Venezuela agribusiness report q2 2015

Regarding livestock, beef and poultry output will record weak growth in thecoming years, as domestic production will be pressured by fixed output prices and high feed costs.Although the

Q2 2015 www.bmiresearch.com

VENEZUELA

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2015

© 2015 Business Monitor International Ltd

All rights reserved

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copyrighted in the name of Business Monitor International Ltd, 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

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International Ltd, 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 10

Agribusiness 10

Operational Risk 12

Industry Forecast 14

Grains Outlook 14

Table: Corn Production & Consumption (Venezuela 2014-2019) 16

Table: Wheat Production & Consumption (Venezuela 2014-2019) 16

Table: Corn Production & Consumption (Venezuela 2009-2014) 21

Table: Wheat Production & Consumption (Venezuela 2009-2014) 21

Livestock Outlook 22

Table: Beef Production & Consumption (Venezuela 2014-2019) 23

Table: Pork Production & Consumption (Venezuela 2014-2019) 23

Table: Poultry Production & Consumption (Venezuela 2014-2019) 24

Table: Beef Production & Consumption (Venezuela 2009-2014) 27

Table: Pork Production & Consumption (Venezuela 2009-2014) 27

Table: Poultry Production & Consumption (Venezuela 2009-2014) 27

Coffee Outlook 29

Table: Coffee Production & Consumption (Venezuela 2014-2019) 30

Table: Coffee Production & Consumption (Venezuela 2009-2014) 34

Commodity Strategy 35

Monthly Softs Update 35

Table: Select Commodities - Performance & BMI Forecasts 42

Monthly Grains Update 43

Table: Select Commodities - Performance & BMI Forecasts 51

Upstream Analysis 52

Americas GM Outlook 52

Americas Machinery Outlook 58

Table: Key Regions To Struggle In 2015 60

Americas Fertiliser Outlook 64

Downstream Analysis 69

Mass Grocery Retail 69

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Venezuela 2012-2019) 69

Table: Sales Breakdown By Retail Format Type 70

Drink 71

Alcoholic Drinks 71

Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019) 72

Soft Drinks 73

Table: Soft Drinks Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019) 74

Hot Drinks 74

Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019) 75

Food 75

Food Consumption 75

Table: Food Consumption Indicators - Historical Data & Forecasts (Venezuela 2012-2019) 76

Confectionery 76

Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019) 77

Regional Overview 78

Competitive Landscape 84

Table: Venezuela Agribusiness Competitive Landscape (USD mn) 84

Demographic Forecast 85

Demographic Outlook 2015 85

Table: Population Headline Indicators (Venezuela 1990-2025) 86

Table: Key Population Ratios (Venezuela 1990-2025) 86

Table: Urban/Rural Population & Life Expectancy (Venezuela 1990-2025) 87

Table: Population By Age Group (Venezuela 1990-2025) 87

Table: Population By Age Group % (Venezuela 1990-2025) 88

Methodology 90

Industry Forecast Methodology 90

Sector-Specific Methodology 91

BMI Industry View

BMI View: The operating environment for the agribusiness sector has deteriorated significantly over recent

years due to the poor macroeconomic climate, shortage of foreign currency and therefore agricultural inputsand government mismanagement Venezuela's economy will be under extreme downward pressure in 2015amidst the drop in international prices The growing headwinds to the economy will weigh on agricultureproduction and consumption in the coming years, and we will see most commodities see modest if notdeclining growth out to 2019 Producers of agricultural goods will struggle as rising production costs andcontrolled prices at farm level reduce margins

Agribusiness Market Value

BMI Market Value By Commodity (2005-2019)

Grains market value, % of total Livestock market value, % of total

2005 2006

2007 2008

2009 2010

2011 2012

2013e 2014e

2015f 2016f

2017f 2018f 2019f 0 20 40 60 80

FAO/ BMI Calculation

■ Beef production growth to 2018/19: 0.1% to 280,400 tonnes High input costs, cheaper Mercosur

competitors and reduced domestic demand will stymie growth

■ 2015 BMI universe agribusiness market value: USD20.7bn (up 2.6% from 2014; forecast to growannually by 2.8% on average from 2015 to 2018)

■ 2015 real GDP growth: -3.6% (down from -2.5% in 2014; forecast to grow annually by 0.2% on averagebetween 2015 and 2019)

■ 2015 consumer price index: 77.0% year-on-year (y-o-y) (up from 61.7% in 2014; forecast to grow

annually by 42.5% on average between 2015 and 2019)

Venezuelans, as the country dependence on imports has been growing over the past ten years due to thepoor policies, and imports now account for about 70% of its food supply

The operating environment for the agribusiness sector has deteriorated significantly over recent years, due

to the poor macroeconomic climate and shortage of foreign currency Venezuela's economy will be underextreme downward pressure over the coming quarters, due to a confluence of factors including a poorbusiness environment, high inflation, and lower oil prices Some types of politically-important publicspending will be bolstered by the government's attempts to consolidate its appeal ahead of the legislativeelections scheduled for the end of 2015, but the dearth of public revenue, as well as high inflation, will mutespending growth in real terms We forecast a real GDP contraction of 3.6% in 2015, compared to anestimated 2.5% contraction in 2014, and expect the recession to stretch into its third year in 2016

The already strained grains and livestock sectors in Venezuela will see their operating environment

deteriorate further in 2015, as the growing headwinds to the Venezuelan economy will weigh on meat

production and consumption Regarding livestock, beef and poultry output will record weak growth in thecoming years, as domestic production will be pressured by fixed output prices and high feed costs.

Although the government lifted meat prices in early 2015, local producers association argue they are stillbelow production costs The country's modern poultry industry will fare better than the beef sector, forwhich the outlook is especially bleak Meanwhile, the growing headwinds to the Venezuelan economy willdrag meat consumption growth lower in 2015

Venezuela's grain farmers and milling sector will continue to operate in a challenging environment in thecoming years Hurdles will include rising production costs and government control over access to foreignexchange and therefore inputs The recent drop in international oil prices poses further risks to the country'sforeign exchange reserves and its ability to import much-needed agricultural inputs Corn production, a keystaple in the country, will decline Meanwhile, the grain downstream segments, including feed

manufacturing and food production, will face mounting challenges

Agribusiness

Venezuela Agribusiness SWOT

products

■ Venezuelan cocoa are known for their high quality Cocoa especially is sought after byproducers of premium chocolate

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

Venezuela Agribusiness SWOT - Continued

reducing the flexibility with which businesses can act with regard to their workforce.

• Venezuela's major cities have some of the highest violent crime rates in the world,and criminality is rife in all areas, day or night

• Total tax rate as a percentage of commercial profits is very high at 61.1%, which isabove the regional average of 47.3%

• Trade procedures are hampered by trade bureaucracy, extensive shipping times, andhigh costs

Opportunities ■ Public education programmes targeting adults create opportunities for further training

and education of unskilled workers

■ Individuals, businesses, and government agencies are investing in security equipmentand services to reduce risk to personal safety and property

■ Venezuela joined the customs union Mercosur in 2012, which will enhance economicintegration in the region and reduce the risk of conflict

■ Improvements in transport infrastructure will reduce the cost and time it takes toimport and export thereby increasing the efficiency of supply chains

SWOT Analysis - Continued

force companies to employ foreign experts at greater cost

• Businesses and foreign nationals are prime targets for theft, kidnapping and robbery.This necessitates high security expenditure, which raises operating costs

• There is widespread corruption throughout the government and public power isexercised for private gain

• Nationalisation of the port sector has caused a decrease in investment, damaging thesector's productivity resulting in supply chain delays

Industry Forecast

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 operating environment for grains farming and manufacturing has deteriorated significantly over recentyears, due to the poor macroeconomic climate and shortage of foreign currency, with farmers unable toinvest in the fertilisers and machinery which would allow them to recover lost production The graindownstream segments, including feed manufacturing and food production, are facing mounting challenges

We forecast corn production to decline by 1.0% year-on-year to 1.34mn tonnes in the 2014/15

season, which started in October 2014 The weather during the planting and growing season of the maincorn crop (winter) was drier than usual, leading to below-par yields Unfavourable weather has added to thestructural difficulties that the corn farming sector is facing Production of grains, as well as other crops, isseverely hampered by the deterioration in supply of farm equipment, as well as low quality transportationinfrastructure, seed and soil conservation

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 hit output, shortages of technical staff and equipment, delays in financing

to farmers, inefficient production techniques and unreliable supplies of materials and agrochemicals Wetherefore expect forecast corn production to decrease by 3.7% between 2013/14 and 2018/19 to1.3mntonnes

Wheat production in Venezuela is negligible, as the country does not have a suitable climate for growing

wheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming 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 havefaced 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 almost 120% from 2005 to 2014, outstripping growth inproduction and leading to a surge in imports from the US

We see corn consumption growing by 3.0% y-o-y to 3.9mn tonnes in 2015, as demand for feed will recoverafter the 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 2019 we forecast demand rising by 15.7%

on the 2014 level to take consumption to 4.4mn 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 28,860tonnes in 2013, up from an average of 7,200 tonnes in 2008-2012 The expansion in production of twomajor millers and pasta manufacturers is likely to lead to increased availability and higher consumption Wesee wheat demand growing by 2.0% to 1.7mn tonnes in 2015; out to 2019, we believe consumption willgrow by 14.6% on in 2014 level to 1.9mn tonnes

Table: Corn Production & Consumption (Venezuela 2014-2019)

Corn production, '000 tonnes 1,350.0 1,336.5 1,333.8 1,300.0 1,300.0 1,300.0

Corn consumption, '000 tonnes 3,806.7 3,920.9 4,042.5 4,163.8 4,284.5 4,404.5

USDA/BMI Calculation

Table: Wheat Production & Consumption (Venezuela 2014-2019)

Wheat consumption, '000 tonnes 1,632.8 1,665.4 1,712.0 1,763.4 1,816.3 1,870.8

USDA/BMI Calculation

Grain Sector Facing Structural Difficulties

Venezuela's agricultural sector has been held back over the past decade by poorly executed control policiesand limited agricultural inputs The country's socialist government has for some time pegged its

procurement price for corn below the cost of production, which has resulted in declining output for severalyears The control by the Venezuelan government of the bolivar and limited loan availability in the countryhas also meant there is limited use of imported agricultural inputs This has drastic implications for

Venezuelans, as the country dependence on imports has been growing over the past ten years due to thepoor policies, and imports now account for about 70% of its food supply

In 2014/15, the operating environment of Venezuela's grain sector will deteriorate further Corn production,

a key staple in the country, will decline Meanwhile, the grain downstream segments, including feedmanufacturing and food production, will face mounting challenges We forecast corn production to decline

by 1.0% year-on-year to 1.34mn tonnes in the 2014/15 season, which started in October 2014 The weatherduring the planting and growing season of the main corn crop (winter) was drier than usual, leading tobelow-par yields

Stagnating Fundamentals

Venezuela - Corn Production ('000 tonnes), Area Harvested ('000 ha) & Yields (tonne/ha)

e/f = BMI estimate/forecast Source: USDA, BMI

Unfavourable weather has added to the structural difficulties that the corn farming sector is facing

Production of grains, as well as other crops, is severely hampered by the deterioration in supply of farmequipment, as well as low quality transportation infrastructure, seed and soil conservation Venezuela's poormacroeconomic climate and shortage of foreign currency means farmers are unable to invest in much-needed fertilisers and machinery The country imports around 45% of its fertiliser consumption, includingits total potash needs and 70% of its phosphate needs As a result, yields have been stagnant over the pastfive years, compared to yield growth in other Latin American countries including Brazil, Argentina andColombia Due to these structural issues and the Venezuelan government's firm opposition to using

genetically modified seeds, we believe corn yields will continue to languish Another factor affectingVenezuelan rice and corn production is controlled farmgate and retail prices Both farmers and the industrycomplain of low prices for their product and high cost of production, which make it difficult to operateprofitably

Despite these difficulties, production will not decline as much as would otherwise be the case due togovernment subsidies, which made up about 50% of total farmers' income in 2013 This is likely to help

corn production remain at current levels (1.3mn tonnes) over the coming years, while we see output

growing by 21.2% between 2013/14 and 2018/19 in Colombia (to 2.1mn tonnes) and by 7.6% in Peru (to1.85mn tonnes) over the same period

Stagnating In Venezuela

Select Countries - Corn Yields (tonne/ha)

Source: USDA, BMI

Lack Of Foreign Currency Also Hampers Wheat Milling Sector

Venezuela does not produce any wheat but it does import it to mill domestically - this sector is

therefore also suffering from the lack of access to foreign exchange In order to control its currency, thegovernment allocates a limited amount of US dollars to companies via the currency board Cencoex in order

to import raw materials including grains This will only worsen in 2015, as the drop in oil prices in H214will limit Venezuela's reserves and jeopardise further the country's access to foreign exchange

Venezuela's largest private company Empresas Polar halted its production of pasta for several weeks in

April-May 2014 over delays in foreign currency allocations from the government This highlights the

difficulties in the wheat milling industry, plagued by poor planning and the lack of timely foreign currencyavailability

Increasing Dependence

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

f = BMI forecast Source: BMI, USDA

Growing Dependence On Imports

The government's aim of achieving self-sufficiency is a long way from being realised, and Venezuela is stillheavily reliant on grain imports to fuel domestic demand, both for human consumption and for the livestockindustry

Grains imports have been steadily growing in recent years and are forecast to reach 2.6mn tonnes for cornand 1.8mn tonnes for wheat in 2014/15 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 basicconsumer goods and to maintain the livestock industry

America Benefiting From Growing Imports

Venezuela - Corn (LHC) & Wheat (RHC) Imports By Suppliers, 2013 (% of total volume imported)

Source: ITC, BMI

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 (USD2.3bn) 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 actuallystagnate between 2013/14 and 2018/19

Table: Corn Production & Consumption (Venezuela 2009-2014)

Corn production, '000 tonnes 1,800.0 1,634.0 1,300.0 1,300.0 1,300.0 1,350.0

Corn consumption, '000 tonnes 3,200.0 3,400.0 3,100.0 3,850.0 3,649.8 3,806.7

USDA/BMI Calculation

Table: Wheat Production & Consumption (Venezuela 2009-2014)

Wheat consumption, '000 tonnes 1,550.0 1,550.0 1,500.0 1,500.0 1,555.0 1,632.8

USDA/BMI Calculation

Risks To Outlook

We see some upside risks to our pessimistic outlook on the country's corn production First, a change in the

government's procurement policy could incentivise farmers to increase plantings, and would also increase

their ability to purchase inputs Second, an improving economic situation may increase consumption and aid credit conditions, allowing greater input usage Third, improved growth in the poultry sector would increase the demand for corn and could encourage domestic corn production to increase Finally, further

devaluation of the bolivar and declining foreign reserves could result in imports becoming too costly for thegovernment This could result in a more facilitating environment for domestic corn production

On the demand side, consumption will be reliant on the continued subsidisation of the price of staple foodsand the ability of the government to source sufficient grain supplies on the export market If the governmentallowed grain prices to rise, consumption would be hit On the other hand, if oil prices rise faster than weexpect, a recovery in government revenues could see increased investment in agriculture and stronger-than-expected growth in the production and consumption of grain

Livestock Outlook

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

Venezuela's livestock sector has been going through challenging times since 2005 Production has beenbroadly stagnating in the country (while it grew strongly in the rest of Latin America), including in

Colombia and Brazil Venezuela was self-sufficient in beef in 2003, but in recent years the country hasbecome increasingly reliant on imports to meet domestic demand The sector is held back by a lack ofprofitability due to high input costs, inflation and government price controls, along with increased

competition from imports from Brazil, Colombia and Nicaragua

Regarding production, we believe both beef and poultry output will record weak growth in the comingyears Domestic production will be pressured by fixed output prices and high feed costs Although thegovernment lifted meat prices in early 2015, local producers associations argue they are still below

production costs Feed costs have been increasing lately, as domestic corn production is dwindling amidstscarce access to inputs Meanwhile, importing feed grains is problematic as the government allocates alimited amount of US dollars to companies to import raw materials including grains in order to control itscurrency This will only worsen in 2015, as the drop in oil prices in H214 will limit Venezuela's reservesand jeopardise further the country's access to foreign exchange

The country's modern poultry industry will fare better than the beef sector, for which the outlook is

especially bleak The poultry industry is organised, vertically integrated and efficient, and producers areconstantly working to modernise and improve their production methods Poultry production will grow by aweak 0.4% annually from 2015 out to our forecast period in 2019, reaching 687,200 tonnes then Beefoutput will broadly stagnate and stand at 280,000 tonnes in 2018/19

Venezuela produces only small quantities of pork Output has remained stable at around 125,000 tonnes inrecent years We see production growing slowly in the coming years, by 2.5% between 2013/14 and20185/19 to 130,200 tonnes

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 Consumption growth was slower since 2008, due to constraints

on production (lower availability of grains) In 2014, annual per capita consumption stood at an estimated33kg for poultry, 19kg for beef and 5kg for pork While price controls have increased demand, they haveworked against investment in production and led to an increasing reliance on imports In 2014, importsreached an estimated 410,000 tonnes for poultry and 325,000 tonnes for beef

After recording more robust growth than production in recent years, consumption is now also slowingdown We forecast poultry meat consumption to grow by a weak 1.8% annually between 2015 and 2019,compared with the 3.4% annual growth recorded over the past five years Meanwhile, beef demand willeven be weaker, due to the price premium it commands, and grow by 1.6% every year over our forecastperiod, compared with the 2.8% annual growth seen over 2010-2014 Although moderate, the pace ofconsumption 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 broadly stagnated over2005-2014 around 134,000 tonnes Out to 2019, we see consumption increasing by 3.4% on the 2014 level

to 148,000 tonnes, fuelled primarily by population increases

Table: Beef Production & Consumption (Venezuela 2014-2019)

2014 2015f 2016f 2017f 2018f 2019f

Beef & veal production, '000 tonnes 280.0 271.6 273.5 276.0 277.9 280.4 Beef & veal production, % y-o-y -9.7 -3.0 0.7 0.9 0.7 0.9 Beef & veal consumption, '000 tonnes 583.0 585.9 592.4 604.2 616.9 630.2 Beef & veal consumption, % y-o-y 0.5 0.5 1.1 2.0 2.1 2.2

Source: USDA/BMI Calculation

Table: Pork Production & Consumption (Venezuela 2014-2019)

Pork production, '000 tonnes 127.0 127.6 128.3 128.9 129.6 130.2

Pork consumption, '000 tonnes 143.0 143.3 144.4 145.6 146.8 147.9

Source: USDA/BMI Calculation

Table: Poultry Production & Consumption (Venezuela 2014-2019)

Poultry production, '000 tonnes 675.0 679.7 681.1 683.1 685.2 687.2

Poultry consumption, '000 tonnes 1,010.0 1,025.2 1,040.5 1,061.3 1,082.6 1,104.2

Source: USDA/BMI Calculation

Weak Prospects Ahead For Venezuela's Livestock Sector

The operating environment for the livestock sector has deteriorated significantly over recent years, due tothe poor macroeconomic climate and shortage of foreign currency, with producers unable to source cheapforeign feed which would allow them to recover lost production As with most industrial and agriculturalsectors in Venezuela, livestock production and consumption have been profoundly affected by the

interventionist policies implemented by Presidents Hugo Chavez and Nicolás Maduro Livestock productionhas been stagnating over the past 10 years, amidst strict price controls and elevated feed costs The outlook

if even bleaker in 2015 as growing economic headwinds and shortages of meat supply will weigh onconsumption

Brazil Is The Main Supplier

Venezuela - Poultry (LHC) & Beef (RHC) Imports, By Country (% of total volume imported)

Note: Data includes chilled and frozen meat Source: Trade Map, BMI

Regarding production, we believe both beef and poultry output will record weak growth in the comingyears Domestic production will be pressured by fixed output prices and high feed costs Although thegovernment lifted meat prices in early 2015, local producers association argue they are still below

production costs Feed costs have been increasing lately, as domestic corn production is dwindling amidstscarce access to inputs Meanwhile, importing feed grains is problematic as the government allocates alimited amount of US dollars to companies to import raw materials including grains in order to control itscurrency This will only worsen in 2015, as the drop in oil prices in H214 will limit Venezuela's reservesand jeopardise further the country's access to foreign exchange

After recording more robust growth than production in recent years, consumption is now also slowingdown We forecast poultry meat consumption to grow by a weak 1.8% annually between 2015 and 2019,compared with the 3.4% annual growth recorded over the past five years Meanwhile, beef demand willeven be weaker, due to the price premium it commands, and grow by 1.6% every year over our forecastperiod, compared with the 2.8% annual growth seen over 2010-2014

The imposition of government price controls for key food staples including meat, along with the strong, fuelled economic growth has led to a steep increase in poultry and beef meat over the past 10 years

oil-However, the growing headwinds to the Venezuelan economy will drag meat consumption growth lower in

2015 Although the government is likely to expand significantly public spending and subsidies over thecourse of 2015 in the lead-up to the legislative elections at the end of the year, government spending will bestrongly curtailed by the decline in government finances amidst the collapse in oil prices since H214 OurCountry Risk team expects that government spending growth will fail to outpace inflation and see publicconsumption expenditures in real terms to decline for the first time since 2002, by 5.0% in 2015 This willmean lower public support to consumer spending, at a time when purchasing power is already dwindling

Growing Imports

Venezuela - Select Meat Imports ('000 tonnes)

Source: USDA, BMI

Growing Imports In Sight

As domestic livestock production loses ground, while consumption keeps on increasing - albeit at a slowerpace - imports are taking a growing share of the domestic market This in turn makes the domestic industryless profitable as it faces stronger completion from trade Poultry and beef imports have seen spectaculargrowth over recent years, and reached around 320,000 tonnes in 2014 for beef and 410,000 tonnes forpoultry, while imports were almost nonexistent back in the early 2000s Brazil has been making large

inroads into the Venezuelan market as it enjoys large and cheap supply of meat However, Venezuela isnow looking at diversifying its exports suppliers, especially towards Uruguay and Paraguay.

Table: Beef Production & Consumption (Venezuela 2009-2014)

Beef & veal production, '000 tonnes 290.0 348.0 345.0 360.0 310.0 280.0 Beef & veal production, % y-o-y -4.9 20.0 -0.9 4.3 -13.9 -9.7 Beef & veal consumption, '000 tonnes 508.0 523.0 560.0 575.0 580.0 583.0 Beef & veal consumption, % y-o-y -17.4 3.0 7.1 2.7 0.9 0.5

Source: USDA/BMI Calculation

Table: Pork Production & Consumption (Venezuela 2009-2014)

Pork production, '000 tonnes 125.0 125.0 125.5 126.0 126.5 127.0

Pork consumption, '000 tonnes 129.0 134.0 141.0 142.0 143.0 143.0

Source: USDA/BMI Calculation

Table: Poultry Production & Consumption (Venezuela 2009-2014)

Poultry production, '000 tonnes 680.0 650.0 625.0 655.0 660.0 675.0

Poultry consumption, '000 tonnes 861.0 887.0 859.0 853.0 990.0 1,010.0

Source: USDA/BMI Calculation

Risks To Outlook

Our current 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

Coffee Outlook

BMI Supply View: As with other agricultural sectors, the failure of government-mandated prices to keep

pace with increasing costs amid rocketing inflation has hurt the profitability 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 complicatedfor producers, providing a disincentive to continue production Producers have also faced competition fromimported coffee, leading many to abandon the sector in favour of more lucrative activities such as cattleranching In recent years, the number of coffee-growing families has fallen from an estimated 80,000 tofewer than 50,000 and since 2009 Venezuela has become a net importer of coffee

Apart from these structural issues, the outbreak of the coffee rust disease in Central and South America in

2013 is also hurting Venezuela's coffee crop and led to a 4.1% year-on-year (y-o-y) decline in 2013/14 Therust disease is unlikely to disappear in 2014/15, given the ongoing shortages of agrichemicals and otherproducts to treat it As a result, we see output coming in at 660,000 bags in 2014/15, down 5.7% y-o-y

The outlook for coffee production in Venezuela remains dire, as hurdles to output expansion will remain inplace over the coming years We forecast coffee production to decline by 1.9% between 2013/14 and2018/19, to 687,000 bags This, however, will be dependent on government policy, particularly pricecontrols If the government relaxes price controls further, interest in investing in production of Venezuela'shigh quality coffee would most likely increase, leading to greater production than we are currently

expecting

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

61.6% 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 growing

slightly in 2015, by 0.4% y-o-y Through to 2019, we forecast demand growing by 2.0% on 2014 to 1.3mnbags.

Table: Coffee Production & Consumption (Venezuela 2014-2019)

Coffee production, '000 60kg bags 700.0 660.0 666.6 673.3 680.0 686.8

Coffee consumption, '000 60kg bags 1,313.2 1,318.5 1,323.8 1,329.1 1,334.4 1,339.7

USDA/BMI Calculation

Another Challenging Year For Coffee Production In 2014/15

Venezuela is on track to record another lacklustre year for agricultural production, as output price

restrictions and soaring input prices are keeping a lid on investment in crops and machinery Coffee will be

no exception to this trend, as we forecast production to decrease in 2014/15 as elevated operating costs, lack

of input supplies and price regulations significantly discourage farmers from grinding coffee of a higherquality The outbreak of the coffee rust disease in Central and South America in 2013 is also still hurtingVenezuela's coffee crop The rust disease is unlikely to disappear in 2014/15, given the ongoing shortages

of agrichemicals and other products to treat it As a result, we see output coming in at 660,000 bags in2014/15, 4.7% y-o-y respectively

The outlook for coffee production in Venezuela remains dire, as hurdles to output expansion will remain inplace over the coming years We forecast coffee production to decline by 1.9% between 2013/14 and2018/19, to 687,000 bags Insufficient maintenance of coffee fields, due to the lack of funding and soaringprices of fertilisers, has led to stagnating yields Venezuela's coffee production yields are now the lowest inSouth America, at 385kg/ha in 2012, according to the UN Food and Agriculture Organization (FAO),compared with 1,433kg/ha in Brazil and 597kg/ha in Colombia The quality of beans is also decreasing, andVenezuela no longer produces type A or Lavado Fino coffee (finely washed), which greatly limits itscompetitiveness with other Latin American Arabica producers

Sector On The Decline

Venezuela - Coffee Production ('000 60kg bags) & Area Harvested ('000 ha)

Source: USDA, FAO, BMI

From Net Exporter To Net Importer

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

Venezuela is increasingly resorting to coffee bean imports in order to meet its dynamic domestic demandfor coffee In 2013/14, domestic production covered about 53% of coffee consumption, while the country

used to record hefty surpluses until 2009/10 Coffee imports are likely to reach a new record high in

2014/15, of about 680,000 bags, compared with 640,000 bags in 2013/14 Venezuela is now a net importer

of coffee, which is in stark contrast with the first half of the 2000s, when the country was exporting over150,000 bags annually to Europe and the US

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

Seismic Shift

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

Source: USDA, BMI

Heavy Price Regulations To Remain In Place

The performance of the coffee industry will remain ruled by price regulations, which are likely to stay ineffect until 2018, affecting both coffee growers and processing companies Coffee prices are controlled atboth the farm gate and retail levels, as coffee is a basic food item and included in the government's basicfood basket

In 2013, the government approved a price increase for wholesale coffee, ranging between 37% and 66%,depending on the quality and grain classification However, farmers argued that this increase was belowproduction costs This lack of profitability shut the doors of private bank loans, leaving growers and

processors depending on public credit entities

Meanwhile, coffee retail prices have been controlled since 2003 and have not been adjusted since

November 2012 In 2014, the government refused once again to raise retail prices and restated in May thatretail prices of coffee would remain at VEF46.6/kg, or USD7.4/kg, while retailers were hoping to beallowed to raise prices above the official controlled price (VEF106.2/kg) during the period February-May

2014 The nationalisation of the two main coffee-producing companies, Fama de América and Café Madrid, has enabled coffee processing to continue despite the lack of profitability in the sector.

Nicaragua's Share Growing

Venezuela - Coffee Imports By Origin, 2013 (% of imported volume)

Source: ITC, BMI

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 a year as incomes rose and the government controlled the retail price.Unless the government alters its restrictive policies and relaxes control over the sector, we see little

potential for the coffee industry to reach the 3mn quintal target that the government 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

Table: Coffee Production & Consumption (Venezuela 2009-2014)

Coffee production, '000 60kg bags 1,000.0 725.0 625.0 700.0 730.0 700.0

Coffee consumption, '000 60kg bags 835.0 875.0 1,305.0 1,305.0 1,308.0 1,313.2

USDA/BMI Calculation

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 Softs Update

■ Cotton, sugar, cocoa and palm oil will all head higher from current spot levels in 2015, though palm oiland sugar will see limited gains in H115

■ Coffee will average the year around current levels following a key break below USc160/lb

Cocoa: Prices To Continue Higher

The cocoa price curve will head higher from current levels over the coming months as West Africa recordsproduction declines for the 2014/15 season due to less favourable weather We opened a bullish cocoa view

on the July 2015 LIFFE contract on December 8 2014, which is currently up by 3.7%

Prices To Head Higher

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

Sources: Bloomberg, BMI

After record production in 2013/14 due to excellent weather, West African authorities have revised downtheir production estimates for 2014/15 due to disease (Nigeria) and dry weather (Ghana) The production

declines underpin our view that the global market will record a deficit for the 2014/15 season and that priceswill average higher year-on-year (y-o-y) in 2015, at GBP2,000/tonne Beyond 2015, we expect prices toaverage gradually lower, as the global market slowly returns to surplus by the end of our forecast period in2019.

Coffee: Prices To Moderate

In line with our long held conviction, coffee prices have receded from last year's highs and continue to trendlower We believe that prices will average much lower in 2015 y-o-y, especially as prices have droppedbelow key support of USc160/lb We forecast prices to average USc160/lb for the year and argue that thereare downside risks to this

Prices To Average Near Current Levels

Front-Month ICE Coffee (USc/lb, weekly chart)

y-o-y in the 2015/16 down year (up 2.3%), which means we keep our price forecast of USc160/lb for 2015.Over the coming years, we expect prices to average slightly lower as global per capita consumption growthremains stable and production growth improves in Brazil and Colombia.

Cotton: Prices Heading Higher

We believe that cotton prices will head higher from current levels In our last Monthly Softs Update

(January 21), we argued that cotton prices had bottomed and would trade within the USc60.00-70.00/lbrange, a view which has so far played out We believe there remains potential for cotton prices to rise inH115, though they will be capped by ample supply following the strong US harvest that ended in December

2014, coupled with lacklustre import demand from China

Bullish Break Of Resistance

Front-Month ICE Cotton (USc/lb, weekly chart)

Source: Bloomberg, BMI

We believe that cotton prices will average USc67.00/lb in 2015, though argue that there are upside risks tothis forecast The global cotton market will register its first production deficit since 2009/10 in 2015/16, aslow cotton prices at the time of plantings will lead to a steep production decline in the 2015/16 season

Moreover, consumption will accelerate in 2015 and 2016, as low cotton prices and an improvement ineconomic conditions in developed countries boosts demand.

Chinese Imports Bottoming Out In 2014/15

China - Cotton Beginning Stocks, Production Balance & Imports (mn 480lb bales)

Note: 2015/16 = tentative forecast (ICAC, BMI) Source: ICAC, USDA, BMI

Sugar: Limited Gains In H115

Sugar prices will generally trade within the USc14.00-16.00/lb range over the next several weeks, as has

been our view since December (see 'Sugar Prices Will Remain Low Through H115', December 22 2014) Low oil prices and a weak real will keep prices depressed relative to levels seen prior to 2013, though

ultimately lower sugar stocks will result in price appreciation in H215 Prices will ultimately break abovethe USc16.00/lb level in 2015 and we expect sugar to average considerably higher in H215 relative to H115,

as the global market will tighten in 2015/16

Ultimately Higher In H215

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

Source: Bloomberg, BMI

We forecast a global sugar surplus of just 2.0mn tonnes in 2015/16, which will cause the stocks-to-use ratio

to decline from 26.0% in 2014/15 to 23.8% in 2015/16 Furthermore, net long speculative positions in sugarare currently low compared to levels in the previous few years, meaning that a bullish driver for prices (such

as dry weather in Brazil) would likely cause a significant increase in prices in a short space of time Overthe next few years, we expect sugar prices to moderately increase y-o-y