Venezuela agribusiness report q3 2011

In 2011, we now forecast that corn consumption will register a small increase, expanding by 1.7% y-o-y to 3.46mn tonnes, owing to stronger demand from the livestock sector than we had pr

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DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the

publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as

REPORT Q3 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2011

Business Monitor International

85 Queen Victoria Street

© 2011 Business Monitor International

All rights reserved

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

DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the

publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as

REPORT Q3 2011

INCLUDES 5-YEAR FORECASTS TO 2015

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: July 2011

CONTENTS

Executive Summary 5

Key Forecasts 5

Key Trends and Developments 6

SWOT Analysis 8

Venezuela agriculture SWOT 8

Venezuela Political SWOT 9

Venezuela Economic SWOT 10

Venezuela Business Environment SWOT 11

Industry Forecast Scenario 12

Venezuela Grain Outlook 12

Venezuela Wheat Consumption & Trade 13

Venezuela Corn Production, Consumption & Trade 14

Venezuela Wheat Consumption & Trade 17

Venezuela Corn Production, Consumption & Trade 17

Venezuela Sugar Outlook 18

Venezuela Sugar Production, Consumption & Trade 19

Venezuela Sugar Production, Consumption & Trade 21

Venezuela Coffee Outlook 23

Venezuela Coffee Production & Consumption 24

Venezuela Coffee Production & Consumption 27

Venezuela Cocoa Outlook 29

Venezuela Cocoa Production, Consumption & Trade 29

Venezuela Cocoa Production, Consumption & Trade 31

Venezuela Livestock Outlook 33

Venezuela Livestock Outlook 33

Venezuela Poultry Production, Consumption & Trade 34

Venezuela Pork Production, Consumption & Trade 35

Venezuela Beef & Veal Production, Consumption & Trade 35

Venezuela Poultry Production, Consumption & Trade 38

Venezuela Pork Production, Consumption & Trade 38

Venezuela Beef & Veal Production, Consumption & Trade 38

Venezuela Dairy Outlook 40

Venezuela Milk Production & Consumption 41

Venezuela Butter Production, Consumption & Trade 41

Venezuela Cheese Production, Consumption & Trade 42

Venezuela Whole Milk Powder Production, Consumption & Trade 42

Venezuela Milk Production & Consumption 45

Venezuela Butter Production, Consumption & Trade 45

Venezuela Cheese Production, Consumption & Trade 46

Venezuela Whole Milk Powder Production, Consumption & Trade 46

Commodity Price Analysis 47

Monthly Softs Update 47

Cocoa 47

COCOA 48

Coffee 49

COFFEE 50

Milk 51

MILK 52

Sugar 52

SUGAR 53

Monthly Grains Update 54

Corn 54

CORN 55

Rice 55

RICE 56

Soybean 57

SOYBEAN 58

Wheat 58

WHEAT 59

Downstream Supply Chain Analysis 60

Consumer Outlook 60

Food 62

Table: Venezuela Food Consumption Indicators - Historical Data & Forecasts 62

Canned Food 63

Table: Canned Food Value/Volume Sales Historical Data & Forecasts 63

Confectionery 64

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts 65

Mass Grocery Retail 66

Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 67

Table: Sales Breakdown by Retail Format Type 67

Trade 68

Table: Food & Drink Trade Balance Historical Data & Forecasts 69

Economic Analysis 70

Macroeconomic Forecast 74

Venezuela - Economic Activity 76

Global Food & Drink View 77

Food & Drink Roundup Q111: Core Views 77

BMI FOOD & DRINK CORE VIEWS 82

BMI Forecast Modelling 83

How We Generate Our Industry Forecasts 83

Executive Summary

BMI View: On April 21 2011, Venezuela departed from the Community of Andean Nations (CAN) The

decision to withdraw was taken in 2006, in opposition to Peru and Colombia signing free trade

agreements (FTA) with the United States However, in the weeks leading up to the end of Venezuela's subscription to CAN, President Hugo Chávez travelled extensively throughout the Andean region to strengthen bilateral relations, leading to the signing of trade agreements with Bolivia, Colombia and Ecuador and ongoing trade negotiations with Peru The exit from CAN should not, therefore, impact too strongly on the country's agricultural sector

Also through Q211, Venezuela's agricultural sector has been hit by further heavy rains and landslides, that killed at least 21 people and caused extensive damage to infrastructure Almost 300,000 acres of agricultural land in the northwestern state of Zulia were flooded, badly damaging milk and livestock production

Key Forecasts

ƒ We anticipate that demand for butter and cheese will remain strong over our forecast period, as government price controls make them affordable for lower income consumers After growing by 13.0% from 2005-2010, we forecast growth in cheese consumption to increase by 14.2% from 2010-2015 to reach 126,530 tonnes We see growth in butter consumption increasing from 12.8% from 2005-2010 to 22.7% from 2010-2015 to reach 3,038 tonnes at the end of our forecast period

ƒ We now see coffee production increasing by 3.1% y-o-y in 2010/11 to reach 748,000 bags The 2011/12 harvest should benefit from the renewal of fertilisation programmes as part of the government's Agricultural Plan We currently forecast a y-o-y increase of 12.3% to take output

to 840,000 bags

ƒ The heavy rains in December 2010 hit the 2010/11 corn harvest and we forecast production rising by just 4.3% y-o-y to 1.71mn tonnes Out to the end of our forecast period to 2014/15, we expect output to continue to rise and are forecasting production to grow by 27.1% on the 2009/10 level to reach 2.08mn tonnes

ƒ We see beef production falling by 1.7% y-o-y to 342,200 tonnes in 2010/11 due to high energy and feed costs and consequent lack of profitability for producers Furthermore, heavy rains and mudslides from February-May 2011 flooded pasture lands in northwestern Venezuela, impacting livestock production

ƒ We estimate that sugar production fell by 27.1% y-o-y in 2009/10 to 485,000 tonnes The lack of profitability has deterred investment and many mills now stand idle We see production

increasing by only 4.3% y-o-y in 2010/11 to 505,800 tonnes as land expropriations and price controls continue to take their toll Over our forecast period to 2014/15, we expect sugar production to increase by 17.7% on the low 2009/10 level to reach 571,000 tonnes

Key Trends and Developments

ƒ In April 2011, the Venezuelan government declared cocoa to be a primary need, or basic staple product, and unveiled plans to form the Corporación Socialista del Cacao Venezolano (Socialist Corporation of Venezuelan Cocoa) to administer all aspects of the cocoa supply chain The corporation will bring together public and private sector companies and other organisations and associations involved in cocoa production and distribution The government has previously criticised the cocoa sector for focusing primarily on the export market and serving the interests

of elite classes

ƒ The costs of milk production in Venezuela have shot up by almost 30% over the past 14 months, according to a study by the Venezuelan Cattle Federation, Fedenaga The study, carried out in the highland dairy-producing region of Merida State, showed that rising prices of vaccines, medicines, antibiotics, oil and other inputs had pushed up production costs by 29.8% This is making dairy production increasingly unsustainable: farmgate prices remain at VEF2.20/litre, while producers claim that the real cost of production is VEF3.26 According to Fedenaga, in order to make ends meet, small and medium-sized producers are reducing feed supplies and cutting back on investment, which will further damage output The federation called for the government to review the remit of the National Fund for Dairy Production, which currently does not grant any additional support to smaller producers

ƒ In April 2011, the governments of Colombia and Venezuela reached an agreement to restore trade relations following a meeting in Cartagena on April 9 At the end of July 2009, Chávez froze diplomatic relations with Colombia in response to Colombia allowing US troops to operate out of Colombian bases in their fight against drug production The agreement will ensure that cross-border trade is not damaged by Venezuela's exit from the Community of Andean Nations trade pact as from April 22 - the departure was prompted by Venezuela's opposition to free trade agreements signed between Colombia and Peru with the US The new Colombia-Venezuela agreement included the offer to export 100,000 tonnes of Colombian dairy products across the border, including liquid, evaporated and powdered milk, cheese, butter, whey and milk-based drinks The deal also opens the way for the sale of 6,500 heads of Colombian cattle, in addition

to 3,000 live cattle, 3,500 pregnant cows, 60,000 day-old chicks and 100,000 hatching eggs

ƒ In January 2011, the government launched Mission Agro Venezuela, a new programme designed

to support the country's agricultural production The programme aims to boost domestic production and lessen reliance on imports, thus improving Venezuela's food security Mission Agro Venezuela will provide low-interest loans, machinery and technical assistance to the country's agricultural producers - from small to large-scale landowners VEF9.9bn (US$2.3bn) has been committed to the programme As part of the programme, a census is also being carried out of Venezuela's agricultural sector By mid-April, 586,000 growers had registered for the programme, according to government data In April 2011, over 20,000 producers received government assistance of VEF554mn (US$129mn) through the Mission Agro Venezuela programme at an event at Municipio Ture, in Portuguesa State According to Juan Carlos Loyo, the Minister for Agriculture and Lands, the funds will support the development of an additional 150,000 hectares of farmland for the cultivation of rice and white and yellow corn

ƒ In May 2011, the government approved a 30% increase in the farmgate prices of corn, rice and soybeans, which will come into effect on August 15 Producers' associations had been

petitioning the government to raise the controlled prices since the beginning of 2011, to counter the rise in input costs that have hit farmers The price of white corn will rise from VEF1.15 to VEF1.50 per kilo, while yellow corn will increase from VEF1.02 to VEF1.33 per kilo

ƒ On June 2 2011, the government announced an increase in the controlled price of sugar from VEF3.73 per kilo to VEF4.89 This should bring some relief to beleaguered producers who have seen profitability eroded in recent years However, the move may prove insufficient to reverse the sector's decline: producers had requested for the regulated price to rise to VEF6.40 per kilo

SWOT Analysis

Venezuela agriculture SWOT

agricultural products

ƒ Venezuelan cocoa and coffee are known for their high-quality and cocoa especially is sought after by producers of premium chocolate

has left Venezuela a major food importer

ƒ High food price inflation and frequent supply shortages have dampened growth in food consumption

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

after years of decline

increase production including finance and subsidies

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

Venezuela

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

Venezuela Political SWOT

tradition of democracy, with elections held regularly since 1959

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

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

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

Chávez has accused Washington of interfering in Venezuela's domestic affairs and threatened to cut off oil supplies to the US

flourish thanks to the fiscal windfalls brought by devaluation of the bolivar and elevated oil prices, bringing longer-term stability to the economy and diminishing the risks of civil turbulence

country's democratic institutions

ƒ The national assembly has pushed through several laws that were previously overturned in the constitutional referendum in 2007 The weakening of democracy in the country threatens to raise political risk and poses a threat to private business activity

former's belligerent rhetoric However, we continue to view the possibility of outright military conflict as improbable given underlying economic

interdependencies

Venezuela Economic SWOT

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

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

energy sector makes the economy increasingly vulnerable to economic shocks

in the long term

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

an opportunity to benefit from increased competitiveness

and successive interest rate hikes Further erosion of domestic productive capacity is likely to raise inflationary pressures in the economy, possibly bringing on hyperinflation

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

Venezuela Business Environment SWOT

ƒ Home to some of the largest oil reserves in the world, the Orinoco region will provide opportunities for large-scale investment

uncertain political environment, could undermine the long-term growth outlook

ƒ Privatisation has ground to a halt since President Hugo Chávez took office, with the administration instead preferring production-sharing agreements to

encourage foreign direct investment

is available The government fund for industrial credit provides large sums of money for small- and medium-sized businesses

community hard This has restricted import growth, as businesses lack the currency to purchase raw materials

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

Industry Forecast Scenario

Venezuela Grain Outlook

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

the first decade of the 21st century, consumption has also risen, fuelled by oil-driven economic growth Corn is Venezuela's major grain crop The vast majority of Venezuela's corn 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 Around 65% is white corn for human consumption and the remainder yellow corn for both human consumption and for feed The viability of corn production in Venezuela is heavily

dependent on government policy In the 1980s, the country's agricultural sector was heavily regulated and high tariffs were imposed on grain imports This saw corn production more than double in the second half

of the 1980s With little competition from imports, however, productivity remained low When the market was opened up in the 1990s, domestic farmers found it hard to compete with imports and production fell

The most severe droughts seen in 37 years hit the 2009/10 harvest and production is estimated to have dropped by 9.2% year-on-year (y-o-y) to 1.63mn tonnes In addition to the extreme weather conditions,

production was also affected by regulated farmgate prices and retail prices (see below for further

comment) Land expropriations and the seizure in October 2010 of Agroisleña, the main private sector

distributor of agricultural inputs, agricultural services and financing, will add to the difficulties facing producers The heavy rains in December 2010 hit the 2010/11 harvest, and we forecast corn production rising by just 4.3% y-o-y to 1.71mn tonnes Production is, however, aided by increased government investment through the Comprehensive Agricultural Development Plan 2010-2011, which has set

ambitious targets to boost white and yellow corn by 61% and 110% respectively, over the course of two years

Out to the end of our forecast period to 2014/15, 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 27.1% on the 2009/10 level to reach 2.08mn tonnes

Wheat production in Venezuela is negligible as the country does not have a suitable climate for growing wheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming from the US and Canada Venezuelan wheat imports totalled an estimated 1.60mn tonnes in 2010 In March 2011, wheat was added to the list of goods classified by the government as essential or staple, which will expedite import procedures

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

Through the end of the 1990s and the first couple of years of the 21st century, demand for corn shot up, driven by the expansion of the poultry sector As the economy went into meltdown in 2002, however, demand for corn collapsed as poultry output fell almost 25% in the space of a year Since then, feed consumption has climbed back up Demand for corn for food has also risen strongly in the past few years

as Venezuela's economy has grown Corn is a staple food in Venezuela and corn flour is used to make

arpea, a flat unleavened bread Total corn consumption rose by an estimated 94.3% from 2005 to 2010,

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

In 2011, we now forecast that corn consumption will register a small increase, expanding by 1.7% y-o-y

to 3.46mn tonnes, owing to stronger demand from the livestock sector than we had previously anticipated

We forecast that demand will continue to grow over our forecast period, as corn is one of the cheapest foods available and the price is kept down by government price controls Growth will, however, be more moderate than during the previous five-year period and out to 2015 we see demand rising by 12.0% on the 2010 level to take consumption to 3.81mn tonnes

Wheat consumption has gained in popularity since the beginning of the 21st century, as Venezuelan consumers have had more money to spend on food Consumption of both bakery goods and pasta has been rising Price controls mean pasta has become far more affordable and per capita consumption has now risen to around 14kg The majority of pasta produced is lower grade and must be sold at a

government-set price Some high grade pasta is also produced which can be sold at market prices As a result of rising wheat prices on the international market, we estimate that consumption remained static in

2010 at 1.55mn tonnes We see demand dipping in 2011 owing to high prices and have pencilled in a

y-o-y decline of 4.8% to take consumption to 1.48mn tonnes Out to 2015, we see consumption growing by-o-y 9.9% on the 2010 level to reach 1.70mn tonnes

Venezuela Wheat Consumption & Trade

Wheat Consumption,

'000 tonnes 1 1,550.1 1,475.2 1,534.7 1,586.9 1,644.4 1,702.7Wheat Net Trade

Balance, '000 tonnes 1 -1,550.1 -1,475.2 -1534.7 -1,586.9 -1,644.4 -1,702.7

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

Venezuela Corn Production, Consumption & Trade

Corn Production, '000

tonnes 1 1,634.0 1,705.2 1,786.3 1,872.3 1,973.6 2,075.9Corn Consumption, '000

tonnes 1 3,400.0 3,457.9 3,513.3 3,600.8 3,707.9 3,807.5Corn Net Trade Balance,

'000 tonnes 1 -1,319.8 -1,281.1 -1,276.1 -1,276.4 -1277.5 -1,277.0

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

Grain Produces Receive Boost From Agro Venezuela Programme

In January 2011, the government of Hugo Chávez launched Mission Agro Venezuela, a new programme designed to support the country's agricultural production The programme aims to boost domestic

production and lessen reliance on imports, thus improving Venezuela's food security Mission Agro Venezuela will provide low-interest loans, machinery and technical assistance to the country's agricultural producers - from small to large-scale landowners VEF9.9bn (US$2.3bn) has been committed to the programme As part of the programme, a census is also being carried out of Venezuela's agricultural sector By mid-April, 586,000 growers had registered for the programme, according to government data

In April 2011, over 20,000 producers received government assistance of VEF554mn (US$129mn)

through the Mission Agro Venezuela programme at an event at Municipio Ture, in Portuguesa State According to Juan Carlos Loyo, the Minister for Agriculture and Lands, the funds will support the

development of an additional 150,000 hectares of farmland for the cultivation of rice and white and yellow corn

Coca Growing Hits Corn Production

The diversion of fertiliser from legal crops to coca growing is damaging Venezuelan corn production, according to a December 2010 report by the Miami Herald Urea, the nitrogen-rich fertiliser used to grow corn and other agricultural produce, is being sold through the black market to coca growers and farmers are complaining that they do not have sufficient fertiliser, particularly during the main planting season, beginning in May On paper, Venezuela produces at least twice as much fertiliser it needs, with the government subsidising its use to the tune of US$100mn per year, according to a Miami Herald report However, farmers in the main growing regions of Portuguesa and Guárico complain that a lack of access

to fertiliser is damaging their harvest The negative impact of the drugs trade upon grains production is a further obstacle to Venezuela's corn producers, who have also been hampered by land expropriations, farmgate prices and extreme weather conditions in recent years

Government To Centralise Wheat Imports

In March 2011, the Venezuelan Ministry of Food requested private companies to provide information

about their requirements for wheat for the following nine months in order to authorise imports Requests totalled 1.40mn tonnes The move is part of the government's plan to centralise imports of a number of food products, including raw milk, wheat, sugar and oil The decision has been criticised by the industrial sector, who argue that the government's priority should be to revise food price controls that are impacting heavily on profitability as input costs continue to rise Many sectors of Venezuelan agroindustry are becoming increasingly reliant on imports to meet domestic demand as production continues to fall in the face of lack of investment, poor management and high production costs

Chávez Authorises Further Corn Price Increase

In May 2011, the government of Hugo Chávez approved a 30% increase in the farmgate prices of corn, rice and soybeans, which will come into effect on August 15 Producers' associations had been petitioning the government to raise the controlled prices since the beginning of 2011, to counter the rise in input costs that have hit farmers The price of white corn will rise from VEF1.15 to VEF1.50 per kilo, while yellow corn will increase from VEF1.02 to VEF1.33 per kilo Previously, in September 2010, the government announced that it would authorise increases in the price of corn, rice and sunflower seeds at the

production stage, in order to encourage planting of these crops for the 2010/11 harvest The move came following sustained complaints from Venezuelan agricultural producers that the regulated farmgate prices had not been adjusted in line with rising costs, which had been driven upwards by high inflation On September 1, the price for a kilogram of yellow corn increased by 27.5% from VEF0.80 to VEF1.02, while a kilo of white corn rose by 27.8% from VEF0.90 to VEF1.15 production

Government Suspends Corn Imports

In mid-September 2010, the Venezuelan government suspended the issuance of licenses to private

companies for imports of white and yellow corn for the remainder of 2010 The move was designed to ensure that domestic corn producers would have a market for the crops harvested during Q410 The announcement will be welcomed by domestic corn producers, who have long raised concerns that

competition from imports was damaging their profitability However, domestic production will not be sufficient to meet demand, so imports will continue to be needed for the foreseeable future to cover the shortfall

Government Seizes Agroisleña

In late September 2010, the government of Hugo Chávez announced the seizure of Spanish-owned

Agroisleña Agroisleña is the largest private agricultural supply distributor in Venezuela, with a large

network of rural stores supplying pesticides, fertiliser, tools and machinery etc It also controls around a third of the country's grain storage capacity Chávez argued that Agroisleña had become an oligopoly in the market of agriculture inputs, contrary to the provisions of the Constitution He stated that the seizure would further the progress of his agricultural reform programme and would further his government's ambitions to improve food security and lower production costs However, should the services provided by Agroisleña become disrupted or fall foul to state mismanagement, the expropriation may compromise the

output of domestic producers who have been reliant on Agroisleña's provision of goods and services The move thus may prove one further obstacle for Venezuela's grain producers, who are already struggling to cope with rising prices and farmgate price controls

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, which have been in force since 2003 on around 100 products considered to be basic necessities The farmgate price of corn was raised by 30% in April 2008, by 24% in July 2009 and by 28% in September 2010 Producers are also given direct subsidy payments and access to cheap fertiliser Despite this, farmers have long

complained that the farmgate price is too low, threatening future production

Chávez's aim to attain self-sufficiency is a long way from being realised and Venezuela is still heavily reliant on grain imports to fuel domestic demand, both for human consumption and for the livestock industry Indeed, in 2010 the government was to relax import permit procedures in order to reinforce its 'food security' policy and avoid domestic food shortages In 2009/10, corn imports were estimated at 1.30mn tonnes, a similar total to that seen in 2008/09, of which 300,000 tonnes are expected to have been 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) In addition, Venezuela is expected to have imported some 1.6mn tonnes of wheat

Chávez Backs Down Over Gruma Takeover

The relationship between the Venezuela government and the Mexican firm Gruma, one of the world's

largest producers of corn flour for tortillas, was a turbulent one throughout 2010 Gruma's Venezuelan operations accounted for 18% of total sales in September 2009 In January 2010, Chávez announced that

his government would temporarily take control of Gruma's Monaca unit, following the arrest of one its

major shareholders under charges of financial irregularities

Subsequently, in May 2010, the government announced the expropriation of Monaco, following

accusations that Gruma had refused to sell flour during a national shortage in the previous month The move came as the Chávez government tightened its control on the supply chain in the face of national shortages and rocketing inflation However, in July 2010, the government retracted and announced that rather than seizing Gruma's assets, it was considering forming a joint-venture with the Mexican company

Venezuela Wheat Consumption & Trade

Wheat Consumption,

'000 tonnes 1 1,700.0 1697.0 1,500.0 1,550.0 1,550.1 1,475.2Wheat Net Trade

Balance, '000 tonnes 1 -1,688.0 -1762.0 -1,500.0 -1,500.0 -1,550.1 -1,475.2

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

Venezuela Corn Production, Consumption & Trade

Corn Production, '000

tonnes 1 1,600.0 2,000.0 1,800.0 1,800.0 1,634.0 1,705.2Corn Consumption, '000

tonnes 1 1,750.0 2,400.0 2,700.0 3,200.0 3,400.0 3,457.9Corn Net Trade Balance,

Venezuela Sugar Outlook

BMI Supply View: 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 Since then, however, the sugar sector has declined and the country has been facing severe sugar shortages The uncertain investment climate and marginal profitability of the sugar sector has seen the area planted to sugar fall, as land seizures and government price caps have deterred producers Adverse weather conditions, including both heavy rains and severe droughts, have caused further declines in production

We estimate that production fell by 27.1% y-o-y in 2009/10 to 485,000 tonnes The lack of profitability has deterred investment and many mills now stand idle We see production increasing by only 4.3% y-o-y

in 2010/11 to 505,800 tonnes as land expropriations and price controls continue to take their toll

However, on June 2 2011, the government announced an increase in the controlled price of sugar from VEF3.73 per kilo to VEF4.89 This should bring some relief to beleaguered producers

Over our forecast period to 2014/15, we expect sugar production to increase by 17.7% on the low 2009/10 level to reach 571,000 tonnes This will be achieved with new mills coming on line We warn, however, that this will be dependent on the policies of President Hugo Chávez' government In 2008, a number of sugar cane plantations were seized by the government If the seizure of sugar cane plantations continues and the new co-operatives created to run them are unable to sustain production, then the managers of the new mills being built may find that there is not enough cane to supply them

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

economic recovery from 2004 From 2005 to 2010, consumption increased by 45.7% to 1.26mn tonnes,

as rising per capita incomes allowed consumers, particularly from poorer segments of society, to increase the amount they spent on food Around 60% of sugar is destined for the industrial sector and used in soft drinks, snacks and confectionary Domestic consumption accounts for the remaining 40%

High food price inflation and supply shortages have, however, countered this strong growth in recent years With domestic production covering only a fraction of consumption in recent years, imports have had to be found to supply the remainder The Chávez government has been criticised by industry bodies for not acting more quickly 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

A large increase in imports in 2010 helped ease shortages, allowing consumption to continue to rise In

2010, consumption grew by an estimated 20.0% y-o-y to reach 1.26mn tonnes We see imports increasing

to around 850,000 tonnes in 2011, which will continue to support domestic consumption However, as

food price inflation continues to rise, we see the growth slowing and consumption increasing by 3.0% o-y to reach 1.30mn tonnes Out to 2015, we expect sugar consumption to grow by 6.2% on the high 2010 level to reach 1.34mn tonnes

y-Venezuela Sugar Production, Consumption & Trade

('000 tonnes) 1 -438.5 -413.6 -400.0 -392.4 -390.8 -386.9

Notes: e BMI estimates f BMI forecasts Sources: 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 have remained reluctant to devote acreage to sugar or to invest further in the sector A further price increase in June 2011 from VEF3.73 per kilo to VEF4.89 may prove insufficient to reverse the sector's decline: producers had requested for the regulated price to rise to VEF6.40 per kilo

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 2011 and anticipates that an increasing amount of domestic demand will be satisfied through imports Imports shot up from just 180,000 tonnes in 2008 to

an estimated 800,000 tonnes in 2010, according to data from the US Department of Agriculture (USDA) Imports, therefore, outstripped domestic production of an estimated 485,000 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

Sourcing affordable imports is set to become increasingly difficult in light of the unification of the official exchange rate at VEF4.3/US$ in January 2011 Throughout 2010, Venezuela used two exchange rates for

US dollars: VEF4.3 and VEF2.6, depending on the category of the product Sugar was one of the

commodities that benefited from the preferential exchange rate; hence, sugar imports will be considerably

more expensive going forward The sugar shortages experienced in recent months could, therefore, continue to hit the Venezuelan market unless the government relaxes its restrictive policies

Threat Of Seizures Continues

In March 2011, the Venezuelan government ordered an inspection of the El Palmar sugar mill and has threatened to expropriate it, according to a report by El Universal newspaper The government is currently

in control of eight sugar mills, which were expropriated following accusations of hoarding or putting profits ahead of the national good Just six mills remain in private hands

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 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 have 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 north-western 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, 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

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 Coffee Outlook

BMI Supply View: The best Venezuelan coffee comes from the Maracaibo region, in the far west of the

country, along the border with Colombia Production is estimated to have fallen by 19.4% year-on-year (y-o-y) to 725,000 60kg bags in 2009/10, due to dry weather related to El Niño-Southern Oscillation in the Pacific The failure of government-mandated prices to keep a pace with increasing costs in the face of rocketing inflation has hurt the profitability of coffee production in Venezuela, leading farmers to turn towards more profitable crops In addition, lack of producer unity and the government's expropriation of two main coffee processors have made the sale of coffee more complicated for producers, providing a disincentive to continue production Producers have also faced competition from imported coffee, leading many to abandon the sector in favour of more lucrative areas such as cattle ranching In recent years, the number of coffee-growing families has fallen from an estimated 80,000 to less than 50,000

There had been hopes that the 2010/11 harvest would see a significant increase in output; however, the heavy rains at the beginning of 2011 disrupted the flowering process, leading to lower yields

Furthermore, the area harvested declined by an estimated 12% y-o-y to 180,000 hectares, due to the decreased profitability of coffee production We now see production growing by just 3.1% y-o-y in 2010/11 to 748,000 bags, with domestic demand expected to outstrip supply for the third successive year The 2011/12 harvest should, however, benefit from the renewal of fertilisation programmes as part of the government's Agricultural Plan We currently forecast a y-o-y increase of 12.3% to take output to 840,000 bags

Government support for small-holder coffee growers, who make up the majority of farms, could see production grow once again over the late years of our forecast period In 2014/15, we currently see production reaching 944,500 60kg bags, 30.3% higher than the low level seen in 2009/10 This, however, will be dependent on government policy, particularly price controls If the government relax price

controls further, interest in investing in production of Venezuela's high-quality coffee would likely increase, leading to greater production than we are currently expecting Conversely, if price controls continue to squeeze profits, farmers may switch to other less tightly controlled crops

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

estimated 25.7% from 2005-2010 The vast majority of coffee consumed is roasted ground coffee, with soluble instant coffee accounting for only around 1% of total consumption Coffee is included in the government's basic food basket and is available in government food stores at controlled prices This has allowed more low-income Venezuelans to afford it, leading to a strong increase in demand

Demand growth has, however, at times led to severe supply shortages and a booming black market Wealthier consumers are able to buy their coffee at cafes or street stalls, but poorer consumers are often unable to afford the high prices The government has blamed the shortages on unscrupulous suppliers

hoarding their stock, rather than selling it at the mandated prices The Venezuelan Coffee Industry

Association, however, has blamed the shortages on the strict control of how much coffee roasters must pay for beans and for how much they are allowed to sell the finished product

Supply shortages and food price inflation saw coffee consumption fall by an estimated 13.7% y-o-y to 880,000 bags in 2010 Supply shortages have, however, been eased by the increase in imports in 2010

(see below for further analysis) With imports set to grow again in 2011, we forecast demand to rise by

19.1% y-o-y to 1.05mn bags Out to 2015, we see demand growing by 52.0% on the low 2010 level to 1.34mn bags

Venezuela Coffee Production & Consumption

Coffee Production, '000

60kg bags 1 725.01 747.55 839.59 889.99 908.42 944.47Coffee Consumption,

'000 60kg bags 1 880.04 1,048.11 1,178.57 1,231.26 1,289.94 1,337.52

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

Price Controls Hit Profitability

Since 2003, the prices of coffee have been subject to government controls and have not been adjusted upwards at the same rate as rising production costs On November 5 2010, the Venezuelan government announced an increase of 27% in the fixed price paid to producers for green coffee The move will see the government-mandated price rise from VEF585 to VEF747 per quintal (45kg) and is backdated to October

1 2010 The increase will bring some relief to coffee producers who have seen their profit margins

slashed by rocketing inflation and rising production costs However, the increase is less than they had been hoping for and is unlikely to lead to any significant rise in production for the 2010/11 harvest

Subsequently, in December 2010, the government announced that the fixed price at consumer levels for different presentations of ground coffee and coffee beans would also rise by 29% This was the first increase in price since November 2008 The price of a kilogramme of coffee beans or ground coffee rose from VEF18.45 to VEF23.88, excluding VAT The price increase was, however, less than the coffee processing industry had hoped for The sector has seen its profitability eroded through increases in the prices of packaging, parts and the increase in the farm-gate price for green coffee However, the

expropriation of the two main coffee-producing companies, Fama de América and Café Madrid, will

enable production to continue, despite the squeezed profit margins

The price increases are unlikely to lead to significant increases in profitability High coffee prices on the international market have led to a huge discrepancy between what producers receive and the cost of

coffee on global markets While the price of a quintal of domestic coffee is fixed at US$174 (VEF747), internationally, prices have reached US$300 and in neighbouring Colombia, a quintal of Venezuelan coffee is sold at US$465-698 This gulf is proving a strong disincentive to producers and has discouraged investment in coffee production As a result of falling domestic output, the government has had to resort

to increased imports to guarantee supply, with imports rocketing to at least 200,000 60kg bags in 2009/10 and 2010/11 This has further exacerbated tensions in the sector, with producers claiming that the

government is effectively subsidising foreign coffee producers

Venezuela And Colombia Announce Binational Coffee Plan

In March 2011, it was announced that officials from the Colombian and Venezuelan governments are developing a joint plant to support coffee growers on both sides of the Colombia-Venezuela border in areas that have been hard hit by the long-running conflict in Colombia The Binational Plan for the Perija Mountain Range will benefit coffee cultivators in Colombian departments of Cesar and La Guajira and in the Venezuelan state of Zulia As well as boosting coffee production, the plan also aims to improve food security, housing improvements, educational infrastructure, energy infrastructure and internet access The binational plan marks a further step forward for collaboration between the two countries, following an extended suspension in diplomatic relations during the premiership of former Colombian president Alvaro Úribe

Coffee Crisis

Venezuela was once among the world's largest producers of coffee At the beginning of the 20th century, coffee production was the mainstay of the Venezuelan economy accounting for more than 80% of the country's exports Since then, however, its significance has fallen, particularly after the discovery of oil led to other industries being crowded out Today Venezuela accounts for less than 1% of world coffee production Government mismanagement of the sector in recent years has seen production dwindle to the point where the country is now reliant on imports from Brazil, El Salvador and Nicaragua In 2009/10, Venezuela imported around 310,500 bags in order to meet domestic demand

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

economy, coffee producers hold the government's interventions responsible for the collapse of the coffee industry as strict price controls have eroded the sector's profitability

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

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

Government Forced To Turn To Imports As Production Dwindles

Despite the Chávez administration's stress on attaining self-sufficiency in food production, poor

management as well as adverse weather conditions have forced the government to turn to imports to meet the requirements of Venezuela's processing industry and supply domestic demand Since 2002/03,

Venezuelan coffee imports had been negligible, totalling 0-13,000 bags per year However, in 2009/10, imports increased to an estimated 205,000 bags, primarily from Brazil and Nicaragua With domestic production expected to decline once again, the country's heavy reliance on imported coffee set to continue into 2010/11, with current forecasts standing at 200,000 bags

'Socialist' Or 'Capitalist' Coffee On Offer In State-Run Chain

In November 2010, the state-run coffee chain Café Venezuela began offering customers parallel price

lists - 'socialist' and 'capitalist' - to demonstrate the benefits of a state-controlled economy over the

purported exploitations of the free market The 'socialist' list offers coffee at half the price of its capitalist counterpart, in a move designed to boost the popularity of Chávez' controversial socialist policies A diagram on the wall details for customers how the different prices are reached, outlining the costs of labour, overheads and raw materials, as reported by Reuters 'Made in Socialism' badges decorate posters and menus The affordable prices are proving a hit with customers, as have other food price subsidies introduced by the Chávez regime However, critics claim that the move is a further populist gimmick designed to distract attention from the spiralling inflation, food shortages and economic contraction that continue to plague the country

Coffee Plants: Victims Of Nationalisation

At the beginning of August 2009, the Venezuelan government announced that it would expropriate two coffee processing companies: Fama de América and Café Madrid The action was taken as the

government claimed that the companies monopolised the market and encouraged smuggling activities Together, the two companies controlled around 80% of the coffee market in Venezuela The move seems

to have been sparked by an announcement by the companies that they were running out of coffee supplies and had enough left to meet only a few days of demand The government claimed the companies had been involved in illegally exporting coffee to Colombia to take advantage of the higher prices The government initially claimed the seizures would be temporary But a few days after the occupation of the plants, Chávez spoke of permanently expropriating them

In mid-November 2009, the government finally announced the official expropriation of Fama de América

as well as Cafea, a smaller roaster based in Táchira State In May 2010, Venezuelan officials seized

control of a Fama de América processing plant in the state of Carabobo after talks to agree a price for the

plant broke down In January 2011, the Dutch Longreef Investment Group, which was a shareholder in

Fama de América, announced that it would sue the Venezuelan government for failing to pay

compensation for the expropriated assets The complaint was lodged at the International Center for Settlement of Investment Disputes in Washington DC

Regardless of whether the allegations of illegal export of coffee are true - they are strenuously denied by both companies - the seizures and the looming shortages that motivated them highlight all that is wrong with the Venezuelan coffee industry The farmgate prices for coffee fixed by the government are well below the level in neighbouring Colombia With Colombia suffering its own shortage of coffee in 2009 owing to a poor crop, demand for coffee from neighbouring countries is high It is inevitable that

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

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

operating environment to continue through our forecast period as price controls continue

Venezuela Coffee Production & Consumption

Coffee Production, '000

60kg bags 1 820.00 862.00 900.00 900.00 725.01 747.55Coffee Consumption,

producers cannot come to an agreement on prices acceptable to both sides, investment in production will not be forthcoming The threat of nationalisation still worries potential investors in the sector Coffee growing has also been hit in other ways by the encroachment of the state Agricultural labourers are reportedly becoming harder to find and more expensive, as workers choose employment with government projects instead of the private sector

On the upside, the dramatic fall in oil prices over the second half of 2008 and the following doldrums since could lead to more interest in developing agriculture as a major export earner, once again At the

end of July 2008, Venezuela-owned petrol station chain Citgo Petroleum Corporation announced that it

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

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 2009/10, we estimate that production declined by 2.4% year-on-year (y-o-y) to 21,410 tonnes, owing to the impact of the long drought that has afflicted parts of Venezuela Heavy flooding in December 2010 hit the 2010/11 harvest and we now see output for that year falling to 19,910 tonnes

President Hugo Chávez' government has ambitions plans to revitalise the sector (see below for further comment) 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 While BMI is forecasting cocoa

production to increase by 9.8% on the 2009/10 level over our forecast period to 2014/15, 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 We believe that consumption fell by a further 1.7% y-o-y in 2010 to 13,820 tonnes

as Venezuela suffered a second successive year of economic contraction With food prices still rising, consumer budgets are likely to remain tight and we see consumption falling further in 2011 to a forecast 13,580 tonnes Out to 2015, we forecast cocoa consumption increasing only marginally on the 2010 level

Balance, '000 tonnes 1 4.46 5.29 5.00 4.37 3.74 3.30

Notes: e BMI estimates f BMI forecasts Sources: 1 International Cocoa Organisation, BMI

Chávez Government Creates Socialist Corporation For Cocoa Sector

In April 2011, the Venezuelan government declared cocoa to be a primary need, or basic staple product and unveiled plans to form the Corporación Socialista del Cacao Venezolano (Socialist Corporation of Venezuelan Cocoa) to administer all aspects of the cocoa supply chain The Corporation will bring together public and private sector companies and other organisations and associations involved in cocoa production and distribution The government has previously criticised the cocoa sector for focusing primarily on the export market and serving the interests of elite classes

The cocoa industry has long been a focus of the Chávez government In October 2010, President Hugo Chávez unveiled plans to turn Venezuela into a leading power in cocoa production and exportation Declaring cocoa a 'strategic product' of the national economy, Chávez revealed plans to increase cocoa production to 30,000 tonnes by 2012 and 60,000 tonnes by 2019 In order to achieve these ambitious goals, Chávez proposed rescuing abandoned plantations and requested Venezuela's Executive Vice President Elias Jaua to carry out research into suitable additional land for cocoa production Chávez also urged small plantation owners to band together as producers associated to the state In addition, Chávez announced that the government was in the process of building a chocolate plant with processing capacity

of 25,000 tonnes This is not the first time that the government has announced plans to revitalise the country's cocoa sector: similar strategies were revealed in 2000 and again in 2005, when cocoa growers and grinders were granted credit from the government to increase production In 2008, the government also declared cocoa a priority for agricultural development

Coveted Chuao Beans Premier On US Market

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, often commanding prices of two to three times above those achieved by cocoa from other growing regions 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 The varietal is among the most sought after and expensive in the world and is highly sought after by international chocolatiers for its aromatic flavours Chuao criollo beans - named after the plantation and geographical area in which they are grown - are considered Venezuela's finest beans and among the best in the world The 140-hectare plantation is located in Northern Venezuela inside one of Latin America's oldest national parks, the Parque Nacional Henri Pittier Rancho Grande Farmers from the village of Chuao have cultivated cocoa for over 300 years and maintain traditional farming, which guarantees the beans' unique flavour Beans are famously sun-dried on the patio of the village's centuries-old colonial church, rather than dried

in kilns In addition, the region's unique soil conditions and humid, the wet equatorial climate creating optimal production conditions for the cocoa bean Cocoa production is managed by the community's

cooperative, the Empresa Campesina de Chuao, Since 2000, the Chuao bean has been protected by an

appellation of origin, which helps the cooperative to command high prices for their produce

Due to its low production volume, the Chuao cocoa bean is notoriously difficult to source and is highly prized by international chocolate producers The rare bean made a splash on the US market in June 2010

when Utah-based Art Pollard, owner of Amano Artisan Chocolate, unveiled a 2-ounce Chuao chocolate

bar at the Summer Fancy Food Show in New York City For the past few decades, Italian chocolate

company Amedei has had exclusive rights to the bean Pollard succeeded in purchasing the Chuao beans

through his close relationship with cocoa growers in Venezuela

Further acclaim for Chuao chocolate arrived in January 2011 when Venezuelan chocolate company

Chuao Chocolatier was named a 2011 Good Food Award winner for its special-edition Origins bar The

awards acknowledge excellence in responsible production, taste and authenticity The company, which was founded by Venezuelan chef Michael Antonorsi and his brother Richard Antonorsi, specialise in 'fusion chocolate': a combination of Chuao bean chocolate with natural ingredients to produce

unexpected, unusual flavours

The prestige of Chuao beans demonstrates the rich potential of cocoa production in Venezuela However, for this potential to be realised, greater investment will be needed to preserve genetic lines and revitalise plantations that have suffered from years of neglect The underdevelopment of many plantations and the traditional techniques of many produces have, however, aided the development of organic cocoa farming,

a further niche market with huge promise for the Venezuelan cocoa sector, due to the large premium commanded by organically grown beans on the international market

Venezuela Cocoa Production, Consumption & Trade

Balance, '000 tonnes 1 6.83 6.49 6.29 3.91 4.46 5.29

Notes: e BMI estimates f BMI forecasts Sources: 1 International Cocoa Organisation, BMI

Risks To Outlook

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 above US$3,000 per tonne

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 Livestock Outlook

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

Venezuelan beef production has gone into reverse in the past few years Venezuela was self-sufficient in beef in 2003, but in 2009 imports accounted for an estimated 52% of domestic consumption A complex system of price controls imposed by President Hugo Chávez in 2003 has restricted the profitability of livestock production in the country Chávez is hoping to boost production by turning over land judged as unproductive to landless farmers The project, however, has been met with mixed results with some formerly productive ranches seeing production evaporate under the direction of inexperienced new managers

In 2009/10 we estimate that production grew as imports from Colombia were suspended, giving a boost

to local producers Output increased by an estimated 20.0% y-o-y to reach 348,000 tonnes However, we see production dropping back once again in 2010/11, due to high energy and feed costs and consequent lack of profitability for producers Furthermore, heavy rains and mudslides from February-May 2011 flooded pasture lands in north-western Venezuela, impacting livestock production As a consequence, we see output falling back by 1.7% y-o-y to 342,200 tonnes Towards the end of our forecast period we expect production to begin to rise again as the government makes efforts to lessen the reliance on imports However, the recovery will be slow, and we see production increasing by just 2.3% on the 2009/10 level

Venezuela produces only small quantities of pork Output has remained stable at around 125,000 tonnes

in recent years We see production increasing by 7.0% on the 2009/10 level over our forecast period to reach 133,800 tonnes in 2014/15

BMI Demand View: Meat consumption soared in Venezuela's boom years from 2004 to 2008 The rise

in demand was driven by a combination of strong oil-fuelled economic growth and government price controls making staple foodstuffs more affordable After falling sharply in 2003, poultry consumption had grown by more than 50% by 2008 Beef consumption also grew by almost 40% between 2004 and 2008 While the price controls have increased demand, they have worked against investment in production and

an increasing reliance on imports In 2011, imports are forecast to reach 275,000 tonnes for poultry and 130,000 tonnes for beef

In 2009, with Venezuela's economy contracting by 3.3%, demand for poultry and beef fell by 17.8%

y-o-y and 17.4% y-o-y-o-y-o-y, respectively-o-y In 2010, despite an estimated 1.4% contraction in real GDP, we believe that meat consumption began to recover somewhat due to the availability of imports In addition, while price controls have placed a strain on production, they have, however, helped to boost consumption We now believe that poultry consumption grew by 1.9% y-o-y in 2010 to 904,000, as imports arrived from Brazil and Argentina However, demand for beef contracted by an estimated 1.6% y-o-y to 500,000 tonnes In 2011, we expect the reliance on imports to continue to shore up demand for poultry and see consumption increasing by 1.8% y-o-y at 920,000 tonnes High import prices and a drop in domestic production are likely to impact on beef consumption and we currently forecast demand to dip by 1.6% y-o-y to 492,200 tonnes Out to 2015, poultry demand is forecast to grow by 9.0% on the 2010 level to 967,000 tonnes, while beef is projected to rise by 9.3% to reach 546,300 tonnes

Pork consumption is much lower than poultry and beef Consumption grew by 12.6% from 2005-2010 to reach 134,000 tonnes Growth is forecast at 5.4% from 2010-2015 in line with population increase to take consumption to 141,200 tonnes at the end of our forecast period

Venezuela Poultry Production, Consumption & Trade

Poultry Production, '000

tonnes 1 650.05 627.38 637.82 648.61 660.65 672.67Poultry Consumption,

'000 tonnes 1 887.07 904.34 919.89 938.30 930.45 967.19Poultry Net Trade

Balance, '000 tonnes 1 -237.03 -276.96 -282.07 -289.69 -269.80 -294.52

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

Venezuela Pork Production, Consumption & Trade

Pork Production, '000

tonnes 1 125.03 127.07 129.02 131.12 132.72 133.82Pork Consumption, '000

tonnes 1 134.04 135.83 136.67 138.01 139.67 141.22Pork Net Trade Balance,

'000 tonnes 1 -9.01 -8.76 -7.64 -6.89 -6.95 -7.40

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

Venezuela Beef & Veal Production, Consumption & Trade

Beef & Veal Production,

'000 tonnes 1 348.03 342.22 345.37 348.61 352.25 355.86Beef & Veal

Consumption, '000

tonnes 1 500.02 492.19 503.06 516.36 531.37 546.27Beef & Veal Net Trade

Balance, '000 tonnes 1 -159.43 -157.31 -165.43 -176.01 -187.97 -199.86

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

Improved Relations With Colombia Ease Beef Supply Restrictions

The long-running trade dispute between Venezuelan President Hugo Chávez and former Colombian president Álvaro Uribe posed difficulties for Venezuela's beef supply for much of 2009/10 In 2008, Venezuela imported about 200,000 tonnes of beef from Colombia, in addition to live cattle However, at the end of July 2009, Chávez froze diplomatic relations with Colombia in response to its neighbour allowing US troops to operate out of its bases in their fight against drug production Chávez was also angered by Colombian protests over anti-tank missiles found in the possession of FARC guerrillas that apparently originated from the Venezuelan army Following the dispute, Chávez vowed to cut trade with Colombia and find alternative sources of vital imports Tensions continued in Q409 with Venezuelan troops reportedly blowing up foot bridges between the two countries in mid-November

While we do not believe the exports completely ground to a halt - even if official trade is completely stopped, a lucrative smuggling industry remains - the fall in trade placed strain on Venezuela's meat supply The value of imports of meat and offal from Colombia fell by a whopping 97.6% y-o-y in

October 2009, according to Colombia's statistics agency DANE, with total imports from Colombia for the month falling by 70.4% Venezuela was forced to seek imports from other countries in the region,

including Brazil, Argentina, Paraguay and Nicaragua

However, in August 2010, newly elected Colombian President Juan Manuel Santos met with Hugo Chávez and agreed to restore diplomatic relations between the two countries The two presidents agreed

to reinforce security along their shared border to clamp down on terrorist groups and drug trafficking Venezuela also agreed to pay debts amounting to some US$800mn to Colombian exporters The

agreement paves the way for the restoration of trade relations between the two countries, which promises

to ease supply shortages of beef on Venezuelan shelves

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

following a meeting in Cartagena on April 9 The deal opens the way for Colombia to export 6,500 heads

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

as promising much needed relief for the food shortages and spiralling prices that have gripped Venezuela

Chávez Orders Vestey Land Seizures

In October 2010, President Hugo Chávez ordered the seizure of 300,000 hectares (ha) of land and

120,0000 head of cattle owned by Compañía Inglesa, the Venezuelan arm of British food company the Vestey Group The company is owned by Lord Vestey's family, who first began trading in Venezuela in

1909 The move forms part of the Chávez government's 'Socialist Revolution' to bring large swathes of land and industry under state control The announcement was made on Chávez's weekly programme, 'Aló Presidente', and came just days after his United Socialist Party of Venezuela (PSUV) failed to maintain his powerful two-thirds supermajority in local elections due to inroads made by a coalition of opposition parties In response, Chávez called for an acceleration of the agrarian reform programme and vowed to clamp down on foreign landholding

It is not the first time that the Vestey Group has been targeted by Chávez' government In 2005, the government nationalised four farms owned by the Vestey Group, including the 33,600-acre Charcote estate south of Caracas, with 13,000 head of cattle

Butchers Behind Bars

Controversy hit the beef sector in Q210 as at least 40 butchers were arrested in early May on charges of selling meat at higher prices than authorised by the government's strict price control system The

government currently allows beef to be sold at VEF17 (US$4) per kilogram, but the butchers are accused

of charging VEF24-40 per kilo, depending on the cut Butchers have complained that they have to pay around VEF14 for the meat, leaving them uenable to cover the costs of running their business The price

controls have remained unchanged since 2008, despite rocketing inflation that has led to steep increases

in costs Eight butchers have been found guilty, fined US$3,000 and put on parole, and are obliged to check in with the court every two weeks, according to Dow Jones A further 32 butchers are yet to be tried; if convicted, they too face heavy fines or between two and six years in prison

However, President Chávez has criticised the butchers' arrest, arguing that officials from the government's consumer rights defence institute, Indepabis, should instead scrutinise the activities of the distributors and big businesses in the beef industry Chávez insisted that if they are found to be violating price controls their assets should be expropriated

The arrest of the butchers is indicative of the extreme difficulties caused by the rigid controls imposed by Chávez's government in its move towards an ever more centralised, state-controlled economic model Despite strong demand, domestic beef production is falling dramatically, as government restrictions drive producers and retailers out of the market, leading to a scarcity of beef on the domestic market As in other areas of the Venezuelan economy, a once profitable sector has been crippled by Chávez's campaign against capitalism

Militia Fears Spook Ranchers

Government-supported farm invasions by the rural poor have been a regular occurrence under the rule of Chávez Venezuela's wealthy ranchers have therefore been particularly perturbed by the announcement of the formation of armed peasant militias Associated Press reported that Chávez explained the move saying that poor farmers needed protection from gangs loyal to wealthy landowners The government claims that

300 poor farmers were killed by the gangs over the past decade, a claim the ranchers deny Ranchers in turn claim that they have been the target of kidnapping and extortion by gangs supportive of the

government While poor farmers have undoubtedly become the victims of predatory landlords in the past, the spectre of armed mobs with government sanction is a worrying one for Venezuela's already struggling cattle ranching industry The move to arm the groups, if followed through, is likely to see a rise in

violence in rural areas and will inhibit investment by ranchers worried that their land or livestock could fall victim to the militias This would slow any recovery in beef production

Venezuela Poultry Production, Consumption & Trade

Poultry Production, '000

tonnes 1 707.00 740.00 695.00 680.00 650.05 627.38Poultry Consumption,

'000 tonnes 1 831.00 903.00 1047.00 861.00 887.07 904.34Poultry Net Trade

Balance, '000 tonnes 1 -124.00 -163.00 -352.00 -319.00 -237.03 -276.96

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

Venezuela Pork Production, Consumption & Trade

Pork Production, '000

tonnes 1 0.00 125.00 125.00 125.00 125.03 127.07Pork Consumption, '000

tonnes 1 130.00 129.00 133.00 129.00 134.04 135.83Pork Net Trade Balance,

'000 tonnes 1 0.00 -4.00 -8.00 -6.32 -9.01 -8.76

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

Venezuela Beef & Veal Production, Consumption & Trade

Beef & Veal Production,

'000 tonnes 1 395.00 365.00 305.00 290.00 348.03 342.22Beef & Veal

Consumption, '000

tonnes 1 443.00 547.00 615.00 508.00 500.02 492.19Beef & Veal Net Trade

Balance, '000 tonnes 1 -54.00 -186.00 -320.00 -250.00 -159.43 -157.31

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

Risks To Outlook

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

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