Venezuela agribusiness report q3 2014

BMI Industry ViewBMI View: Venezuela is on track to record another lacklustre year for agricultural production in 2014, as output price restrictions and soaring input prices are keeping

Q3 2014 www.businessmonitor.com

VENEZUELA

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2014

Business Monitor International

© 2014 Business Monitor International

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

BMI Industry View 7

SWOT 10

Agribusiness 10

Business Environment 12

Industry Forecast 13

Livestock Outlook 13

Table: Beef Production & Consumption (Venezuela 2013-2018) 15

Table: Pork Production & Consumption (Venezuela 2013-2018) 15

Table: Poultry Production & Consumption (Venezuela 2013-2018) 15

Table: Beef Production & Consumption (Venezuela 2008-2013) 17

Table: Pork Production & Consumption (Venezuela 2008-2013) 18

Table: Poultry Production & Consumption (Venezuela 2008-2013) 18

Grains Outlook 19

Table: Corn Production & Consumption (Venezuela 2013-2018) 21

Table: Wheat Production & Consumption (Venezuela 2013-2018) 21

Table: Corn Production & Consumption (Venezuela 2008-2013) 27

Table: Wheat Production & Consumption (Venezuela 2008-2013) 28

Coffee Outlook 29

Table: Coffee Production & Consumption (Venezuela 2013-2018) 30

Table: Coffee Production & Consumption (Venezuela 2008-2013) 34

Commodity Strategy 35

Monthly Grains Update 35

Table: Selected Commodities - Performance & Forecasts 44

Monthly Softs Update 45

Table: Select Commodities - Performance & BMI Forecasts 54

Upstream Analysis 55

Americas Machinery Outlook 55

Table: Deere & Company - Agriculture & Turf Sales Growth Forecasts By Region 56

Americas GM Outlook 62

Americas Fertiliser Outlook 66

Downstream Analysis 72

Food 72

Food Consumption 72

Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018 73

Canned And Prepared Food 73

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018 74

Oils & Fats 75

Table: Oils & Fats Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 76

Confectionery 77

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 78

Drink 79

Alcoholic Drinks 79

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 79

Soft Drinks 80

Table: Soft Drinks Value Sales - Historical Data & Forecasts, 2011-2018 81

Hot Drinks 82

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 83

Mass Grocery Retail 84

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 84

Table: Sales Breakdown By Retail Format Type 85

Regional Overview 86

Competitive Landscape 92

Table: Venezuela Agribusiness Competitive Landscape 92

Demographic Forecast 93

Table: Venezuela's Population By Age Group, 1990-2020 ('000) 94

Table: Venezuela's Population By Age Group, 1990-2020 (% of total) 95

Table: Venezuela's Key Population Ratios, 1990-2020 96

Table: Venezuela's Rural And Urban Population, 1990-2020 96

Methodology 97

Industry Forecast Methodology 97

Sector-Specific Methodology 98

BMI Industry View

BMI View: Venezuela is on track to record another lacklustre year for agricultural production in 2014, as

output price restrictions and soaring input prices are keeping a lid on investment in crops and machinery.Nicolás Maduro and ruling Partido Socialista Unido de Venezuela made the choice of continuity in

terms of interventionist policies, which will maintain a challenging environment for agricultural and foodproduction Price fixing in particular continues to be a source of woe for producers unable to meet inputcosts which are soaring in line with some of the highest rates of inflation in the world Meanwhile,

consumption remains relatively robust causing shortages of some imported goods

Agribusiness Market Value

BMI Market Value By Commodity (% of Total) (2010-2018)

Cocoa market value, % of total Livestock market value, % of total Sugar market value, % of total Cotton market value, % of total Palm Oil market value, % of total Grains market value, % of total

2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

-20 0 20 40 60

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

■ Beef production growth to 2017/18: 3.5% to 367,500 tonnes High input costs, cheaper Mercosur

competitors and reduced domestic demand will stymie growth

■ BMI universe agribusiness market value: USD3.72bn in 2014 (up 0.9% from 2013; forecast to grow

annually by 2.8% on average from 2014 to 2018)

■ 2014 real GDP growth: 0.5% (down from 1.3% in 2013; forecast to grow annually by 2.2% on averagebetween 2014 and 2018)

■ 2014 consumer price index: 51.2% year-on-year (y-o-y) (up from 44.5% in 2013; forecast to grow

annually by 31.4% on average between 2014 and 2018)

Industry Developments

Venezuela's agricultural industry has been held back over the past decade by poorly executed controlpolicies and limited agricultural inputs The country's socialist government has for some time pegged itsprocurement price for corn below the cost of production, which has resulted in declining output for severalyears The Venezuelan bolivar's weakness and limited loan availability in the country has also meant thatthere is limited usage of agricultural inputs Indeed, 2012/13 corn yields were at the same level as in2004/05 As a result, we forecast stagnant growth for corn production in the coming years, following atemporary increase in output in 2013/14

Venezuela's largest private company Empresas Polar halted for several weeks in April-May 2014 its

production of pasta over delays in foreign currency allocations from the government This highlights thedifficulties in the wheat milling industry, plagued by poor planning and by the lack of timely foreigncurrency availability The temporary closure of the factory and overall issues regarding pasta productionposes downside risks to our wheat consumption estimate for 2014 and 2015 Venezuela is the second largestconsumer of pasta behind Italy on a per capita basis according to the International Pasta Association

Coffee will also be hurt by the ongoing challenging environment in the agribusiness sector We forecastproduction to decrease in 2013/14 and 2014/15 as elevated operating costs, lack of input supplies and price

rust disease is unlikely to disappear in 2014/15, given the ongoing shortages of agrichemicals and otherproducts to treat it The outlook for coffee production in Venezuela remains dire, as hurdles to outputexpansion will remain in place over the coming years.

Growth in Venezuela will continue to be constrained in 2014, as soaring inflation impacts householdpurchasing power, oil production stagnates, and private sector investment remains wary of a hostile

operating environment We are forecasting real GDP growth of 0.5% in 2014, down from 1.3% estimatedfor 2013

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

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 came 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 early 2000s, Venezuelan beef 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 A complex system of price controls imposed by the government in 2003 has restricted the profitability of livestock production in the country The government has aimed to boost production by turning over land judged as unproductive to landless farmers The project, however, has had mixed results: some formerly productive 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 believe beef production has decreased by 1.4% in 2012/13 and that it willbroadly stagnate in 2013/14 at 356,000 tonnes The recent increase by 20% of the state-controlled price forkey items of food including livestock products such as beef and chicken should help to stall any furtherdeclines Indeed, towards the end of our forecast period, we expect production to increase as the

government makes efforts to lessen the reliance on imports However, the recovery will be slow, and weforecast production to reach just 368,000 tonnes in 2017/18, up by a mild 3.5% on the 2012/13 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 2011 to VEF15.61/kg Thisprovided some relief for producers However, we believe that high input costs and squeezed profitabilitylimited production growth in the past season Output should grow slightly faster in 2013/14, by 2.3% y-o-y,reaching 675,000 tonnes that year Through to 2017/188, we see production expanding by 7.7% on the2012/13 level to 710,800 tonnes

Venezuela produces only small quantities of pork Output has remained stable at around 125,000 tonnes inrecent years We see production growing slowly in 2013/14 Over our forecast period, we see productionincreasing by 7.5% on the 2012/13 level to reach 129,000 tonnes in 2017/18.

BMI Demand View: Meat consumption soared in Venezuela's boom years from 2004 to 2008 The rise indemand 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 Consumption growthwas slower since 2008, due to constraints on production (lower availability of grains) In 2013, annual percapita consumption stood at an estimated 32kg for poultry, 19kg for beef and 4kg for pork While pricecontrols have increased demand, they have worked against investment in production and led to an

increasing reliance on imports In 2013, imports reached an estimated 300,000 tonnes for poultry and225,000 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 stagnating in 2014 at 582,000 tonnes Out to

2018, we forecast that demand for beef will grow by 8.4% on the 2013 level to 628,500 tonnes

We see poultry consumption rising slightly by 1.6% in 2014 (owing to higher costs and reduced supply) By

2018, we forecast demand for poultry will grow by 9.0% on the 2013 level to 1.0mn tonnes Althoughmoderate, the pace of consumption growth for poultry is still faster than for pork or beef owing to thecomparatively lower cost

Pork consumption is much lower than that of poultry and beef Consumption broadly stagnated over2007-2013 to 133,000 tonnes We believe consumption fell by 5.7% y-o-y in 2013 owing to a dip indomestic production and high input costs, and that it will recover in 2014 with the small increase in

production Out to 2018, we see consumption increasing by 3.8% on the 2013 level to 138,000 tonnes,fuelled primarily by population increases

Table: Beef Production & Consumption (Venezuela 2013-2018)

Beef & Veal Production, '000 tonnes 355.0 356.0 359.2 361.7 365.0 367.5 Beef & Veal production, % y-o-y -1.4 0.3 0.9 0.7 0.9 0.7 Beef & Veal Consumption, '000 tonnes 580.0 582.9 594.0 605.3 616.8 628.5 Beef & Veal consumption, % y-o-y 0.0 0.5 1.9 1.9 1.9 1.9

e/f = BMI estimates/forecasts Sources: USDA.

Table: Pork Production & Consumption (Venezuela 2013-2018)

Pork Production, '000 tonnes 120.0 121.0 123.0 125.0 127.0 129.0

Pork Consumption, '000 tonnes 133.0 133.7 134.7 135.8 136.9 138.0

f = BMI forecasts Sources: USDA.

Table: Poultry Production & Consumption (Venezuela 2013-2018)

Poultry Production, '000 tonnes 660.0 675.0 683.8 692.7 701.7 710.8

Poultry Consumption, '000 tonnes 960.0 975.4 991.9 1,009.8 1,028.0 1,046.5

f = BMI forecasts Sources: USDA.

Beef Cattle From Nicaragua To Aid Production

Shipments of heifers have been arriving to Venezuela from Nicaragua in a bilateral agreement between thetwo 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 A further 1,000 head are expected in the coming months to reach the agreementtarget of 6,000 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 bolívar 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 massive 97.6%y-o-y in October 2009, according to Colombia's statistics agency DANE, with total imports from Colombiafor the month falling by 70.4% Venezuela was forced to seek imports from other countries in the region,including Brazil, Argentina, Paraguay and Nicaragua

shared border to clamp down on terrorist groups and drug trafficking Venezuela also agreed to pay debtsamounting to some USD800mn 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 toUSD3.28bn

Table: Beef Production & Consumption (Venezuela 2008-2013)

Beef & Veal Production, '000 tonnes 305.0 290.0 348.0 345.0 360.0 355.0 Beef & Veal production, % y-o-y -16.4 -4.9 20.0 -0.9 4.3 -1.4 Beef & Veal Consumption, '000 tonnes 615.0 508.0 523.0 560.0 580.0 580.0 Beef & Veal consumption, % y-o-y 12.4 -17.4 3.0 7.1 3.6 0.0

Sources: USDA.

Table: Pork Production & Consumption (Venezuela 2008-2013)

Pork Production, '000 tonnes 125.0 125.0 125.0 125.0 125.0 120.0

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

Sources: USDA.

Table: Poultry Production & Consumption (Venezuela 2008-2013)

Poultry Production, '000 tonnes 695.0 680.0 650.0 625.0 655.0 660.0

Poultry Consumption, '000 tonnes 1,047.0 861.0 887.0 859.0 853.0 960.0

Sources: USDA.

Risks To Outlook

The death of former Venezuelan president Hugo Chávez creates an uncertain political and economiclandscape regardless of the victory of his chosen successor, Nicolas Maduro, in the snap elections Ourcurrent forecast is that the government's interventionist stance towards food production and supply willcontinue; thus, meat production will be highly dependent on government policy If prices are subject tofurther controls as Venezuela's economy contracts, production could fall further as more operators leave thesector Another factor that will have a great influence over demand for livestock is the price of oil WithVenezuela so reliant on its hydrocarbons exports, funds for government schemes to increase production andprovide affordable meat to the masses will be dependent on oil revenues being sufficient If the price of oilfalls again, demand for meat would likely be hit

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 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 About 65% of the area planted is white corn for human consumption; the remainder is yellow corn for both human consumption and for feed In 2012/13, we estimate that corn output fell slightly by 1.9% y-o-y to 1.28mn tonnes Output was hit by the poor macroeconomic climate and shortage of foreign currency, with farmers unable to invest in the fertilisers and machinery that would allow them to recover lost production.

Corn production has been on a downtrend in the past seven years, due to the poor macroeconomic climateand shortage of foreign currency, with farmers unable to invest in the fertilisers and machinery which wouldallow them to recover lost production

We forecast in 2013/14 corn production to rise 1.5% to 1.32mn tonnes which would represent the firstyearly growth in the crop since 2006/07 This view is based on data from the National Agricultural

Producers Association, which suggests that the area devoted to corn will marginally increase y-o-y, from414,000 hectares (ha) in 2012/13 to 443,000ha in 2013/14 This is a result of relatively favourable

government prices compared to other commodities, and less production risk Our belief that the poultrysector will experience relative strong growth of 2.3% in 2013/14 underlines this view

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

to farmers, inefficient production techniques and unreliable supplies of materials and agrochemicals Wetherefore expect forecast corn production to stagnate between 2012/13 and 2017/18 at around 1.3mn tonnes

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 from

the US (42%) and Canada (52%) In 2011, wheat was added to the list of goods classified by the

government as essential or staple, which helps to expedite import procedures However, importers havefaced problems related to rising international prices, limitations on accessing foreign currency and delays inobtaining import approval

BMI Demand View: Demand for feed corn has risen rapidly since the economic recovery began in 2004,mainly driven by the expansion of the poultry sector However, as purchasing power is expected to be low

in 2014, human consumption will increase faster than that of the animal feed industry as Venezuelans turn

to their cheaper staple food Corn is a staple food in Venezuela, and corn flour is used to make arepa, a flat,unleavened bread Total corn consumption rose by an estimated 109% from 2005 to 2013, outstrippinggrowth in production and leading to a surge in imports from the US

We see consumption growing by 4.3% y-o-y to 3.8mn tonnes in 2014, as demand for feed will recover afterthe decline in 2013 In the medium term, we believe consumption will increase, as corn is one of thecheapest foods available and the price is kept down by government price controls Growth will, however, bemore moderate than during the previous five-year period; out to 2018 we forecast demand rising by 17.4%

on the 2013 level to take consumption to 4.3mn tonnes

Wheat has gained in popularity since the beginning of the 21st century, as Venezuelan consumers have hadmore money to spend on food Consumption of both baked goods and pasta has been rising Price controlsmean pasta has become far more affordable and per capita consumption has now risen to around 14kg Themajority of pasta produced is lower grade and must be sold at a government-set price Some high-gradepasta is also produced that can be sold at market prices Pasta imports increased to an estimated 28,860tonnes in 2013, up from an average of 7,200 tonnes in 2008-2012 The expansion in production of twomajor millers and pasta manufacturers is likely to lead to increased availability and higher consumption Wesee wheat demand growing by 1.9% to 1.58mn tonnes in 2014; out to 2018, we believe consumption willgrow by 14.3% on in 2013 level to 1.8mn tonnes

Table: Corn Production & Consumption (Venezuela 2013-2018)

Corn Production, '000 tonnes 1,300.0 1,320.0 1,317.4 1,314.7 1,300.0 1,300.0

Corn Consumption, '000 tonnes 3,649.8 3,806.7 3,920.9 4,042.5 4,163.8 4,284.5

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

Table: Wheat Production & Consumption (Venezuela 2013-2018)

Wheat Consumption, '000 tonnes 1,555.0 1,585.0 1,629.4 1,675.0 1,725.2 1,777.0

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

Growing Dependence On Imports

Venezuela's agricultural industry has been held back over the past decade by poorly executed controlpolicies and limited agricultural inputs The country's socialist government has for some time pegged itsprocurement price for corn below the cost of production, which has resulted in declining output for severalyears The Venezuelan bolivar's weakness and limited loan availability in the country has also meant thatthere is limited usage of agricultural inputs Indeed, 2012/13 corn yields were at the same level as in2004/05

Venezuelan corn consumption has increased significantly over the past 10 years owing to its role as arelatively cheap staple In contrast, consumption of wheat - which is wholly imported - has stagnated owing

to its increasing cost as the bolivar's peg has been successively downgraded over the last decade, makingimports more expensive Venezuela has therefore increasingly relied on grain imports to meet its foodrequirements Indeed, the country imports about 70% of its total food supply

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

industry In 2010 the government relaxed import permit procedures in order to reinforce its 'food security'policy and avoid domestic food shortages

Grains imports have been steadily growing in recent years and are forecast to reach 2.6mn tonnes for cornand 1.6mn tonnes for wheat in 2013/14 and 2014/15 Corn and wheat imports continue to face severe delaysand problems mainly to the long waiting time for the approval of foreign currency and import permits.However, imports of grains should continue to receive preferential treatment to expedite the import of basicconsumer goods and to maintain the livestock industry

Stagnating Fundamentals

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

Source: USDA, BMI

Wheat Milling Industry Woes

Venezuela's largest private company Empresas Polar halted for several weeks in April-May 2014 its

production of pasta over delays in foreign currency allocations from the government This highlights thedifficulties in the wheat milling industry, plagued by poor planning and by the lack of timely foreigncurrency availability Consumers resort to hording and consolidating food purchases among extendedfamily members, which in turn contributes to greater shortages and higher prices for products in informal

markets The government is an important pasta distributer through its state run Mercal, PDVAL and Bicentenario supermarkets, representing about 40 percent of the market.

The temporary closure of the factory and overall issues regarding pasta production poses downside risks toour wheat consumption estimate for 2014 and 2015 Venezuela is the second largest consumer of pastabehind Italy on a per capita basis according to the International Pasta Association

Increasing Dependence

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

Source: BMI, USDA

American Benefiting From Growing Imports

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

Source: ITC, BMI

Mixed Results For Government'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

However, production constraints have been growing in recent years The low availability of foreign

currency to import crop input such as fertilisers and machinery led to a decrease in yields On paper,Venezuela produces at least twice as much fertiliser it needs, with the government subsidising its use to thetune of USD100mn per year But importing the rest has proved difficult in recent years While yields grewsteadily during the 2000s (by 4% on average annually), they dropped in 2010/11 and have been boradolystagnating since, around 3.0-3.3tonne/ha, compared with 3.4tonne/ha on average between 2005/06 and2009/10

Gran Misión Agro Venezuela Fails To Deliver

Following its intention to boost grains production and reach self-sufficiency in corn, the governmentlaunched in 2011 Gran Misión Agro Venezuela, a new programme designed to support the country'sagricultural production as part of a two-year plan for the sector Misión Agro Venezuela was designed toprovide low-interest loans, machinery and technical assistance to the country's agricultural producers, fromsmall to large-scale landowners, with VEF9.9bn (USD2.3bn) committed to the programme However, theGran Misión has failed to reach its objectives since the first years Yellow and white corn reached onlyaround 50% of its fixed target

Nicolás Maduro relaunched Gran Misión AgroVenezuela in January 2013 for 2013-2019 In total,

VEF7.81bn will be available for 2013, of which VEF3.0bn will be dedicated to improving farm roads.However, we believe this renewed programme will also be a failure and forecast corn production to actuallystagnate between 2012/13 and 2017/18

Corn Production, '000 tonnes 1,800.0 1,800.0 1,634.0 1,300.0 1,300.0 1,300.0

Corn Consumption, '000 tonnes 2,700.0 3,200.0 3,400.0 3,100.0 3,850.0 3,649.8

Sources: USDA.

Table: Wheat Production & Consumption (Venezuela 2008-2013)

Wheat Consumption, '000 tonnes 1,500.0 1,550.0 1,550.0 1,500.0 1,500.0 1,555.0

Sources: USDA.

Risks To Outlook

Despite our forecast for growth in 2013/14, we remain pessimistic on corn output over the next five

years Saying this, we highlight some upside risks to corn production First, a change in the government'sprocurement policy could incentivise farmers to increase plantings, and would also increase their ability topurchase inputs Second, an improving economic situation may increase consumption and aid credit

conditions, allowing greater input usage Third, improved growth in the poultry sector would increase thedemand for corn and could encourage domestic corn production to increase Finally, further devaluation ofthe bolivar and declining foreign reserves could result in imports becoming too costly for the government.This could result in a more facilitating environment for domestic corn production

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

Coffee Outlook

BMI Supply View: As with other agricultural sectors, the failure of government-mandated prices to keep pace with increasing costs amid rocketing inflation has hurt the profitability of production in Venezuela, leading farmers to turn towards more profitable crops In addition, lack of producer unity and the

government's expropriation of two main coffee processors have made the sale of coffee more 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 activities such as cattle ranching In recent years, the number of coffee-growing families has fallen from an estimated 80,000 to fewer than 50,000 and since 2009 Venezuela has become a net importer of coffee

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

2013 is also still hurting Venezuela's coffee crop in the ongoing 2013/14 season The rust disease is unlikely

to disappear in 2014/15, given the ongoing shortages of agrichemicals and other products to treat it As aresult, we see output coming in at 700,000 60kg bags in 2013/14 and 660,000 bags in 2014/15, down 4.1%and 4.7% year-on-year (y-o-y) respectively

The outlook for coffee production in Venezuela remains dire, as hurdles to output expansion will remain inplace over the coming years We forecast coffee production to decline by 6.9% between 2012/13 and2017/18, to 680,000 bags This, however, will be dependent on government policy, particularly pricecontrols If the government relaxes price controls further, interest in investing in production of Venezuela'shigh quality coffee would most likely increase, leading to greater production than we are currently

expecting

BMI Demand View: Coffee consumption has shown strong growth in recent years, rising by an estimated61.6% over 2008-2013 The vast majority of coffee consumed is roasted ground coffee, with soluble instantcoffee accounting for only about 1% of total consumption Coffee is included in the government's basicfood basket and is available in government food stores at subsidised prices This has allowed more low-income Venezuelans to afford it, leading to a strong increase in demand

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

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

Association, however, has blamed the shortages on the strict control of how much coffee roasters must pay

for beans and for how much they are allowed to sell of the finished product We see consumption growingslightly in 2014, by 0.4% y-o-y Through to 2018, we forecast demand growing by 2.0% on 2013 to 1.3mnbags.

Table: Coffee Production & Consumption (Venezuela 2013-2018)

Coffee Production, '000 60kg bags 730.0 700.0 660.0 666.6 673.3 680.0

Coffee Consumption, '000 60kg bags 1,308.0 1,313.2 1,318.5 1,323.8 1,329.1 1,334.4

f = BMI forecasts Sources: USDA.

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

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

no exception to this trend, as we forecast production to decrease in 2013/14 and 2014/15 as elevatedoperating costs, lack of input supplies and price regulations significantly discourage farmers from grindingcoffee of a higher quality The outbreak of the coffee rust disease in Central and South America in 2013 isalso still hurting Venezuela's coffee crop The rust disease is unlikely to disappear in 2014/15, given theongoing shortages of agrichemicals and other products to treat it As a result, we see output coming in at700,000 60kg bags in 2013/14 and 660,000 bags in 2014/15, down 4.1% and 4.7% y-o-y respectively

The outlook for coffee production in Venezuela remains dire, as hurdles to output expansion will remain inplace over the coming years We forecast coffee production to decline by 6.9% between 2012/13 and2017/18, to 680,000 bags Insufficient maintenance of coffee fields, due to the lack of funding and soaringprices of fertilisers, has led to stagnating yields Venezuela's coffee production yields are now the lowest inSouth America, at 385kg/ha in 2012, according to the UN Food and Agriculture Organization (FAO),compared with 1,433kg/ha in Brazil and 597kg/ha in Colombia The quality of beans is also decreasing, andVenezuela no longer produces type A or Lavado Fino coffee (finely washed), which greatly limits itscompetitiveness with other Latin American Arabica producers

Sector On The Decline

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

Source: BMI, USDA, FAO

From Net Exporter To Net Importer

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

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

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

2003, Venezuelan coffee imports had been negligible, totalling 0-13,000 bags per year

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

the country used to record hefty surpluses until 2009/10 Coffee imports are likely to reach a new recordhigh in 2014/15, of about 680,000 bags, compared with 640,000 bags in 2013/14 Venezuela is now a netimporter of coffee, which is in stark contrast with the first half of the 2000s, when the country was

exporting over 150,000 bags annually to Europe and the US

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

Seismic Shift

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

Source: BMI, USDA

Heavy Price Regulations To Remain In Place

The performance of the coffee industry will remain ruled by price regulations, which are likely to stay ineffect until 2018, affecting both coffee growers and processing companies Coffee prices are controlled at

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

processors depending on public credit entities

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

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

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

Nicaragua's Share Growing

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

Source: ITC, BMI

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

in Brazil and less than a third of those seen in Colombia Consumption is also only a fraction of its formerlevel, falling from 3kg per capita in 1990 to just over 1kg at the beginning of the 21st century, beforecreeping back up to its current 1.9kg 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

Table: Coffee Production & Consumption (Venezuela 2008-2013)

Coffee Production, '000 60kg bags 996.0 1,000.0 725.0 625.0 700.0 730.0

Coffee Consumption, '000 60kg bags 810.0 835.0 875.0 1,305.0 1,305.0 1,308.0

e = BMI estimate, Source: USDA.

Risks To Outlook

With state involvement in the economy at such a high level, government policy will continue to be themajor factor influencing the success of coffee production in Venezuela If the government and coffeeproducers cannot come to an agreement on prices, investment in production will not be forthcoming Thethreat of nationalisation still worries potential investors in the sector Coffee-growing has also been hit inother ways by the encroachment of the state Agricultural labourers are reportedly becoming harder to findand more expensive, as workers choose employment with government projects instead of the private sector

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

in the sector could increase

Commodity Strategy

Monthly Grains Update

■ We have revised up most of our 2014 grain price forecasts, but continue to expect prices to average below the levels reached at the end of Q114

■ We expect wheat prices to outperform the other grains over the coming months due to relative market

tightness and weak production growth in key exporters

■ Rice prices will face upside pressure over the coming six to nine months as the El Niño weather

pattern looks more likely to occur, bringing dry weather to Asia and posing a threat to rice yields

Through Key Support

S&P GSCI Grains Index (Daily Chart)

Sources: Bloomberg, BMI

Corn: Price Declines To Continue

Corn prices have recently broken through multi-month support around USc500/bushel, and we expect prices

to continue heading lower over the coming months (see 'Grain Prices To Head Lower After Key Breaks', May 15) The recent World Supply And Demand Estimate release from the US Department of Agriculture

supports our view that the global corn market will be well supplied for the ongoing 2013/14 season and

upcoming 2014/15 season, which begins in September 2014 Indeed, we are expecting large surpluses inboth seasons, and our 2013/14 global market surplus forecast (of roughly 60mn tonnes) remains well aboveofficial estimates We are forecasting another large surplus (by historical standards) of 21mn tonnes in2014/15.

More Downside Ahead

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

Sources: BMI, Bloomberg

Along with strong global supply, we are also more bearish than consensus regarding US feed grain demand

We were already projecting US meat production in 2013/14 to remain flat year-on-year but have recentlyrevised down our forecasts for pork production owing to disease outbreaks Although pig farmers may try toincrease slaughter weights to mitigate the reduction in pig stocks, we believe the net effect on feed demand

will be negative (see 'Pig Virus Concerns To Be Felt Over Coming Months', February 28) We believe

official forecasts for US feed demand will eventually be downgraded, loosening the global market

Strong Short-Term Supply

Global - Corn Global Balance (mn tonnes) & Stocks-To-Use (%)

2004 2005 2006 2007 2008 2009 2010 2011 2012

2013e 2014f 2015f 2016f 2017f 2018f13

14 15 16 17 18 19 20 21

-30 -20 -10 0 10 20 30 40 50 60 70

e/f = BMI estimate/forecast Sources: BMI, IGC, USDA

Rice: Prices To Fall But El Niño Remains Key Risk

We expect the global rice market to remain well-supplied in the coming months, which underpins our viewfor prices to average lower in 2014 than 2013 However, our view for the global market to remain in surplusand prices to remain in check will be dependent on the intensity of El Niño After mildly disappointingAsian and US rice production in 2013/14 (which kept prices supported over H114), we expect production torebound in the upcoming 2014/15 season This contributes to our view of another global market surplus in2014/15 In anticipation of improved supply, Asian export prices have already fallen in recent monthsleading up to late May, with Thai prices declining noticeably as the government has tried to unload itsmassive stockpile

Big Downside Expected

CBOT Rough Rice Contracts, USD/cwt (weekly chart)

Note: Current spot price derived from July 2014 contract The July contract expires on July 15, when the spot price will be based

on the September 2014 contract Source: BMI, Bloomberg

As discussed in our previous Monthly Grains Strategy on April 23, CBOT rice futures are currently insevere backwardation at the front-end of the futures curve, and our bias is for front-month (July 2014)prices, which are currently higher than second month (September 2014) prices, to break to the downside ofthe current wedge pattern over the next 1-3 months However, the key risk will be El Niño, which normallybrings dry weather to Asia and could reduce rice yields since most Asian farmers are too poor to irrigaterice fields Even with the risks of El Niño, we forecast prices to average lower at USD14.00/cwt in 2014and USD13.70/cwt in 2015

Potentially Significant Impact

Rice - Global Production Growth (% y-o-y) & El Niño Events

Note: The arrows represent the years in which El Niño developed Bolded arrows represent strong El Niño events Plain arrows represent moderate El Niño events Dashed arrows represent weak El Niño events Source: US National Weather Service, BMI

Soybean: Record Plantings To Drag Down Prices

Like corn, we expect the global soybean market to be well supplied over the coming months, chiefly due tolarge harvests during the 2014 calendar year and weakening demand from China and the US livestocksector We have long expected the South American 2013/14 soybean crops (which were harvested in Q114)

to be at record highs, mainly due to farmers switching from corn and other crops to soybean However, weare also forecasting a record US 2014/15 soybean crop of 94mn tonnes (harvested in September 2014)owing to relatively high prices during the planting season Indeed, in line with our expectation, the areadedicated to soybean in the US will reach a record high in 2014/15

Favouring Soybean Plantings

Price Ratio: CBOT Soybean/CBOT Corn

Notes: Front-month CBOT prices; an increase in the ratio implies soybean price outperformance Sources: Bloomberg, BMI

Soybean meal is a key livestock feed, and poor meat production prospects both in the US and China islikely to keep soybean demand relatively subdued over the coming months Along with the disease concerns

in the US, we expect Chinese soybean imports to slow down following four months of robust demand Thiswill be due to strong domestic inventories and deteriorating margins in the country's soy-crushing industry,which stem from reduced demand from the country's massive pork sector that is suffering from low pricesdue to oversupply Consequently, we are forecasting a global soybean surplus of 14mn tonnes for theongoing 2013/14 season and another surplus of 10mn tonnes for the upcoming 2014/15 season Thisunderpins our view for prices to average below spot levels, at USc1,350/bushel in 2014 and USc1,300/bushel in 2015