Vietnam agribusiness report q2 2012

Consumption growth will outpace production, and the country will therefore remain reliant on pork imports to satisfy demand... Supply Demand Analysis Vietnam Dairy Outlook BMI Supply V

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AGRIBUSINESS REPORT Q2 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2012

CONTENTS

BMI Industry View 5

SWOT Analysis 7

Vietnam Agriculture SWOT 7

Vietnam Political SWOT 8

Vietnam Economic SWOT 9

Vietnam Business Environment SWOT 10

Supply Demand Analysis 11

Vietnam Dairy Outlook 11

Table: Vietnam Milk Production & Consumption,2011-2016 11

Table: Vietnam Butter Production & Consumption,2011-2016 12

Table: Vietnam Cheese Production & Consumption,2011-2016 12

Table: Vietnam Whole Milk Powder Production & Consumption,2011-2016 12

Table: Vietnam Milk Production & Consumption,2008-2012 13

Table: Vietnam Butter Production & Consumption,2008-2012 13

Table: Vietnam Cheese Production & Consumption,2008-2012 13

Table: Vietnam Whole Milk Powder Production & Consumption,2008-2012 14

Vietnam Livestock Outlook 15

Table: Vietnam Poultry Production & Consumption,2011-2016 15

Table: Vietnam Pork Production & Consumption,2011-2016 16

Table: Vietnam Beef & Veal Production & Consumption,2011-2016 16

Table: Vietnam Poultry Production & Consumption, 2008-2012 19

Table: Vietnam Pork Production & Consumption,2008-2012 19

Table: Vietnam Beef & Veal Production & Consumption,2008-2012 20

Vietnam Coffee Outlook 21

Table: Vietnam Coffee Production & Consumption,2011-2016 22

Table: Vietnam Coffee Production & Consumption,2008-2012 24

Vietnam Grains Outlook 25

Table: Vietnam Corn Production & Consumption,2011-2016 25

Table: Vietnam Corn Production & Consumption,2088-2012 27

Vietnam Rice Outlook 28

Table: Vietnam Rice Production & Consumption,2011-2016 29

Table: Vietnam Rice Production & Consumption,2008-2012 31

Commodity Price Analysis 32

Monthly Grains Update 32

Corn: Topped Out 32

Rice: Ample Supply 33

Soybean: Supply Risks 34

Wheat: Regaining Poise 35

Monthly Softs Update 36

Cocoa 36

Coffee 37

Palm Oil 38

Sugar 39

Industry Forecast 40

Food 40

Food 43

Food Consumption 43

Table: Food Consumption Indicators -Historical Data & Forecasts 44

Canned Food 45

Table: Canned Food Value/Volume Sales-Historical Data & Forecasts 45

Confectionery 46

Table : Confectionery 47

Mass Grocery Retail 48

Table: Mass Grocery Retail Indicators Value Sales By Format -Historical Data & Forecasts,2010-2016 50

Trade 50

Table: Trade Indicators -Historical Data & Forecasts,2010-2016 51

Economic Outlook 52

Table: Vietnam - Economic Activity 54

Country Snapshot: Vietnam Demographic Data 55

Section 1: Population 55

Table: Demographic Indicators, 2005-2030 55

Table: Rural/Urban Breakdown, 2005-2030 56

Section 2: Education And Healthcare 56

Table: Education, 2002-2005 56

Table: Vital Statistics, 2005-2030 56

Section 3: Labour Market And Spending Power 57

Table: Employment Indicators, 1999-2004 57

Table: Consumer Expenditure, 2000-2012 (US$) 57

Global Food & Drink View 58

Food & Drink Roundup Q112: Core Views 58

Table: Core Views 69

BMI Forecast Modelling 70

How We Generate Our Industry Forecasts 70

BMI Industry View

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

Vietnam's GDP and employs almost half its population The central bank in early February 2012 cut the compulsory reserve level for banks with large agriculture lending by 20% between February to July, and

we believe this is a step in the right direction in terms of easing the tight credit situation in the country This development is likely to ensure a steady flow of credit to farmers and traders alike, keeping

production and export prospects up for the likes of coffee, rice and livestock

Key Forecasts

ƒ Rice production growth to 2016: 12.8% to 29.7mn tonnes Increased urbanisation, increased

ownership of Western goods and the ongoing spread of modern, organised retail will all prove supportive of strong dairy consumption growth, even if the forecast higher global dairy prices limit the growth outlook to some extent

ƒ Coffee production growth to 2015/16: 36.1% to 25.5mn bags Work on replacing trees, many

of which are more than 20 years old, will improve disease resistance and thus yields in the long term Another growth driver will be export opportunities, given that Vietnam is also the world's largest exporter of robusta coffee

ƒ Pork production growth to 2015/16: 13.1% to 2.22mn Consumption growth will outpace

production, and the country will therefore remain reliant on pork imports to satisfy demand

ƒ 2012 real GDP Growth: 6.8% (down from 5.9% in 2011; predicted to average 6.7% over

Vietnam and India - will converge at 6.5mn tonnes each in 2011/12

The Vietnam central bank in early February 2012 decided to cut the compulsory reserve level for banks with large agriculture lending by 20% between February to July We believe that this will significantly loosen the tight credit conditions in the country, which may have limited the ability of exporters to buy coffee beans for stockpiling purposes and ensure a steady supply of exports prior to that By allowing more credit to the agriculture sector, this will very likely allow the market to be well supplied with beans for export

A local feed company has shown promising development in a sector in which foreign firms such as

Cargill and CP Foods traditionally dominate, possibly signalling a change in trend in this industry In February 2012, the Hong Ha Nutrition Joint Stock Co, a privately owned Vietnamese animal feed

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

SWOT Analysis

Vietnam Agriculture SWOT

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

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

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

ƒ With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period to 2015, consumers will have more money to spend on food, spurring growth in agricultural production

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

comparison to more developed international competitors

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

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

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

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

ƒ With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period to 2015, consumers will have more money to spend on food, spurring growth in agricultural production

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

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

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

Vietnam Political SWOT

Strengths ƒ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The one-party system is generally conducive to short-term political stability

ƒ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia

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

ruling Communist Party

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

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

acted to clamp down on graft among party officials

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

Threats ƒ Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the

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

ƒ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably be unsustainable

ƒ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage

ƒ

Vietnam Economic SWOT

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

GDP growth averaging 7.1% annually between 2000 and 2011

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 9.5% in 2010

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

the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw

ƒ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures

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

while making Vietnamese enterprises stronger through increased competition

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

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

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

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

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy

Vietnam Business Environment SWOT

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

attractive to foreign investors

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

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

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

ƒ Vietnam remains one of the world's most corrupt countries According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries

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

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

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

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

which will remain a concern

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

Supply Demand Analysis

Vietnam Dairy Outlook

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

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

consumption in Vietnam has doubled between 2000 and 2009 to 12kg per person per year Despite this increase, the country remains below the regional average of 65kg Though there has been an increase in milk production over the years, the country produces neither cheese nor butter Condensed milk and yoghurt are also highly popular dairy products in the country We expect the country to be increasingly reliant on dairy imports to meet its domestic needs

In 2011/12 we forecast milk production growth of 2.5% to reach 299,000 tonnes Out to 2015/16, we are forecasting Vietnamese fluid milk production growth of 49.3% to 435,400 tonnes Dramatic increases in cattle numbers and increased public and private sector investment, in an effort to reduce the country's growing import dependency, will be the main boost to strong growth Commercialisation will also play a key role, as larger, more efficient farms come to play a greater part in total milk production A sustained period of high global milk prices - thanks to rising global demand and supply sluggishness - will also prove supportive of production and encourage producers to consider the long-term impact of their

approach to cattle farming Finally, the sector is likely to benefit from the continued increase in yields, which have been rising over the last decade by almost 130% and are expected to continue to do so given the new private investments in the sector

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

to 2016 Strong economic growth will filter through into rising disposable incomes, pushing up demand for non-essential foodstuffs Through to 2016, we expect fluid milk consumption growth of 35.0% to 236,000 tonnes, while demand for butter, cheese and whole milk powder will soar 75.8%, 194.3% and 24.6% respectively, albeit from a far lower base Increased urbanisation, increased ownership of Western goods and the ongoing spread of modern, organised retail will all prove supportive of strong dairy

consumption growth, even if the forecast higher global dairy prices limits the growth outlook to some extent

Table: Vietnam Milk Production & Consumption,2011-2016

Table: Vietnam Butter Production & Consumption,2011-2016

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

Table: Vietnam Cheese Production & Consumption,2011-2016

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

Table: Vietnam Whole Milk Powder Production & Consumption,2011-2016

Whole Milk Powder Consumption, '000 tonnes 1 37.3 38.9 40.7 42.5 44.4 46.4

Notes: f BMI forecasts Sources: 1 FAPRI

Consumers Struggling With High Milk Prices

Consumers will be confronted with higher dairy product prices, especially for milk powder, in the

medium term According to anecdotal reports in late March 2011, prices of imported milk products such

as milk powder had risen by 18% on the back of an 8.5% Vietnamese dong devaluation According to

reports, milk powder products from Abbott have increased 12-18%, a Similac IQ 400-gram box rose by

13% to VND215,000, and a Similac IQ 900-gram box increased by 12% to VND437,000 Some foreign

milk firms, such as Nestlé, Frisland Campina, 3A and Mead Johnson, were also expected to have

raised milk powder prices by an average 5-17% starting from March 1 Given the low incomes earned by the average worker, we believe these price hikes will only place these products further out of reach of the masses and might lead to substitution effects in the short-to-medium term

Production To Benefit From Private Sector Investment

Since the opening up of the economy in 1986, there has been considerable change in the structure of the Vietnamese dairy industry The contribution of state farms, which were previously responsible for almost all milk production, has fallen to around just 5%, with the other 95% coming mainly from small- and

medium-sized private farms Doi Moi, as the restructuring of the economy is known, has also led to the

emergence of a highly consolidated private milk collection and processing sector, within which TH Milk

plays a dominant role

Vinamilk Continues Its Expansion

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

export markets In February 2012, the company announced that it would begin exporting dairy products to Thailand in Q112 through a US$10mn deal signed in late 2011 In 2011, Vinamilk exported $140mn worth of products to 15 countries all over the world, a year-on-year increase of 72% Exporting countries include USA, Australia, Canada, Russia, Turkey, Iraq, South Korea and Cambodia In the domestic market, Vinamilk has a 30% share of the processed dairy sector

Table: Vietnam Milk Production & Consumption,2008-2012

Liquid Milk Consumption, '000 tonnes 3 158.4 175.1 167.6 174.8 184.2

Notes: 1 In all instances year indicates data for harvest year ending that calendar year i.e 2011 = 2008-09; Sources:

2

General Statistics Office of Vietnam, BMI 3 FAPRI, BMI

Table: Vietnam Butter Production & Consumption,2008-2012

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

Table: Vietnam Cheese Production & Consumption,2008-2012

Table: Vietnam Whole Milk Powder Production & Consumption,2008-2012

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

Vietnam Livestock Outlook

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

sector, with pork production comprising about two-thirds of total meat production in 2010/11 For

2011/12, we have revised our forecast for poultry production in line with official estimates, and now expect it to remain stagnant at 350,000 tonnes We believe this is largely due to the threat of the avian flu, which is currently making its rounds across many regions in Vietnam, and which is expected to curb output Pork production is also expected to remain steady at 1.96mn tonnes in 2011/12 Beef and veal production is forecast to fall by 1.7% to 285,000 tonnes in 2011/12

Despite going through hard times over recent years owing to disease outbreaks, soaring input costs and competition from cheap imports, we expect Vietnam's livestock production to grow strongly, led by poultry production, 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 poultry production to rise by 23.5% to 432,100 tonnes over our forecast period to 2015/16 and for pork production to grow 13.1% from its 2011 level to 2.22mn tonnes over the same period The country will remain reliant on pork imports to satiate demand Beef production will remain the least significant of Vietnam's livestock sectors but is expected to rise by 60.4% to 465,300 tonnes, with growth coming from a low base

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

capita consumption rising by 87% from 2001 to 2011 to reach 36.7kg per year Once again, buoyed by strong income as well as population growth, we see healthy demand growth for livestock over the forecast period to 2016 Poultry consumption will see the strongest growth at 43.0% to 965,200 tonnes, while pork (from a higher base) and beef consumption will increase by 11.8% and 35.7% respectively Indeed, we forecast pork consumption to reach 2.2mn tonnes, with beef consumption reaching 799,000 tonnes We believe pork consumption will continue being the dominant meat consumed, comprising more than 60%

of total meat consumption A household 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: Vietnam Poultry Production & Consumption,2011-2016

Table: Vietnam Pork Production & Consumption,2011-2016

Pork Production, '000 tonnes 1 1,960.0 1,960.0 2,065.4 2,119.9 2,168.7 2,217.5Pork Consumption, '000 tonnes 1 1,990.0 1,990.0 2,054.6 2,115.5 2,172.4 2,224.9

Notes: f BMI forecasts Sources: 1 USDA

Table: Vietnam Beef & Veal Production & Consumption,2011-2016

Beef & Veal Production, '000 tonnes 1 290.0 285.0 364.6 396.1 430.7 465.3Beef & Veal Consumption, '000

Notes: f BMI forecasts Sources: 1 USDA

Fragmented Domestic Feed Industry Disadvantages Local Companies

The domestic livestock industry is made up of mainly small-scale or backyard farm operations, which have poor 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 bird flu virus, foot-and-mouth disease and porcine reproductive respiratory syndrome, also known as blue ear disease In our view, disease outbreaks will constantly feature as a challenge to the industry as long as it remains fragmented and low in technology and health standards

The fragmented nature of the industry has thus resulted in foreign companies, with their sophisticated and larger-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, supplying around 6mn chickens

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

Changing Meat Consumption Trends

Vietnam - Livestock Consumption By %

Local Feed Company Expands

The dominance of foreign players in the livestock sector could be changing on the back of news that a

local feed company has shown significant development in a sector in which foreign firms such as Cargill and CP Foods traditionally dominate In February 2012, the Hong Ha Nutrition Joint Stock Co, a

privately owned Vietnamese animal feed company, inaugurated an animal production line in its newly acquired 7 hectare factory in Dong Van Industrial Zone in Duy Tien District, in the northern Ha Nam Province The factory is expected to raise its capacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago This has come on the back of VND150bn (US$7.1mn)

invested last year

Livestock Industry Faces Crucial Challenges In Medium Term

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

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

While we are largely optimistic about the growth prospects for this industry, there are salient downside risks to this outlook We highlight three main challenges: high interest rates, a reliance on imports (which causes the livestock industry to be vulnerable to fluctuating input prices), and the fragmented nature of the market

Growing Poultry Deficit

Vietnam - Selected Livestock Estimates, 000 tonnes

Source: BMI

Reliance On Imports Increases Vulnerability To Price Fluctuations

Given that the dependency on imports of grains is expected to continue growing over the long term, this dynamic makes local livestock farmers highly vulnerable to fluctuations in international grain prices, which contributes 70% in producing animal feed Import dependency for corn, for example, rose from 5.2% in 2005 to 19.0% in 2010 According to the Vietnam Animal Husbandry Department, animal feed manufacturers have increased their prices up to a dozen times since early 2011, pushing current prices 40% higher year-on-year Higher animal feed costs, coupled with a shortage in output, have pushed the prices of live pigs up by 70% to 100% since the start of 2011, costing VND64,000-70,000/kg

With consumption of meat growing steadily in Vietnam as incomes rise, we also expect imports of grain for use of animal feed to continue increasing Unless the government boosts domestic production of these grains or improves storage conditions, the country is likely to remain largely vulnerable to grain price fluctuations in the coming years

Increasing Domestic Feed Production

Vietnam - Imports Of Soybean, Soymeal & Corn Feed, 000 tonnes

Source: USDA, BMI

Table: Vietnam Poultry Production & Consumption, 2008-2012

Notes: f BMI forecasts Sources: 1 USDA Sources: 1 USDA

Table: Vietnam Pork Production & Consumption,2008-2012

Table: Vietnam Beef & Veal Production & Consumption,2008-2012

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

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

highlights that there have been reports that the highly pathogenic avian influenza has been found in numerous provinces such as Quang Tri,Thanh Hoa, Nam Dinh, Bac Ninh, Quang Nam and Quang Ninh

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

on production growth

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

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

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

Vietnam Coffee Outlook

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

doubling and the area planted expanding from 42,000 hectares (ha) to more than 509,000 ha Vietnam is the world's biggest producer of robusta coffee, with more than 95% of its coffee output consisting of the robusta variety and only around 2-3% of production devoted to the premium Arabica variety The

Vietnamese coffee market year runs from October to September, and harvesting takes place between November and February

We have slightly adjusted our forecast for 2011/12 to accommodate reports of a smaller-than-expected

coffee output We forecast a 7.8% year-on-year (y-o-y) increase in 2011/12 production to 20.2mn 60kg

bags The main driver is expected to be higher yields, as higher local prices encourage farmers to reinvest profits from the previous crop to improve the next harvest However, bringing new land into cultivation will be restricted, as according to the Vietnam Coffee and Cocoa Association (Vicofa), new seedlings and new land are limited Coffee yields are also projected to expand to 2.2 tonnes per ha, up from 2.1

tonnes/ha in 2010/11, according to US Department of Agriculture (USDA) estimates

Out to 2015/16, we expect production growth of 36.1% to 25.5mn bags as the Vietnamese government endeavours to increase the replanting of coffee trees Work on replacing trees, many of which are more than 20 years old, will improve disease resistance and thus yields in the long term Another growth driver will be export opportunities given that Vietnam is also the world's largest exporter of robusta coffee

Mostly In Daklak

Vietnamese Coffee Area Harvested By Region

Source: USDA, BMI

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

also very likely to increase Increasing urbanisation and the spread of Western-style coffee shops are also expected to add to this trend Indeed, coffee consumption grew impressively by 56.8% from 0.44kg per capita in 2005 to 0.69kg per capita in 2010, one of the highest growth rates out of all coffee-exporting countries over the period We predict that consumption will rise 11.3% in 2012 to 1.48mn bags That said,

we note that coffee consumption growth comes from a relatively low base, and we expect 66.0% growth

to reach 2.2mn bags over our forecast period to 2016 Coffee consumption per capita is also forecast to expand by 58.0% from 0.99kg per capita to 1.4kg per capita by 2016 The Ministry of Agriculture and Rural Development has said it hopes to boost domestic consumption to 10-15% of the national coffee crop We do not believe this will be achieved in our forecast period, but the existence of such a sizeable target underlines the apparent potential of domestic consumption

Table: Vietnam Coffee Production & Consumption,2011-2016

Coffee Production, '000 60kg bags 1 18,735.0 20,200.0 21,000.0 22,578.0 24,212.0 25,504.6Coffee Consumption, '000 60kg bags 2 1,325.0 1,475.0 1,629.9 1,801.0 1,990.1 2,199.1

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

Surge In Coffee Exports In Line With Our View

Coffee exports out of Vietnam in February 2012 registered a sharp y-o-y jump of 25% to 180,000 tonnes, reversing a trend of lower-than-expected exports since the start of the 2011/12 season in October The mid-February spike in coffee prices prompted farmers and traders to finally release stocks of the bean to

be exported, resulting in a reported 85% jump in coffee shipments between February 13 and February 17, according to traders These developments were in line with our view

We had previously highlighted that tighter credit conditions in the country might have limited the ability

of exporters to buy beans for stockpiling purposes and ensure a steady supply of exports The Vietnam central bank in early February 2012 decided to cut the compulsory reserve level for banks with large agriculture lending by 20% between February to July We believe that this will significantly loosen the tight credit conditions in the country By allowing more credit to the agriculture sector, this is likely to allow the market to be well supplied with beans for export

Increasing Foreign Competition

According to Vicofa, local exporters are facing increasing competition from foreign players in securing coffee bean stocks to be shipped out of the country Larger foreign players are currently allowed to invest only in cultivating, processing and preserving coffee for export, as well as 'the transfer of advanced technology' However, anecdotal evidence suggests that these companies have also been setting up

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

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

structure of the industry results in local companies being less competitive than larger foreign companies

in terms of economies of scale and the ability to take out business loans We believe a greater

consolidation of the local industry and better development of networks between exporters and farmers is needed, especially once the coffee market eventually opens up to foreign wholesalers in accordance with World Trade Organisation commitments

Vietnam Catching Up

Brazil, Colombia, Indonesia & Vietnam, % Of Global Coffee Exports

Source: USDA

Domestic Demand Could Soar, But Poor Business Landscape Undermines Potential

While the vast majority of Vietnam's coffee will be destined for the export market, we expect domestic consumption to rise rapidly in the coming years A 2009 survey by the Policy and Strategy Institute on Agriculture and Rural Development on coffee drinking habits in Hanoi and Ho Chi Minh City clearly reinforces this view Results showed that coffee consumption was highest among the young and the well-educated living in urban areas and lowest among the elderly and in rural areas Consumption was also far higher in the south than in the north The US Department of Agriculture has also noted that 'domestic consumption has been increasing due to the effective marketing strategies of domestic coffee companies.'

Table: Vietnam Coffee Production & Consumption,2008-2012

We are concerned that weather conditions could impact the 2012/13 coffee crop According to the

Vietnam Coffee & Cocoa Association, 20% of the 2012/13 coffee crop is at risk because of rains in the central highlands which damaged trees during the flowering stage Older trees, which are half as

productive as younger ones, could also drag on overall yields as they rise to 30% of the total trees in plantation next year These pose salient downside risks to our projection for coffee output to reach

21.0mn bags in 2012/13

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

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

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

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

Vietnam Grains Outlook

BMI Supply View: Vietnamese corn production is forecast to reach 5.4mn tonnes in 2011/12, an 8.0%

year-on-year (y-o-y) expansion on the back of a slight increase in area planted as well as higher yields This output maintains a decade-long trend of higher yields for the corn sector, which have increased by 52.7% from 2000/01 to 4.2mn tonnes per hectare (ha) in 2010/11 This is higher than the South East Asian average yield of 3.2mn tonnes/ha in 2010/11 according to the US Department of Agriculture Furthermore, yields are expected to rise to a record high of 4.2mn tonnes/ha in 2011/12 Corn's harvested area has also increased from 730,000ha in 2000/01 to 1.3mn in 2010/11 These increases have come as domestic consumption rose significantly on the back of improving incomes; as incomes have risen, consumers have been encouraged to buy more meat, of which corn is the main feedstock Indeed, more than 80% of the country's total corn output goes towards the feed industry

To 2015/16, we expect corn production to increase by 46.4% to 7.3mn tonnes Acreage is likely to remain stagnant or diminish; current yield immaturity means significant gains are still available via this avenue, especially as robust local corn prices provide incentives to farmers The important growth driver will be domestic consumption, especially from the livestock sector Corn consumption doubled from 2005 to

2010 and we expect this trend to continue, although not at such a rate, to 2016 The demand gains will partly come from livestock growth, as beef, veal and poultry production are all expected to register strong growth As a result, Vietnam will very likely become increasingly reliant on corn imports to meet

domestic demand

BMI Demand View: To 2016, corn consumption growth will continue to exceed that of production, at

56.5% This will increase the country's import dependency However, strong economic growth over our forecast period is likely to ensure that the impact of a rising import bill on consumption is deemed

manageable Animal feed will remain the primary use for corn to 2016 and beyond (according to the US Department of Agriculture, 80% of total corn consumption goes to animal feed use) Indeed, we have a positive view on livestock production to 2016 owing to income growth and the fact that the sector has been identified as a recipient of government modernisation efforts Bullish projections from the Food & Drink team reinforce this Indeed, we forecast per capita food consumption to grow by 45.5% to

Animal Feed Industry Faces Crucial Challenges In Medium Term

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

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

While we are largely optimistic about the growth prospects for this industry, there are salient downside risks to this outlook We highlight three main challenges: high interest rates, a reliance on imports (which causes the livestock industry to be vulnerable to fluctuating input prices), and the fragmented nature of the market

Reliance On Imports Increases Vulnerability To Price Fluctuations

Vietnam's dependency on imports to satisfy grains demand is expected to continue growing over the long term; this dynamic makes local livestock farmers highly vulnerable to fluctuations in international grain prices, which contributes 70% in producing animal feed Import dependency for corn, for example, rose from 5.2% in 2005 to 19.0% in 2010 According to the Vietnam Animal Husbandry Department, animal feed manufacturers have increased their prices up to a dozen times since early 2011, pushing current prices 40% higher y-o-y Higher animal feed costs, coupled with a shortage in output, has pushed the prices of live pigs up since the start of 2011, and they now cost VND64,000-70,000/kg

With consumption of meat growing steadily in Vietnam as incomes rise, we also expect imports of grain for animal feed to continue increasing Unless the government boosts domestic production of these grains

or improves storage conditions, the country will, in our view, remain largely vulnerable to grain price fluctuations in the coming years

Increasing Domestic Feed Production

Vietnam - Imports Of Soybean, Soymeal & Corn Feed, 000 tonnes

Source: USDA, BMI

Table: Vietnam Corn Production & Consumption,2088-2012

However, the ongoing introduction of hardier and higher yielding crops will ultimately necessitate greater investment; corn prices will have to remain in favourable territory in the medium term to ensure that this investment is forthcoming

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

Vietnam Rice Outlook

BMI Supply View: Following a record year for rice production in 2010/11, we expect 2011/12 output in

Vietnam to fall slightly, by 0.6% year-on-year (y-o-y) to 26.2mn tonnes This is on the back of a lower area harvested Data from the US Department of Agriculture (USDA) show that area harvested is forecast

to decline from 7.61mn hectare (ha) to 7.55mn ha owing to floods, which destroyed some rice fields Yields of rough rice, on the other hand, are expected to remain stagnant at 5.54 tonnes/ha That said, we expect the domestic market to remain well-supplied

Compared with many of its agricultural sub-sectors, Vietnamese rice is very competitive relative to many

of its regional peers and is well positioned to benefit from both regional and global demand growth Another advantage of Vietnamese rice is its relatively higher yields The government is looking to

increase by 50% the area planted with hybrid rice varieties, and this bolsters our bullish outlook for the country's rice production capabilities over the long term Over our five-year forecast period to 2015/16,

we expect rice output to grow by 12.8% to 29.7mn tonnes

Surprisingly High

Rice Yields Of Selected Asian Countries, mn tonnes per hectare

Source: USDA

BMI Demand View: We forecast a modest consumption increase of 1.8% to 19.8mn tonnes in 2012

Over the longer term, we expect consumption to climb by 13.4% to 22.0mn tonnes in 2016 Rice remains the major food staple in Vietnam, and we do not see this changing over our forecast period However, rising interest in other foods such as wheat-based goods - supported by growing affluence - will restrict demand for rice, and over the forecast period we expect production growth to significantly outpace that of consumption Ultimately, demand growth will be influenced by population growth, as per-capita

consumption is expected to remain roughly the same as the population continues to diversify its diet on the back of rising incomes As such, the country will remain one of the world's top rice exporters

Table: Vietnam Rice Production & Consumption,2011-2016

Rice Production, '000 tonnes 1 26,300.0 26,150.0 26,744.9 27,603.7 28,628.0 29,652.4Rice Consumption, '000 tonnes 1 19,400.0 19,750.0 20,287.9 20,841.0 21,408.2 21,989.6

Notes: f BMI forecasts Sources: 1 USDA

Usurping Thailand's Rice Throne In 2012

We believe that Vietnam will catch up with Thailand in terms of rice export volumes in 2012 This is mainly due to the impact of the Thai government's rice intervention programme, which is expected to keep Thai rice exports uncompetitive relative to other Asian exporters in the near term In fact, the USDA estimates that exports from the three top exporters - Thailand, Vietnam and India - will converge at 6.5mn tonnes each in 2011/12

A Tie Between Top Three Exporters In 2012

Top Rice Exporting Countries, '000 tonnes

Source: USDA, BMI

We note that Vietnamese rice exports in 2012 are likely to be lower from the year prior owing to stiff competition from other smaller Asian rice exporters such as Pakistan and India Indeed, in December

2011, Vietnam's Ministry of Agriculture cut its rice export forecast for 2012 to 6.5mn tonnes, down from the 7.2mn tonnes shipped in 2011

In order to compete with increasing supplies from other Asian rice exporters, Vietnam has consistently priced its rice exports competitively against its rivals At the time of this writing, Viet 5% broken rice was quoted at around US$410-420/tonne, on a par with the Pakistani variety but lower than the Indian's

indication at US$435-445/tonne for the same variety Overall, these developments are likely to keep the global rice market well supplied, ensuring a cap on prices and supporting our view for a lower average CBOT rice price of US$14.50/centum weight in 2012

Slow Start To The Year

Vietnam - Rice Exports ('000 tonnes)

Source: General Statistics Office of Vietnam & BMI

Opening Up The Market

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

onwards poses a likely upside risk to production over the longer term Under World Trade Organisation commitments, foreign traders are allowed to directly undertake rice trading in the country Previously, foreign companies were required to enter into joint ventures with local players In an effort to improve the capabilities of local rice exporters and prepare for the impending increase of competition with bigger more experienced foreign players, the government stepped up efforts to improve the local rice industry The government has mandated that all rice exporters are required to have at least one rice storage

warehouse with a minimum capacity of 5,000 tonnes of paddy and a rice processing facility with a minimum processing capacity of 10 tonnes per hour All rice exporters will have until September 2012 to take the necessary actions and adapt to these changes While this is likely to lead to a reduction in the 264 rice export companies in the country as of 2010, these developments also will very likely increase the industry's economies of scale and increase the competitiveness of the industry We believe that this development is a step in the right direction; a restructuring of the local rice industry will encourage consolidation and better prepare local players for eventual foreign competition in the sector

Table: Vietnam Rice Production & Consumption,2008-2012

On the production side, we believe the gradual transformation of rice cultivation methods in Vietnam presents the main upside risk to our production forecasts in the long term The Cultivation Department of the Ministry of Agriculture and Rural Development of Vietnam is endeavouring to develop a large-scale rice farming model where neighbouring farmers work with businesses and government officials to

increase rice yields In the model, these businesses provide capital for farmers to increase farm inputs such as fertiliser and machinery They also provide a ready consumer network for farmers In return, they reserve the exclusive right to purchase after the harvest Currently, large-scale rice farms cover 10,000ha

of total rice area harvested The plan aims to expand this to 400,000-800,000ha by end-2012 and finally

to 1mn hectares in 2015, or approximately 10% of total area harvested for rice We believe that this plan poses salient upside risks to our forecast for rice production growth

Commodity Price Analysis

Monthly Grains Update

Corn: Topped Out

Front-month corn traded sideways in February testing resistance at USc660/bushel This was in line with supply concerns in South America linked to La Niña However, corn plantings in several growing

countries are near record highs owing to favourable prices Also, we see global demand growth

moderating eventually as the global economy limps along Thus, we forecast another global surplus of 1.4mn tonnes in 2012/13, compared with 4.8mn tonnes in 2011/12 This underpins our expectation of lower average prices in both 2012 and 2013 at USc600/bushel and USc575/bushel respectively We do not expect a collapse in corn prices in the medium term as the crop's stocks-to-use ratio will stay the lowest of the grains complex

Still Sliding

Front-Month CBOT Corn, USc/bushel (Weekly Chart)

Source: Bloomberg, BMI

Rice: Ample Supply

Front-month rough rice was resilient again in February, largely trading sideways in the

US$14.00-14.50/cwt range Fundamentally, the market is well supplied, especially on the back of supply from traditional players Exports from India, for example, are expected to come in at a record 6.5mn tonnes in 2011/12 and other smaller Asian countries such as Cambodia and Myanmar are also expecting higher exports than in previous years Our forecast is for the global rice production balance and stocks-to-use ratio to rise to a high of 9.1mn tonnes and 24.8% respectively in 2011/12 On this basis, we maintain our forecast for prices to average lower at US$14.50/cwt in 2012

non-Staying Under Wraps

Front-Month CBOT Rough Rice, US$/cwt (Weekly Chart)

Source: Bloomberg, BMI

Soybean: Supply Risks

Front-month soybean outperformed the wider grains complex in February, as delays to soybean plantings and concern about rainfall in South America boosted prices Although the soybean market remains the best supplied grain by global historical standards, the market is forecast to return to deficit in 2011/12 at 4mn tonnes, largely because of a decrease in US supply Even though US production is forecast to

rebound in 2012/13, corn crops have expanded dramatically in recent years, which should limit soybean production acreage Nevertheless, we forecast the global market registering only a small surplus in 2012/13 at 3mn tonnes, and prices averaging lower in 2012 at USc1,150/bushel and 2013 at

USc1,000/bushel

Outperforming

Front-Month CBOT Soybean, USc/bushel (Weekly Chart)

Source: Bloomberg, BMI

Wheat: Regaining Poise

Front-month wheat made some gains in February owing to weather concerns affecting plantings in Russia and Ukraine and uncertainty over export policy decisions in both countries However, prices failed to break above resistance at USc660/bushel and should continue to grind lower This is because we expect higher wheat output from the US, Europe, Argentina and Australia to compensate for lower output in the Black Sea Region in 2012/13 Thus, we forecast another strong surplus of 20.0mn tonnes in 2012/13, compared with 23.1mn tonnes in 2011/12 In line with this, we forecast prices averaging lower at

USc575/bushel in 2012 and USc560/bushel in 2013

Testing The Downtrend

Front-Month CBOT Wheat, USc/bushel (Weekly Chart)

Source: Bloomberg, BMI

Monthly Softs Update

Cocoa

Front-month cocoa rallied slightly in February as uncertainty over price reforms in Côte d'Ivoire saw some traders refuse to participate in the country's first auctions for 2012/13 However, any further gains should be capped, as output from both Ghana and Côte d'Ivoire is expected to remain strong in the

coming months Therefore, we maintain our view for another surplus of 171,000 tonnes in 2011/12, compared with 396,000 tonnes in 2010/11 This should take the global stocks-to-use ratio to 47.8%, higher than the 10-year average of 45.1% for the first time in five years On the back of this, we forecast prices averaging lower at GBP1,450/tonne in 2012 and GBP1,275/tonne in 2013

Any Bounce Will Be Temporary

Front-Month LIFFE Cocoa, GBP/tonne (Weekly Chart)

Source: Bloomberg, BMI