Vietnam agribusiness report q2 2013

Rice King Commodity Vietnam - BMI Agribusiness Market Value By Commodity % of total Note: The BMI Market Value is an addition of all domestically produced commodities' value calculated b

Q2 2013 www.businessmonitor.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2013

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BMI Industry View 7

SWOT 10

Agribusiness 10

Business Environment 12

Industry Forecast 13

Dairy Outlook 13

Table: VIETNAM Milk Production & Consumption 14

Table: VIETNAM Butter Production & Consumption 14

Table: VIETNAM Cheese Production & Consumption 14

Table: VIETNAM Milk Production & Consumption 20

Table: VIETNAM Cheese Production & Consumption 20

Table: VIETNAM Butter Production & Consumption 20

Livestock Outlook 22

Table: Poultry Production, Consumption 24

Table: Pork Production, Consumption 24

Table: VIETNAM Beef & Veal Production, Consumption 24

Table: Beef And Veal Production And Consumption 29

Table: Pork Production And Consumption 29

Table: Poultry Production And Consumption 30

Coffee Outlook 31

Table: Coffee Production And Consumption 33

Table: Coffee Production And Consumption 38

Rice Outlook 40

Table: Rice Production, Consumption And Trade 42

Table: Rice Production, Consumption And Trade 47

Grains Outlook 49

Table: Corn Production And Consumption 50

Table: Corn Production And Consumption 52

Commodities Price Analysis 53

Monthly Grains Update 53

Table: Select Agricultural Commodities - Performance & BMI Forecasts 60

Monthly Softs Update 61

Table: Select Agricultural Commodities - Performance & BMI Forecasts 71

Table: BMI Commodity Strategy 72

Upstream Analysis 73

Asia GM Outlook 73

Table: Philippines Corn Estimates 77

Table: Select Countries - GM Crops 78

Asia Fertiliser Outlook 78

Downstream Analysis 91

Food 91

Table: Food Consumption Indicators - Historical Data & Forecasts 94

Table: Canned Food Value/Volume Sales - Historical Data & Forecasts 95

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts 96

Drink 97

Table: Alcoholic Drinks Value/Volume Sales - Historical Data & Forecasts, 2010-2017 99

Table: Hot Drinks Volume Sales - Historical Data & Forecasts, 2010-2017 101

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2010-2017 103

Table: Carbonates Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 103

Mass Grocery Retail 104

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2010-2017 106

Table: Grocery Retail Sales By Format (%) 107

Table: Trade Indicators - Historical Data & Forecasts, 2010-2017 109

Competitive Landscape 110

Table: Vietnam - Major Agribusiness Companies (US$mn) 110

Demographic Forecast 111

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 112

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 113

Table: Vietnam's Key Population Ratios, 1990-2020 114

Table: Vietnam's Rural And Urban Population, 1990-2020 114

Methodology 115

BMI Industry View

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

Vietnam's GDP and employs almost half its population It holds strong growth opportunities in terms of production, exports and retail sales, more specifically with regard to the coffee and livestock sectors However, some industries face large risks in terms of losing competitive advantage as other Asian countries step up production, particularly of rice and coffee We believe Vietnam will have to significantly ramp up investment in crop productivity to avoid being left behind, and if it wants to be able to produce more value- added crops and maintain its status as an export spearhead.

Rice King Commodity

Vietnam - BMI Agribusiness Market Value By Commodity (% of total)

Note: The BMI Market Value is an addition of all domestically produced commodities' value (calculated by

multiplying the production with the international benchmark prices, converted in US$/tonne); e/f = BMI estimate/ forecast Source: BMI.

Key Forecasts

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

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

■ Corn production growth to 2016/17: 43.4% to 7.1mn tonnes Although acreage is likely to remain

stagnant or diminish; current yield immaturity means significant gains are still available via this avenue,especially as robust local corn prices provide incentives to farmers Domestic consumption will beanother important driver

■ Milk production growth to 2016/17: 25.7% to 416,000 tonnes Dramatic increases in cattle numbers

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

■ BMI universe agribusiness market value: US$25.4bn in 2013 (down from US$27.3bn in 2012);

growth expected to average -0.5% annually between 2012 and 2017

■ 2013 real GDP growth: 7.0% (up from 5.0% in 2012; predicted to average 6.7% over 2012-2017).

■ 2013 consumer price index: 6.5% year-on-year (y-o-y) (down from 9.3% in 2012; predicted to average

6.1% over 2012-2017)

■ 2013 central bank policy rate: 9.00% (similar than in 2012; predicted to average 6.67% over

2012-2017)

Key Revisions To Forecasts

■ 2012/13 coffee production forecast revised down, to 19.6mn 60kg bags (compared to a previous

estimate at 22.3mn bags) The decline is mainly due to weather fluctuations, with rains hampering cherrydevelopment during the coffee flower blossoming period, followed by a dry spell in July and August

■ 2012/13 rice production forecast revised up, to 27.0mn tonnes (compared with a previous estimate at

26.7mn tonnes) Favourable weather conditions during planting allowed for expanded crops in theMekong River Delta region for spring and autumn crops

Key Developments

After a strong 2012 year for exports, with Vietnam managing to benefit from the drop in Thai exports,restrained by its uncompetitive prices, the 2013 export outlook is less buoyant for Vietnam Thailand, thetraditional largest exporter, is set to revive its exports and to release part of its bulky stocks India, whichhad withdrawn from exports for four years until September 2011, has made a strong comeback and exportslower quality rice exports, eating into Vietnam's traditional segment India is likely to maintain high exports

in 2012/13 A bright spot among bleak news is the current strength of China's imports The country hasstood out as the main destination for Vietnamese rice for the past year, and is likely to maintain highimports in 2012/13 owing to insufficient supply and high domestic prices

Coffee has proven to be one of main agricultural export engines of the Vietnamese economy and the bulk ofVietnam's coffee production is for exports Only about 6% of total production is for domestic consumption

likely to reach 20.5mn bags, up 5.7% y-o-y Vietnam mainly exports, but is slowly increasing soluble coffeeexports Vietnam now accounts for 17.7% of the world's total exports and exports to more than 80 countries,with Germany, the US, Italy and Spain as its biggest clients Vietnam overtook Colombia as the secondlargest exporter in 2000, and its impact on international markets has been steadily growing ever since.

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

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

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

foreign-invested firms and joint ventures which hold 70% of the domestic animal (compound) feed marketshare while 180 local firms retain the remaining 30%, according to the Vietnam Animal Feed Association

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

Agribusiness

SWOT Analysis

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

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

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

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

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

to more developed international competitors

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

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

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

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

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

SWOT Analysis - Continued

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

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

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

Business Environment

SWOT

Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors

■ Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia andbeyond

Weaknesses ■ 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

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

Opportunities ■ 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-techskills and know-how

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

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

protectionism, which will remain a concern

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

Industry Forecast

Dairy Outlook

BMI Supply View: We are positive on Vietnam's dairy sector We expect it to maintain high-growth

momentum owing to a growing customer base, low milk consumption per capita, rising disposable income and increasing health awareness among consumers Distribution networks are expanding and dairy producers are launching aggressive advertising campaigns 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.

In 2012/13, we expect fluid milk output to grow by 3.6% year-on-year (y-o-y) to 343,000 tonnes In

2016/17, we are forecasting production growth of 25.7% on the 2011/12 level to 416,000 tonnes Dramaticincreases in cattle numbers and increased public and private sector investment - part of the effort to reducethe country's growing import dependency - will be the main boost to growth Commercialisation will alsoplay a key role as larger, more efficient farms come to play a greater role in milk production A sustainedperiod of high global milk prices on the back of rising global demand and supply sluggishness will alsoprove supportive of production and encourage producers to consider the long-term impact of their approach

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

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

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

consumption in Vietnam doubled between 2000 and 2009 to 12kg per person per year Despite this increase,per capita consumption in the country remains below the regional average of 65kg Though there has been

an increase in milk production over the years, the country produces neither cheese nor butter Condensedmilk and yoghurt are highly popular dairy products We expect the country to be increasingly reliant ondairy imports to meet its domestic needs

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

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

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

Table: VIETNAM Milk Production & Consumption

2012e 2013f 2014f 2015f 2016f 2017f

Notes: e BMI estimates f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2011 = 2008-09 Sources: 2 General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI.

Table: VIETNAM Butter Production & Consumption

2012e 2013f 2014f 2015f 2016f 2017f

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

Table: VIETNAM Cheese Production & Consumption

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

Vinamilk - Strong FY12 Results Confirms Long-Term Opportunities

Vietnam Dairy Products (Vinamilk), the largest dairy company in Vietnam by sales volume, reported

revenues for FY12 ending in December of VND26,562bn (US$1.3bn), up 22.8% y-o-y Net profit rose38.0% y-o-y to VND5,819bn (US$279.4mn) Growth was mainly driven by the export markets, with exportsales increasing 33.9% y-o-y in FY12 to VND3,712bn, compared with 21.2% y-o-y for domestic sales

Despite these good results, we are cautious over the performance of Vinamilk in the coming months, for

around overbought territory since the beginning of 2013 The share price has increased by over 75% sinceAugust 2012 Vinamilk's price to earnings (P/E) and price to book (P/B), currently standing at 14.6x and5.5x respectively, are now at their highest in more than three years This compares with Ho Chi MinhIndex's P/E of 12.3x and P/B of 1.8x.

Up For Moderation?

Source: BMI, Bloomberg

Second, our view that international milk prices will stay elevated in H113 and to average higher over 2013(at US$18.00/cwt, compared with US$17.60/cwt in 2012) could hamper Vinamilk's performance over thecoming quarters Indeed, the gross margin of Vinamilk is highly sensitive to global milk prices as thecompany imports 70-75% of its raw milk materials, mainly from Australia and New Zealand

However, we remain positive over Vinamilk's long-term potential, given the strong growth potential fordairy consumption in Vietnam and the region, the company's investment in supply chain and capacityexpansion and its sound financial position We believe Vinamilk's strategy of developing mainly in thedomestic market will be to its benefit, as local demand has significant growth potential in the long term Weforecast the country's liquid milk consumption to expand by 38.9% between 2012 and 1017, to 275,250tonnes, on the back of increased urbanisation, Westernisation and the spread of modern, organised retailnetworks We also highlight Vinamilk's exports growth potential, with the implementation of the ASEANEconomic Community (AEC) tariff free zone by 2015.

Steady Growth

Source: BMI, Bloomberg

Vinamilk's commitment to capacity expansion and product development also bodes well for future

performance The company invests significantly in its Vietnamese production capacities (Dielac II dairyfactory and Mega factory are expected to be completed in 2013) as well as in supply chain enhancement andinfrastructure In terms of product, Vinamilk plans to develop higher value-added products such as yogurt,powdered milk and healthy beverages such as fruit juice and tea More specifically, we believe Vinamilkhas the capacity to expand its market share in the powdered milk market, the most profitable product, as its

Finally, high margins and low debt levels and interest expenses puts Vinamilk ahead of its peers

(Megmilk, Mengniu or Namyang) in terms of financial performance.

Highly Concentrated Market

Vietnam - Liquid & Powdered Milk Production Market Share (as % of total)

Source: BMI, Bloomberg

Vinamilk Continues Expansion

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

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

$140mn worth of products to 15 countries, an increase of 72% y-o-y Countries that receive exports includethe US, Australia, Canada, Russia, Turkey, Iraq, South Korea and Cambodia In the domestic market,Vinamilk has a 30% share of the processed dairy sector

Mostly New Zealand

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

Source: BMI, USDA

Thailand's Fears Over Trade Liberalisation Overplayed

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

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

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

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

market, cheaper Vietnamese dairy products have been gaining market share

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

than Vietnam and China, as dairy cows yield, per year, 3,380kg of milk per head, compared with 2,060kg/head in China and 2,170kg/head in Vietnam.

Lower Productivity In Vietnam

Select Countries - Dairy Cow Yields (kg/head)

f = BMI forecast Source: BMI, FAO, FAPRI

Strong Government Support

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

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

is rather challenging

Table: VIETNAM Milk Production & Consumption

Notes: e BMI estimates 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 Cheese Production & Consumption

Notes: e BMI estimates Sources: 1 FAPRI, BMI.

Table: VIETNAM Butter Production & Consumption

Notes: e BMI estimates Sources: 1 FAPRI, BMI.

Risks To Outlook

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

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

discretionary spending

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

Livestock Outlook

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

sector, with pork production comprising about two-thirds of total meat production in 2011/12 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 the poultry segment, 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 to

be a net importer of livestock over our forecast period.

In 2012/13, we expect meat production to increase, in spite of recent challenges due to disease outbreaksand increasing cost of production The poultry sector was affected by avian influenza (AI) in March andApril 2012 The pork industry was hurt by news of use of banned substances to promote lean growth in pigs(substances such as clenbuterol) We expect poultry output to rise 4.0% y-o-y and reach 780,000 tonnes in2012/13 Pork production is also expected to grow to 2.0mn tonnes, up 2.5% y-o-y, on the back of highernumber of pigs (estimated at 26.7mn in mid-2012, up 1.5% y-o-y) Beef and veal production is forecast tofall 1.8% to 280,000 tonnes in 2012/13

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

Strong Consumption Potential

Vietnam - Population (mn) & GDP Per Capita (US$, % chg y-o-y)

Source: BMI, Asian Development Bank, Vietnam General Statistics Office, UN

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

capita consumption rising by 87% from 2001 to 2011 to reach 36.7kg per year Buoyed by strong income growth as well as population growth, we see healthy demand growth for livestock over 2012-2017 Poultry consumption is forecast to grow by 35.1% to 1.1mn tonnes, while pork (from a higher base) and beef consumption will increase by 12.9% and 24.0% respectively We forecast pork consumption to reach 2.3mn tonnes, with beef consumption reaching 365,800 tonnes We believe pork consumption will continue to be 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: Poultry Production, Consumption

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

Table: Pork Production, Consumption

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

Table: VIETNAM Beef & Veal Production, Consumption

2012e 2013f 2014f 2015f 2016f 2017f

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

Fragmented Domestic Feed Industry Disadvantages Local Companies

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

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

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

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

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

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

Changing Meat Consumption Trends

Vietnam - Livestock Consumption (% of total meat consumption)

e/f = BMI estimate/forecast Source: BMI

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

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

Local Feed Company Expands

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

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

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

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

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

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

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

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

Imbalances To Be Maintained

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

f = BMI forecast Source: BMI, USDA

Lacklustre 2012 Results For Pig Farming

In 2012, Vietnamese media agencies reported that some farms used banned growth hormones

(eg Clenbuterol) in pig production, causing widespread concern over food safety in the country Consumersmassively turned to alternative protein sources such as seafood, making pork prices drop below the break-even price for most farmers for the rest of the year By mid-December 2012, the price of pork in the

Southern region was at VND43,000/kg (US$2.07/kg) and in the northern area of the country, an averageprice of VND50,000/kg (uS$2.40/kg)

As a result, the pig sector went through challenging times, especially in the second half of the year, withlow returns or large losses to the farmers the rise in grain and ingredient prices; the increased costs of mostinputs; lower purchasing power; lack of credit, capital and high interest rates along with the loss situationcaused by diseases (mainly Foot and Mouth and PRRS) added to the losses and this forced many farmers toreduce or suspend their operation in order to limit losses The pig herd currently stands at 26.5mn, down

Livestock Industry Faces Crucial Challenges In Medium Term

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

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

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

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

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

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

Table: Beef And Veal Production And Consumption

Notes: e BMI estimates Sources: 1 USDA.

Table: Pork Production And Consumption

Notes: e BMI estimates Sources: 1 USDA.

Table: Poultry Production And Consumption

Notes: e BMI estimates Sources: 1 USDA.

Risks To Outlook

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

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

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

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

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

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

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

Coffee Outlook

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

doubling and the area planted expanding from 42,000 hectares (ha) to more than 509,000ha Vietnam is 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

Harvest of the 2012/13 season was finished in February We significantly revised down our output estimate,

as adverse weather led to more severe losses than expected We now see production dropping by 19.7%year-on-year (y-o-y) to 19.6mn 60kg bags, compared with a previous estimate at 22.3mn bags The VietnamCoffee and Cocoa Association (Vicofa) has even lower estimates, with production falling by 25% to 18.9mnbags The decline is mainly due to weather fluctuations, with rains hampering cherry development duringthe coffee flower blossoming period, followed by a dry spell in July and August Coffee trees have

produced small beans, which led to a drop in productivity Coffee production was already expected to behampered by the two-year coffee beans cycles, in which output often declines after a bumper crop (whichhas been the case in 2011/12) The USDA estimates the yield at 2.25 tonnes/hectare (ha), compared with2.44 tonnes/ha in 2011/12 As a result of the production decline, 2012/13 exports are likely to slow downafter the exceptional 2011/12 season

Looking at the 2013/14 season starting in October 2013 with the new robusta harvest, we see productionrebounding from this year's dismal crop, and reach 21.2mn bags, up 8.0% y-o-y We see downside risks toour supply outlook, as prolonged drought in 2012 and 2013 in the growing regions threatens the 2013/14output To date, 70% of the coffee growing regions in the Highlands areas have not had enough wateraccording to Vicofa Adverse weather condition, if prolonged, will severely diminish the coffee production

in the coming season

Out to 2016/17, we expect production to decline by 26.9% to 17.8mn bags, as Vietnam's tree replantingprogramme will last years in being implemented Ageing trees will exacerbate the two-year cyles, leading tobig swings in production growth However, export opportunities, coming from the increasing demand fromemerging markets of robusta coffee, will continue to support production

Mostly In Daklak

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

Source: USDA, BMI

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

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

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

2017 Coffee consumption per capita is forecast to expand by 58.5% to 1.7kg per capita by 2017 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 over our forecast period, but the

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

Table: Coffee Production And Consumption

Coffee Production, '000 60kg bags 1 24,400.0 19,600.0 21,168.0 19,051.2 19,813.2 17,831.9

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

Major Robusta Grower

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

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

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

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

Increasing Weight On The International Market

Coffee has proven to be one of main agricultural export engines of the Vietnamese economy and the bulk ofVietnam's coffee production is for exports Only about 6% of total production is for domestic consumption.Vietnamese exports have been exceptionally strong and well above annual averages in 2011/12, mainly due

to the bumper crop and relatively high Robusta prices on the international markets The total value of alltypes of coffee exports hit a record US$3.7bn in 2012, up 34.5% y-o-y We expect Vietnam to remain a keyplayer on international markets in the coming years and to slowly increase its exports, partly due to growingdemand for soluble coffee in Asia The Ministry of Agriculture and Rural Development

(MARD) encourages domestic players to diversify their exports towards higher-value processed coffeeproducts, such as soluble coffee Exports of processed coffee started in 2003/04 and have been slowlyincreasing in the past few years, reaching 2.0% of total exports in 2011/12

Processed Coffee Slowly Picking Up

Source: BMI, ICO, USDA, Vicofa

Although exports are likely to slow down in 2012/13 as production declines, they will remain well above10-year average of 16.8mn bags Relatively high exports from Vietnam, coupled with strong supply fromBrazil, Colombia and Indonesia will help global prices averaging lower in 2013 and 2014, at USc170/lb andUSc150/lb, respectively

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

Growing Market Share

Source: BMI, USDA

Farmers Hoarding Coffee Puts Pressure On Prices

Domestic prices have started to pick up in January, as Vietnamese coffee producers are decreasing salesahead of the Tet Lunar New Year festival (lasting from February 9 to February 16), while demand remainsstrong Producers are most likely hoarding their stocks in a bid to achieve higher prices in the comingmonths Hoarding could continue after the Tet, given the fact that farmers have already sold around 40% oftheir production ahead of the festivities (compared with an average of 50% in previous years) and are under

no pressure to sell further volumes at relatively low prices Robusta prices could therefore head higher,

given the drop in 2012/13 production and the continued adverse weather ahead of the 2013/14 season

Picking Up On Production Concerns And Hoarding

Source: BMI, Vicofa

Direct Coffee Purchases Could Improve Coffee Quality

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

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

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

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

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

Slowly Catching Up

Select Countries - Coffee Exports (% of global)

Source: BMI, USDA

Getting Into Sustainable Production

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

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

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

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

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

traction given the government's strong support

Increasing Foreign Competition For Local Beans

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

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

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

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

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

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

Domestic Demand Could Soar, But Poor Business Landscape Undermines Potential

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

$270 to build a plant in Dong Nai province and was planning to start producing soluble coffee, mainly forlocal sale, in November 2012 A 2009 survey by the Policy and Strategy Institute on Agriculture and RuralDevelopment on coffee-drinking habits in Hanoi and Ho Chi Minh City clearly reinforces this view Resultsshowed that coffee consumption was highest among the young and the well-educated living in urban areasand lowest among the elderly and in rural areas Consumption was also far higher in the south than in thenorth The US Department of Agriculture has also noted that 'domestic consumption has been increasingdue to the effective marketing strategies of domestic coffee companies.'

Table: Coffee Production And Consumption

Coffee Production, '000 60kg bags 1 19,500.0 18,000.0 16,980.0 18,500.0 19,600.0 24,400.0

Notes: e BMI estimates Sources: 1 USDA, Vietnam Coffee and Cocoa Association; 2 USDA.

Risks To Outlook

In the long term, ageing coffee plantations pose downside threats to our production outlook Old trees (over

20 years) account for around 30% of the total production area, according to the Vietnam Coffee And Cocoa

over the next five years In August 2012, the Ministry of Agriculture and Rural Development (MARD)approved a plan for Vietnam's coffee sector development to the year 2020, which aims at replacing ageingtrees and adopting sustainable production practices in order to reap premium prices in developed countries.The MARD plans to maintain area under cultivation at 500,000ha by 2020, with an output of 2.4tonnes/ha,and 479,000ha with an output of 2.5tonnes/ha by 2030 However, if farmers do not receive enough supportfrom the government for their replanting programme, the proportion of higher-yielding coffee trees couldfall, weighing on the country's capacity to at least maintain production growth Favourable weather,

improved inputs, better irrigation and fertilizer application practices, and more productive coffee areascould offset this potential drop in supply

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

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

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

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

Rice Outlook

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

by higher yielding rice varieties and better culture management Output grew by more than 25% between

2000 and 2012 After a record year in 2010/11, Vietnamese rice stagnated at 26.5mn tonnes in 2011/12 We have slightly revised up our 2012/13 rice production forecast in Vietnam mainly to due to favorable

weather conditions during planting that is allowing for expanded crops in the Mekong River Delta region for Spring and Autumn crops We now expect output to come in at 27.0mn tonnes (compared with a

previous estimate at 26.7mn tonnes), up 1.3% year-on-year (y-o-y) Area harvested should grow by a mild 1.3% y-o-y to 7.89mn hectares (ha), and yields by 1.1% to 5.66 5.7tonne/ha, up 0.9% y-o-y.

This will be another record high and well above 10-year average of 23.9mn tonnes Strong ending stocks,estimated at 2.2mn tonnes by the US Department of Agriculture and at 3.4mn tonnes by the UN Food andAgriculture Organization, will support the country's export capacity as well as the continuous discountVietnamese rice prices enjoy compared with global prices We forecast the country's rice productionbalance - at 6.9mn tonnes - to be 15.0% higher than the five-year average, which would take exports to7.0mn-7.5mn tonnes in 2012/13 Stable Vietnamese output, combined with a pickup in Thai exports andstrong Indian shipments, will keep the global market well supplied in 2013 despite a slight global

production deficit (of 0.8mn tonnes)

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

production capabilities over the long term Over our five-year forecast period, we expect rice output to grow

by 13.3% to 30.2mn tonnes