Vietnam agribusiness report q3 2010

However, the livestock industry appears to have become a key focus of government food processing modernisation efforts, while rising domestic incomes and thus diet diversification and st

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AGRIBUSINESS REPORT Q3 2010

Including 5-year industry forecasts by BMI

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: May 2010

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Agricultural SWOT 7

Vietnam Political SWOT 8

Vietnam Economic SWOT 9

Vietnam Business Environment SWOT 10

Supply Demand Analysis 11

Vietnam Sugar Outlook 11

Table: Vietnam Sugar Production, Consumption & Trade 12

Vietnam Livestock Outlook 13

Table: Vietnam – Poultry Production, Consumption & Trade 16

Table: Vietnam – Pork Production, Consumption & Trade 16

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

Vietnam Coffee Outlook 17

Table: Vietnam – Coffee Production & Consumption 19

Vietnam Dairy Outlook 20

Table: Vietnam – Milk Production & Consumption 21

Table: Vietnam – Butter Production, Consumption & Trade 21

Table: Vietnam – Cheese Production, Consumption & Trade 22

Table: Vietnam – Whole Milk Powder Production, Consumption & Trade 22

Vietnam Grains Outlook 23

Table: Vietnam – Corn Production, Consumption & Trade 23

Vietnam Rice Outlook 24

Table: Vietnam – Rice Production, Consumption & Trade 26

Competitive Landscape 27

Table: Agricultural Commodity Producers & Traders 27

Table: Agribusiness Suppliers 28

Table: Integrated Agricultural Producers 29

Commodity Price Analysis 30

Grains Update 30

Corn 30

Table: Corn 30

Rice 31

Table: Rice 31

Soy 32

Table: Soybean 32

Wheat 33

Table: Wheat 33

Softs Update 34

Cocoa 34

Table: Cocoa 34

Coffee 35

Table: Coffee 35

Milk 36

Table: Milk 36

Sugar 37

Table: Sugar 37

Industry Forecast Scenario 38

Food Consumption 38

Table: Food Consumption Indicators Historical Data & Forecasts, 2007-2014 39

Canned Food 40

Confectionery 40

Table: Value/Volume Sales of Selected Food Subsectors - Historical Data & Forecasts 41

Trade 42

Table: Vietnam Food & Drink Trade Indicators Historical Data & Forecasts 43

Retail 44

Table: Vietnam MGR Indicators Value Sales by Format Historical Data & Forecasts 46

Grocery Retail Sales by Format - Historical Data & Forecasts (%) 46

Economic Outlook 47

Table: Vietnam - Economic Activity, 2007-2014 49

2011 Demand Challenges Show Why Selectivity Is Key 50

BMI Forecast Modelling 53

How We Generate Our Industry Forecasts 53

Executive Summary

BMI View: Vietnam is import-dependent for a number of its food staples The country's agricultural

resources are under pressure from strong population growth and rapid urbanisation, and yet positive production outlooks for well-invested industry subsectors suggests that significant improvements can be made if private and public sector investment were more forthcoming Vietnam's strong economic growth outlook and accordant increased food demand should push the matter of food security even further up the political agenda in the coming years

Key Industry Data

! Rice Production to grow by 18% to 2013/14; year-on-year (y-o-y) contraction of 0.5% forecast for 2009/10, due to weather effects and lingering base effects of strong 2007/08 harvest

! Coffee Production to grow by 23% to 2013/14; y-o-y contraction of 1.8% on 2009/10 due to unseasonal weather in the early flowering season

! Milk Production to grow by 41% to 2014 thanks to sustained industry investment

! Poultry, pork and beef Production to increase by 33%, 31% and 21% respectively to 2014 as industry benefits from government support and strong domestic demand

Macroeconomic Data

! GDP Growth Forecast 2010: 4.4% (down from 5.3% in 2009)

! Consumer Price Index (% chg y-o-y) Forecast 2010: 10.2% (up from 7% in 2009)

! Population Forecast 2010: 89.2mn (from 88mn in 2009)

Industry Focus

BMI believes that Vietnam's dairy sector should gain a strong boost following a US$350mn investment

by TH Milk Joint Stock Company in April 2010 to enhance cattle-raising and milk processing in Nghe

An province The project includes the construction of a 10,000 hectare pasture farm for up to 45,000 heads of cattle within two years, and US$100mn for a processing factory designed to produce up to 530mn litres of milk per year, which would make it the largest factory of its kind in Vietnam

We are also optimistic on the outlook for Vietnamese coffee, despite recent evidence suggesting that efforts to provide value exports over volume exports are not paying off Rather than investing in tree replanting to improve bean quality, farmers have been prioritising increased acreage However, the government has shown commitment to lifting quality and supporting export prices by recently buying up large quantities of coffee While this poses some short-term problems - such as farmers hording in the hope of getting higher government prices - the state's involvement should ensure output growth; this is after all a highly economically important agricultural subsector in export terms

SWOT Analysis

Vietnam Agricultural SWOT

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

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

! Vietnam is the world's second largest exporter of both rice and coffee

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

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

in comparison to more developed international competitors

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

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

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

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

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

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

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

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

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

of agriculture

Vietnam Political SWOT

Strengths ! The Communist Party government appears committed to market-oriented

reforms, although specific economic policies will undoubtedly be discussed at the 2011 National Congress The one-party system is generally conducive to short-term political stability

! Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia

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

the ruling Communist Party

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

Opportunities ! The government recognises the threat that corruption poses to its legitimacy,

and has acted to clamp down on graft among party officials

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

Threats ! The slowdown in growth in 2009 and 2010 is likely to weigh on public

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

! Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable

! Relations with China have deteriorated over the past year due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause widescale environmental damage

Vietnam Economic SWOT

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

with GDP growth averaging 7.6% annually between 2000 and 2007

! The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

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

leaving the economy vulnerable as the global economy continues to suffer in

2010 The fiscal picture is clouded by considerable 'off-the-books' spending

! The heavily-managed and weak dong currency reduces incentives to improve quality of exports, and also serves to keep import costs high, thus contributing

to inflationary pressures

Opportunities ! WTO membership has given Vietnam access to both foreign markets and

capital, while making Vietnamese enterprises stronger through increased competition

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

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

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

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

! Prolonged macroeconomic instability could prompt the authorities to put reforms

on hold, as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ! Vietnam has a large, skilled and low-cost workforce, that 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, and beyond

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 Its score in Transparency International's 2008 Corruption Perceptions Index was 2.7, placing it in 20th place in the Asia-Pacific region

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-tech skills and knowhow

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

Threats ! 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 skills levels could leave Vietnam a second-rate economy for an indefinite period

Supply Demand Analysis

Vietnam Sugar Outlook

BMI Supply View: On the back of a bad year for the Vietnamese sugar industry in 2008/09, output is

expected to come in at a more familiar 1.1mn tonnes in 2009/10 Representing an improvement on the weak 2008/09 harvest, this is nonetheless hardly sensational and we expect to see only modest growth improvements through to 2013/14 (4.2% annual average between 2010/11 and 2013/14) The industry suffers from a lack of technological advancement with investment in development not forthcoming as a result of cheap imports and competition from higher quality more efficient producers

BMI Demand View: Increasing the country's import dependency, Vietnamese sugar consumption is

forecast to continue climbing to 2014 Consumption growth will remain modest in 2010 - sugar, and the food and drink products to which it contributes, largely non-essential and thus their consumption is likely

to be scaled down as a result of government fiscal and monetary tightening However, we expect any reduction of consumer spending on the back of stimulus-unwinding to prove temporary and we are bullish Vietnamese economic growth in the medium-term This positive economic growth outlook will be a key driver of our sugar consumption growth forecast of 26% to 2014

Full Potential Not Yet Met

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

stagnated and Vietnam has slipped back to being a net sugar importer

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

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

regulations This uncompetitiveness has inhibited the development of a sugar export industry Even with the protection, many mills have still made losses over the past few years Domestic prices are undermined

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

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

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

on sugar imports from ASEAN members to a maximum of 5% This will expose the country to imports

from Thailand, a major sugar exporter Tariffs on imports from other countries will also have to be reduced by 2011 in line with WTO commitments made by the government

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

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

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

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

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

While the government support for the sector is encouraging, we believe it will struggle to produce enough sugar for domestic consumption Once tariffs are lowered by 2011, it is likely that the government will have to support the sector by other means to keep production on course, as it is unlikely that Vietnamese-produced sugar will be able to compete with imports by then

Table: Vietnam Sugar Production, Consumption & Trade

2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Sugar Production, '000

tonnes 1,2 980 930 1,100.00 1,220.00 1,000.00 1,102.00 1,133.00 1,169.00 1,213.00 1,260.00 Sugar Consumption,

'000 tonnes 2 1,225

00 1,300.00 1,300.00 1,400.00 1,450.00 1,481.00 1,551.00 1,630.00 1,715.00 1,825.00 Sugar Net Trade

Balance '000 tonnes2 -290 -405 -215 -295 -490 -379 -417.6 -460.9 -502.6 -565.6

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

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

Risks To Outlook

Risks to consumption growth remain We have factored in the impact of monetary tightening on spending

on non-essential food and drink purchases, such as soft drinks and confectionery, and yet were this reduction to be exacerbated by a secondary slowdown in the Vietnamese economy - perhaps due to reduced investment as a result of sluggish US and eurozone growth - our sugar consumption forecasts are unlikely to be achieved

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

Vietnam Livestock Outlook

BMI Supply View: To 2014, BMI is forecasting poultry production growth of 33% to 453,700 tonnes,

pork production growth of 31% to 2.42mn tonnes and beef and veal production growth of 21% to 314,100 tonnes The industry has historically suffered from under-investment and competition from cheaper imports However, the livestock industry appears to have become a key focus of government food

processing modernisation efforts, while rising domestic incomes and thus diet diversification and stronger demand for meat products will also be supportive of production growth, which should prop up local prices

BMI Demand View: Once again, buoyed by strong income growth, we see healthy demand growth for

livestock over the forecast period to 2014 Poultry consumption will grow the strongest at 41%, while pork - from a higher base - and beef consumption will increase by 32% and 35% respectively

Consumption growth will surpass production growth in all cases, increasing the country's meat import dependency

Government Intervention

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

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

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

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

While meat import volumes were reportedly low through the middle months of 2009, this did little to help domestic producers as flagging demand and excess saw farmgate meat prices plummet in the second quarter of 2009 In July and August poultry producers were complaining that the cost of production had climbed back above what they were paid for their chickens We expect this situation to improve in 2010

as Vietnam's economy continues to recover

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

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

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

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

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

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

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

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

Government Pledges Crackdown On Low Quality Meat

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

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

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

perceived higher quality However, a number of health scares from imported meat goods in mid-2009 has

dented this assumption Both the national and Ho Chi Minh City authorities have said that inspection of meat imports will be improved In August the deputy director general of the Vietnam Food

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

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

in the city's ports as importers have neglected to collect consignments unlikely to be approved for sale The moves have spurred a wave of complaints from importers, yet we think the moves are a necessary step to improving food safety and will in the long term be beneficial for the sector as they will increase consumer confidence in the meat on sale in Vietnam We warn, however, that without close scrutiny the regulations could be used as a form of back-door protectionism The high publicity surrounding the story should give a boost to local livestock producers and help lift the image of domestically produced meat That said, work on improving hygiene in domestic abattoirs and transport facilities is also desperately needed

Bird Flu Bites Back

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

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

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

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

to be declared avian flu free

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

country's poultry producers International help has been offered with the FAO pledging US$7mn to help the country improve preparedness However, efforts are being hampered by the opaque nature of

officialdom in the country with reports of government vets exaggerating the number of animals

vaccinated to claim vaccination fees The prevalence of small-scale 'backyard' poultry producers also makes implementing an effective system difficult

Table: Vietnam – Poultry Production, Consumption & Trade

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

Table: Vietnam – Pork Production, Consumption & Trade

Consumption,

'000 tonnes 1 1,583

00 1,731.00 1,855.00 1,880.00 1,894.00 1,960.00 2,061.00 2,182.00 2,341.00 2,507.00 Pork Net Trade

Balance, '000

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

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

-5

286.6

-4

297.7

-6

335.0

-1

373.9

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

on production growth, removing as it would one of the key incentives to domestic production currently

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

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

Vietnam Coffee Outlook

BMI Supply View: BMI maintains its optimistic view of Vietnamese coffee over the forecast period to

2014, despite concerns that exporters may have to delay coffee loading in the coming months because of falling prices and concerns that farmers would hold back bean sales due to a government stockpiling plan Coffee prices have weakened following the strengthening of the US dollar, but we still believe that Vietnam's coffee sector will overcome these concerns, as well as bean quality issues, to register strong output over our forecast period because of the government's focus on investing in the sector To 2014, we expect production growth of 23% to 22.8mn bags While the long-term outlook is reasonably bright, we expect a modest production contraction in 2009/10 Output is forecast to fall by 2% year-on-year (y-o-y) due to damage caused by unseasonal rains in the country's early flowering period

BMI Demand View: Vietnam's population is predicted to grow by 7% from 2009-2014 and its GDP is

forecast to rise on average 5.9% annually to 2014 As GDP and population rise, more people will have more money to spend on luxury goods like coffee Increasing urbanisation and the spread of Western style coffee shops should add to this trend Indeed, Vietnamese coffee consumption grew by 18% y-o-y in

2009 and BMI predicts that consumption is set to rise 3% in 2010 One should note that this is on the

heels of a global recession and perhaps more tellingly, consumption is forecast to grow by 46% over our forecast period to 2014 This could have important implications for Vietnamese coffee producers, who may be more likely to focus on the domestic market rather than rely almost exclusively on international markets Indeed, The Ministry of Agriculture and Rural Development (MARD) has said that it hopes to boost domestic consumption to 10-15% of the national coffee crop We do not believe this will be

achieved in our forecast period, but the target's existence underpins the apparent potential of domestic consumption

Volume Up, Value Down

In March 2010, according to The Vietnam Association of Cacao and Coffee (Vicofa), the Vietnamese government announced that it would temporarily stockpile 200,000 tonnes of coffee in order to stabilise its export price This comes on the heels of the MARD stating that it would limit the coffee cultivation area within the country as another method of stabilising export prices Vietnam's coffee exports were up 15.8% y-o-y at 18.5mn bags in the 2009 coffee year (October-September), according to the MARD The

value of exports, however, dropped by around 20% Apart from the falling world price, the export value

of Vietnamese coffee was hurt by its low quality The 2009 coffee crop contained as high as 15% black beans according to Vicofa Black beans are usually discarded

The government is aiming to promote replanting of coffee trees, although in 2009, farmers were still investing in expanding the area under production rather replanting existing trees The poor prices for robusta in 2009 saw farmers' profits drop, leading to the introduction of plans for coffee stockpiling in order to boost prices If such activity is to be sustained it would require significant funding

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

investment in production lines - that meet international standards In September 2009, the Vietnam National Coffee Corporation said it would be investing VND2.5trn (US$140mn) in replanting ageing

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

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

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

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

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

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

Domestic Demand Still Low, But Set To Rise

While the vast majority of Vietnam's coffee will be destined for the export market for a long time to come, we expect domestic consumption to rise rapidly in the coming years In Q209 the Policy and Strategy Institute on Agriculture and Rural Development conducted a survey of coffee drinking habits in

Hanoi and Ho Chi Minh City, according to a report in Viet Nam News As we would expect, the survey found that coffee consumption has been increasing in both volume and value terms The increasing spread

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

of coffee consumption

The survey also found that coffee consumption was highest among the young and the well educated Coffee consumption was lowest among the elderly and in rural areas Consumption was far higher in the south than in the north These findings, in our view, indicate a bright future for coffee consumption in the country As urbanisation continues at a rapid pace and access to education increases, coffee consumption will rise alongside The high level of consumption in trend-setting Ho Chi Minh City suggests that aspirational consumers in other population centres of the country will not be far behind The popularity of coffee among the younger generation also suggests that consumption will see rapid growth in the future While office workers drinking instant coffee will likely be content with domestic production for some time to come, if Vietnamese coffee growers are to benefit from increased domestic demand for higher quality coffees, investment in quality improvement will be needed

Table: Vietnam – Coffee Production & Consumption

2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Coffee Production,

'000 60kg bags 1,2 14,500

.00 13,666.00 19,500.00 18,333.00 18,500.00 18,161.00 19,199.00 20,204.00 21,443.00 22,767.00 Coffee Consumption,

'000 60kg bags 3 618 687 858 900 1,064.00 1,101.00 1,189.00 1,292.00 1,420.00 1,556.00

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

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

Risks To Outlook

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

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

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

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

Vietnam Dairy Outlook

BMI Supply View: To 2014, BMI is forecasting Vietnamese fluid milk production growth of 40.9%

Dramatic increases in cattle numbers and increased public and private sector investment in an effort to reduce the country's growing import dependency will be supportive of strong growth Commercialisation will also play a key role, as larger more efficient farms come to play a greater part in total milk

production A sustained period of high global milk prices - thanks to rising global demand and supply sluggishness - will also prove production-supportive, helping to encourage producers to be more long-term in their approach to cattle farming

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

to 2014 Strong economic growth will filter through into rising disposable incomes which will push up demand for non-essential foodstuffs Through to 2014, we expect fluid milk consumption growth of 39%, while demand for butter, cheese and whole milk powder will soar, albeit from a far lower base Increased urbanisation, increased home ownership of white goods and the ongoing spread of modern, organised retail will all prove supportive of strong dairy consumption growth, even if forecast of higher global dairy prices limits the growth outlook to some extent

Production To Benefit From Private Sector Investment

BMI believes that Vietnam's dairy sector should gain a strong boost following a US$350mn investment

by TH Milk Joint Stock Company to enhance the country's cattle-raising and milk processing in Nghe

An province The project includes the construction of a 10,000 hectare pasture farm for up to 45,000 heads of cattle within two years, and US$100mn for a processing factory designed to produce up to 530mn litres of milk per year, which would make it the largest factory of its kind in Vietnam

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

Since the start of last decade, milk production in Vietnam has grown rapidly as small-scale dairy

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

Table: Vietnam – Milk Production & Consumption

2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Milk Production, '000

tonnes 1,2 197.7 216 234.4 262.2 283.4 295.7 314.5 337.6 367.9 399.3 Liquid Milk Consumption,

'000 tonnes 3 152 158.8 127.6 156.3 165.1 172.7 182.2 195.3 212.1 229.6

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

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

Table: Vietnam – Butter Production, Consumption & Trade

Table: Vietnam – Cheese Production, Consumption & Trade

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

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

Demand for dairy products in 2008 was hit by the contaminated milk scandal in neighbouring China After melamine, which was mixed with milk in China to make the protein content appear higher, was found in some products produced by Vietnamese companies owing to the use of milk powder imported from China, demand for dairy products dropped The scandal not only places downside risks to our

forecast for milk consumption in the short term, but has also negatively affected production volumes as processors have cut back the amount of milk purchased from suppliers The lack of a national quality control body for dairy products will continue to place downside risks on our production and consumption forecasts as it places the dairy industry at risk of a similar scandal at home, which would further tar the image of dairy products in Vietnam

Vietnam Grains Outlook

BMI Supply View: BMI has made a modest upwards revision to our corn - the only widely grown grain

in Vietnam, excluding rice - production forecast for 2009/10 The revision comes on the back of an upwards amendment to 2008/09's production total by the United States Department of Agriculture and in light of ongoing yield improvements, even if these are offset to some extent by a continued fall in the area under corn acreage According to data from Vietnam's General Statistics Office, the area under corn acreage in the year-to-April 15 2010 fell to 432,100 hectares (ha), from 437,500ha in the same period of

2009 To 2013/14, we expect corn production to increase by 40% to 6.19mn tonnes Acreage is likely to continue diminishing and yet currently yield immaturity means that significant gains are still available via this avenue, especially as robust local corn prices provide incentives to farmers

BMI Demand View: To 2014, corn consumption growth will continue to exceed corn production growth,

at 51.3% over the five-year period This will of course increase the country's import dependency and yet strong economic growth over the period should ensure that the impact of a rising import bill on

consumption is not too significant Animal feed will remain the primary use for corn to 2014 and beyond (according to Food and Agricultural Policy Research Institute data, feed accounted for 73% of total demand in 2009) and consequently our demand outlook for corn is very closely linked to our Vietnamese livestock forecasts As our Vietnam Livestock Outlook for Q310 shows, we have a positive view on livestock production to 2014, both thanks to income growth and the fact that the sector has been identified

as a recipient of government modernisation efforts

Table: Vietnam – Corn Production, Consumption & Trade

2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Corn Production, '000

00 3,818.00 4,251.00 4,600.00 4,432.00 5,020.00 5,266.00 5,511.00 5,849.00 6,191.00 Corn Consumption, '000

-00

1,395

-00

1,682

-00

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

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

Risks To Outlook

We see downside risks to our corn production forecasts through to 2013/14 Corn, like many Vietnamese agricultural industries, is suffering from reduced acreage, both as a result of under-investment and the country's rapid pace of urbanisation We see yield growth, coming from a fairly low base as it is, being sufficient to support output growth in spite of reduced acreage However, the ongoing introduction of hardier and higher yielding crops will ultimately necessitate greater investment - corn prices will have to remain in favourable territory in the medium term to ensure that this investment is forthcoming

Realistically, we see this as a risk more likely to manifest itself beyond our current forecast period

We see downside risks to our corn consumption forecasts to 2014 and indeed in the shorter term

Dependent on imports as it is, a sustained period of inflated global corn prices would impede Vietnamese demand growth Fiscal and monetary tightening also poses a risk to consumption growth Corn is not a luxury good and thus demand will not retrench in line with tighter spending conditions However, it will once again make consumers more aware of their expenditure

Vietnam Rice Outlook

BMI Supply View: Vietnam rice production contracted in 2008/09 and we forecast a further modest

contraction of 0.5% in 2009/10 However, these falls should be viewed in the context of an excellent 2007/08 harvest and in fact compared to previous historic levels, output in 2008/09 and forecast output in 2009/10 looks strong The industry is benefiting from strong demand, both due to a retrenchment of consumption habits during the global downturn which pushed up demand for food staples and due to ongoing government stock-building - a response to 2008's aggressive price spike and the consequent introduction of protectionist trade measures Compared to many of its agricultural sub-sectors,

Vietnamese rice is actually very competitive relative to many of its regional peers and it is thus well positioned to benefit from both regional and global demand growth Rising yields will also serve to benefit production over the forecast period

BMI Demand View: To 2014, we expect consumption to climb by 11% Rice is the major food staple in

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

Improving Infrastructure

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

Considering its importance both to national food security and export revenues, rice infrastructure is poor Warehouse storage capacity is a mere 1.2mn tonnes compared to annual production from the country's paddies of over 20mn tonnes Of this capacity, less than a third is regularly used as warehouses are often decrepit and inconveniently located The Ministry of Agriculture and Rural Development (MARD) is now aiming to change this In 2009, the ministry said that it would spend US$400mn to upgrade the existing storage capacity and add extra capacity to store another 2.8mn tonnes of rice The new capacity will be built around the Mekong Delta's ports and the southern capital Ho Chi Minh City The extra capacity and upgraded storage facilities, set to be finished in 2011, will ease the flow of exports and allow exporters more flexibility In November 2009, it was reported in the local press that the MARD had announced plans to build a 4mn-tonne rice storage depot in the delta at a cost of more than US$400mn It was not immediately clear if this was on top of the expansion plans already announced The modern facilities should also reduce loss to spoilage and improve the quality of stored rice Both of these factors should help Vietnam go some way in reducing the discount the country's rice exports currently sell for compared to rice from other exporters in the region such as Thailand

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

US$34mn rice trading centre in the delta city of Can Tho The centre aims to help the sale of rice by farmers to millers without the need for middle men The facility, to be spread over 23 hectares (ha), will also have facilities for auctions and telephone and online sales The 200,000 tonne storage centre, if it goes ahead as planned, should serve to improve efficiency in the rice trade in the Mekong Delta and help farmers get their produce to market

Hybrid Hopes

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

2000 the average yield was 2.73 tonnes/ha and by 2009 this had risen to 3.31 tonnes/ha This lags some way behind producers, such as Japan (4.73 in 2009) and the US (5.6) and yet Vietnam is ahead of many

of its regional peers, including the world's largest exporter Thailand (1.88), the Philippines (2.39) and Myanmar (1.53) The MARD has said that it hopes to further increase yields by encouraging the use of hybrid rice varieties which it claims can increase production by 15-20% over traditional varieties The ministry said that it is aiming to have 70% of the area under rice harvest planted with hybrid seeds by

2010 This would involve a 50% increase in the area currently planted with the seeds, although no data is yet available to show how successful this drive has been so far Affordability of these seed variants has been cited as a possible barrier to targets being met

Table: Vietnam – Rice Production, Consumption & Trade

2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Rice Production, '000

tonnes 1,2 22,716.00 22,772.00 22,922.00 24,375.00 24,312.00 24,180.00 25,699.00 26,613.00 27,589.00 28,580.00 Rice Consumption, '000

5.00 18,392.00 18,775.00 19,400.00 19,150.00 19,222.00 19,677.00 20,195.00 20,714.00 21,257.00 Rice Net Trade Balance,

00 4,355.00 4,072.00 4,349.00 5,450.00 6,102.00 7,422.00 8,253.00 9,135.00 10,051.00

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

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

Risks To Outlook

We place upside risks on our Vietnamese rice consumption forecasts It remains a substantial part of the local diet and any period of prolonged food price inflation or economic weakness would likely see more consumers revert to traditional diets lifting overall demand

On the production side, we see downside risks to our existing forecasts We do not expect any significant increase in rice acreage in Vietnam over our forecast period, or indeed beyond Restricted acreage is a product of strong population growth and rapid urbanisation We see production gains being possible as a result of continued yield, infrastructural and harvesting improvements However, such advancements require ongoing investment While rice remains so economically important, this investment is likely to continue to be forthcoming and yet any reduction would put our production forecasts in jeopardy

Annual Sales (local, mn)

Financial year end

Y-O-Y Sales Value Growth

Main Areas of Operation

Cargill United States 116,000 116,000 May-09 -3.65%

Agriculture, Food processing, Financial and Risk Management

Archer Daniels

Midland United States 69,207 69,207 Jun-09 -1.00%

Oilseed Processing, Corn Processing, Agricultural Services

Bunge Ltd United States 52,574 52,574 Dec-08 38.90%

Fertilisers, Oilseed Processing, Grain

Milling

CHS Inc United States 32,200 32,200 Aug-08 87.20%

Food Processing, Grain retail, Crop Nutrition, Bioenergy refiner and retailer

JBS Brazil 13,191 30,340 Dec-08 81.15% Meat Processing and Exporting Corn Products

International United States 3,900 3,900 Dec-08 15.04% Corn Processing Golden Agriculture

Resources Ltd Singapore 2,986 4,474 Dec-08 59.42% Processing, Refining Palm cultivation Razgulay Group Russia 1,244 36,400 May-09 6.60% Sugar processing

Source: Company Investor Relations, BMI