Vietnam agribusiness report q4 2010

Animal feed will remain the primary use for corn to 2014 and beyond feed accounted for 73% of total demand in 2009 and consequently our demand outlook for corn is very closely linked to

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REPORT Q4 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: September 2010

Business Monitor International

© 2010 Business Monitor International

All rights reserved

All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher

DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

REPORT Q4 2010

INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: September 2010

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Political SWOT 7

Vietnam Economic SWOT 8

Vietnam Business Environment SWOT 9

Industry Forecast Scenario 10

Vietnam Sugar Outlook 10

Table: Vietnam – Sugar Production, Consumption & Trade 10

Table: Vietnam – Sugar Production, Consumption & Trade 12

Vietnam Livestock Outlook 13

Table: Vietnam – Poultry Production, Consumption & Trade 13

Table: Vietnam – Pork Production, Consumption & Trade 14

Table: Vietnam – Beef & Veal Production, Consumption & Trade 14

Table: Vietnam – Poultry Production, Consumption & Trade 17

Table: Vietnam – Pork Production, Consumption & Trade 17

Table: Vietnam – Beef & Veal Production, Consumption & Trade 17

Vietnam Coffee Outlook 19

Table: Vietnam – Coffee Production & Consumption 20

Table: Vietnam – Coffee Production & Consumption 22

Vietnam Dairy Outlook 23

Table: Vietnam – Milk Production & Consumption 23

Table: Vietnam – Butter Production, Consumption & Trade 24

Table: Vietnam – Cheese Production, Consumption & Trade 24

Table: Vietnam – Milk Production & Consumption 26

Table: Vietnam – Butter Production, Consumption & Trade 27

Table: Vietnam – Cheese Production, Consumption & Trade 27

Vietnam Grains Outlook 29

Table: Vietnam – Corn Production, Consumption & Trade 29

Table: Vietnam – Corn Production, Consumption & Trade 30

Vietnam Rice Outlook 31

Table: Vietnam – Rice Production, Consumption & Trade 31

Table: Vietnam – Rice Production, Consumption & Trade 33

Competitive Landscape 35

Table: Agricultural Commodity Producers & Traders 35

Table: Agribusiness Suppliers 36

Table: Integrated Agricultural Producers 37

Commodity Price Analysis 38

Grains Update 38

Corn 38

Table: Corn 38

Rice 39

Table: Rice 39

Soybean 40

Table: Soybean 40

Wheat 41

Table: Wheat 41

Softs Update 42

Cocoa 42

Table: Cocoa 42

Coffee 43

Table: Coffee 43

Milk 44

Table: Milk 44

Sugar 45

Table: Sugar 45

Downstream Supply Chain Analysis 46

Food 46

Industry Forecast Scenario 46

Food Consumption 46

Table: Food Consumption Indicators Historical Data & Forecasts 47

Canned Food 48

Confectionery 48

Table: Canned Food And Confectionery Sales Indicators Historical Data & Forecasts 49

Trade 50

Vietnam Food & Drink Trade Indicators - Historical Data & Forecasts 51

Mass Grocery Retail 52

Table: Vietnam MGR Indicators Value Sales by Format Historical Data & Forecasts 54

Grocery Retail Sales by Format Historical Data & Forecasts (%) 54

Macroeconomic Forecast 55

Table: Vietnam - Economic Activity, 2007-2014 56

Industry Trend Analysis 57

Table: Vietnam -Rice Production, Consumption & Trade 58

BMI Forecast Modelling 59

How We Generate Our Industry Forecasts 59

Executive Summary

BMI View: Consistent economic growth have led to double-digit consumption growth forecasts across all

agricultural sectors in Vietnam However, the industry will continue to produce surpluses in coffee and rice - but few other commodities Indeed, with a rising population and incomes, the country will remain a net importer of all livestock and dairy goods over the forecast period Although the Vietnamese

government is investing in several sectors to increase production, most of the industry, barring rice, will remain import-dependent and vulnerable to changes in global agricultural prices

Key Trends:

! Sugar production growth to 2014: 26% to 1.26mn tonnes Gains will be driven by stronger

domestic demand and an increase in yields Despite this, the country will likely remain a net sugar importer, as demand is expected to outstrip supply

! Corn Consumption growth to 2013/14: 51% to 8.1mn tonnes Animal feed will remain the

primary use for corn to 2014 and beyond (feed accounted for 73% of total demand in 2009) and consequently our demand outlook for corn is very closely linked to our Vietnamese livestock forecasts

! Pork production growth to 2014: 31% to 2.4mn tonnes Rising incomes will stimulate

domestic meat consumption growth and production will increase to keep pace Furthermore, the livestock industry has become a key focus of government efforts to modernise food processing

! 2010 Real GDP Growth: 6% (up from 5.3% in 2009; predicted to average 6.3% from 2010

to increase replanting of coffee trees Work on replacing trees, many of which are more than 20 years old, will improve disease resistance and thus yields in the long term Another growth driver will be export opportunities, given that Vietnam is the world's largest exporter of robusta coffee

Despite virtually flat production growth in recent years and even a slight decrease in 2009/10, we

believes Vietnam's rice sector will experience considerable growth over our forecast period, buoyed by improvements in infrastructure, higher yields and increased domestic demand Compared with many of its agricultural sub-sectors, Vietnamese rice is actually very competitive relative to many of its regional peers and is well positioned to ensure the country remains a net exporter Indeed, it will continue to

be one of the world's few rice exporters, the second largest in 2009/10

Vietnamese dairy consumption has expanded significantly in the last 15 years, driven by relatively large increases in domestic consumption and rising incomes, which have fostered increased milk consumption

To 2013/14, we are forecasting 40.9% growth in Vietnamese fluid milk production to 400,000 tonnes Dramatic increases in cattle numbers and increased public and private sector investment, in an effort to reduce the country's growing import dependency, will support the strong growth Commercialisation will also play a key role as larger, more efficient farms begin to play a greater part in total milk production

SWOT Analysis

Vietnam Political SWOT

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

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

the ruling Communist Party

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

and has acted to clamp down on graft among party officials

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

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

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

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

Vietnam Economic SWOT

with GDP growth averaging 7.6% annually between 2000 and 2009

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

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

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

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

to inflationary pressures

capital, while making Vietnamese enterprises stronger through increased competition

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

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

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

! Prolonged macroeconomic instability could prompt the authorities to put reforms

on hold, as they struggle to stabilise the economy

Vietnam Business Environment SWOT

attractive to foreign investors

! Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond

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

! Vietnam remains one of the world's most corrupt countries Its score in Transparency International's 2009 Corruption Perceptions Index was 2.7, placing it in 22nd place in the Asia-Pacific region

as Japan, South Korea and Taiwan This offers the possibility of the transfer of high-tech skills and knowhow

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

protectionism, which will remain a concern

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

Industry Forecast Scenario

Vietnam Sugar Outlook

BMI Supply View: Vietnam's sugar industry suffers from a lack of technological advancement and

investment as a result of cheap imports and competition from higher quality, more efficient producers The area harvested for sugar reached a 40-year high of 320,000 hectares in 2001/02, but has not returned

to that level in subsequent seasons To mitigate the fall in area planted, sugarcane yields have increased

by 21% from 1997/98 to 2007/08 Following poor output in 2008/09, production is expected to rebound

to 1.1mn tonnes in 2009/10, owing to better weather Over the forecast period, we expect sugar

production to increase by 25% to 1.26mn tonnes, driven by stronger domestic demand and an increase in yields Despite this, the country will likely remain a net sugar importer, as demand is expected to outstrip supply

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

forecast to continue climbing to 2014 Consumption growth will remain modest in 2010 because the consumption of sugar, and the food and drink products to which it contributes, is likely to be scaled down somewhat given the currently high levels of food price inflation However, we expect any reduction of consumer spending due to the combination of stimulus-unwinding and food price inflation to prove temporary We therefore maintain our bullish Vietnamese economic growth outlook for the medium term This positive economic growth outlook will be a key driver of our sugar consumption growth forecast of 26% to 2014

Table: Vietnam – Sugar Production, Consumption & Trade

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

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

Full Potential Not Yet Realised

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

0.95mn tonnes in 2000 and 1.21mn tonnes the following year Since then, however, the sector has

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

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

is considerably more expensive than in other sugar-producing countries in the region such as Thailand and Australia Vietnamese sugar producers have been protected by high tariffs and restrictive import regulations This dearth of competitiveness has inhibited the development of a sugar export industry Even with protection, many mills have made losses over the past few years Domestic prices are

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

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

protection Under the ASEAN Free Trade Area (AFTA) agreement, Vietnam has to reduce tariffs on sugar imports from ASEAN members to a maximum of 5%by 2011 This will expose the country to imports from Thailand, a major sugar exporter Tariffs on imports from other countries will also have to

be reduced by 2011 in line with the government's commitments to the WTO

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

The plan aimed for annual production of 1.5mn tonnes of sugar from 19.3mn tonnes of sugar cane by

2010 Obviously this will not be met The plan had envisioned 300,000 hectares (ha) planted to sugarcane and yields of 65 tonnes/ha Average yields are still some way off this level and cane production in 2009 is estimated at around only 10mn tonnes, though it stood at 12.1mn tonnes in 2008 By 2020, the plan is aiming for production of 2.1mn tonnes to be achieved through increasing cane yields and the sugar content of cane

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

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

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

Table: Vietnam – Sugar Production, Consumption & Trade

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

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

Risks To Outlook

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

on non-essential food and drink purchases, such as soft drinks and confectionery, but were this reduction

to be exacerbated by a secondary slowdown in the Vietnamese economy - perhaps due to reduced

investment as a result of sluggish US and eurozone growth - our sugar consumption forecasts are unlikely

to be achieved

Another downside risk could monetary tightening measures by the central bank As a result of relatively weak economic growth forecasts for Vietnam in 2010, the central bank is determined not to engage in monetary tightening, despite rising food inflation Should the bank change course and resort to a cycle of policy rate hikes, the resulting slowdown in wage increases could see consumers refrain from sugar purchases This could see our forecasts overshoot actual consumption

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

Vietnam Livestock Outlook

BMI Supply View: Vietnam's livestock industry has historically suffered from under-investment and

competition from cheaper imports Within the Vietnamese livestock industry, pig farming is by far the most significant sector, with pork production, totalling 1.9mn tonnes, comprising over three quarters of total meat production in 2009/10 This was a slight 2% increase year-on-year (y-o-y) Poultry production grew slightly to 365,000 in 2009/10 after the sector suffered the year before from reduced demand and low prices

Despite going through hard times over recent years with disease outbreaks, soaring input costs and competition from cheap imports, we expect Vietnam's livestock production to see strong growth over the medium term This is because rising incomes will stimulate domestic meat consumption growth (due to diet diversification) and production will increase to keep pace Furthermore, the livestock industry has become a key focus of government efforts to modernise food processing

As a result, we expect poultry production to rise by 33.5% to 453,700 tonnes over our forecast period to 2013/14, despite the ongoing avian flu problems We forecast pork production growth of 30.6% from its

2009 level to 2.42mn tonnes by 2014, outpacing growth in the production of other meat and further boosting its dominance Despite this growth, the country will remain reliant on pork imports to satiate demand Beef production will remain the least significant of Vietnam's livestock sectors, but will also see good growth over our forecast period, with production expected to rise by 20.8% to 314,100 tonnes

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

per-capita consumption rising by 86% from 1999 to 2009 to reach 28kg per year Once again, buoyed by strong income as well as population growth, we see healthy demand growth for livestock over the forecast period to 2014 Poultry consumption will see the strongest growth at 41% to 453,000 tonnes, while pork (from a higher base) and beef consumption will increase by 32% and 35% respectively By 2014, pork consumption will reach 2.5mn tonnes, while beef consumption will reach 688,000 tonnes Consumption growth will surpass production growth in all cases, increasing the country's meat import dependency

Table: Vietnam – Poultry Production, Consumption & Trade

Poultry Net Trade Balance, '000

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

Table: Vietnam – Pork Production, Consumption & Trade

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

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

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

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

to 33%, depending on the cut, while the duty for frozen beef is set at 20% At the beginning of April

2009, the agriculture ministry also petitioned the finance ministry for the import tariff on corn to be cut

from 8% to 4% to help livestock producers In May 2009, the Ministry of Finance reported that frozen meat imports had been falling by around 20% month-on-month following the March tariff hike

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

2010 as Vietnam's economy continues to recover

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

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

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

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

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

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

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

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

Government Pledges Crackdown On Low Quality Meat

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

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

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

perceived higher quality However, a number of health scares from imported meat goods in mid-2009 has dented this assumption Both the national and Ho Chi Minh City authorities have said that inspection of meat imports will be improved In August 2009, the deputy director general of the Vietnam Food

Administration was quoted in the local press admitting that the agency's food safety inspection teams

were woefully ill-equipped and were unable to detect the presence of disease or prohibited chemicals in imported meat

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

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

Diseases Make Their Way Through Livestock Sector

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

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

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

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

to be declared avian flu free

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

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

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

vaccinated to claim vaccination fees The prevalence of small-scale 'backyard' poultry producers also makes implementing an effective system difficult Indeed, the flu is continuing to hurt farmers, as six separate outbreaks were reported in August 2010, leading to the deaths of over 6,000 birds

Vietnam's pork sector is no stranger to disease either In July 2010, 380 pigs were infected by Blue Ear Disease (porcine reproductive respiratory syndrome; PRRS) in the country's southern Tien Giang

province The government tried to mitigate the problem by killing all infected pigs and sterilising the areas the pigs had inhabited in order to prevent the disease from spreading To aid the farmers, the

government gave out approximately US$1.30 per animal lost

Despite this, the disease has spread to 21 other provinces in a month (mostly in southern areas of the country), including Dong Nai and Binh Phuoc, Nghe An, Cao Bang, Soc Trang, Quang Tri, Tien Giang, Lao Cai, Long An, Binh Duong, Bac Lieu, Quang Nam, Dong Nai, Binh Phuoc and Da Nang Indeed, the spread of the disease has prompted local authorities to label the disease a pandemic In an effort to stop the advance of the disease, local authorities have urged farmers to slaughter sick pigs immediately The authorities have also called for tighter transport restrictions to keep the disease contained In recent years, the beef sector has managed to escape similar problems However, given the general susceptibility of the livestock sector to outbreaks, it may not be long before the beef sector experiences a similar disease outbreak

Table: Vietnam – Poultry Production, Consumption & Trade

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

Table: Vietnam – Pork Production, Consumption & Trade

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

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

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

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

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

Vietnam Coffee Outlook

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

doubling over that time, while the area planted has expanded from 42,000 hectares to over 509,000 Vietnam is the world's biggest producer of robusta coffee, with more than 95% of its coffee output consisting of the cheaper bean and only around 2-3% of production devoted to the premium Arabica variety In 2009/10, we estimate output fell for the second consecutive year, as unseasonal rains caused coffee trees in many areas in Vietnam to flower early This was then followed by a dry period, which damaged the resulting output In 2010/11, we forecast a rebound to 19.1mn bags due to normal weather conditions as well as increased government support

The poor prices for robusta in 2009 saw farmers' profits drop, leading to the introduction of plans for coffee stockpiling in order to boost prices If such activity is to be sustained it would require significant funding

Out to 2013/14, we expect production growth of 23% to 22.8mn bags as the Vietnamese government endeavours to increase the replanting of coffee trees However, in mid-2009, farmers were still investing

in expanding the area under production rather than replanting existing trees Work on replacing trees, many of which are more than 20 years old, will improve disease resistance and thus yields in the long term Another growth driver will be export opportunities, given that Vietnam is also the world's largest exporter of robusta coffee

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

forecast to rise at an average rate of 5.9% annually to the end of the forecast period As GDP and

population rise, more people will have more money to spend on luxury goods like coffee Increasing urbanisation and the spread of Western-style coffee shops should add to this trend Vietnamese coffee consumption grew by 18% y-o-y in 2009 and we predict that consumption is set to rise 3% in 2010 One should note that this is on the heels of a global recession and perhaps more tellingly, consumption is forecast to grow by 46% over our forecast period to 2014 The Ministry of Agriculture and Rural

Development (MARD) 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: Vietnam – Coffee Production & Consumption

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

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

Volume Up, Value Down

In March 2010, according to The Vietnam Association of Cacao and Coffee (Vicofa), the Vietnamese

government announced that it would temporarily stockpile 200,000 tonnes of coffee in order to stabilise its export price The decision comes hot on the heels of the MARD stating that it would limit the coffee cultivation area within the country as another stabilising method Vietnam's coffee exports were up 15.8% y-o-y at 18.5mn bags in the 2009 coffee year (October-September), according to the MARD The value of exports, however, dropped by around 20% Apart from the falling world price, the export value of

Vietnamese coffee was hurt by its low quality Black beans, which are usually discarded, comprised as much as 15% of the 2009 coffee crop, according to Vicofa

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

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

ageing tree stock The ministry had said that it wanted to halt the expansion of coffee growing areas until

2010 and instead work on increasing yields and investing in new trees Despite this, farmers encouraged

by high robusta prices are reportedly increasing the area devoted to coffee, in many cases pushing into forest land

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

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

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

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

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

Domestic Demand Still Low, But Set To Rise

While the vast majority of Vietnam's coffee will be destined for the export market for a long time to come, we expect domestic consumption to rise rapidly in the coming years In Q209, the Policy and Strategy Institute on Agriculture and Rural Development conducted a survey of coffee drinking habits in Hanoi and Ho Chi Minh City, according to a report in Viet Nam News As we would expect, the survey found that coffee consumption has been increasing in both volume and value terms The increasing spread

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

of coffee consumption

The survey also found that coffee consumption was highest among the young and the well educated Coffee consumption was lowest among the elderly and in rural areas Consumption was far higher in the

south than in the north In BMI's view, these findings indicate a bright future for coffee consumption in

the country As urbanisation continues at a rapid pace and access to education increases, coffee

consumption will rise accordingly The high level of consumption in trend-setting Ho Chi Minh City suggests that aspirational consumers in other population centres of the country will not be far behind The popularity of coffee among the younger generation also suggests that consumption will see rapid growth

in the future While office workers drinking instant coffee will likely be content with domestic production for some time to come, Vietnamese coffee growers will only benefit from increased domestic demand for higher quality coffees if investment in quality improvement is made

Table: Vietnam – Coffee Production & Consumption

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

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

Risks To Outlook

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

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

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

While Vietnam's coffee consumption forecast 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 from government monetary normalisation or a secondary economic slowdown Such a scenario would likely see our consumption growth forecast missed

Vietnam Dairy Outlook

BMI Supply 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 which have fostered increased milk consumption In fact, per-capita milk consumption in Vietnam has virtually doubled between 2000 and 2010 to 2kg per person per year Despite this increase, the country remains below the regional average Though there has been an increase in milk production over the years, the country produces neither cheese nor butter

To 2013/14, we are forecasting Vietnamese fluid milk production growth of 40.9% to 400,000 tonnes Dramatic increases in cattle numbers and increased public and private sector investment, in an effort to reduce the country's growing import dependency, will be supportive of strong growth Commercialisation will also play a key role, as larger, more efficient farms come to play a greater part in total milk

production A sustained period of high global milk prices - thanks to rising global demand and supply sluggishness - will also prove production-supportive and encourage producers to be more long-term in their approach to cattle farming Finally, the sector should benefit from the continued increase in yields, which have been rising over the last decade and should continue to do so given the new private

investments in the sector

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

to 2014 Strong economic growth will filter through into rising disposable incomes, pushing up demand for non-essential foodstuffs Through to 2014, we expect fluid milk consumption growth of 39% to 229,0000 tonnes, while demand for butter, cheese and whole milk powder will soar, albeit from a far lower base Increased urbanisation, increased home ownership of white goods and the ongoing spread of modern, organised retail will all prove supportive of strong dairy consumption growth, even if the

forecast higher global dairy prices limits the growth outlook to some extent

Table: Vietnam – Milk Production & Consumption

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

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

Table: Vietnam – Butter Production, Consumption & Trade

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

Table: Vietnam – Cheese Production, Consumption & Trade

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

Consumers Struggling With High Milk Prices

Despite the fall in the international price of milk since the middle of 2008, Vietnamese consumers are still paying some of the highest prices in the region Consumer groups and the Vietnam Competition

Authority have complained that imported powdered milk in Vietnam is far more expensive than in

ASEAN neighbours such as Thailand, Malaysia and Indonesia Some brands being sold in Vietnam are reportedly as much as two to three times the prices seen in other markets Dairy importers have blamed import tariffs and the weakness of the dong for the price differences The head of the competition

authority's consumer protection section was quoted in the local press as saying that the claims are baseless and cannot explain the large price differences between countries In September 2009, the government cut tariffs on imported dairy goods to help consumers struggling with the high prices

The dispute continued into 2010, with the Ministry of Finance alleging that the prices of imported dairy goods are kept high by the vast amount spent on advertising and marketing by the major dairy companies

A report by the ministry released in December 2009 alleged that for many of the large importers,

advertising and marketing costs make up as much as 30% of total costs, breaching a law limiting

advertising expenditure to 10% of total costs This has been strenuously denied by the major importers The authorities are threatening to draft new legislation to control prices We suspect, however, that the dispute will eventually blow over without the need for additional regulation

One reason the companies are able to get away with selling imported brands at a premium is the Vietnam consumer's continuing preference for foreign goods Consumers are often willing to pay a large premium for milk powder from a well-known international brand, particularly when claims of extra nutritional benefits such as added vitamins are made Local producers need to work on improving the quality of local production and increasing marketing efforts to persuade buyers that their products are just as good as imports This will take time, but is essential for increasing the strength of the local dairy production and processing sector as well as making dairy products more affordable If consumers were confident in the quality of cheaper local brands of milk powder, the high prices charged for imported goods would be far harder to maintain The government is currently running a 'buy Vietnam' campaign with dairy goods a key focus Anecdotally, shopkeepers in Ho Chi Minh City have been reporting an increase in sales of domestic dairy brands Sustained investment in brand building for local dairy products will be needed if any gains are to be sustained

Future Bright Despite Difficulties

In spite of the current problems of low sale prices and high input costs faced by farmers, rising demand

on the back of per-capita income growth and government support for the sector should ensure strong growth in dairy production over our forecast period Indeed, the government has a somewhat ambitious plan to increase the proportion of the country's milk consumption from domestic production to 40% in

2010 The government has been working with the three dominant dairy processing companies to provide training to small-scale farmers in a bid to lift output Provincial authorities have also been helping with support, such as interest-free loans and subsidies for the purchase of new dairy animal stock Increasing output will also be assisted by the consolidation of farms, with the proportion of those with five or more cows creeping up While the government may find its 40% target for 2010 a bit steep, the support for the industry bodes well for the future of Vietnamese dairy production

Production To Benefit From Private Sector Investment

The dairy sector has been boosted by a US$350mn investment from TH Milk Joint Stock Company

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

Since the opening up of the economy in 1986, there has been considerable change in the structure of the Vietnamese dairy industry The contribution of state farms, which were previously responsible for almost all milk production, has fallen to around just 5%, with the other 95% of milk production coming mainly

from small- and medium-sized private farms Doi Moi, as the restructuring of the economy is known, has also led to the emergence of a highly consolidated private milk collection and processing sector, within which TH Milk plays a dominant role

To exploit the rewards on offer in the country's dairy sector, Vinamilk has also reportedly started

construction on a US$120mn milk factory in the southern Binh Duong province We are maintaining our upbeat assessment of the growth prospects of Vietnam's dairy sector on the back of the country's strong economic rebound and favourable demographics The country's economic recovery has lifted many Vietnamese out of poverty and we believe consumer spending will continue to hold up strongly over the

coming years BMI is forecasting Vietnamese GDP per capita to grow by more than 50% from its 2009

level to US$1,591 by 2014 Moreover, Vietnam's massive and relatively young population will continue

to bolster demand for dairy products

We believe Vinamilk's expansion on its production capacity will allow Vietnam to reduce its import dependency gradually over the long term The new factory will have a capacity of 400mn litres of milk per year when it becomes operational in 2012, and is expected to double its capacity by 2017 The

company is also planning to increase its stock of milk cows to 80,000, which will allow it to boost its milk supply by 1.3mn litres a day

Vinamilk's increased production capacity is pivotal to alleviating price pressures from the country's dairy imports Despite the growth in milk production - a 400% increase from 54,000 tonnes to 262,200 tonnes between 1999/00 and 2007/08 - Vietnam still has to import around three-quarters of its dairy needs Due

to its heavy reliance on dairy imports, Vietnam is particularly susceptible to the sustained high levels of global milk prices (even though milk prices registered a fall in 2006 and 2009, they have remained high at

an average level of US$16.45 per cwt for the past 10 years.) This need for imports also increases

Vietnam's vulnerability to food price inflation in what is already an inflationary environment These pressures further attest to our view that an expansion plan by domestic and multinational industry players

is essential to improving the affordability of dairy products

Table: Vietnam – Milk Production & Consumption

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

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

Table: Vietnam – Butter Production, Consumption & Trade

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

Table: Vietnam – Cheese Production, Consumption & Trade

Another downside production risk is that 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 their discretionary spending

Demand for dairy products in 2008 was hit by the contaminated milk scandal in neighbouring China After melamine (which was mixed with milk in China to make the protein content appear higher) was found in some products produced by Vietnamese companies owing to the use of milk powder imported from China, demand for dairy products dropped The scandal not only places downside risks to our forecast for milk consumption in the short term, but has also negatively affected production volumes as processors have cut back the amount of milk purchased from suppliers

Finally, the lack of a national quality control body for dairy products will continue to place downside risks on our production and consumption forecasts, as it places the dairy industry at risk of a similar scandal at home, which would further tar the image of dairy products in Vietnam

Vietnam Grains Outlook

BMI Supply View: Vietnamese corn production is forecast to be just over 5mn tonnes in 2009/10, a 14%

y-o-y improvement due to a slight increase in area planted in 2009/10, as well as higher yields This output maintains a decade-long trend of higher yields for the corn sector, which have increased by 66% to 4.58MT/Ha from 2000/01 to 2009/10 Corn has also increased its area harvested from 700,000 hectares in 2000/01 to 1.2mn in 2009/10 This increases have come as domestic consumption rose significantly on the back of improving incomes, diversifying the diet away from rice, the country's traditional staple

To 2013/14, we expect corn production to increase by 40% to 6.19mn tonnes Acreage is likely to resume diminishing, though current yield immaturity means significant gains are still available via this avenue, especially as robust local corn prices provide incentives to farmers The important growth driver will be domestic consumption, especially from the livestock sector Corn consumption doubled from 2004 to

2009 and we expect this trend to continue, although not at such a rate, to 2014 The demand gains will partly come from livestock growth, as beef, veal and poultry production should all see strong growth

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

at 51.3% over the five-year period This will increase the country's import dependency However, strong economic growth over the period should ensure that the impact of a rising import bill on consumption is deemed manageable Animal feed will remain the primary use for corn to 2014 and beyond (according to Food and Agricultural Policy Research Institute data, feed accounted for 73% of total demand in 2009) and consequently our demand outlook for corn is very closely linked to our Vietnamese livestock

forecasts We have a positive view on livestock production to 2014, thanks to income growth and the fact that the sector has been identified as a recipient of government modernisation efforts

Table: Vietnam – Corn Production, Consumption & Trade

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

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