Vietnam agribusiness report q2 2015

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.. The country i

Q2 2015 www.bmiresearch.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor

International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor

International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 10

Agribusiness 10

Operational Risk 12

Industry Forecast 14

Grains Outlook 14

Table: Corn Production & Consumption (Vietnam 2014-2019) 15

Table: Corn Production & Consumption (Vietnam 2009-2014) 19

Rice Outlook 20

Table: Rice Production & Consumption (Vietnam 2013-2019) 21

Table: Rice Production & Consumption (Vietnam 2009-2014) 24

Dairy Outlook 25

Table: Butter Production & Consumption (Vietnam 2014-2019) 26

Table: Cheese Production & Consumption (Vietnam 2014-2019) 26

Table: Milk Production & Consumption (Vietnam 2014-2019) 26

Table: Whole Milk Powder Production & Consumption (Vietnam 2014-2019) 27

Table: Vietnam - Planned Investment In Milk Production Capacity 27

Table: Butter Production & Consumption (Vietnam 2009-2014) 32

Table: Cheese Production & Consumption (Vietnam 2009-2014) 32

Table: Milk Production & Consumption (Vietnam 2009-2014) 32

Table: Whole Milk Powder Production & Consumption (Vietnam 2009-2014) 33

Livestock Outlook 34

Table: Beef Production & Consumption (Vietnam 2014-2019) 35

Table: Pork Production & Consumption (Vietnam 2014-2019) 35

Table: Poultry Production & Consumption (Vietnam 2014-2019) 35

Table: Beef Production & Consumption (Vietnam 2009-2014) 41

Table: Pork Production & Consumption (Vietnam 2009-2014) 41

Table: Poultry Production & Consumption (Vietnam 2009-2014) 41

Coffee Outlook 43

Table: Coffee Production & Consumption (Vietnam 2014-2019) 44

Table: Coffee Production & Consumption (Vietnam 2009-2014) 50

Featured Analysis 51

Industry Trend Analysis 51

Table: Select Countries - Textile Manufacturing: Key Political, Economic and Operational Risk Ratings 55

Vietnam's Uncompetitive Sugar Sector At Risk From ASEAN Integration 57

Table: VIETNAM SUGAR PRODUCTION & CONSUMPTION, 2013-2018 62

Commodities Price Analysis 63

Monthly Softs Update 63

Table: Select Commodities - Performance & BMI Forecasts 70

Monthly Grains Update 71

Table: Select Commodities - Performance & BMI Forecasts 79

Upstream Analysis 80

Asia Machinery Outlook 80

Table: China Grain Public Production Support Programme (CNYbn) 82

Table: Select Countries - Average Size Of Farms, Hectares 86

Asia GM Outlook 89

Table: Selected Countries - GM Crops Use 93

Asia Fertiliser Outlook 94

Table: India - Fertiliser Subsidies, INR/kg 98

Downstream Analysis 100

Mass Grocery Retail 100

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Vietnam 2013-2018) 103

Table: Grocery Retail Sales By Format (%) 103

Drink 104

Alcoholic Drinks 104

Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 106

Hot Drinks 108

Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 109

Soft Drinks 110

Table: Soft Drinks Sales, Production & Trade (Vietnam 2013-2018) 111

Food 113

Food Consumption 113

Table: Food Consumption Indicators - Historical Data & Forecasts (Vietnam 2011-2018) 114

Canned Food 114

Confectionery 115

Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2011-2018) 118

Pasta 119

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 119

Dairy 120

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 120

Regional Overview 121

Table: China - Ongoing And Future Agricultural Policy Reforms 123

Competitive Landscape 126

Table: Major Agribusiness Companies (USDmn) 126

Demographic Forecast 127

Table: Population Headline Indicators (Vietnam 1990-2025) 128

Table: Key Population Ratios (Vietnam 1990-2025) 128

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 129

Table: Population By Age Group (Vietnam 1990-2025) 129

Table: Population By Age Group % (Vietnam 1990-2025) 130

Methodology 132

Industry Forecast Methodology 132

Sector-Specific Methodology 133

BMI Industry View

BMI View: Recent developments in the country's

economic and business environment outlooks add

further weight to our positive view on Vietnam's

agribusiness sector The industry holds strong

growth opportunities in terms of production, exports

and retail sales, particularly with regard to the rice,

coffee, livestock and dairy sectors Moreover, the

upcoming economic and financial integration in

South East Asia will benefit Vietnam's exports of

rice, dairy and coffee However, Vietnam is facing

growing competition in its key markets.

The fulfilment of its promising potential will only be

achieved if the country steps up its competitiveness

and improves both product quality and supply chain

efficiency Vietnam will have to significantly ramp

up investments on crop productivity in order to not

be left behind and, if it does, it will be able to

produce more value-added crops and maintain its status as an export spearhead.

Agribusiness Market Value

BMI Market Value By Commodity (2011-2019)

Cocoa market value, % of total (LHS) Livestock market value, % of total (LHS) Sugar market value, % of total (LHS) Cotton market value, % of total (RHS) Milk market value, % of total (RHS) Palm Oil market value, % of total (RHS) Grains market value, % of total (RHS)

2011 2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f 5

15 25 35 45 55

0 50

-25 25

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

Vietnam Agribusiness Report Q2 2015

Key Forecasts

■ Rice consumption growth to 2019: 10.4% to 23.6mn 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 foodssuch as wheat-based goods - supported by growing affluence - will restrict demand for rice and, over theforecast period, we expect production growth to significantly outpace that of consumption

■ Corn production growth to 2018/19: 30.2% to 6.7mn 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 2018/19: 62.2% to 796,000 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

■ 2015 BMI universe agribusiness market value: USD37.7bn (down from USD37.9bn in 2014; growth

expected to average 2.5% annually between 2015 and 2019)

■ 2015 real GDP growth: 6.4% (up from 5.7% in 2014; predicted to average 6.4% over 2015-2019).

■ 2015 consumer price index: 5.3% year-on-year (y-o-y) (up from 4.0% in 2014; predicted to average

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

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

a drop of Thai rice export prices The return of Thailand on international markets will strongly limit

Vietnam's rice exports in 2015 In the longer term, Vietnam will continue to gain competitiveness and eatinto Thailand's market share The integration of the ASEAN countries also bodes well for Vietnam's riceexports

Vietnam is seeing a wave of private investment in its upstream (farming) and downstream (dairy productmanufacturing and distribution) dairy sector These investments bode well for the future of Vietnam's milk

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

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

to the milk industry, including Vinacafe Bien Hoa Company and property developer Hoang Anh Gia Lai

Group However, the wave of private investment in Vietnam's dairy sector also has its downsides, the main

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

Agribusiness

SWOT Analysis

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

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

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

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

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

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

to more developed international competitors

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

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

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

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

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

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

SWOT Analysis - Continued

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

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

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

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

Operational Risk

SWOT Analysis

Strengths ■ Vietnam has a high number of university graduates with skilled degrees and a high

literacy rate for its income level

• In addition to a number of regional and international flight options, Vietnam has anextensive inland waterway system

■ Strong contract enforcement capabilities increase security

• Vietnam's rate of violent crime is generally low, and foreigners are unlikely to betargeted

Weaknesses ■ High labour costs increase overall operating costs, and difficulty in hiring foreigners

creates shortages of skilled labour

• Underdeveloped rail capacity overburdens the road network

• One of the worst tax administration systems in Asia

• The police force is under-equipped and under-resourced in many areas

Opportunities ■ Fairly high expenditures in secondary education by regional standards will help close

gaps in access to education

• Vietnam is easily accessible from the main shipping routes, and growth in the number

of port facilities will provide adequate capacity

• Declining trade barriers are making it easier to enter the market

• Increased foreign participation in the banking sector will increase the availability offunds for loans

Threats ■ Unequal access to secondary education will result in a lower-quality workforce in

poorer regions

• Vietnam's reliance on imported oil poses risks in the form of energy and fuelshortages

SWOT Analysis - Continued

• Corruption and inefficiency in the legal system

• Anti-Chinese violence, as seen in May 2014, could be a harbinger of wider politicaland social unrest

Industry Forecast

Grains Outlook

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

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

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

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

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

The ongoing push by the government to make farmers shift from rice to corn cultivation will help corn areaharvested grow in the coming years We now expect production to reach 6.7mn tonnes by 2018/19, up30.2% compared with the 2013/14 level Yields will also slowly grow, especially as robust local corn pricesprovide incentives to farmers to invest more in crops (in fertilisers for example) The important growthdriver will be domestic consumption, especially from the livestock and aquaculture sectors Despite thepotential for corn production given the robust growth of the livestock and aquaculture industries, the sector

is encountering many challenges, including high production costs and high post-harvest losses of 13-15%according to industry sources

BMI Demand View: Corn consumption almost doubled from 2005 to 2013 and we expect this trend to

continue, although not at such a strong rate The demand gains will partly come from growth in the

livestock sector, as beef, veal and poultry production are all expected to register strong growth

Between 2014 and 2019, corn consumption growth will expand by 26.9% and will attain 8.5mn tonnes As aresult, Vietnam will very likely become increasingly reliant on corn imports to meet domestic demand.However, strong economic growth over our forecast period is likely to ensure that the impact of a risingimport bill on consumption is deemed manageable Animal feed will remain the primary use for corn to

2019 and beyond Indeed, we have a positive view on livestock production to 2019 owing to income growthand the fact that the sector has been identified as a recipient of government modernisation efforts Bullishprojections from our Food & Drink team reinforce this; we forecast per capita food consumption to grow by147.3% to 2019

Table: Corn Production & Consumption (Vietnam 2014-2019)

2014 2015f 2016f 2017f 2018f 2019f

f = BMI forecast Source: USDA, BMI

Government's Plan To Boost Production

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

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

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

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

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

Booming Feed Imports

Vietnam - Corn, Soy Meal & Soybean Imports ('000 tonnes)

f = BMI forecast Source: BMI, USDA, ITC

A Greater Need For Feed

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

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

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

at a hefty 7.0% annually over the past 10 years

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

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

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

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

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

Mainly Emerging Countries

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

Source: BMI, ITC, UNCTAD

Consumption Driven By Feed

Vietnam - Corn (LHC) & Wheat (RHC) Consumption ('000 tonnes)

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

Corn Production Push Insufficient To Supply Feed Demand

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

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

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

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

Table: Corn Production & Consumption (Vietnam 2009-2014)

2009 2010 2011 2012 2013 2014

Source: USDA, BMI

Risks To Outlook

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

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

Rice Outlook

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

boosted by higher yielding rice varieties and better culture management Output grew by a strong 13%between 2009/10 and 2013/14

Vietnam's rice production will grow at its slowest pace since 2008/09 in the 2014/15 season, which started

in January Vietnam's Ministry of Agriculture and Rural Development (MARD) intends to make ricefarmers shift to other grain crops cultivation in order to avoid paddy overproduction, prevent downwardpressure on prices and increase feed supply The government is looking to transition 100,000-110,000ha ofcurrently rice-cultivated area into corn and soybean fields in 2015 This policy is likely to limit slightly thearea under rice cultivation in the coming years, leaving Vietnam reliant on yield improvement for riceproduction growth The push to reduce rice plantings will make rice production grow by a weak 0.1% year-on-year (y-o-y), to 28.2mn tonnes in 2014/15

Compared with many of its agricultural sub-sectors, Vietnamese rice is very competitive relative to many ofits regional peers and is well positioned to benefit from both regional and global demand growth Anotheradvantage of Vietnamese rice is its relatively higher yields The government is looking to increase by 50%the area planted with hybrid rice varieties, and this bolsters our outlook for the country's rice productioncapabilities over the long term Over our five-year forecast period to 2018/19, we expect rice output to grow

by 9.4% to 30.8mn tonnes

BMI Demand View: We forecast consumption to increase by 2.0% in 2015 to 21.8mn tonnes Over the

longer term, we expect consumption to climb by 10.4% compared to the 2014 level to 23.6mn tonnes in

2019 Rice remains the major food staple in Vietnam and we do not see this changing over our forecastperiod However, rising interest in other foods such as wheat-based goods - supported by growing affluence

- will restrict demand for rice and, over the forecast period, we expect production growth to significantlyoutpace that of consumption Ultimately, demand growth will be influenced by population growth, as percapita consumption is expected to remain roughly the same as the population continues to diversify its diet

on the back of rising incomes As such, the country will remain one of the world's top rice exporters

Table: Rice Production & Consumption (Vietnam 2013-2019)

2013 2014 2015f 2016f 2017f 2018f 2019f

f = BMI forecast Source: USDA, BMI

Slower Production Growth Owing To Corn Focus

Vietnam's plan to shift acreage from rice to other cash crops is likely to reduce slightly area under ricecultivation in the coming years As a result, we expect most the rice production growth will come fromyields improvements Vietnam's Ministry of Agriculture and Rural Development (MARD) has submitted tothe prime minister a proposed programme for shifting acreage from rice to other cash crops, with a focus oncorn and soybean Over the 2013-2015, MARD aims to transition 100,000-110,000 hectares (ha) of currentrice cultivated area into corn and soybean fields The winter and early autumn rice crops will be mostdirectly affected by the proposed programme; these crops usually generate low yields due to lack of waterand recurrent attacks from pests and diseases The ministry proposes support of VND2mn/ha for input costs(seeds, fertilisers, pesticides) and about VND700,000/ha for land preparation costs for those who shift fromrice to corn or soybean This new policy is a clear change to support dynamics in Vietnam, where riceproduction has long been the focus Incentivised by elevated public subsidies for rice production, farmershave planted the grain across the country, even in areas with unfavourable soil conditions As a result, riceproduction has grown by a healthy 2.3% annually since 1999/00

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

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

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

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

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

Vietnam Gaining Competitiveness

Select Countries - Rice Export Prices (USD/tonne)

Note: Thailand, Vietnam: 5% broken rice India: 25% broken rice, US: 2.4% long grain Source: Bloomberg, FAO, BMI

Exports Stagnating In 2014/15

Due to the slow growth in production in 2014/15, Vietnam will see its surplus decrease to 6.4mn tonnes,compared with the five-year average of 6.7mn tonnes With a decline in exportable supply and intensecompetition from Vietnam's traditional competitors, Viet rice exports will broadly stagnate in

2014/15 Competition between the top rice exporters (Vietnam, Thailand and India) is fierce, amidst largeAsian supply Thailand started offloading its large government-held stocks at low prices in Q414 and willcontinue to do so in the coming months

Vietnam will be able to maintain its market share (around 15-16% of the global rice trade) in spite of theincrease in Thai exports Indeed, Vietnamese export prices have eased and are now more competitiverelative to Thai prices: 5% broken rice for exports was priced at around USD375/tonne in January 2015,compared with USD420/tonne in Thailand.

Thailand will see its exports increase, mainly at the expense of India, as a part of the Thai rice stocks havebeen stored in warehouses for more than a year and are subsequently of lower quality than recently

harvested Vietnamese rice Therefore, Thailand is mainly competing with India to export rice to sensitive regions, including African countries

cost-Reshuffling The Cards

Select Countries - Rice Exports (% of total volume exported globally)

Source: USDA, BMI

Table: Rice Production & Consumption (Vietnam 2009-2014)

Source: USDA, BMI

Risks To Outlook

There are upside risks to our Vietnamese rice consumption forecasts Rice remains a substantial part of thelocal diet, and any period of prolonged food price inflation or economic weakness would most likely seemore consumers revert to traditional diets, therefore lifting overall demand

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

Over the long term, we believe the gradual transformation of rice cultivation methods in Vietnam presentsthe main upside risk to our production forecasts The Cultivation Department of the MARD is endeavouring

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

Dairy Outlook

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

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

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

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

maintain strong growth in 2014/15, of 10.2%, reaching 541,000 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.Finally, the sector is likely to benefit from the continued increase in yields, which have risen almost 130%over the past decade and are expected to continue to do so given the new investment in the sector Thecontinued pace of investment will help production growth remain robust in the coming years: we see liquidmilk output growing by 10% annually between 2013/14 and 2018/19, reaching 796,000 tonnes

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

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

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

Vietnamese dairy consumption growth will remain strong over our forecast period to 2019 Strong

economic growth will filter through into rising disposable incomes, pushing up demand for non-essentialfoodstuffs The boom in convenience and mass retail stores in the country will also support access to dairyproducts and incentivise demand Retail sales done via mass grocery retailers remain low in Vietnam:households still go to independent grocery shops for 85% of their retail shopping, compared with 80% in

the Philippines and 77% in Indonesia according to our Food & Drink data Through to 2019, we expectfluid milk consumption growth of 34.8% to 288,000 tonnes, while demand for butter, cheese and wholemilk powder will soar 46.9%, 205.2% and 24.6% respectively, albeit from far lower bases Increasedurbanisation, increased ownership of Western goods and the ongoing spread of modern, organised retail willall prove supportive of strong dairy consumption growth, even if forecast higher global dairy prices limit thegrowth outlook to some extent.

Table: Butter Production & Consumption (Vietnam 2014-2019)

2014 2015f 2016f 2017f 2018f 2019f

f = BMI forecast Source: FAPRI, BMI

Table: Cheese Production & Consumption (Vietnam 2014-2019)

2014 2015f 2016f 2017f 2018f 2019f

f = BMI forecast Source: FAPRI, BMI

Table: Milk Production & Consumption (Vietnam 2014-2019)

2014e 2015f 2016f 2017f 2018f 2019f

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

Table: Whole Milk Powder Production & Consumption (Vietnam 2014-2019)

2014 2015f 2016f 2017f 2018f 2019f

f = BMI forecast Source: FAPRI, BMI

Private Investment To Support Production Growth

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

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

Table: Vietnam - Planned Investment In Milk Production Capacity

Company Domestic milk supply

Current Milk production capacity (tonne/day) Projects

TH Milk

Collecting milk from its

own dairy farms only

TH milk invested USD1.2bn to develop its farms until

2017 Total number of cows projected to grow to 137,000

in 2017, providing 50% of its milk needs Doubling dailry output to 1,000-1,200 tonne.

-Nutifood, Hoang Anh Gia Lai Corp and Vissan will invest together over USD529mn to set up a livestock and dairy farm (120,000 milking cows) by end 2017.

Friesland

Campina

Vietnam Collecting milk fromprivate farmers 230 It plans to collect at least 7,000 tonnes of milk per yearfrom private farms by 2018.

Source: BMI

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

Vinacafe Bien Hoa Company, known as a coffee manufacturer, announced in June 2014 its intention to

join in the sector The property developer Hoang Anh Gia Lai Group decided in 2014 to join hands with food producer NutiFood and meat supplier Vissan to develop a USD566mn meat and dairy breeding

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

yoghurt manufacturing plant operated by NutiFood

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

Indonesia They will fund USD30mn to support local dairy farmers by providing knowledge, financing(affordable loans) and expertise The provided loans will be used to purchase cows, improve facilities andfund the installation of biomass units This investment will contribute to the improvement in quality andmilk, two factors that need to be addressed

On A Downtrend

Vinamilk - Select Margins (%)

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

Increasing Domestic Competition Weighting On Margins

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

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

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

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

Liquid Milk Still The Dominant Product

Vietnam - Dairy Products Sales, In Volume (LHC) & Value (RHC)

Source: VPBS, Bloomberg, BMI

Consumers Eyeing Value-Added Dairy Products

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

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

Large Opportunities Across Products

Vietnam - Annual Penetration Of Dairy Products In Urban and Rural Households (%)

Note: DY = Drinking Yogurt Source: Kantar Worldpanel

Thailand's Fears Over Trade Liberalisation Overplayed

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

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

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

is three times that of Dutch Mill, Thailand's leading milk producer In Cambodia, where Thai milk used to

dominate the market, cheaper Vietnamese dairy products have been gaining market share

Mostly New Zealand

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

Source: BMI, USDA

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

Strong Government Support

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

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

Table: Butter Production & Consumption (Vietnam 2009-2014)

2009 2010 2011 2012 2013 2014

Source: FAPRI, BMI

Table: Cheese Production & Consumption (Vietnam 2009-2014)

2009 2010 2011 2012 2013 2014

Source: FAPRI, BMI

Table: Milk Production & Consumption (Vietnam 2009-2014)

2009 2010 2011 2012 2013e 2014e

e = BMI estimate Source: National sources, BMI

Table: Whole Milk Powder Production & Consumption (Vietnam 2009-2014)

2009 2010 2011 2012 2013 2014

Source: FAPRI, BMI

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 in 2013/14 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 continue on the recovery initiated in 2013/14 in 2014/15, followingseveral years of a challenging environment, with elevated international feed prices and disease outbreaks

We see poultry production outperforming the rest of the complex, growing by a robust 5.0% year-on-year(y-o-y) in 2014/15, reaching 813,500 tonnes The pork sector will see output growth improve comparedwith recent years when it was hurt by low prices, use of banned substances and disease outbreaks; but it willfail to record the robust growth rates of the 2000s We forecast production to grow by a mild 3.0% y-o-y in2014/15, to 2.43mn tonnes Beef and veal production is forecast to grow by a weak 1.0%, to 378,000tonnes

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 32.6% to 1.0mn tonnes in 2018/19compared with the 2013/14 level Pork output should rise 12.5% to 2.7mn tonnes, which will not be enough

to fill in the country's growing demand for the meat The country will remain reliant on pork imports tosatiate demand Beef production will remain the least significant of Vietnam's livestock sectors and isexpected to grow by a low 11.3% on the 2013/14 level to 417,000 tonnes in 2018/19

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 2014 to reach 39kg per year Buoyed by strongincome growth as well as population growth, we see healthy demand growth for livestock over 2014-2019.Poultry consumption is forecast to grow by 40.5% to 1.2mn tonnes, while pork (from a higher base) andbeef consumption will increase by 19.8% and 21.7% respectively We forecast pork consumption to reach2.9mn tonnes, with beef consumption reaching 506,000 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: Beef Production & Consumption (Vietnam 2014-2019)

2014 2015f 2016f 2017f 2018f 2019f

f = BMI forecast Source: Vietnam General Statistics, BMI

Table: Pork Production & Consumption (Vietnam 2014-2019)

2014 2015f 2016f 2017f 2018f 2019f

f = BMI forecast Source: USDA, BMI

Table: Poultry Production & Consumption (Vietnam 2014-2019)

2014 2015f 2016f 2017f 2018f 2019f

f = BMI forecast Source: USDA, BMI

Sector Profitability Improves, But Challenges Remain

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

sources such as seafood Moreover, various outbreaks of diseases, including PED and PRRS have reducedhog inventory and production in some farms.

Prices decreased by around 14% in 2012, reaching VND43,000/kg (US$2.07/kg) in December according toindustry sources By contrast, feed ingredient prices have risen relentlessly on the back of elevated grainprices Meanwhile, credit growth in Vietnam has stalled over recent years, which aggravated the financialsituation of some farms As a result, many farmers were forced to reduce or suspend their operations inorder to limit losses, with as many as 30-50% of individual farmers in southern provinces abandoning theirfarms, while owners of large farms with more than 1,000 heads have reduced their herd size by up to70% Pork production growth slowed down to 2.0% y-o-y in 2011/12 and 2012/13, compared with thestrong 4.4% annual growth seen in the five previous years

The situation improved slightly over 2013/14, especially in the south of Vietnam However, prices remainbelow production costs in the north of Vietnam We believe pork production grew by a stronger 3.0% y-o-y,

to 2.4mn tonnes, which is still below long term growth trends Looking at 2014/15, production shouldcontinue to show lacklustre growth of 3.0% y-o-y

Amidst this challenging operating environment over the past three years, the sector saw the emergence ofbigger, more efficient and more professional hog farms

Due to the sector's difficulties since 2011, Vietnamese pork herd and yields are not growing along the linesintended by the government's official plan While the Vietnamese government had planned for the nationalpig population to increase steadily between 2011 and 2015, the average annual growth rate reached just 0.04per cent a year At the beginning of 2015, the country counted about 26.8mn pigs, up 1.9% y-o-y This is18% lower than planned by the government for 2015

Poultry, Beef On The Rise

Vietnam - Meat Imports ('000 tonnes)

Note: f = BMI forecasts Source: USDA, BMI

Beef And Poultry Imports On The Rise

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

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

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

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

On The Recovery

Select Companies - Operating Margins (%)

Source: BMI, Bloomberg

Fragmented Feed Industry Disadvantages Local Companies

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

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

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

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

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

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

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

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

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

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

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

Mainly Foreign Companies

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

Source: BMI, Vietnam Animal Feed Association