Venezuela agribusiness report q4 2014

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

Q4 2014 www.businessmonitor.com

VENEZUELA

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2014

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BMI Industry View 7

SWOT 10

Agribusiness 10

Business Environment 12

Industry Forecast 13

Livestock Outlook 13

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

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

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

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

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

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

Grains Outlook 19

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

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

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

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

Coffee Outlook 29

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

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

Commodity Strategy 35

Monthly Grains Strategy 35

Table: Select Commodities - Performance & BMI Forecasts 43

Monthly Softs Strategy 43

Table: Select Commodities - Performance & BMI Forecasts 52

Upstream Analysis 54

Americas Machinery Outlook 54

Americas GM Outlook 60

Americas Fertiliser Outlook 66

Downstream Analysis 71

Food 71

Food Consumption 71

Table: Food Consumption Indicators - Historical Data & Forecasts (Venezuela 2011-2018) 72

Confectionery 72

Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2011-2018) 73

Drink 74

Alcoholic Drinks 74

Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2011-2018) 75

Soft Drinks 76

Table: Soft Drinks Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2011-2018) 77

Hot Drinks 77

Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2011-2018) 78

Mass Grocery Retail 79

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Venezuela 2011-2018) 79

Table: Sales Breakdown By Retail Format Type 80

Regional Overview 81

Competitive Landscape 87

Table: Venezuela Agribusiness Competitive Landscape 87

Demographic Forecast 88

Table: Venezuela's Population By Age Group, 1990-2020 ('000) 89

Table: Venezuela's Population By Age Group, 1990-2020 (% of total) 90

Table: Venezuela's Key Population Ratios, 1990-2020 91

Table: Venezuela's Rural And Urban Population, 1990-2020 91

Methodology 92

Industry Forecast Methodology 92

Sector-Specific Methodology 93

BMI Industry View

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

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

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

consumption remains relatively robust causing shortages of some imported goods

Agribusiness Market ValueBMI Market Value By Commodity (2005-2018)

Grains market value, % of total Sugar market value, % of total Livestock market value, % of total

2005 2006

2007 2008

2009 2010

2011 2012

2013e 2014f

2015f 2016f

2017f 2018f 0

25 50 75

f = BMI forecast Sources: FAO/ BMI Calculation

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

competitors and reduced domestic demand will stymie growth

■ 2015 BMI universe agribusiness market value: USD3.85bn (up 3.3% from 2014; forecast to growannually by 3.3% on average from 2015 to 2018)

■ 2015 real GDP growth: 1.2% (up from 0.5% expected in 2014; forecast to grow annually by 2.3% onaverage between 2015 and 2018)

■ 2015 consumer price index: 54.6% year-on-year (y-o-y) (down from 61.5% expected in 2014; forecast to

grow annually by 36.7% on average between 2015 and 2018)

Industry Developments

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

Venezuelan inflation will remain extremely high in the coming months, as fundamental weaknesses in theeconomy exert tremendous upward pressure on the informal exchange rate and the cost of basic goods Weare forecasting end-2014 inflation of 64.1% year-on-year, and see price growth easing modestly in 2015 inpart due to base effects, to an average of 57.1%.The government has failed to provide a sufficient amount ofdollars on the official exchange rate markets, which has led to severe shortages of hard currency and therapid depreciation of the bolívar on the informal, black market As a result, the cost of many imported goodshas soared The government has tried to counteract this by enacting wide-ranging price controls, but thesehave largely served to decrease the profitability of the operations of local producers, leading to a sharpreduction in domestic productive capacity

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

operating environment We are forecasting real GDP growth of 0.5% in 2014 and 1.2% in 2015

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

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

Coffee will also be hurt by the ongoing challenging environment in the agribusiness sector We forecastproduction to decrease in 2013/14 and 2014/15 as elevated operating costs, lack of input supplies and priceregulations significantly discourage farmers from grinding coffee of a higher quality The outbreak of thecoffee rust disease in Central and South America in 2013 is also still hurting Venezuela's coffee crop Therust disease is unlikely to disappear in 2014/15, given the ongoing shortages of agrichemicals and otherproducts to treat it The outlook for coffee production in Venezuela remains dire, as hurdles to outputexpansion will remain in place over the coming years

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

left Venezuela a major food importer

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

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

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

SWOT Analysis - Continued

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

Business Environment

SWOT Analysis

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

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

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

political environment, could undermine the long-term growth outlook

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

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

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

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

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

to purchase raw materials

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

Industry Forecast

Livestock Outlook

BMI Supply View: After strong growth in the 1990s and the early 2000s, Venezuelan beef production has

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

The sector is held back by a lack of profitability due to high input costs, inflation and government pricecontrols, along with increased competition from imports from Brazil, Colombia and Nicaragua Includinglive animal imports for slaughtering, Venezuela depends on imports for more than half of beef consumed,according to Instituto Nacional de Estadística The lack of profitability is leading producers to leave thesector, and the national cattle herd is estimated to have shrunk by 4.7% year-on-year (y-o-y) in 2012 to12.1mn head As a result, we believe beef production have decreased by 1.4% in 2012/13 and that it willbroadly stagnate in 2013/14 at 356,000 tonnes The recent increase by 20% of the state-controlled price forkey items of food including livestock products such as beef and chicken should help to stall any furtherdeclines Indeed, towards the end of our forecast period, we expect production to increase as the

government makes efforts to lessen the reliance on imports However, the recovery will be slow, and weforecast production to reach just 368,000 tonnes in 2017/18, up by a mild 3.5% on the 2012/13 level

Poultry production has weathered the storm of the government's reforms better than the cattle-rearingsector It accounts for an estimated 30% of total agricultural GDP and almost 50% of animal production.Poultry is the most significant component of Venezuela's agricultural output, accounting for 24% in valueterms The poultry industry is organised, vertically integrated and efficient, and producers are constantlyworking to modernise and improve their production methods Despite these strengths, the sector has beenhit by the poor economic climate, high input costs and increasing competition from imports from Brazil andArgentina Producers continue to be affected by the state-controlled price regime, which is squeezingprofitability The state-regulated price for a whole chicken was increased in 2011 to VEF15.61/kg Thisprovided some relief for producers However, we believe that high input costs and squeezed profitabilitylimited production growth in the past season Output should grow slightly faster in 2013/14, by 2.3% y-o-y,reaching 675,000 tonnes that year Through to 2017/188, we see production expanding by 7.7% on the2012/13 level to 710,800 tonnes

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

BMI Demand View: Meat consumption soared in Venezuela's boom years from 2004 to 2008 The rise indemand was driven by a combination of strong, oil-fuelled economic growth and government price controlsmaking staple foodstuffs more affordable After falling sharply in 2003, poultry consumption grew by morethan 50% by 2008 Beef consumption grew by almost 40% between 2004 and 2008 Consumption growthwas slower since 2008, due to constraints on production (lower availability of grains) In 2013, annual percapita consumption stood at an estimated 32kg for poultry, 19kg for beef and 4kg for pork While pricecontrols have increased demand, they have worked against investment in production and led to an

increasing reliance on imports In 2013, imports reached an estimated 300,000 tonnes for poultry and225,000 tonnes for beef

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

consumption through our forecast period We see demand stagnating in 2014 at 582,000 tonnes Out to

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

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

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

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

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

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

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

f = BMI forecast Sources: USDA/BMI Calculation

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

Pork Production, '000 tonnes 120.0 121.0 123.0 125.0 127.0 129.0 Pork production, % y-o-y -4.0 0.8 1.7 1.6 1.6 1.6 Pork Consumption, '000 tonnes 133.0 133.7 134.7 135.8 136.9 138.0 Pork consumption, % y-o-y -5.7 0.5 0.8 0.8 0.8 0.8

f = BMI forecast Sources: USDA/BMI Calculation

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

Poultry Production, '000 tonnes 660.0 675.0 683.8 692.7 701.7 710.8 Poultry production, % y-o-y 0.8 2.3 1.3 1.3 1.3 1.3 Poultry Consumption, '000 tonnes 960.0 975.4 991.9 1,009.8 1,028.0 1,046.5 Poultry consumption, % y-o-y 12.5 1.6 1.7 1.8 1.8 1.8

f = BMI forecast Sources: USDA/BMI Calculation

Beef Cattle From Nicaragua To Aid Production

Shipments of heifers have been arriving to Venezuela from Nicaragua in a bilateral agreement between thetwo countries as part of the national policy AgroVenezuela

It is hoped that this will help to reinvigorate beef production after recent declines in the national herd Intotal, 781 high-quality, dual-purpose heifers arrived in the sea port of Puerto Cabello in May 2013, buildingupon previous deliveries A further 1,000 head are expected in the coming months to reach the agreementtarget of 6,000 The cattle were picked out through a four-month selection process.

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

Price Rises Bring Some Relief For Producers, None For Consumers

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

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

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

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

Improved Relations With Colombia Ease Beef Supply Restrictions

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

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

on Venezuela's meat supply The value of imports of meat and offal from Colombia fell by a massive 97.6%y-o-y in October 2009, according to Colombia's statistics agency DANE, with total imports from Colombiafor the month falling by 70.4% Venezuela was forced to seek imports from other countries in the region,including Brazil, Argentina, Paraguay and Nicaragua

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 their

shared border to clamp down on terrorist groups and drug trafficking Venezuela also agreed to pay debtsamounting to some USD800mn to Colombian exporters The agreement paves the way for the restoration oftrade relations between the two countries, which promises to ease supply shortages of beef on Venezuelanshelves.

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

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

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

In February 2013, data from Colombia's National Administrative Department of Statistics and Office ofTaxes and Customs demonstrated that trade between Colombia and Venezuela increased by 40% y-o-y toUSD3.28bn

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

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

Sources: USDA/BMI Calculation

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

Pork Production, '000 tonnes 125.0 125.0 125.0 125.0 125.0 120.0 Pork production, % y-o-y 0.0 0.0 0.0 0.0 0.0 -4.0 Pork Consumption, '000 tonnes 133.0 129.0 134.0 141.0 141.0 133.0 Pork consumption, % y-o-y 3.1 -3.0 3.9 5.2 0.0 -5.7

Sources: USDA/BMI Calculation

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

Poultry Production, '000 tonnes 695.0 680.0 650.0 625.0 655.0 660.0 Poultry production, % y-o-y -6.1 -2.2 -4.4 -3.8 4.8 0.8 Poultry Consumption, '000 tonnes 1,047.0 861.0 887.0 859.0 853.0 960.0 Poultry consumption, % y-o-y 15.9 -17.8 3.0 -3.2 -0.7 12.5

Sources: USDA/BMI Calculation

Risks To Outlook

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

Grains Outlook

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

first decade of the 21st century, consumption has also risen, fuelled by oil-driven economic growth Corn 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 estimate that corn output fell slightly by 1.9% y-o-y to1.28mn tonnes Output was hit by the poor macroeconomic climate and shortage of foreign currency, withfarmers unable to invest in the fertilisers and machinery that would allow them to recover lost production

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

Production in the 2013/14 season that ended in June 2014 rose by a weak 1.5% year-on-year (y-o-y) to1.32mn tonnes Output grew slightly due to a small increase in area devoted to corn according to data fromthe National Agricultural Producers Association This was a result of relatively favourable governmentprices compared to other commodities, and less production risk In spite of this growth, production

remained significantly below the levels recorded since the start of the 2000s (corn production averaged1.5mn tonnes between 1999/20 and 2009/10

The outlook for corn production in 2014/15 is positive Plantings are now completed, and rains have beengenerally below averages since the start of the season Adding to weather issues, the lack of foreign

exchange to import necessary inputs is reaching critical levels according to local sources, which willstrongly limit input use and yields We forecast production to decline by 0.2% to 1.30mn tonnes Areaharvested and yields will broadly stagnate at around 400,000ha and 3.25tonne/ha respectively These levelsare significantly below the ones recorded in 2004/05-2009/10

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 corn production to stagnate between 2012/13 and 2017/18 at around 1.3mn tonnes

Wheat production in Venezuela is negligible, as the country does not have a suitable climate for growingwheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming fromthe US (42%) and Canada (52%) In 2011, wheat was added to the list of goods classified by the

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

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

in 2014 and 2015, 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 109% from 2005 to

2013, outstripping growth in production and leading to a surge in imports from the US

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

on the 2013 level to take consumption to 4.3mn tonnes

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

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

Corn Production, '000 tonnes 1,300.0 1,320.0 1,317.4 1,314.7 1,300.0 1,300.0 Corn production, % y-o-y 0.0 1.5 -0.2 -0.2 -1.1 0.0 Corn Consumption, '000 tonnes 3,649.8 3,806.7 3,920.9 4,042.5 4,163.8 4,284.5 Corn consumption, % y-o-y -5.2 4.3 3.0 3.1 3.0 2.9

f = BMI forecast Sources: USDA/BMI Calculation

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

Wheat Consumption, '000 tonnes 1,555.0 1,585.0 1,629.4 1,675.0 1,725.2 1,777.0 Wheat consumption, % y-o-y 3.7 1.9 2.8 2.8 3.0 3.0

f = BMI forecast Sources: USDA/BMI Calculation

Growing Dependence On Imports

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

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

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

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

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

Grains imports have been steadily growing in recent years and are forecast to reach 2.6mn tonnes for cornand 1.8mn tonnes for wheat in 2014/15, compared with the five-year average import of 2.16mn tonnes and1.66mn tonnes respectively Corn and wheat imports continue to face severe delays and problems mainly tothe long waiting time for the approval of foreign currency and import permits However, imports of grainsshould continue to receive preferential treatment to expedite the import of basic consumer goods and tomaintain the livestock industry

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

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

Wheat Milling Industry Woes

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

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

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

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

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

f = BMI forecast Source: BMI, USDA

America Benefiting From Growing ImportsVenezuela - Corn (LHC) & Wheat (RHC) Imports By Suppliers, 2013 (% of total volume imported)

Source: ITC, BMI

Mixed Results For Government's Production Drive

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

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

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

farmgate price is too low, threatening future production

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

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

Gran Misión Agro Venezuela Fails To Deliver

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

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

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

Stagnating In VenezuelaSelected Countries - Corn Yields (tonne/ha)

Sources: USDA/BMI Calculation

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

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

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

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

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

Coffee Outlook

BMI Supply View: As with other agricultural sectors, the failure of government-mandated prices to keep

pace with increasing costs amid rocketing inflation has hurt the profitability of production in Venezuela,leading farmers to turn towards more profitable crops In addition, lack of producer unity and the

government's expropriation of two main coffee processors have made the sale of coffee more complicatedfor producers, providing a disincentive to continue production Producers have also faced competition fromimported coffee, leading many to abandon the sector in favour of more lucrative activities such as cattleranching In recent years, the number of coffee-growing families has fallen from an estimated 80,000 tofewer than 50,000 and since 2009 Venezuela has become a net importer of coffee

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

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

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

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

expecting

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

61.6% over 2008-2013 The vast majority of coffee consumed is roasted ground coffee, with soluble instantcoffee accounting for only about 1% of total consumption Coffee is included in the government's basicfood basket and is available in government food stores at subsidised prices This has allowed more low-income Venezuelans to afford it, leading to a strong increase in demand

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

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

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

slightly in 2014, by 0.4% y-o-y Through to 2018, we forecast demand growing by 2.0% on 2013 to 1.3mnbags.

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

Coffee Production, '000 60kg bags 730.0 700.0 660.0 666.6 673.3 680.0 Coffee production, % y-o-y 4.3 -4.1 -5.7 1.0 1.0 1.0 Coffee Consumption, '000 60kg bags 1,308.0 1,313.2 1,318.5 1,323.8 1,329.1 1,334.4 Coffee consumption, % y-o-y 0.2 0.4 0.4 0.4 0.4 0.4

f = BMI forecast Sources: USDA/BMI Calculation

Another Challenging Year For Coffee Production In 2014/15

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

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

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

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

Sector On The DeclineVenezuela - Coffee Production ('000 60kg bags) & Area Harvested ('000 ha)

Source: BMI, USDA, FAO

From Net Exporter To Net Importer

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

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

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

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

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

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

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

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

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

Source: BMI, USDA

Heavy Price Regulations To Remain In Place

The performance of the coffee industry will remain ruled by price regulations, which are likely to stay ineffect until 2018, affecting both coffee growers and processing companies Coffee prices are controlled atboth the farm gate and retail levels, as coffee is a basic food item and included in the government's basicfood basket

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

processors depending on public credit entities

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

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

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

Nicaragua's Share GrowingVenezuela - Coffee Imports By Origin, 2013 (% of imported volume)

Source: ITC, BMI

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

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

plantations will continue, continuing the country's import dependence

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

Coffee Production, '000 60kg bags 996.0 1,000.0 725.0 625.0 700.0 730.0 Coffee production, % y-o-y 15.5 0.4 -27.5 -13.8 12.0 4.3 Coffee Consumption, '000 60kg bags 810.0 835.0 875.0 1,305.0 1,305.0 1,308.0 Coffee consumption, % y-o-y 2.5 3.1 4.8 49.1 0.0 0.2

Sources: USDA/BMI Calculation

Risks To Outlook

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

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

in the sector could increase

Commodity Strategy

Monthly Grains Strategy

■ We believe the S&P GCSI Grains Index has found a base around the 350 level and expect it to

consolidate before heading higher in the coming months

■ Corn, wheat and rice prices will strengthen over the next six months as demand growth improves andproduction growth slows

■ We expect soybean prices to remain weak for the foreseeable future, as the market will register largeproduction surpluses over the coming years

Bottomed OutS&P GSCI Grains Index (weekly chart)

Sources: Bloomberg, BMI

Corn: Prices To Stabilise

We expect corn prices to stabilise and to trade in the USc350-400/bushel range over the coming months.From a technical perspective, our conviction that corn prices will respect the USc350/bushel level is playingout, as prices have rebounded from that level and momentum indicators suggest further resilience Indeed, abullish divergence has formed on both the daily and weekly RSI From a fundamental perspective, we do

not expect additional significant upgrades to official US 2014/15 corn crop estimates before the Septemberharvest, which will limit any large downward price movements We believe prices will average USc430/bushel in 2015 and USc450/bushel in 2016.

Respecting USc350/bushel LevelFront-Month CBOT Corn, USc/bushel (weekly chart) With RSI (below)

Source: Bloomberg, BMI

Looking further ahead, we expect corn prices to average higher than spot levels over the coming years for

three main reasons First, US livestock production will improve, albeit slowly Livestock production in the

US has suffered in recent years due to disease concerns (hogs) and poor pasture conditions (cattle).

However, we forecast beef production to rise in the coming years as US cattle herds are rebuilt and the pork

sector rebounds following disease concerns Second, we expect corn production growth in the Americas to slow, as yields and the area dedicated to corn are at record highs Third, we expect corn demand for ethanol

in the US to remain strong over the coming years due to a more favourable outlook for ethanol producers

Pushing The LimitsUnited States - Corn Area Harvested (mn acres) & Yields (bushels/acre)

Sources: USDA, NASS, BMI

Soybean: Ongoing Weakness

Soybean prices will remain weak over coming months and years, as the global market will be extremelywell supplied Currently, US soybean soil conditions remain excellent, and demand from the US andChinese livestock sectors will remain limited over the coming months due to oversupply (China) anddisease concerns (US) Consequently, although technical indicators are approaching oversold territory andnet speculative positions have already reached multiyear lows, we believe strong supply will keep prices incheck over the next several weeks

Not Ruling Out USc1,000/bushelSecond-Month CBOT Soybean, USc/bushel (weekly chart) With RSI (below)

Source: Bloomberg, BMI

Looking further ahead, we forecast soybean prices to average USc1,150/bushel in 2015 and USc1,100/bushel in 2016, as the market will post big surpluses Soybean production- particularly in the Americas- will

be strong over the next few years as farmers choose to plant soybean instead of other crops (particularlycorn) due to favourable pricing dynamics The soybean/corn ratio remains near multiyear highs, which willincentivise plantings for the upcoming 2015/16 planting season We expect this ratio to eventually headlower and revert to mean, which will add strength to soybean prices from 2016/17

Incentivising Soybean ProductionPrice Ratio - Second-Month CBOT Soybean/Corn

Notes: An increase in the ratio indicates stronger relative prices for soybean than corn and therefore more incentive for farmers to plant soy instead of corn Source: BMI, Bloomberg

Wheat: Prices To Head Higher

We believe wheat prices have bottomed and will grind higher over the remainder of 2014 The northernhemisphere harvests are now largely complete, meaning that the quality of the crop and therefore

production figures are generally known from the market Wheat production growth in Australia and

Argentina, where harvests will begin at the end of 2014, will also be sluggish Furthermore, greater pricestrength from grains in general and geopolitical concerns in the Black Sea region- which could disruptexports of grain- will continue to add strength to wheat prices That said, we expect concerns surroundingreduced grain exports in the Black Sea region to abate over the coming months

Prices To Grind HigherFront-Month CBOT Wheat, USc/bushel (weekly chart) & RSI (below)

Source: Bloomberg, BMI

In terms of regional dynamics, CBOT wheat prices will continue to outperform Paris milling wheat prices

over the coming weeks, despite concerns over the quality of the EU harvest (see 'Europe Wheat Prices To

Underperform CBOT Wheat', July 17) There will be less demand for European wheat, as domestically the

greater decline in corn prices will reduce wheat feed demand in Europe, while external trade will declineyear-on-year (y-o-y) Weaker exports will be largely due to stagnant demand growth in the Middle East andNorth Africa region