Vietnam agribusiness report q4 2012

Vietnam Livestock Outlook BMI Supply View: Within the Vietnamese livestock industry, pig farming is by far the most significant sector, with pork production comprising about two-thirds

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REPORT Q4 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Production Date: September 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Agriculture SWOT 7

Vietnam Business Environment SWOT 8

Supply & Demand Analysis 9

Vietnam Dairy Outlook 9

Table: Vietnam Milk Production & Consumption, 2011-2016 10

Table: Vietnam Butter Consumption, 2011-2016 10

Table: Vietnam Cheese Consumption, 2011-2016 10

Table: Vietnam Whole Milk Powder Consumption, 2011-2016 10

Table: Vietnam Milk Production & Consumption, 2007-2012 11

Table: Vietnam Butter Consumption, 2007-2012 11

Table: Vietnam Cheese Consumption, 2007-2012 11

Table: Vietnam Whole Milk Powder Consumption, 2007-2012 11

Vietnam Livestock Outlook 12

Table: Vietnam Poultry Production & Consumption, 2011-2016 13

Table: Vietnam Pork Production & Consumption, 2011-2016 13

Table: Vietnam Beef & Veal Production & Consumption, 2011-2016 13

Table: Vietnam Poultry Production & Consumption, 2007-2012 15

Table: Vietnam Pork Production & Consumption, 2007-2012 16

Table: Vietnam Beef & Veal Production & Consumption, 2007-2012 16

Vietnam Coffee Outlook 17

Table: Vietnam Coffee Production & Consumption, 2011-2016 18

Table: Vietnam Coffee Production & Consumption, 2007-2012 21

Vietnam Grains Outlook 22

Table: Vietnam Corn Production & Consumption, 2011-2016 23

Table: Vietnam Corn Production & Consumption, 2007-2012 24

Vietnam Rice Outlook 25

Table: Vietnam Rice Production & Consumption, 2011-2016 27

Table: Vietnam Rice Production & Consumption, 2007-2012 31

Commodity Price Analysis 32

Monthly Grains Update 32

Wheat: Little Potential For Export Restrictions 32

Corn: US Downgrades Tighten Market Further 35

Soybean: South America In The Spotlight 37

Rice: The Only Well-Supplied Grain Market 39

Table: Select Commodities: Performance & Forecasts 40

Monthly Softs Update 41

Cocoa: Looking Supported 42

Coffee: Supported In Short Term 44

Palm Oil: Heading Back To Support 46

Sugar: Searching For Support 48

Cotton: Still In A Downward Trend Channel 50

Table: Select Commodities: Performance & Forecasts 51

Upstream Analysis 52

Asia Fertilizer Outlook 56

Asia GM Outlook 60

Table: Select Countries Growing GM Crops 63

Downstream Analysis 64

Consumer Outlook 64

Food 65

Food Consumption 65

Table: Food Consumption Indicators – Historical Data & Forecasts, 2010-2016 66

Canned Food 66

Table: Canned Food Value/Volume Sales – Historical Data & Forecasts, 2010-2016 67

Confectionery 67

Table: Confectionery Value/Volume Sales – Historical Data & Forecasts, 2010-2016 68

Drink 69

Alcoholic Drinks 69

Table: Alcoholic Drinks Value/Volume Sales – Historical Data & Forecasts, 2010-2016 70

Hot Drinks 70

Table: Hot Drinks Volume Sales – Historical Data & Forecasts, 2010-2016 71

Soft Drinks 71

Table: Soft Drinks Value/Volume Sales – Historical Data & Forecasts, 2010-2016 73

Table: Carbonates , 2009-2016 73

Mass Grocery Retail 74

Table: MGR Value Sales by Format – Historical Data & Forecasts 76

Trade 76

Table: Food & Drink Trade Indicators – Historical Data & Forecasts , 2010-2016 77

Country Snapshot 78

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 79

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 80

Table: Vietnam's Key Population Ratios, 1990-2020 81

Table: Vietnam's Rural And Urban Population, 1990-2020 81

BMI Forecast Modelling 82

How We Generate Our Industry Forecasts 82

Executive Summary

BMI View: The agriculture industry (including forestry and aquaculture) contributes to more than 20%

of Vietnam's GDP and employs almost half its population Vietnam's coffee and rice sectors face the largest risks in terms of losing competitive advantage as other Asian countries step up production We believe Vietnam will have to significantly ramp up investments on crop productivity in order to not be left behind, and if it will be able to produce more value-added crops and maintain its status as an export spearhead

Key Forecasts

ƒ Rice production growth to 2016: 12.8% to 29.7mn tonnes Our bullish outlook for Vietnam's

rice production is based on the country's high yields and the fact that its rice is very competitive relative to many of its regional peers It also is well positioned to benefit from both regional and global demand growth

ƒ Coffee consumption growth to 2015/16: 66.0% to 2.2mn bags Strong growth in domestic

coffee consumption will be driven by increases in GDP and population, and as spending on food and drink items such as coffee increases Urbanisation and the spread of Western-style coffee shops are expected to add to this trend

ƒ Milk production growth to 2015/16: 24.4% to 398,000 tonnes Dramatic increases in cattle

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

ƒ BMI universe agribusiness market value: US$21.3mn in 2012; growth to average 5.9%

annually between 2010/11 and 2015/16

ƒ 2012 real GDP growth: 5.3% (down from 5.9% in 2011; predicted to average 6.7% over

Mainly For Exports

f = BMI forecast Source: BMI, USDA, Vicofa

Key Developments

Thailand's strong push to form a rice cartel along with other five Association of Southeast Asian Nations countries – including Vietnam – in order to control and boost international rice prices is unlikely to materialise, in our view Although the project can count on a strong support from Thailand and

Cambodia, Vietnam, which would be one of the two pillars of the project given the volume of its exports, has shown a clear scepticism towards such a plan in past years Moreover, Vietnam has been making inroads into some markets traditionally dominated by Thailand, as Viet rice is now enjoying a

US$100/tonne discount over Thai rice Participating in the rice cartel would lead to a compression of the price differentiation and could hamper Vietnamese exports

Vietnam's coffee production and exports are being hampered by the country's low-quality beans The

decision made by Nestlé in August 2012 to boost direct purchases of coffee from farmers by as much as

five times over the next half decade is likely to significantly improve bean quality Moreover, the plan aims to improve growing techniques through training, and it is likely to shorten the supply chain, thus improving growers' income All this, coupled with tree-replanting programmes, will support yields in the coming years

SWOT Analysis

Vietnam Agriculture SWOT

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

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

ƒ Vietnam is the world's second largest exporter of both rice and coffee It also enjoys relatively high rice yields compared with its regional counterparts

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

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

comparison to more developed international competitors

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

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

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

ƒ Vietnam's fast-growing population of more than 80mn provides a large market for agro-food products

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

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

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

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country

attractive to foreign investors

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

Weaknesses ƒ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

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

ƒ Vietnam remains one of the world's most corrupt countries According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries

Opportunities ƒ Vietnam is increasingly attracting investment from key Asian economies, such as

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

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

Threats ƒ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

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

Supply & Demand Analysis

Vietnam Dairy Outlook

BMI Supply View: 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% coming mainly from small- and medium-sized private farms

We have revised upward our production forecast on the back of an update in historical data In 2011/12,

we forecast milk production growth of 3.4% to 331,000 tonnes Looking at 2012/13, we expect output to grow further to 343,000 tonnes Out to 2015/16, we are forecasting Vietnamese fluid milk production growth of 24.8% on the 2010/11 level to 398,000 tonnes Dramatic increases in cattle numbers and increased public and private sector investment – part of the effort to reduce the country's growing import dependency – will be the main boost to growth Commercialisation will also play a key role as larger, more efficient farms come to play a greater role in milk production A sustained period of high global milk prices on the back of rising global demand and supply sluggishness will also prove supportive of production and encourage producers to consider the long-term impact of their approach to cattle farming Finally, the sector is likely to benefit from the 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

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

driven by relatively large increases in domestic consumption as well as rising incomes Per capita milk consumption in Vietnam doubled between 2000 and 2009 to 12kg per person per year Despite this increase, the country remains below the regional average of 65kg Though there 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 increasingly reliant on dairy imports to meet its domestic needs

Vietnamese dairy consumption growth will remain strong over our forecast period to 2016 Strong economic growth will filter through into rising disposable incomes, pushing up demand for non-essential foodstuffs Through to 2016, we expect fluid milk consumption growth of 38.6% to 242,300 tonnes, while demand for butter, cheese and whole milk powder will soar 49.6%, 165.7% and 19.4% respectively, albeit from far lower bases Increased urbanisation, increased ownership of Western goods and the

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

Table: Vietnam Milk Production & Consumption, 2011-2016

Milk Production, '000 tonnes 1,2 320.0 331.0 343.0 360.0 378.0 398.0Liquid Milk Consumption, '000 tonnes 3 174.8 185.3 200.1 213.6 227.8 242.3

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year, ie, 2011 =

2008-09 Sources: 2 General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI

Table: Vietnam Butter Consumption, 2011-2016

Butter Consumption, '000 tonnes 1 11.3 12.5 13.4 14.5 15.7 16.9

Notes: f BMI forecasts Sources: 1 FAPRI, BMI

Table: Vietnam Cheese Consumption, 2011-2016

Cheese Consumption, '000 tonnes 1 3.5 4.0 4.4 6.0 7.4 9.3

Notes: f BMI forecasts Sources: 1 FAPRI, BMI

Table: Vietnam Whole Milk Powder Consumption, 2011-2016

Whole Milk Powder Consumption,

Notes: f BMI forecasts Sources: 1 FAPRI

Vinamilk Continues Its Expansion

The Viet Nam Dairy Products Joint Stock Company (Vinamilk) has added Thailand to its portfolio of

export markets In February 2012, the company announced that it would begin exporting dairy products to Thailand in Q112 through a US$10mn deal signed in late 2011 In 2011, Vinamilk exported $140mn worth of products to 15 countries all over the world, a y-o-y increase of 72% Countries that receive

exports include the US, Australia, Canada, Russia, Turkey, Iraq, South Korea and Cambodia In the domestic market, Vinamilk has a 30% share of the processed dairy sector

Table: Vietnam Milk Production & Consumption, 2007-2012

Milk Production, '000 tonnes 1,2 234.4 262.2 278.2 306.7 320.0 331.0Liquid Milk Consumption, '000 tonnes 3 127.3 158.4 175.1 167.6 174.8 185.3

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2011 =

2008-09 Sources: 2 General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI

Table: Vietnam Butter Consumption, 2007-2012

Butter Consumption, '000 tonnes 1 10.8 10.8 10.8 10.8 11.3 12.5

Notes: f BMI forecasts Sources: 1 FAPRI, BMI

Table: Vietnam Cheese Consumption, 2007-2012

Cheese Consumption, '000 tonnes 1 2.9 3.1 3.8 3.5 3.5 4.0

Notes: f BMI forecasts Sources: 1 FAPRI, BMI

Table: Vietnam Whole Milk Powder Consumption, 2007-2012

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

Vietnam Livestock Outlook

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

sector, with pork production comprising about two-thirds of total meat production in 2010/11 Despite going through hard times over recent years owing to disease outbreaks, soaring input costs and

competition from 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 diet diversification), and production will increase to keep pace That said, we expect the country to continue being a net importer of livestock over our forecast period

For 2011/12, we have revised our forecast for poultry production in line with official estimates and now expect it to remain stagnant at 350,000 tonnes We believe this is largely due to the threat of avian flu, which is making its rounds across many regions in Vietnam and which is expected to curb output Pork production is also expected to remain steady at 1.96mn tonnes in 2011/12 Beef and veal production is forecast to fall by 1.7% to 285,000 tonnes in 2011/12

We expect poultry production to rise by 23.5% on the 2010/11 level to 432,100 tonnes over our forecast period to 2015/16 and for pork production to grow 13.1% to 2.22mn tonnes The country will remain reliant on pork imports to satiate demand Beef production will remain the least significant of Vietnam's livestock sectors and is expected to fall by 7.2% to 269,000 tonnes

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

capita consumption rising by 87% from 2001 to 2011 to reach 36.7kg per year Buoyed by strong income growth as well as population growth, we see healthy demand growth for livestock over 2011-2016 Poultry consumption is forecast to grow by 32.6% to 884,200 tonnes, while pork (from a higher base) and beef consumption will increase by 12.1% and 24.2% respectively We forecast pork consumption to reach 2.2mn tonnes, with beef consumption reaching 793,800 tonnes We believe pork consumption will continue to be the dominant meat consumed, comprising more than 60% of total meat consumption A household survey conducted in 2010 found that 40% of household meat expenditure was spent on pork, with preference given to fresh pork over chilled or processed meat

Table: Vietnam Poultry Production & Consumption, 2011-2016

Poultry Production, '000 tonnes 1 350.0 350.0 370.0 390.0 410.0 432.1Poultry Consumption, '000 tonnes 1 667.0 700.4 738.9 783.2 830.2 884.2

Notes: f BMI forecasts Sources: 1 USDA

Table: Vietnam Pork Production & Consumption, 2011-2016

Pork Production, '000 tonnes 1 1,960.0 1,960.0 2,032.0 2,100.0 2,168.7 2,217.5Pork Consumption, '000 tonnes 1 1,995.0 2,023.4 2,074.0 2,125.8 2,183.0 2,235.7

Notes: f BMI forecasts Sources: 1 USDA

Table: Vietnam Beef & Veal Production & Consumption, 2011-2016

Beef & Veal Production, '000 tonnes 1 290.0 285.0 280.0 275.0 272.0 269.0Beef & Veal Consumption, '000

Notes: f BMI forecasts Sources: 1 USDA

Pork Free From Chemical Additives

After discovering pork laced with clenbuterol and salbutamol in March, authorities have since conducted random tests of pork and pork products from numerous supermarkets in Ho Chi Minh The meat

inspected has not been found to contain any illegal substances; however, authorities said supermarkets will continue to be monitored

Fragmented Domestic Feed Industry Disadvantages Local Companies

The domestic livestock industry is made up of mainly small-scale or backyard farm operations that have poor 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

also known as blue ear disease In our view, disease outbreaks will constantly feature as a challenge to the industry as long as it remains fragmented and low in technology and health standards

The fragmented nature of the industry has thus resulted in foreign companies, with their sophisticated and larger-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

remaining market share

Changing Meat Consumption Trends

Vietnam – Livestock Consumption, %

e/f = BMI estimate/forecast Source: BMI

It is estimated that approximately 20 of the foreign-owned feed companies control almost 70% of the Vietnamese animal feed industry and similar significant shares in the poultry and pork industry

According to reports, 30% of domestic firms have been forced out of the animal feed business as a result Another advantage that foreign firms enjoy in the sector is that they are not subject to the high lending costs that 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

Local Feed Company Expands

The dominance of foreign players in the livestock sector could be changing on the back of news that a

local feed company has shown significant development in a sector in which foreign firms such as Cargill and CP Foods traditionally dominate In February 2012, the Hong Ha Nutrition Joint Stock Co, a

acquired 7 hectare factory in Dong Van Industrial Zone in Duy Tien District, in the northern Ha Nam Province The factory is expected to raise its capacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago This has come on the back of VND150bn (US$7.1mn)

invested in 2011

Livestock Industry Faces Crucial Challenges In Medium Term

Vietnam's commercial animal feed sector has grown at an annual rate of about 16% between 2005 and

2009, according to the Ministry of Agriculture and Rural Development This reflects the strong growth in livestock production in the country

While we are largely optimistic about the growth prospects for this industry, there are salient downside risks to this outlook We highlight three main challenges: high interest rates, a reliance on imports (which causes the livestock industry to be vulnerable to fluctuating input prices), and the fragmented nature of the market

Growing Poultry Deficit

Vietnam – Selected Livestock Estimates, 000 tonnes

f = BMI forecast Source: BMI

Table: Vietnam Poultry Production & Consumption, 2007-2012

Table: Vietnam Pork Production & Consumption, 2007-2012

Pork Production, '000 tonnes 1 1,832.0 1,850.0 1,910.0 1,930.0 1,960.0 1,960.0Pork Consumption, '000 tonnes 1 1,855.0 1,880.0 1,936.0 1,940.0 1,995.0 2,023.4

Notes: f BMI forecasts Sources: 1 USDA

Table: Vietnam Beef & Veal Production & Consumption, 2007-2012

Disease poses a major downside risk to our forecasts for livestock production in Vietnam It is a particular

risk for our poultry and pork output forecasts, although it could also affect our beef outlook BMI

highlights that there have been reports that the highly pathogenic avian influenza has been found in numerous provinces such as Quang Tri, Thanh Hoa, Nam Dinh, Bac Ninh, Quang Nam and Quang Ninh

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

on production growth

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 and the area planted expanding from 42,000 hectares (ha) to more than 509,000ha Vietnam is the world's biggest producer of robusta coffee, with more than 95% of its coffee output consisting of the robusta variety and only around 2-3% of production devoted to the premium arabica variety The

Vietnamese coffee market year runs from October to September, and harvesting takes place between November and February We slightly revised up production figures from 2010/11 to be in line with the latest historic data available

For the 2011/12 season ending in September 2012, we expect production to come in at 20.9mn 60kg bags, posting y-o-y growth of 6.6% This will come from increases in yields on the back of improved

production practices, which will help to compensate for losses linked to tree replanting According to the Vietnam Coffee & Cocoa Association (Vicofa), about 137,000ha of old and low-quality coffee trees need

to be replaced over the next five years in Vietnam's central highlands, which represents about 25% of total current production area

The outlook for the 2012/13 season is deteriorating, as inclement weather is dragging down yields Rainfall in Daklak, the main growing region, was 28% lower between January and August 2012

compared with a year earlier, according to the province's meteorology and hydrology department Output

is therefore expected to stagnate at 21.0mn bags The dry weather is depressing further coffee production, which was already expected to be hampered by the two-year coffee beans cycles, in which output often declines after a bumper crop (which has been the case in 2011/12)

Out to 2015/16, we expect production growth of 28.7% to 25.2mn bags as the Vietnamese government endeavours to increase the 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 also the world's largest exporter of robusta coffee

Mostly In Daklak

Source: USDA, BMI

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

likely to increase Urbanisation and the spread of Western-style coffee shops are expected to add to this trend Coffee consumption grew impressively by 56.8% from 0.44kg per capita in 2005 to 0.69kg per capita in 2010, one of the highest growth rates out of all coffee-exporting countries over the period We predict that consumption will rise 11.3% in 2012 to 1.48mn bags That said, we note that coffee

consumption growth comes from a relatively low base, and we expect 66.0% growth to 2.2mn bags over our forecast period to 2016 Coffee consumption per capita is forecast to expand by 58.0% from 0.99kg per capita to 1.4kg per capita by 2016 The Ministry of Agriculture and Rural Development has said it hopes to boost domestic consumption to 10-15% of the national coffee crop We do not believe this will

be achieved in our forecast period, but the existence of such a sizeable target underlines the apparent potential of domestic consumption

Table: Vietnam Coffee Production & Consumption, 2011-2016

Direct Coffee Purchases Could Improve Coffee Quality

Vietnam's coffee production and exports are being hampered by the country's low-quality beans The

decision made by Nestlé in August 2012 to boost direct purchases of coffee from farmers by as much as

five times over the next half decade will very likely significantly improve bean quality The company, which started direct buying in 2011, may buy about 1.0mn bags (60,000 tonnes) from growers a year by

2017, compared with 200,000-230,000 bags in 2012

We believe shortening the supply chain will improve growers' income Moreover, Nestlé is likely to provide training to the farmers it buys the coffee from, which would improve yields and overall quality

Mainly For Exports

f = BMI forecast Source: BMI, USDA, Vicofa

Getting Into Sustainable Production

Sustainably produced farm produce is a top seller – especially to developed markets and environmentally conscious customers – and the government of Vietnam knows it Through numerous public-private partnerships, the Vietnamese government has started to pursue sustainable farming practises, placing significant emphasis on the coffee sector According to statistics from Nedcoffee Vietnam, the amount of coffee produced under the UTZ Certified, 4C Association and Rainforest Alliance criteria has risen to 115,000 tonnes (or 1,916 60kg bags) of coffee beans in 2011 from close to zero a few years ago This represents a small 10% of total national coffee production; BMI therefore expects this trend to gather more traction given the government's strong support

Drop In Exports In Line with Our View

We highlighted in July 2012 that coffee exports out of Vietnam have been exceptionally strong since the start of the year and well above averages We noted that they were likely to come down closer to historic averages Indeed, exports in the first six months of 2012 had reached 1mn tonnes, up 38.6% y-o-y and up 50.0% from the 2006-2010 average Our view that exports would fall in the following months played out nicely, as they dropped 18.8% in July compared with June

Falling Exports

Source: BMI, Vicofa

Increasing Foreign Competition

According to Vicofa, local exporters are facing increasing competition from foreign players in securing coffee bean stocks to be shipped out of the country Larger foreign players are currently allowed to invest only in cultivating, processing and preserving coffee for export, as well as 'the transfer of advanced technology' However, anecdotal evidence suggests that these companies have also been setting up unofficial networks to buy coffee stocks for export, thus depriving local exporters of coffee bean supply

BMI believes that any measure to curb such activity will only be a temporary solution The fragmented

structure of the industry results in local companies being less competitive than larger foreign companies

in terms of economies of scale and the ability to take out business loans We believe a greater

consolidation of the local industry and better development of networks between exporters and farmers is needed, especially once the coffee market eventually opens up to foreign wholesalers in accordance with WTO commitments

Vietnam Catching Up

Source: USDA

Domestic Demand Could Soar, But Poor Business Landscape Undermines Potential

While the vast majority of Vietnam's coffee will be destined for the export market, we expect domestic consumption to rise rapidly in the coming years Nestlé set up a mill to process beans in Daklak in 2012

in order to tap on the promising coffee consumption story of the country The company already invested US$270 to build a plant in Dong Nai province and will start producing soluble coffee, mainly for local sale, in November 2012 A 2009 survey by the Policy and Strategy Institute on Agriculture and Rural Development on coffee-drinking habits in Hanoi and Ho Chi Minh City clearly reinforces this view Results showed that coffee consumption was highest among the young and the well-educated living in urban areas and lowest among the elderly and in rural areas Consumption was also far higher in the south than in the north The US Department of Agriculture has also noted that 'domestic consumption has been increasing due to the effective marketing strategies of domestic coffee companies.'

Table: Vietnam Coffee Production & Consumption, 2007-2012

Risks To Outlook

We are concerned that weather conditions could impact the 2012/13 coffee crop According to the

Vietnam Coffee & Cocoa Association, 20% of the 2012/13 coffee crop is at risk Older trees, which are half as productive as younger ones, could also drag on overall yields as they rise to 30% of the total trees

in plantation next year These pose salient downside risks to our projection for coffee output to reach 21.0mn bags in 2012/13

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 Grains Outlook

BMI Supply View: Vietnamese corn production is forecast to reach nearly 5mn tonnes in 2011/12, a

6.5% y-o-y expansion on the back of a slight increase in area planted as well as higher yields This maintains a decade-long trend of higher yields for the corn sector; yields increased by more than 50% from 2000/01 to 4.5mn tonnes per hectare (ha) in 2011/12 This is higher than the South East Asian average yield of 3.2mn tonnes/ha in 2010/11, according to the US Department of Agriculture (USDA) Corn's harvested area also increased from 730,000ha in 2000/01 to 1.15mn in 2011/12 These increases have come as domestic consumption rose significantly on the back of improving incomes Indeed, as incomes have risen, consumers have been encouraged to buy more meat, of which corn is the main feedstock More than 80% of the country's total corn output goes towards the feed industry Looking at 2012/13, we forecast production to come in at 5.3mn tonnes, up 7.1% y-o-y Growth will be supported by acreage expansion and higher yields

To 2015/16, we expect corn production to increase by 42.0% to 6.6mn tonnes 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 The important growth driver will be domestic consumption, especially from the livestock sector Corn consumption doubled from 2005 to

2010, and we expect this trend to continue, although not at such a strong rate, to 2016 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 As a result, Vietnam will very likely become increasingly reliant on corn imports to meet domestic demand

BMI Demand View: To 2016, corn consumption growth will continue to exceed that of production, at

52.3% This will increase the country's import dependency However, strong economic growth over our forecast period is likely to ensure that the impact of a rising import bill on consumption is deemed

manageable Animal feed will remain the primary use for corn to 2016 and beyond (according to the USDA, 80% of total corn consumption goes to animal feed use) Indeed, we have a positive view on livestock production to 2016 owing to income growth and 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 by 45.5% to US$316.20 by 2016

Table: Vietnam Corn Production & Consumption, 2011-2016

Corn Production, '000 tonnes 1 4,648.0 4,950.0 5,300.0 5,600.0 6,100.0 6,600.0Corn Consumption, '000 tonnes 1 5,900.0 5,700.0 6,840.0 7,509.9 8,224.4 8,984.0

Notes: f BMI forecasts Sources: 1 USDA

Animal Feed Industry Faces Crucial Challenges In Medium Term

Vietnam's commercial animal feed sector grew at an annual rate of about 16% between 2005 and 2009, according to the Ministry of Agriculture and Rural Development This reflects the strong growth in livestock production in the country

While we are largely optimistic about the growth prospects for this industry, there are salient downside risks to this outlook We highlight three main challenges: high interest rates, a reliance on imports (which causes the livestock industry to be vulnerable to fluctuating input prices), and the fragmented nature of the market

Reliance On Imports Increases Vulnerability To Price Fluctuations

Vietnam's dependency on imports to satisfy grains demand is expected to continue to grow over the long term; this dynamic makes local livestock farmers highly vulnerable to fluctuations in international grains prices Import dependency for corn, for example, rose from 5.2% in 2005 to 19.0% in 2010 According to the Vietnam Animal Husbandry Department, animal feed manufacturers have increased their prices up to

a dozen times since early 2011, pushing current prices 40% higher y-o-y Higher animal feed costs, coupled with a shortage in output, has pushed the prices of live pigs up since the start of 2011, and they now cost VND64,000-70,000/kg

With consumption of meat growing steadily in Vietnam as incomes rise, we also expect imports of grain for animal feed to continue increasing Unless the government boosts domestic production of these grains

or improves storage conditions, the country will, in our view, remain largely vulnerable to grain price fluctuations in the coming years

Increasing Domestic Feed Production

f = BMI forecast Source: USDA, BMI

Table: Vietnam Corn Production & Consumption, 2007-2012

However, the ongoing introduction of hardier and higher yielding crops will ultimately necessitate greater investment; corn prices will have to remain in favourable territory in the medium term to ensure that this investment is forthcoming

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

Vietnam Rice Outlook

BMI Supply View: After a record year in 2010/11, we forecast Vietnamese rice production to stagnate at

26.5mn tonnes in 2011/12 The area harvested is expected to remain stable at 7.6mn hectares (ha), and yields will increase slightly to 5.36tonne/ha Looking at the 2012/13 season starting in January 2013, we forecast production to grow by a modest 0.9% to 26.7mn tonnes Decent production, combined with strong ending stocks (1.9mn tonnes in 2010/11 and 2.3mn tonnes expected in 2011/12), will support the country's export capacity, as will the inherent discount Vietnamese rice prices enjoy compared with global prices We forecast the country's rice production balance at 6.6mn tonnes in 2011/12 and 2012/13, 22.2% higher than the five-year average, which would bring exports to 7.0mn tonnes for both seasons, according to the US Department of Agriculture (USDA) This will counter reduced supply from Thailand

on the back of the government's changes to procurement policy and help to loosen global markets in 2011/12

Compared with many of its agricultural sub-sectors, Vietnamese rice 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

increase by 50% the area planted with hybrid rice varieties, and this bolsters our bullish outlook for the country's rice production capabilities over the long term Over our five-year forecast period to 2015/16,

we expect rice output to grow by 12.8% to 29.7mn tonnes

BMI Demand View: We forecast a modest consumption increase of 2.0% to 19.8mn tonnes in 2012

Over the longer term, we expect consumption to climb by 8.3% to 21.0mn tonnes in 2016 Rice remains the major food staple in Vietnam, and we do not see this changing over our forecast period However, rising interest in other foods such as wheat-based goods – supported by growing affluence – will restrict demand for rice, and over the forecast period we expect production growth to significantly outpace that of consumption Ultimately, demand growth will be influenced by population growth, as per capita

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

Table: Vietnam Rice Production & Consumption, 2011-2016

Rice Production, '000 tonnes 1 26,300.0 26,455.0 26,700.0 27,603.7 28,628.0 29,652.4Rice Consumption, '000 tonnes 1 19,400.0 19,788.0 20,084.8 20,386.1 20,691.9 21,002.3

Notes: f BMI forecasts Sources: 1 USDA

Rice Cartel Plan Unlikely To Be Materialised

Thailand's strong push to form a rice cartel along with five other Association of Southeast Asian Nations (ASEAN) countries in order to control and boost international rice prices is unlikely to materialise, in our view In August, the country revived its long-held goal to form a cartel and announced five rice-exporting nations in South East Asia (the traditionally top two world rice exporters – Thailand and Vietnam – and their smaller neighbours Cambodia, Laos and Myanmar) are in talks to create a formal alliance aimed at boosting prices and increasing export revenues The project primarily aims to encourage information sharing and cooperation in production and marketing, with the goal of increasing rice export prices by 10% annually

Thailand has for many years toyed with the idea of using its dominant market position to influence the price of rice This is a decade-long project, as Thailand has been unsuccessfully attempting to create an international alliance to coordinate rice prices since 2002 A project similar to the current one gained attention in 2008, but Thailand withdrew its proposal as it immediately came under strong criticism, both domestically and internationally

Creating a cartel is increasingly essential for the country, as it will help plunging exports to recover and sustain the government rice mortgage scheme The government has been paying above-market prices to its own farmers in a costly programme to boost rural incomes and is reluctant to increase the flow of rice

to the market by lowering prices (see 'PTP Poised To Maintain Rice Policy', August 23)

We reiterate our view that the rice cartel plan is unlikely to materialise (see 'Thailand Rice Outlook: Q1 2011', October 21 2010) for two main reasons First, we do not expect Vietnam to participate in the

cartel The project can count on strong support from Thailand and Cambodia; however, Vietnam, which would be one of the two pillars of the project given the volume of its exports, has shown a clear

scepticism towards such a plan in past years The country's exports are benefiting from Thailand's rice scheme programme, and Vietnam has been making inroads into some markets traditionally dominated by Thailand Indeed, Viet rice is now enjoying a US$100/tonne discount over Thai rice Participating in the rice cartel would very likely lead to a compression of the price differentiation and could hamper

Vietnamese exports Moreover, the poor record of cooperation between Thailand and Vietnam is strongly

weighing against the implementation of a rice cartel Second, pro-cartel countries would most likely face fierce opposition from key rice importers and ASEAN members Indonesia and the Philippines

We also highlight that conditions of the rice sectors in the various countries differ significantly, making cooperation difficult Thailand and Vietnam are the two leading rice exporters in the world, while output from Cambodia, Laos and Myanmar is relatively meagre but improving Laos is a net importer of rice, and Cambodia and Myanmar export small quantities A lack of adequate facilities and infrastructure such

as rice mills, storage and transport is constraining production and export growth Regulating supply of a perishable and bulky agricultural commodities in these conditions will prove to be challenging

Even if the cartel is formed, we believe it is unlikely to reach its goal of setting high prices The five countries only account for 42% of total rice exports this season, according the US Department of

Agriculture, and have to face strong competition from India, Pakistan and the United States Moreover, major importers such as China, Japan, Indonesia and the Philippines produce large quantities of rice domestically, which will make it even harder for the cartel to be effective in setting market prices

Exports To Remain Strong

We expect exports from Vietnam to remain strong in the coming months, as they are likely to stay very competitive globally The country enjoys a significant discount compared with global prices Vietnam 5% rice prices grew 11.0% in August, driven by growing demand from Southeast Asian importers and the international price trend, but still enjoy a US$115/tonne discount to Thai 5% rice (compared with a wider spread of nearly US$200/tonne in May) Vietnam is expected to export 7.0mn tonnes in 2011/12 and in the coming season, and the country had already shipped 4.3mn tonnes between January and July 2012 High exports out of Vietnam, along with other traditionally secondary exporter such as India, Pakistan, Cambodia and Myanmar, will help to keep the global market well supplied in spite of reduced exports out

of Thailand this year Vietnam's authorities plan to export 6mn-7mn tonnes of rice annually until 2015

Usurping Thailand's Rice Throne In 2012

We believe that Vietnam will catch up with Thailand in terms of rice export volumes in 2012 This is mainly due to the impact of the Thai government's rice intervention programme, which is expected to keep Thai rice exports uncompetitive relative to other Asian exporters in the near term

A Tie Between Top Three Exporters In 2012

f = BMI forecast Source: USDA, BMI

Having said that, the country is facing fierce competition from India, whose re-entry on the non-basmati rice export market after a four-year export ban was sudden but buoyant Although we expect Vietnamese rice exports to stagnate at 7.0mn tonnes from 2011, Vietnam is likely to take over Thailand exports, forecast at 6.5mn tonnes in 2012 However, Vietnam must now battle against India's rice exports, which have been made competitive thanks to a weakening rupee and high stocks India's exports are expected to outpace Vietnam's, at 8.0mn tonnes in 2012 Therefore, Vietnam's share of global exports could be lower than expected, as increased competition in the international rice markets could divert traditional importers

to other suppliers, mainly India

Even though Vietnam's rice exports are set to exceed Thailand's in 2011/12, we expect Thailand to regain some ground in the coming years, mainly as most stockpiling for the country's procurement programme will be completed by the end of 2011/12, leaving a larger surplus available for export in 2012/13

Slow Start To The Year

Vietnam – Rice Exports, '000 tonnes

Source: General Statistics Office of Vietnam, BMI

Opening Up The Market

BMI believes that the impact of the Vietnamese rice market opening up to foreign traders from 2011

onwards poses a upside risk to production over the longer term Under WTO commitments, foreign traders are allowed to directly undertake rice trading in the country Previously, foreign companies were required to enter into joint ventures with local players In an effort to improve the capabilities of local rice exporters and prepare for the impending increase of competition with bigger more experienced foreign players, the government stepped up efforts to improve the local rice industry The government has

mandated that all rice exporters are required to have at least one rice storage warehouse with a minimum capacity of 5,000 tonnes of paddy and a rice processing facility with a minimum processing capacity of

10 tonnes per hour All rice exporters had until September 2012 to take the necessary actions and adapt to these changes

While this is likely to lead to a reduction in the 264 rice export companies in the country as of 2010, these developments also will very likely increase the industry's economies of scale and increase the

competitiveness of the industry We believe that this development is a step in the right direction; a

restructuring of the local rice industry will encourage consolidation and better prepare local players for eventual foreign competition in the sector

Table: Vietnam Rice Production & Consumption, 2007-2012

On the production side, the main short-term risk to supply lies in the return of El Niño weather This phenomenon could bring hot and dry weather to the country, dragging on yields and overall rice

production for 2011/12 autumn and winter rice and the 2012/13 season

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

Agriculture and Rural Development of Vietnam is endeavouring to develop a large-scale rice farming model where neighbouring farmers work with businesses and government officials to increase rice yields

In the model, these businesses provide capital for farmers to increase farm inputs such as fertiliser and machinery They also provide a ready consumer network for farmers In return, they reserve the exclusive right to purchase after the harvest Currently, large-scale rice farms cover 10,000ha of total rice area harvested The plan aims to expand this to 400,000-800,000ha by end-2012 and finally to 1mn ha in

2015, or approximately 10% of total area harvested for rice We believe that this plan poses salient upside risks to our forecast for rice production growth

Commodity Price Analysis

Monthly Grains Update

ƒ The short-term outlook remains on a knife-edge Our bias remains for a pullback, but any break

up out of current ranges would negate this view

ƒ We continue to forecast lower average prices in 2012 and 2013 for most of the grains complex, largely owing to improving supply prospects In the short term, we expect food price inflation to tick higher into positive territory, although a repeat of H111 looks unlikely at this stage

ƒ We expect corn to remain the outperformer of the grains complex over the coming months, as supply conditions continue to deteriorate and the US ethanol mandate remains in place despite opposition from food and livestock groups

ƒ Commodity prices in general could receive a boost in the coming weeks in anticipation of further monetary easing in the US, although we caution that the impact on grain prices will be

comparatively minimal

Wheat: Little Potential For Export Restrictions

Front-month wheat has traded largely flat in August, after rising significantly in June and July Recent supply concerns have focused on downgrade risks in Russia and Ukraine, although we do not expect export restrictions as local food price inflation (particularly in Russia) is very low by recent standards In the medium term, we forecast a 12mn-tonne deficit in 2012/13, after estimating a 32mn tonne surplus in 2011/12

With the focus now shifting to the southern hemisphere (specifically Australia and Argentina), we

continue to forecast lower average prices for 2012 (at USc700/bushel) and 2013 (at USc680/bushel), although we see strong upside risks to this view should planting prospects in Australia or Argentina disappoint

Barely In Positive Territory

Russia & Ukraine – Food Price Inflation (% chg y-o-y)

Source: BMI, Bloomberg

Cooling Off Slightly

Front-Month CBOT Wheat, USc/bushel, Daily Chart & RSI (below)

Source: BMI, Bloomberg

Corn: US Downgrades Tighten Market Further

Front-month corn has risen slightly in August, after registering a significant increase in June A key reason was the significant downgrade to US production for the 2012/13 season We have long expected

corn to be the outperformer in the grains complex despite lower US ethanol production (see our online service, June 20, ‘Monthly Grains Update’), as net speculative positions remain low by recent standards

Overall, we are forecasting a large 27mn tonne deficit for corn in 2012/13, largely due to further

downward revisions to the US crop For prices, we believe the crop damage in the US is largely priced in, and as such continue to expect lower average prices in 2012 and are in the process of revising our yearly price forecasts In the coming weeks, prices could see some relief should southern hemisphere plantings remain strong

Corn Continues To Outperform

Select Grains – Rebased

Source: BMI, Bloomberg, Notes: June 22, 2012 = 100; BMI calls for outperformance on June 22, 2012.

Hanging Around

Front-Month CBOT Corn, USc/bushel, Weekly Chart

Source: BMI, Bloomberg

Soybean: South America In The Spotlight

Front-month soybean also edged slightly higher in August, remaining above previous record highs This has mainly been a function of poor supply at the end of the 2011/12 season from Latin America and poor prospects for the 2012/13 US soybean crop The result is that the global market will register a 17.0mn tonne deficit in 2011/12, the largest in 50 seasons and more than double the next largest deficit from 2007/08 We also forecast the market to remain in deficit in 2012/13 at 6mn tonnes, after downgrading the US crop by 8% to 77mn tonnes

We expect soybean to temporarily consolidate around the key USc1,700/bushel support level, and this could rise further should US weather conditions remain poor We have revised up our forecasts and now expect soybean prices to average higher in 2012 at USc1,450/bushel and 2013 at USc1,370/bushel

Against The Grain

US – % Of Soybean Crop Soil In Excellent Condition

Source: BMI, NASS, Note: Conditions during Week 30 of the US soybean harvest, roughly corresponding to the end of July with minor variation.

Top Of The Charts

Front-Month CBOT Soybean, USc/bushel, Weekly Chart

Source: BMI, USDA

Rice: The Only Well-Supplied Grain Market

Front-month rough rice has traded slightly lower in July and has been the underperformer among the grains complex in recent weeks as the global rice market remains comparatively well supplied Prices reached the top of the US$13.50-16.00/cwt trading range we had identified, but have moderated since then We continue to forecast production to increase for all major producers and exporters in 2012 and

2013 Elevated prices over recent years have incentivised farmers, with area planted forecast to approach

or exceed record levels in China, Vietnam, Thailand (which is maintaining its rice mortgage scheme) and India in 2011/12 and 2012/13

Greater supply from major growers should enable the stocks-to-use ratio to reach its highest level in a decade On the back of another strong surplus in 2011/12, prices are likely to average lower at

US$14.50/cwt in 2012 and US$14.00/cwt in 2013 The key risk is the effect a weaker Indian monsoon will have on the country’s rice crop, although so far production prospects remain strong by historical levels

Due For A Down Leg?

Front-Month CBOT Rough Rice, US$/cwt, Weekly Chart

Source: BMI, Bloomberg