Vietnam agribusiness report q2 2014

The industry holds strong growth opportunities in terms of production, exports and retail sales, particularly with regard to the rice, coffee, livestock and dairy sectors.. Key Developme

Q2 2014 www.businessmonitor.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2014

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DISCLAIMER

BMI Industry View 7

SWOT 10

Agribusiness 10

Business Environment 12

Industry Forecast 13

Dairy Outlook 13

Table: Vietnam Butter Production, 2013-2018 14

Table: Vietnam Cheese Consumption, 2013-2018 14

Table: Vietnam Milk Production & Consumption, 2013-2018 14

Table: Vietnam Whole Milk Powder Consumption, 2013-2018 14

Table: Vietnam Butter Consumption, 2008-2013 21

Table: Vietman Cheese Consumption, 2009-2013 21

Table: Vietnam Milk Production & Consumption, 2008-2013 21

Table: Vietnam Whole Milk Powder Consumption, 2008-2013 21

Livestock Outlook 23

Table: Vietnam Beef & Veal Production & Consumption, 2013-2018 25

Table: Vietnam Pork Production & Consumption, 2013-2018 25

Table: Vietnam Poultry Production & Consumption, 2013-2018 25

Table: Vietnam Beef & Veal Production & Consumption, 2008-2013 32

Table: Vietnam Pork Production & Consumption, 2008-2013 32

Table: Vietnam Poultry Production & Consumption, 2008-2013 32

Coffee Outlook 34

Table: Vietnam Coffee Production & Consumption, 2013-2018 35

Table: Vietnam Coffee Production & Consumption, 2008-2013 41

Rice Outlook 43

Table: Vietnam Rice Production & Consumption, 2013-2018 45

Table: Vietnam Rice Production & Consumption, 2008-2013 49

Grains Outlook 51

Table: Vietnam Corn Production & Consumption, 2013-2018 52

Table: Vietnam Corn Development Production Plan & BMI Forecasts 52

Table: Vietnam Corn Production & Consumption, 2008-2013 54

Featured Analysis 56

Bright Outlook For Agribusiness In Vietnam 56

Table: Vietnam - Select Commodities Production & Consumption 61

Commodities Price Analysis 63

Monthly Softs Update 63

Table: Select Commodities - Performance & BMI Forecasts 70

Table: BMI Commodities Strategy 71

Monthly Grains Update 72

Table: Select Commodities - Performance & Forecasts 80

Table: BMI Commodities Strategy 81

Upstream Analysis 82

Asia GM Outlook 82

Table: Philippines Corn Estimates 86

Table: Select Countries - GM Crops Use In 2012 87

Asia Fertiliser Outlook 88

Table: Global Benchmark Fertiliser Prices (US$/tonne FOB, reported prices at the end of quarter) 91

Downstream Analysis 95

Drink 95

Alcoholic Drinks 95

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 97

Hot Drinks 100

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 101

Soft Drinks 102

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 104

Mass Grocery Retail 106

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 108

Table: Grocery Retail Sales By Format (%) 109

Food 110

Food Consumption 110

Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018 112

Canned Food 113

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018 113

Confectionery 114

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 115

Pasta 117

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 117

Dairy 119

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 120

Regional Overview 121

Table: Select Countries - Biofuel Blending Mandates & Programmes 123

Competitive Landscape 127

Table: Major Agribusiness Companies (US$mn) 127

Company Profile 128

Vinamilk 128

Table: Vinamilk's Financial Highlights, 2007-2013 137

Demographic Forecast 138

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 139

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 140

Table: Vietnam's Key Population Ratios, 1990-2020 141

Table: Vietnam's Rural And Urban Population, 1990-2020 141

Methodology 142

Industry Forecast Methodology 142 Sector-Specific Methodology 143

BMI Industry View

BMI View: Recent adjustments in our outlook for Vietnam's economy and business environment add

further weight to our positive view on the country's agribusiness sector The industry holds strong growth

opportunities in terms of production, exports and retail sales, particularly with regard to the rice, coffee,

livestock and dairy sectors However, Vietnam is facing growing competition in its key markets, andthe fulfilment of its promising potential will only be achieved if the country steps up its competitiveness andimproves product quality and supply chain efficiency Vietnam will have to significantly ramp up

investment in crop productivity in order to avoid being left behind, and if it succeeds in producing morevalue-added crops and maintaining its status as an export spearhead

Rice The 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); f = BMI forecast Source: BMI.

Key Forecasts

■ Rice consumption growth to 2018: 4.0% to 20.9mn tonnes 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, andover the forecast period we expect production growth to significantly outpace that of consumption.

• Corn production growth to 2017/18: 28.9% to 6.2mn 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: 21.9% to 484,700 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$25.7bn in 2014 (down from US$27.3bn in 2012);

growth expected to average -1.2% annually between 2013 and 2017

• 2014 real GDP growth: 5.9% (up from 5.4% in 2013; predicted to average 6.3% over 2014-2018).

• 2014 consumer price index: 5.8% year-on-year (y-o-y) (down from 6.6% in 2013; predicted to average

5.2% over 2014-2018)

• 2014 central bank policy rate: 7.00% (same than in 2013; predicted to average 6.20% over 2014-2018).

Key Revisions To Forecasts

■ 2013/14 coffee production forecast revised up, to 27.5mn 60kg bags (compared with a previous

estimate at 24.5mn bags) Concerns over a prolonged drought spell in Central Highlands that hinderedcoffee trees blossoms, have now eased Moreover, cultivated area of higher yielding trees has beengrowing at a faster pace than expected

Key Developments

Despite the rebound in production, Vietnam's coffee exports in 2013/14 will probably see slow growth due

to low robusta prices and a growing coffee export sector crisis Coffee prices in Vietnam have been on adeclining trend for the past two years, and have averaged US$1,708/tonne in the past six months

(September-February), down 10.9% y-o-y As a result, coffee farmers have been hoarding beans in order toobtain better prices later on Meanwhile, although coffee bean production is thriving, the coffee exportsector is facing a debt crisis The government scrapped the value added tax on coffee exports in January

2014 in order to help the sector, but uncertainty around this policy has also limited exports since the start ofthe year Following the exceptional 2011/12 production and export season, exports were weak in 2012/13,amounting 23.8mn bags, down 2.5% y-o-y Exports slew down even more since the beginning of the2013/14 season in October

The ongoing restructuring of Vietnam's largest coffee export company, Vinacafe, is reflective of the

difficulties facing the country's coffee export industry It also highlights the government's push

to restructure ailing state-owned enterprises, which we see as a positive development The ongoing

difficulties in the coffee export sector are the result of a combination of factors, including the extensive use

of short-term debt to fund long-term projects, high interest rates, and poor management and futures tradingabilities Although the extension of loan terms and decreasing interest rates will give a breath of fresh air toexporting companies, the sector's outlook remains hindered by overcapacity in the beans processing

industry and bad management practices

Vietnam's livestock sector, and especially the pork sector, went through challenging times in 2012 and 2013due to a rise in feed ingredient and fuel prices, lower demand and plummeting domestic prices As a result,many farmers were forced to reduce or suspend their operations in order to limit losses, with as many as30-50% of individual farmers in southern provinces abandoning their farms, while owners of large farmswith more than 1,000 heads have reduced their herd size by up to 70% The situation has been improvingsince H213, as pork prices are starting to recover, and consumers are showing more confidence in the porkmarket However, we believe pork and poultry production growth will remain below historical

averages Meanwhile, foreign and locally-owned feed companies such as Charoen Pokphand Vietnam

Livestock, Japfa Comfeed Vietnam and GreenFeed Vietnam Corporation have announced investments

to increase feed production capacity

Agribusiness

SWOT Analysis

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

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

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

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

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

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

to more developed international competitors

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

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

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

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

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

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

SWOT Analysis - Continued

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

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

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

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

Business Environment

SWOT Analysis

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 123out 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 should 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 about Vietnam's dairy sector We expect it to maintain its strong

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

expanding, and dairy producers are launching aggressive advertising campaigns Since the opening up ofthe economy in 1986, there 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

Recent investment in the sector, with the development of milk farms and dairy farms, has boosted the shortterm outlook Production grew by 8.4% annually in the past five seaons In 2013/14, we see output showingstrong growth, of 5.0% year-on-year (y-o-y), reaching 417,600 tonnes that year Out to 2017/18, we areforecasting Vietnamese fluid milk production growth of 21.9% on the 2012/13 level to 484,700 tonnes.Dramatic increases in cattle numbers and increased public and private sector investment - part of the effort

to reduce the country's growing import dependency - will be the main boost to growth Commercialisationwill also play a key role as larger, more efficient farms come to play a greater role in milk production Asustained period of high global milk prices on the back of rising global demand and supply sluggishnesswill also prove supportive of production and encourage producers to consider the long-term impact of theirapproach to cattle farming Finally, the sector is likely to benefit from the continued increase in yields,which have risen almost 130% over the past decade and are expected to continue to do so given the newinvestment in the 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 more than doubled between 2000 and 2012 to 12kg per person per year Despitethis increase, the country remains below the regional average of 65kg Though there has been an increase inmilk production over the years, the country produces neither cheese nor butter Condensed milk and yoghurtare highly popular dairy products We expect the country to be increasingly reliant on dairy imports to meetits domestic needs

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

economic growth will filter through into rising disposable incomes, pushing up demand for non-essentialfoodstuffs Through to 2018, we expect fluid milk consumption growth of 36.1% to 272,400 tonnes, while

demand for butter, cheese and whole milk powder will soar 46.9%, 229.6% and 24.3% 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 Butter Production, 2013-2018

2013e 2014f 2015f 2016f 2017f 2018f

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

e/f = BMI estimates/forecasts Sources: FAPRI, BMI.

Table: Vietnam Cheese Consumption, 2013-2018

Cheese Consumption, '000 tonnes 4.4 6.0 7.5 9.3 11.6 14.6

e/f = BMI estimates/forecasts Sources: FAPRI, BMI.

Table: Vietnam Milk Production & Consumption, 2013-2018

Whole Milk Powder Consumption, '000 tonnes 36.8 38.4 40.1 41.9 43.8 45.8

e/f = BMI estimates/forecasts Sources: FAPRI.

Private Investment To Support Production Growth

The recent announcement by dairy company FrieslandCampina and agricultural bank Rabobank that the

two institutions will team up to improve the quality of milk in Vietnam and Indonesia is the latest sign thatthe Vietnamese dairy sector has bright days ahead The companies will provide US$30mn to support localdairy farmers by providing knowledge, financing (affordable loans) and expertise The provided loans will

be used to purchase cows, improve facilities and fund the installation of biomass units

This move, coupled with the constant expansion of milk capacity (by Vinamilk, for example) and of manufacturing (Vietnamese company BIOMIN just opened a premix company), bodes well for milk

production growth

Access To US Confirms Vinamilk's Long-Term Opportunities

Vietnam Dairy Products Joint-Stock Company (Vinamilk) was given the green light in July 2013 to exportits products to the US market This reinforces our positive view of the company, as it will support

Vinamilk's promising future sales growth The company continued to record strong growth in Q313 September) with revenues growing by 21.3% y-o-y to VND8,028bn (US$381mn) and net income by 21.2%y-o-y to VND1,908bn (US$90mn) Margins retreated slightly in Q313 but remained above historicalaverages Profit margins came in at 21.1%, down 0.02 percentage points y-o-y The positive performancewas mainly driven by a strong growth in export sales, which increased 115.6% y-o-y Domestic sales weremore moderate (at 8.8% y-o-y) and driven mostly by demand for powdered milk and Vinamilk's newlyintroduced value-added and premium products in the domestic market Export sales now account for 18% oftotal sales (as of Q313), compared with 8.5% a year ago

(July-Strong Growth

Vinamilk - Revenue Growth, % y-o-y (RHS) & Select Income, VNDmn (LHS)

Source: BMI, Bloomberg

We remain positive about Vinamilk's long-term prospects given the strong growth potential for dairyconsumption in Vietnam and the region, the company's investment in supply chain, and its capacity

expansion and its strong financial position The company is well positioned to benefit from the industry's

growth, as it has a well-known brand (a recent survey by Kantar Worldpanel indicates Vinamilk's

products are consumed by 94% of households in Vietnam) and a large distribution network

We believe Vinamilk's strategy of developing mainly in the domestic market, and more specifically invalue-added segments, will be to its benefit Vinamilk has large market shares in key domestic markets forwhich we forecast strong consumption growth in the coming years For example, Vinamilk enjoys a 40%market share in Vietnam's liquid milk segment, for which we forecast consumption to expand by 38.9%between 2012 and 2017, to 257,250 tonnes on the back of increased urbanisation, Westernisation and theongoing spread of organised retail networks Moreover, Vinamilk plans to scale up its production andmarket share in the powdered milk segment (which only accounts for 20% of total sales in Vietnam), forwhich we believe demand will rise by 19% over the coming five years

We also highlight Vinamilk's export growth potential Exports (mainly to Iraq, Cambodia, the Philippines,Thailand and Australia) only accounted for 14% of total revenue in FY12, compared with 10% in FY07.Exports are likely to see sustained growth in the coming years, favoured by the access to new markets such

as the US, and by the full implementation of the Association of Southeast Asian Nations Economic

Community (AEC) in the coming years Although the current 2015 timeline for integration looks unlikely,

we do expect closer commercial and financial ties with lower import tariffs across the region in the comingyears Vinamilk is trying to capitalise on looser investment regulations in the region and plans to build afactory in Cambodia in order to save costs

Finally, high margins, combined with low debt levels and interest expenses, puts Vinamilk ahead of itspeers (Megmilk, Mengniu and Namyang) in terms of financial performance

Well Diversified

Vinamilk - Revenue By Product (LHS) & Geography (RHS), 2012, % Of Total

Source: BMI, Vinamilk

Our view for international milk prices to remain elevated in H213 and to average higher over 2013 couldhamper Vinamilk's performance over the coming quarters Indeed, Vinamilk's gross margins are highlysensitive to global milk prices, as the company imports 70-75% of its raw milk materials, mainly fromAustralia and New Zealand Pressure from high milk prices is likely to ease from 2014, as we expect prices

to head down on a rebound in supply

Highly Concentrated Market

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

Source: BMI, Bloomberg

Thailand's Fears Over Trade Liberalisation Overplayed

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

the AEC's impending import liberalisation in 2015 Vietnam's dairy sector, although still lagging beingThailand's, is developing rapidly, with milk production increasing by 18.3% on average in the past 10 yearsand forecast to soar by 20.9% on the 2011/12 level to 461,600 tonnes in 2016/17 Vietnam has been trying

to upstage Thailand through massive dairy cow imports and rapid expansion of milk-processing facilitiesand 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

Mostly New Zealand

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

Source: BMI, USDA

We believe that Thai dairy farmers' fears regarding trade liberalisation are relatively overplayed, as farmersare already relatively efficient by regional standards Vietnam still imports 75% of its dairy products needs,while Thailand is 75% self-sufficient Moreover, Thailand has higher dairy cow efficiency than Vietnamand China, recording annual yields of 3,380kg of milk per head, compared with 2,060kg/head in China and2,170kg/head in Vietnam

Strong Government Support

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

developing the country's dairy industry in an effort to keep up with the growing domestic demand for freshmilk We believe the MARD's goal to increase dairy cattle herd to 500,000 head by 2020 (from 145,000head in 2011) and production of raw liquid milk to 1mn tonnes (from an estimated 382,000 tonnes in 2012)

is rather challenging

Table: Vietnam Butter Consumption, 2008-2013

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

e = BMI estimates Sources: FAPRI, BMI.

Table: Vietman Cheese Consumption, 2009-2013

Cheese Consumption, '000 tonnes 3.1 3.8 3.5 3.5 4.0 4.4

e = BMI estimates Sources: 1 FAPRI, BMI.

Table: Vietnam Milk Production & Consumption, 2008-2013

Whole Milk Powder Consumption, '000 tonnes 33.2 33.2 33.2 35.1 36.8 36.8

e = BMI estimates Source: FAPRI.

Risks To Outlook

Another economic slowdown on the back of fiscal and monetary tightening would weigh on our

consumption growth forecasts, as it would force consumers to cut back on discretionary spending

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

Livestock Outlook

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

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

We expect livestock production to recover slightly in 2013/14, following two years of challenging

environment with elevated international feed prices We see poultry production outperforming the rest ofthe complex, growing by a robust 7.2% year-on-year (y-o-y) to 815,000 tonnes in 2013/14 The pork sector,which was hurt in 2013 by news of use of banned substances to promote lean growth in pigs, will continue

to record lacklustre activity We forecast production to grow by a mild 1.8% y-o-y to 2.3mn tonnes in2013/14 Beef and veal production is forecast to broadly stagnate in 2013/14 around 420,000 tonnes

We see strong growth potential for the Vietnamese livestock industry, on the back of rising income Poultrywill record the strongest growth, and we forecast production to expand 32.7% to 1.0mn tonnes to 2017/18compared to the 2012/13 level Pork output should rise 12.0% to 2.5mn tonnes, which will not be enough tofill in the country's growing demand for the meat The country will remain reliant on pork imports to satiatedemand Beef production will remain the least significant of Vietnam's livestock sectors and is expected togrow by a low 3.7% over the 2012/13 level to 417,000 tonnes

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 over 100% from 2000 to 2013 to reach 37.1kg per year Buoyed by strongincome growth as well as population growth, we see healthy demand growth for livestock over 2013-2018.Poultry consumption is forecast to grow by 37.8% to 1.1mn tonnes, while pork (from a higher base) andbeef consumption will increase by 18.8% and 22.8% respectively We forecast pork consumption to reach2.6mn tonnes, with beef consumption reaching 508,300 tonnes We believe pork consumption will continue

to be the dominant meat consumed, comprising more than 60% of total meat consumption A householdsurvey 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 Beef & Veal Production & Consumption, 2013-2018

2013 2014f 2015f 2016f 2017f 2018f

Beef & Veal Production, '000 tonnes 402.0 404.0 407.0 409.0 413.0 417.0 Beef & Veal Consumption, '000 tonnes 414.0 418.1 439.0 461.0 484.0 508.3

f = BMI forecasts Source: USDA.

Table: Vietnam Pork Production & Consumption, 2013-2018

Pork Production, '000 tonnes 2,220.0 2,260.0 2,327.8 2,380.2 2,432.5 2,487.3 Pork Consumption, '000 tonnes 2,200.0 2,255.0 2,329.4 2,410.9 2,505.0 2,612.7

f = BMI forecasts Source: USDA.

Table: Vietnam Poultry Production & Consumption, 2013-2018

Sector Profitability Improves, But Challenges Remain

Vietnam's livestock sector, especially the pork sector, experienced significant challenges in 2012 and

2013 on the back of a rise in feed ingredient and fuel prices, lower demand and plummeting domesticprices Media reports on the use of banned growth hormones in swine farms led consumers to substitute toalternative protein sources such as seafood Pork prices decreased by around 14% in 2012, to VND43,000/

kg (US$2.07/kg) in December of that year, according to industry sources By contrast, feed ingredient priceshave risen steadily on the back of elevated grain prices As a result, many farmers were forced to reduce orsuspend their operations in order to limit losses, with as many as 30-50% of individual farmers in southernprovinces abandoning their farms Owners of large farms with more than 1,000 head are thought to havereduced their herd size by up to 70%

In the first six months of 2013, the market price has been significantly below production costs; farms havetherefore showed unprofitable or less profitable cash flows Pork prices averaged around VND40,200/kg insouthern regions over the first half of 2013, compared with production costs estimated at VND41,000/kg

The situation has been improving since H213 Pork prices are starting to recover, and consumers areshowing more confidence in the pork market and are spending on pork products A survey done by theGeneral Statistics Office showed the estimated total number of pigs to be 26.3 million in December 2013,only 0.9% lower y-o-y Prices are currently around VND50,000/kg

Production growth in the pork industry will remain below-par in 2013/14, expanding by 1.8% y-o-y,compared with the 10 year average of 6.1% Poultry production will grow by a strong 7.2% in 2013/14which is still significantly lower 10-year average of 8.5%

Changing Meat Consumption Trends

Vietnam - Livestock Consumption (% of total meat consumption)

e/f = BMI estimate/forecast Source: BMI

Feed And Animal Breeding Subsectors More Profitable

While Vietnamese livestock production companies (except feed companies) struggle to stay afloat amidfinancial and output woes, foreign rivals have used this opportunity to gain greater control Vietnam's morelucrative husbandry sub-sectors, such as feed production, live animal breeding, as well as veterinaryservices and medicine Of the total capital investment in the livestock sector in 2012, investment in theproduction of meat only accounted for 4.1% (US$15.1mn), while investment in feed production accountedfor 94.9% (US$346.8mn) Investors have been encouraged to invest in the production of animal feedbecause domestic supply does not meet demand, and the livestock sector largely depends on imports In

2012, domestically produced animal feed reached 12.7mn tonnes, accounting for 56% of the country's totaldemand Foreign-owned millers accounted for around 52% of total domestic production The most recentinvestment in the sector is from Charoen Pokphand Food-owned CP Vietnam, which planned to open twonew feed mills in 2013

Compared with the attractive feed sector, the livestock industry is still heavily traditional, with small-scaleand dispersed farms Despite a slight improvement in profitability of the industry in 2013, the domesticlivestock sector will continue to face structural challenges, namely high interest rates and a lack of foreigninvestment into the sector Indeed, livestock farmers must bear interest rates of around 13-15%, whileforeign companies enjoy 1-4% rates Moreover, the livestock business generates volatile and low profits andpresents important risks Disease outbreaks are still very much a risk, while insurance schemes and thepublic policy on aid against disasters and diseases are under-developed.

In spite of all those challenges, we continue to hold a positive view on the livestock industry in the mediumterm Rising income and changing diets will support production out to 2016/17, with poultry output growthoutperforming the rest of the industry

On The Recovery

Select Companies - Operating (LHC) & Profit (RHC) Margins (%)

Source: BMI, Bloomberg

Fragmented Feed Industry Disadvantages Local Companies

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

by disease outbreaks owing to the lack of proper sanitation facilities in farms and meat production facilities.Since 2009, the country's livestock sector has experienced multiple rounds of avian influenza, H5N1 bird

flu virus, foot-and-mouth disease and porcine reproductive respiratory syndrome, also known as blue eardisease In our view, disease outbreaks will constantly feature as a challenge to the industry as long as itremains fragmented and low in technology and health standards.

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

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

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

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

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

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

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

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

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

Mainly Foreign Companies

Vietnam - Feed Production By Company, 2011 (% of total)

Source: BMI, Vietnam Animal Feed Association

Local Feed Company Expands

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

a third of Vietnam's feed is prepared in backyard farms from domestic and far yard scraps However, itscommercial feed output it growing at an extremely rapid pace The animal feed industry has been receivingsignificant - mainly foreign - investment in recent years, given the attractive prospects of the livestock andaquaculture industries of the country Foreign-invested feed companies continue to meet most of the

domestic demand, such as Thailand's Charoen Pokphand Group and US-based Cargill, according to the

Ministry of Industry and Trade Vietnam currently has 59 foreign-invested firms and joint ventures whichhold over 50% of the domestic animal (compound) feed market share while 180 local firms retain theremaining 30%, according to the Vietnam Animal Feed Association According to reports, 30% of domesticfirms have been forced out of the animal feed business as a result

CP Vietnam Livestock announced in March 2012 it is investing US$100mn in several core businesses in

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

The company plans on establishing four feed mills in Vietnam in the coming year The feed mill in HaiDuong province near Hanoi, has started operations recently, with annual capacity of 720,000 tonnes CPV isalso expanding in Binh Dinh, where the facility, which will be completed in 2014, will have an annualcapacity of 216,000 tonnes Finally, CPV plans on establishing two other feed mills in southern Vietnam.Japfa Comfeed Vietnam also plans on building two new mills before 2015, including one in Hoa Binh,which will have a capacity of 156,000 tonnes per year.

Imbalances To Be Maintained

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

f = BMI forecast Source: BMI, USDA

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

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

inaugurated in 2012 an animal production line in Ha Nam Province The factory is expected to raise itscapacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago This hascome on the back of VND150bn (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 increasing their exposure to the sector

Table: Vietnam Beef & Veal Production & Consumption, 2008-2013

improvement of the sector's outlook

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

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

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

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

Coffee Outlook

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

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

After reaching a record high in 2011/12 thanks to excellent growing conditions, Vietnam's coffee crop washampered by inclement weather in 2012/13, and production broadly stagnated at 26.05mn 60kg bags.Production was hurt by unseasonal rains during the blossoming period (January to March)

Vietnam is on track to record its second largest coffee crop ever in the 2013/14 season, which started inOctober 2013 with the harvest We have revised up our coffee production forecasts as cultivated area hasbeen growing at a faster pace than expected The robusta harvest is complete now, and we now believeoutput will record strong growth of 5.6% year-on-year (y-o-y), reaching 27.5mn bags (compared with aprevious estimate of 24.5mn bags) Vietnam's production surplus is likely to swell to 25.5mn bags in2013/14, compared with the five-year average of 20.0mn bags

Following a dry period early this year, rain has been improving the prospects for production There is likelysome decline in productivity due to the lack of moisture during much of the fruiting and fruit-filling stages,but recent rains in major growing areas have mitigated the impact of the drought The USDA estimates theyield at a hefty 2.63tonnes/hectare (ha) in 2013/14, compared with 2.47 tonnes/ha in 2012/13 As a result ofthe production increase, Vietnam's exports are likely to bounce back following the decline in 2012/13'soutbound shipments

Out to 2017/18, we expect production to rise by 7.4% on the 2012/13 level, to 28.0mn bags Vietnam willcontinue to reap the fruits of its replanting programme However, we believe production will record largeswings, due to the vulnerability of old trees (which still represent a large part of the total trees) to diseases.Export opportunities, coming from the increasing demand from emerging markets of robusta coffee, willcontinue to support production

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 0.43kg per capita in 2005 to 1.21kg per capita in

2013, one of the highest growth rates out of all coffee-exporting countries over the period We predict that

consumption will rise 11.0% in 2014 to reach 2.1mn bags that year, boosted by the rebound in economicgrowth and the ever expanding coffee retail industry That said, we note that coffee consumption growthcomes from a relatively low base, and we expect 81.0% growth to 3.3mn bags over our forecast period to

2018 compared to the 2013 levels Coffee consumption per capita is forecast to expand to 2.10kg per capita

by 2018 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 forecastperiod, but the existence of such a sizeable target underlines the apparent potential of domestic

e/f = BMI estimates/forecasts Sources: USDA, Vietnam Coffee and Cocoa Association.

Slow Exports Growth In 2013/14

Despite the rebound in production, Vietnam's coffee exports in 2013/14 will probably see slow growth due

to low robusta prices and a growing coffee export sector crisis First, coffee prices in Vietnam have been on

a declining trend for the past two years, and have averaged US$1,708/tonne in the past six months

(September-February), down 10.9% y-o-y As a result, coffee farmers have been hoarding beans in order toobtain better prices later on Meanwhile, although coffee bean production is thriving, the coffee exportsector is facing a debt crisis Of the 127 local coffee export firms that operated in Vietnam a year ago, 56have ceased trading or shifted to other businesses, as the industry is plagued by insolvency, high interestrates and a credit squeeze, according to industry reports Bean hoarding from farmers and lower prices areaggravating the export sector' debt woes The problems pose downside risks to exports volumes in 2013/14and beyond, as trading companies lack funds to operate normally and ship the beans The governmentscrapped the value added tax on coffee exports in January 2014, but uncertainty around this policy has alsolimited exports since the start of the year

Following the exceptional 2011/12 production and export season, exports were weak in 2012/13, amounting23.8mn bags, down 2.5% y-o-y Exports slew down even more since the beginning of the 2013/14 season inOctober, reaching 9.67mn bags (580,000 tonnes) in the first five month, down 18.7% y-o-y

Slower Exports

Vietnam- Coffee Exports ('000 tonnes)

Source: BMI, Vicofa

Crisis Brewing For Coffee Exporters

The ongoing restructuring of Vietnam's largest coffee export company, Vinacafe, is a clear evidence of the

difficulties of the coffee export industry The Vietnam National Coffee Corporation (Vinacafe), a

state-owned enterprise that owns more than 25 subsidiary units, is Vietnam's largest coffee exporter, ahead

of Nestlé Vietnam and Trung Nguyen Vinacafe's total debt, including its subsidiaries', amounted to

VND2,970bn (US$141.7mn) in FY1212, while profits were at VND105bn (US$5mn) Vinacafe is not alone

in its struggles, with reports that of the 127 local coffee export firms that operated in Vietnam a year ago, 56have ceased trading or shifted to other businesses Many coffee operators are trapped with crippling debt,and banks are reluctant to lend them more money The value of non-performing loans or debts in the sectorlikely to go unpaid stands at VND8,000bn ($379mn), or 60% of all coffee industry loans, according to the

country's deputy agriculture minister Two major coffee exporters - An Giang Coffee and Thai Hoa - were

forced to delist from Vietnam's stock exchange in the past 14 months due to rising losses

The crisis is the result of a combination of factors, including the extensive use of short-term debt to fundlong-term projects, high interest rates, and poor management and futures trading abilities In the hot growth

period of the coffee industry from 2008 to 2011, some companies accepted loan interest rates of 24% perannum The extent of the damage was only revealed when robusta prices started to decrease in 2012 Inaddition, many exporters took on debt and invested heavily in storage capacity and bean processing plants,leaving the sector oversupplied For example, Thai Hoa invested in two plants with a capacity of 110,000tonnes a year in the central province of Quang Tri, which only had 5,000 hectares of coffee plantations with

a maximum output of 10,000 tonnes, according to industry sources The supply of raw materials in theprovince and its neighbours can only meet around 40% of the plants' capacity

At A Three-Year Low

Vietnam - Coffee Prices Fob (US$/tonne)

Source: BMI, Bloomberg

As a result of coffee exporters' inability to repay their debts, the government is stepping in to resolve theissue It has allowed banks to triple the loan length for coffee export companies to 36 months and adopted arestructuring plan for Vinacafe in January 2013 The project will be concluded in 2015 and will makeVinacafe focus on its core business, including coffee production, processing and trading The company ismaking an exit from non-core investments such as sugar, fertilisers, seeds and construction companies Thegovernment is also adopting an aggressive stance for loss-making subsidiaries, as it decided to let VinacafeQuang Tri One-member go bankrupt

Although we believe the worst is over for the coffee export sector, significant challenges remain Theextension of loan terms gave exporters a bit of breathing space and will help them repay at least part of theirdebt In addition we view the Vietnamese government's latest push to restructure ailing state-owned

enterprises (as is the case with Vinacafe) as a positive development for the economy (see 'More

Restructuring To Come For SOEs', September 26 2013) By privatising SOEs and channelling more

economic resources towards supporting the private sector through infrastructure investment and tax

incentives, we believe that Vietnam will become an even more attractive destination for foreign directinvestment However, the overcapacity of bean processing and poor management practices will hinder acomplete recovery for coffee exporters in the short term Moreover, we believe easy credit in Vietnam isnow a thing of the past, and credit growth is unlikely to return to the high double-digit rates seen over thepast decade Banks are especially cautious on lending more to the coffee sector, which is likely to pushmore exporters out of the industry in the coming months As such, we believe the government's move toextend loans may not be sufficient for an industry that is currently having difficulties covering its workingcapital needs

Little Change Ahead

Vietnam - Coffee Area By Region, 2012 & 2020 Goal (% of total)

Source: USDA, BMI

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 planted in northern and central regions to 40,000haover the coming eight years, from the current 32,000-35,000ha (there is no official agency providing exactdata on area planted to coffee) International prices continue to provide a strong incentive for farmers toexpand coffee cultivation in Vietnam

The Question Of Planted Area

Favoured by stable and elevated Robusta prices, Vietnam has seen its area dedicated to coffee increasestrongly in the past years Planted area has increased from around 500,000 ha in 2005/06 to over 640,000 ha

in 2012/13 according to estimates by the Ministry of Agriculture and Rural Development (MARD) and theUSDA However, the quality has not followed, and farmers have faced many difficulties, including

inclement weather and decreasing coffee quality Coffee yields have picked up strongly in the past twoseasons, as the results of the replanting programme going on for several years now are starting to be seen.Yields are estimated at 2.63tonne/ha in 2013/14, compared with 2.47tonne/ha last season and the

2008/09-2011/12 average of 2.20tonne/ha

The MARD plans to focus on quality rather than on plantation expansion It aims at reducing planted areaback to 500,000 ha by 2020 and to 479,000 ha by 2030 However, given the coffee price competitiveness,the reduction in planted area is unlikely to happen Vietnam plans to develop high yield coffee breedingvarieties through replanting programmes of old trees According to the MARD, there are about

140,000-160,000 ha of aged trees needed to be replanted in the next 5-10 years, and about 200,000 ha by

2020 The Bank of Viet Nam announced in May that the sector will receive preferential credit loans ofVND8-10 trillion (US$381-476mn) from now until 2016 to help implement the programme of old coffeecrops recultivation

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 were exceptionally strong and well above annual averages in 2011/12, mainly due tothe bumper crop and relatively high robusta prices on the international markets The total value of all types

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 MARD encourages domestic players to diversify their exports towardshigher-value processed coffee products, such as soluble coffee Exports of processed coffee started in2003/04 and have been slowly increasing in the past few years, reaching 2.0% of total exports in 2011/12

Low Value-Added Exports

Vietnam - Coffee Exports ('000 60kg bags)

f = BMI forecast Source: BMI, USDA, Vicofa

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