Venezuela agribusiness report q4 2010

Venezuela is also being forced to increase its sugar imports as domestic production plummets.. Source: 1 FAPRI, BMI VENEZUELA Whole Milk Powder Production, Consumption & Trade Colombia

Business Monitor International

© 2010 Business Monitor International

All rights reserved

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

DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as

REPORT Q4 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: October 2010

CONTENTS

Executive Summary 5

SWOT Analysis 7

Venezuela Agriculture SWOT 7

Venezuela Political SWOT 8

Venezuela Economic SWOT 9

Venezuela Business Environment SWOT 9

Industry Forecast Scenario 10

Venezuela Dairy Outlook 10

VENEZUELA Milk Production & Consumption 11

VENEZUELA Butter Production, Consumption & Trade 11

VENEZUELA Cheese Production, Consumption & Trade 11

VENEZUELA Whole Milk Powder Production, Consumption & Trade 12

VENEZUELA Milk Production & Consumption 14

VENEZUELA Butter Production, Consumption & Trade 14

VENEZUELA Cheese Production, Consumption & Trade 15

VENEZUELA Whole Milk Powder Production, Consumption & Trade 15

Venezuela Livestock Outlook 17

VENEZUELA Poultry Production, Consumption & Trade 18

VENEZUELA Pork Production, Consumption & Trade 18

VENEZUELA Beef & Veal Production, Consumption & Trade 19

VENEZUELA Poultry Production, Consumption & Trade 21

VENEZUELA Pork Production, Consumption & Trade 21

VENEZUELA Beef & Veal Production, Consumption & Trade 21

Venezuela Cocoa Outlook 22

VENEZUELA Cocoa Production, Consumption & Trade 23

VENEZUELA Cocoa Production, Consumption & Trade 24

Venezuela Sugar Outlook 25

VENEZUELA Sugar Production, Consumption & Trade 26

VENEZUELA Sugar Production, Consumption & Trade 28

Venezuela Coffee Outlook 30

VENEZUELA Coffee Production & Consumption 31

VENEZUELA Coffee Production & Consumption 34

Venezuela Grain Outlook 35

VENEZUELA Wheat Consumption 36

VENEZUELA Corn Production, Consumption & Trade 36

VENEZUELA Wheat Consumption 38

VENEZUELA Corn Production, Consumption & Trade 38

Competitive Landscape 40

Table: Agricultural Commodity Producers & Traders 40

Table: Agribusiness Suppliers 41

Table: Integrated Agricultural Producers 42

Commodity Price Analysis 43

Softs Update 43

Cocoa 43

Table: Cocoa 43

Coffee 44

Table: Coffee 44

Milk 45

Table: Milk 45

Sugar 46

Table: Sugar 46

Grains Update 47

Corn 47

Table: Corn 47

Rice 48

Table: Rice 48

Soybean 49

Table: Soybean 49

Wheat 50

Table: Wheat 50

Downstream Supply Chain Analysis 51

Industry Forecast Scenario 51

Consumer Outlook 51

Food 54

Total Food Consumption 54

Table: Venezuela Food Consumption Indicators - Historical Data & Forecasts 54

Canned Food 55

Table: Canned Food Value/Volume Sales - Historical Data & Forecasts, 2007-2014 55

Confectionery 56

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2007-2014 57

Mass Grocery Retail 58

Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts, 2007-2014 59

Table: Sales Breakdown by Retail Format Type 59

Trade 60

Food & Drink Trade Balance - Historical Data & Forecasts 61

Macroeconomic Forecast 62

Industry Trend Analysis 64

Appropriation Remains Key Risk But Stronger Opposition And Drop In Inflation Seen As Positive 64

Company News Alert 66

AmBev Seeks Additional Scale In Difficult Venezuelan Market 66

Global Food & Drink View 68

Food and Drink Roundup : Core Views 68

BMI Food & Drink Core Views 72

BMI Forecast Modelling 73

How We Generate Our Industry Forecasts 73

Executive Summary

BMI View: Following a 5.8% year-on-year (y-o-y) contraction in Q110, the Venezuelan economy grew

by 10.4% quarter-on-quarter (q-o-q) in Q2, representing growth of -1.9% y-o-y Although it appears that the worst of the recession could be over, Venezuela's fragile economy remains in the grip of runaway

inflation, with BMI holding to our forecast that inflation will reach 40.0% by the end of 2010 Indeed,

food prices have increased by 41% in the past 12 months, despite the fact that the government has rolled out a popular chain of supermarkets selling food at discounted prices The Chávez administration has also been rocked by further criticism of its poor and corrupt management of food supply, as reports in the local and international press in June 2010 claimed that 80,000 tonnes of rotting food - including meat and powdered milk - had been found in warehouses belonging to the government The scandal came just weeks before crucial legislative elections held on September 26, which weakened Chávez's domination of the national assembly

However, the thawing of diplomatic tensions with Colombia may help to ease concerns of Venezuela's food supply problems Cross-border trade had been suspended since July 2009, when Chávez broke off diplomatic relations with former Colombian President Álvaro Uribe, in retaliation against accusations that Venezuela was aiding guerrillas belonging to the Fuerzas Armadas Revolucionarias de Colombia

(FARC) However, following the election of new Colombian President Juan Manuel Santos, it was announced in August 2010 that the two countries had resumed diplomatic relations and made a

commitment to improve security along their shared border to prevent drug traffickers and guerrillas taking shelter or launching attacks from the area The agreement opens up the prospect of resuming trade, which should help improve supply of meat and dairy products in Venezuelan shops

Venezuela has therefore been forced to turn to imports, primarily from Brazil, in order to guarantee supply

Venezuela is also being forced to increase its sugar imports as domestic production plummets We see production falling by 9.9% y-o-y in 2009/10 to 599,100 tonnes This has led to severe supply shortages;

however, the arrival of around 700,000 tonnes of imports, primarily from Brazil, has eased restrictions and in 2009/10, we see sugar consumption increasing by 13.2% y-o-y to 1.19mn tonnes

On September 1, the Venezuelan government announced that it would authorise increases in the price of corn, rice and sunflower seeds at the production stage, in order to encourage planting of these crops for the 2010/11 harvest The move came following sustained complaints from Venezuelan agricultural producers that the regulated farmgate prices had not been adjusted in line with rising costs The price for a kilogram of yellow corn increased by 27.5% from VEF0.80 to VEF1.02, while a kilo of white corn rose

by 27.8% from VEF0.90 to VEF1.15

Venezuelan imports of dairy products and poultry from Argentina have increased dramatically through

2010 Cheese imports shot up by 235% y-o-y in volume terms during the first seven months of 2010 to reach 1,924 tonnes The influx of imported produce is expected to impact negatively on domestic

producers who have long complained to the government about the excess of cheap imported goods

SWOT Analysis

Venezuela Agriculture SWOT

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

agricultural products

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

is sought after by producers of premium chocolate

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

has left Venezuela a major food importer

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

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

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

after years of decline

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

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

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

Venezuela

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

Venezuela Political SWOT

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

tradition of democracy, with elections held regularly since 1959

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

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

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

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

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

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

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

country's democratic institutions

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

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

a threat to private business activity

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

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

Venezuela Economic SWOT

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

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

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

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

energy sector makes the economy increasingly vulnerable to economic shocks

in the long term

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

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

an opportunity to benefit from increased competitiveness

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

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

in the economy, possibly bringing on hyperinflation

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

Venezuela Business Environment SWOT

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

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

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

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

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

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

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

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

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

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

Industry Forecast Scenario

Venezuela Dairy Outlook

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

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

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

by an estimated 17.6% Chávez's interest in milk production may yet turn out to be a mixed blessing as the private sector is dissuaded from investing in the sector With this in mind, we do not see the kind of leaps in production the government is hoping for and are forecasting growth of 7.4% from to 2009 to

2014 to 1.61mn tonnes Production should be aided by the government's increase of the price caps on

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

saw even stronger growth from 2004-2009 than fluid milk, expanding by an estimated 28.4% to reach 31,200 tonnes To 2014, we forecast production to grow by 6.1% to 31,320 tonnes

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

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

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

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

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

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

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

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

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

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

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

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

VENEZUELA Milk Production & Consumption

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

VENEZUELA Butter Production, Consumption & Trade

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

VENEZUELA Cheese Production, Consumption & Trade

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

VENEZUELA Whole Milk Powder Production, Consumption & Trade

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

Dairy Prices Raised By 30% Following Bolívar Devaluation

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

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

Argentinian Imports Rocket As Trade With Colombia Stalls

The recent spat between Venezuelan President Hugo Chávez and former Colombian president Álvaro Uribe saw imports of dairy products from Colombia fall At the end of July 2009, Chávez froze

diplomatic relations with Colombia in response to the country allowing US troops to operate out of their bases in the fight against drug production From January to October 2009, the value of Venezuela's imports of milk, dairy products, eggs and honey from Colombia plummeted 72.4% y-o-y, according to Colombia's statistics agency, DANE The recent election of the new Colombian President Juan Manuel Santos has seen diplomatic relations restored between the two countries However, it may be some time before dairy exports to Venezuela, at least legal ones, return to their former level

Any fall in imports caused by the dispute with Colombia will be welcomed by Venezuela's dairy farmers who have been complaining to the government about an excess of cheap imported milk powder on the market However, any potential benefits to domestic producers look to be offset by the increase in dairy imports from alternative sources, most notably Argentina In September 2010, statistics released by the Argentine government indicated that cheese exports to Venezuela during the first seven months of 2010 totalled 1,924 tonnes, at a value of US$8.4mn This was 235% up on the same period in 2009, when Venezuela purchased some 575 tonnes of Argentine cheese, worth US$1.7mn Venezuela has also

imported 18,700 tonnes of milk, at a cost of US$63.4mn The spike in imports is expected to hit sales of domestic cheese and represents a further blow for local producers

Government Enters Dairy Business

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

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

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

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

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

Parmalat in November 2007

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

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

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

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

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

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

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

VENEZUELA Milk Production & Consumption

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

VENEZUELA Butter Production, Consumption & Trade

VENEZUELA Cheese Production, Consumption & Trade

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

VENEZUELA Whole Milk Powder Production, Consumption & Trade

Colombia seem to be dying down, any renewed flare-up could once again act as a deterrent to investment

in dairy farming near the border With BMI forecasting Venezuela's GDP to contract by 3.8% in 2010,

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

Venezuela Livestock Outlook

BMI Supply View: After strong growth in the 1990s and the first few years of this decade, Venezuelan

beef production has gone into reverse in the past few years Venezuela was self-sufficient in beef in 2003, but in 2009 imports accounted for almost half of domestic consumption A complex system of price controls imposed by President Hugo Chávez in 2003 has restricted the profitability of livestock

production in the country The threat of land seizures has also inhibited investment in expanding

production In 2007, as feed costs began to rise rapidly, many producers left the sector as they were unable to sell their produce at a profit Production slumped 7.6% year-on-year (y-o-y) in 2007 and 16.3% y-o-y in 2008, according to figures from the US Department of Agriculture (USDA) Increasing demand has led to shortages of meat in the shops In August 2008, the government raised the price of beef to try and spur production, but farmers complained that it wasn't enough The fall in production has left

Venezuela, which in the first few years of this decade was all but self-sufficient in beef, having to import more than half its beef

Chávez is hoping to boost production by turning over land judged as unproductive to landless farmers The project, however, has met with mixed results with some formerly productive ranches seeing

production evaporate under the direction of inexperienced new managers In 2009, production fell again, falling by a further 5.6% y-o-y to 288,000 tonnes In 2010 we expect to see a moderate recovery as imports from Colombia continue to face restrictions, giving a boost to local producers We forecast production to grow by 10.3% y-o-y to reach 317,800 tonnes Towards the end of our forecast period we expect production to begin to rise again as the government makes efforts to lessen the reliance on imports

Poultry production has weathered the storm of Chávez' reforms somewhat better than the cattle rearing sector Production fell sharply in 2003 as Venezuela's economy was hit by recession The sector has recovered since that year, despite the price controls, though output is still way below the level seen in

2002 The poultry sector is well developed with many large, vertically integrated players This has helped producers continue to squeeze a profit despite rising feed costs Growth in production would surely have been much higher if it weren't for the price controls In 2008, as feed costs soared, production fell by 6.1% y-o-y to 695,000 tonnes For 2009, there was a small contraction in production of 2.2% y-o-y owing

to the economic difficulties and continued high input costs We see a moderate recovery in 2010, and forecast production to increase by 2.5% y-o-y to 696,700 tonnes The increase in March 2010 to the state-regulated price for poultry to VEF13.83 per kilo also provided a boost for producers Out to 2014, we see production increasing by 14.2% on 2009 output to reach 776,200 tonnes, still some way below the level seen in the early years of the 21st century

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

in demand was driven by a combination of strong oil-fuelled economic growth and government price controls making staple foodstuffs more affordable After falling sharply in 2003, poultry consumption had

grown by more than 50% by 2008 Beef consumption also grew by almost 40% between 2004 and 2008 While the price controls have increased demand, they have, as discussed above, worked against

investment in production This has often left consumers unable to buy meat, at least not at government prices Poultry imports reached 352,000 tonnes in 2008 while 320,000 tonnes of beef were imported as domestic production was unable to meet demand In 2009, with Venezuela's economy contracting by 1.8%, we expect there to have been large falls in consumption and imports of meat, with more expensive

beef particularly hard hit In 2010, with BMI forecasting an even larger annual fall in GDP of 3.8%, we

expect meat consumption to fall once again, with beef consumption particularly hard hit as consumers trade down to cheaper meats We have revised down our forecast for beef consumption in 2010 owing to the continued trade dispute with Colombia, as well as the devaluation of the bolivar in January 2010 which will see the cost of imported beef rise We now forecast demand for beef to fall by 16.2% y-o-y to 451,000 tonnes

In the later years of our forecast period, we see growth in poultry, pork and beef picking up but at a slower pace to that witnessed between 2004 and 2009

VENEZUELA Poultry Production, Consumption & Trade

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

VENEZUELA Pork Production, Consumption & Trade

VENEZUELA Beef & Veal Production, Consumption & Trade

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

Butchers Behind Bars

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

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

of charging VEF24-40 per kilo, depending on the cut Butchers have complained that they have to pay around VEF14 for the meat, leaving them unable to cover the costs of running their business The price controls have remained unchanged since 2008, despite rocketing inflation that has led to steep increases

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

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

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

Thawing With Colombia To Ease Beef Supply Restrictions

The long-running trade dispute between Venezuelan President Hugo Chávez and former Colombian president Álvaro Uribe has posed difficulties for Venezuela's beef supply for over a year In 2008,

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

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

October 2009, according to Colombia's statistics agency DANE, with total imports from Colombia for the month falling by 70.4% In late October, Venezuela's minister of food told newspaper El Universal that

no permits to import meat from Colombia had been issued since before September The minister said the shortfall in key foods such as meat would be made up by increased imports from other countries in the region such as Brazil, Argentina and Paraguay In August 2009, a US$1.1bn deal was signed for imports from Argentina including 80,000 tonnes of beef However, with Argentina's agricultural sector wracked

by drought, this may not be enough to supply food-deficit Venezuela Chávez also sourced the import of 6,000 head of cattle from Nicaragua

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

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

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

to ease supply shortages of beef on Venezuelan shelves

Militia Fears Spook Ranchers

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

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

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

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

VENEZUELA Poultry Production, Consumption & Trade

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

VENEZUELA Pork Production, Consumption & Trade

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

VENEZUELA Beef & Veal Production, Consumption & Trade

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

in power for some time to come The government's highly interventionist stance towards food production

and supply in Venezuela means that meat production will be highly dependent on government policy If prices are subjected to further controls as Venezuela's economy contracts, production could fall further as more operators leave the sector Another factor that will have a great influence over demand for livestock

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

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

Venezuela Cocoa Outlook

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

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

of that is consumed domestically, leaving little left for exports In 2008, Venezuela produced 19,000 tonnes of cocoa In 2008/09, we estimate production to have risen by 18.4% to 22,500 tonnes as

producers took advantage of the high world cocoa prices In 2009/10, however, we have revised down our forecast for production owing to the impact of the long drought that has afflicted parts of Venezuela

Despite its current low fortunes, Venezuelan cocoa beans are still regarded as some of the finest in the world and sell at a premium on the world market, often commanding prices of two to three times above those achieved by cocoa from other growing regions In 2005, President Hugo Chávez announced plans to revitalise the cocoa industry Cocoa growers and grinders have been granted credit from the government

to increase production and the government has also reportedly invested US$2mn in reopening a chocolate factory in Sucre State

However, for production to be significantly increased, a number of obstacles must be overcome Yields at only 0.34 tonnes per hectare are very low by international standards and farms have been starved of investment for years Renewing cocoa trees and improving infrastructure in cocoa growing areas will take

time and a concerted investment effort While BMI is forecasting cocoa production to increase over our

forecast period to 2013/14, we do not see the large gains that the government is hoping for being

achieved

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

Venezuela over recent years With the recovery of the economy beginning in 2004, demand for cocoa rose rapidly in 2004 and 2005 as consumers had more money to spend on non-essential food Since then, however, high food price inflation has once again strained consumers' food budgets and consumption growth has stagnated, falling 2.2% to an estimated 14,180 tonnes in 2008 We expect the fall in

consumption to accelerate in 2010 as Venezuela is expected to suffer a second successive year of

economic contraction With food prices still rising consumers are likely to see their budgets pressed even further in the coming year To 2014, forecast cocoa consumption to fall to 13,980 tonnes

VENEZUELA Cocoa Production, Consumption & Trade

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

Coveted Chuao Beans Premier On US Market

If production can be increased, Venezuelan cocoa would likely find a willing market in the premium chocolate sector due to its world-renowned Criollo cocoa, which is far superior in quality to the mass-produced cocoa of West Africa The varietal is among the most sought after and expensive in the world and is highly sought after by international chocolatiers for its aromatic flavours Chuao criollo beans - named after the plantation and geographical area in which they are grown - are considered Venezuela's finest beans and among the best in the world The 140-hectare plantation is located in Northern Venezuela inside one of Latin America's oldest national parks, the Parque Nacional Henri Pittier Rancho Grande Farmers from the village of Chuao have cultivated cocoa for over 300 years and maintain traditional farming, which guarantees the beans' unique flavour Beans are famously sun-dried on the patio of the village's centuries-old colonial church, rather than dried in kilns In addition, the region's unique soil conditions and humid, the wet equatorial climate creating optimal production conditions for the cocoa

bean Cocoa production is managed by the community's cooperative, the Empresa Campesina de Chuao, Since 2000, the Chuao bean has been protected by an appellation of origin, which helps the

cooperative to command high prices for their produce

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

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

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

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

through his close relationship with cocoa growers in Venezuela

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

traditional techniques of many produces has, however, aided the development of organic cocoa farming, a further niche market with huge promise for the Venezuelan cocoa sector, due to the large premium commanded by organically grown beans on the international market

VENEZUELA Cocoa Production, Consumption & Trade

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

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

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

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

consumers in high-income countries are forced to cut back on non-essential products such as premium chocolate At present, however, cocoa prices are bucking the trend for falling commodity prices and at the time of writing were still above US$3,000 per tonne

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

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

Venezuela Sugar Outlook

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

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

2008/09, however, heavy rains followed by severe droughts saw yields fall and production dropped by 14.7% year-on-year (y-o-y) to an estimated 665,000 tonnes In addition, the uncertain investment climate and marginal profitability of the sugar sector has seen the area planted to sugar fall National Federation

of Associations of Venezuelan Cane Producers (FESOCA) estimates that the area planted could fall by 20% over the next three years due to land seizures and government price caps deterring producers As a result, we see production falling again in 2009/10 and have pencilled in a decline of 9.9% y-o-y to take production to 599,100 tonnes We see production increasing only marginally in 2010/11 to 608,500 tonnes as land expropriations and price controls continue to deter producers

Over our forecast period to 2013/14, we expect sugar production to increase gradually to reach 674,900 tonnes This will be achieved with new mills coming on line We warn, however, that this will be

dependent on the policies of President Hugo Chávez' government In 2008, a number of sugar cane plantations were seized by the government If this policy continues and the new co-operatives created to run the plantations are unable to sustain production, then the managers of the new mills being built may find that there is not enough cane to supply them

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

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

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

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

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

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

of sugar again to VEF3.73/kg We expect this to have only a moderate impact on consumption, with supply shortages a more likely constraint Around 60% of sugar is destined for the industrial sector and used in soft drinks, snacks and confectionary Domestic consumption accounts for the remaining 40% In

2009/10, we see sugar consumption increasing by 13.2% y-o-y to 1.19mn tonnes as an increase in imports helps to ease supply restrictions To 2014, we expect sugar consumption to grow by 17.1% on the 2009 level to reach 1.23mn tonnes

VENEZUELA Sugar Production, Consumption & Trade

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

Price Rise Fails To Revitalise Sugar Sector

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

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

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

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

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

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

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

Seizures Continue Into 2010

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

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

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

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

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

in production from the seized mills any time soon

Seizures Alone Cannot Drive Production

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

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

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

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

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

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

Shortages Force Changes In Consumption

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

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

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

VENEZUELA Sugar Production, Consumption & Trade

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

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

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

Venezuela Coffee Outlook

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

country, along the border with Colombia Favourable growing conditions led to a comparatively good coffee harvest in Venezuela in 2007/08, with production rising by 4.4% year-on-year (y-o-y) to 900,000

60 kilogramme (kg) bags However, in the 2008/09 coffee year, production fell off again, as low

government-mandated prices hurt the profitability of coffee production in Venezuela, particularly given the large increase in the price of inputs such as fertiliser in 2008 Heavy rain through the latter months of

2008 and first quarter of 2009 also saw yields decline Production is estimated to have fallen 6.1% y-o-y

to 845,000 bags

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

to El Niño-Southern Oscillation in the Pacific The failure of prices to keep a pace with increasing costs in the face of rocketing inflation has also meant that farmers continue to turn to 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

As a result, we forecast production to sink to 744,000 tonnes, down by 12.0% y-o-y Production is

forecast to fall again in 2010/11, and for the second year in succession, domestic demand is expected to outstrip supply

Government support for small-holder coffee growers, who make up the majority of farms, could see production grow once again over the late years of our forecast period, and we currently see production reaching 870,000 60kg bags, 3% higher than the level seen in 2009 This, however, will be dependent on government policy, particularly price controls If the government responds to the current demands from millers and producers to relax price controls, interest in investing in production of Venezuela's high-quality coffee would likely increase, leading to greater production than we are currently expecting Conversely, if price controls continue to squeeze profits, farmers may switch to other less tightly

controlled crops

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

1.9kg per year is some way below other Latin American countries, such as Brazil and Argentina, where per capita consumption is 4.6kg and 4.0kg, respectively Consumption in 2007/08 grew 8.9% y-o-y to 860,000 bags and expanded again in 2008/09 growing 7.6% y-o-y to 925,000 bags The vast majority of coffee consumed is roasted ground coffee, with soluble instant coffee accounting for only around 1% of total consumption While controls on the retail price on ground coffee have allowed more low-income Venezuelans to afford it, they have also led to severe supply shortages and a booming black market Wealthier consumers were able to buy their coffee at cafes or street stalls, but poorer consumers are often unable to afford the high prices The government has, as usual, blamed the shortages on unscrupulous suppliers hoarding their stock, rather than selling it at the mandated prices The Venezuelan Coffee

Industry Association, however, has blamed the shortages on the strict control of how much coffee that roasters must pay for beans and for how much they are allowed to sell the finished product Until this situation is resolved, growth in coffee consumption will be hindered by the supply shortages and the disincentives to invest in the sector that come from price controlling In 2009/10, we expect a small fall in consumption as Venezuela's economy faces severe contraction

VENEZUELA Coffee Production & Consumption

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

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

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

coffee was once again disappearing from shop shelves In that month the government raised the retail price of coffee to VEF18.85/kg from VEF11.45 to try and spur production The farmgate price for a quintal of best green coffee is set at VEF585 Faced with inflation and increased costs, coffee producers were hoping for a further increase to VEF850 for the 2009/10 harvest in order to see modest profits on their crop However, the government has not made any change to the price

In 2004, the government announced plans to invest US$156mn in the sector as part of its ambitious 'Coffee Plan', so production could more than double to 3mn quintals (2.3mn bags) by 2007 The area planted with coffee was to increase by 50,000 hectares, and the government would plant new trees and build new roads in coffee growing areas Despite considerable investment, the plan has been a failure and the area planted to coffee has actually decreased to around 200,000 hectares Growers were dissuaded from investing in production increases by unappealing government-fixed farmgate prices which have failed to increase in line with rises in production costs, decreasing the profitability of coffee As a result, farmers have increasingly turned towards more profitable crops, complaining that the price they received for coffee did not cover production costs

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

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

Government Forced To Turn To Imports As Production Dwindles

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

management as well as adverse weather conditions have forced the government to turn to imports to meet domestic coffee demand Since 2002/03, Venezuelan coffee imports had been negligible, totalling 0-13,000 bags per year However, in 2009/10, imports are expected to total 310,000 bags, with the heavy reliance on imported coffee set to continue into 2010/11 182,580 bags came from Brazil, 121,348 bags from Nicaragua and 6,957 bags from El Salvador

Coffee Plants: Victims Of Nationalisation

At the beginning of August 2009, the Venezuelan government announced that it would expropriate two

coffee processing companies: Fama de América and Cafe Madrid The action was taken as the

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

to have been sparked by an announcement by the companies that they were running out of coffee supplies and had enough left to meet only a few days of demand The government claimed the companies had been involved in illegally exporting coffee to Colombia to take advantage of the higher prices The government

initially claimed the seizures would be temporary But a few days after the occupation of the plants, Chávez spoke of permanently expropriating them This move seemed increasingly likely in September after Commerce Minister Eduardo Samán said in a speech that he would recommend for the companies' assets to be expropriated following the expiration of the initial intervention order used to take control of the plants In mid-November, the government finally announced the official expropriation of Fama de

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

seized control of a Fama de América processing plant in the state of Carabobo after talks to agree a price for the plant broke down, as reported by Associated Press It was unclear whether Fama de América would receive compensation At the time of writing, the government was still in discussions with Cafe Madrid over the formation of a joint venture

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

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

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

operating environment to continue into 2010 and beyond as price controls continue

Premium Coffee Controls Hit Imports

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

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

y-o-y in the first 11 months of 2009, primarily due to the collapse in demand from Venezuela, its major export market In total, the value of Colombian coffee and tea exports to Venezuela plummeted from

US$1.77mn in the first 10 months of 2008 to US$54,450 in the same period of 2009 The fall was caused

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

Venezuela and Colombia owing to the ongoing spat between the countries' leaders Some low-grade Colombian coffee is reportedly still being imported by Venezuela to make instant coffee To make up for the fall in Colombian coffee, importers have turned to other markets such as Brazil In the longer term, we expect Colombian coffee to re-establish itself in the Venezuelan market The election of new Colombian President Juan Manuel Santos should present a good opportunity to reset relations between the two countries and normalise trade relations

VENEZUELA Coffee Production & Consumption

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

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

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

Venezuela Grain Outlook

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

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

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

When the market was opened up in the 1990s, domestic farmers found it hard to compete with imports and production fell Production climbed back up, reaching an estimated 2.00mn tonnes in 2006/07 However, production has since fallen again, mainly as a result of unfavourable weather conditions Output fell to 1.8mn tonnes in 2007/08 and remained at the same level in 2008/09 The most severe droughts seen in 37 years hit the 2009/10 harvest and production is forecast to have dropped by 23.3% to 1.38mn tonnes In addition to the extreme weather conditions, production has also been affected by

regulated farmgate prices and retail prices (see below for further comment)

Out to the end of our forecast period to 2013/14, the level of production will be highly reliant on the ability of President Hugo Chávez's government to support the agricultural sector Without continued support, much of the newly opened farmland would return to fallow Despite this risk, we do expect output to continue to rise and are forecasting production to grow by 16.0% to reach 2.10mn tonnes in 2013/14

Wheat production in Venezuela is negligible as the country does not have a suitable climate for growing wheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming from the US and Canada Venezuelan imports of US wheat totalled US$132mn in 2008, according to the Office of the US Trade Representative

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

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

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

arpea, a flat unleavened bread Total corn consumption rose 73.0% from 2004 to 2009, outstripping

growth in production Imports come primarily from the US We see demand dipping slightly in 2010, as the livestock sector is affected by the turbulent economic climate As such, we have pencilled in a

decrease of 3.3% to 3.10mn tonnes Going forward, we see demand picking up, as it is one of the

cheapest foods available and the price is kept down by government price controls

Wheat consumption has been gaining in popularity this decade as Venezuelan consumers have had more money to spend on food Consumption of both bakery goods and pasta has been rising Price controls mean pasta has become far more affordable and per capita consumption has now risen to around 14kg The majority of pasta produced is lower grade and must be sold at a government-set price Some high grade pasta is also produced which can be sold at market prices The high prices on the world market in 2007/08 saw consumption fall by 10.1% y-o-y to 1.53mn tonnes, and demand grew only marginally in 2008/09 As a result of rising wheat prices on the international market, we now see consumption dropping slightly in 2009/10, and forecast demand to drop by 1.4 y-o-y to 1.54mn tonnes Out to 2014, we see consumption growing by 13.6% on the 2009 level to reach 1.77mn tonnes

VENEZUELA Wheat Consumption

Wheat Consumption,

'000 tonnes 1 1,559.0 1,536.8 1,555.8 1,622.6 1,692.5 1,771.0

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

VENEZUELA Corn Production, Consumption & Trade

Chávez Authorises Corn Price Hike

In September 2010, Hugo Chávez's government announced that it would authorise increases in the price

of corn, rice and sunflower seeds at the production stage, in order to encourage planting of these crops for the 2010/11 harvest The move came following sustained complaints from Venezuelan agricultural producers that the regulated farmgate prices had not been adjusted in line with rising costs, which have been driven upwards by high inflation

On September 1, the price for a kilogram of yellow corn increased by 27.5% from VEF0.80 to VEF1.02, while a kilo of white corn rose by 27.8% from VEF0.90 to VEF1.15 The price rise will come as welcome relief to grain producers who have struggled to keep a pace with the increasing input costs in the face of rocketing inflation

Mixed Results For Chávez's Production Drive

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

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

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

Chávez's aim to attain self-sufficiency is a long way from being realised and Venezuela is still heavily reliant on grain imports to fuel domestic demand, both for human consumption and for the livestock industry Indeed, in 2010 the government is set to relax import permit procedures in order to reinforce its 'food security' policy and avoid domestic food shortages In 2009/10,corn imports are forecast to total 1.30mn tonnes, a similar total to that seen in 2008/09, of which 300,000 tonnes are expected to be white corn, which is largely for human consumption, and a further 1.0mn tonnes of yellow corn for animal feed, according to data from the US Department of Agriculture (USDA) In addition, Venezuela is expected to import some 1.6mn tonnes of wheat