Vietnam agribusiness report q1 2011

Despite virtually flat production growth in recent years and even a slight decrease in 2009/10, we believe Vietnam's rice sector will experience considerable growth over our forecast per

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All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

REPORT Q1 2011

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Production Date: December 2010

CONTENTS

Executive Summary 5

Industry Developments 6

SWOT Analysis 7

Vietnam Agricultural SWOT 7

Vietnam Political SWOT 8

Vietnam Economic SWOT 9

Vietnam Business Environment SWOT 10

Industry Forecast Scenario 11

Vietnam Sugar Outlook 11

VIETNAM Sugar Production, Consumption & Trade 11

VIETNAM Sugar Production, Consumption & Trade 13

Vietnam Livestock Outlook 14

VIETNAM Poultry Production, Consumption & Trade 15

VIETNAM Pork Production, Consumption & Trade 15

VIETNAM Beef & Veal Production, Consumption & Trade 15

VIETNAM Poultry Production, Consumption & Trade 19

VIETNAM Pork Production, Consumption & Trade 19

VIETNAM Beef & Veal Production, Consumption & Trade 19

Vietnam Coffee Outlook 21

VIETNAM Coffee Production & Consumption 22

VIETNAM Coffee Production & Consumption 24

Vietnam Dairy Outlook 25

VIETNAM Milk Production & Consumption 25

VIETNAM Butter Production, Consumption & Trade 26

VIETNAM Cheese Production, Consumption & Trade 26

VIETNAM Milk Production & Consumption 28

VIETNAM Butter Production, Consumption & Trade 28

VIETNAM Cheese Production, Consumption & Trade 29

Vietnam Grains Outlook 30

VIETNAM Corn Production, Consumption & Trade 30

VIETNAM Corn Production, Consumption & Trade 31

Vietnam Rice Outlook 32

VIETNAM Rice Production, Consumption & Trade 33

VIETNAM Rice Production, Consumption & Trade 35

Competitive Landscape 36

Table: Agricultural Commodity Producers & Traders 36

Table: Agribusiness Suppliers 37

Table: Integrated Agricultural Producers 38

Commodity Price Analysis 39

Softs Update 39

Cocoa 39

COCOA 39

Coffee 40

COFFEE 40

Milk 41

MILK 41

Sugar 42

SUGAR 42

Monthly Grains Update 43

Corn 43

CORN 43

Rice 44

RICE 44

Soybean 45

SOYBEAN 45

Wheat 46

WHEAT 46

Downstream Supply Chain Analysis 47

Industry Forecast Scenario 47

Consumer Outlook 47

Food 49

Food Consumption 49

Table: Food Consumption Indicators - Historical Data & Forecasts 50

Canned Food 51

Confectionery 52

Table: Value/Volume Sales of Selected Food Sub-Sectors - Historical Data & Forecasts 53

Trade 54

Table: Vietnam Food & Drink Trade Indicators - Historical Data & Forecasts 55

Mass Grocery Retail 56

Table: Vietnam MGR Indicators - Value Sales by Format - Historical Data & Forecasts 58

Grocery Retail Sales by Format Historical Data & Forecasts (%) 58

Macroeconomic Forecast 59

Vietnam – Economic Activity 61

Industry Trend Analysis 62

Global Coffee Outlook: Vietnam Focus 62

VIETNAM ESTIMATES 65

Asia-Pacific Food & Drink Risk/Reward Ratings 66

Asia Pacific Food & Drink Risk/Reward Ratings -Q1 2011 69

Company News Aler 70

Fonterra EM Expansion Highlights Promise For Dairy Industry Players 70

Global Food & Drink View 73

Food and Drink Roundup: Core Views 73

BMI Food & Drink Core Views 77

BMI Forecast Modelling 78

How We Generate Our Industry Forecasts 78

Executive Summary

BMI View: Consistent economic growth has led to double-digit consumption growth forecasts across all

agricultural sectors in Vietnam However, the industry will continue to produce surpluses in coffee and rice - but few other commodities Indeed, with a rising population and incomes, the country will remain a net importer of all livestock and dairy goods over the forecast period Although the Vietnamese

government is investing in several sectors to increase production, most of the industry, barring rice, will remain import-dependent and vulnerable to changes in global agricultural prices

Key Trends:

ƒ Coffee production growth to 2014/15: 23% to 24.2mn 60kg bags The recently approved

government stock-piling scheme should serve to smooth price fluctuations and also ensure a steady supply of yearly coffee output

ƒ Sugar production growth to 2014/15:31.2% to 1.9mn tonnes Gains will be driven by stronger

domestic demand and an increase in yields Despite this, the country will likely remain a net sugar importer, as demand is expected to outstrip supply

ƒ Rice production growth to 2014/15: 23% to 29.6mn tonnes.We do not foresee expansion

through increase in area harvested but through yield improvements

ƒ Corn Consumption growth to 2015: 52% Animal feed will remain the primary use for corn to

2015 and beyond (feed accounted for 73% of total demand in 2009) and consequently our demand outlook for corn is very closely linked to our Vietnamese livestock forecasts

ƒ Pork production growth to 2014/15: 36.3% to 2.6mn tonnes This will constitute more than

60% of total meat consumed in 2015 Rising incomes will stimulate domestic meat consumption growth and production will increase to keep pace Furthermore, the livestock industry has become a key focus of government efforts to modernise food processing

ƒ 2011 Real GDP Growth: 6% (down from 6.7% in 2010; predicted to average 6.5% from 2010

until 2014)

ƒ Consumer Price Inflation: 10.8% y-o-y in September 2010 (up from 1.8% y-o-y in September

2009)

Industry Developments

Vietnam's coffee sector has grown significantly over the last 20 years, with yields doubling over that time, while the area planted has expanded from 42,000 hectares to over 509,000 We believe that growth will be driven by the Vietnamese government's plans to increase replanting of coffee trees Work on replacing trees, many of which are more than 20 years old, will improve disease resistance and thus yields

in the long term Another growth driver will be export opportunities, given that Vietnam is the world's largest exporter of robusta coffee The newly-approved government stockpiling plan should also serve to smooth price fluctuations and ensure a steady output in the long run

Despite virtually flat production growth in recent years and even a slight decrease in 2009/10, we believe Vietnam's rice sector will experience considerable growth over our forecast period, buoyed by

improvements in infrastructure, higher yields and increased domestic demand Compared with many of its agricultural sub-sectors, Vietnamese rice is actually very competitive relative to many of its regional peers and is well positioned to ensure the country remains a net exporter Indeed, it will continue to

be one of the world's few rice exporters, the second largest in 2009/10

Vietnamese dairy consumption has expanded significantly in the last 15 years, driven by relatively large increases in domestic consumption and rising incomes, which have fostered increased milk consumption Dramatic increases in cattle numbers and increased public and private sector investment, in an effort to reduce the country's growing import dependency, will support the strong growth Commercialisation will also play a key role as larger, more efficient farms begin to play a greater part in total milk production

SWOT Analysis

Vietnam Agricultural SWOT

Strengths ƒ The natural fertility of Vietnam around the Red River Delta in the north and the

Weaknesses ƒ Much of Vietnam's agriculture is based on small-scale farms with poor yields in

comparison to more developed international competitors

ƒ Transportation and production infrastructure is often poor, making getting crops to market difficult and negatively affecting quality

Opportunities ƒ Since the opening up of the economy in 1986, allowing more private involvement

in agriculture, yields have improved dramatically and look set to continue doing so over our forecast period to 2013

ƒ Vietnam's fast-growing population of over 80mn provides a large market for food products

agro-ƒ With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period to 2014, consumers will have more money to spend on food, spurring growth in agricultural production

Threats ƒ Poor knowledge of good farming practices and hygiene standards leaves

Vietnamese agriculture open to disease outbreaks of the kind that have plagued the livestock industry in recent years

ƒ The slowing world economy threatens demand for key exports such as coffee and could lead to domestic food consumption growth falling short of expectations

ƒ The rising population and increasing industrialisation of the economy will increase competition for land use, curtailing the area available for expansion of agriculture

Vietnam Political SWOT

Strengths ƒ The Communist Party government appears committed to market-oriented

reforms, although specific economic policies will undoubtedly be discussed at the 2011 National Congress The one-party system is generally conducive to short-term political stability

ƒ Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ƒ Corruption among government officials poses a major threat to the legitimacy of

the ruling Communist Party

ƒ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent

Opportunities ƒ The government recognises the threat that corruption poses to its legitimacy,

and has acted to clamp down on graft among party officials

ƒ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system

Threats ƒ The slowdown in growth in 2009 and 2010 is likely to weigh on public

acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule

ƒ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable

ƒ Relations with China have deteriorated over the past year due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause widescale environmental damage

Vietnam Economic SWOT

Strengths ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years,

with GDP growth averaging 7.6% annually between 2000 and 2009

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

Weaknesses ƒ Vietnam still suffers from substantial trade, current account and fiscal deficits,

leaving the economy vulnerable as the global economy continues to suffer in

2010 The fiscal picture is clouded by considerable 'off-the-books' spending

ƒ The heavily-managed and weak dong currency reduces incentives to improve quality of exports, and also serves to keep import costs high, thus contributing

to inflationary pressures

Opportunities ƒ WTO membership has given Vietnam access to both foreign markets and

capital, while making Vietnamese enterprises stronger through increased competition

ƒ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s

Threats ƒ Inflation and deficit concerns have caused some investors to re-assess their

hitherto upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms

on hold, as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country

attractive to foreign investors

ƒ Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond

Weaknesses ƒ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate

to cope with the country's economic growth and links with the outside world

ƒ Vietnam remains one of the world's most corrupt countries Its score in Transparency International's 2009 Corruption Perceptions Index was 2.7, placing it in 22nd place in the Asia-Pacific region

Opportunities ƒ Vietnam is increasingly attracting investment from key Asian economies, such

as Japan, South Korea and Taiwan This offers the possibility of the transfer of high-tech skills and knowhow

ƒ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector This should offer foreign investors new entry points

Threats ƒ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

ƒ Labour unrest remains a lingering threat A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period

Industry Forecast Scenario

Vietnam Sugar Outlook

BMI Supply View: Vietnam's sugar industry suffers from a lack of technological advancement and

investment as a result of cheap imports and competition from higher quality, more efficient producers The area harvested for sugar reached a 40-year high of 320,000 hectares in 2001/02, but has not returned

to that level in subsequent seasons To mitigate the fall in area planted, sugarcane yields have increased

by 21% from 1997/98 to 2007/08 Following poor output in 2008/09, we forecast production to rebound

to 1.1mn tonnes in 2009/10, owing to better weather Over the forecast period, we expect sugar

production to increase by 18.8% to 1.3mn tonnes, driven by stronger domestic demand and an increase in yields Despite this, the country will likely remain a net sugar importer, as demand is expected to outstrip supply

BMI Demand View: Increasing the country's import dependency, Vietnamese sugar consumption is

forecast to continue climbing 31.2% to 2015 to reach 1.9mn tonnes in 2015 We therefore maintain our bullish Vietnamese economic growth outlook for the medium term This positive outlook is bolstered by the robust sales figures for sugar confectionary and soft drinks of 28.5% and 39.4% growth respectively over our forecast period

VIETNAM Sugar Production, Consumption & Trade

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2009 =

2008-09; Sources: 2 USDA, BMI

Full Potential Not Yet Realised

In 1995, recognising the potential of the sugar production sector and rising domestic demand for the commodity, the Vietnamese government launched a programme to more than double production to 1mn tonnes by 2000 The government encouraged foreign involvement in the milling sector and provided cheap credit and assurances of infrastructure improvement Sugar production grew rapidly, rising to

0.95mn tonnes in 2000 and 1.21mn tonnes the following year Since then, however, the sector has

stagnated and Vietnam has slipped back to being a net sugar importer

This can be explained by the inefficiency of production in the newly expanded industry Sugar in Vietnam

is considerably more expensive than in other sugar-producing countries in the region such as Thailand and Australia Vietnamese sugar producers have been protected by high tariffs and restrictive import regulations This dearth of competitiveness has inhibited the development of a sugar export industry Even with protection, many mills have made losses over the past few years Domestic prices are

undermined by the smuggling of cheaper Thai sugar into the country via Cambodia

The industry is now in a state of transition as international agreements are forcing Vietnam to cut

protection Under the ASEAN Free Trade Area (AFTA) agreement, Vietnam has to reduce tariffs on sugar imports from ASEAN members to a maximum of 5%by 2011 This will expose the country to imports from Thailand, a major sugar exporter Tariffs on imports from other countries will also have to

be reduced by 2011 in line with the government's commitments to the WTO

The government has been trying to increase efficiency in the sector to prepare it for greater integration with the world economy by encouraging farmers to plant high-yielding cane varieties and improving the mechanisation of cane production In 2007, the government presented a plan for the development of the sector to 2010 and further to 2020

The plan aimed for annual production of 1.5mn tonnes of sugar from 1.9mn tonnes of sugar cane by 2010 Obviously this was not met The plan had envisioned 300,000 hectares (ha) planted to sugarcane and yields of 65 tonnes/ha Average yields are still some way off this level and cane production in 2009 is estimated at around only 10mn tonnes, though it stood at 12.1mn tonnes in 2008 By 2020, the plan is aiming for production of 2.1mn tonnes to be achieved through increasing cane yields and the sugar content of cane

To achieve these ambitious aims the government has put a moratorium on the building of new mills so that technology in existing mills can be improved Provincial authorities will assist mills in organising the zones where their cane will come from and assist in improving farming practices Financially, the

government has committed to investing in importing and propagating new cane varieties and improving infrastructure such as reservoirs and irrigation canals

While government support for the sector is encouraging, we believe it will struggle to produce enough sugar for domestic consumption Once tariffs are lowered by 2011, it is likely that the government will have to support the sector by other means to keep production on course, as it is unlikely that Vietnamese-produced sugar will be able to compete with imports by then

French shipping service company Bourbon SA has recently sold off its 69% stake in local sugar

company Sucrerie de Bourbon Tay Ninh to a group of Vietnamese investors for EUR34mn

(USD483mn) BMIA believes that as the company is now in the hands of local producers, there could be

more incentive to improve efficiencies and strengthen its falling revenues

VIETNAM Sugar Production, Consumption & Trade

Risks to consumption growth remain We have factored in the effects of monetary tightening on spending

on non-essential food and drink purchases, such as soft drinks and confectionery (both of which fell by 4% y-o-y in 2009), but were this reduction to be exacerbated by a secondary slowdown in the Vietnamese economy - perhaps due to reduced investment as a result of sluggish US and eurozone growth - our sugar consumption forecasts are unlikely to be achieved

Another downside risk could monetary tightening measures by the central bank As a result of relatively weak economic growth forecasts for Vietnam in 2010, the central bank is determined not to engage in monetary tightening, despite rising food inflation Should the bank change course and resort to a cycle of policy rate hikes, the resulting slowdown in wage increases could see consumers refrain from sugar purchases This could see our forecasts overshoot actual consumption

If government support for sugar production proves ineffective and mill owners are not able to increase profitability, the sector could struggle when import tariffs on sugar are reduced in 2012 Though it is not our core scenario, this could possibly see output fall later in our forecast period

Vietnam Livestock Outlook

BMI Supply View: Vietnam's livestock industry has historically suffered from under-investment and

competition from cheaper imports Within the Vietnamese livestock industry, pig farming is by far the most significant sector, with pork production, totalling 1.9mn tonnes, comprising over three quarters of total meat production in 2009/10 This was a slight 2% increase year-on-year (y-o-y) Poultry production grew slightly to 365,000 tonnes in 2009/10 after the sector suffered the year before from reduced demand and low prices Beef production, on the other hand, has witnessed virtually stagnant growth, reaching 261,800 tonnes in 2009/10

Despite going through hard times over recent years with disease outbreaks, soaring input costs and competition from cheap imports, we expect Vietnam's livestock production to see strong growth, led by pork production, over the medium term This is because rising incomes will stimulate domestic meat consumption growth (due to diet diversification) and production will increase to keep pace Furthermore, the livestock industry has become a key focus of government efforts to modernise food processing

As a result, we expect poultry production to rise by 30.5% to 476,200 tonnes over our forecast period to 2014/15 and for pork production to grow 36.8% from its 2010 level to 2.6mn tonnes over the same period The country will still remain reliant on pork imports to satiate demand Beef production will remain the least significant of Vietnam's livestock sectors, but will also see good growth over our forecast period, with production expected to rise by 26.1% to 330,000 tonnes

BMI Demand View: Meat consumption in Vietnam has risen significantly over the last decade, with

per-capita consumption rising by 86% from 1999 to 2009 to reach 28kg per year Once again, buoyed by strong income as well as population growth, we see healthy demand growth for livestock over the forecast period to 2015 Poultry consumption will see the strongest growth at 45.2% to 802,000 tonnes, while pork (from a higher base) and beef consumption will increase by 36.3% and 38.7% respectively Indeed, we foresee pork consumption reaching 2.7mn tonnes, while beef consumption will reach 742,800 tonnes

BMI foresees pork continuing to be the country's most popular meat, comprising more than 60% of total

meat consumed Indeed, a recent household survey revealed that 40% of household meat expenditure comprised of pork, with preference given to fresh pork, as compared to chilled or processed meat

VIETNAM Poultry Production, Consumption & Trade

Poultry Production, '000

tonnes 1 365.10 381.70 401.20 428.00 453.70 476.20Poultry Consumption,

'000 tonnes 1 552.30 579.80 630.90 688.30 746.50 802.00Poultry Net Trade

Balance, '000 tonnes 1 -187.30 -198.20 -229.70 -260.20 -292.80 -325.70

Notes: f BMI forecasts Sources: 1 USDA, BMI

VIETNAM Pork Production, Consumption & Trade

Notes: f BMI forecasts Sources: 1 USDA, BMI

VIETNAM Beef & Veal Production, Consumption & Trade

Balance, '000 tonnes 1 -273.65 -286.64 -297.76 -335.01 -373.92 -412.80

Notes: f BMI forecasts Sources: 1 USDA, BMI

Meeting International Standards

Since joining the WTO in 2007, Vietnam has striven hard to meet an array of standards pertaining to food and health safety issues, also known as Sanitary and phytosanitary (SPS) rules To date, it has already

submitted 22 notifications to the WTO BMI believes that adhering to implementing these new rules will

be a tall order for the industry, given that roughly 80% of livestock farms are household farms with small animal headcounts It is, however, a step in the right direction for ensuring the quality of meat produced and supports producers in their battle against livestock diseases, especially as the country tries to increase the exports of its meat products

Government Intervention

In order to protect local meat producers, the Ministry of Finance raised import tariffs on meat in March

2009 Effective from March 20, the tariff on fresh pork was raised to 28% and frozen pork to 24% Duties

on fresh beef now range from 17% to 33%, depending on the cut, while the duty for frozen beef is set at 20% At the beginning of April 2009, the agriculture ministry also petitioned the finance ministry for the import tariff on corn to be cut from 8% to 4% to help livestock producers In May 2009, the Ministry of Finance reported that frozen meat imports had been falling by around 20% month-on-month following the March tariff hike

While meat import volumes were reportedly low through the middle months of 2009, this did little to help domestic producers as flagging demand and excess saw farmgate meat prices plummet in the second quarter of 2009 In July and August 2009, poultry producers were complaining that the cost of production had climbed back above what they were paid for their chickens We expect this situation to improve in

2010 as Vietnam's economy continues to recover

Despite the assistance, a Ministry of Agriculture and Rural Development official was quoted by Viet Nam News as warning that domestic producers would still have to work on improving production efficiency and cutting costs so they could compete with imports without government help After 2012, however, WTO commitments will mean the Vietnamese government has less freedom in setting tariffs An official

at the ministry said that Vietnam is aiming to produce 5.5mn tonnes of meat by 2020 He said that work needed to be done on improving Vietnam's self-sufficiency in animal feed by better utilising agricultural by-products

New, more efficient farms have been springing up in Vietnam over the last few years, particularly in the south At the end of June 2009, a new chicken farm complex opened in the province of Binh Phuoc The five farms in the complex will have an annual capacity of 1.8mn birds Modern, air-conditioned poultry farms have been on the rise in the provinces around the southern commercial capital of Ho Chi Minh City The growth of new farms has attracted the interest of international companies such as Thailand's

food giant CP In August, Hung Farm, linked to the Thai giant's Vietnamese subsidiary CP Vietnam,

opened a new broiler complex in Binh Duong Province The project, which contains 18 broiler houses,

will be one of the largest modern poultry farms in the country While we expect the development of modern livestock farms to be rapid around major urban population centres, the majority of farming will continue to be done in small-scale, more traditional ventures in rural areas

Government Pledges Crackdown On Low Quality Meat

As well as increasing tariffs on meat imports in 2009, the Vietnamese government also pledged to tighten

up import regulations to prevent the dumping of low quality livestock products on the Vietnamese

market Consumers have traditionally preferred imported meat to domestic produce owing to the

perceived higher quality However, a number of health scares from imported meat goods in mid-2009 has dented this assumption Both the national and Ho Chi Minh City authorities have said that inspection of meat imports will be improved In August 2009, the deputy director general of the Vietnam Food

Administration was quoted in the local press admitting that the agency's food safety inspection teams were woefully ill-equipped and were unable to detect the presence of disease or prohibited chemicals in imported meat

The tightening of rules for meat imports in Ho Chi Minh City has left thousands of tonnes of meat to rot

in the city's ports, as importers have neglected to collect consignments unlikely to be approved for sale The moves have spurred a wave of complaints from importers, yet we think the moves are a necessary step to improving food safety and will be beneficial to the sector in the long term as they will increase consumer confidence in the meat on sale in Vietnam We warn, however, that without close scrutiny the regulations could be used as a form of back-door protectionism The publicity surrounding the story should give a boost to local livestock producers and improve the image of domestically-produced meat That said, work on improving hygiene in domestic abattoirs and transport facilities is also desperately needed

Other complaints surrounding the turbulent livestock industry include poultry sellers resortedly dyeing chicken meat yellow by using a toxic wood polishing chemical found in industrial pigments As many Vietnamese prefer chicken with yellow skin, believing that this indicates Vietnamese origin, some small-scale chicken sellers have turned away from using more expensive food dyes from Thailand

(VND330,000/kg) to instead applying iron oxide (VND90,000-150,000/kg) on their birds Iron oxide in the body can damage the kidneys and liver, as well as cause cancer over the long term

Diseases Make Their Way Through Livestock Sector

In common with many countries in the region, Vietnam battled with repeated outbreaks of highly

pathogenic avian influenza (HPAI) in the first few months of 2009 Occurrences were reported across the country and by the end of March, three people had died of the disease While the hot season in May should have seen a fall in outbreaks, the wide geographic spread of the disease was worrying At the end

of June, Vietnam was still not completely free of the disease, though most of the country had passed the 21-day period without infection to be declared clear An outbreak in the northern province of Quang Ninh

at the end of June saw 500 birds die and another 1,300 culled In mid-July, this was the only province yet

to be declared avian flu free

With the start of the cool season in November, HPAI returned to Vietnam after being absent since June following the first incident in the northern province of Lai Chau which saw the culling of almost 2,000 birds Outbreaks continued across the country through December Unless effective measures can be put in place to stop the return of the disease every cool season, it will continue to be a major threat to the

country's poultry producers International help has been offered with the FAO pledging US$7mn to help the country improve preparedness However, efforts are being hampered by the opaque nature of

officialdom in the country with reports of government vets exaggerating the number of animals

vaccinated to claim vaccination fees The prevalence of small-scale 'backyard' poultry producers also makes implementing an effective system difficult Indeed, the flu is continuing to hurt farmers, as six separate outbreaks were reported in August 2010, leading to the deaths of over 6,000 birds

Vietnam's pork sector is no stranger to disease either Since the start of 2010 to October, as many as 105,023 pigs had been infected with Blue Ear Disease (porcine reproductive respiratory syndrome; PRRS), with the government slaughtering almost half of them to prevent further spreading To aid the farmers, the government gave out approximately US$1.30 per animal lost

Despite this, the disease spread to 21 other provinces in a month (mostly in southern areas of the country), including Dong Nai and Binh Phuoc, Nghe An, Cao Bang, Soc Trang, Quang Tri, Tien Giang, Lao Cai, Long An, Binh Duong, Bac Lieu, Quang Nam, Dong Nai, Binh Phuoc and Da Nang Indeed, the spread of the disease has prompted local authorities to label the disease a pandemic In an effort to stop the advance

of the disease, local authorities have urged farmers to slaughter sick pigs immediately The authorities have also called for tighter transport restrictions to keep the disease contained In recent years, the beef sector has managed to escape similar problems However, given the general susceptibility of the livestock sector to outbreaks, it may not be long before the beef sector experiences a similar disease outbreak

VIETNAM Poultry Production, Consumption & Trade

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

VIETNAM Pork Production, Consumption & Trade

Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, BMI

VIETNAM Beef & Veal Production, Consumption & Trade

Beef & Veal Production,

'000 tonnes 1 220.00 230.00 240.00 250.00 260.00 261.80Beef & Veal

A reduction in consumer spending, as a result of the return to more normal fiscal and monetary policy could adversely affect livestock consumption growth Prolonged demand sluggishness would also weigh

on production growth, removing as it would one of the key incentives currently available to domestic production

Competition from cheap imports remains a risk to Vietnamese livestock farmers Efficiency

improvements are being made - as demonstrated by our robust production forecasts - and yet this risk might only be fully realised beyond 2012 once government intervention is reduced

An upside production risk is continued government investment If the sector continues to get investment from the government, the ensuing efficiency increases could pose upside risks to our forecasts

Vietnam Coffee Outlook

BMI Supply View: Vietnam's coffee sector has grown significantly over the last 20 years, with yields

doubling over that time, while the area planted has expanded from 42,000 hectares to over 509,000 Vietnam is the world's biggest producer of robusta coffee, with more than 95% of its coffee output consisting of the cheaper bean and only around 2-3% of production devoted to the premium Arabica variety In 2009/10, we estimate output fell for the second consecutive year, as unseasonal rains caused coffee trees in many areas in Vietnam to flower early This was then followed by a dry period, which damaged the resulting output which we estimate at 18.2mn bags In 2010/11, we forecast a rebound to 19.2mn bags due to good weather conditions in the major coffee growing region of Dak Lak, as well as increased government support

Out to 2014/15, we expect production growth of 23% to 24.2mn bags as the Vietnamese government endeavours to increase the replanting of coffee trees However, in mid-2009, farmers were still investing

in expanding the area under production rather than replanting existing trees Work on replacing trees, many of which are more than 20-years old, will improve disease resistance and thus yields in the long term Another growth driver will be export opportunities, given that Vietnam is also the world's largest exporter of robusta coffee The newly-approved national coffee stockpiling scheme should also serve to smooth out domestic price fluctuations in the coffee market over the long run and ensure a steady supply

of coffee beans

BMI Demand View: Vietnam's population is predicted to grow by 7% from 2009-2014 and its GDP is

forecast to rise at an average rate of 6.5% annually to the end of the forecast period As GDP and

population rise, more people will have more money to spend on luxury goods like coffee Increasing urbanisation and the spread of Western-style coffee shops should add to this trend We predict that consumption will rise 8.0% in 2010 and 8.7% in 2011 to 1.2mn bags and 1.3mn bags respectively Over our forecast period to 2015, we foresee 46% growth to reach 1.7mn bags The Ministry of Agriculture and Rural Development (MARD) has said it hopes to boost domestic consumption to 10-15% of the national coffee crop We do not believe this will be achieved in our forecast period, but the existence of such a sizeable target underlines the apparent potential of domestic consumption

VIETNAM Coffee Production & Consumption

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2009 =

2008-09; Sources: 2 USDA, Vietnam Coffee and Cocoa Association, BMI 3 USDA, BMI

Stockpiling Scheme To Smoothen Fluctuations

In March 2010, according to The Vietnam Association of Cacao and Coffee (Vicofa), the Vietnamese government announced that it would temporarily stockpile 200,000 tonnes of coffee in order to stabilise its export price The decision comes hot on the heels of the MARD stating that it would limit the coffee cultivation area within the country as another stabilising method Vietnam's coffee exports were up 15.8% y-o-y at 18.5mn bags in the 2009 coffee year (October-September), according to the MARD The value of exports, however, dropped by around 20% Apart from the falling world price, the export value of

Vietnamese coffee was hurt by its low quality Black beans, which are usually discarded, comprised as much as 15% of the 2009 coffee crop, according to Vicofa

All this is set to change, however, as a result of the government's recently-approved plans, in late

October, to stockpile 500,000 tonnes of coffee beans for six months, possibly starting as early as

December 2010 BMI believes this should prevent price fluctuations in the domestic market and also

ensure steady output of the bean in the long run

MARD is now focusing on improving the quality of Vietnam's coffee output and has laid out a plan to improve infrastructure in coffee-growing areas - in addition to trade promotion, new farming techniques

and investment in production lines - that meet international standards In September 2009, the Vietnam National Coffee Corporation said it would be investing VND2.5trn (US$140mn) in replanting the

ageing tree stock The ministry had said that it wanted to halt the expansion of coffee growing areas until

2010 and instead work on increasing yields and investing in new trees Despite this, farmers encouraged

by high robusta prices are reportedly increasing the area devoted to coffee, in many cases pushing into forest land

MARD is also planning on establishing a new quality benchmark for coffee destined for the export market, according to a Reuters report released in December 2009 The ministry will assist producers building warehouses and processing machinery The new benchmark will be based on the number of

defects in the coffee rather than moisture content as used previously If the ministry follows through with the plans, it will be good news for Vietnam's coffee sector, which suffers from perceptions of low quality

Vicofa is also pushing for the development of more coffee processing facilities in Vietnam This would allow the country to move up the coffee value chain and reap a higher reward from its exports In June

2009, Trung Nguyen Corporation began work on a US$40mn instant coffee production plant in the

Central Highlands coffee-growing province of Dak Lak The plant, due to become operational around the beginning of 2011, will have capacity to process around 60,000 tonnes a year The company says it hopes

to improve the quality of Vietnamese coffee and raise awareness of the brand The company has also pledged to annually invest VND15bn (US$0.84mn) in improving coffee production practices in the region If Vietnam is to benefit fully from its coffee production, more developments of this ilk will be necessary

Domestic Demand Still Low, But Set To Rise

While the vast majority of Vietnam's coffee will be destined for the export market for a long time to come, we expect domestic consumption to rise rapidly in the coming years In Q209, the Policy and Strategy Institute on Agriculture and Rural Development conducted a survey of coffee drinking habits in Hanoi and Ho Chi Minh City, according to a report in Viet Nam News As we would expect, the survey found that coffee consumption has been increasing in both volume and value terms The increasing spread

of Western-style coffee shops and interest in high-quality coffee will be the driver of growth in the value

of coffee consumption

The survey also found that coffee consumption was highest among the young and the well educated Coffee consumption was lowest among the elderly and in rural areas Consumption was far higher in the

south than in the north In BMI 's view, these findings indicate a bright future for coffee consumption in

the country As urbanisation continues at a rapid pace and access to education increases, coffee

consumption will rise accordingly The high level of consumption in trend-setting Ho Chi Minh City suggests that aspirational consumers in other population centres of the country will not be far behind The popularity of coffee among the younger generation also suggests that consumption will see rapid growth

in the future While office workers drinking instant coffee will likely be content with domestic production for some time to come, Vietnamese coffee growers will only benefit from increased domestic demand for higher quality coffees if investment in quality improvement is made

VIETNAM Coffee Production & Consumption

With Vietnam's coffee industry so dependent on exports, our forecasts for production will be heavily

dependent on world demand and prices for robusta coffee BMI is expecting prices to remain relatively

high over the medium term, but should further demand weakness - or indeed global oversupply - cause prices to come in lower than expected, production could undershoot our growth forecast

While Vietnam's coffee consumption forecast indicates significant growth, it is coming from a low base This highlights the fact that despite government efforts to lift local consumption, coffee remains a luxury, discretionary item Its status leaves it exposed to any period of reduced consumer confidence resulting from government monetary normalisation or a secondary economic slowdown Such a scenario would likely see our consumption growth forecast missed

Vietnam Dairy Outlook

BMI Supply View: Vietnamese dairy consumption has expanded significantly in the last 15 years, driven

by rising incomes which have fostered increased milk consumption In fact, per-capita milk consumption

in Vietnam virtually doubled between 2000 and 2009 to 12kg per person per year Despite this increase, the country remains below the regional average of 65kg Though there has been an increase in milk production over the years, the country produces neither cheese nor butter Condensed milk and yoghurt are also highly popular dairy products in the country

In 2010/11 we foresee production growth of 6.4% to reach 314,500 tonnes Out to 2014/15, we are forecasting Vietnamese fluid milk production growth of 45.8% to 431,000 tonnes Dramatic increases in cattle numbers and increased public and private sector investment, in an effort to reduce the country's growing import dependency, will be the main boost to strong growth Commercialisation will also play a key role, as larger, more efficient farms come to play a greater part in total milk production A sustained period of high global milk prices - thanks to rising global demand and supply sluggishness - will also prove production-supportive and encourage producers to be more long-term in their approach to cattle farming Finally, the sector should benefit from the continued increase in yields, which have been rising over the last decade and should continue to do so given the new private investments in the sector

BMI Demand View: Vietnamese dairy consumption growth will remain strong over our forecast period

to 2015 Strong economic growth will filter through into rising disposable incomes, pushing up demand for non-essential foodstuffs Through to 2015, we expect fluid milk consumption growth of 43.6% to 247,900 tonnes, while demand for butter, cheese and whole milk powder will soar, albeit from a far lower base Increased urbanisation, increased home ownership of Western goods and the ongoing spread of modern, organised retail will all prove supportive of strong dairy consumption growth, even if the

forecast higher global dairy prices limits the growth outlook to some extent Indeed, BMI's forecasts for

GDP per capita growth of 90% over the next five years from US$1,125 to US$2,139 serves to reinforce our bullish outlook

VIETNAM Milk Production & Consumption

Milk Production, '000

tonnes 1,2 295.7 314.5 337.6 367.9 399.3 431.0Liquid Milk Consumption,

'000 tonnes 3 172.7 182.2 195.3 212.1 229.6 247.9

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2009 =

2008-09; Sources: 2 General Statistics Office of Vietnam, BMI 3 FAPRI, BMI

VIETNAM Butter Production, Consumption & Trade

Notes: f BMI forecasts Sources: 1 FAPRI, BMI

VIETNAM Cheese Production, Consumption & Trade

Notes: f BMI forecasts Sources: 1 FAPRI, BMI

Consumers Struggling With High Milk Prices

The dispute over high local milk prices amid low international prices in 2008 continued into 2010, with the Ministry of Finance alleging that the prices of imported dairy goods are kept high by the vast amount spent on advertising and marketing by the major dairy companies A report by the ministry released in December 2009 alleged that for many of the large importers, advertising and marketing costs make up as much as 30% of total costs, breaching a law limiting advertising expenditure to 10% of total costs This has been strenuously denied by the major importers The authorities are threatening to draft new

legislation to control prices We suspect, however, that the dispute will eventually blow over without the need for additional regulation

One reason the companies are able to get away with selling imported brands at a premium is the

Vietnamese consumer's continuing preference for foreign goods Consumers are often willing to pay a large premium for milk powder from a well-known international brand, particularly when claims of extra nutritional benefits such as added vitamins are made Local producers need to work on improving the quality of local production and increasing marketing efforts to persuade buyers that their products are just

as good as imports This will take time, but is essential for increasing the strength of the local dairy production and processing sector as well as making dairy products more affordable If consumers were confident in the quality of cheaper local brands of milk powder, the high prices charged for imported goods would be far harder to maintain The government is currently running a 'buy Vietnam' campaign with dairy goods a key focus Anecdotally, shopkeepers in Ho Chi Minh City have been reporting an increase in sales of domestic dairy brands Continued investment in brand building for local dairy

products will be needed if any gains are to be sustained

Future Bright Despite Difficulties

Rising demand on the back of per-capita income growth and government support for the sector should ensure strong growth in dairy production over our forecast period Indeed, the government has a

somewhat ambitious plan to increase the proportion of the country's milk consumption from domestic production to 40% in 2010 The government has been working with the three dominant dairy processing companies to provide training to small-scale farmers in a bid to lift output Provincial authorities have also been helping with support, such as interest-free loans and subsidies for the purchase of new dairy animal stock Increasing output will also be assisted by the consolidation of farms, with the proportion of those with five or more cows creeping up While the government may find its 40% target for 2010 a bit steep, the support for the industry bodes well for the future of Vietnamese dairy production

Production To Benefit From Private Sector Investment

The dairy sector has been boosted by a US$350mn investment from TH Milk Joint Stock Company

(Vinamilk) to enhance the country's cattle-raising and milk processing in Nghe An province The project includes the construction of a 10,000 hectare pasture farm for up to 45,000 heads of cattle within two years, and US$100mn for a processing factory designed to produce up to 530mn litres of milk per year, which would make it the largest factory of its kind in Vietnam

Since the opening up of the economy in 1986, there has been considerable change in the structure of the Vietnamese dairy industry The contribution of state farms, which were previously responsible for almost all milk production, has fallen to around just 5%, with the other 95% of milk production coming mainly from small- and medium-sized private farms Doi Moi, as the restructuring of the economy is known, has also led to the emergence of a highly consolidated private milk collection and processing sector, within which TH Milk plays a dominant role

To exploit the rewards on offer in the country's dairy sector, Vinamilk has also reportedly started

construction on a US$120mn milk factory in the southern Binh Duong province We are maintaining our upbeat assessment of the growth prospects of Vietnam's dairy sector on the back of the country's strong economic rebound and favourable demographics The country's economic recovery has lifted many Vietnamese out of poverty and we believe consumer spending will continue to hold up strongly over the

coming years Moreover, Vietnam's massive and relatively young population will continue to bolster demand for dairy products

We believe Vinamilk's expansion on its production capacity will allow Vietnam to reduce its import dependency gradually over the long term The new factory will have a capacity of 400mn litres of milk per year when it becomes operational in 2012, and is expected to double its capacity by 2017 The

company is also planning to increase its stock of milk cows to 80,000, which will allow it to boost its milk supply by 1.3mn litres a day

Vinamilk's increased production capacity is pivotal to alleviating price pressures from the country's dairy imports Despite the growth in milk production - a 400% increase from 54,000 tonnes to 262,200 tonnes between 1999/00 and 2007/08 - Vietnam still has to import around three-quarters of its dairy needs Due

to its heavy reliance on dairy imports, Vietnam is particularly susceptible to the sustained high levels of global milk prices (even though milk prices registered a fall in 2006 and 2009, they have remained high at

an average level of US$16.45 per cwt for the past 10 years.) This need for imports also increases

Vietnam's vulnerability to food price inflation in what is already an inflationary environment These pressures further attest to our view that an expansion plan by domestic and multinational industry players

is essential to improving the affordability of dairy products

VIETNAM Milk Production & Consumption

Milk Production, '000

tonnes 1,2 197.7 216.0 234.4 262.2 283.4 295.7Liquid Milk Consumption,

Butter Production, '000 tonnes 1 0.0 0.0 0.0 0.0 0.0 0.0

Butter Consumption, '000 tonnes 1 6.1 6.6 5.3 6.2 6.7 7.2Butter Net Trade Balance, '000

Notes: e BMI estimates f BMI forecasts Sources: 1 FAPRI, BMI

VIETNAM Cheese Production, Consumption & Trade

Another downside production risk is that another economic slowdown on the back of fiscal and monetary tightening would weigh on our consumption growth forecasts, as it would force consumers to cut back on their discretionary spending

Demand for dairy products in 2008 was hit by the contaminated milk scandal in neighbouring China After melamine (which was mixed with milk in China to make the protein content appear higher) was found in some products produced by Vietnamese companies owing to the use of milk powder imported from China, demand for dairy products dropped The scandal not only places downside risks to our forecast for milk consumption in the short term, but has also negatively affected production volumes as processors have cut back the amount of milk purchased from suppliers

Finally, the lack of a national quality control body for dairy products will continue to place downside risks on our production and consumption forecasts, as it places the dairy industry at risk of a similar scandal at home, which would further tar the image of dairy products in Vietnam

Vietnam Grains Outlook

BMI Supply View: Vietnamese corn production is forecast to be just over 5mn tonnes in 2009/10, a 14%

year-on-year (y-o-y) improvement due to a slight increase in area planted, as well as higher yields This output maintains a decade-long trend of higher yields for the corn sector, which have increased by 66% to 4.58MT/Ha from 2000/01 to 2009/10 This is higher than the South East Asian average yield of

3.18MT/HA in 2009/10 Corn has also increased its area harvested from 700,000 hectares in 2000/01 to 1.2mn in 2009/10 These increases have come as domestic consumption rose significantly on the back of improving incomes, encouraging consumers to buy more meat, of which corn is the main feedstock

To 2014/15, we expect corn production to increase by 30% to 6.5mn tonnes Acreage is likely to remain stagnant or diminish; current yield immaturity means significant gains are still available via this avenue, especially as robust local corn prices provide incentives to farmers The important growth driver will be domestic consumption, especially from the livestock sector Corn consumption doubled from 2005 to

2010 and we expect this trend to continue, although not at such a rate, to 2015 The demand gains will partly come from livestock growth, as beef, veal and poultry production should all see strong growth

BMI Demand View: To 2015, corn consumption growth will continue to exceed corn production growth,

at 52.2% over the five-year period This will increase the country's import dependency of the grain However, strong economic growth over the period should ensure that the impact of a rising import bill on consumption is deemed manageable Animal feed will remain the primary use for corn to 2015 (according

to the US Department of Agriculture 80% of total corn consumption goes to animal feed use) and beyond and consequently our demand outlook for corn is very closely linked to our Vietnamese livestock

forecasts We have a positive view on livestock production to 2015, thanks to income growth and the fact that the sector has been identified as a recipient of government modernisation efforts

VIETNAM Corn Production, Consumption & Trade

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2009 =

2008-09; Sources: 2 USDA, BMI

VIETNAM Corn Production, Consumption & Trade

Corn Production, '000

tonnes 1,2 3,757.0 3,818.0 4,251.0 4,600.0 4,432.0 5,019.7Corn Consumption, '000

tonnes 2 3,900.0 4,250.0 4,900.0 5,200.0 5,400.0 5,859.9Corn Net Trade Balance,

investment - corn prices will have to remain in favourable territory in the medium term to ensure that this investment is forthcoming

An important long-term downside consumption risk is that the country's dependence on imports could impede Vietnamese demand growth should a sustained period of inflated global corn prices occur Fiscal and monetary tightening also poses a risk to consumption growth Corn is not a luxury good and thus demand will not retrench in line with tighter spending conditions However, if the 2008 financial crisis is anything to go by, corn production in the country did dip by 3.7% y-o-y in 2008/09 on the back of tighter credit regulations throughout Vietnam then

Vietnam Rice Outlook

BMI Supply View : Despite virtually flat production growth in recent years and even a slight decrease in 2009/10, BMI believes Vietnam's rice sector will experience considerable growth over our forecast

period, buoyed by infrastructure improvements, higher yields and increased domestic demand We have revised down our 2009/10 rice production figure to 24.2mn tonnes on the back of water shortages in the Mekong Delta, which is responsible for half the country's rice output Droughts also hit the central region

- a relatively minor production area - resulting in 100,000 hectares (ha) of rice being damaged That said, overall estimates are for 2010 exports to reach a record high of 7.2mn tonnes - surpassing the 6.6mn tonnes already contracted out - signifying a 20% increase from the previous year due to large carry-over stocks

For 2010/11, we foresee production rising 6% year-on-year to reach 25.7mn tonnes on the back of higher yields According to the US Department of Agriculture (USDA), area harvested for 2010/11 is estimated

at 7.35mn hectares, virtually the same as 2009/10 Over our forecast period, we are bullish about

Vietnam's rice production growth and expect the country's output to hit 29.6mn tonnes in 2014/15 The industry is benefiting from strong demand, both due to a retrenchment of consumption habits during the global downturn, which pushed up demand for food staples and due to ongoing government stock-

building - a response to 2008's aggressive price spike and the consequent introduction of protectionist trade measures Compared with many of its agricultural sub-sectors, Vietnamese rice is actually very competitive relative to many of its regional peers and is well positioned to benefit from both regional and global demand growth Another advantage of Vietnamese rice is in its relatively higher yields With the government's added backing to increase yields through the use of hybrid rice varieties for a 50% increase

in area currently planted with the seeds, this bolsters our bullish outlook for the country's rice production capabilities over the long term

BMI Demand View: We foresee a modest increase of 2.4% for consumption to reach 19.7mn tonnes in

2010/11 Going forward, we expect consumption to climb by 13.5% to 21.8mn tonnes in 2015 Rice remains the major food staple in Vietnam and we do not see this changing over our forecast period However, rising interest in other foods such as wheat-based goods - supported by growing affluence - will restrict demand for rice, and over the forecast period we expect production growth to significantly

outpace that of consumption Ultimately, demand growth will be influenced by population growth, as capita consumption is expected to remain roughly the same as the population continues to diversify its diet on the back of rising incomes As such, the country will remain one of the world's top rice exporters

per-VIETNAM Rice Production, Consumption & Trade

Rice Production, '000

tonnes 1,2 24,179.5 25,699.1 26,612.6 27,588.8 28,579.6 29,616.8Rice Consumption, '000

tonnes 2 19,221.9 19,677.2 20,194.9 20,714.5 21,256.8 21,812.4Rice Net Trade Balance,

'000 tonnes 2 6,101.9 7,422.0 8,253.0 9,135.3 10,051.5 11,063.4

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2009 =

2008-09; Sources: 2 USDA, BMI

Expanding Exports

Vietnam contributes to roughly 5% of total world production but is responsible for close to 20% of total rice trade In 2010, increasing rice exports have encouraged the government to lift the floor price of 5% broken rice a total of three times in all, with the most recent adjustment on September 16 2010 Then, the floor price was raised by 18.8% from US$400/tonne to US$475/tonne Demand for Vietnamese rice has been strong in Malaysia, Indonesia, the Philippines and Cuba, but exports received an additional boost from Bangladesh and China after adverse weather affected their domestic crops Indeed, exports reached

a peak of 7mn tonnes in August 2010, up 46% year-on-year

Improving Infrastructure

The vast majority of Vietnam's exportable rice is grown in the Mekong Delta The region produces around half the country's rice output, but is home to only around a fifth of the county's population The country's other major rice cultivating centre, the Red River Delta, produces just under a fifth of the nation's rice, but owing to the high population density is still unable to supply all its rice needs

Considering its importance both to national food security and export revenues, rice infrastructure is poor Warehouse storage capacity is a mere 1.2mn tonnes compared with the country's paddies' annual

production of over 20mn tonnes Of this capacity, less than a third is regularly used as warehouses are often decrepit and inconveniently located The Ministry of Agriculture and Rural Development (MARD)

is now aiming to change this In 2009, the ministry said it would spend US$400mn on upgrading existing storage capacity and adding extra capacity to store another 2.8mn tonnes of rice The new capacity will be built around the Mekong Delta's ports and the southern capital Ho Chi Minh City

The extra capacity and upgraded storage facilities, set to be finished in 2011, will ease the flow of exports and allow exporters more flexibility The modern facilities should also reduce loss to spoilage and

improve the quality of stored rice Both these factors should help Vietnam go some way to reducing the

discount at which the country's rice exports are currently sold compared with rice from other exporters in the region such as Thailand

The government has also approved a plan by the state-run Southern Food Corporation to build a

US$34mn rice trading centre in the delta city of Can Tho The centre aims to help the sale of rice by farmers to millers without the need for middle men The facility, to be spread over 23 ha, will also have facilities for auctions and telephone and online sales The 200,000 tonne storage centre, if it goes ahead as planned, should serve to improve efficiency in the rice trade in the Mekong Delta and help farmers get their produce to market

Hybrid Hopes

Average yields on Vietnamese rice farms have risen impressively since the start of the decade In 2000, the average yield was 2.73 tonnes/ha and by 2009 this had risen to 3.31 tonnes/ha This lags some way behind producers, such as Japan (4.73 in 2009) and the US (5.6) and yet Vietnam is ahead of many of its regional peers, including the world's largest exporter Thailand (1.88), the Philippines (2.39) and Myanmar (1.53) The MARD has said that it hopes to further increase yields by encouraging the use of hybrid rice varieties, which it claims can increase production by 15-20% over traditional varieties The ministry said

it is aiming to have 70% of the area under rice harvest planted with hybrid seeds by 2010 This would involve a 50% increase in the area currently planted with the seeds, although no data is yet available to show how successful this drive has been so far The affordability of these seed variants has been cited as a possible barrier to targets being met

The (Chinese) Elephant In The Region

The Vietnamese government has recently warned exporters that they must make sure they have enough stocks to amply supply the domestic market in the event that large orders come in While the government stated that tenders could come from all over the region, they placed particular emphasis on large Chinese orders Some traders have been saying that Chinese buyers have purchased as much as 600,000 tonnes of rice in order to offset droughts that have been causing yields to fall in some areas, particularly in the south close to the Vietnamese border Initially, these Chinese purchases had little impact on domestic

Vietnamese rice price However, Chinese purchases continued into July, past their normal buying cycle, and have even led local regulators in Vietnam to worry about a domestic shortfall, despite the country traditionally running a production surplus That said, it is clear that these fears were largely unfounded and excess demand from foreign importers should not be a major threat to upsetting the production balance of rice supplies

VIETNAM Rice Production, Consumption & Trade

Rice Production, '000

tonnes 1,2 22,716.0 22,772.0 22,922.0 24,375.0 24,312.0 24,179.5Rice Consumption, '000

tonnes 2 17,595.0 18,392.0 18,775.0 19,400.0 19,150.0 19,221.9Rice Net Trade Balance,

On the production side, we see downside risks to our existing forecasts We do not expect any significant increase in rice acreage in Vietnam over our forecast period, or indeed beyond as a result of increasing urbanisation We see production gains being possible as a result of continued yield, infrastructural and harvesting improvements However, such advancements require ongoing investment While rice remains

so economically important, this investment is likely to continue to be forthcoming and yet any reduction would put our production forecasts in jeopardy

Annual Sales (local, mn)

Financial year end

Y-O-Y Sales Value Growth

Main Areas of Operation

Cargill

United States 116,000 116,000 May-09 -3.65%

Agriculture, Food processing, Financial and Risk Management

Archer Daniels

Midland

United States 69,207 69,207 Jun-09 -1.00%

Oilseed Processing, Corn Processing, Agricultural Services

Bunge Ltd

United States 52,574 52,574 Dec-08 38.90%

Fertilisers, Oilseed Processing, Grain

Milling

CHS Inc

United States 32,200 32,200 Aug-08 87.20%

Food Processing, Grain retail, Crop Nutrition, Bioenergy refiner and retailer

JBS Brazil 13,191 30,340 Dec-08 81.15%

Meat Processing and Exporting Corn Products

International

United States 3,900 3,900 Dec-08 15.04% Corn Processing Golden Agriculture

Resources Ltd

Singapor

e 2,986 4,474 Dec-08 59.42%

Palm cultivation Processing, Refining Razgulay Group Russia 1,244 36,400 May-09 6.60% Sugar processing

Source: Company Investor Relations, BMI

Table: Agribusiness Suppliers

Company

Name

Country of Origin

Annual Sales (US$mn)

Annual Sales (local, mn)

Financial year end

Y-O-Y Sales Value Growth Areas of Operation

Noble Group

Ltd* United States 36,090 36,090 Dec-08 53.59%

Agricultural Supply Management & Crop

Processing

DuPont Co* United States 31,836 31,836 Dec-08 3.74%

Crop Protection, Seeds

and Traits Deere & Co* United States 28,438 28,438 Dec-08 18.08% Agricultural Equipment

CNH** Netherlands 12,902 12,902 Dec-08 29.69% Agricultural Equipment

Syngenta AG Switzerland 11,624 8,789 Mar-09 25.80%

Crop Protection, Seeds

and Traits

Monsanto United States 11,365 11,365 Aug-09 36.12%

Crop Protection, Seeds

and Traits Mosaic Co.* United States 10,300 10,300 May-09 5.00% Fertilisers

Potash Corp Canada 8,737 9,446 Oct-08 80.47% Fertilisers Bayer

CropScience Germany 8,441 6,382 Dec-08 1.78%

Crop Protection, Seeds

and Traits Agco Corp United States 8,424 8,424 Dec-08 23.37% Agricultural Equipment

BASF SE

(Agricultural

Chemicals

Division) Germany 5,041 3,409 Mar-09 8.70%

Crop Protection, Seeds

and Traits Nutreco Netherlands 6,540 4,943 Dec-08 22.93% Animal Feed

Viterra Canada 6,330 6,777 Oct-08 74.89% Animal Feed Australian

Wheat Board Australia 5,900 6,501 Sep-08 50.31%

Grains Storage and

Handling

OLAM

International Singapore 5,415 8,111 Dec-08 20.01%

Agricultural Supply Management & Food Processing/Refining

Dow

AgroSciences United States 4,535 4,535 Dec-08 20.01%

Crop protection, seeds

and Traits

Ag Processing

Inc United States 4,294 4,294 Jan-09 5.76%

Animal Nutrition & Poultry Breeding

Andersons

Inc* United States 3,489 3,489 Dec-08 66.11%

Processing, Transporting, Marketing

Grains Nufarm Australia 2,429 2,677 Jul-09 7.42% Crop Protection

Agrium Inc United States 1,322 1,322 Dec-08 86.38%

Agricultural Products And Nutrients

* Annual Sales refers to sales across entire product range and not exclusively agricultural goods, due to lack of data,

** Reports in US$ Source: Company Investor Relations, BMI

Table: Integrated Agricultural Producers

Company Name

Country

of Origin

Annual Sales (US$mn)

Annual Sales (local, mn)

Financial year end

Y-O-Y Sales Value Growth Areas of Operation

Tyson Foods

United States 26,862 26,862 Apr-09 4.40%

Pork, Beef and Chicken Production and Processing

Dairy Farmers of

America

United States 11,700 11,700 Dec-08 5.41%

Dairy Production and Processing, Animal feed, Crop Protection, Crop

Seeds

Smithfield Foods

United States 12,487 12,487 May-09 10.01%

Pork Production and

Processing

Fonterra

New Zealand 12,846 19,500 Jul-08 40.28%

Dairy Producer, Processor

and Exporter

Pilgrim's Pride

United States 8,525 8,525 Dec-08 13.70%

Chicken Production &

Processing

Chiquita Brands

Inc

United States 3,609 3,609 Dec-08 4.16%

Production, Distribution and Marketing of Fresh and Processed Fruit and Veg Charoen

Pokphand Foods

PLC Thailand 4,448 156,238 Dec-08 15.90%

Livestock Production, Processing, Manufacture, Aquaculture, Feedstcocks

Sadia SA Brazil 6,489 12,192 Dec-08 23.03%

Production, Distribution and Marketing of Various

Foodstuffs

Fresh Del Monte

Produce

United States 3,500 3,500 Dec-08 4.01%

Fresh Fruit and Fruit Derivative Production and

Distribution

Seaboard

Corporation

United States 4,267 4,267 Dec-08 2.01%

Pork Production and Processing, Sugar & Citrus Production, Grain Milling

Source: Company Investor Relations, BMI

Commodity Price Analysis

Softs Update

Cocoa

Front-month (December) cocoa

continued to consolidate in October,

taking a breather after three straight

months of decline The contract was hit

towards the end of the month, though,

by weak grindings data from the

European Cocoa Association European

Q3 grindings declined by 4.1%

year-on-year and were the weakest Q3

outturn since 2006 We continue to

forecast a lower average price of

GBP2,000/tonne in 2011, compared to

GBP2,150/tonne in 2010 This view is

based on an expectation that greater

West African cocoa production will see production outstrip consumption for the first time in five years over the 2010/11 season, which should marginally alleviate current market tightness

COCOA

GBP/tonne 878 924 978 1,426 1,869 2,150 2,000 Production (mn/t) 3.38 3.76 3.38 3.71 3.48 3.59 3.82

Consumption (mn/t) 3.35 3.51 3.64 3.73 3.52 3.61 3.72

Inventories (mn/t) 1.68 1.86 1.57 1.49 1.45 1.44 1.54Stocks-to-use (%) 50.1 53.2 43.1 40.0 41.2 39.9 41.3

Source: BMI

Front-Month Cocoa

GBP/tonne

Source: BMI