Venezuela agribusiness report q4 2012

However, many producers are concerned that the elimination of tariffs will mean cheap imports of coffee, soy and meat threatening domestic production, which has already been hit by price

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DISCLAIMER

REPORT Q4 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Venezuela Agriculture SWOT 7

Venezuela Business Environment SWOT 7

Supply & Demand Analysis 8

Venezuela Livestock Outlook 8

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

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

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

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

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

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

Venezuela Grain Outlook 14

Table: Venezuela Wheat Consumption, 2011-2016 16

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

Table: Venezuela Wheat Consumption, 2008-2012 20

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

Venezuela Coffee Outlook 21

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

Table: Venezuela Coffee Production & Consumption, 2008-2012 26

Commodity Price Analysis 27

Monthly Softs Update 27

Cocoa: Momentum Waning 28

Coffee: Temporary Rally 29

Cotton: Forming A Base 30

Palm Oil: Underperforming The Complex 31

Sugar: Scope For A Moderate Rebound 33

Table: Select Commodities: Performance & Forecasts 34

Monthly Grains Update 36

Wheat: Little Relief From Southern Hemisphere 37

Corn: Looking The Weakest 38

Soybean: Prices To Stay Relatively Supported 40

Rice: Still The Underperformer 41

Table: Select Commodities: Performance & Forecasts 43

Upstream Analysis 44

Americas GM Outlook 44

Americas Machinery Outlook 48

Americas Fertiliser Outlook 51

Downstream Analysis 55

Food 55

Food Consumption 55

Table: Venezuela Food Consumption Indicators – Historical Data & Forecasts, 2009-2016 55

Canned And Prepared Food 56

Table: Canned Food Value/Volume Sales – Historical Data & Forecasts, 2009-2016 56

Table: Oils & Fats, 2009-2016 58

Confectionery 59

Table: Confectionery Value/Volume Sales – Historical Data & Forecasts, 2009-2016 60

Drink 60

Alcoholic Drinks 60

Table: Alcoholic Drink Value/Volume Sales – Historical Data & Forecasts, 2009-2016 61

Table: Wine, 2009-2016 61

Soft Drinks 62

Table: Soft Drink Value Sales – Historical Data & Forecasts, 2009-2016 63

Hot Drinks 63

Table: Hot Drink Value Sales – Historical Data & Forecasts, 2009-2016 63

Mass Grocery Retail 64

Table: Mass Grocery Retail Sales By Format – Historical Data & Forecasts, 2009-2016 64

Table: Sales Breakdown by Retail Format Type 65

Trade 65

Table: Food & Drink Trade Balance – Historical Data & Forecasts, 2009-2016 65

Country Snapshot 66

Table: Venezuela’s Population By Age Group, 1990-2020 (‘000) 67

Table: Venezuela’s Population By Age Group, 1990-2020 (% of total) 68

Table: Venezuela’s Key Population Ratios, 1990-2020 69

Table: Venezuela’s Rural And Urban Population, 1990-2020 69

BMI Forecast Modelling 70

How We Generate Our Industry Forecasts 70

Executive Summary

BMI View: While the likelihood of a victory by opposition candidate Henrique Capriles Radonski in

Venezuela’s October 7 presidential election has increased in recent months, we still believe President Hugo Chávez is the most likely winner Whatever the outcome of the election, making improvements to Venezuela’s deep-seated economic and social problems will be extremely challenging Venezuela’s agricultural and agribusiness sectors remain crippled by a combination of rising input costs, spiralling inflation, poor management and infrastructure, and controlled farmgate prices With the country

increasingly reliant on imports to meet domestic demand, the outlook for the sector is poor We hold to our forecast that the bolívar will be subject to devaluation following the election While the overvaluation

of the bolívar is exacerbating the problem of competition from imports, devaluation may add to the runaway inflation that is eroding producers’ profitability

Key Forecasts

ƒ Venezuela faces major political and economic uncertainty in the run-up to and immediate aftermath of the election Although real GDP growth came in at 5.6% y-o-y in H112, we still expect a sharp slowdown in growth in the second half of the year, as the country’s current growth model, which is driven by pre-electoral fiscal and monetary stimulus, is unsustainable

We forecast full-year GDP growth of 4.7% in 2012 and 2.6% in 2013 Consumer price inflation will remain elevated, forecast at 26.0% in 2012 and 20.0% in 2013, the highest level in Latin America The operating environment will remain very precarious for foreign multinationals in the country

ƒ The lack of profitability is leading beef producers to leave the sector The national cattle herd is forecast to shrink by 4.7% y-o-y in 2012 to 12.1mn head We forecast that production will fall to 290,000 tonnes This is a bigger fall than previously forecast, owing to producers leaving the sector liquidating their herds We see production increasing to 297,000 tonnes in 2013 Policy changes after the presidential election could mean production increases further We forecast production reaching 321,000 tonnes in 2016

ƒ After shooting up by 49.1% to 1.31mn bags in 2011 due to an increase in imports, we forecast that coffee consumption will increase only marginally in 2012 to reach 1.32mn bags We forecast consumption remaining at a similar level in 2013 Through to 2016, we forecast demand growing by 4.5% on the high 2011 level to 1.36mn bags

Key Trends And Developments

ƒ In July 2012, Venezuela was granted full membership of the South American trading bloc

Paraguay because of concerns over a lack of democratic rights in Venezuela However, Paraguay has been suspended from Mercosur until its presidential election in 2013 due to the impeachment

of President Fernando Lugo Chávez has highlighted the potential for Venezuela to widen its market access and diversify its exports However, many producers are concerned that the elimination of tariffs will mean cheap imports of coffee, soy and meat threatening domestic production, which has already been hit by price controls, inflation and a lack of investment

ƒ In September 2012, the government announced a further increase of an average of 33% in fixed coffee prices The price for Good Washed ‘A’ green coffee rose from VEF1,200 to VEF1,600 per quintal; Good Washed ‘B’ rose from VEF 1,080 to VEF1,400 and Good Washed ‘C’

increased from VEF980 to VEF1,350 Lower-quality coffee prices also rose, with Good Natural rising from VEF940 to VEF1,240 and Natural Standard increasing from VEF820 to VEF1,090 Prices charged to consumers for ground coffee are likely to be revised in Q412 In addition to the price increases, the Ministry of Agriculture and Land said it would open 35 purchase points to serve producers in Lara, Barinas, Portuguesa, Trujillo, Mérida, Táchira and Monagas It will also open nine roasters, five of which will purchase directly from farmers to eliminate middlemen The changes have disappointed producers, who argue the price increases are insufficient to cover the rapid increase in production costs Manuel Morillo, director of the Association of Venezuela Coffee Producers, said the organisation had worked for months to demonstrate to the ministry that the true costs of production are VEF1,700-2,200 per quintal

ƒ On August 1 2012, the government raised the farmgate prices of corn and rice The price of yellow corn increased by 42.9% from VEF1.33 to VEF1.90 per kilo, while white corn rose by 46.6% from VEF1.50 to VEF2.20 However, the increase has not been sufficient to satisfy producers, who argue that even with the price rises they cannot cover production costs, which have increased dramatically Antonio Pestana, vice president of the National Confederation of Agricultural Producers Associations of Venezuela (Fedeagro), said the cost of producing a kilo

of white corn is VEF2.40, VEF0.20 higher than the new government-mandated price He also warned that a failure to invest in improving crop irrigation and drainage poses threatens the recovery of domestic grain production, leaving the crops vulnerable to drought and flooding

SWOT Analysis

Venezuela Agriculture SWOT

agricultural products

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

has left Venezuela as a major food importer

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

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

after years of decline

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

ƒ Falling oil revenue is bringing more attention to increasing agricultural production

to reduce the cost of food imports

Venezuela

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

Venezuela Business Environment SWOT

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

political environment, could undermine the long-term growth outlook

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

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

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

ƒ State expropriation of ‘idle’ plants and proposals for land reform will act as a

Supply & Demand Analysis

Venezuela Livestock Outlook

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

Venezuelan beef production has gone into reverse in the past few years Venezuela was self-sufficient in beef in 2003, but in recent years the country has become increasingly reliant on imports to meet domestic demand A complex system of price controls imposed by Chávez in 2003 has restricted the profitability of livestock production in the country Chávez is hoping to boost production by turning over land judged as unproductive to landless farmers The project, however, has had mixed results: some formerly productive ranches have seen production evaporate under the direction of inexperienced new managers

We believe that beef production fell by 3.7% y-o-y to 335,000 tonnes in 2011 as high energy and feed costs led to a lack of profitability for producers Furthermore, heavy rains and mudslides in February-May

2011 flooded pasture lands in north-west Venezuela, affecting livestock production The sector continues

to be held back by a lack of profitability due to high input costs, inflation and government price controls, along with increased competition from imports from Brazil, Colombia and Nicaragua Including live animal imports for slaughtering, Venezuela depends on imports for more than half of beef consumed, according to Instituto Nacional de Estadística (INE) The lack of profitability is leading producers to leave the sector and the national cattle herd is forecast to shrink by 4.7% y-o-y in 2012 to 12.1mn head

We forecast that production will fall to 290,000 tonnes This is a bigger fall than previously forecast, owing to producers leaving the sector liquidating their herds We see production increasing to 297,000 tonnes in 2013 Policy changes after the presidential election in October could see production increase further

Towards the end of our forecast period, we expect production to rise as the government makes efforts to lessen the reliance on imports However, the recovery will be slow and we forecast production reaching just 321,000 tonnes in 2016

Poultry production has weathered the storm of Chávez’s reforms better than the cattle-rearing sector It accounts for an estimated 30% of total agricultural GDP and almost 50% of animal production The poultry industry is vertically integrated and efficient, and producers are constantly working to modernise and improve their production methods Despite these strengths, the sector has been hit by the poor

economic climate, high input costs and increasing competition from imports from Brazil and Argentina Producers continue to be affected by the state-controlled price regime, which is squeezing profitability The state-regulated price for poultry was increased in March 2010 to VEF13.83/kg This provided some relief for producers but has done little to stem the downward spiral We estimate output fell by 3.8% y-o-

y in 2011 to take production to 625,000 tonnes and we forecast a further decline of 3.0% in 2012 to 606,000 tonnes Through to 2016, we see production recovering to 653,000 tonnes

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

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

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

in demand was driven by a combination of strong, oil-fuelled economic growth and government price controls making staple foodstuffs more affordable After falling sharply in 2003, poultry consumption grew by more than 50% by 2008 Beef consumption grew by almost 40% between 2004 and 2008 In

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

We believe demand for poultry fell by 3.2% y-o-y to 859,000 tonnes in 2011 on the back of lower

production Imports of an estimated at 234,000 tonnes supported domestic demand We forecats

consumption growing by 1.6% in 2012 to 872,700 tonnes By 2016, we forecast demand for poultry will grow by 10.5% on the 2011 level to 949,300 tonnes

In 2011, the reliance on imports continued to shore up beef consumption and we estimate consumption increased by 6.1% y-o-y to 555,000 tonnes High import prices and a drop in domestic production are likely to constrain beef consumption We therefore forecast demand to grow by 0.9% y-o-y in 2012 to 560,000 tonnes Despite the increase in imports, consumption continues to be constrained by limited availability Through to 2016, demand for beef is forecast to grow to 596,100 tonnes

Pork consumption is much lower than that of poultry and beef Consumption grew by 8.4% in 2006-2011

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

Table: Venezuela Poultry Production & Consumption, 2011-2016

Table: Venezuela Pork Production & Consumption, 2011-2016

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

e/f = BMI estimate/forecasts Source: USDA

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

Beef & Veal Production, ‘000 tonnes 335.0 290.0 297.0 306.0 314.0 321.0Beef & Veal Consumption, ‘000 tonnes 555.0 560.0 568.4 578.6 587.3 596.1

e/f = BMI estimate/forecast Source: USDA

Chávez Unveils Plans To Increase Livestock Production

In late January 2012, Chávez announced the relaunchof the Gran Misión Agro Venezuela, his

government’s plan to boost agricultural production and improve food security in Venezuela As part of the relaunch, Chávez announced the creation of the Organo Superior de Agricultura, a new body which will be headed up by the president, alongside Elías Jaua, the vice president and new Minister of

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

production, which currently stands at just 800,000ha, with the aim of growing the national herd to 20mn head by 2019 Chávez asked for the cooperation of local government to achieve these aims He also promised a further VEF114mn (US$26.5mn) in investment to improve the agricultural transport network

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

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

structural problems in the sector if significant gains in production are to be made In particular, farmgate price controls and high input costs are severely affecting the profitability of the sector and providing significant disincentives for producers

Chávez Orders Further Vestey Land Seizures

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

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

company is owned by Lord Vestey’s family, who first began trading in Venezuela in 1909 Agroflora is engaged in the production of cattle, beef and buffalo Chávez announced the news during a live broadcast

on state television channel Vive, claiming that under the terms of the Food Security and Sovereignty Law land is ‘social property’ Chávez said the expropriation followed a breakdown in negotiations with Agroflora over a compensation agreement for the land

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

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

Chávez’s weekly programme, Aló Presidente, and came just days after his United Socialist Party of Venezuela failed to maintain his powerful two-thirds supermajority in local elections owing to inroads made by a coalition of opposition parties In response, Chávez called for an acceleration of the agrarian reform programme and vowed to clamp down on foreign landholding

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

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

Beef Price Rise Brings Some Relief For Producers

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

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

profitability to the sector

Improved Relations With Colombia Ease Beef Supply Restrictions

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

While we do not believe exports completely ground to a halt, even if official trade is completely stopped,

a lucrative smuggling industry remains, the fall in trade placed strain on Venezuela’s meat supply The value of imports of meat and offal from Colombia fell by a whopping 97.6% y-o-y in October 2009, according to Colombia’s statistics agency DANE, with total imports from Colombia for the month falling

by 70.4% Venezuela was forced to seek imports from other countries in the region, including Brazil, Argentina, Paraguay and Nicaragua

However, in August 2010, Colombian President Juan Manuel Santos met with Chávez and agreed to restore diplomatic relations between the two countries The two presidents agreed to reinforce security along their shared border to clamp down on terrorist groups and drug trafficking Venezuela also agreed

to pay debts amounting to some US$800mn to Colombian exporters The agreement paves the way for the restoration of trade relations between the two countries, which promises to ease supply shortages of beef

on Venezuelan shelves

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

following a meeting in Cartagena The deal opens the way for Colombia to export 6,500 head of cattle in addition to 3,000 live cattle and 3,500 pregnant cows to increase Venezuela’s breeding stock The deal also included the offer to export 60,000 day-old chicks and 100,000 hatching eggs

Then in April 2012, the Venezuelan Minister of Foreign Affairs Nicolás Maduro and his Colombian counterpart María Holguín signed a partial bilateral trade agreement, at the sixth Summit of the Americas

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

Butchers Behind Bars

Controversy hit the beef sector in 2010 as at least 40 butchers were arrested in early May on charges of selling meat at higher prices than authorised by the government’s strict price control system The

government at the time allowed beef to be sold at VEF17 (US$4) per kilogram, but the butchers are accused of charging VEF24-40 per kilo, depending on the cut Butchers have said that they have to pay around VEF14 for the meat, leaving them unable to cover the costs of running their business Eight butchers have been found guilty, fined US$3,000 and put on parole; they also must check in with the court every two weeks, according to Dow Jones A further 32 butchers are yet to be tried; if convicted, they too face heavy fines or between two and six years in prison

Chávez has criticised the butchers’ arrest, arguing that officials from the government’s consumer rights defence institute, Indepabis, should instead scrutinise the activities of the distributors and big businesses

in the beef industry Chávez insisted that if they are found to be violating price controls their assets should

be expropriated

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

Militia Fears Spook Ranchers

Government-supported farm invasions by the rural poor have been a regular occurrence under the rule of Chávez Venezuela’s wealthy ranchers have therefore been particularly perturbed by the announcement of the formation of armed peasant militias The Associated Press reported that Chávez said that poor farmers needed protection from gangs loyal to wealthy landowners The government has said that 300 poor farmers were killed by the gangs over the past decade, a claim the ranchers deny Ranchers in turn said that they have been the target of kidnapping and extortion by gangs supportive of the government While poor farmers have undoubtedly become the victims of predatory landlords in the past, the spectre of armed mobs with government sanction is a worrying one for Venezuela’s already struggling cattle

ranching industry The move to arm the groups, if followed through, is likely to see a rise in violence in rural areas and will inhibit investment by ranchers worried that their land or livestock could fall victim to the militia This would slow any recovery in beef production

Table: Venezuela Poultry Production & Consumption, 2008-2012

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

e/f = BMI estimate/forecast Source: USDA

Table: Venezuela Pork Production & Consumption, 2008-2012

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

production and provide affordable meat to the masses will be dependent on oil revenues being sufficient

If the price of oil falls again, demand for meat would likely be hit

Venezuela Grain Outlook

BMI Supply View: Venezuela is a major net importer of 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 Abou 65% of the area planted is white corn for human consumption; the remainder

is yellow corn for both human consumption and for feed The viability of corn production in Venezuela is heavily dependent on government policy In the 1980s, the country’s agricultural sector was heavily regulated, and high tariffs were imposed on grain imports This saw corn production more than double in the second half of the 1980s With little competition from imports, however, productivity remained low When the market was opened up in the 1990s, domestic farmers found it hard to compete with imports, and production fell Since then, the introduction regulated farmgate prices and retail prices has hit

profitability and seen output decrease further Poor weather conditions, land expropriations and the

seizure in October 2010 of Agroisleña, the main private sector distributor of agricultural inputs,

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

Following droughts, heavy rains in December 2010 hit the 2010/11 harvest In response to the widespread flooding, in January 2011 Chávez unveiled the Gran Misión Agro Venezuela, which formed part of his government’s two-year plan for the agricultural sector, the Plan Bienal para la Producción de Alimentos

2011-2012 The plan set out ambitious aims for agricultural production, including boosting white and yellow corn by 61% and 110%, respectively, over the course of two years

The goals for the first year of the project were not met, however Further rains caused damage to crops, and the sector has continued to be held back by shortages of technical staff and equipment, delays in financing to farmers and inefficient production techniques In 2010/11, we estimate that corn production rose by just 4.7% y-o-y on the low 2009/10 harvest to 1.71mn tonnes In 2011/12, we see production falling by 15.2% y-o-y to 1.45mn tonnes as poor weather, poor agricultural policies, a lack of fertiliser and low profitability continue to blight the sector In 2012/13, we believe that output will recover by 22.1% y-o-y to 1.77mn tonnes Output is expected to be aided by the government’s announcement that it will assist corn producers through the winter crop cycle by providing fertiliser and seeds through the

state-owned Agropatria chain of agricultural supply shops

Out to the end of our forecast period in 2016, the level of production will be highly reliant on the

government’s ability to support the agricultural sector Without continued support, much of the newly opened farmland will very likely return to fallow Despite this risk, we expect output to rise and forecast production to grow by 18.7% on the 2011 level to reach 2.03mn tonnes

Wheat production in Venezuela is negligible, as the country does not have a suitable climate for growing wheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming from the US (42%) and Canada (52%) In March 2011, wheat was added to the list of goods classified by the government as essential or staple, which helps to expedite import procedures Venezuelan wheat imports totalled an estimated 1.59mn tonnes in 2011/12 Imports are forecast to remain at a similar level

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

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

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

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

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

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

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

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

Wheat has gained in popularity since the beginning of the 21st century, as Venezuelan consumers have had more money to spend on food Consumption of both bakerd goods and pasta has been rising Price controls mean pasta has become far more affordable and per capita consumption has now risen to around 14kg The majority of pasta produced is lower grade and must be sold at a government-set price Some high grade pasta is also produced which can be sold at market prices Pasta imports increased to an estimated 8,600 tonnes in 2011, up from an average of 3,490 tonnes in 2007-2010 As a result of rising wheat prices on the international market, we estimate that consumption declined by 3.2% y-o-y in 2011 to 1.50mn tonnes We see consumption falling by a further 2.5% y-o-y in 2012 to 1.46mn tonnes However, the expansion in production of two major millers and pasta manufacturers should lead to increased availability and higher consumption We see demand recovering to 1.50mn tonnes in 2012/13 and out to

2016, we believe consumption will grow by 10.9% on in 2011 level to 1.66mn tonnes

Table: Venezuela Wheat Consumption, 2011-2016

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

f = BMI forecast Source: USDA

Table: Venezuela Corn Production & Consumption, 2011-2016

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

f = BMI forecast Source: USDA

Chávez Authorises Corn Price Increase

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

invest in improving crop irrigation and drainage poses threatens the recovery of domestic grain

production, leaving the crops vulnerable to drought and flooding

Government Enters Gruma Partnership

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

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

resulted from a meeting between Chávez and Mexican President Felipe Calderón, will see the

establishment of two joint ventures, one focusing on the production of corn flour and rice, and the second producing pasta, wheat flour and oatmeal The move was welcomed by Calderón for providing a stronger legal platform for encouraging other Mexican firms to invest in Venezuela

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

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

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

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

Gran Misión Agro Venezuela Fails To Deliver

In January 2011, the government launched Gran Misión Agro Venezuela, a new programme designed to support the country’s agricultural production as part of a two-year plan for the sector The programme aims to boost domestic production and lessen reliance on imports, thus improving Venezuela’s food security Misión Agro Venezuela was designed to provide low-interest loans, machinery and technical assistance to the country’s agricultural producers, from small to large-scale landowners VEF9.9bn (US$2.3bn) was committed to the programme

During 2011, data from the Ministry of Agriculture and Land indicate 75,000 producers received

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

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

financing to farmers and inefficient production techniques

Despite the plan’s failure to reach its first-year targets, in late January 2012 Chávez announced the relaunching of the Gran Misión Agro Venezuela on his radio and television show Aló Presidente Chávez called for the cooperation of local government to bring disused agricultural land back into production He also promised a further VEF114mn (US$26.5mn) in investment to improve the agricultural transport network

Coca Growing Hits Corn Production

The diversion of fertiliser from legal crops to coca growing is damaging Venezuelan corn production, according to a December 2010 report by the Miami Herald Urea, the nitrogen-rich fertiliser used to grow corn and other agricultural produce, is being sold through the black market to coca growers As a result, farmers say, they do not have sufficient fertiliser, particularly during the main planting season beginning

in May On paper, Venezuela produces at least twice as much fertiliser it needs, with the government subsidising its use to the tune of US$100mn per year, according to a Miami Herald report However, farmers in the main growing regions of Portuguesa and Guárico say that a lack of access to fertiliser is damaging their harvest The negative impact of the drugs trade upon grains production is a further

obstacle to Venezuela’s corn producers, who have also been hampered by land expropriations, farmgate prices and extreme weather conditions in recent years

Government Centralises Wheat Imports

In March 2011, the Venezuelan Ministry of Food requested private companies to provide information about their requirements for wheat for the subsequent nine months in order to authorise imports Requests totalled 1.40mn tonnes The move is part of the government’s plan to centralise imports of a number of food products, including raw milk, wheat, sugar and oil The decision has been criticised by the industrial sector, with some arguing that the government’s priority should be revising food price controls which are impacting heavily on profitability as input costs continue to rise Many sectors of Venezuelan

agroindustry are becoming increasingly reliant on imports to meet domestic demand as production

continues to fall in the face of lack of investment, poor management and high production costs

Government Sparks Empresas Polar Controversy

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

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

emblematic of the production of arepa, is no longer Venezuelan, as the company had sold the rights to the

Canadian firm Deutsche Tran Trustee

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

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

Government Seizes Agroisleña

In late September 2010, the government announced the seizure of Spanish-owned Agroisleña Agroisleña was the largest private agricultural supply distributor in Venezuela, with a large network of rural stores supplying pesticides, fertiliser, tools and machinery, etc It also controls around a third of the country’s grain storage capacity Chávez argued that Agroisleña had become an oligopoly in the market of

agriculture inputs, contrary to the provisions of the country’s constitution He stated that the seizure would further the progress of his agricultural reform programme and would further his government’s ambitions to improve food security and lower production costs

Following its nationalisation, Agroisleña was renamed Agrotiendas and managed by the Agricultural Inputs, Supplies and Services Trading Company (Ecisa), which is part of the Ministry of Agriculture

and Land Despite Ecisa’s goals to strengthen the distribution model for the agricultural sector, Ministry

of Agriculture data indicates Agrotiendas was hit by limited supply, owing to lack of transportation equipment and poor cold storage facilities This has represented a further obstacle for Venezuela’s grain producers, who are already struggling to cope with rising prices and farmgate price controls

In March 2012, it was reported in the local press that the supreme court had granted an application

seeking to annul the expropriation of Agroisleña

Mixed Results For Chávez’s Production Drive

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

Another brake on the expansion of grain production is controlled farmgate prices, which have been in force since 2003 on around 100 products considered to be basic necessities The farmgate price of corn was raised by 30% in April 2008, by 24% in July 2009, by 28% in September 2010 and by 30% in May

2011 Producers are also given direct subsidy payments and access to cheap fertiliser Despite this, farmers have long complained that the farmgate price is too low, threatening future production

Chávez’s aim to achieve self-sufficiency is a long way from being realised, and Venezuela is still heavily reliant on grain imports to fuel domestic demand, both for human consumption and for the livestock industry Indeed, in 2010 the government was to relax import permit procedures in order to reinforce its

‘food security’ policy and avoid domestic food shortages In 2011/12, corn imports are forecast to reach

at 1.60mn tonnes, a similar total to that seen in 1997/98 In addition, Venezuela is expected to import some 1.55mn tonnes of wheat

Table: Venezuela Wheat Consumption, 2008-2012

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

f = BMI forecast Source: USDA

Table: Venezuela Corn Production & Consumption, 2008-2012

expected growth in the production and consumption of grain

Venezuela Coffee Outlook

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

country, along the border with Colombia However, as with other agricultural sectors, the failure of government-mandated prices to keep a pace with increasing costs in the face of rocketing inflation has hurt the profitability of production in Venezuela, leading farmers to turn towards more profitable crops In addition, lack of producer unity and the government’s expropriation of two main coffee processors have made the sale of coffee more complicated for producers, providing a disincentive to continue production Producers have also faced competition from imported coffee, leading many to abandon the sector in favour of more lucrative areas such as cattle ranching In recent years, the number of coffee-growing families has fallen from an estimated 80,000 to less than 50,000

There had been hopes that the 2010/11 harvest would see a significant increase in output but the heavy rains at the beginning of 2011 disrupted the flowering process, leading to lower yields Furthermore, the area harvested declined by an estimated 12% y-o-y to 180,000ha owing to the decreased profitability of coffee production We estimate production declined by a further 13.8% y-o-y to 625,000 bags, with domestic demand expected to outstrip supply for the third successive year The 2011/12 harvest, however,

is likely to benefit from the renewal of fertilisation programmes as part of the government’s agricultural plan The increase in farmgate and retail prices in November 2011 and new legislation allowing the coffee industry to have 30% of production in non-regulated products will also help the sector We forecast a y-o-

y increase of 35.2% to take output to 845,000 60kg bags Production is forecast to increase by a further 3.6% y-o-y in 2012/13 to reach 875,000 bags, if weather conditions remain favourable

Government support for smallholder coffee growers, which make up the majority of farms, could see production grow once again over the latter years of our forecast period In 2015/16, we forecast

production reaching 925,000 bags, 48.0% higher than the low level seen in 2010/11 This, however, will

be dependent on government policy, particularly price controls In September 2012, the government announced an average 33% increase in farmgate prices However, producers have argued that this is insufficient to counter rocketing inflation and input costs If the government relax price controls further, interest in investing in production of Venezuela’s high-quality coffee would most likely increase, leading

to greater production than we are currently expecting Conversely, if price controls continue to squeeze profits, farmers may switch to other less tightly controlled crops

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

estimated 48.3% over 2006-2011 The vast majority of coffee consumed is roasted ground coffee, with soluble instant coffee accounting for only about 1% of total consumption Coffee is included in the government’s basic food basket and is available in government food stores at subsidised prices This has allowed more low-income Venezuelans to afford it, leading to a strong increase in demand

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 often unable to afford the high prices The government has blamed the shortages on unscrupulous suppliers hoarding their stock rather than selling it at the mandated prices The Venezuelan Coffee Industry

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

Supply shortages in 2011 were eased by a sharp rise in imports to an estimated 622,000 bags in 2011, up from just 5,000 bags as recently as 2009 Correspondingly, we estimate domestic consumption shot up by 49.1% to 1.31mn bags in 2011 Imports are forecast to reach 606,000 bags in 2012 and we see

consumption increasing marginally to reach 1.32mn bags We forecast consumption remaining at a similar level in 2013 Through to 2016, we forecast demand growing by 4.5% on 2011 to 1.36mn bags

Table: Venezuela Coffee Production & Consumption, 2011-2016

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

f = BMI forecast Source: USDA

Producers Deem New Price Rises Insufficient

Since 2003, the prices of coffee have been subject to government controls and have not been adjusted upwards at the same rate as rising production costs However, in November 2011, the government

announced an increase of 60.6% in the fixed price paid to producers for Good Washed ‘A’ green coffee, from VEF747 per quintal (45kg) to VEF1,200 per quintal Good Washed ‘B’ rose by 56.3% from

VEF691 to VEF 1,080 and Good Washed ‘C’ was increased by 57.3% from VEF623 to VEF980 The retail prices for both coffee beans and ground coffee was increased by 55.7% to VEF18.45 per kilo, from VEF11.85 previously

Then, in September 2012, the government announced a further increase of an average 33% in fixed coffee prices The price for Good Washed ‘A’ green coffee rose from VEF1,200 to VEF1,600 per quintal; Good Washed ‘B’ rose from VEF 1,080 to VEF1,400 and Good Washed ‘C’ increased from VEF980 to

VEF1,350 Lower quality coffee prices also rose, with Good Natural rising from VEF940 to VEF1,240 and Natural Standard increasing from VEF820 to VEF1,090 Prices charged to consumers for ground coffee are likely to be revised in Q412 In addition to the price increases, the Ministry of Agriculture and Land announced that it would open 35 purchase points to serve producers in Lara, Barinas, Portuguesa, Trujillo, Mérida, Táchira and Monagas It will also open nine roasters, five of which will purchase

directly from farmers in order to eliminate middlemen

The changes have disappointed producers, who argue the price increases are insufficient to cover the rapid increase in production costs Manuel Morillo, director of the Association of Venezuela Coffee Producers, said the organisation had worked for months to demonstrate to the Ministry of Agriculture and Land that the true costs of production are VEF1,700-2,200 per quintal The expropriation of the two main

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

despite the lack of profitability

High coffee prices on the international market have led to a huge discrepancy between what producers receive and the cost of coffee on global markets While the price of a quintal of ‘A’ grade domestic coffee

is now fixed at US$279, in neighbouring Colombia, a quintal of Venezuelan coffee is sold at

US$465-698 Although average prices of coffee on the global market are forecast to remain lower through 2012 and 2013, the gulf is still considerable and has discouraged investment in coffee production

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

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

in 2012 Much of this has come from Brazil and Nicaragua This has further exacerbated tensions in the sector, with producers claiming that the government is effectively subsidising foreign coffee producers, as the price paid for imported coffee can be over 50% more than the fixed price for domestic producers

Venezuela And Colombia Announce Binational Coffee Plan

In March 2011, officials from the Colombian and Venezuelan governments developed a joint plan to support coffee growers on both sides of the Colombia-Venezuela border in areas that have been hard-hit

by the long-running conflict in Colombia The Binational Plan for the Perija Mountain Range will benefit coffee cultivators in Colombian departments of Cesar and La Guajira and in the Venezuelan state of Zulia As well as boosting coffee production, the plan also aims to improve food security, housing

improvements, educational infrastructure, energy infrastructure and internet access The binational plan marks a further step forward for collaboration between the two countries, following an extended

suspension in diplomatic relations during the premiership of former Colombian president Alvaro Úribe

Coffee Crisis

Venezuela was once among the world’s largest producers of coffee At the beginning of the 20th century, coffee production was the mainstay of the Venezuelan economy, accounting for more than 80% of the country’s exports Since then, however, its significance has fallen, particularly after the discovery of oil led to other industries being crowded out Venezuela accounts for less than 1% of world coffee

production currently

Despite the Chávez administration’s goal to attain self-sufficiency in food production, government mismanagement of the sector, as well as adverse weather conditions, have seen production dwindle and forced the government to turn to imports to meet the requirements of Venezuela’s processing industry and supply domestic demand Since 2002/03, Venezuelan coffee imports had been negligible, totalling 0-13,000 bags per year However, in 2010/11, imports increased to an estimated 622,000 bags, primarily from Brazil and Nicaragua

Although the government continues to blame the private sector for the failures of the economy, coffee producers hold the government’s interventions responsible for the collapse of the coffee industry as strict price controls have eroded the sector’s profitability

The difficulties faced by the sector have led to falls in consumption and the quality of production Low investment in coffee farms has left most with old trees well past their peak production and vulnerable to attack by pests This means that average yields from coffee farms in Venezuela are less than half those seen in Brazil and less than a third of those seen in Colombia Consumption is also only a fraction of its former level, falling from 3kg per capita in 1990 to just over 1kg at the beginning of the 21st century, before creeping back up to its current 1.9kg per year as incomes rose and the government controlled the retail price Unless the government alters its restrictive policies and relaxes control over the sector, we see little potential for the coffee industry to reach the 3mn quintal target that the government envisaged If price controls are not loosened, farmers will continue to abandon coffee growing and the degradation of plantations will continue, continuing the country’s import dependence

‘Socialist’ Or ‘Capitalist’ Coffee On Offer In State-Run Chain

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

lists, ‘socialist’ and ‘capitalist’, to demonstrate the benefits of a state-controlled economy over the

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

Nationalisation Of Coffee Sector

At the beginning of August 2009, the Venezuelan government announced that it would expropriate coffee processing firm Fama de América and take a 50% share in Café Madrid The action was taken as the government claimed that the companies monopolised the market and encouraged smuggling activities Together, the two companies controlled around 80% of the coffee market in Venezuela The move seems

to have been sparked by an announcement by the companies that they were running out of coffee supplies

and had enough left to meet only a few days of demand The government claimed the companies had been involved in illegally exporting coffee to Colombia to take advantage of the higher prices The government initially claimed the seizures would be temporary But a few days after the occupation of the plants, Chávez spoke of permanently expropriating them

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

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

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

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

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

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

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

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

Now, including the plants of Café Madrid, the government is in control of 80% of the country’s coffee roasting capacity, with the remaining 20% owned by small private companies The government is hoping

to use its new power in the coffee sector to guarantee a constant flow of supplies to all areas of the

country, with half of the nation’s capacity provided by the government-operated plants and the remaining half in the hands of smaller private players We do not expect the going to be easy, however, particularly for the remaining private roasters According to data from the Superintendent of Silos, Warehouse and Agricultural Storage, reported El Universal, only 99 of the 145 coffee roasters active in 2008 were still working in 2009 We expect the tough operating environment to continue through our forecast period as price controls continue

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

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

Coffee Corporation and will be responsible for facilitating and coordinating economic activities relating

to the coffee industry, including cultivation, processing, sales and exports

Table: Venezuela Coffee Production & Consumption, 2008-2012

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

Venezuela-owned petrol station chain CITGO Petroleum Corporation said it would sell Venezuelan

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

Commodity Price Analysis

Monthly Softs Update

In line with our largely overall bearish view on the complex, softs markets have remained subdued compared with grains markets in September The US Federal Reserve’s stimulus plan (QE3) has had little effect on softs prices so far, with the exception of coffee, the rally for which we see as temporary Cocoa, sugar and cotton have largely traded sideways, while palm oil resumed its downtrend, in line with our view The weak performances have largely been a function of ample supply and progress in Southern Hemisphere harvests, particularly for sugar and coffee

ƒ After outperforming for several months in line with our view, we see little upside for cocoa prices and expect an end to outperformance from this point forward

ƒ We believe cotton and sugar have now bottomed out and see room for prices to increase

ƒ We believe palm oil has the potential to become the underperformer of the complex, as fundamentals are likely to restrain upside for prices in spite of tightness on the soy oil market

Overall Weakness On The Softs Complex

Select Softs Prices (rebased)

Note: 1 January 2012=100 Source: BMI, Bloomberg

Cocoa: Momentum Waning

Our view in May that cocoa would outperform the soft complex has played out, as insect and volume concerns in West Africa have kept cocoa prices in the moderate uptrend that began in January We now have more subdued expectations regarding cocoa prices in the short term We see cocoa eventually heading towards support at GBP1,540/tonne, breaking below this level once West Africa’s main crop gathers steam towards the end of the year

Back To Support

Front-Month LIFFE Cocoa, GBP/tonne (weekly chart)

Source: BMI, Bloomberg

That said, we have revised up our 2012 and 2013 forecasts for prices as supply prospects, particularly in West Africa, have deteriorated We still expect the market to record a surplus, as weak European

grindings will keep global demand subdued We therefore maintain our view of lower average cocoa prices in 2012 and 2013, at GBP1,575/tonne and GBP1,550/tonne respectively

Coffee: Temporary Rally

We expect the September rally in coffee prices aided by the US Federal Reserve’s stimulus plan (QE3) to

be temporary and believe prices will remain fairly anchored to 10-year support at USc150/lb over the coming months We expect supply on the global market to loosen over the coming months as exports from Brazil will pick up Exports from Brazil have been below average, as the country actively depleted stocks to take advantage of high prices in the run-up to its 2012/13 season and has since sought to

replenish stocks Exports will increase once domestic stocks have recovered to average levels

Entering Export Season

Coffee – Brazil Exports (‘000 60kg bags)

Source: BMI, Bloomberg

Increased supply from Colombia and Honduras and bumper crops from Vietnam and Indonesia are expected to complement Brazilian output and help the global market to shift from a global deficit in 2011/12 to a global surplus of 7.5mn 60kg bags in 2012/13 Looking further ahead, we expect prices have bottomed and expect a modest recovery to average USc170/lb in 2013

Close To The Bottom?

Front-Month ICE Coffee, USc/lb (weekly chart)

Source: BMI, Bloomberg

Cotton: Forming A Base

Our view that cotton prices have bottomed is playing out, with prices testing the upper bound of their downward trend channel at USc76.00/lb The weekly relative strength index has been rounding higher and has not yet reached overbought territory; thus, we see more room for prices to increase

In the medium term, we expect prices to remain fairly range bound and forecast prices to average

USc80.00/lb in 2012 and USc78.00/lb in 2013 Although we see upward momentum picking up slightly mainly because prices have come such a long way down, upside for prices is likely to be limited because

of ample supply on the global market

About To Break Higher?

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

Source: BMI, Bloomberg

Palm Oil: Underperforming The Complex

Our short-term view for continuing weakness in three-month palm oil prices has been playing out well, as

prices resumed their downtrend after bouncing back in August We expect prices to average

MYR2,975/tonne over the remainder of the year, which would bring the yearly average to

around MYR3,100/tonne in 2012 Palm oil will very likely remain supported by tightness in the soybean

market and strong soy oil prices in the short term High soy oil prices are pushing palm oil demand higher via substitution effects, with palm oil currently trading at a significant discount of more

than US$300/tonne (higher than the long-term discount average of US$120) However, palm oil

fundamentals will continue to keep a lid on prices We see strong support around MYR2,880/tonne and

expect prices to largely trade sideways to lower in the MYR2,800-3,250/tonne range in the short term

In the medium turn, ample supply and continued soft demand is likely to restrain the upside for prices

We expect prices to average lower in 2013 at MYR2,800/tonne and to average MYR2,750/tonne in 2014

Palm Oil, Soy Oil & Soybean Prices (rebased)

Note: 1 January 2012=100 Source: BMI, Bloomberg

Palm Prices Patient

Three-Month MDE Crude Palm Oil, MYR/tonne (weekly chart)

Source: BMI, Bloomberg

Sugar: Scope For A Moderate Rebound

Our bearish medium-term view for sugar has been playing out nicely, as prices resumed their downtrend

in August after showing strength in July Prices were unable to sustain their bullish break, which began in June, on the back of heavy rainfall in Brazil that delayed the start of sugar crushing for the 2012/13 season In the short term, we see strong support for prices in the USc18.00-19.00/lb area, as anecdotal evidence shows that Brazilian production starts becoming unprofitable below this level, curbing

production and supporting prices

Exports Gathering Speed

Select Countries – Brazil (‘000 tonnes, LHS) & Australia (tonnes, RHS) Sugar Exports

Source: BMI, Bloomberg

The acceleration of the harvest in Brazil owing to drier weather and easing concerns over India’s weak monsoon are likely to limit short-term upside for prices in the coming weeks However, we see scope for

a moderate rebound, as any new supply disruption from Brazil could send prices higher More

specifically, inclement weather in Brazil such as rains could slow exports as roads to ports get washed away; this would significantly support prices

Getting Squeezed

Front-Month ICE Sugar, USc/lb (weekly chart)

Source: BMI, Bloomberg

Given our expectations for a loosening market in the rest of the year, we see downside risks to our

forecast for prices to average USc22.50/lb in 2012 However, we continue to believe prices will average lower compared with 2011 (USc 27.10/lb) and maintain our forecast for prices to average USc21.50/lb in

2013

Table: Select Commodities: Performance & Forecasts

YTD (% chg)

1 Year (% chg)

5 Year (% chg)

2011 (ave)

YTD (ave)

2012 (BMI ave)

2013 (BMI ave)

Barley EUR/tonne -2.8 -1.1 na 268 248 250 230 Corn USc/bushel 16.0 8.7 103.1 680 679 700 650 Sugar #11 USc/lb -18.3 -31.0 93.5 27.07 22.30 22.50 21.50 Soymeal US$/tonne 60.9 44.0 80.9 3,099 421 na na Cocoa (London) GBP/tonne 19.0 -7.1 67.4 1,863 1,534 1,575 1,550 Coffee USc/lb -23.8 -33.4 29.9 253 183 185 170 Cocoa (US) US$/tonne 20.8 -6.7 29.3 2,921 2,318 na na Live cattle US$/lb 2.9 6.6 32.8 115 121 na na Rough Rice US$/cwt 3.5 -12.1 32.2 15.11 14.78 14.75 14.00 Feeder Cattle US$/lb -1.3 7.6 24.7 134 149 na na Cotton USc/lb -18.4 -28.1 22.1 137 82.6 80.0 78.0

Table: Select Commodities: Performance & Forecasts

YTD (% chg)

1 Year (% chg)

5 Year (% chg)

2011 (ave)

YTD (ave)

2012 (BMI ave)

2013 (BMI ave)

Lean Hogs US$/lb -10.9 -15.6 20.4 90.4 86.4 na na Palm Oil MYR/tonne -15.7 -13.3 3.4 3,289 3,139 3,100 2,800 Class 3 Milk US$/cwt 19.2 18.9 14.8 17.7 16.9 16.8 18.0 Hard Red

Winter Wheat USc/bushel 26.4 18.5 8.7 809 738 na na Wheat USc/bushel 34.4 30.0 3.2 709 713 700 680

na = not available Source: BMI, Bloomberg

Monthly Grains Update

ƒ In the short term, we believe grains prices will continue the moderation initiated in September,

as most of the rally is now clearly behind us

ƒ Even though we have revised up our forecasts for wheat and corn prices in 2012 and 2013 and see some upside risks to our soybean forecasts on the back of a rapidly deteriorating supply picture, we still forecast prices to average lower in the coming years

ƒ We expect soybean to be the outperformer in the complex from now on, replacing corn as the best performer Uncertainty over the prospects for the soybean crop is likely to persist until the start of the 2012/13 season in South America in March 2013 Even though wheat has proven the most resilient in the past month, we believe the disconnect between overly bullish non-

commercial net long speculative positions and prices will unfold rapidly, taking prices down

ƒ Although QE3 is positive for agricultural prices, we do not expect net specs positions, already at record highs, to be significantly affected by the increased market liquidity

Corn Outperformance Over

Select Grains – Price Rebased

Source: Bloomberg; Note= 1 June 2012 = 100; when BMI called for corn outperformance