Vietnam agribusiness report q2 2010

SWOT Analysis Vietnam Agricultural SWOT Strengths The natural fertility of Vietnam around the Red River Delta in the north and the Mekong River Delta in the south provides the countr

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DISCLAIMER

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

Report Q2 2010

Including 5-year industry forecasts by BMI

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: January 2009

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CONTENTS

Executive Summary 5

SWOT Analysis 6

Vietnam Agricultural SWOT 6

Industry Forecast Scenario 7

Vietnam Sugar Outlook 7

Table: Vietnam Sugar Production, Consumption & Trade 8

Table: Vietnam Sugar Production, Consumption & Trade 10

Vietnam Livestock Outlook 11

Table: Vietnam Poultry Production, Consumption & Trade 12

Table: Vietnam Pork Production, Consumption & Trade 12

Table: Vietnam Beef & Veal Production, Consumption & Trade 12

Table: Vietnam Poultry Production, Consumption & Trade 16

Table: Vietnam Pork Production, Consumption & Trade 16

Table: Vietnam Beef & Veal Production, Consumption & Trade 16

Vietnam Coffee Outlook 18

Table: Vietnam Coffee Production & Consumption 19

Table: Vietnam Coffee Production & Consumption 20

Vietnam Dairy Outlook 22

Table: Vietnam Milk Production & Consumption 23

Table: Vietnam Butter Production, Consumption & Trade 23

Table: Vietnam Cheese Production, Consumption & Trade 23

Table: Vietnam Whole Milk Powder Production, Consumption & Trade 24

Table: Vietnam Milk Production & Consumption 26

Table: Vietnam Butter Production, Consumption & Trade 26

Table: Vietnam Cheese Production, Consumption & Trade 27

Table: Vietnam Whole Milk Powder Production, Consumption & Trade 27

Vietnam Grains Outlook 29

Table: Vietnam Corn Production, Consumption & Trade 30

Vietnam Rice Outlook 31

Table: Vietnam Rice Production, Consumption & Trade 32

Table: Vietnam Rice Production, Consumption & Trade 34

Industry Business Environment Overview 36

Global Agribusiness Business Environment Ratings 36

Global Agribusiness Business Environment Ratings 40

Competitive Landscape 42

Table: Agricultural Commodity Producers & Traders 42

Table: Agribusiness Suppliers 43

Table: Integrated Agricultural Producers 44

Commodity Price Analysis 45

Grains Update 45

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Table: Corn 45

Rice 46

Table: Rice 46

Soy 47

Table: Soybean 47

Wheat 48

Table: Wheat 48

Softs Update 49

Cocoa 49

Table: Cocoa 49

Coffee 50

Table: Coffee 50

Milk 51

Table: Milk 51

Sugar 52

Table: Sugar 52

Downstream Supply Chain Analysis 53

Industry Forecast Scenario – Food 53

Food Consumption 53

Table: Food Consumption Indicators Historical Data & Forecasts 54

Canned Food 55

Confectionery 55

Table: Value/Volume Sales of Selected Food Sub-Sectors Historical Data & Forecasts 56

Trade 57

Vietnam Food & Drink Trade Indicators Historical Data & Forecasts (US$mn) 57

Industry Forecast Scenario – Retail 58

Table: Vietnam MGR Indicators Value Sales by Format, Historical Data & Forecasts 60

Grocery Retail Sales by Format - Historical Data & Forecasts (%) 60

Economic Outlook 61

Table: Vietnam - Economic Activity 63

Industry Trend Analysis 64

Fund To Improve Farmers Earnings Potential 64

BMI Forecast Modelling 66

How We Generate Our Industry Forecasts 66

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production and quality fall in 2010

The storms also hit some of Vietnam's major cane growing areas on the central coast This contributed to

a fall in cane production The shortage of cane combined with the rapid surge in the price of sugar on the world market has seen the prices received by farmers for their cane rise rapidly This is good news for the sector and should see sugar production increase in the 2010/11 harvest year following two years of low output Low cane prices and high input costs in previous years has seen many farmers abandon cane production, replacing it with other crops such as corn and cassava Much of the problem of low

profitability is down to the low yields for sugar cane production in Vietnam

With the start of the cool season an old enemy of Vietnam's poultry sector returned after being absent since June Highly pathogenic avian influenza (HPAI) was found in a poultry flock in the northern

province of Lai Chau in November Almost 2,000 birds were culled in the incident Outbreaks continued across the country through December Unless effective measures can be put in place to stop the return of the disease every cool season, it will continue to be a major threat to the country's poultry producers

Vietnam's pork producers were also having a tough time in the final quarter of last year In the last few months of 2009 the price of pork in Vietnam fell sharply An abundance of supply is being blamed for the fall This is bad news for the country's pork producers who have had a difficult time over the past couple

of years with high feed and fuel prices in 2008 followed by the economic slump in 2009 Pork producers

in China suffered a similar problem in the first half of 2009 but a combination of government action and a return of demand saw prices rise again in the second half of the year We do not expect any government help for Vietnam's producers, but demand is likely to pick up in the run up to the Tết festival in mid-February This should mop up the excess of supply and bring prices back up

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SWOT Analysis

Vietnam Agricultural SWOT

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 both rice and coffee

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

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

in comparison to more developed international competitors

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

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

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

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

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

Threats Poor knowledge of good farming practices and hygiene standards leaves

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

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

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

of agriculture

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Industry Forecast Scenario

Vietnam Sugar Outlook

BMI Supply View: Sugar production in Vietnam is estimated to have fallen 18.0% to 1.00mn tonnes in

2009 owing to a reduction in the area planted and poor yields Half of the country's 40 sugar mills were forced to finish production early owing to a lack of sugar cane The mills have a combined annual

processing capacity of 12.3mn tonnes of raw sugar cane, but in 2009 only around 10mn tonnes of cane was produced, according to reports sourcing the Vietnamese Sugar Cane Association

What was bad news for the millers was good news for at least some farmers as competition for the dwindling stocks of cane saw prices shoot up to around 50% above the price paid for cane at the same time in the 2008 season Input costs such as fuel and fertiliser have also fallen sharply since 2008 While this should have seen farmers profits rise substantially, many complained that the price rise came too late

as they had already sold their crop at lower prices In 2009/10, we now expect only moderate growth in sugar production as a large area of cane production was damaged by bad weather in late 2009

BMI Demand View: Sugar consumption in Vietnam has grown rapidly since the start of this decade Between 2000 and 2008, annual consumption grew 47.4% to 1.40mn tonnes This has been driven by rising incomes allowing consumers to spend more on non-essential food and drink Despite the rapid growth, sugar consumption is still low compared to Vietnam's South East Asian neighbours Vietnam's sugar consumption in 2008 was more than a third less than Thailand's and slightly lower even than Malaysia, which has a population of less than a third of that of Vietnam

This implies that sugar consumption in Vietnam will continue to increase as incomes rise towards those seen in other countries in the region While the slowdown in Vietnam's economy in 2009 and 2010 will slow growth in sugar consumption, we still expect to see consumption rise 25.9% over our forecast period

to 2014 to reach 1.83mn tonnes This will be driven by increasing consumption of confectionery and soft drinks among Vietnam's young population In 2009 sugar consumption is estimated at 1.45mn tonnes The poor sugar crop in 2009 caused retail prices to rise In October 2009, prices were reportedly almost double the level at the same time in 2009 Prices peaked in November before falling slightly into

December owing to increased supplies We expect retail sugar prices to remain elevated at least until after the Tết festival in mid-February The high price and continued economic worries will see consumption growth fall again in 2010

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Table: Vietnam Sugar Production, Consumption & Trade

Sugar Production, '000 tonnes 1,2 1,000.0 1,057.0 1,206.0 1,244.0 1,291.0 1,341.0Sugar Consumption, '000 tonnes 2 1,450.0 1,481.0 1,551.0 1,630.0 1,715.0 1,825.0Sugar Net Trade Balance ('000 tonnes)

2 -490.0 -424.5 -344.8 -385.9 -424.7 -484.7

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

2009 = 2008-09; Source: 2 USDA, BMI

High Cane Prices To Boost Production

In 2008/09, Vietnamese sugar production suffered as farmers moved away from cane production owing to the low returns Farmers found that with cane yields in Vietnam low and input costs high, they were left with little profit This saw many farmers abandon cane production in favour of other crops such as corn or cassava For the 2009/10 crop, however, farmers have been enjoying far higher returns In the Mekong Delta in December 2009 the price for sugar cane was reaching almost VND1mn/tonne, more than double the price a year earlier The price has been supported by a fall in cane production following the twin typhoons of Ketsana and Mirinae which lashed Vietnam in September and October damaging plantations particularly in the south-central coast The surge in sugar price, both domestically and on the world market, has also been supportive of prices While we do not see the high cane prices lasting beyond next year, the strong profits enjoyed by cane farmers should see the area planted for the 2010/11 crop increase allowing sugar production to return to the high level seen in 2007/08

Full Potential Not Yet Met

In 1995, recognising the potential of the sugar production sector and the rising domestic demand for the commodity, the Vietnamese government launched a programme to more than double production to 1mn tonnes by 2000 The government encouraged foreign involvement in the milling sector and provided cheap credit and assurance of infrastructure improvement Sugar production grew rapidly, rising to 0.95mn tonnes in 2000 and 1.21mn tonnes the following year Since then however, the sector has

stagnated The 1.21mn tonnes produced in 2001 was not been repeated until last year and Vietnam has slipped back to being a net sugar importer

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

is considerably more expensive than in other sugar producing countries in the region such as Thailand and Australia Vietnamese sugar producers have been protected by high tariffs and restrictive import

regulations This uncompetitiveness has inhibited the development of a sugar export industry Even with

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the protection, many mills have still made losses over the past few years Domestic prices are undermined

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

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

protection Under the ASEAN Free Trade Area (AFTA) agreement, by 2011 Vietnam has to reduce tariffs

on sugar imports from ASEAN members to a maximum of 5% This will expose the country to imports from Thailand, a major sugar exporter Tariffs on imports from other countries will also have to be reduced by 2011 in line with WTO commitments made by the government

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

By 2010, the plan aimed for annual production of 1.5mn tonnes of sugar from 19.3mn tonnes of sugar cane Obviously this will not be met To do this the plan envisioned 300,000 hectares (ha) planted to sugarcane and yields of 65 tonnes/ha Average yields are still some way off this level and cane production

in 2009 is estimated at only around 10mn tonnes, though the year before the figure stood at 12.1mn tonnes By 2020, the plan is aiming for production of 2.1mn tonnes to be achieved through increasing cane yields and the sugar content of cane

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

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

While the government support for the sector is encouraging, we believe the sector will struggle to produce enough sugar for domestic consumption Once tariffs are lowered by 2011, it is likely that the government will have to support the sector by other means if production is not to be set back as it is unlikely that Vietnamese-produced sugar will be able to compete with imports by then We forecast only modest growth in production of 34.1% to the end of our forecast period in 2014

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Table: Vietnam Sugar Production, Consumption & Trade

Sugar Production, '000 tonnes 1,2 980.0 930.0 1,100.0 1,220.0 1,000.0 1,057.0Sugar Consumption, '000 tonnes 2 1,225.0 1,300.0 1,300.0 1,400.0 1,450.0 1,481.0Sugar Net Trade Balance ('000 tonnes)

2 -290.0 -405.0 -215.0 -295.0 -490.0 -424.5

2009 = 2008-09; Source: 2 USDA, BMI

Risks To Outlook

While Vietnam's economy seems to have recovered from the world economic slowdown faster than expected, risks to growth still remain If the economy takes longer to fully recover than we currently anticipate, consumers are likely to cut the amount they spend on non-essential food and drink purchases such as soft drinks and confectionery, placing downside risks on our forecasts

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

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Vietnam Livestock Outlook

BMI Supply View: Despite going through hard times over recent years with disease outbreaks, soaring

input costs and competition from cheap imports, we expect Vietnam's livestock production to see strong growth over the medium term Rising incomes will stimulate domestic meat consumption growth and production will increase to keep pace Pig farming is by far the most significant sector of the Vietnamese livestock industry with pork production making up over three quarters of total meat production in 2008

We forecast production to grow by 30.6% from its 2009 level to 2.42mn tonnes by 2014, outpacing growth in the production of other meat and further boosting its dominance Even faster increases in consumption, however, will mean Vietnam will remain a net importer of pork

Over our forecast period to 2014, we expect chicken production to rise by 33.5% to 453,700 tonnes Vietnam also produces around 90,000 tonnes of duck meat annually In 2009, production fell slightly as the sector suffered from reduced demand and low prices We expect output to pick up in 2010 and grow rapidly from 2011 to the end of our forecast period, assuming there are no more major disease outbreaks The poultry sector has been gradually recovering from the outbreak of avian flu in December 2003, which caused production in 2004 to fall by 15.3% year-on-year (y-o-y) The sector has been held back by regular outbreaks of the disease ever since Increasing demand for poultry though will see the

development of more efficient, modern farms more able to stem the spread of disease

Beef production will remain the least significant of Vietnam's livestock sectors, but will also see good growth over our forecast period with production expected to rise by 20.8% to 314,100 tonnes

BMI Demand View: BMI forecasts Vietnamese GDP per capita to grow by more than two thirds from its

2009 level to US$1,640 by 2014 This will allow Vietnamese consumers to increase the amount they spend on food with meat likely to be a major beneficiary Indeed, the proportion of the Vietnamese diet consisting of animal products has risen dramatically since the opening up of the economy in 1986

According to the UN Food and Agriculture Organization (FAO), between that year and 2003 (the latest year for which FAO Statistics publishes data) the proportion of total calorie intake derived from animal products rose from 8% to 13% as average per capita animal product consumption rose 104% from 167 kilocalories per day to 341

Despite this rapid rise in meat demand, the per capita consumption of animal products in Vietnam is still only slightly more than half the level seen in its northern neighbour China and less than a third of the level in the US This leaves plenty of room for growth and we expect consumption of all major meats to rise over our forecast period to 2014 In 2009 growth in pork consumption slowed sharply while poultry consumption also, surprisingly, declined slightly as the economy struggled We expect growth to pick up again in 2010 Out to 2014, we forecast chicken consumption to grow by 40.9% to 746,500 tonnes in

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Table: Vietnam Poultry Production, Consumption & Trade

Poultry Production, '000 tonnes 1 340.00 365.10 381.70 401.20 428.00 453.70Poultry Consumption, '000 tonnes 1 530.00 552.30 579.80 630.90 688.30 746.50Poultry Net Trade Balance, '000 tonnes

1 -190.00 -187.30 -198.20 -229.70 -260.20 -292.80

Notes: e/f=BMI estimate/forecast Source: 1 USDA, BMI

Table: Vietnam Pork Production, Consumption & Trade

Pork Production, '000 tonnes 1 1,850.00 1,902.00 1,941.00 2,054.00 2,231.00 2,415.00Pork Consumption, '000 tonnes 1 1,894.00 1,960.00 2,061.00 2,182.00 2,341.00 2,507.00Pork Net Trade Balance, '000 tonnes 1 -44.00 -57.70 -119.10 -127.50 -110.80 -91.10

Table: Vietnam Beef & Veal Production, Consumption & Trade

Beef & Veal Production, '000 tonnes 1 260.00 261.80 274.10 285.40 299.20 314.10Beef & Veal Consumption, '000 tonnes

1 509.00 535.50 560.70 583.20 634.20 688.10Beef & Veal Net Trade Balance, '000

tonnes 1 -249.00 -273.65 -286.64 -297.76 -335.01 -373.92

Falling Prices Worry Pork Producers

The price of pork in Vietnam fell sharply in the last few months of 2009 Prices in the wholesale markets

of Ho Chi Minh City fell by around 10% in December according to a Viet Nam News report An

abundance of supply is being blamed for the fall This is bad news for the country's pork producers who have had a difficult time over the past couple of years with high feed and fuel prices in 2008 followed by

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the economic slump in 2009 Pork producers in China suffered a similar problem in the first half of 2009 but a combination of government action and a return of demand saw prices rise again in the second half of the year We do not expect any government help for Vietnam's producers, but demand is likely to pick up

in the run up to the Tết festival in mid-February This should mop up the excess of supply and bring prices back up

Imports Put Pressure On Profits

In 2008, livestock breeders came under considerable pressure from rising input costs and increased competition from cheap meat imports With feed costs in September 2008 according to the Department of Animal Husbandry up by 40% to 60% since the end of 2007, the cost of raising livestock has risen

considerably At the same time, imports of meat products have been rising, with the US, Brazil and Argentina major suppliers While consumers in Vietnam have traditionally preferred domestically

produced meat, the growing price differential with imported meat products such as chicken quarters have encouraged more shoppers to buy the foreign produce, particularly at a time when high food price

inflation has put a strain on food budgets This along with the rising price of feed and fuel costs has forced domestic producers to slash their profit margins with many complaining that they are making a loss on the animals they raise

After months of lobbying from the industry, at the beginning of October 2008 the Ministry of Finance announced that import taxes on meat would be increased to help support domestic producers Viet Nam News reported that the tariff on whole bird poultry imports was raised from 15% to 40%, while the tariff

on chicken legs and wings was lifted to 20% from 5% The tariff on fresh pork and beef imports was increased by two percentage points to 27% and 17%, respectively The tariffs aim to slow the rapid rise in imports; in the first eight months of 2008 Vietnam imported over 100,000 tonnes of poultry, more than twice as much as was imported in the whole of 2007 According to the Ministry of Agriculture, monthly meat and poultry imports have fallen by 20-25% following the introduction of the tariffs, though the worsening economic outlook could also have contributed to this

Still not satisfied, in March 2009, the finance ministry raised tariffs again Effective from March 20, the tariff on fresh pork was raised to 28% and 24% for frozen pork Duties on fresh beef now range from 17%

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

While meat import volumes were reportedly low through the middle months of 2009, this did little to help domestic producers as flagging demand and excess saw farmgate meat prices plummet in the second quarter of 2009 In July and August poultry producers were complaining that the cost of production had

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climbed back above what they were paid for their chickens We expect this situation to improve moving into 2010 as Vietnam's economy continues to recover

Tariff Hikes Alone Will Not Save Sector

Despite the assistance, a Ministry of Agriculture and Rural Development official was quoted by Viet Nam News as warning that domestic producers would still have to work on improving production efficiency and cutting costs so they could compete with imports without government help After 2012, WTO

commitments will mean the Vietnamese government has less freedom in setting tariffs In November

2008, the ministry announced a plan to increase efficiency in the sector by encouraging intensive

production At present, a large proportion of Vietnam's meat production comes from small-scale backyard producers An official at the ministry said that Vietnam is aiming to produce 5.5mn tonnes of meat by

2020 He said that work needed to be done on improving Vietnam's self-sufficiency in animal feed by better utilising agricultural biproducts

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

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

opened a new broiler complex in Binh Duong Province The project, which contains 18 broiler houses, will be one of the largest modern poultry farms in the country While we expect the development of modern livestock farms to be rapid around major urban population centres, the majority of farming will continue to be done in smallscale more traditional ventures in rural areas

Government Pledges Crackdown On Low Quality Meat

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

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

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

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

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

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

in the city's ports as importers have neglected to collect consignments unlikely to be approved for sale The moves have spurred a wave of complaints from importers, yet we think the moves are a necessary

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step to improving food safety and will in the long term be beneficial for the sector as they will increase consumer confidence in the meat on sale in Vietnam We warn, however, that without close scrutiny the regulations could be used as a form of back-door protectionism The high publicity surrounding the story should give a boost to local livestock producers and help lift the image of domestically produced meat That said, work on improving hygiene in domestic abattoirs and transport facilities is also desperately needed

Bird Flu Bites Back

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

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

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

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

to be declared avian flu free

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

country's poultry producers

We do not expect the series of outbreaks to have had much impact on overall production for the year, but

if effective control measures are not put in place, this may not be the case in future International help has been offered with the FAO pledging US$7mn to help the country improve preparedness However, efforts are being hampered by the opaque nature of officialdom in the country with reports of government vets exaggerating the number of animals vaccinated to claim vaccination fees The prevalence of small-scale 'backyard' poultry producers also makes implementing an effective system difficult

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Table: Vietnam Poultry Production, Consumption & Trade

Poultry Production, '000 tonnes 1 322.00 344.00 344.00 350.00 340.00 365.10Poultry Consumption, '000 tonnes 1 327.00 370.00 460.00 545.00 530.00 552.30Poultry Net Trade Balance, '000 tonnes

1 -5.00 -26.00 -116.00 -195.00 -190.00 -187.30

Table: Vietnam Pork Production, Consumption & Trade

Pork Production, '000 tonnes 1 1602.00 1713.00 1832.00 1850.00 1850.00 1902.00Pork Consumption, '000 tonnes 1 1583.00 1731.00 1855.00 1880.00 1894.00 1960.00Pork Net Trade Balance, '000 tonnes 1 17.00 -19.00 -6.00 -30.00 -44.00 -57.70

Table: Vietnam Beef & Veal Production, Consumption & Trade

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

1 239.00 258.00 329.00 448.00 509.00 535.50Beef & Veal Net Trade Balance, '000

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recorded outbreak at the end of 2003 and another severe incidence could severely dampen poultry

production

Our forecasts for strong growth in meat consumption are dependent on per capita incomes continuing to rise If income growth slows, as it is expected to over the next year, or food price inflation fails to come down significantly from the highs of 2008, meat consumption growth will slow as consumers are forced

to cut back on non-essential food items

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Vietnam Coffee Outlook

BMI Supply View: Vietnam is the world's biggest producer of robusta coffee with more than 95% of its

coffee output given to the cheaper bean and only around 2-3% of production devoted to the premium Arabica variety In 2008 coffee production fell significantly, dropping 13.9% from the 2007 level to 18.33mn 60kg bags after heavy rains and frost led to poor output In the 2009 harvesting year production bounced back, growing 7.3% to 19.67mn tonnes This came despite poor rains in the major coffee-

growing provinces of Dak Lak, Lam Dong and Dak Nong as well as high prices leading farmers to reduce the amount of fertiliser used

In 2010, we expect output to fall once again Unseasonal rains caused early flowering of coffee trees in many areas in Vietnam This was then followed by a dry period, damaging resulting fruits The Vietnam Coffee and Cocoa Association now expects 2010's output to be well down on the 2009 level Harvesting

of the 2009/10 crop has been delayed by the impact of Typhoon Ketsana which hit central Vietnam in late September 2009 Though some plantations were badly damaged, the storm missed most of the main coffee growing areas Harvesting was then further disrupted by Typhoon Mirinae which struck the

country in early November This has led us to downgrade our forecast for 2010 to 17.37mn bags from a previous forecast of 18.20mn bags Despite these short-term setbacks and the recent fall in price, the medium-term outlook for coffee production in Vietnam looks strong We forecast output to rise by 14.5% from its 2009 level over our forecast period reaching 22.61mn bags in 2014

BMI Demand View: In 2009 Vietnamese coffee consumption grew 18.2% year-on-year (y-o-y) to

1.06mn bags, according to updated data from the US Department of Agriculture, slightly above our previous forecast for consumption of 921,300 bags While still impressive, growth in coffee consumption slowed in 2008 and 2009 as Vietnam's economy was hit by slowing growth and high inflation We expect growth to pick back up in the latter years of our forecast period Rising incomes combined with increased urbanisation and the spread of Western-style coffee shops in more prosperous city areas will see

consumption rise gradually and we expect spending on coffee to increase significantly over our forecast period To 2014 we see consumption growing by 46.2% to 1.56mn bags

Despite the rise in demand over recent years, in 2009 domestic consumption was barely over 5% of the country's coffee production for that year If domestic consumption is to provide any real support to Vietnam's coffee growers and reduce the overwhelming reliance on exports, concerted action from the government and industry bodies will be needed to promote coffee drinking The Ministry of Agriculture and Rural Development (MARD) has said that it hopes to boost domestic consumption to 10-15% of the national coffee crop We do not believe this will be achieved in our forecast period

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Table: Vietnam Coffee Production & Consumption

Coffee Production, '000 60kg bags 1,2 19,670.00 17,366.00 18,521.00 19,673.00 21,093.00 22,611.00Coffee Consumption, '000 60kg bags 3 1,064.00 1,101.00 1,189.00 1,292.00 1,420.00 1,556.00

2009 = 2008-09; Source: 2 USDA, Vietnam Coffee and Cocoa Association, BMI, 3 USDA, BMI

Volume Up, Value Down

Vietnam's coffee exports were up 15.8% year-on-year (y-o-y) at 18.85mn bags in the 2009 coffee year (October-September) according to the MARD The value of the exports, however, dropped by around 20% Apart from the falling world price, the export value of Vietnamese coffee was hurt by its low quality The 2009 coffee crop contained as high as 15% black beans according to the Vietnam Coffee and Cocoa Association (Vicofa) Black beans are usually discarded As mentioned above, the government is aiming to promote replanting of coffee trees, though in 2009, farmers were still investing in expanding the area under production over replanting existing trees The poor prices for robusta in 2009 saw farmers' profits drop Vicofa in September 2009 announced a plan to buy up to 3.33mn bags of coffee to boost prices While this may give a short-term boost to farmgate prices, in the longer term Vietnamese farmers will remain very heavily exposed to fluctuations in the world robusta price In January 2010, the plan was still under consideration The plan would require a large amount of loans to the sector to allow for

stockpiles of coffee to be maintained

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

investment in production lines - that meet international standards In September 2009, the Vietnam

National Coffee Corporation said it would be investing VND2.5trn (US$140mn) in replanting ageing

tree stock, according to a Bloomberg report Work on replacing trees, many of which are more than 20 years old, will improve yields in the long term and improve resistance to disease The ministry had said that it wanted to halt the expansion of coffee growing areas until 2010 and instead work on increasing yields and investing in new trees Despite this, farmers encouraged by high robusta prices are reportedly increasing the area devoted to coffee, in many cases pushing into forest land

MARD is also planning on establishing a new quality benchmark for coffee destined for the export market, according to a Reuters report released in December 2009 The ministry will assist producers in building warehouses and processing machinery The new benchmark will be based on the number of defects in the coffee rather than moisture content as used previously If the ministry follows through with the plans, it will be good news for Vietnam's coffee sector which suffers from a perception of low quality

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

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

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

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

Domestic Demand Still Low, But Set To Rise

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

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

of coffee consumption

The survey also found that coffee consumption was highest among the young and the well educated Coffee consumption was lowest among the elderly and in rural areas Consumption was far higher in the south than in the north These findings, in our view, indicate a bright future for coffee consumption in the country As urbanisation continues at a rapid pace and access to education increases, coffee consumption will rise alongside The high level of consumption in trend-setting Ho Chi Minh City suggests that

aspirational consumers in other population centres of the country will not be far behind The popularity of coffee among the younger generation also suggests that consumption will see rapid growth in the future While office workers drinking instant coffee will likely be content with domestic production for some time to come, if Vietnamese coffee growers are to benefit from increased domestic demand for higher quality coffees, investment in quality improvement will be needed

Table: Vietnam Coffee Production & Consumption

Coffee Production, '000 60kg bags 1,2 14500.00 13666.00 19500.00 18333.00 19670.00 17366.00Coffee Consumption, '000 60kg bags 3 618.00 687.00 858.00 900.00 1064.00 1101.00

2009 = 2008-09; Source: 2 USDA, Vietnam Coffee and Cocoa Association, BMI, 3 USDA, BMI

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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 From 1989 to 2004, the years of the so-called coffee crisis, coffee prices stayed very low leading to losses among producers as the cost of production was higher than the price There are some fears that the rising production of low-cost coffee could lead world prices to fall once again, removing the incentive to expand production While a return to the coffee

crisis situation is not our core scenario and BMI is expecting prices to remain relatively high over the

medium term, despite the fall through the second half of 2008, slowing global growth could potentially weigh on the commodity causing prices to fall sooner than we expect This could see production

undershoot our growth forecast

As seen in 2008, Vietnam's coffee crop is vulnerable to poor weather conditions and the country is

frequently in the path of typhoons The damage caused by adverse weather conditions is exacerbated by the often low-quality plant stock

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Vietnam Dairy Outlook

BMI Supply View: Milk production in Vietnam has grown rapidly since the start of this decade as

small-scale dairy production has taken off Between 2000 and 2008, fluid milk production shot up by more than 400% from 54,000 tonnes to 262,200 This was achieved by a more than five-fold increase in the size of the dairy herd from 35,000 head of cattle in 2000 to just over 159,000 head in 2008 The growth in the dairy herd came mainly on small-scale farms which numbered 19,800 in 2006 with an average of just 5.3 cows per farm, according to data from the Ministry of Agriculture and Rural Development (MARD)

Despite the growth in milk production, Vietnam still has to import around three quarters of its dairy needs Demand for milk in Vietnam will encourage further expansion of the country's dairy farms and we expect production growth to stay strong in the medium term, though it will slow somewhat from the rapid gains seen this decade Over our forecast period to 2014, we expect fluid milk production to grow by 40.9% from its estimated 2009 level to 399,300 tonnes

Production of other dairy products remains undeveloped in Vietnam and the country imports almost all of its cheese, butter and whole milk powder (WMP) We do not see this changing over our forecast period and expect production to be minimal out to 2014

BMI Demand View: Consumption of dairy products has seen some strong growth in recent years

Between 2000 and 2008 fluid milk consumption grew by 90.2% from 82,000 tonnes to 156,000 Though Vietnamese fluid milk production is enough to meet demand, the country imports nearly all of its required WMP which makes up a large proportion of dairy consumption We anticipate demand for WMP to continue growing over our forecast period and see consumption rising by 45.2% to 59,720 tonnes in

2014 We also expect demand growth for cheese and butter to be strong, but starting from a very low base

Consumption of dairy products will be driven by rising per capita incomes allowing consumers to spend

more money on food - BMI forecasts Vietnamese GDP per capita to grow by more than two thirds from

its 2009 level to US$1,640 by 2014 Rising incomes will also aid the spread of white goods into the home allowing more families to store fresh dairy products Increasing urbanisation and access to modern retail

outlets will also help increase demand To 2014 BMI is forecasting value sales at mass grocery retail

stores to rise by almost 90% from the 2009 level to US$389.6mn

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Table: Vietnam Milk Production & Consumption

Milk Production, '000 tonnes 1,2 283.4 295.7 314.5 337.6 367.9 399.3Liquid Milk Consumption, '000 tonnes 3 165.1 172.7 182.2 195.3 212.1 229.6

2009 = 2008-09; Source: 2 General Statistics Office of Vietnam, BMI, 3 FAPRI, BMI

Table: Vietnam Butter Production, Consumption & Trade

Butter Production, '000 tonnes 1 0.0 0.0 0.0 0.0 0.0 0.0Butter Consumption, '000 tonnes 1 6.7 7.2 7.8 8.4 9.2 10.0Butter Net Trade Balance, '000 tonnes 1 -6.7 -7.2 -7.8 -8.4 -9.2 -10.0

Notes: e/f=BMI estimate/forecast Source: 1 FAPRI, BMI

Table: Vietnam Cheese Production, Consumption & Trade

Cheese Production, '000 tonnes 1 0.0 0.0 0.0 0.0 0.0 0.0Cheese Consumption, '000 tonnes 1 0.7 0.8 1.0 1.2 1.5 1.9Cheese Net Trade Balance, '000

tonnes 1 -0.7 -0.8 -1.0 -1.2 -1.5 -1.9

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Table: Vietnam Whole Milk Powder Production, Consumption & Trade

'000 tonnes 1 -41.1 -44.1 -48.1 -52.1 -56.0 -59.7

Consumers Struggling With High Milk Prices

Despite the fall in the international price of milk since the middle of 2008, Vietnamese consumers are still paying some of the highest prices for milk in the region Consumer groups as well as the Vietnam

Competition Authority have complained that imported powdered milk in Vietnam is far more expensive than in ASEAN neighbours such as Thailand, Malaysia and Indonesia Some brands being sold in

Vietnam are reportedly as much as two to three times the price as in these markets Dairy importers have blamed import tariffs and the weakness of the dong for the price differences The head of the competition authority's consumer protection section was quoted in the local press as saying that these claims are baseless and cannot explain the large price differences between countries In September 2009, the

government cut tariffs on imported dairy goods to help consumers struggling with the high prices

The dispute continued into 2010 with the Ministry of Finance alleging that the prices of imported dairy goods are kept high by the vast amount spent on advertising and marketing by the major dairy companies

A report by the ministry released in December alleged that for many of the large importers, advertising and marketing costs make up as much as 30% of total costs, breaching a law limiting advertising

expenditure to 10% of total costs This has been strenuously denied by the major importers The

authorities are threatening to draft new legislation to control prices We suspect, however, that the dispute will eventually blow over without the need for regulations

One reason the importers are able to get away with selling imported brands at a premium is the continuing preference Vietnamese consumers have for foreign goods Consumers are often willing to pay a large premium for milk powder from a well-known international brand, particularly when claims of extra nutritional benefits such as added vitamins are made Local producers need to work on improving the quality of local production and increasing marketing efforts to persuade buyers that their products are just

as good as imports This will take time but is essential for increasing the strength of the local dairy

production and processing sector as well as making the price of dairy products more affordable If

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consumers were confident in the quality of cheaper local brands of milk powder, the high prices charged for imported goods would be far harder to maintain The government is currently running a 'buy Vietnam' campaign with dairy goods a key focus Anecdotally, shopkeepers in Ho Chi Minh City have been

reporting an increase in sales of domestic dairy brands Sustained investment in brand building for local dairy products will be needed if any gains are to be sustained

Big Changes In Vietnamese Dairy

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

dominated by three companies - Vietnam Dairy Products Joint Stock Company (Vinamilk), Dutch

Lady and Nestlé

The overwhelming dominance of these three companies - according to MARD data, Vinamilk collects over 60% of milk production with Dutch Lady collecting a further 18% - has led to complaints from farmers that they are being underpaid for their produce In September 2008, stories surfaced in the media reporting that farmers were often being paid only VND2,000-2,500 (US$0.12-0.15) per litre of milk These low prices combined with poor access to pasture and rising feed costs - which rose by 40% to 60% from the end of 2007 to September 2008 according to the Department of Animal Husbandry - have pushed many dairy farmers to the edge of bankruptcy Vinamilk hit back saying that the reason the purchasing price was so low was because of the poor quality of milk production on many farms Since April 2008, the company has been offering VND5,000-5,500 per litre for 'grade A' quality milk, with the price declining on a sliding scale dependent on the quality Vinamilk insisted that the lower prices are necessary to encourage farmers to improve animal husbandry practices and ensure a high quality product

The poor quality of output is still a big problem for dairy producers in Vietnam The results of a test released by newspaper Thanh Nien in April 2009 showed that protein content in milk was often way below advertised levels The tests revealed that over a third of the 99 samples taken had protein levels well below the advertised content Coming in the wake of the melamine adulteration scandal in China, studies such as these will be damaging to the national dairy industry and could see consumers move toward trusted brands of imported dairy products instead of drinking locally produced fluid milk For the long-term health of the industry, the government will need to introduce standards for dairy products that will win public trust

The lowering of tariffs on imported milk products from between 10% and 34% to between 3% and 7% at the height of the rally in world milk prices last year has been a further blow for local producers World

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domestically produced milk In the longer term, efficiency will have to improve if domestic producers are

to be able to compete with imports In 2008, average milk yields on Vietnamese dairy farms were a mere 1,741kg per cow This is little over half the level of nearby Thailand and a fraction of the level seen in developed countries

Future Bright Despite Difficulties

In spite of the current problems of low sale prices and high input costs faced by farmers, rising demand

on the back of per capita income growth and government support for the sector should ensure strong growth in dairy production over our forecast period Indeed, the government has a somewhat ambitious plan to increase the proportion of the country's milk consumption coming from domestic production to 40% in 2010 The government has been working with the three dominant dairy processing companies to provide training to small-scale farmers in a bid to lift output Provincial authorities have also been helping with support, such as interest-free loans and subsidies for the purchase of new dairy animal stock

Increasing output will also be helped by the consolidation of farms, with the proportion of those with five

or more cows creeping up While the government may find its 40% target for 2010 a bit steep, the support for the industry bodes well for the future of Vietnamese dairy production

Table: Vietnam Milk Production & Consumption

Milk Production, '000 tonnes 1,2 197.7 216.0 234.4 262.2 283.4 295.7Liquid Milk Consumption, '000 tonnes 3 152.0 158.8 127.6 156.3 165.1 172.7

2009 = 2008-09; Source: 2 General Statistics Office of Vietnam, BMI, 3 FAPRI, BMI

Table: Vietnam Butter Production, Consumption & Trade

Butter Production, '000 tonnes 1 0.0 0.0 0.0 0.0 0.0 0.0Butter Consumption, '000 tonnes 1 6.1 6.6 5.3 6.2 6.7 7.2Butter Net Trade Balance, '000 tonnes 1 -6.1 -6.6 -5.3 -6.2 -6.7 -7.2

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Table: Vietnam Cheese Production, Consumption & Trade

Cheese Production, '000 tonnes 1 0.0 0.0 0.0 0.0 0.0 0.0Cheese Consumption, '000 tonnes 1 1.1 1.1 0.7 0.7 0.7 0.8Cheese Net Trade Balance, '000

tonnes 1 -1.1 -1.1 -0.7 -0.7 -0.7 -0.8

Table: Vietnam Whole Milk Powder Production, Consumption & Trade

domestically produced fluid milk

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Demand growth for dairy products slowed in 2009 owing to the struggling economy If the slowdown in GDP growth is longer or deeper than we currently expect, then this would place downside risks on our forecasts for growth in demand for dairy products

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Vietnam Grains Outlook

BMI Supply View: Corn production has shot up dramatically over the past five years, growing by 98.9%

from 2003 to 2008 to reach 4.60mn tonnes In 2009, contrary to our previous forecast, production fell slightly, dropping 1.5% year-on-year (y-o-y) to 4.53mn tonnes owing to a fall in the average yield Though we still expect production to bounce back in 2010, we have revised down our forecast slightly owing to the impact of Typhoon Mirinae which hit the country in early November 2009 We now forecast growth of 4.5% y-o-y to 4.73mn tonnes Production growth should remain strong through our forecast period - though slowing somewhat from the previous five years We forecast growth of 36.8% to 6.20mn tonnes in 2014 Wheat production in Vietnam is negligible with demand supplied almost entirely by imports

These impressive growth figures have come about through both the expansion of the area under corn production - as farmers have given over more of their land to corn to meet strong demand growth - and by rising yields From 2000 to 2008, the average yield for corn in Vietnam increased from 2.54 tonnes per hectare to 4.00 tonnes/ha This is similar to the level seen in Thailand, though still a long way off yields in developed countries such as the US and Australia The Ministry of Agriculture and Rural Development is aiming to improve yields further and is encouraging the use of high-yielding seed varieties The majority

of the forecast growth in production will come through improved yields as we do not expect the area planted to corn to rise significantly during the forecast period

BMI Demand View: Consumption of corn in Vietnam has been expanding even faster than production

with growth from 2004 to 2009 of 100.0% to 5.30mn tonnes With around 80% of Vietnam's corn

consumption used for animal feed, consumption growth has been driven by the development of the livestock industry As rising incomes allow Vietnamese consumers to spend more on food, we expect consumption of meat to increase significantly over our forecast period, driving increased livestock

production We are forecasting poultry and pork production to grow by 33.5% and 30.6% respectively to

2014 This will ensure demand for corn remains strong and we forecast consumption to grow by 45.7% to

2014 reaching 7.72mn tonnes

Vietnam consumed about 1.29mn tonnes of wheat in 2007 according to the US Department of

Agriculture In 2008, wheat consumption fell sharply, dropping 17.2% y-o-y to 1.07mn tonnes owing to high prices forcing consumers to cut back Consumption fell again in 2009 Despite these setbacks, we expect consumption to rise over the medium term as rising incomes and the spread of modern retail bring wheat-based goods such as noodles and bakery products within reach of more and more consumers Wheat is also used in shrimp feed and with Vietnam among the world's largest producers of farmed shrimp, this should also boost consumption

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Table: Vietnam Corn Production, Consumption & Trade

Corn Production, '000 tonnes 1,2 4,530.0 4,735.0 4,981.0 5,279.0 5,727.0 6,198.0Corn Consumption, '000 tonnes 2 5,300.0 5,602.0 5,991.0 6,479.0 7,079.0 7,724.0Corn Net Trade Balance, '000 tonnes 2 -890.0 -857.0 -966.0 -1,143.0 -1,277.0 -1,430.0

2009 = 2008-09; Source: 2 USDA, BMI

Table: Vietnam Corn Production, Consumption & Trade

Corn Production, '000 tonnes 1,2 3,757.0 3,818.0 4,251.0 4,600.0 4,530.0 4,735.0Corn Consumption, '000 tonnes 2 3,900.0 4,250.0 4,900.0 5,200.0 5,300.0 5,602.0Corn Net Trade Balance, '000 tonnes 2 -165.0 -474.0 -649.0 -499.0 -890.0 -857.0

2009 = 2008-09; Source: 2 USDA, BMI

Though corn prices dropped off sharply through the second half of 2008, the sharp spike from late 2007

to mid-2008 shows how volatile prices on the world market can be With corn consumption in Vietnam forecast to outstrip growth in domestic supply, Vietnam will become more reliant on imports to meet its needs If prices on the world market were to spike once more, it would place downside risks on our consumption forecasts The increasing interest in using the crop to produce ethanol for biofuels, notably

in China and the US, could also cause world prices to rise, particularly if oil prices were to go up again

Demand for corn in Vietnam will be highly dependent on the livestock industry due to the use of corn for feed Further disease outbreaks or a fall in demand for meat would likely dampen corn consumption and could lead farmers to switch to other crops, placing risks on our production forecasts

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Vietnam Rice Outlook

BMI Supply View: Vietnam enjoyed a good rice harvest in 2008 with production up 6.3% year-on-year

(y-o-y) to 24.38mn tonnes Rice exports increased in the final quarter of 2008, making up some of the ground lost in the first three quarters due to export restrictions imposed to help keep down domestic prices Vietnam exported around 4.7mn tonnes of rice over the year Though the volume of exports was little changed, the value more than doubled from US$1.4bn in 2007 to US$2.9bn in 2008 on the back of high world prices In 2009, the volume of exports increased on the back of high demand in Asia as

consumers hard pressed by slowing growth substitute rice for more expensive foods as well as poor crops

in India and the Philippines Export companies have also been helped by cheap loans handed out by the government as part of its economic stimulus package This is allowing the companies to advance money

to producers in return for guaranteed supplies

In 2008/09, rice production came in at 24.39mn tonnes, almost the same as the previous year For 2010,

we expect high prices to see the area planted to rice expand However, we are forecasting for a small fall

in production owing to dry weather in the Mekong Delta linked to the El Niño-Southern Oscillation phenomenon which will see yields drop Over our forecast period to 2014, we expect production to grow

by 17.5% from the 2009 level to 28.66mn This expansion is likely to come predominantly from rising yields as the area under harvest is not expected to increase significantly Though at 3.22 tonnes per hectare in 2009, yields in Vietnam are already fairly high by South East Asian standards, above those in Indonesia, the Philippines and the world's leading rice exporter Thailand A proposed liberalisation of the rice market could further boost production in the coming years

BMI Demand View: Rice is the major food staple in Vietnam and we do not see this changing over our

forecast period despite rising interest in other foods such as wheat-based goods In 2008 consumers were hard pushed by rapidly rising food prices - between the beginning of January and the end of May, prices

on the domestic market rose by more than 60% to around VND6,000 (US$0.36) per kilogram After that though, prices came back down and by October had fallen to around VND4,000/kg Despite the high prices, consumption in 2008 grew by 3.3% y-o-y to 19.40mn tonnes as with prices of other basic

foodstuffs, such as wheat used to make noodles, also high, there was little opportunity for substitution In

2009, consumption fell as the Vietnamese economy slowed In 2010, we expect only fairly slow growth

in demand as rising prices hold back increases in consumption

As incomes rise and more of the population is brought into range of modern retail outlets, interest in Western wheat-based food such as bakery goods is likely to rise, potentially dampening growth in rice consumption We expect this trend to contribute to per capita rice consumption stagnating; though we do not as yet anticipate a major fall as we do not foresee any considerable changes to the Vietnamese diet, with Western foods likely to remain occasional luxuries for the majority of the population Over our

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Table: Vietnam Rice Production, Consumption & Trade

Rice Production, '000 tonnes 1,2 24,388.0 24,158.0 25,711.0 26,654.0 27,651.0 28,663.0Rice Consumption, '000 tonnes 2 19,150.0 19,222.0 19,677.0 20,195.0 20,714.0 21,257.0Rice Net Trade Balance, '000 tonnes 2 5,450.0 6,055.0 7,404.0 8,267.0 9,171.0 10,112.0

2009 = 2008-09; Source: 2 USDA, BMI

Export Boom Raises Policy Questions

Vietnam had a bumper year for rice exports in 2009 with volumes estimated to have reached 6mn tonnes Exports later in the year benefited from the poor output for the rice crop in India and the impact of

typhoons on rice production in the Philippines These factors will also drive robust exports sales in 2010 The restrictions placed on exports by the Vietnam Food Association (VFA) have come under heavy criticism by farmers They blame the association for allowing stocks to pile up and putting pressure on prices The VFA manages rice exports together with the Ministry of Agricultural and Rural Development (MARD) and the Ministry of Industry and Trade (MOIT) The VFA is responsible for setting export quotas for firms and provinces Producers argue that the quotas are often irrational with provinces with large rice stockpiles having their exports restricted, while those with no excess rice given large quotas The VFA has also been criticised for favouring large food companies

The government has now scrapped provincial rice export quotas, though it will retain control of the national annual quota for exports In June, the MOIT also accepted that there were problems with the current system and scolded the VFA for its errors We expect the rice export management system to come under increasing scrutiny in coming months Indeed, in September it was reported in the local press that the deputy agriculture minister said the ministry was planning to do away with export quotas altogether The minister also said that traders would no longer have to purchase rice from farmers at government-set minimum prices, but would be able to buy at the market price with the government compensating farmers for any losses with subsidies There is as yet no time-scale for the introduction of the proposed changes This is good news for the sector and we believe it will help farmers and exporters get the best returns for their product and increase incentives to boost production

Another change reportedly in the process of being introduced is stricter requirements on companies applying for permits to export, according to a report in Thanh Nien News Under the new proposal, companies wishing to export must have a minimum warehouse storage capacity of 5,000 tonnes

Companies that make no exports in any 12 months will have their permits revoked The move is designed

to prevent smaller companies moving into the export market only when prices are high and quick profits

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are on offer The government is also hoping that the move will help prevent exporters undercutting each other, driving down the price of rice exports We fear, however, that the requirements will drive many medium-sized companies out of the market handing even more power to the large, state-owned food companies

Rice Price Rollercoaster

Rice prices, both on the domestic market and internationally, surged in the first five months of 2008, almost doubling between January and May This put the government in somewhat of a quandary With Vietnam the world's second largest rice exporter after Thailand, the high prices presented the chance of reaping bumper export earnings for the country's excess rice crop However, rampant food price inflation

at home also risked raising the hackles of Vietnamese consumers With little opportunity to air their grievances in the tightly controlled Vietnamese political environment, this risked boiling over into

embarrassing protests at the government's inability to guarantee affordable food for all

In the end, the government opted to sacrifice potential export earnings for the good of domestic stability and from March to June restricted exports to try and keep domestic prices down By the end of September

2008, Vietnam had exported 3.7mn tonnes according to the MOIT, down 7% on the volume for the same period in 2007 As mentioned above, in the final quarter, all the lost ground was made up

While the bumper crop in 2009 kept rice prices low for most of the year - too low for many farmers - strong demand on the export market owing to the poor outlook for India's 2010 rice crop and threats of El Niño-related drought in Indonesia could see prices rise rapidly in the second half of 2009 This should see export revenues increase in 2010, though the government could be tempted to limit exports if prices on the domestic market rise too swiftly

Improving Infrastructure

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

Considering its importance both to national food security and export revenues, rice infrastructure is poor Warehouse storage capacity is a mere 1.2mn tonnes compared to annual production from the country's paddies of over 20mn tonnes Of this capacity, less than a third is regularly used as warehouses are often decrepit and inconveniently located The MARD is now aiming to change this In March, the ministry said that it would spend US$400mn to upgrade the existing storage capacity and add extra capacity to store another 2.8mn tonnes of rice The new capacity will be built around the Mekong Delta's ports and the southern capital Ho Chi Minh City The extra capacity and upgraded storage facilities, set to be

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was reported in the local press that the MARD had announced plans to build a 4mn-tonne rice storage depot in the delta at a cost of more than US$400mn It was not immediately clear if this was on top of the expansion plans already announced The modern facilities should also reduce loss to spoilage and

improve the quality of stored rice Both of these factors should help Vietnam go some way in reducing the discount the country's rice exports currently sell for compared to rice from other exporters in the region such as Thailand

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

US$34mn rice trading centre in the delta city of Can Tho The centre aims to help the sale of rice by farmers to millers without the need for middle men The facility, to be spread over 23 hectares (ha), will also have facilities for auctions and telephone and online sales Construction was set to start in mid-2009 and will include warehouse capacity to store 200,000 tonnes of rice The centre, if it goes ahead as

planned, should serve to improve efficiency in the rice trade in the Mekong Delta and help farmers get their produce to market

Hybrid Hopes

The average yields on Vietnamese rice farms have risen impressively since the start of the decade In

2000 the average yield was 2.73 tonnes/ha and by 2008 this had risen to 3.09 tonnes/ha This still,

however, lags some way behind developed country growers such as the US and Japan where yields in the same year were 5.68 tonnes/ha and 4.81 tonnes/ha, respectively The MARD has said that it hopes to further increase yields by encouraging the use of hybrid rice varieties which it claims can increase

production by 15-20% over traditional varieties The ministry said that it is aiming to have 70% of the area under rice harvest planted with hybrid seeds by 2010 This would involve a 50% increase in the area currently planted with the seeds

This plan, however, has come under a fair amount of criticism, with many doubting whether enough seeds would be available at an affordable price The touted yield increases have also been questioned, with many farmers reportedly complaining that production increased by less than 10% and that they needed to use more fertiliser and pesticide

Table: Vietnam Rice Production, Consumption & Trade

Rice Production, '000 tonnes 1,2 22,716.0 22,772.0 22,922.0 24,375.0 24,388.0 24,158.0Rice Consumption, '000 tonnes 2 17,595.0 18,392.0 18,775.0 19,400.0 19,150.0 19,222.0Rice Net Trade Balance, '000 tonnes 2 4,854.0 4,355.0 4,072.0 4,349.0 5,450.0 6,055.0

2009 = 2008-09; Source: 2 USDA, BMI

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