Venezuela agribusiness report q3 2012

ƒ Beef production is forecast to fall by 13.4% y-o-y in 2011/12 to 290,000 tonnes as the sector continues to be held back by a lack of profitability owing to high input costs and governm

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REPORT Q3 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Production Date: July 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Venezuela Agriculture Swot 7

Venezuela Business Environment SWOT 7

Supply Demand Analysis 8

Venezuela Livestock Outlook 8

Table: Venezuela Poultry Production & Consumption, 2011-2016 9

Table: Venezuela Pork Production & Consumption, 2011-2016 10

Table: Venezuela Beef & Veal Production & Consumption, 2011-2016 10

Table: Venezuela Poultry Production & Consumption, 2008-2012 13

Table: Venezuela Pork Production & Consumption, 2008-2012 13

Table: Venezuela Beef & Veal Production & Consumption, 2008-2012 14

Venezuela Grain Outlook 14

Table: Venezuela Wheat Consumption, 2011-2016 16

Table: Venezuela Corn Production & Consumption, 2011-2016 16

Table: Venezuela Wheat Consumption, 2008-2012 20

Table: Venezuela Corn Production & Consumption, 2008-2012 20

Venezuela Coffee Outlook 20

Table: Venezuela Coffee Production & Consumption, 2011-2016 22

Table: Venezuela Coffee Production & Consumption, 2008-2012 25

Commodity Price Analysis 27

Monthly Softs Update 27

Cocoa: 2012 Outperformance To Continue 28

Coffee: Next Support At USc130.0/lb 29

Palm Oil: False Break? 31

Sugar: More Fears Over Brazilian Crop 32

Cotton: Technical Bounce Over? 33

Table: Select Commodities: Performance & BMI Forecasts 34

Monthly Grains Update 35

Wheat - Deteriorating Supply Prospects 36

Corn - Anticipating US Supply Downgrades 37

Soybean - Range Trading Ahead 38

Rice - Ample Supply To Keep Prices In Check 40

Table: Select Commodities: Performance & BMI Forecasts 41

Upstream Analysis 42

Tractor Growth In The Americas Driven By Brazil And Argentina 42

GM Plantings Growth To Slow, Americas To Remain The Largest Exporter 45

Americas Fertiliser Quarterly 49

Downstream Analysis 51

Food 51

Table: Canned Food Value/Volume Sales - Historical Data & Forecasts 53

Table: Fish 53

Edible Oil 54

Table: Oils & Fats 54

Confectionery 56

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts 56

Drink 57

Alcoholic Drinks 57

Table: Alcoholic Drink Value/Volume Sales - Historical Data & Forecasts 57

Table: Wine 58

Soft Drinks 59

Table: Soft Drink Value Sales - Historical Data & Forecasts 59

Hot Drinks 60

Table: Hot Drink Value Sales - Historical Data & Forecasts 60

Mass Grocery Retail 61

Table: Mass Grocery Retail Value Sales by Format - Historical Data & Forecasts 61

Table: Sales Breakdown by Retail Format Type 62

Trade 62

Table: Trade Indicators - Historical Data & Forecasts 62

Country Snapshot: Venezuela Demographic Data 63

Table: Venezuela's Population By Age Group, 1990-2020 ('000) 64

Table: Venezuela's Population By Age Group, 1990-2020 (% of total) 65

Table: Venezuela's Key Population Ratios, 1990-2020 66

Table: Venezuela's Rural And Urban Population, 1990-2020 66

BMI Forecast Modelling 67

How We Generate Our Industry Forecasts 67

Executive Summary

BMI View: Food shortages continue to affect Venezuelan consumers in the run-up to the next

presidential election, set for October Milk and sugar were top of a June index of food scarcity in

Venezuelan capital, Cáracas Beef, chicken, rice and vegetable oil have also been in short supply The Venezuelan Central Bank's scarcities index - which monitors the availability of food and other basic supplies - was up by 24% year-on-year in May Shortages are particularly acute in government-

controlled shops, which provide affordable food to low-income households The shortages have seen renewed criticism of the government's price control policies, which have seen agricultural producers' and manufacturers' outputs fall owing to a lack of profitability As a result, reliance on imports continues to grow, despite President Hugo Chávez's emphasis on the importance of food sovereignty Venezuela now imports more than 70% of its food supply, according to the Food and Agriculture Organization

Key Forecasts

ƒ Venezuelan consumer price inflation has been declining since the beginning of the year,

reaching 23.6% year-on-year (y-o-y) in April from 29.0% at the end of 2011 However, BMI

believes that inflation will tick up later this year due to demand-side inflationary pressure, as the administration is likely to increase its monetary stimulus to boost domestic demand ahead of the October elections As such, we are sticking to our 26.0% end-year consumer price inflation for

2012 We see GDP growth coming in at 3.5% y-o-y in 2012 and 2.2% y-o-y in 2013

ƒ Beef production is forecast to fall by 13.4% y-o-y in 2011/12 to 290,000 tonnes as the sector continues to be held back by a lack of profitability owing to high input costs and government price controls, along with increased competition from imports from Brazil and Nicaragua A steep rise in imports is, however, expected to support domestic beef demand, which we see growing by 0.9% y-o-y to 560,000 tonnes in 2012

ƒ In 2011/12, we see corn production falling by 15.2% y-o-y to 1.45mn tonnes as poor weather, poor agricultural policies, a lack of fertiliser and low profitability continue to blight the sector In 2012/13, we believe that output will recover by 22.1% y-o-y to 1.77mn tonnes Output is expected to be aided by the government's announcement that it will assist corn producers through the winter crop cycle by providing fertiliser and seeds through the state-owned

Agropatria chain of agricultural supply shops Out to the end of our forecast period in 2015/16,

we expect corn output to grow by 18.7% on the 2010/11 level to reach 2.03mn tonnes

ƒ We estimate that coffee consumption shot up by 49.1% to 1.31mn bags in 2011 owing to a spike

in imports to 622,000 bags, from 316,000 bags the previous year Imports are forecast to reach 606,000 bags in 2012, and we see consumption increasing marginally to reach 1.32mn bags Out

to 2016, we see demand growing by 4.5% on the high 2011 level to 1.36mn bags

Key Trends And Developments

ƒ In April 2012, Venezuelan Foreign Minister Nicolás Maduro and his Colombian counterpart, María Holguín, signed a partial bilateral trade agreement at the Sixth Summit of the Americas held in Cartagena, Colombia The agreement establishes a new model for trade relations between the two nations, covering preferential trade agreements, sanitary norms, technical norms, rules of origin, trade protection and the mechanism for the settlement of disputes The agreement also includes plans to increase joint infrastructure and agricultural production The pact signals the continued improvement of diplomatic relations between the two countries, which were suspended in 2009 owing to a trade dispute The increased availability of imports should help to ease continued food shortages in Venezuela

ƒ Also in April 2012, the Venezuelan government's National Superintendence of Securities authorised an issue of agricultural bonds by the National Development Fund (Fonden) The bonds, worth VEF7bn (US$1.63bn) will be purchased by Venezuelan banks and will be due in 2015-2017 The banks in turn will provide funds for agricultural programmes Fonden was established in 2005 to fund the government's investment projects and has to date received US$95bn in funds, according to Jorge Giordani, the minister of finance and planning

ƒ Despite ongoing price controls and supply issues, the retail sector is forecast to grow strongly over the coming years There are currently 162,054 retail outlets selling food and drink in the country, including supermarkets, government-owned shops and small-scale convenience stops There are more than 15,500 government-run MERCAL shops, which sell goods at subsidised prices The number of convenience stores is forecast to expand quickly as petrol stations begin to incorporate shops into their facilities

ƒ In March 2012, the Venezuelan government announced funding of VEF725mn (US$168mn) to assist the country's sugar sector The funding will be targeted at increasing output at government-owned mills Ten of the 16 operating sugar mills are currently state-controlled Price controls, fear of expropriation and increasing competition from imports have constrained domestic production in recent years Production has fallen from 780,000 tonnes in 2007/08 to a forecast 503,000 tonnes in 2011/12

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

company: Venezuela Coffee: Shops and Services The new chain will be an affiliate of the Venezuelan Coffee Corporation and will be responsible for facilitating and coordinating

economic activities relating to the coffee industry, including cultivation, processing, sales and exports

SWOT Analysis

Venezuela Agriculture Swot

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

agricultural products

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

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

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 investing in increasing production

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

after years of decline

ƒ The government has introduced a number of programmes, including financing and subsidies, to help small holders increase production

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

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

Venezuela

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

Venezuela Business Environment SWOT

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

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

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

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

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

Threats ƒ 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

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

Supply Demand Analysis

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 2012 imports are forecast to account for 53% 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; some formerly productive ranches have seen production evaporate under the direction of inexperienced new managers

We believe that beef production fell in 2010/11 as high energy and feed costs led to a lack of profitability for producers Furthermore, heavy rains and mudslides from February-May 2011 flooded pasture lands in north-west Venezuela, affecting livestock production We estimate that output dropped by 3.7% year-on-year (y-o-y) to 335,000 tonnes We forecast that production will fall by a further 13.4% y-o-y to 290,000 tonnes in 2011/12 as the sector continues to be held back by a lack of profitability owing to high input costs and government price controls, along with increased competition from imports from Brazil and Nicaragua Venezuela now depends on imports for more than half of beef consumed, according to

Instituto Nacional de Estadística, the national statistics institute The government has promised credits to cattle ranchers in 2012 and, if granted, this could provide a much-needed boost to the sector 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 forecast production reaching 321,000 tonnes, still down by 4.2% on the 2010/11 level

Poultry production has weathered the storm of Chávez's reforms somewhat better than the cattle-rearing sector The poultry sector accounts for an estimated 30% of total agricultural GDP and almost 50% of animal production The poultry industry is vertically integrated and efficient, and producers are constantly working to modernise and improve their production methods Despite these strengths, the sector has been hit by the poor economic climate, continued high input costs and the increasing competition from imports from Brazil and Argentina Producers continue to be affected by the state-controlled price regime, which

is squeezing profitability The state-regulated price for poultry was increased in March 2010 to

VEF13.83/kg; this provided some relief for producers but has done little to stem the downwards spiral

We estimate that output fell by 3.8% y-o-y in 2010/11 to take production to 625,000 tonnes, and we forecast a further decline of 3.0% in 2011/12 to 606,000 tonnes Out to 2016, we see production

increasing by 4.5% on 2011 output to reach 653,000 tonnes, still some way below the level seen in the early years of the 21st century

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

in recent years We see production increasing by 4.0% on the 2011 level over our forecast period to reach 130,000 tonnes in 2016

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

In 2011, annual per capita consumption stood at an estimated 28.7kg for poultry, 19.2kg for beef and 5.1kg for pork While price controls have increased demand, they have worked against investment in production and led to an increasing reliance on imports In 2012, imports are forecast to reach 275,000 tonnes for poultry and 325,000 tonnes for beef

We now believe that demand for poultry fell by 3.2% y-o-y to 859,000 tonnes in 2011 on the back of lower production Imports estimated at 234,000 tonnes supported domestic demand We see consumption growing by 1.6% in 2012 to 872,700 tonnes Out to 2016, we forecast that demand for poultry will grow

by 10.5% on the 2011 level to reach 949,300 tonnes

In 2011, the reliance on imports continued to shore up beef consumption, and we estimate that

consumption increased by 6.1% y-o-y to 555,000 tonnes High import prices and a drop in domestic production are likely to constrain beef consumption, and we therefore currently forecast demand to grow

by 0.9% y-o-y in 2012 to 560,000 tonnes Despite the increase in imports, consumption continues to be constrained by limited availability Out to 2016, demand for beef is forecast to grow by 7.4% on the 2011 level to 596,100 tonnes

Pork consumption is much lower than that of poultry and beef Consumption grew by 8.4% from

2006-2011 to reach 141,000 tonnes We forecast growth of 3.5% between 2006-2011 and 2016, fuelled primarily by population increases, to take consumption to 146,000 tonnes at the end of our forecast period

Table: Venezuela Poultry Production & Consumption, 2011-2016

Table: Venezuela Pork Production & Consumption, 2011-2016

Pork Production, '000 tonnes 1 125.0 126.0 128.0 129.0 129.0 130.0Pork Consumption, '000 tonnes 1 141.0 141.7 142.4 143.7 144.8 146.0

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

Table: Venezuela Beef & Veal Production & Consumption, 2011-2016

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

Chávez Unveils Plans To Increase Livestock Production

In late January 2012, President Chávez announced the relaunching of the Gran Misión Agro Venezuela, his government's plan to boost agricultural production and improve food security in the country As part

of the relaunch, Chávez announced the creation of the Organo Superior de Agricultura, a new body which will be headed by Chávez himself, along with Elías Jaua, the vice president and new minister of

agriculture One of the main goals of the Organo Superior will be to increase land for livestock

production, which currently stands at just 800,000 hectares (ha), with the aim of growing the national herd to 20mn head by 2019 Chávez called for the cooperation of local government to achieve these aims

He also promised a further VEF114mn (US$26.5mn) in investment to improve the agricultural transport network

Increased investment in the sector is expected to provide some relief to producers, who have been hit by

high prices and competition from imports However, BMI believes that it will also be necessary to

address structural problems within the sector if significant gains in production are to be made In

particular, farmgate price controls and high input costs are severely impacting the profitability of the sector and providing significant disincentives for producers

Chávez Orders Further Vestey Land Seizures

On November 1 2011, Chávez announced the immediate expropriation of 290,000ha of farmland from 11

ranches owned by Agroflora, a subsidiary of the British beef producing firm Vestey Group The

company is owned by Lord Vestey's family, who first began trading in Venezuela in 1909 Agroflora is

engaged in the production of cattle, beef and buffalos Chávez announced the news during a live

broadcast on state television channel Vive, claiming that under the terms of the Food Security and

Sovereignty Law, land is 'social property' Chávez said that the forced expropriation came following the breakdown in negotiations with Agroflora over a compensation agreement for the land

Previously, in October 2010, Chávez ordered the seizure of 300,000ha of land and 120,000 head of cattle

owned by Compañía Inglesa, the Venezuelan arm of Vestey Group The announcement was made on

Chávez's weekly programme, 'Aló Presidente', and came just days after his United Socialist Party of Venezuela failed to maintain his powerful two-thirds supermajority in local elections owing 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

The Vestey Group was also targeted by Chávez's government in 2005, when four farms were

nationalised, including the 33,600-acre Charcote estate south of Caracas, with 13,000 head of cattle

Beef Price Rise Brings Some Relief For Producers

The Venezuelan livestock sector continues to be held back by the government-controlled price regime, which is squeezing profitability and holding back production The mandated price for beef was last reviewed in 2008; with input costs rising, producers have long been pressing for the maximum sale and retail prices to be increased In June 2011, the government announced an increase of 29.2% in the cost of

a kilo of prime beef, from VEF17.60 to VEF22.74 The maximum prices of second- and third-class beef, live cattle and carcass meat were all raised The news will be welcomed by producers; however, some producers' representatives have argued that the price adjustments do not go far enough to restore

profitability to the sector

Improved Relations With Colombia Ease Beef Supply Restrictions

The long-running trade dispute between President 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 the country 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 Fuerzas Armadas Revolucionarias de Colombia 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 late 2009, with Venezuelan troops reportedly blowing up foot bridges between the two countries in mid-November

While we do not believe 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 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 The deal opens the way for Colombia to export 6,500 head 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

In April 2012, Venezuelan Foreign Minister Nicolás Maduro and his Colombian counterpart, María Holguín, signed a partial bilateral trade agreement at the Sixth Summit of the Americas held in Cartagena, Colombia The agreement establishes a new model for trade relations between the two nations, covering preferential trade agreements, sanitary norms, technical norms, rules of origin, trade protection and the mechanism for the settlement of disputes The agreement also includes plans to increase joint

infrastructure and agricultural production The pact signals the continued improvement of diplomatic relations between the two countries, which were suspended in 2009 owing to a trade dispute The pact is expected to provide much-needed relief for the food shortages and spiralling prices that have gripped Venezuela

Butchers Behind Bars

Controversy hit the beef sector in 2010 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 at the time allowed 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 said that they have to pay around VEF14 for the meat, leaving them unable to cover the costs of running their business Eight butchers have been found guilty, fined US$3,000 and put on parole; they also must 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

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 The Associated Press reported that Chávez said that poor farmers needed protection from gangs loyal to wealthy landowners The government has said that 300 poor farmers were killed by the gangs over the past decade, a claim the ranchers deny Ranchers in turn said 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

Table: Venezuela Poultry Production & Consumption, 2008-2012

Poultry Production, '000 tonnes 1 695.0 680.0 650.0 625.0 606.0Poultry Consumption, '000 tonnes 1 1,047.0 861.0 887.0 859.0 872.7

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

Table: Venezuela Pork Production & Consumption, 2008-2012

Table: Venezuela Beef & Veal Production & Consumption, 2008-2012

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 prices are subjected to further controls as Venezuela's economy contracts, production could fall further as more operators leave the sector Another factor that will have a great influence over demand for livestock

is the price of oil With Venezuela so reliant on its hydrocarbons exports, funds for government schemes

to increase production and provide affordable meat to the masses will be dependent on oil revenues being sufficient If the price of oil falls again, demand for meat would likely be hit

Venezuela Grain Outlook

BMI Supply View: Venezuela is a major net importer of grains 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, with the vast majority grown in the central states of Barinas, Portuguesa and Guárico While the area planted to corn has risen by around 50% since the end of the 1990s, Venezuela's agricultural sector remains relatively undeveloped, and there is still plenty of room for further expansion Around 65% of the area planted is white corn for human consumption; the remainder is 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 Since then, the introduction regulated farmgate prices and retail prices has hit

profitability and seen output decrease further (see below for further comment) Poor weather conditions,

land expropriations and the seizure in October 2010 of Agroisleña, the main private sector distributor of

agricultural inputs, agricultural services and financing, have added to the difficulties facing producers

Following droughts, heavy rains in December 2010 hit the 2010/11 harvest In response to the widespread flooding, in January 2011 President Hugo Chávez unveiled the Gran Misión Agro Venezuela (Great Venezuelan Agricultural Mission), which formed part of his government's two-year plan for the

agricultural sector, the Plan Bienal para la Producción de Alimentos 2011-2012 The plan set out

ambitious plans for agricultural production, including boosting white and yellow corn by 61% and 110%, respectively, over the course of two years

The goals for the first year of the project were not met, however Further rains caused damage to crops, and the sector has continued to be held back by shortages of technical staff and equipment, delays in financing to farmers and inefficient production techniques In 2010/11, we estimate that corn production rose by just 4.7% year-on-year (y-o-y) on the low 2009/10 harvest to 1.71mn tonnes In 2011/12, we see production falling by 15.2% y-o-y to 1.45mn tonnes as poor weather, poor agricultural policies, a lack of fertiliser and low profitability continue to blight the sector In 2012/13, we believe that output will

recover by 22.1% y-o-y to 1.77mn tonnes Output is expected to be boosted by the government's

announcement that it will assist corn producers through the winter crop cycle by providing fertiliser and

seeds through the state-owned Agropatria chain of agricultural supply shops

Out to the end of our forecast period in 2015/16, the level of production will be highly reliant on the government's ability to support the agricultural sector Without continued support, much of the newly opened farmland will very likely return to fallow Despite this risk, we expect output to rise and forecast production to grow by 18.7% on the 2010/11 level to reach 2.03mn 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 (42%) and Canada (52%) In March 2011, wheat was added to the list of goods classified by the government as essential or staple, which helps to expedite import procedures Venezuelan wheat imports totalled an estimated 1.59mn tonnes in 2011/12 Imports are forecast to remain at a similar level

in 2012/13; however, importers have faced problems relating to rising international prices, limitations on accessing foreign currency and delays in obtaining import approval

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

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

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

arepa, a flat unleavened bread Total corn consumption rose by an estimated 97.1% from 2006 to 2011,

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

In 2010/11, we estimate that corn consumption remained stable at 3.40mn tonnes We forecast that demand will grow only marginally in 2011/12 to reach 3.42mn tonnes Yellow corn for feed is forecast to account for around 1.9mn tonnes, with the remainder for human consumption Out to 2016, we believe consumption will increase, as corn is one of the cheapest foods available and the price is kept down by

government price controls Import controls for feed corn have also been relaxed Growth will, however,

be more moderate than during the previous five-year period; out to 2016 we forecast demand rising by 7.0% on the 2011 level to take consumption to 3.64mn tonnes

Wheat 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 Pasta imports increased to an estimated 8,600 tonnes in 2011, up from an average 3,490 tonnes from 2007-2010 As a result of rising wheat prices on the international market, we estimate that consumption declined by 3.2% y-o-y in 2011 to 1.50mn tonnes We see consumption falling by a further 2.5% y-o-y in 2012 to 1.46mn tonnes However, the expansion in production of two major millers and pasta manufacturers is likely to lead to increased availability and higher consumption We see demand recovering to 1.50mn tonnes in 2013; out to 2016,

we believe that consumption will grow by 10.9% on in 2011 level to 1.66mn tonnes

Table: Venezuela Wheat Consumption, 2011-2016

Wheat Consumption, '000 tonnes 1 1,500.0 1,462.5 1,499.1 1,544.0 1,602.7 1,663.6

Notes: f BMI forecasts Sources: 1 USDA

Table: Venezuela Corn Production & Consumption, 2011-2016

Corn Production, '000 tonnes 1 1,710.0 1,450.0 1,770.0 1,850.0 1,935.0 2,030.0Corn Consumption, '000 tonnes 1 3,400.0 3,417.0 3,434.1 3,489.0 3,562.3 3,637.1

Notes: f BMI forecasts Sources: 1 USDA

Chávez Government Enters Gruma Partnership

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

Mexican firm Gruma, the world's largest producer of corn flour for tortillas The Venezuelan government had previously stated its intention to nationalise the assets of Gruma subsidiary Monaca The

announcement, which resulted from a meeting between Chávez and Mexican President Felipe Calderón, will see the establishment of two joint ventures, one focusing on the production of corn flour and rice, and

the second producing pasta, wheat flour and oatmeal The move was welcomed by Calderón as providing

a stronger legal platform for encouraging other Mexican firms to invest in Venezuela

The relationship between the Venezuelan government and Gruma was a turbulent one throughout 2010

In January of that year, Chávez announced that his government would temporarily take control of

Gruma's unit, following the arrest of one its major shareholders under charges of financial irregularities Subsequently, in May 2010, the government announced the expropriation of Monaca following

accusations that Gruma had refused to sell flour during a national shortage 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

Gran Misión Agro Venezuela Programme Fails To Deliver

In January 2011, Chávez's government launched Gran Misión Agro Venezuela, a new programme

designed to support the country's agricultural production as part of a two-year plan for the sector The programme aims to boost domestic production and lessen reliance on imports, thus improving

Venezuela's food security Misión Agro Venezuela was designed to provide low-interest loans, machinery and technical assistance to the country's agricultural producers - from small to large-scale landowners VEF9.9bn (US$2.3bn) was committed to the programme

During 2011, data from the Ministry of Agriculture and Lands indicate that 75,000 producers received VEF2.7bn (US$627.9mn) in order to boost production However, data also showed that the Gran Misión had failed to reach its objectives for its first year of operation with regards to grain production Yellow corn production reached only 62.1% of the target of 1.39mn tonnes for 2011, and white corn production hit only 50.0% of official targets

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

Despite the plan's failure to reach its first-year targets, in late January 2012 Chávez announced the

relaunching of the Gran Misión Agro Venezuela on his radio and television show 'Aló, Presidente' Chávez called for the cooperation of local government to bring disused agricultural land back into

production He also promised a further VEF114mn (US$26.5mn) in investment to improve the

agricultural transport network

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 As a result,

farmers say, 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 say that a lack of access to fertiliser is damaging their harvest The negative impact of the drugs trade upon grains production is a further

obstacle to Venezuela's 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 subsequent 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, with some arguing that the government's priority should be revising food price controls which 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

Government Sparks Empresas Polar Controversy

In September 2011, Empresas Polar, Venezuela's largest food and drinks company, struck back at

government accusations that its Harina Pan pre-cooked corn flour is no longer a Venezuelan brand José Villalba, the president of the Autonomous Service for Intellectual Property, a government office which registers trademarks and invention patents, had previously stated that the Harina Pan brand, which is

emblematic of the production of the traditional arepa dish, is no longer Venezuelan, as the company had

sold the rights to the Canadian firm Deutsche Tran Trustee Inc

In response, Empresas Polar published a press release countering the claim and stating that, 'Harina Pan has always been and always will be a Venezuelan product' The company claimed that the government was seeking to create confusion among the product's customers in order to detract attention from the problems facing the producers of white corn, who are struggling to source domestic raw materials, as well

as the difficult situation facing manufacturers of pre-cooked corn flour, who are incurring losses as a result of the government's price controls The dispute highlights the widespread discord surrounding the lack of profitability resulting from the fixed price regime, as well as the politics of nationalism that continue to exert a strong force over the agro-industrial sector

Government Seizes Agroisleña

In late September 2010, the government of Hugo Chávez announced the seizure of Spanish-owned Agroisleña Agroisleña was 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 country's 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

Following its nationalisation, Agroisleña was renamed Agrotiendas and managed by the Agricultural Inputs, Supplies and Services Trading Company (Ecisa), which is part of the Ministry of Agriculture and Lands Despite Ecisa's goals to strengthen the distribution model for the agricultural sector, Ministry of Agriculture data indicates that the Agrotiendas have been hit by limited supply, owing to lack of

transportation equipment and poor cold storage facilities This has represented a further obstacle for Venezuela's grain producers, who are already struggling to cope with rising prices and farmgate price controls

In March 2012, it was reported in the local press that the Supreme Court had granted an application seeking to annul the expropriation of Agroisleña

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 in 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, by 28% in September 2010 and by 30% in May

2011 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 2011/12, corn imports are forecast to reach at 1.60mn tonnes, a similar total to that seen in 1997/98 In addition, Venezuela is expected to import some 1.55mn tonnes of wheat

Table: Venezuela Wheat Consumption, 2008-2012

Wheat Consumption, '000 tonnes 1 1,500.0 1,550.0 1,550.0 1,500.0 1,462.5

Notes: f BMI forecasts Sources: 1 USDA

Table: Venezuela Corn Production & Consumption, 2008-2012

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 However, as with other agricultural sectors, 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, heavy rains at the beginning of 2011 disrupted the flowering process, leading to lower yields Furthermore, the

area harvested declined by an estimated 12% year-on-year (y-o-y) to 180,000 hectares owing to the decreased profitability of coffee production We estimate that production declined by a further 13.8% y-o-

y to 625,000 bags in 2010/11, with domestic demand expected to outstrip supply for the third successive year The 2011/12 harvest, however, is likely to benefit from the renewal of fertilisation programmes as part of the government's agricultural plan The increase in farmgate and retail prices in November 2011 and new legislation allowing the coffee industry to have 30% of production in non-regulated products will also aid the sector We currently forecast a y-o-y increase of 35.2% to take output to 845,000 bags in 2011/12 Production is forecast to increase by a further 3.6% y-o-y in 2012/13 to reach 875,000 bags, provided weather conditions remain favourable

Government support for smallholder coffee growers, who make up the majority of farms, could see production grow once again over the late years of our forecast period In 2015/16, we currently see production reaching 925,000 60kg bags, 48.0% higher than the low level seen in 2010/11 This, however, will be dependent on government policy, particularly price controls If the government relaxes price controls further, interest in investing in production of Venezuela's high-quality coffee would most likely increase, leading to greater production than we are currently expecting Conversely, if price controls continue to squeeze profits, farmers may switch to other less tightly controlled crops

BMI Demand View: Coffee consumption has grown strongly in recent years, rising by an estimated

48.3% over 2006-2011 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 subsidised 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 come in at 875,000 bags in 2010 Supply shortages were, however, eased by a sharp rise in imports to an estimated 622,000 bags in 2011,

up from just 5,000 bags as recently as 2009 (see below for further analysis) Correspondingly, we

estimate that domestic consumption shot up by 49.1% to 1.31mn bags in 2011 Imports are forecast to reach 606,000 bags in 2012, and we see consumption increasing marginally to reach 1.32mn bags Out to

2016, we see demand growing by 4.5% on the high 2011 level to 1.36mn bags

Table: Venezuela Coffee Production & Consumption, 2011-2016

Coffee Production, '000 60kg bags 1 625.0 845.0 875.0 890.0 910.0 925.0Coffee Consumption, '000 60kg bags 1 1,305.0 1,315.4 1,323.3 1,336.6 1,349.9 1,363.4

Notes: f BMI forecasts Sources: 1 USDA

Price Rises Bring Relief To Squeezed Coffee Sector

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 However, in November 2011, the Venezuelan

government announced an increase of 60.6% in the fixed price paid to producers for Good Washed 'A' green coffee, from VEF747 per quintal (45kg) to VEF1,200 per quintal Good Washed 'B' rose by 56.3% from VEF691 to VEF1,080, and Good Washed 'C' increased by 57.3% from VEF623 to VEF980 The retail price for both coffee beans and ground coffee increased by 55.7% to VEF18.45 per kilo, from VEF11.85 previously

The sector has seen its profitability eroded through increases in the prices of packaging, parts and the increase in the farmgate price for green coffee However, the expropriation of the two main coffee-

producing companies, Fama de América and Café Madrid, has enabled production to continue despite

the squeezed profit margins The increase will bring some relief to coffee producers who have seen their profit margins slashed by rocketing inflation and rising production costs However, many small farmers and processors have claimed that the increases are insufficient to provide adequate returns

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 'A' grade domestic coffee

is now fixed at US$279 (VEF1,200) in neighbouring Colombia, a quintal of Venezuelan coffee is sold at US$465-US$698 Although average prices of coffee on the global market are forecast to remain lower through 2012 and 2013, the gap is still considerable and has discouraged investment in coffee production

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

As a result of falling domestic output, the government has had to resort to increased imports to guarantee supply, with imports rocketing to an estimated 622,000 bags in 2010/11 and a forecast 606,000 bags in

2012 Much of this has come from Brazil and Nicaragua This has further exacerbated tension in the sector, with producers claiming that the government is effectively subsidising foreign coffee producers, as

the price paid for imported coffee can be more than 50% more than the fixed price for domestic

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 plan 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

Despite the Chávez administration's goal to attain self-sufficiency in food production, government

mismanagement of the sector, as well as adverse weather conditions, have seen production dwindle and 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 2010/11, imports increased to an estimated 622,000 bags, primarily from Brazil and Nicaragua

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

'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's 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

Nationalisation Of Coffee Sector Continues

At the beginning of August 2009, the Venezuelan government announced that it would expropriate coffee processing firm Fama de América and take a 50% share in Marcelo y Rivero (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 80% of the country's coffee roasting capacity, with the remaining 20% owned by small private companies The government is hoping

to use its new power in the coffee sector 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

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

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

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

Table: Venezuela Coffee Production & Consumption, 2008-2012

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

Commodity Price Analysis

Monthly Softs Update

Recent moves in the softs markets have confirmed our overall bearish view on the complex However, many softs prices are close to long-term support, and we expect some consolidation in the coming weeks Sustained breaks below these levels would be an even more bearish signal

We expect cocoa to continue to outperform the softs complex in the coming weeks, as it will be the only market to experience tightening in the second half of 2012 This will be due to lower production from major producers in West Africa on the back of disease and weather problems

We see more room for coffee to decrease as the next significant support level comes in 13.3% lower than current levels

For sugar, we believe the reverse of recent break below USc20.00/lb is bullish in the short term This is linked to remaining uncertainties over the recovery of the Brazilian crop

Commodity prices in general could continue to be affected by bearish investor sentiment linked to anxiety over eurozone debt and renewed US dollar strength later in the year

Cocoa: 2012 Outperformance To Continue

Front-month cocoa continues to form a base, having respected a tight range since the start of the year With global supply heading into a seasonal trough and prospects for the West African crop slightly weaker, we expect cocoa prices to outperform the wider soft commodity index in the coming months Our core scenario is for continued trade in the GBP1,350-1,600/tonne range, with break-out risks slanted to the upside While short-term prospects are fairly positive, our medium-term expectation remains for lower prices

Consolidation In Place

Front-Month LIFFE Cocoa, GBP/tonne (Weekly Chart) & RSI (Below)

Source : Bloomberg, BMI

Indeed, we continue to forecast an average of GBP1,450/tonne in 2012 and GBP1,275/tonne in 2013 The global market will remain well supplied over the medium term as high prices in recent years have

encouraged significant production improvements, particularly in key producers Côte d'Ivoire and Ghana

The current seasonal tightness of supply should ease in Q412, following the start of the West African 2012/13 harvest in October, which will drag prices lower again

Coffee: Next Support At USc130.0/lb

Front-month coffee looks to have formed a temporary base around USc150.0/lb as the weekly relative strength index has reached a historical low and remained in oversold territory for a couple of weeks

Looking To Support

Front-Month ICE Coffee, USc/lb (Monthly Chart) & RSI (Below)

Source : Bloomberg, BMI

However, we still see some room for prices to trade lower as the next significant support comes at around USc130.0/lb Overall, prices should find a base in the USc135-150/lb area A key reason for this is that

we see a divergence between non commercial net speculative positions for coffee and price levels as the last time net specs were this low (in 2008), coffee prices were trading at USc120.0/lb

Bearish Sentiment Getting Overstretched

Front-Month ICE Coffee, USc/lb & Non Commercial Net Long Speculative

Positions

Source : Bloomberg, BMI

Ultimately, the global coffee market is forecast to return to a surplus of around 9.7mn bags in the 2012/13 season (which begins in April) as Brazil begins a strong up-year harvest Global production will also be boosted by growth in Vietnam and eventually Colombia, for which we forecast 6% output expansion in 2012/13 Thus, we see downside risks to our forecast for average prices of USc200/lb in 2012 and

USc180/lb in 2013

Palm Oil: False Break?

Three-month palm oil continued to trade lower in June after a seven-month rally Prices even broke term support at MYR3,000/tonne as the commodity complex lurched lower on global growth concerns and data revealed that import demand from China took a hit in May Thus, the global crude palm oil market should remain well supplied in the 2011/12 season, which will most likely keep a lid on prices Although the market is expected to tighten in 2012/13 as demand picks up again, a possible decrease in Indonesia's crude palm oil export tax should prevent a sustained price rally We forecast palm oil prices to average MYR3,200/tonne in 2012 and MYR3,220/tonne in 2013

long-Broken Long-Term Support

Front-Month MDE Palm Oil, MYR/tonne (Weekly Chart) & RSI (Below)

Source : Bloomberg, BMI

Sugar: More Fears Over Brazilian Crop

Front-month sugar broke below the USc20.00/lb level in June but rapidly recovered as unfavourable weather is threatening the recovery in Brazilian yields, on the back of delays in the country's replanting programmes Also, delays in loading at the country's main port of Santos linked to heavy rains could disrupt exports and create temporary tightness in the market

Reversed Break

Front-Month ICE Sugar, USc/lb (Weekly Chart) & RSI (Below)

Source : Bloomberg, BMI

Nonetheless, production increases are expected from other large exporters (including Thailand and Australia) for the 2012/13 season, and we forecast the global sugar market to register increased surpluses

in both 2011/12 and 2012/13 at 11.1mn tonnes and 15.5mn tonnes respectively This underpins our view

of lower average prices in 2012 at USc22.50/lb and 2013 at USc21.50/lb

Cotton: Technical Bounce Over?

Front-month cotton recovered strongly in June trading back towards the upper bound of the downtrend channel at around USc90.00/lb This bounce is mainly technical as the weekly relative strength index had sunk into oversold territory for the first time since 2008 Also, we called for a short-term rebound as historically low prices are encouraging textile producers to increase their share of cotton use compared to normally cheaper synthetic fibres

Respecting The Trend

Front-Month ICE Cotton, USc/lb (Weekly Chart) & RSI (Below)

Source : Bloomberg, BMI

Ultimately, prices should remain subdued as we forecast another strong global surplus of 10.7mn bales in 2012/13, compared to a 15.6mn tonne surplus in 2011/12 This will come as the fall in global demand will compensate for subdued growth in production We note some downside risks to our average price forecasts of USc95.00/lb for 2012 and USc105/lb for 2013

Table: Select Commodities: Performance & BMI Forecasts

2013 (BMI ave)

Cocoa (London) GBP/tonne 10.0 -18.7 1,863 1,491 1,450 1,275

Corn USc/bushel -6.4 -14.5 680 629 600 575 Cotton USc/lb -14.8 -49.5 138 87.6 95.0 105 Palm Oil MYR/tonne -6.0 -8.2 3,245 3,248 3,200 3,220 Rough Rice US$/cwt -1.0 4.7 15.12 14.56 14.50 14.00 Soybean USc/bushel 20.2 6.8 1,317 1,344 1,250 1,200 Sugar #11 USc/lb -7.8 -21.9 27.10 22.96 22.50 21.50

Source: BMI, Bloomberg