Venezuela agribusiness report q4 2013

Total corn consumption rose by an estimated 63.3% from 2007 to 2012, outstripping growth in production and leading to a surge in imports from the US.. The programme aims to boost domesti

Q4 2013 www.businessmonitor.com

VENEZUELA

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2013

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BMI Industry View 7

SWOT 10

Agribusiness 10

Business Environment 12

Industry Forecast 13

Livestock Outlook 13

Table: Venezuela Beef & Veal Production, Consumption & Trade 14

Table: Venezuela Pork Production, Consumption & Trade 15

Table: Venezuela Poultry Production, Consumption & Trade 15

Table: Venezuela Beef & Veal Production, Consumption & Trade 17

Table: Venezuela Pork Production, Consumption & Trade 17

Table: Venezuela Poultry Production, Consumption & Trade 17

Grains Outlook 18

Table: VENEZUELA Corn Production & Consumption 20

Table: VENEZUELA Wheat Production & Consumption 20

Table: VENEZUELA Corn Production & Consumption 25

Table: VENEZUELA Wheat Production & Consumption 25

Coffee Outlook 26

Table: VENEZUELA Coffee Production & Consumption 27

Table: VENEZUELA Coffee Production & Consumption 32

Commodity Strategy 33

Monthly Softs Strategy 33

Table: Select Commodities - Performance & BMI Forecasts 41

Table: BMI Commodities Strategy 42

Monthly Grains Strategy 43

Table: Select Commodities - Performance & BMI Forecasts 51

Table: BMI Commodities Strategy 52

Upstream Analysis 53

Americas GM Outlook 53

Americas Machinery Outlook 58

Americas Fertiliser Outlook 65

Downstream Analysis 71

Food 71

Food Consumption 71

Table: Food Consumption Indicators - Historical Data & Forecasts, 2010-2017 72

Canned and Prepared Food 72

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2010-2017 73

Table: Fish Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 73

Oils & Fats 74

Table: Oils & Fats Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 75

Confectionery 76

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2010-2017 77

Drink 77

Alcoholic Drinks 77

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2010-2017 78

Soft Drinks 79

Table: Soft Drinks Value Sales - Historical Data & Forecasts, 2010-2017 80

Hot Drinks 80

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2010-2017 81

Mass Grocery Retail 81

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2010-2017 81

Table: Sales Breakdown By Retail Format Type 82

Regional Overview 83

Regional Overview - Americas 83

Competitive Landscape 90

Table: Venezuela Agribusiness Competitive Landscape 90

Demographic Forecast 91

Table: Venezuela's Population By Age Group, 1990-2020 ('000) 92

Table: Venezuela's Population By Age Group, 1990-2020 (% of total) 93

Table: Venezuela's Key Population Ratios, 1990-2020 94

Table: Venezuela's Rural And Urban Population, 1990-2020 94

Methodology 95

BMI Industry View

BMI View: The victory of Nicolás Maduro of the ruling Partido Socialista Unido de Venezuela in April will

most probably ensure the continuity of many of the interventionist policies of Chávez's era Price fixing in particular continues to be a source of woe for producers unable to meet input costs which are soaring in line with some of the highest rates of inflation in the world Some respite has arrived in the form of a 20% rise in the government-fixed price of food items including beef, chicken and dairy products, but even this will fall short of the rate of inflation which is expected to increase 30% year-on-year in 2013 Inflation is also contributing to the diminishing purchasing power of Venezuelan households while foreign currency shortages after a pre-election spending boom are causing shortages of some imported goods.

Tough Years Ahead

Venezuela - BMI Agribusiness Market Value By Commodity (As % of total)

Source: BMI

Key Forecasts

■ Corn consumption growth to 2017: 8.2% to 4.16mn tonnes Consumers hit by economic turmoil will turn

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

■ Coffee production growth to 2016/17: 34.3% to 940,000 60kg bags The hike in government prices andincreased investment in small farms will see some recovery in supply

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

competitors and reduced domestic demand will stymie growth

■ BMI universe agribusiness market value: US$4.24bn in 2013 (down 7.6% from US$4.59bn in 2012;

forecast to grow annually by 0.7% on average from 2013 to 2017)

■ 2013 real GDP growth: 2.0% (down from 5.6% in 2012; forecast to grow annually by 2.7% on averagebetween 2013 and 2017)

■ 2013 consumer price index: 33.0% year-on-year (y-o-y) (up from 21.3% in 2012; forecast to grow

annually by 24.0% on average between 2013 and 2017)

■ 2013 lending rate: 15.2% (down from 15.3% in 2012; forecast to average to 16.6% between 2013 and2017)

Industry Developments

While inflation seems to have peaked on a month-on-month (m-o-m) basis at 6.1% in May, base effects willlikely keep inflation elevated on a year-on-year basis for several months As such, we are also revising upour end-2013 inflation forecast from 30.0% to 34.0% Given these factors, we continue to expect householdspending to remain very weak over the coming months, as high inflation erodes consumers' purchasingpower We expect exchange rate imbalances to be the main driver of higher inflation over the comingmonths Indeed, weakening exports and the ongoing use of foreign reserves to finance government spendinghas led to significant shortages of foreign currency in the country Restricted access to foreign currency hasfuelled a large black market for foreign exchange, where the rate at which US dollars can be bought isnearly 5 times the official exchange rate This in turn will continue to drive higher import costs, which willfeed through to domestic prices of consumer goods

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

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

The three-year long dispute between Mexican firm Gruma - the world's largest producer of corn flour fortortillas - and Venezuela's government and the constant threat of the latter to nationalise the assets of Gruma

in the country highlights the very low business environment standards and high policy risks for foreigncompanies in Venezuela In June 2013, Gruma filed a complaint with the World Bank's International Centrefor Settlement of Investment Disputes The company wants the World Bank to arbitrate in its negotiationswith Venezuela, at it said it was stripped of control of its Venezuelan subsidiaries in January by Venezuela'sgovernment

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

left Venezuela a major food importer

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

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

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

SWOT Analysis - Continued

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

Business Environment

SWOT Analysis

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

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

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

political environment, could undermine the long-term growth outlook

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

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

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

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

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

to purchase raw materials

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

Industry Forecast

Livestock Outlook

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

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

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

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

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

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

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

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

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

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

or beef owing to the comparatively lower cost

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

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

Table: Venezuela Beef & Veal Production, Consumption & Trade

Table: Venezuela Pork Production, Consumption & Trade

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

Table: Venezuela Poultry Production, Consumption & Trade

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

Beef Cattle Imports Arrive

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

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

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

Price Rises Bring Some Relief For Producers, None For Consumers

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

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

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

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

Improved Relations With Colombia Ease Beef Supply Restrictions

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

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

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

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

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

Then in April 2012, the Venezuelan Minister of Foreign Affairs Nicolás Maduro and his Colombiancounterpart María Holguín signed a partial bilateral trade agreement, at the sixth Summit of the Americas inCartagena, Colombia The agreement establishes a new model for trade relations between the nations,covering preferential trade agreements, sanitary norms, technical norms, rules of origin, trade protection andthe mechanism for the settlement of disputes The agreement also includes plans to increase joint

infrastructure and agricultural production The pact, which came into force in October 2012, signals the

continued improvement of diplomatic relations between the two countries The pact is expected to providemuch-needed relief for the food shortages and spiralling prices that have gripped Venezuela.

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

Table: Venezuela Beef & Veal Production, Consumption & Trade

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

Risks To Outlook

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

Grains Outlook

BMI Supply View: Venezuela is a major net importer of grain Though production rose rapidly through thefirst decade of the 21st century, consumption has also risen, fuelled by oil-driven economic growth Corn isVenezuela's major grain crop, with the vast majority grown in the central states of Barinas, Portuguesa andGuárico While the area planted to corn has risen by around 50% since the end of the 1990s, Venezuela'sagricultural sector remains relatively undeveloped, and there is still plenty of room for further expansion.About 65% of the area planted is white corn for human consumption; the remainder is yellow corn for bothhuman consumption and for feed

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

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

Looking at the 2013/14 season starting in October, we see production falling further by 2.0% y-o-y to1.25mn tonnes This will be due to a decrease in area harvested, estimated at 380,000ha by the USDA,down 0.1% y-o-y, and a general lack of foreign currency, which lead to shortages of all types of inputs

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

lack of fertiliser, low profitability hit output, shortages of technical staff and equipment, delays in financing

to farmers, inefficient production techniques and unreliable supplies of materials and agrochemicals Wetherefore expect forecast production to fall 6.9% on the low 2012 level to reach 1.21mn tonnes in 2017

Wheat production in Venezuela is negligible, as the country does not have a suitable climate for growingwheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming fromthe US (42%) and Canada (52%) In March 2011, wheat was added to the list of goods classified by thegovernment as essential or staple, which helps to expedite import procedures However, importers havefaced problems related to rising international prices, limitations on accessing foreign currency and delays inobtaining import approval

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

in 2013 and 2014, human consumption will increase faster than that of the animal feed industry as

Venezuelans turn to their cheaper staple food Corn is a staple food in Venezuela, and corn flour is used tomake arepa, a flat, unleavened bread Total corn consumption rose by an estimated 63.3% from 2007 to

2012, outstripping growth in production and leading to a surge in imports from the US Import controls forfeed corn have been relaxed, and imports grew from just 152,000 tonnes in 2006 to an estimated 2.3mntonnes in 2012

We see consumption declining by 5.2% y-o-y to 3.65mn tonnes in 2013, as demand for feed falls due tolower demand for meat Out to 2017, we believe consumption will increase, as corn is one of the cheapestfoods available and the price is kept down by government price controls Growth will, however, be moremoderate than during the previous five-year period; out to 2017 we forecast demand rising by 8.2% on the

2012 level to take consumption to 4.16mn tonnes

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

availability and higher consumption We see demand growing by 3.0% to 1.55mn tonnes in 2012/13; out to

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

Table: VENEZUELA Corn Production & Consumption

Corn Production, '000 tonnes 1 1,300.0 1,275.0 1,250.0 1,225.0 1,210.0 1,210.0 Corn Consumption, '000 tonnes 1 3,850.0 3,649.8 3,806.7 3,920.9 4,042.5 4,163.8

Notes: f BMI forecasts Sources: 1 USDA.

Table: VENEZUELA Wheat Production & Consumption

Wheat Consumption, '000 tonnes 1 1,500.0 1,545.0 1,555.8 1,602.5 1,650.6 1,700.1

Notes: f BMI forecasts Sources: 1 USDA.

Viability Of Corn Sector Dependent On Policy

The viability of corn production in Venezuela is heavily dependent on government policy In the 1980s, thecountry's agricultural sector was heavily regulated, and high tariffs were imposed on grain imports Thissaw 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 of regulated farmgateprices and retail prices has hit profitability and seen output decrease further Poor weather conditions, landexpropriations 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

Corn production has been hurt by low farmgate prices, set by the govnemrnt, and lack of incentives to plantlarger area The Federation of Asociations of Farmers (Confederación de Asociaciones de ProductoresAgropecuarios), Fedeagro, is asking for a 100% increase in farmgate prices in order to make productionmore profitable The govermnemnt already granted in August 2012 a 42-46% increase to VEF1.90-2.20/kg

of corn prices, but Antonio Pestana, the vice president of Fedeagro, argues that the cost of producing a kilo

of white corn stands at VEF2.40, VEF0.20 higher than the new government mandated price Subsequently,

in November 2012, Venezuela Agriculture Ministry announced a 46% increase in the price of pre-cookedcorn flour from VEF4.06/kg to VEF5.93 (US$1.38)/kg However, the Venezuelan corn processing industryhad argued that an increase of 66% would be necessary to cover production costs and ensure a small profit

In addition to the 47% increase in farmgate corn prices, freight rates have also risen by 20% Industryrepresentatives argued that the lack of profitability could undermine companies' viability and potentiallythreaten food production Nonetheless, we expect the increase in the farmgate prices and the consumer pricegaps to go some way towards encouraging an increase in the area planted to grains in the coming year

Increasing Dependance

Venezuela - Corn & Wheat Imports ('000 tonnes)

Source: BMI, USDA

The turbulent relationship between the Venezuelan government and Gruma started in 2010, when ugoChávez 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 in May 2010, the government

announced the expropriation of Monaca following accusations that Gruma had refused to sell flour during anational shortage the previous month The move came as the government tightened its control on the supplychain in the face of national shortages and rocketing inflation However, in July 2010, the governmentretracted and announced that rather than seizing Gruma's assets, it was considering forming a joint venturewith the Mexican company However, the negociations over the creation of a joint venture were

unsuccessful

In June 2013, Gruma filed a complaint with the World Bank's International Centre for Settlement of

Investment Disputes The company wants the World Bank to arbitrate in its negotiations with Venezuela, at

it said it was stripped of control of its Venezuelan subsidiaries in January by Venezuela's government

Leaving To Be Desired

Select Countries - BMI Long Term Political Rating & Business Environment Ratings

Note: Score is % of 100 100 being best, 0 worst Source: BMI

Gran Misión Agro Venezuela Fails To Deliver

In January 2011, the government launched Gran Misión Agro Venezuela, a new programme designed tosupport the country's agricultural production as part of a two-year plan for the sector The programme aims

to boost domestic production and lessen reliance on imports, thus improving Venezuela's food security.Misión Agro Venezuela was designed to provide low-interest loans, machinery and technical assistance tothe country's agricultural producers, from small to large-scale landowners, with VEF9.9bn (US$2.3bn)committed to the programme

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

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

Despite the plan's failure to reach its first-year targets, in late January 2012 Chávez relaunched the GranMisión Agro Venezuela on his radio and television show Aló Presidente Chávez called for the cooperation

of local government to bring disused agricultural land back into production He also promised a furtherVEF114mn (US$26.5mn) in investment to improve the agricultural transport network

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

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

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

Coca Growing Hits Corn Production

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

On paper, Venezuela produces at least twice as much fertiliser it needs, with the government subsidising itsuse to the tune of US$100mn per year, according to a Miami Herald report However, farmers in the maingrowing regions of Portuguesa and Guárico say that a lack of access to fertiliser is damaging their harvest.The negative impact of the drugs trade upon grains production is a further obstacle to Venezuela's cornproducers, who have also been hampered by land expropriations, farmgate prices and extreme weatherconditions in recent years

Mixed Results For Chávez's Production Drive

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

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

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

farmgate price is too low, threatening future production

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

tonnes, compared to 1.16mn tonnes in 1997/98 In addition, Venezuela is expected to import around 1.7mntonnes of wheat.

Table: VENEZUELA Corn Production & Consumption

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

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

Coffee Outlook

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

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

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

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

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

We have revised down our 2011/12's production numbers in order to be in line with official statistics, andnow believe output came in at 700,000 60kg bags that year, compared with a previsou forecast at 850,000bags Therefore, our forecast for 2012/13 and 2013/14 are lower than estimated We continue to believecoffee production will increase those two seasons, reaching 800,000 bags in 2013/14, up 9.6% year-on-year(y-o-y) 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

Nevertheless, government support for smallholder coffee growers, which make up the majority of farms,could see production grow further over the later years of our forecast period We forecast production toreach 940,000 bags in 2017, 34.3% higher than the 2012 level This, however, will be dependent on

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

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

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

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

Wealthier consumers are able to buy their coffee at cafes or street stalls, but poorer consumers are often

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

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

We see consumption growing again slightly to 1.31mn bags in 2013 Through to 2017, we forecast demandgrowing by 4.2% on 2012 to 1.36mn bags

Table: VENEZUELA Coffee Production & Consumption

Coffee Production, '000 60kg bags 1 700.0 730.0 800.0 840.0 890.0 940.0 Coffee Consumption, '000 60kg bags 1 1,305.0 1,308.9 1,315.5 1,328.6 1,345.9 1,359.3

Notes: f BMI forecasts Sources: 1 USDA.

Producers Deem New Price Rises Insufficient

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

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

The changes have disappointed producers, who argue the price increases are insufficient to cover the rapidincrease in production costs Manuel Morillo, director of the Association of Venezuela Coffee Producers,said the organisation had worked for months to demonstrate to the Ministry of Agriculture and Land that thetrue costs of production are VEF1,700-2,200/quintal The expropriation of the two main coffee-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 producersreceive and the cost of coffee on global markets While the price of a quintal of 'A' grade domestic coffee isnow fixed at US$279, in neighbouring Colombia, a quintal of Venezuelan coffee is sold at US$465-698.Although average prices of coffee on the global market are forecast to remain lower through 2013 and 2014,the gap is still considerable and has discouraged investment in coffee production.

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

As a result of falling domestic output, the government has had to resort to increased imports to guaranteesupply, with imports rocketing to an estimated 622,000 bags in 2011 and estimated to have reached 576,000bags in 2012 Much of this has come from Brazil and Nicaragua This has further exacerbated tensions inthe sector, with producers claiming that the government is effectively subsidising foreign coffee producers,

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

producers

Minister Offers Reassurances Over Coffee Supply

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

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

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

Seismic Shift

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

Source: BMI, USDA

Factors Impacting Coffee Crisis

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

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

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

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

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

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

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

plantations will continue, continuing the country's import dependence

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

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

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

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

contraction that continue to plague the country

Nationalisation Of Coffee Sector

At the beginning of August 2009, the Venezuelan government announced that it would expropriate 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 tohave been sparked by an announcement by the companies that they were running out of coffee supplies andhad enough left to meet only a few days of demand The government claimed the companies had beeninvolved in illegally exporting coffee to Colombia to take advantage of the higher prices The governmentinitially claimed the seizures would be temporary But a few days after the occupation of the plants, Chávezspoke of permanently expropriating them

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

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

Investment Disputes in Washington DC

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

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

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

by the government-operated plants and the remaining half in the hands of smaller private players We do notexpect 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 145coffee roasters active in 2008 were still working in 2009 We expect the tough operating environment tocontinue through our forecast period as price controls continue.

In June 2012, the government announced the creation of a new coffee supply and distribution 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 thecoffee industry, including cultivation, processing, sales and exports

Table: VENEZUELA Coffee Production & Consumption

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

in the sector could increase

Commodity Strategy

Monthly Softs Strategy

■ In line with our view, softs have outperformed grains and industrial commodities since the start of the

year

• We believe the softs index is close to a bottom, especially for sugar and coffee.

• Cotton and cocoa will remain the best supported among softs on the back of China's ongoing

stockpiling policy (cotton) and subdued supply prospects in West Africa (cocoa)

• Despite little upside potential in the short term, palm oiI prices are likely to start to recover in 2014.

More Neutral On Softs Now

Select Commodities & Indices - Prices (rebased)

Note: 2 January 2013 = 100 Source: BMI, Bloomberg

Cocoa: Supply Risks Remaining

We expect cocoa prices to continue trading within the GBP1,400-1,700/tonne range in the coming months.Concerns over delays to the coming West African crop, combined with quality issues, will prevent

significant declines in prices Indeed, we have revised down our 2012/13 and 2013/14 cocoa supply

forecasts for Ghana, as poor rainfall has affected yields However, we believe the recent rally in prices willfade as new supply comes online Despite strong European grindings in Q213, we believe any demandrecovery in Europe will be uneven in the short term given the high prices.

Range Trading

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

Source: Bloomberg, BMI

We forecast small global cocoa deficits in the coming seasons, which will push cocoa prices higher in themedium term We are particularly cautious about supply prospects in West Africa, where ageing trees andfarmers, low efficiency and limited access to credit will restrict production growth As a result, we forecastcocoa prices to average GBP1,550/tonne in 2014

Picking Up

Europe - Year-On-Year Q2 Cocoa Grindings (% of previous year)

Source: BMI, European Cocoa Association

Coffee: Finding A Bottom Soon?

We expect coffee prices to remain weak in the coming months as ample global supply puts pressure onprices The supply problems in Central America related to coffee rust disease have had little impact onprices so far, mainly because Colombia is projected to offset its neighbours' production drop Although westill expect a decline in 2013/14 production in Vietnam, concerns over a prolonged dry spell have noweased

Little Support Before US$1 Level

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

Source: Bloomberg, BMI

Prices could drift towards USc100/lb, a level we believe presents strong psychological support Farmers inmajor producers, including Brazil, Colombia, Vietnam and Indonesia, will consider hoarding in the face ofsharply declining profitability Moreover, Brazil's soon-to-be-announced support programme for coffeefarmers is likely to include a subsidies scheme, which will limit the downside for prices We forecast prices

to stabilise in the coming years, averaging USc115/bushel in 2014 and 2015 compared with USc125/bushel

in 2013

Downside Pressure For Sugar And Coffee

BRL/US$ Exchange Rate (weekly chart)

Source: Bloomberg, BMI

Cotton: Stable For Now

We expect cotton prices to respect current resistance at USc90.00/lb in the coming months, as the globalmarket remains well supplied Net speculative long positions are still high by historical standards, which islikely to limit upside risks for prices in the near term Prices could make a decisive move above the

USc90.00/lb level towards the end of the year, when the market is likely to enter a supply trough after adisappointing year in terms of output growth We do not foresee a major change to China's stockpilingpolicy before mid-2014 at least; this will maintain domestic prices at elevated levels and incentivise millers

to import significant volumes of cotton

In the medium term, we expect the global market to record decreasing surpluses as relatively low pricescontinue to discourage plantings and demand recovers at a stronger pace We forecast cotton prices toaverage USc85.00/lb in 2013 and USc87.50/lb in 2014

Resistance To Hold For Now

Front-Month ICE Cotton, USc/lb (daily) & RSI (below)

Source: Bloomberg, BMI

Palm Oil: Recovery In 2014

Although we continue to believe palm oil prices have bottomed, we see limited upside to prices in thecoming months given the lack of a significant fundamental upward catalyst We continue to expect prices totrade along support at MYR2,250/tonne The demand picture has deteriorated in recent months, as the

depreciating Indian rupee is weighting on India's imports, which usually represent close to 20% of theworld's total trade Meanwhile, Malaysia and Indonesia are now in the part of the season during whichyields peak, and when production is at its highest.

Weakness For Now

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

Source: Bloomberg, BMI

Prices are expected to start to recover in 2014 as production growth slows and consumption maintains ahealthy growth rate Palm oil remains competitive compared with other vegetable oils, as the palm oil/soyoil and palm oil/soybean ratios are still low by historical standards We see prices averaging MYR2,650/tonne in 2014, compared with MYR2,450/tonne in 2013

Weak Rupee Weighting On Imports

India - Palm Oil Imports ('000 tonnes)

Source: BMI, India Solvent Association

Sugar: Bottoming Out

We maintain our view that sugar prices are close to bottoming out and are likely to show resilience over athree-to-six-month horizon Prices could face downward pressure in the very short term, as sugar priceshave recently regained competitiveness over ethanol prices in Brazil, which could prompt millers to turn

more cane into sugar The continued weakness in the Brazilian real also poses downside risk to sugar

prices However, unfavourable weather in June and July and the upcoming end of the harvest season inBrazil suggest that supply will only tighten The Brazilian sugarcane association Unica revised down itsproduction estimate for Brazil in April and could do so again in its next report in September We forecastthe global surplus to significantly narrow in 2013/14, to 5mn tonnes, down 37.5% year-on-year This willhelp prices recover slightly in 2014 to average USc18.00/lb, compared with USc17.50/lb in 2013