Vietnam agribusiness report q1 2015

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 2015 www.businessmonitor.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: November 2014

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DISCLAIMER

BMI Industry View 7

SWOT 10

Agribusiness 10

Industry Forecast 12

Grains Outlook 12

Table: Corn Production & Consumption (Vietnam 2013-2018) 13

Table: Corn Production & Consumption (Vietnam 2008-2013) 17

Rice Outlook 18

Table: Rice Production & Consumption (Vietnam 2012-2018) 19

Table: Rice Production & Consumption (Vietnam 2008-2013) 22

Dairy Outlook 24

Table: Butter Production & Consumption (Vietnam 2013-2018) 25

Table: Cheese Production & Consumption (Vietnam 2013-2018) 25

Table: Milk Production & Consumption (Vietnam 2013-2018) 25

Table: Whole Milk Powder Production & Consumption (Vietnam 2013-2018) 26

Table: Butter Production & Consumption (Vietnam 2008-2013) 31

Table: Cheese Production & Consumption (Vietnam 2008-2013) 31

Table: Milk Production & Consumption (Vietnam 2008-2013) 31

Table: Whole Milk Powder Production & Consumption (Vietnam 2008-2013) 31

Livestock Outlook 33

Table: Beef Production & Consumption (Vietnam 2013-2018) 34

Table: Pork Production & Consumption (Vietnam 2013-2018) 34

Table: Poultry Production & Consumption (Vietnam 2013-2018) 34

Table: Beef Production & Consumption (Vietnam 2008-2013) 39

Table: Pork Production & Consumption (Vietnam 2008-2013) 39

Table: Poultry Production & Consumption (Vietnam 2008-2013) 40

Coffee Outlook 41

Table: Coffee Production & Consumption (Vietnam 2013-2018) 42

Table: Coffee Production & Consumption (Vietnam 2008-2013) 49

Featured Analysis 50

Vietnam's Uncompetitive Sugar Sector At Risk From ASEAN Integration 50

Table: VIETNAM SUGAR PRODUCTION & CONSUMPTION, 2013-2018 55

Agribusiness: Winners And Losers From AEC 56

Table: Selected Risk Ratings 57

Table: ASEAN Economic Community - Winners & Losers In Selected Agribusiness Sectors 58

Commodities Price Analysis 64

Monthly Softs Strategy 64

Table: Select Commodities - Performance & BMI Forecasts 73

Monthly Grains Strategy 75

Table: Selected Commodities - Performance & BMI Forecasts 83

Upstream Analysis 84

Asia GM Outlook 84

Table: Select Countries - GM Crops Use 90

Asia Machinery Outlook 91

Table: China Grain Public Production Support Programme (CNYbn) 91

Table: Selected Countries - Average Size Of Farms, Hectares 95

Asia Fertiliser Outlook 99

Table: India - Fertiliser Subsidies, INR/kg 103

Downstream Analysis 105

Mass Grocery Retail 105

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Vietnam 2013-2018) 109

Table: Grocery Retail Sales By Format (%) 109

Drink 110

Alcoholic Drinks 110

Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 112

Hot Drinks 113

Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 114

Soft Drinks 115

Table: Soft Drinks Sales, Production & Trade (Vietnam 2013-2018) 116

Food 118

Food Consumption 118

Table: Food Consumption Indicators - Historical Data & Forecasts (Vietnam 2011-2018) 119

Canned Food 120

Table: Food Consumption Indicators - Historical Data & Forecasts (Vietnam 2011-2018) 120

Confectionery 121

Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2011-2018) 125

Pasta 126

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 126

Dairy 127

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 127

Regional Overview 128

Table: China - Ongoing And Future Agricultural Policy Reforms 129

Table: ASEAN Economic Community - Winners And Losers In Selected Agribusiness Sectors 130

Competitive Landscape 133

Table: Major Agribusiness Companies (USDmn) 133

Demographic Forecast 134

Table: Population Headline Indicators (Vietnam 1990-2025) 135

Table: Key Population Ratios (Vietnam 1990-2025) 135

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 136

Table: Population By Age Group (Vietnam 1990-2025) 136

Table: Population By Age Group % (Vietnam 1990-2025) 137

Methodology 139

Industry Forecast Methodology 139

Sector-Specific Methodology 140

BMI Industry View

BMI View: Recent developments in the country's economic and business environment outlooks add further

weight to our positive view on Vietnam's agribusiness sector The industry holds strong growth

opportunities in terms of production, exports and retail sales, particularly with regard to the rice, coffee, livestock and dairy sectors Moreover, the upcoming economic and financial integration in South East Asia will benefit Vietnam's exports of rice, dairy and coffee However, Vietnam is facing growing competition in its key markets, and the fulfillment of its promising potential will only be achieved if the country steps up its competitiveness and improves both product quality and supply chain efficiency Vietnam will have to significantly ramp up investments on crop productivity in order to not be left behind, and if it does, it will be able to produce more value-added crops and maintain its status as an export spearhead.

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

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

2005 2006

2007 2008

2009 2010

2011 2012

2013e 2014f

2015f 2016f

2017f 2018f 0

5 10 15 20 25 30 35 40 45 50 55

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

Key Forecasts

■ Rice consumption growth to 2018: 5.1% to 22.1mn 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

■ Corn production growth to 2017/18: 32.9% to 6.4mn tonnes Although 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 Domestic consumption will beanother important driver

■ Milk production growth to 2017/18: 60.3% to 721,400 tonnes Dramatic increases in cattle numbers

and increased public and private sector investment - part of an effort to reduce the country's growingimport dependency - will be the main boosts to growth Commercialisation will also play a key role aslarger, more efficient farms come to play a greater role in milk production

■ 2015 BMI Universe Agribusiness Market Value: USD37.3bn (down 0.4% year-on-year (y-o-y) from USD37.4bn estimated in 2014; growth expected to average 2.2% annually between 2015 and 2018).

■ 2015 real GDP growth: 6.4% (up from 5.7% expected in 2014; predicted to average 6.5% over

Key Revisions To Forecasts

■ Milk production to 2017/18 revised up, as the continued pace of private investment into the sector will boost production capacity We now see liquid milk output growing by a robust 9.9% annually between

2013/14 and 2017/18, reaching 721,000 tonnes (compared with a previous estimate for production to be

at 485,000 tonnes by 2017/18)

Key Developments

After decades of active support to the rice sector, Vietnam is shifting its attention to corn and soybeanproduction in order to address its soaring animal feed deficit and to avoid rice oversupply This plan islikely to take years before farmers switch away from rice and manage to improve yields for alternativegrains and oilseeds The eventual increase in domestic feed output is likely to favour the development of thelivestock sector This policy will slightly reduce area under rice cultivation in the coming years As a result,

we expect rice production growth will come from yield improvements

Due to decline in exportable supply and fiercer competition from traditional competitors, Vietnam's riceexports will broadly stagnate in 2014/15 Thailand ended its rice scheme in 2014, which resulted in a drop

of Thai rice export prices The return of Thailand on international markets will strongly limit Vietnam's riceexports in 2015 In the longer term, Vietnam will continue to gain competitiveness and eat into Thailand'smarket share The integration of the Association of Southeast Asian Nations (ASEAN) countries also bodeswell for Vietnam's rice exports

Vietnam's beef production slipped in 2012/13, and coupled with surging demand from overall economicgrowth and changes in Vietnam's foodservice industry, it is providing a strong impetus for beef importersand distributors Imported beef - mainly from eligible supplying countries Australia, India and the UnitedStates - has been on a strong uptick since 2013 Imports of live cattle, for the meat and dairy industries, havebeen particularly strong, and Vietnam will surpass China to become the second-largest importer of

Australian cattle in 2014, behind only Indonesia

Vietnam is seeing a wave of private investment in its upstream (farming) and downstream (product

manufacturing and distribution) dairy sector These investments bode well for the future of Vietnam's milk

production in the coming years Vinamilk, Vietnam's largest dairy company, is one of the most active in

terms of investment Vietnamese companies operating in other sectors than diary are also turning their eyes

to the milk industry, including Vinacafe Bien Hoa Company and property developer Hoang Anh Gia Lai Group However, the wave of private investment in Vietnam's dairy sector also has its downsides, the main

one being the rise in competition Growth in domestic dairy prices has slowed down and margins in thesector have been on a downtrend since 2013

Agribusiness

SWOT Analysis

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

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

■ Vietnam enjoys relatively good international price competitiveness for rice and coffee

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

to more developed international competitors

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

Opportunities ■ Since the opening up of the economy in 1986, which allowed more private

involvement in agriculture, yields have improved dramatically and look set to continuedoing so

■ 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

■ A move towards higher-quality products, especially in the coffee and dairy sectors,will help to improve Vietnam's product competitiveness

SWOT Analysis - Continued

Threats ■ Poor knowledge of good farming practices and hygiene standards leaves Vietnamese

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

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

■ Climate change and rising sea levels will reduce arable land in the Mekong Delta andcoastal areas of the Central region unless active protection policies are implemented.This would then weigh on production growth in two of Vietnam's main agricultural-producing regions

Industry Forecast

Grains Outlook

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

grown by a hefty 9.5% annually since 2000 Area harvested and yields increased by 12.5% and 23.1%respectively between 2004/05 and 2013/14 as domestic corn consumption rose significantly on the back ofimproving incomes Indeed, as incomes have risen, consumers have been encouraged to buy more meat, ofwhich corn is the main feedstock More than 80% of the country's total corn output goes towards the feedindustry

In the 2013/14 season, which ended in April 2014, we believe production reached a record high of 5.2mntonnes, up 7.7% year-on-year (y-o-y) Following a long term trend, output growth will be driven by asustained improvement in yields rather than area expansion Area harvested is estimated to have broadlystagnated at 1.2mn hectares (ha) according to the USDA and the Ministry of Agriculture and Rural

Development (MARD) Yields grew to 4.43tonne/ha, up 6.7% y-o-y, which is significantly higher than theSouth East Asian average yield of 3.42tonnes/ha in 2013/14

Harvesting of the 2014/15 corn crop is complete We believe production grew for the sixth consecutiveseason, but at a slower pace of 4.5% y-o-y to 5.4mn tonnes following robust growth in 2013/14 Areaharvested is likely to grow at a higher rate than last year due to the government's plan to shift cultivated areafrom rice to corn and soybean Yields will also improve

We have revised up our forecast for corn production in the medium term as we believe the ongoing push bythe government to make farmers shift from rice to corn cultivation will boost corn area harvested in thecoming years We now expect production to reach 6.4mn tonnes by 2017/18 (compared with a previousprojection of 6.2mn tonnes), up 32.9% compared with the 2012/13 level Yields will also slowly grow,especially as robust local corn prices provide incentives to farmers to invest more in crops (in fertilisers, forexample) The important growth driver will be domestic consumption, especially from the livestock andaquaculture sectors Despite the potential for corn production given the robust growth of the livestock andaquaculture industries, the sector is encountering many challenges, including high production costs and highpost-harvest losses of 13-15%, according to industry sources

BMI Demand View: Corn consumption almost doubled from 2005 to 2013, 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 2018, corn consumption growth will continue to exceed that of production; we forecast growth of 24.8%between 2013 and 2018, to 8.1mn tonnes As a result, Vietnam will very likely become increasingly reliant

on corn imports to meet domestic demand However, strong economic growth over our forecast period islikely to ensure that the impact of a rising import bill on consumption is deemed manageable Animal feedwill remain the primary use for corn to 2018 and beyond Indeed, we have a positive view on livestockproduction to 2018 owing to income growth and the fact that the sector has been identified as a recipient ofgovernment modernisation efforts Bullish projections from our Food & Drink team reinforce this; weforecast per capita food consumption to grow by 147.3% to USD650.7 by 2018

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

Corn production, '000 tonnes 4,780.0 5,150.0 5,380.0 5,692.0 6,005.1 6,353.4

Corn consumption, '000 tonnes 6,450.0 6,695.1 6,896.0 7,254.5 7,639.0 8,051.5

f = BMI forecast Source: USDA, BMI

Government's Plan To Boost Production

MARD has submitted to the prime minister a proposed programme for shifting acreage from rice to othercash crops, with a focus on corn and soybean Over the period to 2015, MARD aims to transition

100,000-110,000ha of current rice-cultivated area into corn and soybean fields The winter and earlyautumn rice crops will be most directly affected by the proposed programme; these crops usually generatelow yields due to lack of water and recurrent attacks from pests and diseases The ministry proposes support

of VND2mn/ha for input costs (seeds, fertilisers, pesticides) and about VND700,000/ha for land preparationcosts for those who shift from rice to corn or soybean This new policy is a clear change to support

dynamics in Vietnam, where rice production has long been the focus Incentivised by elevated publicsubsidies for rice production, farmers have planted the grain across the country, even in areas with

unfavourable soil conditions As a result, rice production has grown by a healthy 2.3% annually since1999/00

Booming Feed ImportsVietnam - Corn, Soy Meal & Soybean Imports ('000 tonnes)

f = BMI forecast Source: BMI, USDA, ITC

A Greater Need For Feed

Vietnam struggles to export its large rice surpluses, as competitors export higher-quality rice (such as mainrival Thailand) or rice at a lower price (such as India) The country is therefore eager to diversify its crops.The need to increase corn and soybean production is all the more salient given that imports of feed

ingredients have skyrocketed in recent years in line with the development of the livestock sector Supported

by growing domestic demand for more protein, beef, poultry and pork meat production have been growing

at a hefty 7.0% annually over the past 10 years

The feed manufacturing sector has grown hand-in-hand with meat output, with many big names in the feedindustry setting up plants in Vietnam However, feed grain and oilseeds production has failed to keep upwith consumption Feed demand is 70% comprised of imports According to the Viet Nam Feed

Association, the country imported about 9mn tonnes of feed and fish powder in 2013 worth about USD4bn,while rice exports amounted to 6.6mn tonnes that year, earning USD2.9bn With the new corn and soybeanproduction plan, the government hopes to import less than 50% of its animal feed requirements by 2020

The growing attention and support to corn and soybean production in Vietnam will most likely provepositive for the livestock sector, as it could help producers reduce production costs Decreasing the reliance

on imported feed ingredients could cut down on feed expenses, as it would reduce transportation costs andimport taxes (5% for feed) Moreover, the increase in domestic supply of feed ingredients will help ease thepressure on Vietnamese feed companies Domestic feed companies are facing stiff competition from theirinternational counterparts, which have set up large manufacturing plants in the country in recent years In

2012, for example, many domestic manufacturers closed down due to a sudden spike in international grainprices, which contributed to the credit crunch Vietnam experienced It is estimated that 50-100 of the 243Vietnamese animal feed producers had to close in 2012 and 2013

Mainly Emerging CountriesVietnam - Corn & Soybean Imports By Origin, 2012/13 (% of total imported volume)

Source: BMI, ITC, UNCTAD

Consumption Driven By FeedVietnam - Corn (LHC) & Wheat (RHC) Consumption ('000 tonnes)

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

Corn Production Push Insufficient To Supply Feed Demand

We believe Vietnam's plan to reduce its dependence on imported feed from 70% to 50% out to 2020 willprove difficult The country is likely to remain largely dependent on imported feed in the coming five years.Corn and soybean productivity is low in this traditional rice-producing country and will take years tosee improvement Vietnam's corn yields are lagging its neighbours, at 4.50 tonnes/ha, compared with6.03 tonnes/ha in China and 5.35 tonnes/ha in Laos Meanwhile, the scale of soybean production remainsextremely low, at around 200,000 tonnes, compared with consumption of 1mn tonnes annually

Adequate infrastructure for corn storage and transport is also lacking This prevents Vietnam from having astable supply of corn throughout the year, as farmers are obliged to sell their product quickly after theharvest Moreover, corn growers are still spread across the least accessible territories (in the Central

Highlands, for example), making it difficult for feed companies to collect and transport products Moreover,

we expect livestock production to maintain the robust growth rates recorded in recent years, which willdeepen the domestic feed deficit

Table: Corn Production & Consumption (Vietnam 2008-2013)

Corn production, '000 tonnes 4,600.0 4,432.0 4,630.0 4,648.0 4,650.0 4,780.0

Corn consumption, '000 tonnes 5,200.0 5,400.0 6,100.0 5,900.0 6,000.0 6,450.0

Source: USDA, BMI

Risks To Outlook

Corn production growth will be more than ever dependent on government's policies now that Vietnam isramping up its support to the sector A decrease in public support to corn production could push backfarmers towards rice cultivation

An important long-term downside consumption risk is that the country's dependence on imports couldimpede Vietnamese demand growth should a sustained period of inflated global corn prices occur Fiscaland monetary tightening also pose a risk to consumption growth Corn is not a luxury good, and thusdemand will not retrench in line with tighter spending conditions However, corn production in the countrydid dip by 3.7% y-o-y in 2008/09 on the back of tighter credit regulations throughout Vietnam during thattime

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 a strong 31%between 2009/10 and 2012/13 In the 2013/14 season ending in December 2014, we maintain our view thatVietnam's rice production will reach a new record high, although year-on-year (y-o-y) growth will remainmodest Output is projected to increase by 1.0% y-o-y, to 27.78mn tonnes Area under cultivation is likely

to decline slightly to 7.80mn ha, while yields will reach an all time high of 5.76tonne/ha due to favourableweather conditions and adequate supplies of irrigation water

Vietnam's Ministry of Agriculture and Rural Development (MARD)'s recent plan to make rice farmers shift

to other grain crops cultivation will have a small impact on rice production in the 2014/15 season Thegovernment is looking to transition 100,000-110,000ha of current rice-cultivated area into corn and soybeanfields out to 2015 in order to avoid paddy overproduction, prevent downward pressure on prices andincrease feed supply This policy is likely to slightly limit the area under rice cultivation in the comingyears, leaving Vietnam reliant on yield improvement for rice production growth The push to reduce riceplantings will lead to a slight decline in production in 2014/15, of 0.1% year-on-year (y-o-y), to 27.75mntonnes

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 outlook for the country's rice productioncapabilities over the long term Over our five-year forecast period to 2017/18, we expect rice output to grow

by 8.8% to 29.9mn tonnes

BMI Demand View: We forecast a modest consumption increase of 1.0% in 2015 to 21.4mn tonnes Over

the longer term, we expect consumption to climb by 5.1% to 22.1mn tonnes in 2018 compared with the

2013 level Rice remains the major food staple in Vietnam, and we do not see this changing over ourforecast period However, rising interest in other foods such as wheat-based goods - supported by growingaffluence - will restrict demand for rice, and over the forecast period we expect production growth tosignificantly outpace that of consumption Ultimately, demand growth will be influenced by populationgrowth, as per capita consumption is expected to remain roughly the same as the population continues todiversify its diet on the back of rising incomes As such, the country will remain one of the world's top riceexporters

Table: Rice Production & Consumption (Vietnam 2012-2018)

Rice production, '000 tonnes 27,150.0 27,500.0 27,780.0 27,752.2 28,501.5 29,214.1 29,915.2

Rice consumption, '000 tonnes 19,650.0 21,000.0 21,210.0 21,422.1 21,636.3 21,852.7 22,071.2

f = BMI forecast Source: USDA, BMI

Slower Production Growth Owing To Corn Focus

Vietnam's plan to shift acreage from rice to other cash crops is likely to reduce slightly the area under ricecultivation in the coming years As a result, we expect most the rice production growth will come fromyield improvements MARD has submitted to the prime minister a proposed programme for shifting acreagefrom rice to other cash crops, with a focus on corn and soybean Over the period to 2015, MARD aims totransition 100,000-110,000ha of rice-cultivated area into corn and soybean fields The winter and earlyautumn rice crops will be most directly affected by the proposed programme; these crops usually generatelow yields due to lack of water and recurrent attacks from pests and diseases The ministry proposes support

of VND2mn/ha for input costs (seeds, fertilisers, pesticides) and about VND700,000/ha for land preparationcosts for those who shift from rice to corn or soybean This new policy is a clear change to support

dynamics in Vietnam, where rice production has long been the focus Incentivised by elevated publicsubsidies for rice production, farmers have planted the grain across the country, even in areas with

unfavourable soil conditions As a result, rice production has grown by a healthy 2.3% annually since1999/00

Exports Still Elevated Despite Production DeclineVietnam - Rice Production, Exports & Endings Stocks ('000 tonnes)

Source: BMI, USDA

However, Vietnam now struggles to export its large rice surpluses as competitors export higher-quality rice(such as main rival Thailand) or rice at a lower price (such as India) The country is therefore eager todiversify its crops The need to increase corn and soybean production is all the more salient given thatimports of feed ingredients have skyrocketed in recent years in line with the development of the livestocksector

In order to support rice production via the improvement in rice yields, the government is currently

encouraging farmers to implement the large scale farm model (between 50ha and 100ha), where farmersconsolidate individual small farms into larger farms to lower per hectare production costs on land

preparation, irrigation, planting and harvesting costs In 2011, more than 85% of paddy-farming householdswere cultivating rice in plots of 0.5ha or less Since the implementation of the plan in 2011/12, the total area

of large scale farms has reached 100,000ha In the coming years, we expect that most of the increase in riceproduction will come from yield improvement Vietnamese yields currently stand well above neighbouringcountries, but still have room to reach Australian rice yields of 9.2 tonnes/ha, which are the world's highest

Vietnam And Thailand On ParSelect Countries - Rice Export Prices (USD/tonne)

Note: Thailand, Vietnam = 5% broken rice prices; India, Pakistan = 25% broken rice prices Source: FAO, BMI

Beyond the current season, we do not expect the Thai government to continue supporting rice farmersthrough similar mechanisms We therefore believe Vietnam will improve its competitiveness in the comingyears, further undercutting Thailand's market share in the long term

Reshuffling The CardsSelect Countries - Rice Exports ('000 tonnes)

Source: USDA, BMI

Table: Rice Production & Consumption (Vietnam 2008-2013)

Rice production, '000 tonnes 24,375.0 24,393.0 24,993.4 26,370.0 27,150.0 27,500.0

Rice consumption, '000 tonnes 19,400.0 19,000.0 19,150.0 19,400.0 19,650.0 21,000.0

Source: USDA, BMI

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 risks to our output forecast for 2014/15 are skewed to the downside due topotential weather problems There are reports that the probability of El Niño returning in 2014 is growing,according to various meteorologist departments This phenomenon brings dry weather to Vietnam's mainrice-producing regions, which poses a downside risks to yields and production

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 MARD is endeavouring

to develop a large-scale rice farming model whereby neighbouring farmers work with businesses andgovernment officials to increase rice yields In this model, businesses provide capital for farmers to increasefarm inputs such as fertiliser and machinery They also provide a ready consumer network for farmers Inreturn, they reserve the exclusive right to purchase after the harvest Currently, large-scale rice farms cover10,000ha of total rice area harvested The plan aims to expand this to 1mn ha in 2015, or approximately10% of total area harvested for rice We believe that this plan poses salient upside risks to our forecast forrice production growth

Dairy Outlook

BMI Supply View: We hold a positive outlook on Vietnam's dairy sector and expect it to maintain its

strong growth momentum on the back of a growing customer base, low milk consumption per capita, risingdisposable incomes and increasing health awareness among consumers Distribution networks are

expanding, and dairy producers are launching aggressive advertising campaigns Since the opening up ofthe economy in 1986, there have been considerable changes in the structure of the Vietnamese dairyindustry The contribution of state farms, which were previously responsible for almost all milk production,has fallen to around just 5%, with the other 95% coming mainly from small- and medium-sized privatefarms

Recent investment in the sector, with the development of milk farms and dairy farms, has boosted themedium term outlook Production grew by 11.5% annually in the past five seasons Production will

maintain strong growth in 2013/14 and 2014/15, of 9.0% and 10.2% respectively, reaching 541,000 tonnes

in 2014/15

Dramatic increases in cattle numbers and increased public and private sector investment - part of the effort

to reduce the country's growing import dependency - will be the main boost to growth Commercialisationwill also play a key role as larger, more efficient farms come to play a greater role in milk production.Finally, the sector is likely to benefit from the continued increase in yields, which have risen almost 130%over the past decade and are expected to continue to do so given the new investment in the sector Thecontinued pace of investment prompted us to revise up our production forecast for the coming years Wenow see liquid milk output growing by a robust 9.9% annually between 2013/14 and 2017/18, reaching721,000 tonnes (compared with a previous estimate for production to be at 485,000 tonnes by 2017/18)

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

by rising incomes, the emergence of the middle class, improving diets, high birth rates and young

populations Per capita milk consumption in Vietnam more than doubled between 2000 and 2012 to 12kgper person per year Despite this increase, the country remains below the regional average of 65kg Thoughthere has been an increase in milk production over the years, the country produces neither cheese nor butter.Condensed milk and yoghurt are highly popular dairy products We expect the country to be increasinglyreliant on dairy imports to meet its domestic needs

Vietnamese dairy consumption growth will remain strong over our forecast period to 2018 Strong

economic growth will filter through into rising disposable incomes, pushing up demand for non-essentialfoodstuffs The boom in convenience and mass retail stores in the country will also support access to dairy

products and incentivise demand Retail sales made via mass grocery retailers remain low in Vietnam;households still go to independent grocery shops for 85% of their retail shopping, compared with 80% inthe Philippines and 77% in Indonesia according to our Food & Drink data Through to 2018, we expectfluid milk consumption growth of 36.1% to 272,000 tonnes, while demand for butter, cheese and wholemilk powder will soar 46.7%, 230.3% and 24.3% respectively, albeit from far lower bases Increasedurbanisation, increased ownership of Western goods and the ongoing spread of modern, organised retail willall prove supportive of strong dairy consumption growth, even if forecast higher global dairy prices limit thegrowth outlook to some extent.

Table: Butter Production & Consumption (Vietnam 2013-2018)

Butter consumption, '000 tonnes 13.4 14.5 15.7 16.9 18.3 19.7

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

Table: Cheese Production & Consumption (Vietnam 2013-2018)

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

Table: Milk Production & Consumption (Vietnam 2013-2018)

Milk production, '000 tonnes 450.0 490.5 540.5 594.6 655.8 721.4

Liquid milk consumption, '000 tonnes 200.1 213.6 227.8 242.3 257.3 272.4

e/f = BMI estimate/forecast Source: National sources, BMI

Table: Whole Milk Powder Production & Consumption (Vietnam 2013-2018)

Whole milk powder consumption, '000 tonnes 36.8 38.4 40.1 41.9 43.8 45.8 Whole milk power consumption, % y-o-y 0.0 4.2 4.5 4.5 4.5 4.5

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

Private Investment To Support Production Growth

Vietnam is seeing a wave of private investment in its upstream (farming) and downstream (dairy productmanufacturing and distribution) dairy sector Various domestic and international companies are developingtheir brands and trying to enter the market These investments bode well for the future of Vietnam's milkproduction in the coming years Consequently, we have revised up our production forecast for Vietnam out

to 2017/18, and now see liquid milk output growing by a robust 9.9% annually between 2013/14 and2017/18, reaching 721,000 tonnes (compared with a previous estimate for production to be at 485,000tonnes by 2017/18)

Vinamilk, Vietnam's largest dairy company, is one of the most active in terms of investment It is expandingboth its upstream and downstream production capacity The company, which sources 25% of its raw milkfrom small-scale farms in Vietnam, is ramping up its cow farming business and aims to source 60-70% ofits raw milk needs from internally owned farms by 2024 It will open three new dairy farms in 2014 and2015

Vietnamese companies operating in other sectors than diary are also turning their eyes to the milk industry

Vinacafe Bien Hoa Company, known as a coffee manufacturer, announced in June 2014 its intention to join in the sector The property developer Hoang Anh Gia Lai Group decided in 2014 to join hands with food producer NutiFood and meat supplier Vissan to develop a USD566mn meat and dairy breeding

company The joint venture will import live cattle and dairy cows from Australia to raise them in Vietnam'sCentral Highlands The milk collected from the project will supply a new fresh milk and

yoghurt manufacturing plant operated by NutiFood

International players are also drawn to Vietnam's dynamic dairy sector In 2013, Friesland Campina and agricultural bank Rabobank announced they will team up to improve the quality of milk in Vietnam and

Indonesia They will fund USD30mn to support local dairy farmers by providing knowledge, financing

(affordable loans) and expertise The provided loans will be used to purchase cows, improve facilities andfund the installation of biomass units This investment will contribute to the improvement in quality andmilk, two factors that need to be addressed.

On A DowntrendVinamilk - Select Margins (%)

Note: YTD = Year to date (Q1 to Q3 2014) Source: Vinamilk, BMI

Increasing Domestic Competition Weighting On Margins

However, the wave of private investment in Vietnam's dairy sector also has its downsides, the main onebeing the rise in competition The growth in prices of dairy products has slowed down since 2013, partly as

a result of higher competition The clamp down of the government in 2014 on the price of certain milkpowder prices for children has also played a part in this trend Moreover, operating costs of dairy companieshas increased, as they have ramped up advertisement in an effort to maintain their market share

Margins in the sector have been on a downtrend, taking Vinamilk's margins as a proxy (it is the onlypublicly traded dairy producer in Vietnam) The company's operating margins have been broadly stagnatingsince FY09 (at elevated levels) and declined over Q114-Q314

In light of the increase in competition and growing limits on domestic prices for dairy products, traditionalplayers in Vietnam's dairy sector, including Vinamilk, will have to keep up their expansionary activities anddevelop products in order to secure their market share.

Liquid Milk Still The Dominant ProductVietnam - Dairy Products Sales, In Volume (LHC) & Value (RHC)

Source: VPBS, Bloomberg, BMI

Consumers Eyeing Value-Added Dairy Products

Consumers in Vietnam and in Asian countries in general mainly consume fresh milk, produced locally.However, consumers are slowly turning to more value-added products In Vietnam for example, the

consumption of UHT or sterilized liquid milk has a 90% penetration in cities and 70% penetration in ruralareas, while infant milk powder has a 43% penetration in cities and 30% in rural areas, according to aconsumer panel made in 2012 by Kantar Worldpanel For functional dairy products (i.e products thatprovide health benefits beyond their inherent nutritional value, probiotics in the case of drinking yogurt ormilk for example), penetrations drops to less than 20% in cities and below 5% in rural areas In urban areas,the fastest retail growth, both in terms of volume and value, is currently coming from infant milk powderand functional products In rural areas, most dairy product consumption is blossoming, with infant milkpowder, UHT liquid milk and cup yogurt recording the most robust growth

Large Opportunities Across ProductsVietnam - Annual Penetration Of Dairy Products In Urban and Rural Households (%)

Note: DY = Drinking Yogurt Source: Kantar Worldpanel

Thailand's Fears Over Trade Liberalisation Overplayed

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

the AEC's impending import liberalisation in 2015 Vietnam's dairy sector, although still lagging Thailand's,

is developing rapidly Vietnam has been trying to upstage Thailand through massive dairy cow imports andrapid expansion of milk-processing facilities and dairy operations Indeed, 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

Mostly New ZealandVietnam - Milk & Milk Product Imports By Country, 2010 (% of total)

Source: BMI, USDA

We believe that Thai dairy farmers' fears regarding trade liberalisation are relatively overplayed, as farmersare already 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 efficiency than Vietnamand China, recording annual yields of 3,380kg of milk per head, compared with 2,060kg/head in China and2,170kg/head in Vietnam

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 estimated 382,000 tonnes in 2012)will prove challenging

Table: Butter Production & Consumption (Vietnam 2008-2013)

Butter consumption, '000 tonnes 10.8 10.8 10.8 11.3 12.5 13.4

e = BMI estimate Source: FAPRI, BMI

Table: Cheese Production & Consumption (Vietnam 2008-2013)

e = BMI estimate Source: FAPRI, BMI

Table: Milk Production & Consumption (Vietnam 2008-2013)

Milk production, '000 tonnes 262.2 278.2 306.7 345.0 382.0 450.0

Liquid milk consumption, '000 tonnes 158.4 175.1 167.6 174.8 185.3 200.1

e = BMI estimate Source: National sources, BMI

Table: Whole Milk Powder Production & Consumption (Vietnam 2008-2013)

Risks To Outlook

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 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

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 as of 2011/12 Despitethe sector going through hard times over recent years owing to disease outbreaks, soaring input costs andcompetition from cheap imports, we expect Vietnam's livestock production to grow strongly, led by poultryproduction, over the medium term Rising incomes will stimulate domestic meat consumption growth(owing to diet diversification), and production will increase to keep pace That said, we expect the country

to continue being a net importer of livestock over our forecast period

We expect livestock production to recover slightly in 2013/14 and 2014/15, following two year of

challenging environment with elevated international feed prices and disease outbreaks We see poultryproduction outperforming the rest of the complex, growing by a robust 4.0% and 5.0% year-on-year (y-o-y)

in 2013/14 and 2014/15 respectively, reaching 813,500 tonnes in 2014/15 The pork sector, which was hurt

in 2013 by news of use of banned substances to promote lean growth in pigs, will continue to recordlacklustre activity We forecast production to grow by a mild 3.0% y-o-y in both years, to 2.5mn tonnes in2014/15 Beef and veal production is forecast to grow by a weak 1.0% both years, to 378,000 tonnes in2014/15

We see strong growth potential for the Vietnamese livestock industry, on the back of rising income Poultrywill record the strongest growth, and we forecast production to expand 34.5% to 968,900 tonnes to 2017/18compared to the 2012/13 level Pork output should rise 13.4% to 2.66mn tonnes, which will not be enough

to fill in the country's growing demand for the meat The country will remain reliant on pork imports tosatiate demand Beef production will remain the least significant of Vietnam's livestock sectors and isexpected to grow by a low 9.6% over the 2012/13 level to 406,500 tonnes

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

capita consumption rising by more than 100% from 2000 to 2013 to reach 37.1kg per year Buoyed bystrong income growth as well as population growth, we see healthy demand growth for livestock over2013-2018 Poultry consumption is forecast to grow by 34.5% to 1.1mn tonnes, while pork (from a higherbase) and beef consumption will increase by 17.8% and 18.7% respectively We forecast pork consumption

to reach 2.7mn tonnes, with beef consumption reaching 487,000 tonnes We believe pork consumption willcontinue to be the dominant meat consumed, comprising more than 60% of total meat consumption Ahousehold survey conducted 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: Beef Production & Consumption (Vietnam 2013-2018)

Beef & veal production, '000 tonnes 370.8 374.5 378.3 387.3 396.6 406.5 Beef & veal production, % y-o-y -3.0 1.0 1.0 2.4 2.4 2.5 Beef & veal consumption, '000 tonnes 410.0 416.2 432.8 450.1 468.1 486.8 Beef & veal consumption, % y-o-y 2.5 1.5 4.0 4.0 4.0 4.0

f = BMI forecast Source: Vietnam General Statistics, BMI

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

Pork production, '000 tonnes 2,350.0 2,420.5 2,493.1 2,549.2 2,605.3 2,663.9

Pork consumption, '000 tonnes 2,315.0 2,384.5 2,432.1 2,517.3 2,615.4 2,727.9

f = BMI forecast Source: USDA, BMI

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

Poultry production, '000 tonnes 745.0 774.8 813.5 858.3 909.8 968.9

Poultry consumption, '000 tonnes 790.0 821.6 862.7 918.8 984.9 1,062.7

f = BMI forecast Source: USDA, BMI

Sector Profitability Improves, But Challenges Remain

Vietnam's livestock sector, and especially the pork sector, went through challenging times in 2012 and 2013due to a rise in feed ingredient and fuel prices, lower demand and plummeting domestic prices Mediareports over the use of banned growth hormones in farms led to consumer substitution to alternative protein

sources such as seafood Prices decreased by around 14% in 2012, reaching VND43,000/kg (USD2.07/kg)

in December according to industry sources By contrast, feed ingredient prices have risen relentlessly on theback of elevated grain prices As a result, many farmers were forced to reduce or suspend their operations inorder to limit losses, with as many as 30-50% of individual farmers in southern provinces abandoning theirfarms, while owners of large farms with more than 1,000 heads have reduced their herd size by up to 70%.Pork production growth slowed down to 2.0% y-o-y in 2011/12 and 2012/13, compared with the strong4.4% annual growth seen in the five previous years

The situation improved slightly over 2013/14, especially in the south of Vietnam However, prices remainbelow production costs in the north of Vietnam We believe pork production will grow by a stronger 3.0%y-o-y, to 2.4mn tonnes, which is still below long term growth trends Looking at 2014/15, production shouldcontinue to show lacklustre growth of 3.0% y-o-y

Poultry, Beef On The RiseVietnam - Meat Imports ('000 tonnes)

Note: f = BMI forecasts Source: USDA, BMI

Beef And Poultry Imports On The Rise

Vietnam's beef production slipped in 2012/13, while surging demand from overall economic growth andchanges in Vietnam's foodservice industry provided a strong impetus for beef importers and distributors

Imported beef - mainly from eligible supplying countries Australia, India and the United States - has been

on a strong uptick since 2013 due mainly to the growth in beef-centric chain restaurants and growingsophistication and competition among Vietnam's importers A significant volume of beef imported intoVietnam is also re-exported, especially to China

In 2014, the country will surpass China to become the second-largest importer of Australian cattle, behindonly Indonesia According to Vietnamese and Australian meat traders, forecast imports from Australia willreach 130,000 heads in 2014, compared with 90,000 for China In 2013, Vietnam imported almost 67,000cattle from Australia, but this has risen by more than 90% to 120,000 head in the first seven months.Australian beef currently holds a 70% market share for imports

On The RecoverySelect Companies - Operating Margins (%)

Source: BMI, Bloomberg

Fragmented 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

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

In 2012, 40 out of 243 Vietnamese feed manufacturers were forced to close their doors due to low

profitability, as grains prices remained elevated and to fierce competition in Vietnam's feed industry,according to the Vietnam Feed Association A large number of these companies were located in Dong Nai

or Binh Duong, the region considered the southern hubs of the animal feed making industry in Vietnam.Most of the feed making plants with an annual capacity of at least 50,000 tons belong to foreign companies

Mainly Foreign CompaniesVietnam - Feed Production By Company, 2011 (% of total)

Source: BMI, Vietnam Animal Feed Association

Local Feed Company Expands

Vietnam's feed industry is one of the world's fastest agribusiness markets It is estimated that approximately

a third of Vietnam's feed is prepared in backyard farms from domestic and far yard scraps However, itscommercial feed output it growing at an extremely rapid pace The animal feed industry has been receivingsignificant - mainly foreign - investment in recent years, given the attractive prospects of the livestock andaquaculture 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 whichhold more than 50% of the domestic animal (compound) feed market share, while 180 local firms retain theremaining 30%, according to the Vietnam Animal Feed Association According to reports, 30% of domesticfirms have been forced out of the animal feed business as a result

CP Vietnam Livestock (CPV) announced in March 2012 it is investing USD100mn in several core

businesses in Vietnam, including feed mills, farms, processed food, ready-to-eat food and CP shops, its

distribution store A feed mill in Hai Duong province, near Hanoi, has started operations recently, withannual capacity of 720,000 tonnes CPV is also expanding in Binh Dinh, where the facility, which will becompleted in 2014, will have an annual capacity of 216,000 tonnes Finally, CPV plans on establishing twoother feed mills in southern Vietnam Japfa Comfeed Vietnam also plans on building two new mills before

2015, including one in Hoa Binh, which will have a capacity of 156,000 tonnes per year

Local companies are also expanding: GreenFeed Vietnam Corporation in April 2013 opened a new mill

in Binh Dinh with initial capacity of 220,000 tonnes per year The Hong Ha Nutrition Joint Stock Co

inaugurated in 2012 an animal production line in 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 (USD7.1mn) invested in 2011

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

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

Beef & veal production, '000 tonnes 298.2 342.5 362.5 375.0 382.4 370.8 Beef & veal production, % y-o-y 9.0 14.9 5.8 3.4 2.0 -3.0 Beef & veal consumption, '000 tonnes 305.0 360.0 375.0 385.0 400.0 410.0 Beef & veal consumption, % y-o-y 10.1 18.0 4.2 2.7 3.9 2.5

Source: Vietnam General Statistics, BMI

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

Pork production, '000 tonnes 2,020.0 2,140.0 2,215.0 2,260.0 2,305.0 2,350.0

Pork consumption, '000 tonnes 2,000.0 2,120.0 2,200.0 2,240.0 2,275.0 2,315.0

Source: USDA, BMI

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

Poultry production, '000 tonnes 417.0 503.0 621.0 696.0 730.0 745.0

Poultry consumption, '000 tonnes 499.0 538.0 660.0 754.0 775.0 790.0

Source: USDA, BMI

Risks To Outlook

Should the government initiate regulatory changes related to disease control and disaster aid, and improvelending conditions for the domestic sector, the meat production sector is likely to finally attract moreinvestment This poses an upside risk to our production forecasts In an attempt to aid the industry, theVietnamese government issued a document in early August 2012 showing that the State Bank of Vietnamasked commercial banks to offer an annual lending rate at 11% on loans to agricultural firms Meanwhile,the National Assembly offered a 30% reduction of corporate income tax in 2012 to agricultural enterprises.Although these policies will not completely eliminate difficulties, they are a first step towards the

improvement of the sector's outlook

Disease poses a major downside risk to our forecasts for livestock production in Vietnam It is a particularrisk for our poultry and pork output forecasts, although it could also affect our beef outlook

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