Vietnam agribusiness report q3 2014

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

Q3 2014 www.businessmonitor.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: May 2014

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DISCLAIMER

BMI Industry View 7

SWOT 10

Agribusiness 10

Business Environment 12

Industry Forecast 13

Dairy Outlook 13

Table: Butter Production & Consumption (Vietnam 2013-2018) 14

Table: Cheese Production & Consumption (Vietnam 2013-2018) 14

Table: Milk Production & Consumption (Vietnam 2013-2018) 14

Table: Whole Milk Powder Consumption (Vietnam 2013-2018 15

Table: Butter Production & Consumption (Vietnam 2008-2013) 20

Table: Cheese Production & Consumption (Vietnam 2008-2013) 20

Table: Milk Production & Consumption (Vietnam 2008-2013) 20

Table: Whole Milk Powder Consumption (Vietnam 2008-2013 20

Livestock Outlook 22

Table: Beef Production & Consumption (Vietnam 2013-2018) 23

Table: Pork Production & Consumption (Vietnam 2013-2018) 23

Table: Poultry Production & Consumption (Vietnam 2013-2018) 23

Table: Beef Production & Consumption (Vietnam 2008-2013) 28

Table: Pork Production & Consumption (Vietnam 2008-2013) 28

Table: Poultry Production & Consumption (Vietnam 2008-2013) 29

Coffee Outlook 30

Table: Coffee Production & Consumption (Vietnam 2013-2018) 31

Table: Coffee Production & Consumption (Vietnam 2008-2013) 36

Rice Outlook 38

Table: Rice Production & Consumption (Vietnam 2012-2018) 39

Table: Rice Production & Consumption (Vietnam 2008-2013) 42

Grains Outlook 43

Table: Corn Production & Consumption (Vietnam 2013-2018) 44

Table: Corn Production & Consumption (Vietnam 2008-2013) 48

Featured Analysis 49

Bright Outlook For Agribusiness In Vietnam 49

Commodities Price Analysis 55

Monthly Softs Update 55

Table: Select Commodities - Performance & BMI Forecasts 64

Monthly Grains Update 64

Table: Selected Commodities - Performance & Forecasts 74

Upstream Analysis 75

Asia GM Outlook 75

Table: Select Countries - GM Crops Use In 2012 81

Asia Fertiliser Outlook 81

Table: India - Fertiliser Subsidies, INR/kg 85

Asia Machinery Outlook 88

Table: China Grain Public Production Support Programme (CNYbn) 91

Table: Select Countries - Average Size Of Farms, ha 95

Downstream Analysis 99

Food 99

Food Consumption 99

Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018 101

Canned Food 102

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018 102

Confectionery 103

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

Pasta 106

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 106

Dairy 108

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 109

Drink 110

Alcoholic Drinks 110

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 112

Hot Drinks 115

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 116

Soft Drinks 117

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 119

Mass Grocery Retail 121

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 123

Table: Grocery Retail Sales By Format (%) 124

Regional Overview 125

Table: Hourly Textile Industry Wages By Country (USD) 129

Table: Select Countries - Biofuel Blending Mandates & Programmes 131

Competitive Landscape 132

Table: Major Agribusiness Companies (USDmn) 132

Company Profile 133

Global Company Strategy 133

Table: Vinamilk's Financial Highlights, 2008-2013 141

Demographic Forecast 143

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 144

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 145

Table: Vietnam's Key Population Ratios, 1990-2020 146

Table: Vietnam's Rural And Urban Population, 1990-2020 146

Methodology 147

Industry Forecast Methodology 147

Sector-Specific Methodology 148

BMI Industry View

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

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

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

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

investment in crop productivity in order to avoid being left behind, and if it wants to succeed in producingmore value-added crops and maintaining its status as an export spearhead

Agribusiness Market Value

BMI Market Value By Commodity (% of Total) (2010-2018)

Cocoa market value, % of total Livestock market value, % of total Sugar market value, % of total Cotton market value, % of total Milk market value, % of total Palm Oil market value, % of total Grains market value, % of total

0 20 40

-20 60

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

Key Forecasts

■ Rice consumption growth to 2018: 4.0% to 22.2mn tonnes Rice remains the major food staple in

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

• Corn production growth to 2017/18: 32.9% to 6.4mn tonnes Although acreage is likely to remain

stagnant or diminish; current yield immaturity means significant gains are still available, especially asrobust local corn prices provide incentives to farmers Domestic consumption will be another importantdriver

• Milk production growth to 2017/18: 21.9% to 484,700 tonnes Dramatic increases in cattle numbers

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

• BMI universe agribusiness market value: USD25.7bn in 2014 (down from USD27.3bn in 2012);

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

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

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

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

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

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

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

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

industry and bad management practices

Vietnam's livestock sector, and especially the pork sector, went through challenging times in 2012 and 2013due to a rise in feed ingredient and fuel prices, lower demand and plummeting domestic prices As a result,many farmers were forced to reduce or suspend their operations in order to limit losses, with as many as

30-50% of individual farmers in southern provinces abandoning their farms, while owners of large farmswith more than 1,000 head have reduced their herd size by up to 70% The situation has been improvingsince H213, as pork prices are starting to recover, and consumers are showing more confidence in the porkmarket While we believe pork and poultry production growth will remain below historical averages,

foreign and locally owned feed companies such as Charoen Pokphand Vietnam Livestock, Japfa

Comfeed Vietnam and GreenFeed Vietnam Corporation have announced investments to increase feed

production capacity

Agribusiness

SWOT Analysis

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

to more developed international competitors

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

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

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

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

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

Business Environment

SWOT Analysis

attractive to foreign investors

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

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

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

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

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

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

protectionism, which will remain a concern

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

Industry Forecast

Dairy Outlook

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

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

expanding, and dairy producers are launching aggressive advertising campaigns Since the opening up ofthe economy in 1986, there 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, in line with the development of milk farms and dairy farms, has boosted theshort-term outlook Production grew by an average of 8.4% annually over the past five seasons In 2013/14,

we see output showing strong growth, of 5.0% year-on-year (y-o-y), reaching 417,600 tonnes that year Out

to 2017/18, we are forecasting Vietnamese fluid milk production growth of 21.9% on the 2012/13 level to484,700 tonnes Dramatic increases in cattle numbers and increased public and private sector investment -part of the effort to reduce the country's growing import dependency - will be the main boost to growth.Commercialisation will also play a key role as larger, more efficient farms come to play a greater role inmilk production A sustained period of high global milk prices on the back of rising global demand andsupply sluggishness will also prove supportive of production and encourage producers to consider the long-term impact of their approach to cattle farming Finally, the sector is likely to benefit from the continuedincrease in yields, which have risen almost 130% over the past decade and are expected to continue to do sogiven new investment in the sector

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

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

consumption in Vietnam more than doubled between 2000 and 2012 to 12kg per person per year Despitethis increase, the country remains below the regional average of 65kg Though there has been an increase inmilk production over the years, the country produces minimal amounts of cheese and butter Condensedmilk and yoghurt are highly popular dairy products We expect the country to be increasingly reliant ondairy imports to meet its domestic needs

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

economic growth will filter through into rising disposable incomes, pushing up demand for non-essential

foodstuffs Through to 2018, we expect fluid milk consumption growth of 36.1% to 272,400 tonnes, whiledemand for butter, cheese and whole milk powder will soar 46.9%, 229.6% and 24.3% respectively, albeitfrom far lower bases Increased urbanisation, increased ownership of Western goods and the ongoing spread

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

Table: Butter Production & Consumption (Vietnam 2013-2018)

Butter Consumption, '000 tonnes 13.4 14.5 15.7 16.9 18.3 19.7 Butter consumption, % y-o-y 7.8 8.0 8.0 8.0 8.0 8.0

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

Table: Cheese Production & Consumption (Vietnam 2013-2018)

Cheese Consumption, '000 tonnes 4.4 6.0 7.5 9.3 11.6 14.6 Cheese consumption, % y-o-y 9.3 35.0 25.0 25.0 25.0 25.0

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

Table: Milk Production & Consumption (Vietnam 2013-2018)

Milk Production, '000 tonnes 397.7 417.5 433.4 449.9 467.0 484.7 Milk production, % y-o-y 4.1 5.0 3.8 3.8 3.8 3.8 Liquid Milk Consumption, '000 tonnes 200.1 213.6 227.8 242.3 257.3 272.4 Liquid milk consumption, % y-o-y 8.0 6.7 6.6 6.4 6.2 5.9 Milk market value, % of total 0.6 0.5 0.5 0.5 0.6 0.6

e/f = BMI estimates/forecasts Sources: General Statistics Office of Vietnam, BMI, FAPRI.

Table: Whole Milk Powder Consumption (Vietnam 2013-2018

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

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

Private Investment To Support Production Growth

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

institutions will team up to improve the quality of milk in Vietnam and Indonesia is the latest sign that theVietnamese dairy sector has bright days ahead The companies will provide USD30mn to support localdairy farmers by providing knowledge, financing (affordable loans) and expertise The provided loans will

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

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

production growth

Access To US Confirms Vinamilk's Long-Term Opportunities

Vinamilk was given the green light in July 2013 to export its products to the US market This reinforces ourpositive view of the company, as it will support Vinamilk's promising future sales growth The companycontinued to record strong growth in Q313 (July-September) with revenues growing by 21.3% y-o-y toVND8,028bn (USD381mn) and net income by 21.2% y-o-y to VND1,908bn (USD90mn) Margins

retreated slightly in Q313 but remained above historical averages Profit margins came in at 21.1%, down0.02 percentage points y-o-y The positive performance was mainly driven by strong growth in export sales,which increased 115.6% y-o-y Domestic sales were more moderate (at 8.8% y-o-y) and driven mostly bydemand for powdered milk and Vinamilk's newly introduced value-added and premium products in thedomestic market Export sales account for 18% of total sales as of Q313, compared with 8.5% a year ago

Strong Growth

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

Source: BMI, Bloomberg

We remain positive regarding Vinamilk's long-term prospects given the strong growth potential for dairyconsumption in Vietnam and the region, the company's investment in supply chain and capacity expansion,and its strong financial position The company is well positioned to benefit from the industry's growth, as it

has a well-known brand (a recent survey by Kantar Worldpanel indicates Vinamilk's products are

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

We believe Vinamilk's strategy of developing mainly in the domestic market, and more specifically invalue-added segments, will be to its benefit Vinamilk has large market shares in key domestic markets forwhich we forecast strong consumption growth in the coming years For example, Vinamilk enjoys a 40%market share in Vietnam's liquid milk segment, for which we forecast consumption to expand 36.1% to272,400 tonnes between 2013 and 2018 on the back of increased urbanisation, Westernisation and theongoing spread of organised retail networks Moreover, Vinamilk plans to scale up its production andmarket share in the powdered milk segment (which only accounts for 20% of total sales in Vietnam), forwhich we believe demand will rise by 24.3% over the five-year forecast period

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

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

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

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

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

Well Diversified

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

Source: BMI, Vinamilk

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 Products Imports By Country, 2010 (% of total)

Source: BMI, USDA

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

Strong Government Support

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

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

Table: Butter Production & Consumption (Vietnam 2008-2013)

Butter Consumption, '000 tonnes 10.8 10.8 10.8 11.3 12.5 13.4 Butter consumption, % y-o-y 0.0 0.0 0.0 4.7 10.1 7.8

e = BMI estimates Sources: FAPRI, BMI.

Table: Cheese Production & Consumption (Vietnam 2008-2013)

Cheese Consumption, '000 tonnes 3.1 3.8 3.5 3.5 4.0 4.4 Cheese consumption, % y-o-y 6.9 22.7 -7.7 0.3 15.4 9.3

e = BMI estimates Sources: FAPRI, BMI.

Table: Milk Production & Consumption (Vietnam 2008-2013)

Milk Production, '000 tonnes 262.2 278.2 306.7 345.0 382.0 397.7 Milk production, % y-o-y 11.8 6.1 10.2 12.5 10.7 4.1 Liquid Milk Consumption, '000 tonnes 158.4 175.1 167.6 174.8 185.3 200.1 Liquid milk consumption, % y-o-y 24.4 10.5 -4.3 4.3 6.0 8.0 Milk market value, % of total 0.5 0.4 0.4 0.5 0.5 0.6

e = BMI estimates, Sources: General Statistics Office of Vietnam, BMI, FAPRI.

Table: Whole Milk Powder Consumption (Vietnam 2008-2013

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

e = BMI estimates Source: FAPRI.

Risks To Outlook

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

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

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

Livestock Outlook

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

sector, with pork production comprising about two-thirds of total meat production as of 2011/12 Despitethe sector going through hard times over recent years owing to disease outbreaks, soaring input costs andcompetition from cheap imports, we expect Vietnam's livestock production to grow strongly, led by poultryproduction, over the medium term Rising incomes will stimulate domestic meat consumption growth(owing to diet diversification), and production will increase to keep pace That said, we expect the country

to continue being a net importer of livestock over our forecast period

We expect livestock production to recover slightly in 2013/14 following two years where elevated

international feed prices weighed on growth We see poultry production outperforming the rest of thecomplex, growing by a robust 7.2% year-on-year (y-o-y) to 815,000 tonnes in 2013/14 The pork sector,which was hurt in 2013 by news that banned substances had been used to promote lean growth in pigs, willcontinue to record lacklustre growth We forecast production to grow by a mild 1.8% y-o-y to 2.3mn tonnes

in 2013/14 Beef and veal production is forecast to broadly stagnate in 2013/14 around 400,000 tonnes

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

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

capita consumption rising by more than 100% from 2000 to 2013 to reach 37.1kg per year Buoyed bystrong income growth as well as population growth, we see healthy demand growth for livestock over2013-2018 Poultry consumption is forecast to grow by 37.8% to 1.1mn tonnes, while pork (from a higherbase) and beef consumption will increase by 18.8% and 22.8% respectively We forecast pork consumption

to reach 2.6mn tonnes, with beef consumption reaching 508,300 tonnes We believe pork consumption willcontinue to be the dominant meat consumed, comprising more than 60% of total meat consumption Ahousehold survey conducted in 2010 found that 40% of household meat expenditure was spent on pork,with preference given to fresh pork over chilled or processed meat

Table: Beef Production & Consumption (Vietnam 2013-2018)

Beef & veal production, '000 tonnes 402.0 404.0 407.0 409.0 413.0 417.0 Beef & veal production, % y-o-y 0.5 0.5 0.7 0.5 1.0 1.0 Beef & veal consumption, '000 tonnes 414.0 418.1 439.0 461.0 484.0 508.3 Beef & veal consumption, % y-o-y 1.0 1.0 5.0 5.0 5.0 5.0

f = BMI forecasts Source: USDA.

Table: Pork Production & Consumption (Vietnam 2013-2018)

Pork production, '000 tonnes 2,220.0 2,260.0 2,327.8 2,380.2 2,432.5 2,487.3 Pork production, % y-o-y 2.1 1.8 3.0 2.3 2.2 2.3 Pork consumption, '000 tonnes 2,200.0 2,255.0 2,329.4 2,410.9 2,505.0 2,612.7 Pork consumption, % y-o-y 1.9 2.5 3.3 3.5 3.9 4.3

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

Table: Poultry Production & Consumption (Vietnam 2013-2018)

Poultry production, '000 tonnes 760.0 815.0 859.0 906.3 956.1 1,008.7 Poultry production, % y-o-y 4.1 7.2 5.4 5.5 5.5 5.5 Poultry consumption, '000 tonnes 790.0 829.5 883.4 940.8 1,008.6 1,088.3 Poultry consumption, % y-o-y 1.9 5.0 6.5 6.5 7.2 7.9

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

Sector Profitability Improves, But Challenges Remain

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

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

kg (USD2.07/kg) in December of that year, according to industry sources By contrast, feed ingredientprices have risen steadily on the back of elevated grain prices As a result, many farmers were forced toreduce or suspend their operations in order to limit losses, with as many as 30-50% of individual farmers insouthern provinces abandoning their farms Owners of large farms with more than 1,000 head are thought tohave reduced their herd size by up to 70%

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

The situation has been improving since H213 Pork prices are starting to recover, and consumers areshowing more confidence in the pork market and are spending on pork products A survey done by theGeneral Statistics Office showed the estimated total number of pigs to be 26.3mn in December 2013, only0.9% lower y-o-y Prices are currently around VND50,000/kg

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

Feed And Animal Breeding Subsectors More Profitable

While Vietnamese livestock production companies (except feed companies) struggle to stay afloat amidfinancial and output woes, foreign rivals have used this opportunity to gain greater control of Vietnam'smore lucrative husbandry sub-sectors, such as feed production, live animal breeding, as well as veterinaryservices and medicine Of the total capital investment in the livestock sector in 2012, investment in theproduction of meat only accounted for 4.1% (USD15.1mn), while investment in feed production accountedfor 94.9% (USD346.8mn) Investors have been encouraged to invest in the production of animal feedbecause domestic supply does not meet demand, and the livestock sector largely depends on imports In

2012, domestically produced animal feed reached 12.7mn tonnes, accounting for 56% of the country's total

demand Foreign-owned millers accounted for around 52% of total domestic production The most recentinvestment in the sector is from Charoen Pokphand Food-owned CP Vietnam, which planned to open twonew feed mills in 2013.

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

In spite of all those challenges, we continue to hold a positive view on the livestock industry in the mediumterm Rising income and changing diets will support production out to 2017/18, with poultry output growthoutperforming the rest of the industry

On The Recovery

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

Source: BMI, Bloomberg

Fragmented Feed Industry Disadvantages Local Companies

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

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

Local Feed Company Expands

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

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

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

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

CP Vietnam Livestock announced in March 2012 it is investing USD100mn in several core businesses in

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

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

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

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

inaugurated in 2012 an animal production line in Ha Nam Province The factory is expected to raise itscapacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago This hascome on the back of VND150bn (USD7.1mn) invested in 2011

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

Table: Beef Production & Consumption (Vietnam 2008-2013)

Beef & Veal Production, '000 tonnes 333.0 369.0 384.0 387.0 400.0 402.0 Beef & Veal production, % y-o-y 5.4 10.8 4.1 0.8 3.4 0.5 Beef & Veal Consumption, '000 tonnes 344.0 375.0 392.0 395.0 410.0 414.0 Beef & Veal consumption, % y-o-y 7.2 9.0 4.5 0.8 3.8 1.0

e = BMI estimate, Source: USDA/BMI Calculation

Table: Pork Production & Consumption (Vietnam 2008-2013)

Pork Production, '000 tonnes 1,915.0 2,090.0 2,090.0 2,130.0 2,175.0 2,220.0 Pork production, % y-o-y 4.5 9.1 0.0 1.9 2.1 2.1 Pork Consumption, '000 tonnes 1,890.0 2,071.0 2,072.0 2,113.0 2,160.0 2,200.0 Pork consumption, % y-o-y 3.7 9.6 0.0 2.0 2.2 1.9

e = BMI estimate, Source: USDA/BMI Calculation

Table: Poultry Production & Consumption (Vietnam 2008-2013)

Poultry Production, '000 tonnes 417.0 503.0 621.0 696.0 730.0 760.0 Poultry production, % y-o-y 16.2 20.6 23.5 12.1 4.9 4.1 Poultry Consumption, '000 tonnes 499.0 538.0 660.0 754.0 775.0 790.0 Poultry consumption, % y-o-y 23.8 7.8 22.7 14.2 2.8 1.9

e = BMI estimate, Source: USDA/BMI Calculation

Risks To Outlook

Should the government initiate regulatory changes related to disease control and disaster aid, and improvelending conditions for the domestic sector, the meat production sector is likely to finally attract moreinvestment This poses an upside risk to our production forecasts In an attempt to aid the industry, theVietnamese government issued a document in early August 2012 showing that the State Bank of Vietnamasked commercial banks to offer an annual lending rate at 11% on loans to agricultural firms Meanwhile,the National Assembly offered a 30% reduction of corporate income tax in 2012 to agricultural enterprises.Although these policies will not completely eliminate difficulties, they are a first step towards the

improvement of the sector's outlook

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

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

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

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

Coffee Outlook

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

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

For the 2013/14 season, output is forecast to record strong growth of 7.2% year-on-year (y-o-y), reaching28.2mn 60kg bags Following a dry period early this year, rain has been improving the prospects forproduction The US Department of Agriculture (USDA) estimates yields at a hefty 2.63 tonnes per hectare(ha) for 2013/14, compared with 2.47 tonnes/ha in 2012/13 As a result of the production increase,

Vietnam's production surplus is likely to swell to 26.2mn bags in 2013/14, compared with the five-yearaverage of 20.0mn bags Vietnam's exports are likely to bounce back following the decline in 2012/13'soutbound shipments

Looking at the 2014/15 season starting in October 2014 with the harvest, we see coffee production growingfor the sixth consecutive year but at a slower pace of 0.7% y-o-y given 2013/14's strong growth We haverevised up our output estimate, as favourable weather and timely rainfall in major coffee growing areas haspromoted above-average cherry development Additional output from newly productive planted and

replanted areas continue to push yields higher than the five year average We now see production reaching28.4mn bags, compared with a previous estimate of 27.6mn bags

Out to 2017/18, we expect production to rise by 8.6% on the 2012/13 level, to 28.6mn bags as Vietnamcontinues to reap the fruits of its replanting programme However, we believe production will see largeswings owing to the vulnerability of old trees (which still represent a large part of the total trees) to

diseases Export opportunities, coming from the increasing demand from emerging markets of robustacoffee, will continue to support production

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

to increase Urbanisation and the spread of Western-style coffee shops are expected to add to this trend.Coffee consumption grew impressively by 56.8% from 0.43kg per capita in 2005 to 1.19kg per capita in

2013, one of the highest growth rates out of all coffee-exporting countries over the period We predict thatconsumption will rise 8.0% in 2014 and 11.0% in 2015 to reach 2.2mn bags that year, boosted by therebound in economic growth and the ever expanding coffee retail industry That said, we note that coffeeconsumption growth comes from a relatively low base, and we expect 64.0% growth on the 2013 level to

3.0mn bags by 2018 Coffee consumption per capita is forecast to expand to 1.88kg per capita by 2018 TheMinistry of Agriculture and Rural Development has said it hopes to boost domestic consumption to 10-15%

of the national coffee crop We do not believe this will be achieved in our forecast period, but the existence

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

Table: Coffee Production & Consumption (Vietnam 2013-2018)

Coffee Production, '000 60kg bags 26,300.0 28,200.0 28,400.0 28,456.8 28,513.7 28,570.7 Coffee production, % y-o-y 1.2 7.2 0.7 0.2 0.2 0.2 Coffee Consumption, '000 60kg bags 1,825.0 1,971.0 2,187.8 2,428.5 2,695.6 2,992.1 Coffee consumption, % y-o-y 9.6 8.0 11.0 11.0 11.0 11.0

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

Strong Export Growth In 2013/14 And 2014/15

As a result of the production increase, Vietnam's exports in 2013/14 are likely to bounce back following thedecline in 2012/13's outbound shipments Vietnam's production surplus is likely to swell to 26.2mn bags in2013/14, compared with the five-year average of 20.0mn bags Exports could therefore reach 25-26mnbags, up by around 4-6% y-o-y and compared with the five-year average of 20.3mn bags After a slow start

at the beginning of the season in October, exports have picked up strongly since February October May 2014 exports reached 1.3mn tonnes, up 15.6% y-o-y Exports will remain strong in the coming months,

2013-as farmers try to benefit from the recent rally in international and domestic coffee prices

Exports are likely to remain historically strong in 2014/15 owing to the production increase and to elevatedstocks Ending stocks in 2013/14 are estimated at around 3.5mn bags, compared with the five year average

of 1.4mn bags The USDA forecasts exports at 28.0mn bags, lower y-o-y but significantly higher thanhistorical averages

Slower Exports

Vietnam - Coffee Exports ('000 tonnes)

Source: BMI, Vicofa

Crisis Brewing For Coffee Exporters

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

difficulties of the coffee export industry Vinacafe, a state-owned enterprise that owns more than 25

subsidiary units, is Vietnam's largest coffee exporter, ahead of Nestlé Vietnam and Trung

Nguyen Vinacafe's total debt, including its subsidiaries', amounted to VND2,970bn (USD141.7mn) in

FY12, while profits were at VND105bn (USD5mn) Vinacafe is not alone in its struggles, with reports that

of the 127 local coffee export firms that operated in Vietnam a year ago, 56 have ceased trading or shifted toother businesses Many coffee operators are trapped with crippling debt, and banks are reluctant to lendthem more money The value of non-performing loans or debts in the sector likely to go unpaid stands atVND8,000bn (USD379mn), or 60% of all coffee industry loans, according to the country's deputy

agriculture minister Two major coffee exporters - An Giang Coffee and Thai Hoa - were forced to delist

from Vietnam's stock exchange due to rising losses

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

period of the coffee industry from 2008 to 2011, some companies accepted loan interest rates of 24% perannum The extent of the damage was only revealed when robusta prices started to decrease in 2012 Inaddition, many exporters took on debt and invested heavily in storage capacity and bean processing plants,leaving the sector oversupplied For example, Thai Hoa invested in two plants with a capacity of 110,000tonnes a year in the central province of Quang Tri, which only had 5,000ha of coffee plantations with amaximum output of 10,000 tonnes, according to industry sources The supply of raw materials in theprovince and its neighbours can only meet around 40% of the plants' capacity.

At A Three-Year Low

Vietnam - Coffee Prices Fob (USD/tonne)

Source: BMI, Bloomberg

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

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

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

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

incentives, we believe that Vietnam will become an even more attractive destination for foreign direct

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

Little Change Ahead

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

Source: USDA, BMI

Major Robusta Grower

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

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

of the superior-quality bean to 96,000 tonnes by 2020, from output of 48,000 tonnes in 2011/12, in a bid toreap more benefits from coffee plantations, as the arabica variety is normally sold for around double theprice of robusta Vietnam intends to expand arabica area planted in northern and central regions to 40,000haover the coming eight years, from the current 32,000-35,000ha (there is no official agency providing exactdata on area planted to coffee) International prices continue to provide a strong incentive for farmers toexpand coffee cultivation in Vietnam

The Question Of Planted Area

Favoured by stable and elevated robusta prices, Vietnam has seen its area dedicated to coffee increasestrongly in the past years Planted area has increased from around 500,000ha in 2005/06 to more than640,000ha in 2012/13, according to estimates by the Ministry of Agriculture and Rural Development(MARD) and the USDA However, the quality has not followed, and farmers have faced many difficulties,including inclement weather and decreasing coffee quality Coffee yields have picked up strongly in thepast two seasons, as the results of the replanting programme going on for several years now are starting to

be seen Yields are estimated at 2.63tonne/ha in 2013/14, compared with 2.47tonne/ha last season and the2008/09-2011/12 average of 2.20tonne/ha

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

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

2020 The Bank of Viet Nam announced in May that the sector will receive preferential credit loans ofVND8-10trn (USD381-476mn) from now until 2016 to help implement the programme of old coffee cropsrecultivation

Table: Coffee Production & Consumption (Vietnam 2008-2013)

Coffee Production, '000 60kg bags 18,000.0 16,980.0 18,500.0 19,450.0 26,000.0 26,300.0 Coffee production, % y-o-y -7.7 -5.7 9.0 5.1 33.7 1.2 Coffee Consumption, '000 60kg bags 850.0 950.0 1,200.0 1,337.0 1,665.0 1,825.0 Coffee consumption, % y-o-y 13.3 11.8 26.3 11.4 24.5 9.6

e/f = BMI estimate/forecast Sources: USDA, Vietnam Coffee and Cocoa Association, BMI.

Increasing Weight On The International Market

Coffee has proven to be one of the main agricultural export engines of the Vietnamese economy, and thebulk of Vietnam's coffee production is for export Only about 6% of total production is for domesticconsumption Vietnamese exports were exceptionally strong and well above annual averages in 2011/12,mainly due to the bumper crop and relatively high robusta prices on international markets The total value

of all types of coffee exports hit a record USD3.7bn in 2012, up 34.5% y-o-y We expect Vietnam to remain

a key player on international markets in the coming years and to slowly increase its exports, partly due togrowing demand for soluble coffee in Asia MARD encourages domestic players to diversify their exportstowards higher-value processed coffee products, such as soluble coffee Exports of processed coffee started

in 2003/04 and have been slowly increasing in the past few years, reaching 2.0% of total exports in 2011/12

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

Getting Into Sustainable Production

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

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

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

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

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

traction given the government's strong support

Risks To Outlook

In the short term, we see downside risks to our 2014/15 production forecast owing to the drought-likeconditions Vietnam has been experiencing since February 2014 Adverse weather conditions, if prolonged,will severely diminish the coffee production in the coming season

In the long term, aging coffee plantations pose downside threats to our production outlook Old trees (olderthan 20 years) account for around 30% of the total production area, according to Vicofa, and approximately137,000ha of old and low-quality coffee trees need to be replaced over the next five years In August 2012,MARD approved a plan for Vietnam's coffee sector development to the year 2020, which aims at replacingageing trees and adopting sustainable production practices in order to reap premium prices in developedcountries MARD plans to maintain the area under cultivation at 500,000ha by 2020, with an output of2.4tonnes/ha, and 479,000ha with an output of 2.5tonnes/ha by 2030 However, if farmers do not receiveenough support from the government for their replanting programme, the proportion of higher-yieldingcoffee trees could fall, weighing on the country's capacity to at least maintain production growth

Favourable weather, improved inputs, better irrigation and fertiliser application practices, and more

productive coffee areas could offset this potential drop in supply

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

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

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

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

Rice Outlook

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

boosted by higher yielding rice varieties and better culture management Indeed, output grew by more than25% between 2000 and 2012 For the 2013/14 season that started in January, we maintain our view thatVietnam's rice production will reach a new record high, although year-on-year (y-o-y) growth will remainmodest Output is projected to increase by 0.7% y-o-y, to 27.7mn tonnes, which compares with five-yearaverage annual growth of 2.5% Area under cultivation is likely to decline slightly to 7.80mn hectares (ha),while yields will reach an all time high of 5.70 tonnes/ha due to favourable weather conditions and adequatesupplies of irrigation water Production growth in 2012/13 and 2013/14 will support the country's exportcapacity as well as the continuous discount Vietnamese rice prices enjoy relative to global prices Weforecast the country's rice production balance in 2013/14 - at 7.3mn tonnes - to be 10.6% higher than thefive-year average, which would take exports to 6.8mn and 7.5mn tonnes, according to the Food and

Agriculture Organization and US Department of Agriculture (USDA) respectively, slightly higher than in2012/13

Looking at the 2014/15 season, we see production rising by 1.0% y-o-y to 28.0mn tonnes The government'splan to shift acreage from rice to corn and soybean in order to avoid rice oversupply will limit area underrice cultivation We see downside risks coming from the probable return of El Niño, which usually bringsdry weather to South East Asia and could hamper yields

Vietnamese rice is very competitive relative to many of its regional peers and is well positioned to benefitfrom both regional and global demand growth Another advantage of Vietnamese rice is its relatively higheryields The government is looking to increase by 50% the area planted with hybrid rice varieties, and thisbolsters our outlook for the country's rice production capabilities over the long term Over our five-yearforecast period to 2017/18, we expect rice output to grow by 8.5% on the 2013 level to 29.8mn tonnes

BMI Demand View: We forecast a modest consumption decrease of 1.2% to 21.6mn tonnes in 2014 Over

the longer term, we expect consumption to climb by 4.0% to 22.2mn tonnes in 2018 Rice remains themajor food staple in Vietnam, and we do not see this changing over our forecast period However, risinginterest in other foods such as wheat-based goods - supported by growing affluence - will restrict demandfor rice, and over the forecast period we expect production growth to significantly outpace that of

consumption Ultimately, demand growth will be influenced by population growth, as per capita

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

Table: Rice Production & Consumption (Vietnam 2012-2018)

Rice production, '000 tonnes 27,150.0 27,500.0 27,680.0 27,956.8 28,571.8 29,200.4 29,842.8 Rice production, % y-o-y 3.0 1.3 0.7 1.0 2.2 2.2 2.2 Rice consumption, '000 tonnes 19,650.0 21,900.0 21,637.2 21,702.1 21,854.0 22,007.0 22,161.1 Rice consumption, % y-o-y 1.3 11.5 -1.2 0.3 0.7 0.7 0.7

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

Slower Production Growth Owing To Corn Focus

Vietnam's plan to shift acreage from rice to other cash crops is likely to reduce slightly the 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 period to 2015, MARD aims to transition 100,000-110,000 hectares (ha) ofcurrent rice cultivated area into corn and soybean fields The winter and early autumn rice crops will

be most directly affected by the proposed programme; these crops usually generate low yields due to lack ofwater and recurrent attacks from pests and diseases The ministry proposes support of VND2mn/ha for inputcosts (seeds, fertilisers, pesticides) and about VND700,000/ha for land preparation costs for those who shiftfrom rice 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 50-100ha), where farmers

consolidate 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

Stiffer Competition

Rice - CBOT Rough Rice & Select Countries Rice Export Price (USD/tonne)

Note: Thailand, Vietnam: 5% broken rice India, Pakistan: 25% broken rice Source: BMI, FAO, Bloomberg

Exports To Remain Strong Despite Stiffer Competition

We believe the recent collapse in Thai rice prices will limit Vietnam's share of global exports in 2013/14and 2014/15, but expect Vietnam's market share to rebound over the long term Thailand has rushed to sellits huge stockpiles as the government needs money to pay farmers, lest they add their voices to a wider anti-government uprising Ending stocks in the country climbed to a record 18.0mn tonnes during 2013 and thegovernment has only started recently to sell inventories at a loss These dynamics will give a competitiveadvantage to Thai rice supplies in the near term, and prevent significant further growth in Vietnam's globalrice market share The USDA forecasts Thailand's share of global exports to recover to 22% in 2013/14 and