Venezuela agribusiness report q3 2013

12 Table: Venezuela Beef & Veal Production, Consumption & Trade.. 14 Table: Venezuela Poultry Production, Consumption & Trade.. 14 Table: Venezuela Beef & Veal Production, Consumption &

Q3 2013 www.businessmonitor.com

VENEZUELA

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2013

Business Monitor International

© 2013 Business Monitor International

All rights reserved

All information contained in this publication iscopyrighted 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 ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2013

Business Monitor International

© 2013 Business Monitor International

All rights reserved

All information contained in this publication iscopyrighted 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 ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 9

Agribusiness 9

Business Environment 11

Industry Forecast 12

Livestock Outlook 12

Table: Venezuela Beef & Veal Production, Consumption & Trade 13

Table: Venezuela Pork Production, Consumption & Trade 14

Table: Venezuela Poultry Production, Consumption & Trade 14

Table: Venezuela Beef & Veal Production, Consumption & Trade 16

Table: Venezuela Pork Production, Consumption & Trade 16

Table: Venezuela Poultry Production, Consumption & Trade 16

Grains Outlook 17

Table: Venezuela Corn Production, Consumption & Trade 19

Table: Venezuela Wheat Production, Consumption & Trade 19

Table: Venezuela Corn Production, Consumption & Trade 23

Table: Venezuela Wheat Production, Consumption & Trade 23

Coffee Outlook 24

Table: Venezuela Coffee Production, Consumption & Trade 25

Table: Venezuela Coffee Production, Consumption & Trade 29

Commodity Strategy 30

Monthly Grains Update 30

Monthly Softs Update 34

Table: Select Commodities - Performance & BMI Forecasts 43

Table: BMI Commodities Strategy 44

Upstream Analysis 45

Americas GM Outlook 45

Americas Fertiliser Outlook 49

Americas Machinery Outlook 55

Downstream Analysis 62

Food 62

Food Consumption 62

Table: Food Consumption Indicators Historical Data and Forecasts 2010-2017 63

Canned and Prepared Food 63

Table: Canned Food Volume/Value Sales Historical Data and Forecasts 2010-2017 64

Table: Fish Volume Sales, Production and Trade Historical Data and Forecasts 2010-2017 64

Oils and Fats 66

Table: Oils and Fats Volume Sales, Production and Trade Historical Data and Forecasts 2010-2017 67

Confectionery 69

Table: Confectionery Value/Volume Sales Historical Data and Forecasts 2010-2017 69

Drink 70

Alcoholic Drinks 70

Table: Alcoholic Drinks Volume/Value Sales Historical Data and Forecasts 2010-2017 70

Soft Drinks 72

Table: Soft Drinks Value Sales Historical Data and Forecasts 2010-2017 73

Hot Drinks 73

Table: Hot Drinks Value Sales Historical Data and Forecasts 2010-2017 74

Mass Grocery Retail 74

Table: Mass Grocery Retail Sales by Format Historical Data and Forecasts 2010-2017 74

Table: Sales Breakdown by Retail Format Type 75

Regional Overview 76

Regional Overview - Americas 76

Competitive Landscape 82

Table: Venezuela Agribusiness Competitive Landscape 82

Demographic Forecast 83

Table: Venezuela's Population By Age Group, 1990-2020 ('000) 84

Table: Venezuela's Population By Age Group, 1990-2020 (% of total) 85

Table: Venezuela's Key Population Ratios, 1990-2020 86

Table: Venezuela's Rural And Urban Population, 1990-2020 86

Methodology 87

BMI Industry View

BMI View: The victory of Nicolás Maduro of the

ruling Partido Socialista Unido de Venezuela in

April will most probably ensure the continuity of

many of the interventionist policies of Chávez's era.

Price fixing in particular continues to be a source of

woe for producers unable to meet input costs which

are soaring in line with some of the highest rates of

inflation in the world Some respite has arrived in

the form of a 20% rise in the government-fixed price

of food items including beef, chicken and dairy

products, but even this will fall short of the rate of

inflation which is expected to increase 30%

year-on-year in 2013 Inflation is also contributing to the

diminishing purchasing power of Venezuelan

households while foreign currency shortages after a

pre-election spending boom are causing shortages of

some imported goods.

Key Forecasts

■ Corn consumption growth to 2017: 8.5% to 4.17mn tonnes Consumers hit by economic turmoil will

turn to the cheapest staple food, more than compensating for reduced demand from the livestock sector

■ Coffee production growth to 2016/17: 10.6% to 940,000 60kg bags The hike in government prices

and increased investment in small farms will see some recovery in supply

■ Beef production growth to 2017: down 1.9% to 358,000 tonnes High input costs, cheaper Mercosur

competitors and reduced domestic demand will stymie growth

■ BMI universe agribusiness market value: US$4.47bn in 2013 (down 5.0% from US$4.70bn in 2012;

forecast to grow annually by 2.2% on average from 2014 to 2017)

■ 2013 real GDP growth: 2.6% (down from 5.6% in 2012; forecast to grow annually by 3.4% on average

between 2012 and 2017)

■ 2013 consumer price index: 30.0% year-on-year (y-o-y) (up from 20.1% in 2012; forecast to grow

annually by 22.9% on average between 2012 and 2017)

■ 2013 central bank policy rate: 15.5% (up from 15.0% in 2012; forecast to increase to 16.5% in 2014).

Tough Years Ahead

Venezuela - BMI Agribusiness Market Value By

Commodity (As % of total)

Source: BMI

Key Revisions To Forecasts

■ Beef consumption in 2013 to fall to 565,000 tonnes (revised down from a previous forecast of 581,000

tonnes) Consumption is expected to fall due to high costs and reduced supply.

Industry Developments

We expect consumer price inflation in Venezuela to remain elevated over the coming months fuelled by the

February 8 devaluation of the bolívar (see 'New Dual Exchange Rate, Same Old Problems For The Private

Sector', March 22) Inflation reached its highest level in three years in April, coming in at 29.4%

year-on-year (y-o-y), a sharp uptick from 25.1% y-o-y in March Venezuelan residents rely heavily on imports foressential household goods, and we therefore forecast that a weaker currency will drive average inflation of30.0% this year, up from 21.3% last year Moreover, food prices have been particularly sensitive to aweaker bolívar, which we expect will keep social tensions high and continue posing threats to politicalstability through anti-government demonstrations

Venezuela imported about US$8bn in food-related products in 2012, over 17.0% of total imports, meaningthat food prices are particularly susceptible to weaker currency Just in April, food prices rose by 6.4%month-on-month (m-o-m), well above the 4.3% m-o-m increase in the overall consumer price inflationindex

The recent announcement of a 20% rise in the government-fixed price of important foodstuffs includingbeef and chicken by the new government of President Maduro may give some encouragement to producers.The shift in policy came in the wake of a meeting with business leaders which may signal a thaw in

relations with the private sector However, prices for basic goods set artificially low by the governmentwere instrumental in allowing increasing consumption of meat and coffee among lower-income households;increasing prices will make such commodities unaffordable for some Venezuelans

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

left Venezuela a major food importer

■ High food price inflation and frequent supply shortages have dampened growth infood consumption

■ Price controls in place since 2003 squeeze the profits of producers and are adisincentive to investing in increasing production

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

years of decline

subsidies, to help smallholders increase production

■ Falling oil revenue is bringing more attention to increasing agricultural production toreduce the cost of food imports

SWOT Analysis - Continued

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

Business Environment

SWOT Analysis

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

■ Home to some of the largest oil reserves in the world, the Orinoco region will provideopportunities for large-scale investment

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

political environment, could undermine the long-term growth outlook

■ Privatisation ground to a halt under the administration of former President HugoChávez, with the government instead preferring production-sharing agreements toencourage foreign direct investment

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

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

Threats ■ The implementation of stringent foreign currency controls has hit the business

community hard This has restricted import growth, as businesses lack the currency

to purchase raw materials

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

Industry Forecast

Livestock Outlook

BMI Supply View: After strong growth in the 1990s and the first few years of the 21st century, Venezuelanbeef production has gone into reverse in the past few years Venezuela was self-sufficient in beef in 2003,but in recent years the country has become increasingly reliant on imports to meet domestic demand Acomplex system of price controls imposed by the government in 2003 has restricted the profitability oflivestock production in the country The government has aimed to boost production by turning over landjudged as unproductive to landless farmers The project, however, has had mixed results: some formerlyproductive ranches have seen production evaporate under the direction of inexperienced new managers

The sector is held back by a lack of profitability due to high input costs, inflation and government pricecontrols, along with increased competition from imports from Brazil, Colombia and Nicaragua Includinglive animal imports for slaughtering, Venezuela depends on imports for more than half of beef consumed,according to Instituto Nacional de Estadística The lack of profitability is leading producers to leave thesector, and the national cattle herd is estimated to have shrunk by 4.7% year-on-year (y-o-y) in 2012 to12.1mn head As a result, we expect that production will fall by 5.5% in 2013 to 345,000 tonnes

The recent increase by 20% of the state-controlled price for key items of food including livestock productssuch as beef and chicken should help to stall any further declines Indeed, towards the end of our forecastperiod, we expect production to increase as the government makes efforts to lessen the reliance on imports.However, the recovery will be slow, and we forecast production to reach just 358,000 tonnes in 2017, still1.9% down on the 2012 level

Poultry production has weathered the storm of the government's reforms better than the cattle-rearingsector It accounts for an estimated 30% of total agricultural GDP and almost 50% of animal production.Poultry is the most significant component of Venezuela's agricultural output, accounting for 24% in valueterms The poultry industry is organised, vertically integrated and efficient, and producers are constantlyworking to modernise and improve their production methods Despite these strengths, the sector has beenhit by the poor economic climate, high input costs and increasing competition from imports from Brazil andArgentina Producers continue to be affected by the state-controlled price regime, which is squeezingprofitability The state-regulated price for a whole chicken was increased in July 2011 to VEF15.61/kg Thisprovided some relief for producers However, we believe that high input costs and squeezed profitabilitywill see output fall back by 0.8% y-o-y in 2013 to 650,000 tonnes Through to 2017, we see productionexpanding by 6.4% on the 2012 level to 697,000 tonnes

Venezuela produces only small quantities of pork Output has remained stable at around 125,000 tonnes inrecent years We see production dipping by 4.0% y-o-y to 120,000 tonnes in 2013, owing to high inputcosts Over our forecast period, we see production increasing by 4.8% on the 2012 level to reach 131,000tonnes in 2017.

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

demand was driven by a combination of strong, oil-fuelled economic growth and government price controlsmaking staple foodstuffs more affordable After falling sharply in 2003, poultry consumption grew by morethan 50% by 2008 Beef consumption grew by almost 40% between 2004 and 2008 In 2011, annual percapita consumption stood at an estimated 28.7kg for poultry, 19.2kg for beef and 5.1kg for pork Whileprice controls have increased demand, they have worked against investment in production and led to anincreasing reliance on imports In 2012, imports reached an estimated 196,000 tonnes for poultry and220,000 tonnes for beef

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

consumption through our forecast period We see demand falling by 4.2% y-o-y in 2013 to 565,000 tonnes.Out to 2017, we forecast that demand for beef will grow by 3.4% on the 2012 level to 609,800 tonnes

We see poultry consumption dipping slightly by 0.1% y-o-y in 2013 to 850,000 tonnes owing to highercosts and reduced supply By 2017, we forecast demand for poultry will grow by 9.6% on the 2012 level to932,800 tonnes Although moderate, the pace of consumption growth for poultry is still faster than for pork

or beef owing to the comparatively lower cost

Pork consumption is much lower than that of poultry and beef Consumption grew by 9.8% over 2007-2012

to 141,000 tonnes We see consumption falling by 2.0% y-o-y in 2013 to 138,200 tonnes owing to a dip indomestic production and high input costs Out to 2017, we see consumption increasing by 1.3% on the 2012level to reach 142,800 tonnes, fuelled primarily by population increases

Table: Venezuela Beef & Veal Production, Consumption & Trade

Table: Venezuela Pork Production, Consumption & Trade

Pork Consumption, '000 tonnes 1 141.0 138.2 139.4 140.5 141.7 142.8

Table: Venezuela Poultry Production, Consumption & Trade

Poultry Production, '000 tonnes 1 655.0 650.0 665.0 674.0 685.0 697.0 Poultry Consumption, '000 tonnes 1 851.0 850.0 868.7 889.5 910.9 932.8

Beef Cattle Imports Arrive

Another shipment of heifers has arrived from Nicaragua in the latest allocation of livestock in a bilateralagreement between the two countries as part of the national policy AgroVenezuela

It is hoped that this will help to reinvigorate beef production after recent declines in the national herd Intotal 781 high quality, dual purpose heifers arrived in the sea port of Puerto Cabello in May 2013 buildingupon previous deliveries and a further 1000 head are expected in the coming months to reach the agreementtarget of 6000 The cattle were picked out through a four-month selection process

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

Price Rises Bring Some Relief For Producers, None For Consumers

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

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

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

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

Improved Relations With Colombia Ease Beef Supply Restrictions

The long-running trade dispute between Chávez and the previous Colombian president, Álvaro Uribe, poseddifficulties for Venezuela's beef supply for much of 2009/10 In 2008, Venezuela imported about 200,000tonnes of beef from Colombia, in addition to live cattle However, at the end of July 2009, Chávez frozediplomatic relations with Colombia in response to the country allowing US troops to operate out of its bases

in their fight against drug production While we do not believe exports completely ground to a halt (even ifofficial trade is completely stopped, a lucrative smuggling industry remains) the fall in trade placed strain

on Venezuela's meat supply The value of imports of meat and offal from Colombia fell by a whopping97.6% y-o-y in October 2009, according to Colombia's statistics agency DANE, with total imports fromColombia for the month falling by 70.4% Venezuela was forced to seek imports from other countries in theregion, including Brazil, Argentina, Paraguay and Nicaragua

However, in August 2010, Colombian President Juan Manuel Santos met with Chávez and agreed to restorediplomatic relations between the two countries The two presidents agreed to reinforce security along theirshared border to clamp down on terrorist groups and drug trafficking Venezuela also agreed to pay debtsamounting to some US$800mn to Colombian exporters The agreement paves the way for the restoration oftrade relations between the two countries, which promises to ease supply shortages of beef on Venezuelanshelves

In April 2011, the two governments reached an agreement to restore trade relations following a meeting inCartagena The deal opens the way for Colombia to export 6,500 head of cattle in addition to 3,000 livecattle and 3,500 pregnant cows to increase Venezuela's breeding stock The deal also included the offer toexport 60,000 day-old chicks and 100,000 hatching eggs

Then in April 2012, the Venezuelan Minister of Foreign Affairs Nicolás Maduro and his Colombiancounterpart María Holguín signed a partial bilateral trade agreement, at the sixth Summit of the Americas inCartagena, Colombia The agreement establishes a new model for trade relations between the nations,

covering preferential trade agreements, sanitary norms, technical norms, rules of origin, trade protection andthe mechanism for the settlement of disputes The agreement also includes plans to increase joint

infrastructure and agricultural production The pact, which came into force in October 2012, signals thecontinued improvement of diplomatic relations between the two countries The pact is expected to providemuch-needed relief for the food shortages and spiralling prices that have gripped Venezuela

In February 2013, data from Colombia's National Administrative Department of Statistics and Office ofTaxes and Customs demonstrated that trade between Colombia and Venezuela increased by 40% y-o-y toUS$3.28bn

Table: Venezuela Beef & Veal Production, Consumption & Trade

Pork Consumption, '000 tonnes 1 129.0 133.0 129.0 134.0 141.0 141.0

Risks To Outlook

Chávez's death creates an uncertain political and economic landscape regardless of the victory of his chosensuccessor, Maduro, in the snap elections Our current forecast is that the government's interventionist stancetowards food production and supply will continue; thus, meat production will be highly dependent ongovernment policy If prices are subject to further controls as Venezuela's economy contracts, productioncould fall further as more operators leave the sector Another factor that will have a great influence overdemand for livestock is the price of oil With Venezuela so reliant on its hydrocarbons exports, funds forgovernment schemes to increase production and provide affordable meat to the masses will be dependent onoil revenues being sufficient If the price of oil falls again, demand for meat would likely be hit

Grains Outlook

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

first decade of the 21st century, consumption has also risen, fuelled by oil-driven economic growth Corn isVenezuela's major grain crop, with the vast majority grown in the central states of Barinas, Portuguesa andGuárico While the area planted to corn has risen by around 50% since the end of the 1990s, Venezuela'sagricultural sector remains relatively undeveloped, and there is still plenty of room for further expansion.About 65% of the area planted is white corn for human consumption; the remainder is yellow corn for bothhuman consumption and for feed The viability of corn production in Venezuela is heavily dependent ongovernment policy In the 1980s, the country's agricultural sector was heavily regulated, and high tariffswere 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, theintroduction of regulated farmgate prices and retail prices has hit profitability and seen output decreasefurther 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 thedifficulties facing producers

In 2011/12, we estimate that corn production stagnated at 1.30mn tonnes as poor weather, poor agriculturalpolicies, a lack of fertiliser and low profitability hit output Production continued to be held back by

shortages of technical staff and equipment, delays in financing to farmers, inefficient production techniquesand unreliable supplies of materials and agrochemicals

In 2012/13, we forecast that corn output will fall slightly by 1.9% y-o-y to 1.28mn tonnes Output will be hit

by the poor macroeconomic climate and shortage of foreign currency with farmers unable to invest in thefertilisers and machinery which would allow them to recover lost production

Out to the end of our forecast period, the level of production will be highly reliant on the government'sability to support the agricultural sector In 2012, the government set ambitious targets to boost domesticgrain production by 70% by 2018 However, without continued support, improved production techniquesand improved profitability, much of the newly opened farmland will very likely return to fallow In thecurrent climate of economic and political uncertainty we are sceptical of the government's ability to investscarce foreign currency in the sector to prevent further falls in output We therefore expect forecast

production to fall 6.9% on the low 2012 level to reach 1.21mn tonnes in 2017

Wheat production in Venezuela is negligible, as the country does not have a suitable climate for growingwheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming fromthe US (42%) and Canada (52%) In March 2011, wheat was added to the list of goods classified by thegovernment as essential or staple, which helps to expedite import procedures Venezuelan wheat importstotalled an estimated 1.69mn tonnes in 2011/12 and are forecast to remain at a similar level in 2012/13.However, importers have faced problems related to rising international prices, limitations on accessingforeign 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

However, as purchasing power is expected to decline in 2013 and 2014, human consumption will increasefaster than that of the animal feed industry as Venezuelans turn to their cheaper staple food Corn is a staple

food in Venezuela, and corn flour is used to make arepa, a flat, unleavened bread Total corn consumption

rose by an estimated 63.3% from 2007 to 2012, outstripping growth in production and leading to a surge inimports from the US Import controls for feed corn have been relaxed, and imports grew from just 152,000tonnes in 2006 to an estimated 2.3mn tonnes in 2012

We estimate that demand grew by 12.0% y-o-y in 2012 to reach 3.85mn tonnes, due primarily to increaseddemand from the livestock sector Yellow corn for feed is estimated to account for around 2.3mn tonnes,

with the remainder for human consumption We see consumption dropping back to 3.75mn tonnes in 2013,

as demand for feed falls back Out to 2017, we believe consumption will increase, as corn is one of thecheapest foods available and the price is kept down by government price controls Growth will, however, bemore moderate than during the previous five-year period; out to 2017 we forecast demand rising by 8.5% onthe 2012 level to take consumption to 4.17mn tonnes

Wheat has gained in popularity since the beginning of the 21st century, as Venezuelan consumers have hadmore money to spend on food Consumption of both baked goods and pasta has been rising Price controlsmean pasta has become far more affordable and per capita consumption has now risen to around 14kg Themajority of pasta produced is lower grade and must be sold at a government-set price Some high-gradepasta is also produced that can be sold at market prices Pasta imports increased to an estimated 8,600tonnes in 2011, up from an average of 3,490 tonnes in 2007-2010 As a result of rising wheat prices on theinternational market, we believe that consumption remained stable in 2011/12 at 1.50mn tonnes However,the expansion in production of two major millers and pasta manufacturers is likely to lead to increasedavailability and higher consumption We see demand growing by 3.0% to 1.55mn tonnes in 2012/13; out to

2017, we believe consumption will grow by 15.4% on in 2012 level to 1.73mn tonnes

Table: Venezuela Corn Production, Consumption & Trade

Corn Production, '000 tonnes 1 1,300.0 1,275.0 1,250.0 1,225.0 1,210.0 1,210.0 Corn Consumption, '000 tonnes 1 3,850.0 3,750.7 3,851.9 3,959.8 4,066.7 4,176.5

Notes: f BMI forecasts Sources: 1 USDA.

Table: Venezuela Wheat Production, Consumption & Trade

Wheat Consumption, '000 tonnes 1 1,500.0 1,545.0 1,591.3 1,637.5 1,683.3 1,730.5

Notes: f BMI forecasts Sources: 1 USDA.

Further Corn Price Increase Authorised

On August 1 2012, the Venezuelan government raised the farmgate prices of corn and rice The price ofyellow corn increased by 42.9% from VEF1.33 to VEF1.90 per kilo, while white corn rose by 46.6% fromVEF1.50 to VEF2.20 However, the increase has not been sufficient to satisfy producers, who argued thateven with the price rise they cannot cover production costs, which have risen dramatically Antonio Pestana,the vice president of Fedeagro, argued that the cost of producing a kilo of white corn stands at VEF2.40,VEF0.20 higher than the new government mandated price He also warned that a failure to invest in

improving crop irrigation and drainage poses threatens the recovery of domestic grain production, leavingthe crops vulnerable to drought and flooding

Subsequently, in November 2012, Venezuelan Agriculture Minister Juan Carlos Loyo announced a 46%increase in the price of pre-cooked corn flour from VEF4.06/kg to VEF5.93 (US$1.38)/kg However, theVenezuelan corn processing industry had argued that an increase of 66% would be necessary to coverproduction costs and ensure a small profit In addition to the 47% increase in farmgate corn prices, freightrates have also risen by 20% Industry representatives argued that the lack of profitability could underminecompanies' viability and potentially threaten food production Nonetheless, we expect the increase in thefarmgate prices and the consumer price gaps to go some way towards encouraging an increase in the areaplanted to grains in the coming year

Government Enters Gruma Partnership

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

Gruma, the world's largest producer of corn flour for tortillas The government had previously stated its

intention to nationalise the assets of Gruma subsidiary Monaca The announcement will see the

establishment of two joint ventures, one focusing on the production of corn flour and rice, and the secondproducing pasta, wheat flour and oatmeal

The relationship between the Venezuelan government and Gruma was a turbulent one throughout 2010 InJanuary of that year, Hugo Chávez announced that his government would temporarily take control ofGruma'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 accusationsthat Gruma had refused to sell flour during a national shortage the previous month The move came as thegovernment 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'sassets, it was considering forming a joint venture with the Mexican company.

Gran Misión Agro Venezuela Fails To Deliver

In January 2011, the government launched Gran Misión Agro Venezuela, a new programme designed tosupport 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 tothe country's agricultural producers, from small to large-scale landowners, with VEF9.9bn (US$2.3bn)committed to the programme

Data from the Ministry of Agriculture and Land indicate that during 2011, 75,000 producers receivedVEF2.7bn (US$627.9mn) in order to boost production However, data also showed that the Gran Misiónhad failed to reach its objectives for its first year of operation with regards to grain production Yellow cornproduction reached only 62.1% of the target of 1.39mn tonnes for 2011, and white corn production hit only50.0% of official targets

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

Despite the plan's failure to reach its first-year targets, in late January 2012 Chávez relaunched the GranMisión 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 furtherVEF114mn (US$26.5mn) in investment to improve the agricultural transport network

There are signs that the government is becoming more responsive to the needs and views of producersassociations when developing agricultural policies In Q312, Fedeagro, the National Confederation ofAssociations of Agricultural Producers, announced that agricultural production during H112 was morepositive than the same period in previous years, with increased area planted to cereals and rice

In January 2013, Vice President Nicolás Maduro relaunched Gran Misión AgroVenezuela for 2013-2019.Shortly afterwards, he announced that funding had been approved to support the programme's objectives for

2013 In total, VEF7.81bn will be available for 2013, of which VEF3.0bn will be dedicated to improvingfarm roads.

Coca Growing Hits Corn Production

The diversion of fertiliser from legal crops to coca growing is damaging Venezuelan corn production Urea,the nitrogen-rich fertiliser used to grow corn and other agricultural produce, is being sold through the blackmarket to coca growers As a result, farmers say, they do not have sufficient fertiliser, particularly duringthe main planting season that begins in May

On paper, Venezuela produces at least twice as much fertiliser it needs, with the government subsidising itsuse to the tune of US$100mn per year, according to a Miami Herald report However, farmers in the maingrowing 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 cornproducers, who have also been hampered by land expropriations, farmgate prices and extreme weatherconditions in recent years

Mixed Results For Chávez's Production Drive

Agricultural production in Venezuela increased during Hugo Chávez's time as president After risinggradually in the first half of last decade, production rose rapidly from 2005 as the oil wealth pouring into thecountry allowed more investment in agriculture From 2004 to 2008, corn production grew 56.5% to2.00mn tonnes This was driven by a large increase in the area planted under the government's NationalSowing Plan Chávez's stated aim was to not only end Venezuela's reliance on imported corn, but to build

up a surplus for export Since coming to office, Chávez redistributed millions of hectares of land to the poorand invested billions of dollars in agriculture While the rise in production shows that the policy has enjoyedsome success for grains, there are still problems Many of the people granted rights to farmland have littleexperience in agriculture There have also been complaints that promised training and inputs such as seedand equipment has been slow to materialise, leaving land fallow

Another brake on the expansion of grain production is controlled farmgate prices, which have been in forcesince 2003 on around 100 products considered to be basic necessities Producers are also given directsubsidy payments and access to cheap fertiliser Despite this, farmers have long complained that the

farmgate price is too low, threatening future production

The aim of achieving self-sufficiency is a long way from being realised, and Venezuela is still heavilyreliant on grain imports to fuel domestic demand, both for human consumption and for the livestockindustry Indeed, in 2010 the government relaxed import permit procedures in order to reinforce its 'foodsecurity' policy and avoid domestic food shortages In 2012/13, corn imports are forecast to reach 2.0mntonnes, compared to 1.16mn tonnes in 1997/98 In addition, Venezuela is expected to import around 1.7mntonnes of wheat.

Table: Venezuela Corn Production, Consumption & Trade

consumption will be reliant on the continued subsidisation of the price of staple foods and the ability of thegovernment to source sufficient grain supplies on the export market If the government allowed grain prices

to rise, consumption would be hit On the other hand, if oil prices rise faster than we expect, a recovery ingovernment revenues could see increased investment in agriculture and stronger-than-expected growth inthe production and consumption of grain

Coffee Outlook

BMI Supply View: The highest quality Venezuelan coffee comes from the Maracaibo region, in the far

west of the country, along the border with Colombia However, as with other agricultural sectors, the failure

of government-mandated prices to keep pace with increasing costs amid rocketing inflation has hurt theprofitability of production in Venezuela, leading farmers to turn towards more profitable crops In addition,lack of producer unity and the government's expropriation of two main coffee processors have made the sale

of coffee more complicated for producers, providing a disincentive to continue production Producers havealso faced competition from imported coffee, leading many to abandon the sector in favour of more

lucrative activities such as cattle ranching In recent years, the number of coffee-growing families has fallenfrom an estimated 80,000 to fewer than 50,000 and since 2009 Venezuela has become a net importer ofcoffee

We expect production growth of 3.5% in 2012/13 to reach 880,000 60kg bags, building on the recovery of36.0% year-on-year in 2011/12 In September 2012, the government announced an average 33% increase infarmgate prices However, producers have argued that this is insufficient to counter rocketing inflation andinput costs

Nevertheless, government support for smallholder coffee growers, which make up the majority of farms,could see production grow further over the later years of our forecast period We forecast production toreach 940,000 bags in 2017, 10.6% higher than the 2012 level This, however, will be dependent on

government policy, particularly price controls If the government relaxes price controls further, interest ininvesting in production of Venezuela's high quality coffee would most likely increase, leading to greaterproduction than we are currently expecting Conversely, if price controls continue to squeeze profits,farmers may switch to other less tightly controlled crops

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

66.5% over 2007-2012 The vast majority of coffee consumed is roasted ground coffee, with soluble instantcoffee accounting for only about 1% of total consumption Coffee is included in the government's basicfood basket and is available in government food stores at subsidised prices This has allowed more low-income Venezuelans to afford it, leading to a strong increase in demand

However, demand growth has led to severe supply shortages at times and a booming black market

Wealthier consumers are able to buy their coffee at cafes or street stalls, but poorer consumers are oftenunable to afford the high prices The government has blamed the shortages on unscrupulous suppliershoarding their stock rather than selling it at the mandated prices The Venezuelan Coffee Industry

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

A steep increase in imports has helped to ease supply restrictions Imports reached an estimated 606,000bags in 2011/12 and we estimate that consumption increased marginally to reach 1.32mn bags in 2012 Wesee consumption growing again slightly to 1.33mn bags in 2013 Through to 2017, we forecast demandgrowing by 4.7% on 2012 to 1.38mn bags

Table: Venezuela Coffee Production, Consumption & Trade

Coffee Production, '000 60kg bags 1 850.0 880.0 890.0 910.0 925.0 940.0 Coffee Consumption, '000 60kg bags 1 1,315.0 1,322.9 1,336.1 1,349.5 1,363.0 1,376.6

Notes: f BMI forecasts Sources: 1 USDA.

Producers Deem New Price Rises Insufficient

In September 2012, the government announced a further increase of an average 33% in fixed coffee pricesafter similar increases were implemented in November 2011 The price for 'good washed A' green coffeerose from VEF1,200 to VEF1,600/quintal; 'good washed B' rose from VEF1,080 to VEF1,400, and 'goodwashed C' increased from VEF980 to VEF1,350 Lower quality coffee prices also rose, with 'good natural'rising from VEF940 to VEF1,240, and 'natural standard' increasing from VEF820 to VEF1,090 In addition

to the price increases, the Ministry of Agriculture and Land announced that it would open 35 purchasepoints to serve producers in Lara, Barinas, Portuguesa, Trujillo, Mérida, Táchira and Monagas It will alsoopen nine roasters, five of which will purchase directly from farmers in order to eliminate middlemen

The changes have disappointed producers, who argue the price increases are insufficient to cover the rapidincrease in production costs Manuel Morillo, director of the Association of Venezuela Coffee Producers,said the organisation had worked for months to demonstrate to the Ministry of Agriculture and Land that thetrue costs of production are VEF1,700-2,200/quintal The expropriation of the two main coffee-producingcompanies, Fama de América and Café Madrid, has enabled production to continue despite the lack of

profitability

High coffee prices on the international market have led to a huge discrepancy between what producersreceive and the cost of coffee on global markets While the price of a quintal of 'A' grade domestic coffee isnow fixed at US$279, in neighbouring Colombia, a quintal of Venezuelan coffee is sold at US$465-698.Although average prices of coffee on the global market are forecast to remain lower through 2013 and 2014,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 tohave up to 30% of production in non-regulated products This opens up the possibility for producers toexplore gourmet or flavoured coffees, which are not subject to government price controls

As a result of falling domestic output, the government has had to resort to increased imports to guaranteesupply, with imports rocketing to an estimated 622,000 bags in 2011 and estimated to have reached 606,000bags in 2012 Much of this has come from Brazil and Nicaragua This has further exacerbated tensions inthe 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

Minister Offers Reassurances Over Coffee Supply

The supply shortages that have plagued Venezuela in recent years became more acute during the first fewweeks of 2013, with coffee widely reported to be one of the staple goods in scarce supply on the shelves ofVenezuelan shops Endings stocks are forecast to fall in 2013, with imports expected to fall from 606,000bags in 2012 to 400,000 bags and domestic production unlikely to compensate In a move to reassure thepublic, in February 2013, food minister Carlos Osorio announced that the public and private coffee

distribution networks have more than 1.8mn quintals, sufficient to meet domestic demand for the next 10months Since rules on importing coffee were relaxed in 2010, domestic coffee consumption has accelerated

by around 50% However, accelerating inflation and a lack of access to US dollars in the market havedisrupted supply chains in recent months

Factors Impacting Coffee Crisis

Venezuela was once among the world's largest producers of coffee At the beginning of the 20th century,coffee production was the mainstay of the Venezuelan economy, accounting for more than 80% of thecountry's exports Since then, however, its significance has fallen, particularly after the discovery of oil led

to other industries being crowded out Venezuela accounts for less than 1% of world coffee productioncurrently

Despite the government's goal to attain self-sufficiency in food production, mismanagement of the sector, aswell as adverse weather conditions, have seen production dwindle and forced the government to turn toimports to meet the requirements of Venezuela's processing industry and supply domestic demand Before

2003, Venezuelan coffee imports had been negligible, totalling 0-13,000 bags per year However, in 2012,imports increased to an estimated 606,000 bags, primarily from Brazil and Nicaragua

Although the government continues to blame the private sector for the failures of the economy, coffeeproducers hold the government's interventions responsible for the collapse of the coffee industry, as strictprice controls have eroded the sector's profitability

The difficulties faced by the sector have led to falls in consumption and the quality of production Lowinvestment in coffee farms has left most with old trees well past their peak production and vulnerable toattack by pests This means that average yields from coffee farms in Venezuela are less than half those seen

in Brazil and less than a third of those seen in Colombia Consumption is also only a fraction of its formerlevel, falling from 3kg per capita in 1990 to just over 1kg at the beginning of the 21st century, beforecreeping back up to its current 1.9kg per year as incomes rose and the government controlled the retailprice Unless the government alters its restrictive policies and relaxes control over the sector, we see littlepotential for the coffee industry to reach the 3mn quintal target that the government envisages If pricecontrols are not loosened, farmers will continue to abandon coffee growing and the degradation of

plantations will continue, continuing the country's import dependence

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

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

'socialist' and 'capitalist', to demonstrate the benefits of a state-controlled economy over the purportedexploitations of the free market The 'socialist' list offers coffee at half the price of its capitalist counterpart,

in a move designed to boost the popularity of the administration's socialist policies A diagram on the wallshows customers how the different prices are reached, outlining the costs of labour, overheads and rawmaterials, Reuters has reported 'Made in Socialism' badges decorate posters and menus The affordableprices have been a success with customers; however, critics claim that the move is a further populistgimmick designed to distract attention from the spiralling inflation, food shortages and economic

contraction that continue to plague the country

Nationalisation Of Coffee Sector

At the beginning of August 2009, the Venezuelan government announced that it would expropriate coffeeprocessing firm Fama de América and take a 50% share in Café Madrid The action was taken as the

government claimed that the companies monopolised the market and encouraged smuggling activities.Together, the two companies controlled around 80% of the coffee market in Venezuela The move seems tohave been sparked by an announcement by the companies that they were running out of coffee supplies andhad enough left to meet only a few days of demand The government claimed the companies had beeninvolved in illegally exporting coffee to Colombia to take advantage of the higher prices The governmentinitially claimed the seizures would be temporary But a few days after the occupation of the plants, Chávezspoke of permanently expropriating them

In mid-November 2009, the government finally announced the official expropriation of Fama de América aswell 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 brokedown In January 2011, the Netherlands-based Longreef Investment Group, which was a shareholder in

Fama de América, announced that it would sue the Venezuelan government for failing to pay compensationfor the expropriated assets The complaint was lodged at the International Center for Settlement of

Investment Disputes in Washington DC

Regardless of whether the allegations of illegal exports of coffee are true (they are strenuously denied byboth companies) the seizures and the looming shortages that motivated them highlight all that is wrong withthe Venezuelan coffee industry The farmgate prices for coffee fixed by the government are well below thelevel in neighbouring Colombia With Colombia suffering its own shortage of coffee in 2009 owing to apoor crop, demand for coffee from neighbouring countries is high It is inevitable that Venezuelan coffeewill find its way over the border given the difference in prices on offer The low prices offered are alsocausing yields to fall as growers complain that they are unable to hire enough labourers or invest in

improving tree stock We see Venezuela becoming increasingly reliant on imports in the future as domesticproduction is unable to meet demand

The government is in control of 80% of the country's coffee roasting capacity, with the remaining 20%owned by small private companies The government is hoping to use its new power in the coffee sector toguarantee a constant flow of supplies to all areas of the country, with half of the nation's capacity provided

by the government-operated plants and the remaining half in the hands of smaller private players We do not

expect the going to be easy, however, particularly for the remaining private roasters According to data fromthe Superintendent of Silos, Warehouse and Agricultural Storage, reported El Universal, only 99 of the 145coffee roasters active in 2008 were still working in 2009 We expect the tough operating environment tocontinue through our forecast period as price controls continue.

In June 2012, the government announced the creation of a new coffee supply and distribution companycalled Venezuela Coffee: Shops and Services The new chain will be an affiliate of the Venezuelan Coffee

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

Table: Venezuela Coffee Production, Consumption & Trade

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

in the sector could increase

Commodity Strategy

Monthly Grains Update

Wheat: Downside Production Risks

Wheat prices have been dragged down by weakness in corn prices recently and we believe prices have nowbottomed Lingering downside risks to harvests in the US, Europe and the Black Sea Region offer somesupport to prices As a result, we expect prices to move back to previous resistance around USc750/bushel

in the short term

Support To Hold For Now

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

Source: BMI, Bloomberg

Wheat prices will moderate in H213 as stocks are replenished with the start of the 2013/14 harvest in theNorthern Hemisphere As a result, and because prices have been weaker than expected in recent weeks, wesee downside risks to our current forecast at USc780/bushel and will revise it slightly lower when moreinformation on the 2013/14 crop is made available

Corn: Record Plantings To Weigh On Prices

We expect corn to experience the most weakness in the coming months and eventually break throughsupport coming in at USc640/bushel Weak consumption growth in the US, coupled with good crop

prospects in key producers will improve the global supply We see strong support around the USc550-600/bushel level

Bumpy Ride Ahead

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

Source: BMI, Bloomberg

Overall, although we forecast a global market deficit in corn for the 2012/13 season, we expect the market

to return to a massive surplus of over 40mn tonnes in 2013/14 We forecast corn prices to average USc650/bushel in 2013 and USc575/bushel in 2014

Soybean: Continued Outperformance

We continue to expect soybean to outperform the grains complex over the medium term and expect

volatility in prices over the short term owing to export delays in Argentina and Brazil Although we forecast

South America to register record production in 2012/13, the soybean market will remain tight by historicalstandards, largely because stocks are low and US production growth in 2013/14 will be relatively mutedcompared with corn.

No Weakness In Sight

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

Source: BMI, Bloomberg

Overall, we expect soybean prices to average only slightly higher at USc1,480/bushel in 2013 We expectthe global supply to improve in 2014 and see prices averaging USc1,450/bushel over that year

Rice: Keeping A Close Eye On Thai Export Policy

Supported by strong demand and a price premium coming from Thailand's rice pledging programme, webelieve front-month rice prices will continue to trade within their moderate channel uptrend (US$15.00/cwtand US$17.50/cwt) in the coming months We continue to believe Thailand will have little choice but torelease at least part of its unsustainably high stocks on the market at a discounted price, which will increasethe availability of rice on the international market and push prices below multi-year support which comes inaround US$14.80/cwt

Weakness To Come

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

Source: BMI, Bloomberg

Therefore, despite potential for prices to remain supported in the short term, we forecast lower average riceprices in the next two years, of US$14.50/cwt in 2013 and US$13.00/cwt in 2014

Monthly Softs Update

■ In line with our view, softs have outperformed grains and industrial commodities in recent months.Recent weeks have seen a sharp reversal of this, especially sugar and coffee, for which we have closedour bullish view

■ We maintain our bullish cocoa view, as we see more short-term upside risks before the start of the

2013/14 harvest in West Africa in September

■ We are neutral on palm oil, even after prices broke resistance at MYR2,330/tonne We see few supportivefactors, even in the months leading to Ramadan

Cocoa: Still Bullish

We maintain our positive view on cocoa and believe prices have the potential to reach horizontal resistancearound GBP1,600/tonne over a three-month horizon There are still concerns about the quality and size of

beans for the mid-crop in West Africa, for which the harvest started in May Supply is likely to then be in atrough before the main harvest for the 2013/14 season starts in September We expect grindings growth toremain particularly subdued in the coming months, especially in Europe, but stress that demand can onlyaccelerate from its recent low, especially driven by Asia.

More Upside On The Cards

Front-Month LIFFE Cocoa (GBP/tonne, weekly) & RSI (below)

Source: Bloomberg, BMI

We forecast the cocoa market to remain in deficit over the rest of our forecast period, even though deficitsare likely to be small enough to prevent a return to record prices in the medium term We see some upsiderisks to our current forecast of GBP1,350/tonne in 2013 and 2014 We forecast prices to average to

GBP1,750/tonne in 2016/17, a 14.0% increase from average price levels in 2012, compared with an overall8.0% decrease for the 10 other agricultural commodities we forecast

Broken Lower

Front-Month ICE Coffee (USc/lb, monthly) & RSI (below)

Source: Bloomberg, BMI

Coffee: Closed Bullish View On Increased Volatility

We have closed our short-term bullish coffee view at a loss of 6.9% as prices moved back sharply against us

in reaction to the latest Brazilian estimates for the 2013/14 crop We are turning more cautious on prices asoptimistic estimates from Brazil now appear cemented while prospects for the Vietnamese coffee crop haveimproved in recent months This, combined with a better-than-expected crop in Colombia and smallerlosses from rust in Central America, is likely to keep the global market well supplied

Little Support In Sight

Front-Month ICE Coffee (USc/lb, weekly) & RSI (below)

Source: Bloomberg, BMI

Ultimately, we believe prices will trend towards next support at USc125.0/lb and see little strong supportafter that We believe losses could be limited by the already record low level of the arabica/robusta priceratio (the lowest since 2008) and of net long speculative positions for coffee Also, we believe prices atcurrent levels could push Brazilian producers to hoard supply, providing upside to prices in the shortterm We still forecast prices to average below their 2012 levels (at USc150/lb in 2013 and USc145/lb in2014) but highlight downside risks to these forecasts

Prices Supported

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

Source: Bloomberg, BMI

Cotton: Supported Around Current Levels

We expect cotton to remain supported around current levels at USc85.00/lb, as Chinese stocking policy isstill distorting global supplies The country, which currently holds 63.0% of the world's stocks, has stillbeen unable to make its tenders attractive to local mills, which prefer to import cheaper and better qualitycotton from abroad Thus, more cotton is being kept out of market, artificially inflating global prices in spite

of production surpluses and strong stocks-to-use ratios We believe disappointing harvests from the US,China and Australia (because of crop substitution) will also prevent price falls

China Losing Competitiveness

US - Cotton Apparel Import Prices By Country (US$/square meter equivalent)

Source: Bloomberg, BMI

In the medium term, we expect the global market to record decreasing surpluses, as relatively low pricescontinue to discourage plantings while demand recovers at a stronger pace This will leave the globalsurplus as low as 0.4mn 480lb bales in 2013/14, compared with 3.8mn bales in 2012/13 We have revisedour average cotton price forecast up to USc85.00/lb in 2013 and USc87.50/lb in 2014