Vietnam agribusiness report q1 2013

However, rising interest in otherfoods such as wheat-based goods - supported by growing affluence - will restrict demand for rice, andover the forecast period we expect production growth

Q1 2013 www.businessmonitor.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

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BMI Industry View 7

BMI Industry View 7

SWOT 10

Agribusiness SWOT Analysis 10

Business Environment SWOT Analysis 12

Industry Forecast 13

Vietnam Dairy Outlook 13

Table: Vietnam Milk Production & Consumption, 2012-2017 14

Table: Vietnam Butter Consumption, 2012-2017 14

Table: Vietnam Cheese Consumption, 2012-2017 14

Table: Vietnam Whole Milk Powder Consumption, 2012-2017 14

Table: Vietnam Milk Production & Consumption, 2007-2012 17

Table: Vietnam Butter Consumption, 2007-2012 17

Table: Vietnam Cheese Consumption, 2007-2012 17

Table: Vietnam Whole Milk Powder Consumption, 2007-2012 17

Vietnam Livestock Outlook 18

Table: Vietnam Poultry Production & Consumption, 2012-2017 19

Table: Vietnam Pork Production & Consumption, 2012-2017 19

Table: Vietnam Beef & Veal Production & Consumption, 2012-2017 19

Table: Vietnam Poultry Production & Consumption, 2007-2012 24

Table: Vietnam Pork Production & Consumption, 2007-2012 24

Table: Vietnam Beef & Veal Production & Consumption, 2007-2012 24

Vietnam Coffee Outlook 25

Table: Vietnam Coffee Production & Consumption, 2012-2017 27

Table: Vietnam Coffee Production & Consumption, 2007-2012 32

Vietnam Rice Outlook 33

Table: Vietnam Rice Production & Consumption, 2012-2017 35

Table: Vietnam Rice Production & Consumption, 2007-2012 38

Vietnam Grains Outlook 39

Table: Vietnam Corn Production & Consumption, 2012-2017 40

Table: Vietnam Corn Production & Consumption, 2007-2012 43

Commodities Price Analysis 44

Monthly Softs Strategy 44

Table: BMI Commodity Price Strategy 54

Table: Agricultural Commodity Performance & Forecasts 55

Monthly Grains Strategy 56

Table: Agricultural Commodity Performance & Forecasts 64

Upstream Analysis 65

Asia Machinery Outlook 65

Asia Fertiliser Outlook 71

Asia GM Outlook 76

Table: Select Countries - GM Crops 81

Downstream Analysis 82

Vietnam Food Outlook 82

Table: Food Consumption Indicators - Historical Data & Forecasts, 2010-2017 83

Table: Canned Food Value/Volume Sales - Historical Data & Forecasts, 2010-2017 84

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2010-2017 86

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 87

Vietnam Drink Outlook 89

Table: Alcoholic Drinks Value/Volume Sales - Historical Data & Forecasts, 2010-2017 91

Table: Hot Drinks Volume Sales - Historical Data & Forecasts, 2010-2017 93

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2010-2017 95

Table: Carbonates Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 95

Vietnam Mass Grocery Retail Outlook 96

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2010-2017 98

Table: Grocery Retail Sales By Format (%) 99

Table: Trade Indicators - Historical Data & Forecasts, 2010-2017 101

Demographic Forecast 102

Vietnam Demographic Forecast 102

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 103

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 104

Table: Vietnam's Key Population Ratios, 1990-2020 105

Table: Vietnam's Rural And Urban Population, 1990-2020 105

Methodology 106

How We Generate Our Industry Forecasts 106

BMI Industry View

BMI Industry View

BMI View: The agriculture industry (including forestry and aquaculture) contributes to more than 20% of

Vietnam's GDP and employs almost half its population It holds strong growth opportunities in terms of production, exports and retail sales, more specifically with regard to the coffee and livestock sectors However, some industries face large risks in terms of losing competitive advantage as other Asian countries step up production, particularly of rice and coffee We believe Vietnam will have to significantly ramp up investment in crop productivity in order to not be left behind, and if it wants to be able to produce more value-added crops and maintain its status as an export spearhead.

Key Forecasts

■ Rice consumption growth to 2017: 7.7% to 21.3mn tonnes Rice remains the major food staple in

Vietnam, and we do not see this changing over our forecast period However, rising interest in otherfoods such as wheat-based goods - supported by growing affluence - will restrict demand for rice, andover the forecast period we expect production growth to significantly outpace that of consumption

• Coffee production growth to 2016/17: 28.0% to 29.1mn bags Strong growth in domestic coffee

production will be driven by increasing investment, leading to tree replacement programmes andexpansion of area cultivated Consumption growth and export prospects will also favour output

• Poultry production growth to 2016/17: 27.2% to 954,000 tonnes Dramatic increases in herd numbers

and increased public and private sector investment - part of the effort to reduce the country's growingimport dependency - will be the main boost to growth Rising consumption, driven by income growth,will also play a key role

• BMI universe agribusiness market value: US$22.9bn in 2013 (down from US$23.1bn in 2012);

growth expected to average 2.9% annually between 2012 and 2017

• 2013 real GDP growth: 7.0% (down from 5.3% in 2012; predicted to average 6.9% over 2012-2017).

• 2013 consumer price index: 6.4% year-on-year (y-o-y) (lower than 9.2% in 2012; predicted to average

6.2% over 2012-2017)

• 2013 central bank policy rate: 9.00% (lower than 10.00% in 2012; predicted to average 7.8% over

2012-2017)

Mainly For Exports

Vietnam - Coffee Production & Exports ('000 60kg Bags)

f = BMI forecast Source: BMI, USDA, Vicofa

The animal feed industry has been receiving significant - mainly foreign - investment in recent years, giventhe attractive prospects of the livestock and aquaculture industries of the country Foreign-invested feed

companies continue to meet most of the domestic demand, such as Thailand's Charoen Pokphand

Group and U.S.-based Cargill, according to the Ministry of Industry and Trade Vietnam currently has 59

foreign-invested firms and joint ventures that hold 70% of the domestic animal (compound) feed marketshare; 180 local firms retain the remaining 30%, according to the Vietnam Animal Feed Association Webelieve the ongoing consolidation of the sector is likely to continue, with foreign livestock and feed

companies buying local assets and increasing their exposure to the sector

Coffee has proven to be one of main agricultural export engines of the Vietnamese economy, and the bulk

of Vietnam's coffee production is for export Only about 6% of total production is for domestic

consumption In 2012/13, exports are expected to be strong on the back of strong production and endingstocks in 2011/12 Exports are projected to reach 20.5mn bags, up 5.7% y-o-y, in 2012/13 Vietnam nowaccounts for 17.7% of the world's total exports and exports to more than 80 countries, with Germany, the

US, Italy and Spain as its biggest clients Vietnam overtook Colombia as the second largest exporter ofcoffee in 2000, and its impact on international markets has been steadily growing ever since

Agribusiness SWOT Analysis

SWOT

Mekong River Delta in the south provides the country with a strong agricultural base

■ Vietnam is the world's second largest exporter of rice and coffee It also enjoysrelatively high rice yields compared with its regional counterparts

■ Agricultural productivity has improved considerably since the opening up of theeconomy in 1986

to more developed international competitors

■ Transportation and production infrastructure is often poor, making getting crops tomarket difficult and negatively affecting quality

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

■ Vietnam's fast-growing population of more than 80mn provides a large market foragro-food products

■ With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecastperiod, consumers will have more money to spend on food, spurring growth inagricultural production

agriculture open to disease outbreaks of the kind that have plagued the livestockindustry in recent years

SWOT - Continued

■ The rising population and increasing industrialisation of the economy will increasecompetition for land use, curtailing the area available for expansion of agriculture

Business Environment SWOT Analysis

SWOT

attractive to foreign investors

■ 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 andbeyond

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

■ Vietnam remains one of the world's most corrupt countries According toTransparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123rdout of 176 countries

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-techskills and know-how

■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and theliberalisation of the banking sector This is likely to offer foreign investors new entrypoints

protectionism, which will remain a concern

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

Industry Forecast

Vietnam Dairy Outlook

BMI Supply View: 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 previouslyresponsible for almost all milk production, has fallen to around just 5%, with the other 95% coming mainlyfrom small- and medium-sized private farms

In 2012/13, we expect fluid milk output to grow by 3.6% year-on-year (y-o-y) to 343,000 tonnes Out to2016/17, we are forecasting production growth of 25.7% on the 2011/12 level to 416,000 tonnes Dramaticincreases in cattle numbers and increased public and private sector investment - part of the effort to reducethe country's growing import dependency - will be the main boost to growth Commercialisation will alsoplay a key role as larger, more efficient farms come to play a greater role in milk production A sustainedperiod of high global milk prices on the back of rising global demand and supply sluggishness will alsoprove supportive of production and encourage producers to consider the long-term impact of their approach

to cattle farming Finally, the sector is likely to benefit from the continued increase in yields, which haverisen almost 130% over the past decade and are expected to continue to do so given the new investment inthe sector

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

by relatively large increases in domestic consumption as well as rising incomes Per capita milk

consumption in Vietnam doubled between 2000 and 2009 to 12kg per person per year Despite this increase,per capita consumption in 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 Condensedmilk and yoghurt are highly popular dairy products We expect the country to be increasingly reliant ondairy imports to meet its domestic needs

Vietnamese dairy consumption growth will remain strong over our forecast period to 2017 Strong

economic growth will filter through into rising disposable incomes, pushing up demand for non-essentialfoodstuffs Through to 2017, we expect fluid milk consumption growth of 38.8% to 257,200 tonnes, whiledemand for butter, cheese and whole milk powder will soar 46.6%, 188.3% and 18.9% respectively, albeitfrom far lower bases Increased urbanisation, increased ownership of Western goods and the ongoing spread

of modern, organised retail will all prove supportive of strong dairy consumption growth, even if forecasthigher global dairy prices limit the growth outlook to some extent

Table: Vietnam Milk Production & Consumption, 2012-2017

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2011 =

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

Table: Vietnam Butter Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 FAPRI, BMI.

Table: Vietnam Cheese Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 FAPRI, BMI.

Table: Vietnam Whole Milk Powder Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 FAPRI.

Vinamilk Continues Expansion

The Viet Nam Dairy Products Joint Stock Company (Vinamilk) has added Thailand to its portfolio of

export markets In February 2012, the company announced that it would begin exporting dairy products toThailand in Q112 through a US$10mn deal signed in late 2011 In 2011, Vinamilk exported US$140mn

worth of products to 15 countries all over the world, a y-o-y increase of 72% Countries that receive exportsinclude the US, Australia, Canada, Russia, Turkey, Iraq, South Korea and Cambodia In the domesticmarket, Vinamilk has a 30% share of the processed dairy sector.

Mostly New Zealand

Vietnam - Milk & Milk Products Imports By Country, 2010 (% of total)

Source: BMI, USDA

Thailand's Fears Over Trade Liberalisation Overplayed

Thai milk farmers and processors fear losing market share - both domestically and abroad - due to

the Association of South East Asian Nations (ASEAN) Economic Community (AEC)'s impending importliberalisation in 2015 Vietnam's dairy sector, although still lagging being Thailand's, is developing rapidly,with milk production increasing by 18.3% on average in the past 10 years and forecast to soar by 25.7% to416,000 tonnes to 2016/17 compared with 2011/12 levels Vietnam has been trying to upstage Thailandthrough massive dairy cow imports and rapid expansion of milk-processing facilities and dairy

operations Vietnam's state-owned dairy company Vinamilk now has a capacity that is three times that

of Dutch Mill, Thailand's leading milk producer In Cambodia, where Thai milk used to dominate the

market, cheaper Vietnamese dairy products have been gaining market share

We believe that Thailand dairy farmers' fears regarding the trade liberalisation are relatively overplayed, asfarmers already are relatively efficient by regional standards Vietnam still imports 75% of its dairy

products needs, while Thailand is 75% self-sufficient Moreover, Thailand has higher dairy cow efficiencythan Vietnam and China, as dairy cows yield, per year, 3,380kg of milk per head, compared with 2,060kg/head in China and 2,170kg/head in Vietnam

Lower Productivity In Vietnam

Select Countries - Dairy Cow Yields (kg/head)

f = BMI forecast Source: BMI, FAO, FAPRI

Strong Government Support

The Ministry of Agriculture and Rural Development (MARD) continues to place a high priority on

developing the country's dairy industry in an effort to keep up with the growing domestic demand for freshmilk We believe the MARD's goal to increase dairy cattle herd to 500,000 head by 2020 (from 145,000head in 2011) and production of raw liquid milk to 1mn tonnes (from an expected 331,000 tonnes in 2012)

is rather challenging

Table: Vietnam Milk Production & Consumption, 2007-2012

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2011 =

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

Table: Vietnam Butter Consumption, 2007-2012

Notes: f BMI forecasts Sources: 1 FAPRI, BMI.

Table: Vietnam Cheese Consumption, 2007-2012

Notes: f BMI forecasts Sources: 1 FAPRI, BMI.

Table: Vietnam Whole Milk Powder Consumption, 2007-2012

Notes: f BMI forecasts Sources: 1 FAPRI.

Risks To Outlook

A downside production risk is that another economic slowdown on the back of fiscal and monetary

tightening weighs on our consumption growth forecasts, as it would force consumers to cut back on

discretionary spending

The lack of a national quality control body for dairy products will continue to place downside risks to ourproduction and consumption forecasts, as it places the dairy industry at risk of a health scandal, whichwould further tarnish the image of dairy products in Vietnam

Vietnam Livestock Outlook

BMI Supply View: Within the Vietnamese livestock industry, pig farming is by far the most dominant

sector, with pork production comprising about two-thirds of total meat production in 2011/12 Despitegoing through hard times over recent years owing to disease outbreaks, soaring input costs and competitionfrom cheap imports, we expect Vietnam's livestock production to grow strongly, led by the poultry segment,over the medium term Rising incomes will stimulate domestic meat consumption growth (owing to dietdiversification), and production will increase to keep pace That said, we expect the country to continue to

be a net importer of livestock over our forecast period

In 2012/13, we expect meat production to increase in spite of recent challenges due to disease outbreaks andthe increasing cost of production The poultry sector was affected by avian influenza in March and April

2012, while the pork industry was hurt by news of use of banned substances (such as clenbuterol) topromote lean growth in pigs We expect poultry output to rise 4.0% year-on-year (y-o-y) to reach 780,000tonnes in 2012/13 Pork production is expected to grow to 2.0mn tonnes, up 2.5% y-o-y, on the back of ahigher number of pigs (estimated at 26.7mn in mid-2012, up 1.5% y-o-y) Beef and veal production isforecast to fall by 1.8% to 280,000 tonnes in 2012/13

We see strong growth potential for the Vietnamese livestock industry on the back of rising incomes Poultrywill record the strongest growth, and we forecast production to expand 27.2% on the 2011/12 level to954,000 tonnes in 2016/17 Pork output is projected to rise 15.6% to 2.3mn tonnes, which will not beenough to satisfy the country's growing demand for the meat, leaving the country reliant on imports Beefproduction will remain the least significant of Vietnam's livestock sectors and is expected to fall by 6.7% to266,000 tonnes over the forecast period to 2016/17

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

capita consumption rising by 87% from 2001 to 2011 to reach 36.7kg per year Buoyed by strong incomegrowth as well as population growth, we see healthy demand growth for livestock over 2012-2017 Poultryconsumption is forecast to grow by 35.1% to 1.1mn tonnes, while pork (from a higher base) and beefconsumption will increase by 12.9% and 24.0% respectively We forecast pork consumption to reach 2.3mntonnes, with beef consumption reaching 365,800 tonnes We believe pork consumption will continue to bethe dominant meat consumed, comprising more than 60% of total meat consumption A household surveyconducted in 2010 found that 40% of household meat expenditure was spent on pork, with preference given

to fresh pork over chilled or processed meat

Table: Vietnam Poultry Production & Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 USDA.

Table: Vietnam Pork Production & Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 USDA.

Table: Vietnam Beef & Veal Production & Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 USDA.

Fragmented Domestic Feed Industry Disadvantages Local Companies

The domestic livestock industry is made up of mainly small-scale or backyard farm operations that havepoor hygiene standards and are susceptible to epidemics The Vietnamese livestock sector is often plagued

by disease outbreaks owing to the lack of proper sanitation facilities in farms and meat production facilities.Since 2009, the country's livestock sector has experienced multiple rounds of avian influenza, H5N1 birdflu virus, foot-and-mouth disease and porcine reproductive respiratory syndrome, also known as blue eardisease In our view, disease outbreaks will constantly feature as a challenge to the industry as long as itremains fragmented and low in technology and health standards

The fragmented nature of the industry has thus resulted in foreign companies, with their sophisticated andlarger-scale production facilities, dominating livestock production in Vietnam In the poultry sector, for

example, the three main companies dominating the landscape are China-based CP Vietnam Livestock

Corporation, Indonesia-based Japfa and Malaysian company Emivest; these firms supply around 6mn

chickens to the domestic market monthly, leaving hundreds of domestic firms to compete for the remainingmarket share

Changing Meat Consumption Trends

Vietnam - Livestock Consumption (% of total meat consumption)

e/f = BMI estimate/forecast Source: BMI

Another advantage that foreign firms enjoy in the sector is that they are not subject to the high lending coststhat local famers have to pay Being able to rely on their parent companies also allows these foreign players

to dig into deep pockets and purchase raw materials at lower costs in foreign currencies

Local Feed Company Expands

The animal feed industry has been receiving significant - mainly foreign - investment in recent years as aresult of the attractive prospects of the livestock and aquaculture industries of the country Foreign-invested

feed companies continue to meet most of the domestic demand, such as Thailand's Charoen Pokphand

Group and US-based Cargill, according to the Ministry of Industry and Trade Vietnam currently has 59

foreign-invested firms and joint ventures that hold 70% of the domestic animal (compound) feed marketshare, while 180 local firms retain the remaining 30%, according to the Vietnam Animal Feed Association.According to reports, 30% of domestic firms have been forced out of the animal feed business as a result.Charoen Pokphand announced in 2011 it would build six additional factories by 2014, while Chinese firm

New Hope confirmed it would construct six more feed plants in Vietnam Local companies are also

expanding: the Hong Ha Nutrition Joint Stock Co, a privately owned Vietnamese animal feed company,

inaugurated in February 2012 an animal production line in its newly acquired 7 hectare factory in Dong VanIndustrial Zone in Duy Tien District, in the northern Ha Nam Province The factory is expected to raise itscapacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago This hascome on the back of VND150bn (US$7.1mn) invested in 2011

We believe the ongoing consolidation of the sector is likely to continue, with foreign livestock and feedcompanies buying local assets and rising their exposition to the sector

Imbalances To Be Maintained

Vietnam - Poultry & Pork Production & Consumption ('000 tonnes)

f = BMI forecast Source: BMI, USDA

Livestock Industry Faces Crucial Challenges In Medium Term

The local livestock industry generally uses cassava, wheat, broken rice and corn as feed In recent years,rice and cassava have been more focused on export markets and fell short of supplying the domestic animalfeed industry Feed wheat has recently been an alternative source, but its use is based on its price

competitiveness and its availability in the market In 2012/13, the use of feed wheat for the local animalfeed industry will likely drop to about 1.1mn tonnes due to limited supply in international and domesticmarket after widespread inclement weather in key growing countries led to a drop in exports

Vietnam's commercial animal feed sector has grown at an annual rate of about 16% between 2005 and

2009, according to the Ministry of Agriculture and Rural Development This reflects the strong growth inlivestock production in the country

While we are largely optimistic about the growth prospects for this industry, there are salient downside risks

to this outlook We highlight three main challenges: high interest rates, a reliance on imports (which causesthe livestock industry to be vulnerable to fluctuating input prices), and the fragmented nature of the market

Table: Vietnam Poultry Production & Consumption, 2007-2012

Notes: f BMI forecasts Sources: 1 USDA.

Table: Vietnam Pork Production & Consumption, 2007-2012

Notes: f BMI forecasts Sources: 1 USDA.

Table: Vietnam Beef & Veal Production & Consumption, 2007-2012

Notes: f BMI forecasts Sources: 1 USDA.

Risks To Outlook

Disease poses a major downside risk to our forecasts for livestock production in Vietnam It is a particular

risk for our poultry and pork output forecasts, although it could also affect our beef outlook BMI highlights

that there have been reports that the highly pathogenic avian influenza has been found in numerous

provinces such as Quang Tri, Thanh Hoa, Nam Dinh, Bac Ninh, Quang Nam and Quang Ninh

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

Competition from cheap imports remains a risk to Vietnamese livestock farmers Efficiency improvementsare being made - as demonstrated by our robust production forecasts - and yet this risk might only be fullyrealised beyond 2012 once government intervention is reduced.

An upside production risk is continued government investment If the sector continues to receive investmentfrom 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 and the area planted expanding from 42,000 hectares (ha) to more than 509,000ha Vietnam is theworld's biggest producer of robusta coffee, with more than 95% of its coffee output consisting of the robustavariety and only around 2-3% of production devoted to the premium arabica variety The Vietnamese coffeemarket year runs from October to September, and harvesting takes place between November and February

We revised up our estimation for the 2011/12 crop, as favourable weather and improved investment in treesand inputs led to high yields Production rose to a record high 22.7mn 60kg bags Vietnam is undergoing awave of tree replanting, as the sector's yields and level of production were hampered by old trees

According to the Vietnam Coffee & Cocoa Association (Vicofa), about 137,000ha of old and low-qualitycoffee trees need to be replaced over the next five years in Vietnam's central highlands, which representabout 25% of total current production area

The outlook for the 2012/13 coffee season is deteriorating in Vietnam, as inclement weather during thegrowing season is dragging down yields Rainfall in Daklak, the main growing region, was 28% lowerbetween January and August 2012 compared with a year earlier, according to the province's meteorologyand hydrology department Dry weather is depressing coffee production, which was already expected to besubdued owing to factors associated with the two-year coffee bean cycle, in which output often declinesafter a bumper crop (which was the case in 2011/12) Clement weather during the harvest and post-harvestseason will only partially offset this As a result, we expect output to decrease after 2011/12 bumper cropand to come in at 20.7mn bags, down 8.8% year-on-year (y-o-y)

Out to 2016/17, we expect production growth of 28.0% to 29.1mn bags as the Vietnamese governmentendeavours to increase the 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 beexport opportunities given that Vietnam is the world's largest exporter of robusta coffee

Mostly In Daklak

Vietnam - Coffee Area Harvested By Region (% of total)

Source: USDA, BMI

BMI Demand View: As GDP and population rise, spending on food and drink items such as coffee is likely

to increase Urbanisation and the spread of Western-style coffee shops are expected to add to this trend.Coffee consumption grew impressively by 56.8% from 0.44kg per capita in 2005 to 1.07kg per capita in

2012, one of the highest growth rates of all coffee-exporting countries over the period We predict thatconsumption will rise 11.5% in 2013 to 1.8mn bags That said, we note that coffee consumption growthcomes from a relatively low base, and we expect 66.2% growth to 2.7mn bags over our forecast period to

2017 Coffee consumption per capita is forecast to expand by 58.5% to 1.7kg per capita by 2017 TheMinistry of Agriculture and Rural Development has said it hopes to boost domestic consumption to 10-15%

of the national coffee crop We do not believe this will be achieved over our forecast period, but the

existence of such a sizeable target underlines the apparent potential of domestic consumption

Table: Vietnam Coffee Production & Consumption, 2012-2017

Coffee Production, '000 60kg bags 1 22,700.0 f 20,700.0 f 24,990.0 f 26,264.5 f 27,656.5 f 29,067.0 f Coffee Consumption, '000 60kg bags

Notes: f BMI forecasts Sources: 1 USDA, Vietnam Coffee and Cocoa Association; 2 USDA.

Major Robusta Grower

Vietnam is the world's largest producer of robusta coffee, with more than 95% of its coffee output

consisting of the robusta variety and only around 2-3% of production devoted to the premium arabicavariety We expect Vietnam to maintain its specialisation in robusta production, even if the governmentrecently announced plans to expand arabica planting area and output Vietnam expects to double production

of the superior-quality bean to 96,000 tonnes by 2020, from output of 48,000 tonnes in 2011/12, in a bid toreap more benefits from coffee plantations, as the arabica variety is normally sold for around double theprice of robusta Vietnam intends to expand Arabica area in northern and central regions to 40,000ha overthe coming eight years, from the current 32,000-35,000ha (there is no official agency providing exact data

on area planted to coffee) International prices continue to provide a strong incentive for farmers to expandcoffee cultivation in Vietnam

Mainly For Exports

f = BMI forecast Source: BMI, USDA, Vicofa

Increasing Weight On The International Market

Coffee has proven to be one of main agricultural export engines of the Vietnamese economy, and the bulk

of Vietnam's coffee production is for export Only about 6% of total production is for domestic

consumption In 2012/13, exports are expected to be strong on the back of strong production and endingstocks in 2011/12, reaching 20.5mn bags, up 5.7% y-o-y Vietnam mainly exports beans (98% of totalexports in 2011/12), but is slowly increasing soluble coffee exports (300,000 bags in 2011/12, comparedwith only 75,000 in 2006/07)

Vietnam now accounts for 17.7% of the world's total exports and exports to more than 80 countries, withGermany, the US, Italy and Spain as its biggest clients Vietnam overtook Colombia as the second largestcoffee exporter in 2000, and its impact on international markets has been steadily growing ever since

Increasing Exports

Vietnam - Monthly (LHS) & Yearly Coffee Exports ('000 tonnes)

Source: BMI, Vietnam's General Statistics

Direct Coffee Purchases Could Improve Coffee Quality

Vietnam's coffee production and exports are being hampered by the country's low-quality beans The

decision made by Nestlé in August 2012 to boost direct purchases of coffee from farmers by as much as

five times over the next half decade will very likely significantly improve bean quality The company,which started direct buying in 2011, may buy about 1.0mn bags (60,000 tonnes) from growers a year by

2017, compared with 200,000-230,000 bags in 2012

We believe shortening the supply chain will improve growers' income Moreover, Nestlé is likely to providetraining to the farmers it buys the coffee from, which would improve yields and overall quality

Slowly Catching Up

Select Countries - Coffee Exports (% of global)

Source: BMI, USDA

Getting Into Sustainable Production

Sustainably produced farm produce is a top seller - especially to developed markets and environmentallyconscious customers - and the government of Vietnam knows it Through numerous public-private

partnerships, the Vietnamese government has started to pursue sustainable farming practises, placing

significant emphasis on the coffee sector According to statistics from Nedcoffee Vietnam, the amount of

coffee produced under the UTZ Certified, 4C Association and Rainforest Alliance criteria has risen to115,000 tonnes (or 1,916 60kg bags) of coffee beans in 2011 from close to zero a few years ago This

represents a small 10% of total national coffee production; BMI therefore expects this trend to gather more

traction given the government's strong support

Increasing Foreign Competition For Local Beans

According to Vicofa, local exporters are facing increasing competition from foreign players in securingcoffee bean stocks to be shipped out of the country Larger foreign players are currently allowed to invest

only in cultivating, processing and preserving coffee for export, as well as 'the transfer of advanced

technology' However, anecdotal evidence suggests that these companies have also been setting up

unofficial networks to buy coffee stocks for export, thus depriving local exporters of coffee bean supply

BMI believes that any measure to curb such activity will only be a temporary solution The fragmented

structure of the industry results in local companies being less competitive than larger foreign companies interms of economies of scale and the ability to take out business loans We believe a greater consolidation ofthe local industry and better development of networks between exporters and farmers is needed, especiallyonce the coffee market eventually opens up to foreign wholesalers in accordance with WTO commitments

Tighter Market In Vietnam

Front-Month ICE Coffee (USc/lb) & Vietnam Prices In Daklak (VND/kg)

Source: BMI, Bloomberg

Domestic Demand Could Soar, But Poor Business Landscape Undermines Potential

While the vast majority of Vietnam's coffee will be destined for the export market, we expect domesticconsumption to rise rapidly in the coming years Nestlé set up a mill to process beans in Daklak in 2012 inorder to tap on the promising coffee consumption story of the country The company already invested US

$270 to build a plant in Dong Nai province and was planning to start producing soluble coffee, mainly for

local sale, in November 2012 A 2009 survey by the Policy and Strategy Institute on Agriculture and RuralDevelopment on coffee-drinking habits in Hanoi and Ho Chi Minh City clearly reinforces this view Resultsshowed that coffee consumption was highest among the young and the well-educated living in urban areasand lowest among the elderly and in rural areas Consumption was also far higher in the south than in thenorth The US Department of Agriculture has also noted that 'domestic consumption has been increasingdue to the effective marketing strategies of domestic coffee companies.'

Table: Vietnam Coffee Production & Consumption, 2007-2012

Coffee Production, '000 60kg bags 1 19,500.0 18,000.0 16,980.0 18,500.0 19,600.0 22,700.0 f

Notes: f BMI forecasts Sources: 1 USDA, Vietnam Coffee and Cocoa Association; 2 USDA.

Risks To Outlook

We are concerned that weather conditions could impact the 2012/13 coffee crop According to the VietnamCoffee & Cocoa Association, 20% of the 2012/13 coffee crop is at risk Older trees, which are half asproductive as younger ones, could also drag on overall yields as they rise to 30% of the total trees inplantation next year These pose salient downside risks to our projection for coffee output to reach 20.7mnbags in 2012/13

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 tocome 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 fromgovernment monetary normalisation or a secondary economic slowdown Such a scenario would likely seeour consumption growth forecast missed

Vietnam Rice Outlook

BMI Supply View: Vietnam is a key grower and world provider of rice Production is growing fast,

boosted by higher yielding rice varieties and better culture management Output grew by more than 25%between 2000 and 2012 After a record year in 2010/11, Vietnamese rice production stagnated at 26.5mntonnes in 2011/12 Looking at the 2012/13 season starting in January 2013, we forecast production to grow

by a modest 0.9% to 26.7mn tonnes, as area harvested is expected to stay flat at 7.7mn hectares (ha), whileyields are projected to increase slightly to 5.7 tonnes/ha, up 0.9% year-on-year (y-o-y)

Decent production, combined with strong ending stocks (1.9mn tonnes in 2010/11 and 2011/12), willsupport the country's export capacity, as will the inherent discount Vietnamese rice prices enjoy relative toglobal prices We forecast the country's rice production balance at 6.6mn tonnes in 2011/12 and 2012/13,22.2% higher than the five-year average, which would bring exports to 7.0mn tonnes for both seasons,according to the US Department of Agriculture (USDA) This will counter reduced supply from Thailand

on the back of the government's changes to procurement policy and help to loosen global markets in 2013

Compared with many of its agricultural sub-sectors, Vietnamese rice is very competitive relative to many ofits regional peers and is well positioned to benefit from both regional and global demand growth Anotheradvantage of Vietnamese rice is its relatively higher yields The government is looking to increase by 50%the area planted with hybrid rice varieties, and this bolsters our bullish outlook for the country's rice

production capabilities over the long term Over our five-year forecast period to 2016/17, we expect riceoutput to grow by 16.0% to 30.7mn tonnes

Higher In Vietnam

Select Countries - Rice Yields (tonnes/ha)

f = BMI forecast Source: BMI, USDA

BMI Demand View: We forecast a modest rice consumption increase of 1.5% to 20.1mn tonnes in 2013.

Over the longer term, we expect consumption to climb by 7.7% on the 2012 level to 21.3mn tonnes in 2017.Rice remains the major food staple in Vietnam, and we do not see this changing over our forecast period.That said, rising interest in other foods such as wheat-based goods - supported by growing affluence - willrestrict demand for rice, and over the forecast period we expect production growth to significantly outpacethat of consumption Ultimately, demand growth will be influenced by population growth, as per capitaconsumption is expected to remain roughly the same as the population continues to diversify its diet on theback of rising incomes As such, the country will remain one of the world's top rice exporters

Table: Vietnam Rice Production & Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 USDA.

Rice Cartel Plan Unlikely To Materialise

Thailand's strong push to form a rice cartel along with five other Association of Southeast Asian Nations(ASEAN) countries in order to control and boost international rice prices is unlikely to materialise, in ourview In August 2012, the country revived its long-held goal to form a cartel and announced five rice-exporting nations in South East Asia (the traditional top two global rice exporters - Thailand and Vietnam -and their smaller neighbours Cambodia, Laos and Myanmar) are in talks to create a formal alliance aimed atboosting prices and increasing export revenues The project primarily aims to encourage informationsharing and cooperation in production and marketing, with the goal of increasing rice export prices by 10%annually

Thailand has for many years toyed with the idea of using its dominant market position to influence the price

of rice This is a decade-long project, as Thailand has been unsuccessfully attempting to create an

international alliance to coordinate rice prices since 2002 A project similar to the current one gainedattention in 2008, but Thailand withdrew its proposal as it immediately came under strong criticism, bothdomestically and internationally

Creating a cartel is increasingly essential for the country, as it will help plunging exports to recover andsustain the government rice mortgage scheme The government has been paying above-market prices to itsown farmers in a costly programme to boost rural incomes and is reluctant to increase the flow of rice to the

market by lowering prices (see our online service, August 23 2012, 'PTP Poised To Maintain Rice Policy').

We reiterate our view that the rice cartel plan is unlikely to materialise for two main reasons First, we donot expect Vietnam to participate in the cartel The project can count on strong support from Thailand andCambodia; however, Vietnam, which would be one of the two pillars of the project given the volume of itsexports, has shown a clear scepticism towards such a plan in past years The country's exports are benefitingfrom Thailand's rice scheme programme, and Vietnam has been making inroads into some markets

traditionally dominated by Thailand Indeed, Viet rice is now enjoying a US$100/tonne discount over Thairice Participating in the rice cartel would very likely lead to a compression of the price differentiation andcould hamper Vietnamese exports Moreover, the poor record of cooperation between Thailand and

Vietnam is strongly weighing against the implementation of a rice cartel Second, pro-cartel countrieswould most likely face fierce opposition from key rice importers and ASEAN members Indonesia and thePhilippines

We also highlight that conditions of the rice sectors in the various countries differ significantly, makingcooperation difficult Thailand and Vietnam are the two leading rice exporters in the world, while outputfrom Cambodia, Laos and Myanmar is relatively meagre but improving Laos is a net importer of rice, andCambodia and Myanmar export small quantities A lack of adequate facilities and infrastructure such as ricemills, storage and transport is constraining production and export growth Regulating supply of perishableand bulky agricultural commodities in these conditions will prove to be challenging

Even if the cartel is formed, we believe it is unlikely to reach its goal of setting high prices The fivecountries only account for 42% of total rice exports in the 2011/12 season, according the USDA, and have

to face strong competition from India, Pakistan and the US Moreover, major importers such as China,Japan, Indonesia and the Philippines produce large quantities of rice domestically, which will make it evenharder for the cartel to be effective in setting market prices

Exports To Remain Strong

We expect rice exports from Vietnam to remain strong in the coming months, as they are likely to stay verycompetitive globally The country enjoys a significant discount compared with global prices Vietnam 5%rice prices grew 11.0% in August 2012, driven by growing demand from Southeast Asian importers and theinternational price trend, but still enjoy a US$115/tonne discount to Thai 5% rice (compared with a widerspread of nearly US$200/tonne in May) Vietnam is expected to export 7.0mn tonnes in 2011/12 and in thecoming season, and the country had already shipped 6.4mn tonnes between January and October 2012 Highexports out of Vietnam, along with other traditionally secondary exporters such as India, Pakistan,

Cambodia and Myanmar, will help to keep the global market well supplied in spite of reduced exports out

of Thailand Vietnam's authorities plan to export 6mn-7mn tonnes of rice annually until 2015

High Imports

Vietnam (LHS) & Select Countries' Rice Exports ('000 tonnes)

Source: BMI, USDA

Usurping Thailand's Rice Throne In 2012

We believe that Vietnam will have caught up with Thailand in terms of rice export volumes in 2012 This ismainly due to the impact of the Thai government's rice intervention programme, which is expected to keepThai rice exports uncompetitive relative to other Asian exporters in the near term

Having said that, the country is facing fierce competition from India, whose re-entry on the non-basmatirice export market after a four-year export ban was sudden but buoyant Although we expect Vietnameserice exports to stagnate at 7.0mn tonnes from 2011, Vietnam is likely to take over Thailand exports, forecast

at 6.5mn tonnes in 2012 However, Vietnam must now battle against India's rice exports, which have beenmade competitive thanks to a weakening rupee and high stocks India's exports are expected to outpaceVietnam's, at 8.0mn tonnes in 2012 Therefore, Vietnam's share of global exports could be lower thanexpected, as increased competition in the international rice markets could divert traditional importers toother suppliers, mainly India

Even though Vietnam's rice exports are set to exceed Thailand's in 2011/12, we expect Thailand to regainsome ground in the coming years, mainly as most stockpiling for the country's procurement programme will

be completed by the end of 2011/12, leaving a larger surplus available for export in 2012/13

Opening Up The Market

BMI believes that the impact of the Vietnamese rice market opening up to foreign traders from 2011

onwards poses a upside risk to production over the longer term Under WTO commitments, foreign tradersare allowed to directly undertake rice trading in the country Previously, foreign companies were required toenter into joint ventures with local players In an effort to improve the capabilities of local rice exportersand prepare for the impending increase of competition with bigger more experienced foreign players, thegovernment stepped up efforts to improve the local rice industry The government has mandated that all riceexporters are required to have at least one rice storage warehouse with a minimum capacity of 5,000 tonnes

of paddy and a rice processing facility with a minimum processing capacity of 10 tonnes per hour All riceexporters had until September 2012 to take the necessary actions and adapt to these changes

While this is likely to lead to a reduction in the 264 rice export companies in the country as of 2010, thesedevelopments also will very likely increase the industry's economies of scale and increase the

competitiveness of the industry We believe that this development is a step in the right direction; a

restructuring of the local rice industry will encourage consolidation and better prepare local players foreventual foreign competition in the sector

Table: Vietnam Rice Production & Consumption, 2007-2012

Notes: f BMI forecasts Sources: 1 USDA.

Risks To Outlook

There are upside risks to our Vietnamese rice consumption forecasts Rice remains a substantial part of thelocal diet, and any period of prolonged food price inflation or economic weakness would most likely seemore consumers revert to traditional diets, therefore lifting overall demand

On the production side, the main short-term risk to supply lies in the return of El Niño weather Thisphenomenon could bring hot and dry weather to the country, dragging on yields and overall rice productionfor the 2012/13 season.

Over the long term, we believe the gradual transformation of rice cultivation methods in Vietnam presentsthe main upside risk to our production forecasts The Cultivation Department of the Ministry of Agricultureand Rural Development of Vietnam is endeavouring to develop a large-scale rice farming model wherebyneighbouring farmers work with businesses and government officials to increase rice yields In this model,businesses provide capital for farmers to increase farm inputs such as fertiliser and machinery They alsoprovide a ready consumer network for farmers In return, they reserve the exclusive right to purchase afterthe harvest Currently, large-scale rice farms cover 10,000ha of total rice area harvested The plan aims toexpand this to 1mn ha in 2015, or approximately 10% of total area harvested for rice We believe that thisplan poses salient upside risks to our forecast for rice production growth

Vietnam Grains Outlook

BMI Supply View: Corn is one of Vietnam's most important food crops, along with rice, and the

country produces a significant amount of corn, with output growing by a hefty 9.5% annually since 2000 In2012/13, we forecast production to grow by 7.1% year-on-year (y-o-y) to reach an all-time high of 5.3mntonnes Output growth is being driven by a slight increase in area planted as well as higher yields Thismaintains a decade-long trend of higher yields for the corn sector, which increased by more than 60% from2002/03 to 4.6 tonnes per hectare (ha) in 2012/13 This is higher than the South East Asian average yield of3.4 tonnes/ha in 2012/13, according to the US Department of Agriculture (USDA) Corn's harvested areaalso increased, from 810,000ha in 2002/03 to 1.15mn ha in 2012/13 These increases have come as

domestic consumption rose significantly on the back of improving incomes Indeed, as incomes have risen,consumers have been encouraged to buy more meat, of which corn is the main feedstock More than 80% ofthe country's total corn output goes towards the feed industry

To 2016/17, we expect corn production to increase by 43.4% on the 2011/12 level to 7.1mn tonnes Acreage

is likely to remain stagnant or diminish; current yield immaturity means significant gains are still availablevia this avenue, especially as robust local corn prices provide incentives to farmers The important growthdriver will be domestic consumption, especially from the livestock and aquaculture sectors Despite thepotential for corn production given the robust growth of the livestock and aquaculture industries, the sector

is encountering many challenges, including high production costs and high post-harvest losses of 13-15%,according to industry sources

BMI Demand View: Corn consumption almost doubled from 2005 to 2012, and we expect this trend to

continue, although not at such a strong rate The demand gains will partly come from growth in the

livestock sector, as beef, veal and poultry production are all expected to register strong growth

To 2017, corn consumption growth will continue to exceed that of production, at 47.8%, with demandreaching 9.1mn tonnes As a result, Vietnam will very likely become increasingly reliant on corn imports tomeet domestic demand However, strong economic growth over our forecast period is likely to ensure thatthe impact of a rising import bill on consumption is deemed manageable Animal feed will remain theprimary use for corn to 2017 and beyond Indeed, we have a positive view on livestock production to 2017owing to income growth and the fact that the sector has been identified as a recipient of government

modernisation efforts Bullish projections from our Food & Drink team reinforce this; we forecast per capitafood consumption to grow by 57.3% to US$356.4 by 2017

Table: Vietnam Corn Production & Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 USDA.