Vietnam agribusiness report q3 2015

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

Q3 2015 www.bmiresearch.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: June 2015

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BMI Industry View 7

SWOT 10

Agribusiness 10

Operational Risk 12

Industry Forecast 14

Grains Outlook 14

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

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

Rice Outlook 20

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

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

Dairy Outlook 25

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

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

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

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

Table: Vietnam - Planned Investment In Milk Production Capacity 28

Table: Butter Production & Consumption (Vietnam 2009-2014) 33

Table: Cheese Production & Consumption (Vietnam 2009-2014) 33

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

Table: Whole Milk Powder Production & Consumption (Vietnam 2009-2014) 34

Livestock Outlook 35

Table: Beef Production & Consumption (Vietnam 2014-2019) 36

Table: Pork Production & Consumption (Vietnam 2014-2019) 36

Table: Poultry Production & Consumption (Vietnam 2014-2019) 36

Table: Beef Production & Consumption (Vietnam 2009-2014) 42

Table: Pork Production & Consumption (Vietnam 2009-2014) 42

Table: Poultry Production & Consumption (Vietnam 2009-2014) 42

Coffee Outlook 44

Table: Coffee Production & Consumption (Vietnam 2014-2019) 45

Table: Coffee Production & Consumption (Vietnam 2009-2014) 49

Commodities Price Analysis 51

Commodity Strategy 51

Table: Impact Of El Niño On Crops 51

Upstream Analysis 56

Asia GM Outlook 56

Table: Selected Countries - GM Crops Use 58

Asia Machinery Outlook 59

Table: Select Countries - Average Size Of Farms, Hectares 60

Asia Fertiliser Outlook 66

Downstream Analysis 71

Mass Grocery Retail 71

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Vietnam 2014-2019) 74

Table: Grocery Retail Sales By Format (%) 75

Drink 76

Alcoholic Drinks 76

Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2014-2019) 77

Hot Drinks 79

Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2014-2019) 80

Soft Drinks 81

Table: Soft Drinks Sales, Production & Trade (Vietnam 2014-2019) 82

Food 84

Food Consumption 84

Table: Food Consumption Indicators - Historical Data & Forecasts (Vietnam 2012-2019) 85

Canned Food 85

Confectionery 86

Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2012-2019) 88

Pasta 89

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2014-2019) 90

Dairy 90

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2014-2019) 90

Regional Overview 92

Competitive Landscape 98

Table: Major Agribusiness Companies (USDmn) 98

Demographic Forecast 99

Table: Population Headline Indicators (Vietnam 1990-2025) 100

Table: Key Population Ratios (Vietnam 1990-2025) 100

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 101

Table: Population By Age Group (Vietnam 1990-2025) 101

Table: Population By Age Group % (Vietnam 1990-2025) 102

Methodology 104

Industry Forecast Methodology 104

Sector-Specific Methodology 105

BMI Industry View

BMI View: Recent developments in the country's economic and business environment outlooks add further

weight to our positive view on Vietnam's agribusiness sector The industry holds strong growth

opportunities in terms of production, exports and retail sales, particularly with regard to the rice, coffee, livestock and dairy sectors Moreover, the upcoming economic and financial integration in South East Asia will benefit Vietnam's exports of rice, dairy and coffee However, Vietnam is facing growing competition in its key markets The fulfilment of its promising potential will only be achieved if the country steps up its competitiveness and improves both product quality and supply chain efficiency Vietnam will have to significantly ramp up investments on crop productivity in order to not be left behind and, if it does, it will be able to produce more value-added crops and maintain its status as an export spearhead.

Agribusiness Market Value

BMI Market Value By Commodity (2011-2019)

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

5 15 25 35 45 55

0 50

-25 25

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

Vietnam Agribusiness Report Q3 2015

Key Forecasts

■ Rice consumption growth to 2019: 10.4% to 23.6mn tonnes Rice remains the major food staple in

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

■ Corn production growth to 2018/19: 30.2% to 6.7mn tonnes Although acreage is likely to remain

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

■ Milk production growth to 2018/19: 62.2% to 795,700 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

■ 2015 BMI universe agribusiness market value: USD37.5bn (down 1.3% from USD37.9bn in 2014;

growth expected to average 2.3% annually between 2015 and 2019)

■ 2015 real GDP growth: 6.4% (up from 6.0% in 2014; predicted to average 6.4% over 2015-2019).

■ 2015 consumer price index: 2.1% year-on-year (y-o-y) average (up from 4.1% in 2014; predicted to

average 4.1% over 2015-2019)

■ 2015 central bank policy rate: 6.00% (down from 6.50% in 2014; predicted to average 6.00% over

2015-2019)

Key Developments

Vietnam's coffee sector is undergoing some positive changes which will help the country maintain its status

as the largest exporter of robusta coffee globally in the coming years The Ministry of Agriculture (MARD)has unveiled a coffee plan for the 2014-2020 period, focusing mainly on a tree replanting programme and

on the development of the processing sector However, we believe the implementation of the recentlyunveiled coffee plan will be slow and the government's goal to boost value-added coffee exports will

be difficult to achieve In particular, the replanting programme may be partly jeopardised by the lowcompetitiveness of coffee prices relative to other crops, including pepper

After decades of active support to the rice sector, Vietnam is shifting its attention to corn and soybeanproduction in order to address its soaring animal feed deficit and to avoid rice oversupply A year into thenew policy incentivising farmers to switch to corn and soybean production, rice output growth has actuallyshown signs of slowing down, while corn production is picking up The eventual increase in domesticfeed output is likely to favour the development of the livestock sector

Due to the decline in exportable supply and fiercer competition from Vietnam's traditional competitors,Vietnamese rice exports will broadly stagnate in 2014/15 and 2015/16 compared with the five-year average.Thailand ended its rice scheme in 2014, which resulted in a drop of Thai rice export prices The return ofThailand on international markets will strongly limit Vietnam's rice exports in 2015 In the longer term,Vietnam will continue to gain competitiveness and eat into Thailand's market share The integration of theASEAN countries also bodes well for Vietnam's rice exports.

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

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

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

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

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

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

Agribusiness

SWOT Analysis

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

Operational Risk

SWOT Analysis

literacy rate for its income level

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

• Growing levels of foreign investment encourage further trade and spin-off industries

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

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

creates shortages of skilled labour

• Underdeveloped rail capacity overburdens the road network

• An underdeveloped banking sector decreases the options for keeping money in thestate

• Vietnam's military forces are only a quarter the size of China's, meaning that Beijingwould probably prevail in any naval battle over maritime disputes in the South ChinaSea

Opportunities ■ Explosive growth in demand for tertiary education will increase the number of highly

skilled graduates in the medium term

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

of port facilities will provide adequate capacity

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

action

SWOT Analysis - Continued

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

• Corruption and inefficiency in the legal system

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

Industry Forecast

Grains Outlook

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

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

Corn production grew for the sixth consecutive season in 2014/15, by 4.5% year-on-year (y-o-y) to 5.4mntonnes, following robust growth of 7.7% in 2013/14 Area harvested grew at a higher rate than in previousyears due to the government's plan to shift cultivated area from rice to corn and soybean Yields will alsoimprove Looking at the 2015/16 season, for which plantings are now complete, we believe production willcontinue to grow at a strong pace, reaching 5.7mn tonnes

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

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

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

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

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

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

2019 and beyond Indeed, we have a positive view on livestock production to 2019 owing to income growthand the fact that the sector has been identified as a recipient of government modernisation efforts Bullish

projections from our Food & Drink team reinforce this; we forecast per capita food consumption to grow by147.3% to 2019.

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

2014 2015f 2016f 2017f 2018f 2019f

Corn production, '000 tonnes 5,150.0 5,380.0 5,692.0 6,005.1 6,353.4 6,702.8 Corn production, % y-o-y 7.7 4.5 5.8 5.5 5.8 5.5 Corn consumption, '000 tonnes 6,695.1 6,896.0 7,254.5 7,639.0 8,051.5 8,494.4 Corn consumption, % y-o-y 3.8 3.0 5.2 5.3 5.4 5.5

f = BMI forecast Source: USDA, BMI

Government's Plan To Boost Production

The Ministry of Agriculture and Rural Development (MARD) has submitted to the prime minister a

proposed programme for shifting acreage from rice to other cash crops, with a focus on corn and soybean.Over the period to 2015, MARD aims to transition 100,000-110,000ha of current rice-cultivated area intocorn and soybean fields The winter and early autumn rice crops will be most directly affected by theproposed programme; these crops usually generate low yields due to lack of water and recurrent attacksfrom pests and diseases The ministry proposes support of VND2mn/ha for input costs (seeds, fertilisers,pesticides) and about VND700,000/ha for land preparation costs for those who shift from rice to corn orsoybean This new policy is a clear change to support dynamics in Vietnam, where rice production has longbeen the focus Incentivised by elevated public subsidies for rice production, farmers have planted the grainacross the country, even in areas with unfavourable soil conditions As a result, rice production has grown

by a healthy 2.3% annually since 1999/00

Booming Feed Imports

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

f = BMI forecast Source: BMI, USDA, ITC

A Greater Need For Feed

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

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

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

at a hefty 7.0% annually over the past 10 years

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

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

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

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

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

Mainly Emerging Countries

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

Source: BMI, ITC, UNCTAD

Consumption Driven By Feed

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

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

Corn Production Push Insufficient To Supply Feed Demand

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

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

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

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

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

2009 2010 2011 2012 2013 2014

Corn production, '000 tonnes 4,432.0 4,630.0 4,648.0 4,650.0 4,780.0 5,150.0 Corn production, % y-o-y -3.7 4.5 0.4 0.0 2.8 7.7 Corn consumption, '000 tonnes 5,400.0 6,100.0 5,900.0 6,000.0 6,450.0 6,695.1 Corn consumption, % y-o-y 3.8 13.0 -3.3 1.7 7.5 3.8

Source: USDA, BMI

Risks To Outlook

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

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

Rice Outlook

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

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

In the 2014/15 season, Vietnam's rice production will decline for the first time since 2000/01, which started

in January Vietnam's Ministry of Agriculture and Rural Development (MARD) intends to make ricefarmers shift to the cultivation of other grains in order to avoid paddy overproduction, prevent downwardpressure on prices and increase feed supply The government is looking to transition 100,000-110,000ha ofrice-cultivated area into corn and soybean fields per year This policy is likely to slightly limit the areaunder rice cultivation in the coming years, leaving Vietnam reliant on yield improvement for rice

production growth Planted area is declining more than previously expected, according to local sources,which report it has shrunk by 160,000ha in 2014/15 We have therefore revised down slightly our forecastand expect the push to reduce rice plantings to lead to a 0.1% decrease in production, to 28.1mn tonnes in2014/15 Area under cultivation is likely to be reduced by a lesser extent in 2015/16, which, combined withhigher yields, will help production recover by 0.5%

Compared to other agricultural sub-sectors, Vietnamese rice production is very competitive relative to many

of its regional peers and is well positioned to benefit from both regional and global demand growth

Another advantage of Vietnamese rice is its relatively higher yields The government is looking to increasethe area planted with hybrid rice varieties by 50%; this bolsters our outlook for the country's rice productioncapabilities over the long term Over our five-year forecast period to 2018/19, we expect rice output to grow

by 6.5% to 30.0mn tonnes

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

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

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

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

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

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

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

Rice production, '000 tonnes 27,510.0 28,150.0 28,121.9 28,262.5 28,827.7 29,404.3 29,992.3 Rice production, % y-o-y 1.3 2.3 -0.1 0.5 2.0 2.0 2.0 Rice consumption, '000 tonnes 20,800.0 21,380.0 21,807.6 22,243.8 22,688.6 23,142.4 23,605.2 Rice consumption, % y-o-y 5.6 2.8 2.0 2.0 2.0 2.0 2.0

f = BMI forecast Source: USDA, BMI

Slower Production Growth Owing To Corn Focus

Vietnam's plan to shift acreage from rice to other cash crops is likely to slightly reduce the area under ricecultivation in the coming years As a result, we expect most rice production growth to come from yieldimprovements MARD has submitted to the prime minister a proposed programme for shifting acreage fromrice to other cash crops, with a focus on corn and soybean Over 2013-2015, MARD aims to transition100,000-110,000ha of rice cultivated area into corn and soybean fields The ministry proposes support ofVND2mn/ha for input costs (seeds, fertilisers, pesticides) and about VND700,000/ha for land preparationcosts for those who shift from rice to corn or soybean This new policy is a clear change to support

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

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

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 an improvement in rice yields, in 2008 the government startedencouraging 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 Most of the production input (fertiliser, pesticide,machinery) is supported by a trading company In return, the company will directly purchase most of the

rice products from farmers, without going through middle men In 2011, over 85% of paddy farminghouseholds were cultivating rice in plots of 0.5ha or less We believe this plan will help yields grow.Vietnamese yields currently stand well above neighbouring countries, but still have room to reach

Australian rice yields of 9.2tonne/ha, which are the world's highest

Vietnam Gaining Competitiveness

Select Countries - Rice Export Prices (USD/tonne)

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

Exports Stagnating In 2014/15

Due to the decline in production in 2014/15, Vietnam will see its surplus decrease to 6.3mn tonnes,

compared with the five-year average of 6.7mn tonnes With a decline in exportable supply, lower stocksthan in recent years and intense competition from Vietnam's traditional competitors, Vietnamese riceexports will broadly stagnate in 2014/15 and 2015/16, compared with the five-year average Exports couldcome in around 6.0mn tonnes both years

Competition between the top rice exporters (Vietnam, Thailand and India) is fierce, amidst large Asiansupply Thailand started offloading its large government-held stocks at low prices in Q414 and will continue

to do so in the coming quarters Secondary exporters, including Mynamar and Cambodia, are also seeingtheir exports grow.

Vietnam will be able to maintain its market share (around 15-16% of the global rice trade) in spite of theincrease in Thai exports Indeed, Vietnamese export prices have eased and are now more competitiverelative to Thai prices: 5% broken rice for export was priced at around USD347/tonne in June 2015,

compared with USD385/tonne in Thailand

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

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

cost-Reshuffling The Cards

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

Source: USDA, BMI

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

2009 2010 2011 2012 2013 2014

Rice production, '000 tonnes 24,393.0 24,993.4 26,370.0 27,150.0 27,510.0 28,150.0 Rice production, % y-o-y 0.1 2.5 5.5 3.0 1.3 2.3 Rice consumption, '000 tonnes 19,000.0 19,150.0 19,400.0 19,700.0 20,800.0 21,380.0 Rice consumption, % y-o-y -2.1 0.8 1.3 1.5 5.6 2.8

Source: USDA, BMI

Risks To Outlook

In the short term, we see downside risks to our 2015/16 production forecast, due to the return of El Niño in

2015 Various meteorologist departments around the world have announced that El Niño has emerged in

2015 and forecast a moderate-to-strong event that will last through the year Although the link between theonset of El Niño and the actual materialisation of adverse growing weather (dryness in South and SouthEast Asia including in Vietnam) does not always hold, the weather phenomenon poses clear downside risks

to production in Vietnam

Dairy Outlook

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

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

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

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

maintain strong growth in 2014/15, of 10.2%, reaching 540,500 tonnes

Dramatic increases in cattle numbers and increased public and private sector investment - part of the effort

to reduce the country's growing import dependency - will be the main boost to growth Commercialisationwill also play a key role as larger, more efficient farms come to play a greater role in milk production.Finally, the sector is likely to benefit from the continued increase in yields, which have risen almost 130%over the past decade and are expected to continue to do so given the new investment in the sector Thecontinued pace of investment will help production growth remain robust in the coming years: we see liquidmilk output growing by 10.2% annually between 2013/14 and 2018/19, reaching 796,000 tonnes

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

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

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

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

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

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

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

2014 2015f 2016f 2017f 2018f 2019f

Butter consumption, '000 tonnes 14.5 15.7 16.9 18.3 19.7 21.3 Butter consumption, % y-o-y 8.0 8.0 8.0 8.0 8.0 8.0

f = BMI forecast Source: FAPRI, BMI

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

2014 2015f 2016f 2017f 2018f 2019f

Cheese consumption, '000 tonnes 6.0 7.5 9.3 11.6 14.6 18.2 Cheese consumption, % y-o-y 35.0 25.0 25.0 25.0 25.0 25.0

f = BMI forecast Source: FAPRI, BMI

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

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

Milk production, '000 tonnes 490.5 540.5 594.6 655.8 721.4 795.7 Milk production, % y-o-y 9.0 10.2 10.0 10.3 10.0 10.3 Liquid milk consumption, '000 tonnes 213.6 227.8 242.3 257.3 272.4 287.8 Liquid milk consumption, % y-o-y 6.7 6.6 6.4 6.2 5.9 5.7 Milk market value, % of total 0.6 0.6 0.7 0.8 0.8 0.9

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

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

2014 2015f 2016f 2017f 2018f 2019f

Whole milk powder consumption, '000 tonnes 38.4 40.1 41.9 43.8 45.8 47.8 Whole milk power consumption, % y-o-y 4.2 4.5 4.5 4.5 4.5 4.5

f = BMI forecast Source: FAPRI, BMI

Private Investment To Support Production Growth

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

Vinamilk, Vietnam's largest dairy company, is one of the most active in terms of investment It is

expanding both its upstream and downstream production capacity The company, which sources 25% of itsraw milk from small-scale farms in Vietnam, is ramping up its cow farming business and aims to source60-70% of its raw milk needs from internally owned farms by 2024 It will open three new dairy farms in

2014 and 2015

Table: Vietnam - Planned Investment In Milk Production Capacity

Company Domestic milk supply Current Milk production capacity (tonne/day) Projects

120,000-140,000 in 2020 (from contracted farmers and own farms).

TH Milk

Collecting milk from its

own dairy farms only

(45,000 cows) 400

TH milk invested USD1.2bn to develop its farms until 2017 Total number of cows projected to grow to 137,000 in

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

Nutifood -

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

Friesland

Campina

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

Source: BMI

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

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

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

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

yoghurt manufacturing plant operated by NutiFood

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

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

On A Downtrend

Vinamilk - Select Margins (%)

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

Increasing Domestic Competition Weighting On Margins

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

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

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

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

Liquid Milk Still The Dominant Product

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

Source: VPBS, Bloomberg, BMI

Consumers Eyeing Value-Added Dairy Products

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

consumption of ultr-high temperature (UHT) or sterilized liquid milk has a 90% penetration in cities and70% penetration in rural areas, while infant milk powder has a 43% penetration in cities and 30% in ruralareas, according to a consumer panel made in 2012 by Kantar Worldpanel For functional dairy products (ie,products that provide health benefits beyond their inherent nutritional value, probiotics in the case ofdrinking yogurt or milk for example), penetrations drops to less than 20% in cities and below 5% in ruralareas In urban areas, the fastest retail growth, both in terms of volume and value, is currently coming frominfant milk powder and functional products In rural areas, most dairy product consumption is blossoming,with infant milk powder, UHT liquid milk and cup yogurt recording the most robust growth

Large Opportunities Across Products

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

Note: DY = Drinking Yogurt Source: Kantar Worldpanel

Thailand's Fears Over Trade Liberalisation Overplayed

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

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

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

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

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

Mostly New Zealand

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

Source: BMI, USDA

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

Strong Government Support

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

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

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

2009 2010 2011 2012 2013 2014

Butter consumption, '000 tonnes 10.8 10.8 11.3 12.5 13.4 14.5 Butter consumption, % y-o-y 0.0 0.0 4.7 10.1 7.8 8.0

Source: FAPRI, BMI

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

2009 2010 2011 2012 2013 2014

Cheese consumption, '000 tonnes 3.8 3.5 3.5 4.0 4.4 6.0 Cheese consumption, % y-o-y 22.7 -7.7 0.3 15.4 9.3 35.0

Source: FAPRI, BMI

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

2009 2010 2011 2012 2013e 2014e

Milk production, '000 tonnes 278.2 306.7 345.0 382.0 450.0 490.5 Milk production, % y-o-y 6.1 10.2 12.5 10.7 17.8 9.0 Liquid milk consumption, '000 tonnes 175.1 167.6 174.8 185.3 200.1 213.6 Liquid milk consumption, % y-o-y 10.5 -4.3 4.3 6.0 8.0 6.7 Milk market value, % of total 0.4 0.4 0.5 0.5 0.7 0.6

e = BMI estimate Source: National sources, BMI

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

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

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

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

Livestock Outlook

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

sector, with pork production comprising about two-thirds of total meat production in 2013/14 Despitegoing through hard times over recent years owing to disease outbreaks, soaring input costs and competitionfrom cheap imports, we expect Vietnam's livestock production to grow strongly, led by poultry production,over the medium term Rising incomes will stimulate domestic meat consumption growth (owing to dietdiversification), and production will increase to keep pace That said, we expect the country to continuebeing a net importer of livestock over our forecast period

In 2014/15, we expect livestock production to continue on the recovery initiated in 2013/14, followingseveral years of a challenging environment characterised by elevated international feed prices and diseaseoutbreaks We see poultry production outperforming the rest of the complex, growing by a robust 5.0%year-on-year (y-o-y) in 2014/15, reaching 813,500 tonnes The pork sector will see output growth improvecompared with recent years when it was hurt by low prices, use of banned substances and disease outbreaks,but it will fail to record the robust growth rates of the 2000s We forecast production to grow by a mild3.0% y-o-y in 2014/15, to 2.5mn tonnes Beef and veal production is forecast to grow by a weak 1.0%, to378,300 tonnes

We see strong growth potential for the Vietnamese livestock industry on the back of rising incomes Poultrywill record the strongest growth; we forecast production to expand 32.6% compared with the 2013/14level to 1.0mn tonnes in 2018/19 Pork output should rise 12.5% to 2.7mn tonnes, which will not be enough

to fill in the country's growing demand for the meat The country will remain reliant on pork imports tosatiate demand Beef production will remain the least significant of Vietnam's livestock sectors and isexpected to grow by a low 11.3% on the 2013/14 level to 416,700 tonnes in 2018/19

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

capita consumption rising by over 100% from 2000 to 2014 to reach 39kg per year Buoyed by strongincome growth as well as population growth, we see healthy demand growth for livestock over 2014-2019.Poultry consumption is forecast to grow by 40.5% to 1.2mn tonnes, while pork (from a higher base) andbeef consumption will increase by 19.8% and 21.7% respectively We forecast pork consumption to reach2.9mn tonnes, with beef consumption reaching 506,300 tonnes We believe pork consumption will continue

to be the dominant meat, comprising more than 60% of total meat consumption A household surveyconducted in 2010 found that 40% of household meat expenditure was spent on pork, with preference given

to fresh pork over chilled or processed meat

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

2014 2015f 2016f 2017f 2018f 2019f

Beef & veal production, '000 tonnes 374.5 378.3 387.3 396.6 406.5 416.7 Beef & veal production, % y-o-y 1.0 1.0 2.4 2.4 2.5 2.5 Beef & veal consumption, '000 tonnes 416.2 432.8 450.1 468.1 486.8 506.3 Beef & veal consumption, % y-o-y 1.5 4.0 4.0 4.0 4.0 4.0

f = BMI forecast Source: Vietnam General Statistics, BMI

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

2014 2015f 2016f 2017f 2018f 2019f

Pork production, '000 tonnes 2,420.5 2,493.1 2,549.2 2,605.3 2,663.9 2,722.5 Pork production, % y-o-y 3.0 3.0 2.3 2.2 2.3 2.2 Pork consumption, '000 tonnes 2,384.5 2,432.1 2,517.3 2,615.4 2,727.9 2,856.1 Pork consumption, % y-o-y 3.0 2.0 3.5 3.9 4.3 4.7

f = BMI forecast Source: USDA, BMI

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

2014 2015f 2016f 2017f 2018f 2019f

Poultry production, '000 tonnes 774.8 813.5 858.3 909.8 968.9 1,027.1 Poultry production, % y-o-y 4.0 5.0 5.5 6.0 6.5 6.0 Poultry consumption, '000 tonnes 821.6 862.7 918.8 984.9 1,062.7 1,154.1 Poultry consumption, % y-o-y 4.0 5.0 6.5 7.2 7.9 8.6

f = BMI forecast Source: USDA, BMI

Sector Profitability Improves, But Challenges Remain

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

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

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

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

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

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

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

Poultry, Beef On The Rise

Vietnam - Meat Imports ('000 tonnes)

Note: f = BMI forecasts Source: USDA, BMI

Beef And Poultry Imports On The Rise

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

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

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

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

On The Recovery

Select Companies - Operating Margins (%)

Source: BMI, Bloomberg

Fragmented Feed Industry Disadvantages Local Companies

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

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

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

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

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

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

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

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

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

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

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

Mainly Foreign Companies

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

Source: BMI, Vietnam Animal Feed Association