Venezuela agribusiness report q3 2010

11 Table: Venezuela –Coffee Production, Consumption & Trade .... 16 Table: Venezuela –Butter Production, Consumption & Trade .... 16 Table: Venezuela –Whole Milk Powder Production, Consu

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REPORT Q3 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: July 2010

CONTENTS

Executive Summary 5

SWOT Analysis 7

Venezuela Agriculture SWOT 7

Venezuela Political SWOT 8

Venezuela Economic SWOT 9

Venezuela Business Environment SWOT 9

Industry Forecast Scenario 10

Venezuela Coffee Outlook 10

Table: Venezuela –Coffee Production & Consumption 11

Table: Venezuela –Coffee Production, Consumption & Trade 14

Venezuela Dairy Outlook 15

Table: Venezuela –Milk Production & Consumption 16

Table: Venezuela –Butter Production, Consumption & Trade 16

Table: Venezuela –Cheese Production, Consumption & Trade 16

Table: Venezuela –Whole Milk Powder Production, Consumption & Trade 17

Table: Venezuela –Milk Production & Consumption 18

Table: Venezuela –Butter Production, Consumption & Trade 19

Table: Venezuela –Cheese Production, Consumption & Trade 19

Table: Venezuela –Whole Milk Powder Production, Consumption & Trade 19

Venezuela Sugar Outlook 21

Table: Venezuela –Sugar Production, Consumption & Trade 22

Table: Venezuela –Sugar Production, Consumption & Trade 24

Venezuela Cocoa Outlook 26

Table: Venezuela – Cocoa Production, Consumption & Trade 26

Table: Venezuela – Cocoa Production, Consumption & Trade 27

Venezuela Grains Outlook 29

Table: Venezuela – Wheat Production, Consumption & Trade 30

Table: Venezuela – Corn Production, Consumption & Trade 30

Table: Venezuela – Wheat Production & Consumption 31

Table: Venezuela – Corn Production, Consumption & Trade 32

Venezuela Livestock Outlook 33

Table: Venezuela – Poultry Production, Consumption & Trade 34

Table: Venezuela – Pork Production, Consumption & Trade 34

Table: Venezuela – Beef & Veal Production, Consumption & Trade 35

Table: Venezuela – Poultry Production, Consumption & Trade 37

Table: Venezuela – Pork Production, Consumption & Trade 37

Table: Venezuela – Beef & Veal Production, Consumption & Trade 37

Competitive Landscape 39

Table: Agricultural Commodity Producers & Traders 39

Table: Agribusiness Suppliers 40

Table: Integrated Agricultural Producers 41

Commodity Price Analysis 42

Grains Update 42

Corn 42

Table: Corn 42

Rough Rice 43

Table: Rice 43

Soybean 44

Table: Soybean 44

Wheat 45

Table: Wheat 45

Softs Update 46

Cocoa 46

Table: Cocoa 46

Coffee 47

Table: Coffee 47

Milk 48

Table: Milk 48

Sugar 49

Table: Sugar 49

Downstream Supply Chain Analysis 50

Industry Forecast Scenario 50

Consumer Outlook 50

Food 53

Total Food Consumption 53

Table: Colombia Food Consumption Indicators – Historical Data & Forecasts 53

Canned Food 54

Table: Canned Food Value/Volume Sales – Historical Data & Forecasts 54

Confectionery 55

Table: Confectionery Value/Volume Sales – Historical Data And Forecasts 55

Mass Grocery Retail 57

Table: Venezuela Mass Grocery Retail Value Sales By Format – Historical Data And Forecasts 58

Table: Sales Breakdown by Retail Format Type 58

Trade 59

Table: Food And Drink Trade Balance – Historical Data And Forecasts 60

Macroeconomic Forecast 61

Table: Venezuela - Economic Activity, 2007-2014 62

BMI Forecast Modelling 63

How We Generate Our Industry Forecasts 63

Executive Summary

BMI View: The Venezuelan agriculture industry's woes continue to mount under the constraints of

President Hugo Chávez's 'socialist revolution.' The government continued to tighten its grip on production

in Q210 as it decreed the takeover of the assets of Venezuela-based assets of Mexican food-processor

Gruma Chávez has also renewed his threat to expropriate Polar, the largest local private food processor,

brewer and miller Although the government's centralised, state-controlled policies were designed to boost local production, they have in practice had the opposite effect Venezuela is set to fall further into

recession in 2010, with BMI forecasting the economy to shrink by 3.6%, following an estimated 3.3%

contraction in 2009 Rising inflation is pushing up production costs, but strict government controls on food prices have meant shrinking profit margins for domestic producers and retailers The resulting food shortages have been exacerbated by the continued disputes with Colombia that have seen imports to Venezuela grind to a halt The government has responded to the growing food supply crisis with a series

of raids through June 2010 designed to clamp down on retailers accused of hoarding food and selling it at above the authorised price At least 40 butchers were arrested in early May on charges of selling beef for higher than the regulated price Eight butchers have been found guilty and fined US$3,000 A further 32 butchers are yet to be tried; if convicted, they too face heavy fines or between two and six years in prison

! Production of beef and poultry in 2010 are forecast to rise by 10.3% year-on-year (y-o-y) to reach 317,800 tonnes The trade spat with Colombia has halted exports of beef, giving a boost to local producers Poultry output is also forecast to increase by 2.5% y-o-y to 696,700 tonnes The increase in March 2010 to the state-regulated price for poultry to VEF13.83 per kilogram should also provide a boost for producers

! Corn production is forecast to increase by 14.9% to 1.55mn tonnes in 2009/10, after three years

of successive declines Production was hit by extreme droughts in 2008/09 and has also been negatively affected by regulated farmgate prices and retail prices, which farmers complain have not been adequately adjusted in line with rising costs, which have been driven upwards by high inflation

! In April 2010, the Venezuelan government raised the state-controlled price caps for milk and dairy products by as much as 30% The increase was in response to spiralling costs following the 50% devaluation of the bolívar in early January 2010 The price of fluid milk was raised by 30%

to VEF4.15 (US$0.97) per 900ml container, while the costs of white cheeses and powdered milk were also increased In recent years, demand for fluid milk in particular has regularly outstripped supply The government hopes that the increase in authorised prices will provide an incentive to producers and head off the danger of future food shortages

! We now see coffee production falling for a second successive year in 2009/10 due to dry weather related to the El Niño-Southern Oscillation in the Pacific Low prices have also meant that farmers continue to turn to more profitable crops As a result, we forecast production to sink

to 813,400 tonnes, down by 3.8% y-o-y

! Venezuela's sugar sector continues to struggle from a lack of investment and strictly controlled prices Despite two increases in the official cost of sugar on the domestic market in October

2009 and March 2010, producers are still reluctant to devote acreage to sugar or to invest further

in the sector Of the market price of VEF3.73 per kilogram, cane producers were receiving just VEF1.20 per kilogram when delivered to the processor; far short of the production cost of VEF2.60 per kilogram We forecast production to decline by 9.9% y-o-y to 599,100 tonnes, following a 14.7% y-o-y decline in 2008/09

SWOT Analysis

Venezuela Agriculture SWOT

Strengths ! Venezuela's tropical climate allows for production of a diversified range of

agricultural products

! Venezuelan cocoa and coffee are known for their high-quality and cocoa especially

is sought after by producers 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 in food consumption

! Price controls in place since 2003 squeeze the profits of producers and are a disincentive to invest in increasing production

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

after years of decline

! The government has introduced a number of programmes to help small holders increase production including finance and subsidies

! Falling oil revenues are bringing more attention to increasing agricultural production to reduce the cost of food imports

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

Venezuela

! Falls in the oil price will severely limit the amount of money the government will be able to spend on agriculture

Venezuela Political SWOT

Strengths ! Setting Venezuela apart from its neighbours, the country has enjoyed a long

tradition of democracy, with elections held regularly since 1959

! A consistently high electoral turnout points to a strong level of public participation in politics

Weaknesses ! The military has traditionally played a dominant role in politics and possible

future intervention by disgruntled officers - especially following the attempted coup in 2002 - is not beyond the realms of possibility

! The meltdown of the traditional party structure has left something of a political vacuum where the opposition should be

! Relations between President Hugo Chávez and the US remain strained, as Chávez has accused Washington of interfering in its domestic affairs and has threatened to cut off oil supplies to the US

Opportunities ! If invested prudently in areas such as infrastructure and education, the fiscal

windfalls brought by the devaluation of the bolivar and elevated oil prices could help bring longer-term stability to the economy in turn diminishing the risks of civil turbulence

Threats ! President Chávez's ability to rule by decree continues to undermine the

country's democratic institutions

! The national assembly has pushed through a number of laws that were previously overturned in the constitutional referendum in 2007 The weakening

of democracy in the country threatens to seriously raise political risk and poses

a threat to private business activity

! Tensions between Venezuela and Colombia remain heightened, due to the former's belligerent rhetoric and recent destruction of bridges straddling the border Although we continue to view the possibility of outright military conflict

as improbably, given underlying economic interdependencies, we caution that risks of a confrontation have risen

Venezuela Economic SWOT

Strengths ! Venezuela is rich in natural resources In particular, it has huge oil and gas

reserves (it is the world's fifth largest crude producer) and is one of the main suppliers to the US

! The oil boom has allowed the government to accumulate international reserves

Weaknesses ! Although oil is one of the country's strengths, a high level of dependence on the

energy sector makes the economy increasingly vulnerable to economic shocks

in the long term

! The lack of transparency in the government's fiscal accounts is a source of concern

Opportunities ! Following the devaluation of the bolivar in January 2010, the non-oil sector has

an opportunity to benefit from increased competitiveness

Threats ! Inflation remains dangerously high, despite the extensive price control system

and successive interest rate hikes A devaluation of the bolivar, which could result from a decline in oil prices, would significantly raise inflationary pressures

in the economy, possibly bringing on hyperinflation

! The sustainability of economic growth will depend on boosting private investment, rather than relying on oil and public investment (both of which are dependent on high oil prices)

Venezuela Business Environment SWOT

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 provide opportunities 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 has ground to a halt since Chávez took office, with the administration instead preferring production-sharing agreements to encourage foreign direct investment

Opportunities ! Government support for businesses, through a range of low interest rate loans,

is available The government fund for industrial credit targets large sums of money at small 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 a disincentive for prospective investment (domestic and foreign)

Industry Forecast Scenario

Venezuela Coffee Outlook

BMI Supply View: Favourable growing conditions led to a comparatively good coffee harvest in

Venezuela in 2007/08, with production rising by 4.4% year-on-year (y-o-y) to 900,000 60 kilogramme (kg) bags However, in the 2008/09 coffee year, production fell off again, as low government-mandated prices hurt the profitability of coffee production in Venezuela, particularly given the large increase in the price of inputs such as fertiliser in 2008 Heavy rain through the latter months of 2008 and first quarter of

2009 also saw yields decline Production is estimated to have fallen 6.1% y-o-y to 845,000 bags

We now see coffee production falling for a second successive year in 2009/10 due to dry weather related

to El Niño-Southern Oscillation in the Pacific Low prices have also meant that farmers continue to turn

to more profitable crops As a result, we forecast production to sink to 813,000 tonnes, down by 3.8% o-y

y-Government support for small-holder coffee growers, who make up the majority of farms, could see production rise back up from the low of 2009/10 over our forecast period to 2013/14 and we expect growth of 9.3% from the 2008/09 level to 924,000mn bags This, however, will be dependent on

government policy, particularly price controls If the government responds to the current demands from millers and producers to relax price controls, interest in investing in production of Venezuela's high-quality coffee would likely increase, leading to greater production than we are currently expecting Conversely, if price controls continue to squeeze profits, farmers may switch to other less tightly

controlled crops

BMI Demand View: While Venezuelans consume a fair amount of coffee, per capita consumption at

1.9kg per year is some way below other Latin American countries, such as Brazil and Argentina, where per capita consumption is 4.6kg and 4.0kg, respectively Consumption in 2007/08 grew 5.6% y-o-y to 834,000 bags and expanded again in 2008/09 growing 4.9% y-o-y The vast majority of coffee consumed

is roasted ground coffee, with soluble instant coffee accounting for only around 1% of total consumption While controls on the retail price on ground coffee have allowed more of Venezuela's poor to afford it, they have also led to severe supply shortages and a booming black market

In November 2008, coffee was once again in short supply on shop shelves, even as other staples such as milk and beef had returned to the stores Wealthier consumers were able to buy their coffee at cafes or street stalls, but poorer consumers are often unable to afford the high prices The government has, as usual, blamed the shortages on unscrupulous suppliers hoarding their stock, rather than selling it at the mandated prices The Venezuelan Coffee Industry Association, however, has blamed the shortages on the

strict control of how much coffee that roasters must pay for beans and for how much they are allowed to sell the finished product Until this situation is resolved, growth in coffee consumption will be hindered

by the supply shortages and the disincentives to invest in the sector that come from price controlling In 2009/10, we expect a small fall in consumption as Venezuela's economy faces a second consecutive severe contraction

Table: Venezuela –Coffee Production & Consumption

Although the Venezuelan government continues to blame the private sector for the failures of the

economy, coffee producers hold the government's intervention in the sector responsible for the collapse of the coffee industry Since 2003, coffee has come under price controls with the retail price for ground coffee and the farmgate price for green coffee set by the government In December 2005, the government almost doubled the price roasters must pay farmers for their beans Many roasters then refused to sell their product, claiming they would lose money if they did This led to an increase in tension with Chávez' government, as the army seized coffee stocks from roasters and Chávez threatened to nationalise the

industry (see below for further analysis) In November 2008, the problem had still not been solved and

coffee was once again disappearing from shop shelves In that month the government raised the retail price of coffee to VEF18.85/kg from VEF11.45 to try and spur production

In 2004, the government announced plans to invest US$156mn in the sector, so production could more than double to 3mn quintals (2.3mn bags) by 2007 The area planted with coffee was to increase, the government would plant new trees and build new roads in coffee growing areas Despite considerable investment, the plan has been a failure and the area planted to coffee has actually decreased to around

200,000 hectares Growers were dissuaded from investing in production increases by unappealing

government-fixed farmgate prices which have failed to increase in line with rises in production costs, decreasing the profitability of coffee As a result, farmers have increasingly turned towards more

profitable crops, complaining that the price they received for coffee did not cover production costs

The difficulties faced by the sector have led to falls in consumption and the quality of production Low investment in coffee farms has left most with old trees well past their peak production and vulnerable to attack by pests This means that average yields from coffee farms in Venezuela are less than half those seen in Brazil and less than a third of those seen in Colombia Consumption is also only a fraction of its former level, falling from 3kg per capita in 1990 to just over 1kg at the beginning of the 21st century, before creeping back up to its current 1.9kg per year as incomes rose and the government controlled the retail price

Unless the Chávez government alters its restrictive policies and relaxes control over the sector, we see little potential for the coffee industry to reach the 3mn quintal target that the government envisaged If price controls are not loosened, farmers will continue to abandon coffee growing and the degradation of plantations will continue, continuing the country's import dependence

Coffee Plants Latest Victim Of Nationalisation

At the beginning of August 2009, the Venezuelan government seized control of two coffee processing

companies: Fama de América and Cafe Madrid Together, the two companies controlled around 80%

of the coffee market in Venezuela The move seems to have been sparked by an announcement by the companies that they were running out of coffee supplies and had enough left to meet only a few days of demand The government claimed the companies had been involved in illegally exporting coffee to Colombia to take advantage of the higher prices The government initially claimed the seizures would be temporary But a few days after the occupation of the plants, Chávez spoke of permanently expropriating them This move seemed increasingly likely in September after Commerce Minister Eduardo Samán said

in a speech that he would recommended for the companies' assets to be expropriated following the

expiration of the initial intervention order used to take control of the plants In mid-November, the

government finally announced the official expropriation of Fama de America 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, as reported

by Associated Press It was unclear whether Fama de América would receive compensation At the time

of writing, the government was still in discussions with Cafe Madrid over the formation of a joint venture

Regardless of whether the allegations of illegal export of coffee are true - they are strenuously denied by both companies - the seizures and the looming shortages that motivated them highlight all that is wrong with the Venezuelan coffee industry The farmgate prices for coffee fixed by the government are well

owing to a poor crop, demand for coffee from neighbouring countries is high It is inevitable that

Venezuelan coffee will find its way over the border given the difference in prices on offer The low prices offered are also causing yields to fall as growers complain that they are unable to hire enough labourers or invest in improving tree stock The added instability in the sector following the seizures will only make matters worse as investors In August, just after the seizures, Venezuela imported 25,000 bags of coffee from Brazil, the first imports from that country since 2004 We see Venezuela becoming increasingly reliant on imports in the future as domestic production is unable to meet demand

Now, including the plants of Cafe Madrid, the government is in control of 75% of the country's coffee roasting capacity The government is hoping to use its new power in the coffee sector to guarantee a constant flow of supplies to all areas of the country, with half of the nation's capacity provided by the government-operated plants and the remaining half in the hands of smaller private players We do not expect the going to be easy, however, particularly for the remaining private roasters According to data from the Superintendent of Silos, Warehouse and Agricultural Storage (SADA) reported in El Univerasl, only 99 of the 145 coffee roasters active in 2008 were still working in 2009 We expect the tough

operating environment to continue into 2010 as price controls continue

Premium Coffee Controls Hit Imports

In January 2009 speciality coffee was brought under government price control along with regular coffee Previously, premium brands had been exempt from the controls This saw the official price for many brands fall by up to 50% This obviously made official imports of many brands of high-quality coffee

unprofitable Colombian coffeemaker Cafe Oma told Reuters that its total exports fell by almost 80%

y-o-y in the first 11 months of 2009, primarily due to the collapse in demand from Venezuela, its major export market In total, the value of Colombian coffee and tea exports to Venezuela plummeted from US$1.77mn in the first 10 months of 2008 to US$54,450 in the same period of 2009 The fall was caused

by both the price controls imposed on specialist coffee, as well as the general fall in trade between

Venezuela and Colombia owing to the ongoing spat between the countries' leaders Some low-grade Colombian coffee is reportedly still being imported by Venezuela to make instant coffee To make up for the fall in Colombian coffee, importers have turned to other markets such as Brazil In the longer term, we expect Colombian coffee to re-establish itself in the Venezuelan market Following the decision of the Constitutional Court to bar President Álvaro Uribe from seeking a third term, Colombia will have a new president in 2010 This will present a good opportunity to reset relations between the two countries and normalise trade relations

Table: Venezuela –Coffee Production, Consumption & Trade

On the upside, the dramatic fall in oil prices over the second half of 2008 could lead to more interest in developing agriculture as a major export earner, once again At the end of July 2008, Venezuela-owned

petrol station chain Citgo Petroleum Corporation announced that it would begin selling Venezuelan

coffee at its forecourts in the US While production is not yet large enough to meet both domestic demand and support an export industry, if Venezuelan coffee could find popularity on world markets as

neighbouring Colombian coffee has done, then investment in the sector could increase

Venezuela Dairy Outlook

BMI Supply View: The past few years have been eventful for the dairy sector in Venezuela, as the

government has begun to exert itself by taking over farms and one of the country's leading milk

processing companies The moves have been part of President Hugo Chávez's attempts to bring food prices down and provide enough milk to meet rising demand from Venezuelan consumers Despite the turbulence, from 2004 to 2009, milk production recovered from a number of years of contraction to grow

by an estimated 17.6%, according to newly available data from the Food and Agricultural Policy

Research Institute Chávez's interest in milk production may yet turn out to be a mixed blessing as the private sector is dissuaded from investing in the sector With this in mind, we do not see the kind of leaps

in production the government is hoping for and are forecasting growth of 7.4% from to 2009 to 2014 to 1.61mn tonnes Production should be aided by the government's increase of the price caps on milk and

dairy products in April 2010 (see below for further comment) Whole milk powder production saw even

stronger growth from 2004-2009 than fluid milk, expanding by an estimated 28.4% to reach 29,500 tonnes To 2014, we forecast production to grow by 6.1% to 31,320 tonnes

In contrast to his enthusiasm for fluid milk production, Chávez has taken a rather dim view of processed dairy products He has partly blamed the shortage of milk on companies profiting by diverting milk to produce high-value-added cheese and yoghurt, which are not subject to the same price controls as milk Nonetheless, cheese production grew strongly from 2004-2009, increasing by 23.8% to 74,250 Out to

2014, we forecast cheese production to grow 9.5% on the 2009 level to reach 81,290 tonnes We now believe that butter production contracted by 10.3% between 2004 and 2009 We see production returning

to growth over our forecast period and have pencilled in an increase of 3.1% to take output to 1,340 tonnes in 2014

BMI Demand View: With stocks often in short supply and long queues at stores selling subsidised milk,

demand for fluid milk is higher than consumption figures suggest In 2008, consumption fell by 4.7% to 185,600 tonnes The fall can be partly attributed to producers attempting to circumvent price controls on milk by switching output to products such as flavoured milk, the prices of which are not controlled This practice was reduced in 2009, however, as at the beginning of March the government signed into law new regulations stipulating that 70% to 95% of output from companies producing basic food products, such as milk, must be products that come under the price control system We forecast only slow growth in

demand over our forecast period and see consumption rising by 3.9% on the 2009 level to reach 193,000 tonnes

Transport infrastructure is poor and local production of fluid milk is unable to meet demand Most of Venezuela's milk consumption therefore comes in the form of reconstituted powdered milk From 2004-

2009, consumption increased by 7.4% to reach 123,500 tonnes We expect consumption growth to

continue to outstrip that of fluid milk and are forecasting expansion of 5.8% to 2014 to reach 130,600 tonnes, driven by population growth and rising incomes

With the lack of support from the government and slower economic growth, we expect growth in

consumption of processed dairy products to be weak over our forecast period We forecast cheese

consumption to grow 2.7% to reach 81.06 tonnes in 2014 and butter consumption to grow by 4.3% to 4,040 tonnes in 2014

Table: Venezuela –Milk Production & Consumption

Notes: e/f=BMI estimate/forecast Source: 1 FAPRI, BMI

Table: Venezuela –Butter Production, Consumption & Trade

Notes: e/f=BMI estimate/forecast Source: 1 FAPRI, BMI

Table: Venezuela –Cheese Production, Consumption & Trade

Table: Venezuela –Whole Milk Powder Production, Consumption & Trade

Notes: e/f=BMI estimate/forecast Source: 1 FAPRI, BMI

Dairy Prices Raised By 30% Following Bolívar Devaluation

In April 2010, the Venezuelan government raised the state-controlled price caps for milk and dairy products by as much as 30% The increase was in response to spiralling costs following the 50%

devaluation of the bolívar in early January 2010 The price of fluid milk was raised by 30% to VEF4.15 (US$0.97) per 900ml container, will the costs of white cheeses and powdered milk were also increased In recent years, demand for fluid milk in particular has regularly outstripped supply The government hopes that the increase in authorised prices will provide an incentive to producers and head off the danger of future food shortages

Trade Spat Good News For Domestic Producers

The recent spat between Venezuelan President Hugo Chávez and Colombian President Álvaro Uribe is likely to see imports of dairy products from Colombia fall At the end of July 2009, Chávez froze

diplomatic relations with Colombia in response to the country allowing US troops to operate out of their bases in the fight against drug production From January to October 2009, the value of Venezuela's imports of milk, dairy products, eggs and honey from Colombia plummeted 72.4% y-o-y, according to Colombia's statistics agency, DANE With no sign of relations between the two countries improving - Venezuelan troops reportedly blew up cross-border foot bridges in mid-November - it looks like it will be some time before dairy exports to Venezuela, at least legal ones, return to their former level

A number of deals have been struck for imports of dairy products from countries friendly with Chávez' government including Belarus and Argentina Any fall in imports caused by the dispute with Colombia will be welcomed by Venezuela's dairy farmers who have been complaining to the government amount an excess of cheap, imported milk powder on the market While producers may be happy, the dispute will be less welcome for consumers Dairy products can already be hard to come by in some parts of the country,

at least at the legally controlled price - on the black market supplies are reportedly still plentiful

Government Enters Dairy Business

In February 2008, the Venezuelan government announced that it would buy Lácteos Los Andes , one of

the largest domestic dairy processing companies While the government did not announce how much it paid for the firm, press reports estimated it at around US$180mn With the company now in state hands,

managers were moved over from state oil company Petróleos de Venezuela to oversee a large increase in

milk production Orders were given to abandon production of other dairy products such as yoghurt While Los Andes was put up for sale by its owners, rather than expropriated by the government as Chávez had previously threatened to do, the increasing involvement of the state in the dairy sector will not be

welcome news for other players The move followed the purchase of a dairy processing plant from

Parmalat in November 2007

In August 2008, the US Department of Agriculture (USDA) reported that the Venezuelan government had taken over 87 dairy farms in Zulia state While the government is hoping that once the farms are in state hands, milk production will increase, dairy industry bodies have been predicting a dramatic drop in output Doubts over whether the often inefficient and corrupt state bureaucracy will be able to effectively manage the farms remain Farming expertise is often lacking, with, in some cases, managers being

brought in from the state oil company to run dairy farms Questions also remain over some of the

government's strategic investment decisions For example, a new dairy processing plant built with Iranian assistance in Mantecal in Bolívar State has been unable to source enough milk from the local area to produce at anywhere near full capacity

Reports over the success of the government's activities in the dairy business have been mixed In June

2009, Chávez gave his weekly radio show from a government farm in the Andean state of Tachira He said that milk production at the farm was up 38% compared to a year earlier He also said that the national cattle herd would rise to 14mn head from its present level of 12mn News from non-government sources

is more mixed There are many reports of seized or newly established dairy operations struggling to keep

up production levels The seizures have also led to fragmentation of production as land is divided up among settlers

Table: Venezuela –Milk Production & Consumption

Table: Venezuela –Butter Production, Consumption & Trade

Notes: e/f=BMI estimate/forecast Source: 1 FAPRI, BMI

Table: Venezuela –Cheese Production, Consumption & Trade

Notes: e/f=BMI estimate/forecast Source: 1 FAPRI, BMI

Table: Venezuela –Whole Milk Powder Production, Consumption & Trade

forecasts, particularly for fluid milk where most of the government's efforts are focused On the other hand, if Chávez's rhetoric succeeds only in putting off private investors in the sector, production could fall short of our forecasts and growth turn negative, as producers leave the sector due to the strict price controls squeezing profits and the threat of expropriation In the past dairy farming in areas of the country close to the Colombian border has been hit by instability spilling over While the insurgencies in

Colombia seem to be dying down under President Álvaro Uribe's Democratic Security policy, any

renewed flare-up could once again act as a deterrent to investment in dairy farming near the border With

BMI forecasting Venezuela's GDP to have contracted 3.3% in 2009 and then again by 3.6% in 2010,

growth in dairy consumption could be hit harder than we currently forecast Much will depend on the success of the government's production policies and on the price control regime

Venezuela Sugar Outlook

BMI Supply View: The Venezuelan sugar sector has declined dramatically in the past 24 months and the

country has been facing severe sugar shortages Sugar production rose rapidly between 2003/04 and 2007/08, growing by 41.8% to reach 780,000 tonnes This growth was driven by improving efficiency of production, as the area under sugar cane cultivation saw no significant increase over the period In

2008/09, however, heavy rains followed by severe droughts saw yields fall and production dropped by 14.7% year-on-year (y-o-y) to an estimated 665,000 tonnes The uncertain investment climate and

marginal profitability of the sugar sector has seen the area planted to sugar fall National Federation of Associations of Venezuelan Cane Producers (FESOCA) estimates that the area planted could fall by 20% over the next three years due to land seizures and government price caps deterring producers As a result,

we see production falling again in 2009/10 and have pencilled in a decline of 9.9% y-o-y to take

BMI Demand View: Sugar consumption has seen reasonably strong growth over the last few years,

spurred by the economic recovery from 2004 From 2004 to 2009, consumption increased by 25.0% to 1.05mn tonnes, as rising per capita incomes allowed consumers, particularly from poorer segments of society, to increase the amount they spent on food Countering this in the last couple of years, however, has been high food price inflation and supply shortages With domestic production covering only around three-quarters of consumption in 2008, imports have had to be found to supply the remainder The

Chávez government has been criticised by industry bodies for not acting quicker to ensure that enough sugar was available to meet demand Conversely, Chávez has blamed the shortages on producers

hoarding their output and illegally exporting it to neighbouring countries such as Colombia

In 2009, growth in sugar consumption was held up by strong demand in late 2008 By late 2009, however, consumption was falling rapidly In October 2009, consumption fell by 25.8% y-o-y according to a poll

by the Venezuelan Chamber of the Food Industry published in newspaper El Universal Also in October, the government raised the official price of sugar slightly In March 2010, the government raised the price

of sugar again to VEF3.73/kg We expect this to have only a moderate impact on consumption, with

supply shortages a more likely constraint BMI is forecasting Venezuela's GDP to fall 3.6% in 2010

following a 3.3% contraction in 2009 With inflation still high, we expect sugar consumption to increase

only marginally in 2010 as consumers' ability to purchase is constrained To 2014, we expect sugar consumption to grow by 9.8% on the high 2009 level to reach 1.15mn tonnes

Table: Venezuela –Sugar Production, Consumption & Trade

Notes: e/f=BMI estimate/forecast Source: 1 USDA, BMI

Price Rise Fails To Revitalise Sugar Sector

Venezuelan sugar production has fallen dramatically since 2008 Large amounts of sugar-producing land have been expropriated in the states of Aragua and Carabobo under the government's 'Land and Free Men' programme to 'liberate' land from private control The expropriations have had a negative impact on Venezuelan sugar production and the area planted to sugar has fallen Sugar cane growers have also been discouraged from planting from the shrinking profit margins in the sector Despite two increases in the official cost of sugar on the domestic market in October 2009 and March 2010, producers are still

reluctant to devote acreage to sugar or to invest further in the sector Of the market price of VEF3.73 per kilogram, cane producers were receiving just VEF1.20 per kilogram delivered to the processor; far short

of the production cost of VEF2.60 per kilogram In addition, cane producers are yet to receive

government subsidies granted to them in 2009, further deterring them from planting

The negative production margins bode ill for Venezuela's sugar sector going forward BMI sees little

hope of much needed investment in the sector through 2010 and 2011 and anticipates that an increasing amount of domestic demand will be satisfied through imports Imports have shot up from just 150,000 tonnes in 2006 to a forecast 700,000 tonnes in 2010, according to data from the US Department of

Agriculture (USDA) Imports would, therefore, outstrip domestic production of a forecast 600,000 tonnes The majority of imports are raw sugar from neighbouring Brazil However, the tight caps placed on refined sugar prices by the government for the domestic market make sourcing imports difficult and reduce profitability on the domestic market The sugar shortages experienced in recent months could, therefore, continue to hit the Venezuelan market unless the government relaxes its restrictive policies

Seizures Continue Into 2010

In the first quarter of 2010, the government took control of another two of the country's sugar mills On

March 9, the government moved in to run Santa Elena mill in Potuguesa and the Santa Clara mill in Yaracuy for a period of 90 days The moves were motivated by allegations of irregularities in supply - the authorities claim that 4,000 tonnes of sugar were being hoarded in a warehouse by the Santa Elena mill The owner of the two mills, a Guatemalan businessman, has denied any wrongdoing, according to an Associated Press report The government has been encouraging citizens' groups to keep an eye on mills and sugar processing plants to watch out for any suspicious practices With the cost of imports high and Venezuelan mills unable to meet demand, we would not be surprised if the government permanently seizes the mills owing to expected continued difficulty in keeping the country supplied with sugar

The March moves came only a few months after the government seized two sugar mills in the western border states of Táchira and Zulia in October 2009 El Universal reported that the Ministry of Agriculture and Lands said the seizures were needed as the mills' owners had put the desire for excessive profits before the needs of their workers and the general public The owners of the Zulia mill had raised the ire of the government in September by declaring a temporary shutdown leaving around 1,000 employees out of work The seizures mean that six of Venezuela's 15 sugar mills are under government control, according

to El Universal The agriculture ministry has vowed to raise sugar production at its mills, but we believe this will be difficult without considerable investment Years of price controls of sugar have worked as a disincentive to investment in milling technology The rise in the price of sugar will do little to solve the problem - millers wanted the price to be raised to VEF4.40/kg claiming that at before the most recent rise they received only VEF1.20/kg against costs of VEF2.60/kg, according to the USDA The government has offered subsidies to encourage investment, but many millers complain that payment of the subsidies has been irregular There is now little excess milling capacity available to increase sugar production This will not be easy to turn around The performance records of food production units seized by the

government has been highly mixed The government often lacks experienced managers to replace the outgoing former owners leading to difficult transitions We therefore do not expect to see a major increase

in production from the seized mills any time soon

Seizures Alone Cannot Drive Production

In April 2008, Venezuelan soldiers seized 32 sugar plantations in the northwestern state of Lara The plantations were expropriated on orders from the National Land Institute which claimed they were

unproductive and could therefore be seized under the Land and Agricultural Development Law The president of the institute was quoted in press reports as saying that only 20% of the total 2,460 hectares seized was productive The local sugar producers association, however, reportedly claimed that 80% of the land was under cane cultivation and protests followed which the police dispersed with teargas The seized land has been transformed into a state co-operative called a Social Production Unit (SPU) SPUs have been popping up on expropriated land across the country, but it is still too early to say whether the hoped for gains in production can be achieved and sustained over the long term

Despite the dramatic news of land seizures and protests (with more than 80% of sugar cane grown by independent farmers on plots averaging only 45 hectares according to USDA data) just as much attention will have to be given to assisting smallholders as to pressuring large plantation owners Measures

introduced to help cane growers include subsidies for every kilogram of cane produced, zero income tax, cheap fuel and finance

These measures will only help relieve future sugar supply shortages if the milling capacity is built up to match any increase in sugar cane production The government has begun work on new sugar mills, but construction has been delayed and the projects have been hit by corruption allegations The most

infamous problems have been with the Ezequiel Zamora Agro-Industrial Sugar Complex in Chávez's home state of Barinas In early 2006, 17 people, including members of the military, were arrested amid accusations that millions of dollars had gone missing from the project The delay in bringing new mills online has led to cane being left in the field, owing to a lack of processing capacity

Shortages Force Changes In Consumption

Refined sugar is one the basic food staples for which the price is controlled by the government While this has insulated consumers from the high food price inflation seen over 2007 and much of 2008, the

government has often been unable to get enough sugar to the market at the official rate, leading to long queues at its Mercal-branded supermarkets The black market has been quick to fill the gap left by

shortages for those who can afford to pay a premium, with street stalls selling refined sugar at three or four times the official price Other consumers have turned to less favoured types of sugar such as bars of brown sugar and fruit lactose products, which are not covered by price controls In March 2009, the government signed into law new regulations stipulating that 70% to 95% of output from companies producing basic food products such as sugar must be products that come under the price control system This could restrict supply of alternatives to refined sugar

Table: Venezuela –Sugar Production, Consumption & Trade

Risks To Outlook

Our forecasts for sugar production are highly dependent on government policy If, in the face of flagging popularity, President Chávez steps up land seizures, it could seriously dent confidence among large sugar producers and be a significant disincentive to investment in the sector How effectively the new co-operatives are able to manage the seized lands will also have an impact on production levels

The introduction of ethanol production could also threaten sugar production, as sugar cane would have to

be diverted to make the fuel In July 2008, Chávez said that he planned to build 14 ethanol plants in Venezuela, with the first four to be completed by the end of 2009 Unless sugar cane production can be significantly raised, this will put further pressure on the countries already face tight sugar supplies

Venezuela Cocoa Outlook

BMI Supply View: Cocoa, like coffee, was once a mainstay of the Venezuelan economy Since the

middle of the last century, however, interest in the commodity has waned as focus turned to oil and production declined Venezuela now produces only around 0.5% of total world output, and the majority

of that is consumed domestically leaving little left for exports In 2008, Venezuela produced 19,000 tonnes of cocoa In 2008/09, we estimate production to have risen by 18.4% year-on-year (y-o-y) to 22,500 tonnes as producers took advantage of the high world cocoa prices In 2009/10, however, we have revised down our forecast for production owing to the impact of the long drought that has afflicted parts

of Venezuela We now see production declining by 2.4% y-o-y to 21,970 tonnes While BMI is

forecasting cocoa production to increase over our forecast period to 2014, we do not see the large gains that the government is hoping for being achieved

BMI Demand View: A young population and rising incomes have driven demand for chocolate in

Venezuela over recent years With the recovery of the economy beginning in 2004, demand for cocoa rose rapidly in 2004 and 2005 as consumers had more money to spend on non-essential food Since then, however, high food price inflation has once again strained consumers' food budgets and consumption growth has stagnated, falling 2.2% y-o-y to an estimated 14,180 tonnes in 2008 We expect fall once again in 2010 as Venezuela is expected to suffer a second successive year of economic contraction With food prices still rising consumers are likely to see their budgets pressed even further in the coming year

We forecast demand to decline by 1.7% to 13,820 tonnes To 2014, forecast cocoa consumption stands at 13,980 tonnes, a 0.6% contraction on the 2009 level

Table: Venezuela – Cocoa Production, Consumption & Trade

Notes: e/f=BMI estimate/forecast Source: 1 International Cocoa Organisation, BMI

Investment Needed To Tap Cocoa Potential

Despite its current low fortunes, Venezuelan cocoa beans are still regarded as some of the finest in the world and sell at a premium on the world market In 2005, President Hugo Chávez announced plans to revitalise the cocoa industry Cocoa growers and grinders have been granted credit from the government

to increase production and the government has also reportedly invested US$2mn in reopening a chocolate factory in Sucre State As the price of oil slides, other potential export earners, such as cocoa, could see increased interest In June 2010, a new Socialist Corporation of Venezuelan Cacao was launched to administer the government's involvement in the sector The move forms part of the government's

expansion of state-orchestrated production, marketing and distribution of food at state-regulated prices

If production can be increased, Venezuelan cocoa would likely find a willing market in the premium chocolate sector due to its world-renowned Criollo cocoa, which is far superior in quality to the mass-produced cocoa of West Africa Organic cocoa farming is also a promising development in Venezuela, with organically grown beans selling at a large premium to high-quality chocolate makers However, for production to be significantly increased, a number of obstacles must be overcome Yields at only 0.34 tonnes per hectare are very low by international standards and farms have been starved of investment for years Renewing cocoa trees and improving infrastructure in cocoa growing areas will take time and a concerted investment effort

Table: Venezuela – Cocoa Production, Consumption & Trade

As with other agricultural sectors in Venezuela, the threat of seizure of land declared by the government

to be unproductive will be a worry for producers and a disincentive to invest in cocoa production

Agricultural workers have also become harder to employ as people have moved into state employment Funds for investment will now likely be harder to come by as oil prices have fallen so far, starving the government of funds

The fragile world economy could continue to hit demand for Venezuela's high-quality cocoa as

consumers in high-income countries are forced to cut back on non-essential products such as premium chocolate At present, however, cocoa prices are bucking the trend for falling commodity prices and at the time of writing were still around record levels

So far Venezuela's cocoa has been largely free of the witch's broom fungus which devastated cocoa farms

in neighbouring Brazil However, with much of Venezuela's stock of cocoa trees fairly old, it remains vulnerable to the disease which would severely hamper attempts to revitalise the sector

Venezuela Grains Outlook

BMI Supply View: Venezuela is a major net importer of grain Though production rose rapidly through

the first decade of the 20th century, consumption has also risen fuelled by the fast oil-driven GDP growth through the middle years of this decade Corn is Venezuela's major grain crop The vast majority of Venezuela's corn crop is grown in the central states of Barinas, Portuguesa and Guárico While the area planted to corn has risen by around 50% from the end of the 1990s, with Venezuela's agricultural sector relatively undeveloped there is still plenty of room for further expansion The viability of corn production

in Venezuela is heavily dependent on government policy In the 1980s, the country's agricultural sector was heavily regulated and high tariffs were imposed on grain imports This saw corn production more than double in the second half of the 1980s With little competition from imports, however, productivity remained low

When the market was opened up in the 1990s, domestic farmers found it hard to compete with imports and production fell Production climbed back up reaching an estimated 2.00mn tonnes in 2006/07

However, production has since fallen again, mainly as a result of unfavourable weather conditions Output fell to 1.8mn tonnes in 2007/08 and dropped by a further 25% year-on-year (y-o-y) in 2008/09 to just 1.35mn tonnes The 2008/09 harvest was hit by the most severe droughts in 37 years, which

continued into Q110, also impacting on the 2009/10 harvest As a result, we see production registering only a moderate recovery, rising by 14.9% to 1.55mn tonnes In addition to the extreme weather

conditions, production has also been affected by regulated farmgate prices and retail prices, which

farmers complain have not been adequately adjusted in line with rising costs, which have been driven upwards by high inflation

Out to the end of our forecast period to 2013/14, the level of production will be highly reliant on the ability of President Hugo Chávez's government to support the agricultural sector Without continued support, much of the newly opened farmland would return to fallow Despite this risk, we do expect output to continue to rise and are forecasting production to grow by 66.8% from the decimated 2008/09 level to reach 2.25mn tonnes in 2013/14

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 of imports coming from the US and Canada

BMI Demand View: Demand for feed corn has risen rapidly since the economic recovery began in 2004

Through the end of the 1990s and the first couple of years of the 20th century, demand for corn shot up driven by the expansion of the poultry sector As the economy went into meltdown in 2002, however, demand for corn collapsed as poultry output fell almost 25% in the space of a year Since then, feed consumption has climbed back up Demand for corn for food has also risen strongly in the past few years

as Venezuela's economy has grown Corn is a staple food in Venezuela and corn flour is used to make arpea, a flat unleavened bread Total corn consumption rose 73.0% from 2004 to 2009, outstripping growth in production Imports come primarily from the US However, we see demand dipping in 2010, due to reduced demand for feed from the livestock sector and have pencilled in a decrease of 11.9% to 2.80mn tonnes Going forward, we see demand picking up, as it is one of the cheapest foods available and the price is kept down by government price controls

Wheat consumption has been gaining in popularity this decade as Venezuelan consumers have had more money to spend on food Consumption of both bakery goods and pasta has been rising Price controls mean pasta has become far more affordable and per capita consumption has now risen to around 14kg The majority of pasta produced is lower grade and must be sold at a government-set price Some high grade pasta is also produced which can be sold at market prices The high prices on the world market in

2008 saw consumption fall to 1.50mn tonnes, and demand remained stable at that level in 2009 We now forecast consumption growth to return in 2010, and see demand increasing by 1.7% y-o-y to 1.53mn tonnes as pasta remains a low-cost food source in the face of the continuing forecast contraction of the Venezuelan economy Out to 2014, we see consumption growing by 17.0% on the 2009 level to reach 1.76mn tonnes

Table: Venezuela – Wheat Production, Consumption & Trade

Notes: e/f=BMI estimate/forecast Source: 1 USDA, BMI

Table: Venezuela – Corn Production, Consumption & Trade

Mixed Results For Chávez's Production Drive

Since Hugo Chávez came to power in 1999, production has increased After rising gradually in the first half of last decade, production rose rapidly from 2005 as the oil wealth pouring into the country allowed more investment in agriculture From 2004 to 2008, corn production grew 56.5% to 2.00mn tonnes This was driven by a large increase in the area planted under the government's National Sowing Plan Chávez's stated aim is to not only end Venezuela's reliance on imported corn, but to build up a surplus for export Since coming to office, Chávez has redistributed millions of hectares of land to the poor and invested billions of dollars in agriculture While the rise in production shows that the policy has enjoyed some success for grains, there are still problems Many of the people granted rights to farmland have little experience of agriculture There have also been complaints that promised training and inputs such as seed and equipment has been slow to materialise, leaving land fallow Another brake on the expansion of grain production is controlled farmgate prices The farmgate price of corn was raised by 30% in April 2008 and again by 24% in July 2009 Producers are also given direct subsidy payments and access to cheap

fertiliser Despite this, farmers are still complaining that the farmgate price is too low, threatening future production

Chávez's aim to attain self-sufficiency is a long way from being realised and Venezuela is still heavily reliant on grain imports to fuel domestic demand, both for human consumption and for the livestock industry Indeed, in 2010 the government is set to relax import permit procedures in order to reinforce its 'food security' policy and avoid domestic food shortages In 2009/10, imports are forecast to total 1.30mn tonnes, a similar total to that seen in 2008/09, of which 300,000 tonnes are expected to be white corn, which is largely for human consumption, and a further 1.0mn tonnes of yellow corn for animal feed, according to data from the US Department of Agriculture (USDA)

Table: Venezuela – Wheat Production & Consumption

Table: Venezuela – Corn Production, Consumption & Trade