 73

Table: Fish Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 73

Oils & Fats 74

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

Confectionery 76

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2010-2017 76

Mass Grocery Retail 78

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2010-2017 78

Table: Sales Breakdown By Retail Format Type 79

Drink 80

Alcoholic Drinks 80

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2010-2017 80

Soft Drinks 81

Table: Soft Drinks Value Sales - Historical Data & Forecasts, 2010-2017 82

Hot Drinks 82

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2010-2017 83

Regional Overview 84

Competitive Landscape 90

Table: Venezuela Agribusiness Competitive Landscape 90

Demographic Forecast 91

Table: Venezuela's Population By Age Group, 1990-2020 ('000) 92

Table: Venezuela's Population By Age Group, 1990-2020 (% of total) 93

Table: Venezuela's Key Population Ratios, 1990-2020 94

Table: Venezuela's Rural And Urban Population, 1990-2020 94

Methodology 95

Industry Forecast Methodology 95

Sector-Specific Methodology 96

BMI Industry View

BMI View: The victory of Nicolás Maduro of the ruling Partido Socialista Unido de Venezuela in April will

most probably ensure the continuity of many of the interventionist policies of Chávez's era Price fixing in particular continues to be a source of woe for producers unable to meet input costs, which are soaring in line with some of the highest rates of inflation in the world Some respite has arrived in the form of a 20% rise in the government-fixed price of food items including beef, chicken and dairy products, but even this will fall short of the rate of inflation, which is expected to increase 30% year-on-year in 2013 Inflation is also contributing to the diminishing purchasing power of Venezuelan households, while foreign currency shortages after a pre-election spending boom are causing shortages of some imported goods.

Tough Years Ahead

Venezuela - BMI Agribusiness Market Value By Commodity (As % of total)

Source: BMI

■ Beef production growth to 2017/18: 3.5% to 367,500 tonnes High input costs, cheaper Mercosur

competitors and reduced domestic demand will stymie growth

■ BMI universe agribusiness market value: US$3.70bn in 2014 (up 0.3% from US$3.69bn in 2013; forecast

to grow annually by 5.8% on average from 2014 to 2018)

■ 2014 real GDP growth: 1.2% (up from 0.8% in 2013; forecast to grow annually by 2.6% on averagebetween 2014 and 2018)

■ 2014 consumer price index: 50.0% year-on-year (y-o-y) (up from 44.8% in 2013; forecast to grow

annually by 31.3% on average between 2014 and 2018)

Industry Developments

While public unrest in Venezuela is on the rise, we do not believe that the recent large-scale protests staged

by student and political opposition groups present an existential threat to the administration of PresidentNicolás Maduro The protests are unlikely to do damage to the PSUV government in the near term, giventhat the party's supporters, not to mention the military, have not lost faith in the Maduro administration.However, over the longer term this is not guaranteed to remain the case, and we could see the politicalsituation deteriorate if the government does not do enough to address soaring inflation and worseningshortages which affect all segments of society

Growth in Venezuela will continue to be constrained in 2014, as soaring inflation impacts householdpurchasing power, oil production stagnates, and private sector investment remains wary of a hostile

operating environment We are forecasting real GDP growth of 1.5% in 2014, down from 2.0% estimatedfor 2013

Venezuela is experiencing declining export revenues, accelerating inflation and widespread shortages of

basic consumer goods Empresas Polar, Venezuela's largest privately held company, said in January

2014 that food production is at risk from record delays in the release of foreign currency by the government,fuelling shortages of goods such as rice and milk The government stopped publishing scarcity statistics inNovember 2013, after the previous month's data showed about one in five basic goods was out of stock atany given time The agriculture sector is also being hit, as low availability of inputs and decreasing

investment hurt crop production As a result, Venezuela is recording declining agricultural exports and issteadily increasing its imports.

Venezuela is likely to record another disappointing year for corn production in 2013/14 Low

availability of foreign currency and therefore limited possibility to import agricultural inputs has impeded corn production growth As a result of stagnant production and steady food and feed

demand, grains imports are likely to come in strong this year Corn and wheat imports continue to face severe delays and problems, mainly due to the long waiting time for the approval of foreign currency and import permits However, imports of grains should continue to receive preferential treatment to expedite the import of basic consumer goods and to maintain the livestock industry.

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

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 came 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 early 2000s, Venezuelan beef production hasgone into reverse in the past few years Venezuela was self-sufficient in beef in 2003, but in recent years thecountry has become increasingly reliant on imports to meet domestic demand A complex system of pricecontrols imposed by the government in 2003 has restricted the profitability of livestock production in thecountry The government has aimed to boost production by turning over land judged as unproductive tolandless farmers The project, however, has had mixed results: some formerly productive ranches have seenproduction 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 2012 to12.1mn head As a result, we believe beef production has decreased by 1.4% in 2012/13 and that it willbroadly stagnate in 2013/14 at 356,000 tonnes The recent increase by 20% of the state-controlled price forkey items of food including livestock products such as beef and chicken should help to stall any furtherdeclines Indeed, 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 weforecast production to reach just 368,000 tonnes in 2017/18, up by a mild 3.5% on the 2012/13 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 2011 to VEF15.61/kg Thisprovided some relief for producers However, we believe that high input costs and squeezed profitabilitylimited production growth in the past season Output should grow slightly faster in 2013/14, by 2.3% y-o-y,reaching 675,000 tonnes that year Through to 2017/188, we see production expanding by 7.7% on the2012/13 level to 710,800 tonnes

Venezuela produces only small quantities of pork Output has remained stable at around 125,000 tonnes inrecent years We see production growing slowly in 2013/14 Over our forecast period, we see productionincreasing by 7.5% on the 2012/13 level to reach 129,000 tonnes in 2017/18.

BMI Demand View: Meat consumption soared in Venezuela's boom years from 2004 to 2008 The rise indemand 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 Consumption growthwas slower since 2008, due to constraints on production (lower availability of grains) In 2013, annual percapita consumption stood at an estimated 32kg for poultry, 19kg for beef and 4kg for pork While pricecontrols have increased demand, they have worked against investment in production and led to an

increasing reliance on imports In 2013, imports reached an estimated 300,000 tonnes for poultry and225,000 tonnes for beef

High import prices, rising inflation and a drop in domestic production are likely to constrain beef

consumption through our forecast period We see demand stagnating in 2014 at 582,000 tonnes Out to

2018, we forecast that demand for beef will grow by 8.4% on the 2013 level to 628,500 tonnes

We see poultry consumption rising slightly by 1.6% in 2014 (owing to higher costs and reduced supply) By

2018, we forecast demand for poultry will grow by 9.0% on the 2013 level to 1.0mn tonnes Althoughmoderate, the pace of consumption growth for poultry is still faster than for pork or beef owing to thecomparatively lower cost

Pork consumption is much lower than that of poultry and beef Consumption broadly stagnated over2007-2013 to 133,000 tonnes We believe consumption fell by 5.7% y-o-y in 2013 owing to a dip indomestic production and high input costs, and that it will recover in 2014 with the small increase in

production Out to 2018, we see consumption increasing by 3.8% on the 2013 level to 138,000 tonnes,fuelled primarily by population increases

Table: Venezuela Beef & Veal Production & Consumption, 2013-2018

f = BMI forecasts Sources: USDA.

Table: Venezuela Pork Production & Consumption, 2013-2018

f = BMI forecasts Sources: USDA.

Table: Venezuela Poultry Production & Consumption, 2013-2018

f = BMI forecasts Sources: USDA.

Beef Cattle From Nicaragua To Aid Production

Shipments of heifers have been arriving to Venezuela from Nicaragua in a bilateral agreement between thetwo countries as part of the national policy AgroVenezuela

It is hoped that this will help to reinvigorate beef production after recent declines in the national herd Intotal, 781 high-quality, dual-purpose heifers arrived in the sea port of Puerto Cabello in May 2013, buildingupon previous deliveries A further 1,000 head are expected in the coming months to reach the agreementtarget of 6,000 The cattle were picked out through a four-month selection process

This new impetus to the industry in the Unare river basin has been made with a view to meeting rising fooddemand from the Orinoco Oil Belt.

Price Rises Bring Some Relief For Producers, None For Consumers

The Venezuelan livestock sector continues to be held back by the government-controlled price regime,which is squeezing profitability and holding back production However, the recent announcement of a 20%rise in the government-fixed price of important foodstuffs including beef and chicken by the new

government of President Maduro may give some encouragement to producers The shift in policy came inthe wake of a meeting with business leaders, which may signal a thaw in relations with the private sector

The move may also serve to push inflation higher: a 6.4% jump in food prices not government-controlledpushed Venezuela's inflation up 4.3% last month, the largest rise in three years, bringing the annual rate tonearly 30% The bolívar has also been devalued, further weakening the purchasing power of consumers As

a result, we expect declines in consumer demand across the board for livestock products in 2013

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 massive 97.6%y-o-y in October 2009, according to Colombia's statistics agency DANE, with total imports from Colombiafor 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, 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, 2008-2013

Sources: USDA.

Table: Venezuela Pork Production & Consumption, 2008-2013

Sources: USDA.

Table: Venezuela Poultry Production & Consumption, 2008-2013

Sources: USDA.

Risks To Outlook

The death of former Venezuelan president Hugo Chávez creates an uncertain political and economiclandscape regardless of the victory of his chosen successor, Nicolas Maduro, in the snap elections Ourcurrent forecast is that the government's interventionist stance towards food production and supply willcontinue; thus, meat production will be highly dependent on government policy If prices are subject tofurther controls as Venezuela's economy contracts, production could fall further as more operators leave thesector Another factor that will have a great influence over demand for livestock is the price of oil WithVenezuela so reliant on its hydrocarbons exports, funds for government schemes to increase production andprovide affordable meat to the masses will be dependent on oil revenues being sufficient If the price of oilfalls again, 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 thefirst 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 In 2012/13, we forecast that corn output will fall slightly by 1.9% y-o-y to1.28mn tonnes Output will be hit by the poor macroeconomic climate and shortage of foreign currency,with farmers unable to invest in the fertilisers and machinery that would allow them to recover lost

production

Corn production has been on a downtrend in the past seven years, due to the poor macroeconomic climateand shortage of foreign currency, with farmers unable to invest in the fertilisers and machinery that wouldallow them to recover lost production In the 2013/14 season that started in October 2013, we estimateproduction broadly stagnating, at 1.3mn tonnes This will be due to stagnant area harvested, estimated at400,000ha by the USDA, and a general lack of foreign currency, leading to shortages of all types of inputs.Yields will also be stable, at 3.25tonne/ha

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, without continued support, improved production techniquesand improved profitability, much of the newly opened farmland will very likely return to fallow In thecurrent climate of economic and political uncertainty, we are sceptical of the government's ability to investscarce foreign currency in the sector to prevent further falls in output Production will be held back by thelack of fertiliser, low profitability hitting output, shortages of technical staff and equipment, delays infinancing to farmers, inefficient production techniques and unreliable supplies of materials and

agrochemicals We therefore forecast corn production to fall 5.8% on the low 2012/13 level to reach 1.21mntonnes in 2017/18

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 2011, wheat was added to the list of goods classified by the

government as essential or staple, which helps to expedite import procedures However, importers have

faced problems related to rising international prices, limitations on accessing foreign currency and delays inobtaining import approval.

BMI Demand View: Demand for feed corn has risen rapidly since the economic recovery began in 2004,mainly driven by the expansion of the poultry sector However, as purchasing power is expected to be low

in 2014, human consumption will increase faster than that of the animal feed industry as Venezuelans turn

to their cheaper staple food 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 109% from 2005 to 2013, outstrippinggrowth in production and leading to a surge in imports from the US Import controls for feed corn have beenrelaxed, and imports grew from just 152,000 tonnes in 2006 to an estimated 2.1mn tonnes in 2013

We see consumption growing by 4.3% y-o-y to 3.8mn tonnes in 2014, as demand for feed will recover afterthe decline in 2013 In the medium term, 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 2018 we forecast demand rising by 17.4%

on the 2013 level to take consumption to 4.3mn tonnes

Wheat has gained in popularity since the beginning of the 2000s, as Venezuelan consumers have had moremoney to spend on food Consumption of both baked goods and pasta has been rising Price controls meanpasta 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 The expansion in production of twomajor millers and pasta manufacturers is likely to lead to increased availability and higher consumption Wesee demand growing by 2.1% to 1.58mn tonnes in 2014; out to 2018, we believe consumption will grow by14.5% on in 2013 level to 1.8mn tonnes

Table: Venezuela Corn Production & Consumption, 2013-2018

f = BMI forecasts Sources: USDA.

Table: Venezuela Wheat Consumption, 2013-2018

f = BMI forecasts Sources: USDA.

Another Year Of Production Stagnation

Venezuela is likely to record another disappointing year for corn production in 2013/14.

The country's corn output has not grown y-o-y for since the 2006/07 season, when it recorded a 25% increase over the previous season Since then, low availability of foreign currency and therefore limited possibility to import agricultural inputs has impeded corn production to grow We estimate output at 1.3mn tonnes, down 0.2% y-o-y and compared with 2.0mn tonnes in 2006/07.

In an attempt to encourage corn, rice and sugar cane producers to plant more, in August 2013 the government increased commodity subsidies to farmers, which will be paid at harvest based on

quantity (not quality) in the coming months Producers are skeptical, however, since no payments to date have been made Failure to pay the promised subsidies will further reduce production in the coming years

As a result of stagnant production, steady food and feed demand, grains imports are likely to come in strong this year Venezuelan corn imports are estimated at 2.6mn tonnes in 2013/14, compared with 2.2mn tonnes in 2012/13 Yellow corn imports usually come from the US, but Venezuela has been increasing its imports from Argentina and Brazil Wheat imports could reach 1.7mn tonnes in

2013/14, up 6.2% y-o-y.

Corn and wheat imports continue to face severe delays and problems mainly to the long waiting time for the approval of foreign currency and import permits However, imports of grains should continue to receive preferential treatment to expedite the import of basic consumer goods and to maintain the livestock industry.

Viability Of Corn Sector Dependent On Policy

The viability of corn production in Venezuela is heavily dependent on government policy In the 1980s, thecountry's agricultural sector was heavily regulated, and high tariffs were imposed on grain imports Thissaw 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, the introduction of regulated farmgateprices 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 the difficulties facing producers

Corn production has been hurt by low farmgate prices set by the government, and lack of incentives to plantlarger area The Federation of Asociations of Farmers (Confederación de Asociaciones de ProductoresAgropecuarios), Fedeagro, is asking for a 100% increase in farmgate prices in order to make productionmore profitable The government already granted in August 2012 a 42-46% increase to VEF1.90-2.20/kg ofcorn prices, but Antonio Pestana, the vice president of Fedeagro, argues that the cost of producing a kilo ofwhite corn stands at VEF2.40, VEF0.20 higher than the new government mandated price Subsequently, inNovember 2012, the Venezuela Agriculture Ministry announced a 46% increase in the price of pre-cookedcorn flour from VEF4.06/kg to VEF5.93 (US$1.38)/kg However, the Venezuelan corn processing industryhad argued that an increase of 66% would be necessary to cover production costs and ensure a small profit

In addition to the 47% increase in farmgate corn prices, freight rates have also risen by 20% Industryrepresentatives argued that the lack of profitability could undermine companies' viability and potentiallythreaten food production Nonetheless, we expect the increase in the farmgate prices and the consumer pricegaps to go some way towards encouraging an increase in the area planted to grains in the coming year

Increasing Dependence

Venezuela - Corn, Wheat & Rice Imports ('000 tonnes)

Source: BMI, USDA

in 2010, when Hugo Chávez announced that his government would temporarily take control of Gruma'sunit, following the arrest of one its major shareholders under charges of financial irregularities

Business Environment Below Standard

Selected Countries - BMI Long Term Political Rating & Business Environment Ratings

Note: Score is % of 100 100 being best, 0 worst Source: BMI

Mixed Results For Government'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 was to not only end Venezuela's reliance on imported corn, but to build

up a surplus for export Since coming to office, Chávez 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 direct

subsidy payments and access to cheap fertiliser Despite this, farmers have long complained that the

farmgate price is too low, threatening future production

However, production constraints have been growing in recent years The low availability of foreign

currency to import crop input such as fertilisers and machinery led to a decrease in yields On paper,Venezuela produces at least twice as much fertiliser it needs, with the government subsidising its use to thetune of US$100mn per year But importing the rest has proved difficult in recent years While yields grewsteadily during the 2000s (by 4% on average annually), they dropped in 2010/11 and have been boradolystagnating since, around 3.0-3.3tonne/ha, compared with 3.4tonne/ha on average between 2005/06 and2009/10

As a result, the government's aim of achieving self-sufficiency is a long way from being realised, andVenezuela is still heavily reliant on grain imports to fuel domestic demand, both for human consumptionand for the livestock industry Indeed, in 2010 the government relaxed import permit procedures in order toreinforce its 'food security' policy and avoid domestic food shortages In 2012/13, corn imports are forecast

to reach 2.0mn tonnes, compared to 1.16mn tonnes in 1997/98 In addition, Venezuela is expected to importaround 1.7mn tonnes of wheat

Gran Misión Agro Venezuela Fails To Deliver

Following its intention to boost grains production and reach self-sufficiency in corn, the governmentlaunched in 2011 Gran Misión Agro Venezuela, a new programme designed to support the country'sagricultural production as part of a two-year plan for the sector Misión Agro Venezuela was designed toprovide low-interest loans, machinery and technical assistance to the country's agricultural producers, fromsmall to large-scale landowners, with VEF9.9bn (US$2.3bn) committed to the programme However, theGran Misión has failed to reach its objectives since the first years Yellow and white corn reached onlyaround 50% of its fixed target

Nicolás Maduro relaunched Gran Misión AgroVenezuela in January 2013 for 2013-2019 In total,

VEF7.81bn will be available for 2013, of which VEF3.0bn will be dedicated to improving farm roads.However, we believe this renewed programme will also be a failure and forecast corn production to actuallydecline by 5.8% between 2012/13 and 2017/18 to 1.2mn tonnes

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 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 activities such as cattle ranching In recent years, the number of coffee-growing families has fallenfrom an estimated 80,000 to fewer than 50,000 and since 2009 Venezuela has become a net importer ofcoffee We believe coffee production will grow by 9.6% year-on-year (y-o-y) in 2013/14, to 800mn 60kgbags

Nevertheless, government support for smallholder coffee growers, which make up the majority of farms,could see production grow further over the later years of our forecast period We forecast production toreach 990,000 bags in 2017/18, 35.6% higher than the 2012/13 level This, however, will be dependent ongovernment policy, particularly price controls If the government relaxes price controls further, interest ininvesting in production of Venezuela's high-quality coffee would most likely increase, leading to greaterproduction 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 estimated61.6% over 2008-2013 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 basicfood basket and is available in government food stores at subsidised prices This has allowed more low-income Venezuelans to afford it, leading to a strong increase in demand

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 We see consumption growingslightly in 2014, by 0.5% y-o-y Through to 2018, we forecast demand growing by 4.6% on 2013 to 1.4mnbags

Table: Venezuela Coffee Production & Consumption, 2013-2018

e/f = BMI estimates/forecasts Sources: USDA.

No Recent Price Hike Despite Challenging Time

Coffee is one of the basic food basket products that are under a control price regime (established by thegovernment of Venezuela in 2003) Farmgate prices for green coffee and ground coffee retail prices havenot been adjusted since September 2012 and November 2012 respectively, when the government was forced

to review the controlled prices due to pressures from the market But many small farmers and processorsstill claim that the prices set by the government are not high enough to cover production costs

In September 2012, the government announced an increase of an average 33% in fixed coffee, the forstonces since November 2011 The price for 'good washed A' green coffee rose from VEF1,200 to VEF1,600/quintal; 'good washed B' rose from VEF1,080 to VEF1,400, and 'good washed C' increased from VEF980 toVEF1,350 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 ofAgriculture and Land announced the opening of 35 purchase points to serve producers in Lara, Barinas,Portuguesa, Trujillo, Mérida, Táchira and Monagas The government also planned back then to open nineroasters, five of which will purchase directly from 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-producingcompanies, Fama de América and Café Madrid, has enabled production to continue despite the lack ofprofitability

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

Controlled farm-gate prices and significant competition from government imports have reduced profitabilityfor domestic coffee producers This in turn is a big factor behind the steady decrease in coffee productionover the past decade It also poses a downside risk to our output forecast, which is already conservative(production will fail to reach previous highs by 2017/18).

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

Imports To Remain High In The Coming Years

As a result of falling domestic output, the government has had to resort to increased imports to guaranteesupply, with imports increasing to an estimated 622,000 bags in 2011 and estimated to have reached576,000 bags in 2011/2 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 over 50% more than the fixed price for domesticproducers Since rules on importing coffee were relaxed in 2010, domestic coffee consumption has

accelerated by around 50%

Ending stocks have been relatively low since 2011/12, and came in at 54,000 bags in 2012/13, 374,000 bags

on average in 2006/07-2010/11 Imports are forecast to reach 636,000 bags in 2013/14, up 5.0% y-o-yaccording to the USDA Imports could come in even stronger should the acceleration of inflation and thelack of access to US dollars would not disrupt supply chains in the country

Seismic Shift

Venezuela - Coffee Imports & Exports ('000 60kg bags)

Source: BMI, USDA

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 Before

2003, Venezuelan coffee imports had been negligible, totalling 0-13,000 bags per year However, in 2012,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 early 2000s, before creepingback up to its current 1.9kg per year as incomes rose and the government controlled the retail price Unlessthe government alters its restrictive policies and relaxes control over the sector, we see little potential for thecoffee industry to reach the 3mn quintal target that the government envisages If price controls are notloosened, 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 exports 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 from

the 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, 2008-2013

e = BMI estimates Sources: USDA.

Risks To Outlook

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

On the upside, lower oil prices could lead to more interest in developing agriculture as a major export earneragain While production is not yet large enough to meet domestic demand and support an export industry, ifVenezuelan coffee could find popularity on world markets as Colombian coffee has done, then investment

in the sector could increase

Commodity Strategy

Monthly Grains Update

■ Grain prices will underperform softs in the coming quarters, benefiting from relatively strong supply.

■ Dry weather in Brazil presents upside risks to our price forecasts, but we anticipate only relatively

minor downgrades in supply for the ongoing 2013/14 season

■ Wheat prices will fail to break key resistance in the short term owing to increased competition among

exporters

■ Rice prices will face increased downside pressure in the short term, as the Thai rice purchasing

programme is expected to come to an end

Corn: More Range Trading Ahead

In our December Monthly Grains Strategy, we suggested that corn prices would find support in the

USc400-425/bushel area, a view that has played out as of mid-February, and we continue to expect corn totrade within a range of USc425-475/bushel in the coming months With the northern hemisphere harvestscomplete, attention will focus on South America, where we see downside risks to production due to hot anddry weather in Brazil We believe corn prices will remain in this trading range over the coming months, as

we expect a significant global market surplus of more than 50mn tonnes for the 2013/14 season, well aboveofficial estimates

Sideways Trade To Come

Front-Month CBOT Corn, USc/bushel (weekly chart) & RSI (below)

Sources: BMI, Bloomberg

We expect only a minor increase in US corn consumption for the 2014 calendar year, and this forms thebasis for our view for a significant market surplus We forecast US corn demand to increase by only 6%year-on-year to 278mn tonnes in 2014, in line with our expectations for subdued livestock productiongrowth and declining ethanol production By comparison, official forecasts have US consumption growthcloser to 13% We believe eventual downgrades to official consumption forecasts will lead to a loosening of

the corn market and forecast prices to average slightly below current levels at USc425/bushel in 2014 and2015.

Optimistic Estimates

United States - Y-o-Y Growth In Feed Demand & Livestock Production

Note: Livestock production includes beef, pork, and broiler poultry, Source: USDA

Rice: Weakness In H214

We believe rice prices will come under increasing downside pressure over the medium term after remainingsupported in the months leading up to mid-February Prices have remained strong largely because of poorproduction in the US, one of the few global rice exporters and also the location of the benchmark CBOTcontract We believe prices are likely to maintain multi-month support around US$15.50/cwt until Q314,when the new Asian harvests come online We expect a recovery in global production in 2014/15 after2013/14's disappointing output

Supported For Now

Front-Month CBOT Rough Rice, US$/cwt (weekly chart) & RSI (Below)

Source: BMI, Bloomberg

We believe the end of the government-sponsored Thai rice purchasing scheme will ultimately lead to aboost in exports and put considerable downside pressure on prices Our long-held view that the government

would have no option but to scrap the scheme is finally playing out (see 'Rice Scheme Days

Numbered', June 10 2013), as the programme will not be extended beyond February The end of the

programme is likely to see Thai exports (which have already started to pick up in recent months) increase

This underpins our forecast for prices to average US$14.00/cwt in 2014, well below the spot price of US

$15.80/cwt

Pickup Imminent

Thailand - Rice Exports ('000 tonnes)

Source: BMI, Thai Rice Exporters Association

Soybean: Short-Term Upside Limited

Like corn, we see downside risks to the Brazilian soybean crop due to dry weather, but expect prices to holdresistance around USc1,360/bushel Brazilian soybean production has been only mildly affected by therecent heat wave in Brazil thus far, but there remain downside risks to supply as some plantings have beendelayed, leading to reduced yields Elsewhere in South America, however, supply prospects are relativelystrong, particularly in Argentina (the world's third largest producer), where we forecast supply to

approach record highs in 2013/14

Line In The Sand

Front-Month CBOT Soybean, USc/bushel (weekly chart)

Source: BMI, Bloomberg

Looking ahead, we currently forecast prices to average below spot levels (currently trading around

USc1,350/bushel), mainly due to increased US plantings After a record corn crop in 2013/14, corn pricescollapsed in H213, leaving the price ratio between soybean and corn (which generally compete for acreage)significantly in soybean's favour We therefore forecast a significant increase in US soybean production and

a decline in corn production in 2014/15 Consequently, we believe the soybean market will register a largesurplus in 2015, leading the stocks-to-use ratio to climb above the 10-year average in 2014 and 2015 This