Vietnam agribusiness report q4 2013

It holds strong growth opportunities in terms of production, exports and retail sales, more specifically with regard to the coffee and livestock sectors.. Vietnam's livestock sector, and

Q4 2013 www.businessmonitor.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: September 2013

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DISCLAIMER

BMI Industry View 7

BMI Industry View 7

SWOT 10

Agribusiness 10

Business Environment 12

Industry Forecast 13

Dairy Outlook 13

Table: Vietnam Milk Production & Consumption, 2012-2017 14

Table: Vietnam Butter Consumption, 2012-2017 14

Table: Vietnam Cheese Consumption, 2012-2017 14

Table: Vietnam Milk Production & Consumption, 2007-2012 20

Table: Vietnam Cheese Consumption, 2007-2012 21

Table: Vietnam Butter Consumption, 2007-2012 21

Livestock Outlook 22

Table: Vietnam Beef & Veal Production & Consumption, 2012-2017 24

Table: Vietnam Pork Production & Consumption, 2012-2017 24

Table: Vietnam Poultry Production & Consumption, 2012-2017 24

Table: Vietnam Beef & Veal Production & Consumption, 2007-2012 32

Table: Vietnam Pork Production & Consumption, 2007-2012 32

Table: Vietnam Poultry Production & Consumption, 2007-2012 32

Coffee Outlook 34

Table: VIETNAM Coffee Production & Consumption 35

Table: VIETNAM Coffee Production & Consumption 43

Rice Outlook 44

Table: VIETNAM Rice Production & Consumption 46

Table: Vietnam Rice Production & Consumption, 2007-2012 50

Grains Outlook 51

Table: VIETNAM Corn Production & Consumption 52

Table: Vietnam Corn Development Production Plan & Bmi Forecasts 53

Table: VIETNAM Corn Production & Consumption 55

Commodities Price Analysis 57

Monthly Softs Strategy 57

Table: Select Commodities - Performance & BMI Forecasts 65

Table: BMI Commodities Strategy 66

Monthly Grains Strategy 67

Table: Select Commodities - Performance & BMI Forecasts 75

Table: BMI Commodities Strategy 76

Upstream Analysis 77

Drink 77

Alcoholic Drinks 77

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2010-2017 79

Hot Drinks 80

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2010-2017 81

Soft Drinks 82

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2010-2017 83

Table: Carbonates Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 84

Mass Grocery Retail 84

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2010-2017 87

Table: Grocery Retail Sales By Format (%) 87

Food 88

Food Consumption 88

Table: Food Consumption Indicators - Historical Data & Forecasts, 2010-2017 89

Canned Food 90

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2010-2017 90

Confectionery 91

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2010-2017 92

Pasta 92

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 93

Dairy 95

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 95

Downstream Analysis 97

Asia GM Outlook 97

Table: Philippines Corn Estimates 101

Table: Select Countries - GM Crops, 2012 102

Asia Machinery Outlook 102

Table: China Grain Public Production Support Programme (CNYbn) 104

Asia Fertiliser Outlook 109

Table: Global Benchmark Fertiliser Prices (US$/tonne FOB, reported prices at the end of quarter) 112

Regional Overview 116

Regional Overview - Asia 116

Table: Select Companies - Palm Oil Landbank, 2012 121

Competitive Landscape 124

Competitive Landscape 124

Table: Vietnam - Major Agribusiness Companies (US$mn) 124

Company Profile 125

Charoen Pokphand Foods PLC 125

Table: Charoen Pokphand Foods' Financial Highlights, 2008-2012 134

Demographic Forecast 135

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 136

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 137

Table: Vietnam's Key Population Ratios, 1990-2020 138

Table: Vietnam's Rural And Urban Population, 1990-2020 138

Methodology 139

BMI Industry View

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

Vietnam's GDP and employs almost half its population It holds strong growth opportunities in terms of production, exports and retail sales, more specifically with regard to the coffee and livestock sectors However, some industries face large risks in terms of losing their competitive advantage as other Asian countries step up production, particularly of rice and coffee We believe Vietnam will have to significantly ramp up investment in crop productivity to avoid being left behind, and if it wants to be able to produce more value-added crops and maintain its status as an export spearhead.

Rice King Commodity

Vietnam - BMI Agribusiness Market Value By Commodity (% of total)

Note: The BMI Market Value is an addition of all domestically produced commodities' value (calculated by

multiplying the production with the international benchmark prices, converted in US$/tonne); e/f = BMI estimate/ forecast Source: BMI.

Key Forecasts

■ Rice consumption growth to 2017: 7.8% to 21.3mn tonnes Rice remains the major food staple in

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

• Corn production growth to 2016/17: 28.0% to 6.0mn tonnes Although acreage is likely to remain

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

• Milk production growth to 2016/17: 25.7% to 416,000 tonnes Dramatic increases in cattle numbers

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

• BMI universe agribusiness market value: US$21.32bn in 2013 (down from US$22.47bn in 2012);

growth expected to average -1.3% annually between 2013 and 2017

• 2013 real GDP growth: 5.3% (up from 5.2% in 2012; predicted to average 6.4% over 2013-2017).

• 2013 consumer price index: 7.0% year-on-year (y-o-y) (down from 9.3% in 2012; predicted to average

5.7% over 2013-2017)

• 2013 central bank policy rate: 7.00% (down from 9.00% in 2012; predicted to average 6.40% over

2012-2017)

Key Developments

Vietnam Dairy Products Joint-Stock Company (Vinamilk) has been given the green light in July 2013 to

export its products to the US market This reinforces our positive view of the company, as it will supportVinamilk's promising sales growth in the future We remain positive over Vinamilk's long-term prospects,given the strong growth potential for dairy consumption in Vietnam and the region, the company's

investment in supply chain and capacity expansion and its strong financial position We also like Vinamilk'sexport growth potential

Although coffee bean production is thriving, increasing by 8.6% annually on average between 2003/04 and2013/14, the coffee export sector is facing a debt crisis This serious situation poses downside risks toexports volumes in 2013/14 and beyond, as trading companies lack funds to operate normally and ship thebeans Of the 127 local coffee export firms that operated in Vietnam a year ago, 56 have ceased trading orshifted to other businesses after taking out loans they cannot repay Banks are very reluctant to lend tocoffee exporters, even at a 10 to 16.5% interest rate Meanwhile, the Vietnam Coffee and Cocoa

Association's attempt to support the sector will face difficulties As a result, we expect the trading sector tocontinue facing challenging times in the coming quarters, putting clear downside risks to exports volumes

Vietnam's livestock sector, and especially the pork sector, went through challenging times in 2012 due to arise in feed ingredient prices, lower demand and plummeting domestic prices Many farmers were forced toreduce or suspend their operations in order to limit losses, with as many as 30-50% of individual farmers in

southern provinces abandoning their farms We expect profitability issues in the Vietnamese livestocksector to ease slightly in 2013, helped by decreasing grain prices following an arduous 2012 Livestockdomestic prices are also likely to recover, driven by lower supply We forecast livestock production growth

to slow down in 2012/13 Meanwhile, foreign and locally-owned feed companies such as Charoen

Pokphand Vietnam Livestock, Japfa Comfeed Vietnam and GreenFeed Vietnam Corporation have

announced investments to increase feed production capacity

Agribusiness

SWOT Analysis

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

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

■ Vietnam is the world's second largest exporter of rice and coffee It also enjoysrelatively high rice yields compared with its regional counterparts

■ Agricultural productivity has improved considerably since the opening up of theeconomy in 1986

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

to more developed international competitors

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

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

involvement in agriculture, yields have improved dramatically and look set to continuedoing so

■ Vietnam's fast-growing population of more than 80mn provides a large market foragro-food products

■ With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecastperiod, consumers will have more money to spend on food, spurring growth inagricultural production

SWOT Analysis - Continued

Threats ■ Poor knowledge of good farming practices and hygiene standards leaves Vietnamese

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

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

Business Environment

SWOT Analysis

Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors

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

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

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

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

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

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

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

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

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

protectionism, which will remain a concern

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

Industry Forecast

Dairy Outlook

BMI Supply View: We are positive about Vietnam's dairy sector We expect it to maintain its strong

growth momentum owing to a growing customer base, low milk consumption per capita, rising disposableincome and increasing health awareness among consumers Distribution networks are expanding, and dairyproducers are launching aggressive advertising campaigns Since the opening up of the economy in 1986,there has been considerable change in the structure of the Vietnamese dairy industry The contribution ofstate 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 expect Vietnam to record high milk production growth in 2012/13 and 2013/14, by 3.6% and 5.0%respectively, reaching 360,000 tonnes that year Out to 2016/17, we are forecasting Vietnamese fluid milkproduction growth of 25.7% on the 2011/12 level to 416,000 tonnes Dramatic increases in cattle numbersand increased public and private sector investment - part of the effort to reduce the country's growingimport dependency - will be the main boost to growth Commercialisation will also play a key role as larger,more efficient farms come to play a greater role in milk production A sustained period of high global milkprices on the back of rising global demand and supply sluggishness will also prove supportive of productionand encourage producers to consider the long-term impact of their approach to cattle farming Finally, thesector is likely to benefit from the continued increase in yields, which have risen almost 130% over the pastdecade 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,per capita consumption in 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 Condensedmilk and yoghurt are highly popular dairy products We expect the country to be increasingly reliant ondairy imports to meet its domestic needs

Vietnamese dairy consumption growth will remain strong over our forecast period to 2017 Strong

economic growth will filter through into rising disposable incomes, pushing up demand for non-essentialfoodstuffs Through to 2017, we expect fluid milk consumption growth of 38.8% to 257,200 tonnes, whiledemand for butter, cheese and whole milk powder will soar 46.6%, 188.3% and 18.9% respectively, albeitfrom far lower bases Increased urbanisation, increased ownership of Western goods and the ongoing spread

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

Table: Vietnam Milk Production & Consumption, 2012-2017

Notes: e BMI estimates f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year Sources: 2 General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI.

Table: Vietnam Butter Consumption, 2012-2017

Notes: e BMI estimates f BMI forecasts Sources: 1 FAPRI, BMI.

Table: Vietnam Cheese Consumption, 2012-2017

Notes: e BMI estimates f BMI forecasts Sources: 1 FAPRI, BMI.

Access To US Confirms Vinamilk's Long-Term Opportunities

Vietnam Dairy Products Joint-Stock Company (Vinamilk) has been given the green light in July 2013 to

export its products to the US market This reinforces our positive view of the company, as it will supportVinamilk's promising sales growth in the future Vinamilk continued to record strong growth in Q113(January-March), with revenues growing by 13.6% year-on-year (y-o-y) to VND6,676bn (US$314mn) andnet income by 38.0% y-o-y to VND1,749bn (US$82mn) Margins have remained in an uptrend, with profitmargins standing at 22.9%, up 1.3 percentage points (pp) y-o-y The good performance was mainly driven

by a strong demand for powdered milk and Vinamilk's newly introduced value-added and premium

products in the domestic market

Steady Growth

Vinamilk - Operating & Net Income, VNDmn (LHS) & Revenue Growth, % chg y-o-y (RHS)

Source: BMI, Bloomberg

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

it enjoys a well-known brand (a recent survey by Kantar Worldpanel indicates Vinamilk's products areconsumed by 94% of households in Vietnam) and a large distribution network

We believe Vinamilk's strategy of developing mainly in the domestic market, and more specifically invalue-added segments will be to its benefit Vinamilk boasts large market shares in key domestic marketsfor which we forecast strong consumption growth in the coming years For example, Vinamilk enjoys a40% market share in Vietnam's liquid milk segment, for which we forecast consumption to expand by38.9% between 2012 and 1017, to 275,250 tonnes on the back of increased urbanisation, Westernisation andthe ongoing spread of organised retail networks Moreover, Vinamilk plans to scale up its production and

market share in the powdered milk segment (it only account for 20% of total sales in Vietnam), for which

we believe demand will rise by 19% over the coming five years

Vinamilk On Top

Select Companies - Operating (LHS) & Profit Margins, %

Source: Bloomberg

With new downstream projects coming online soon (a second powdered milk factory commenced

operations in Q113 and a liquid milk factory will be completed in Q313), the company is now heavilyinvesting in upstream capacity and plans to spend VND1,555bn (US$73mn) in capex for the next threeyears Vianmilk, which sources 25% of its raw milk from small-scales farms in Vietnam, is ramping up itscow farming business and aims to source 40% of its raw milk needs from internally-owned farms by 2016

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

as the US, and by the full implementation of the ASEAN Economic Community (AEC) in the coming years.Although the current 2015 timeline for integration looks unlikely, we do expect closer commercial andfinancial ties with lower import tariffs across the region in the coming years Vinamilk is trying to capitalise

on loser investment regulations in the region and plans to build a factory in Cambodia in order to save costs

Finally, high margins and low debt levels and interest expenses puts Vinamilk ahead of its peers

(Megmilk, Mengniuand Namyang) in terms of financial performance

Well Diversified

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

Source: BMI, Vinamilk

Our view for international milk prices to remain elevated in H213 and to average higher over 2013 couldhamper Vinamilk's performance over the coming quarters Indeed, the gross margin of Vinamilk is highlysensitive to global milk prices as the company imports 70-75% of its raw milk materials, mainly fromAustralia and New Zealand Pressure from high milk prices should ease from 2014, as we expect prices tohead down on a rebound in supply

Highly Concentrated Market

Vietnam - Liquid & Powdered Milk Production Market Share (% of total)

Source: BMI, Bloomberg

Thailand's Fears Over Trade Liberalisation Overplayed

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

the AEC's impending import liberalisation in 2015 Vietnam's dairy sector, although still lagging beingThailand's, is developing rapidly, with milk production increasing by 18.3% on average in the past 10 yearsand forecast to soar by 25.7% on the 2011/12 level to 416,000 tonnes in 2016/17 Vietnam has been trying

to upstage Thailand through massive dairy cow imports and rapid expansion of milk-processing facilitiesand dairy operations Vietnam's state-owned dairy company Vinamilk now has a capacity that is three times

that of Dutch Mill, Thailand's leading milk producer In Cambodia, where Thai milk used to dominate the

market, cheaper Vietnamese dairy products have been gaining market share

Mostly New Zealand

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

Source: BMI, USDA

We believe that Thailand dairy farmers' fears regarding the trade liberalisation are relatively overplayed, asfarmers already are relatively efficient by regional standards Vietnam still imports 75% of its dairy

products needs, while Thailand is 75% self-sufficient Moreover, Thailand has higher dairy cow efficiencythan Vietnam and China, as dairy cows yield, per year, 3,380kg of milk per head, compared with 2,060kg/head in China and 2,170kg/head in Vietnam

Lower Productivity In Vietnam

Select Countries - Dairy Cow Yields (kg/head)

f = BMI forecast Source: BMI, FAO, FAPRI

Strong Government Support

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

developing the country's dairy industry in an effort to keep up with the growing domestic demand for freshmilk We believe the MARD's goal to increase dairy cattle herd to 500,000 head by 2020 (from 145,000head in 2011) and production of raw liquid milk to 1mn tonnes (from an estimated 331,000 tonnes in 2012)

is rather challenging

Table: Vietnam Milk Production & Consumption, 2007-2012

Notes: e BMI estimates 1 In all instances year indicates data for harvest year ending that calendar year Sources: 2

General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI.

Table: Vietnam Cheese Consumption, 2007-2012

Notes: e BMI estimates Sources: 1 FAPRI, BMI.

Table: Vietnam Butter Consumption, 2007-2012

Notes: e BMI estimates Sources: 1 FAPRI, BMI.

Risks To Outlook

A downside production risk is that another economic slowdown on the back of fiscal and monetary

tightening weighs on our consumption growth forecasts, as it would force consumers to cut back on

discretionary spending

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

Livestock Outlook

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

sector, with pork production comprising about two-thirds of total meat production in 2011/12 Despitegoing through hard times over recent years owing to disease outbreaks, soaring input costs and competitionfrom cheap imports, we expect Vietnam's livestock production to grow strongly, led by poultry production,over the medium term Rising incomes will stimulate domestic meat consumption growth (owing to dietdiversification), and production will increase to keep pace That said, we expect the country to continuebeing a net importer of livestock over our forecast period

In 2012/13, we expect meat production to increase, in spite of recent challenges caused by disease outbreaksand rising production costs The poultry sector was affected by avian influenza in March and April 2012,and the pork industry has been hurt by news of use of banned substances to promote lean growth in pigs(such as clenbuterol) We expect poultry output to rise 4.0% year-on-year (y-o-y) to 780,000 tonnes in2012/13 Pork production is also expected to grow by 2.5% y-o-y on the back of higher number of pigs(estimated at 26.7mn in mid-2012, up 1.5% y-o-y) Beef and veal production is forecast to increase by 1.8%

to 290,000 tonnes in 2012/13

We see strong growth potential for the Vietnamese livestock industry on the back of rising incomes Poultrywill see the strongest growth, and we forecast production to expand 27.2% on the 2011/12 level to 954,000tonnes in 2016/17 Pork output is projected to rise 15.6% to 2.3mn tonnes over the same period, which willnot be enough to fill in the country's growing demand for the meat The country will remain reliant on porkimports to satiate demand Beef production will remain the least significant of Vietnam's livestock sectors

Strong Consumption Potential

Vietnam - Population (mn) & GDP Per Capita (US$, % chg y-o-y)

Source: BMI, Asian Development Bank, Vietnam General Statistics Office, UN

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 incomegrowth as well as population growth, we see healthy demand growth for livestock over 2012-2017 Poultryconsumption is forecast to grow by 35.1% to 1.1mn tonnes between 2012 and 2017, while pork (from ahigher base) and beef consumption will increase by 12.9% and 24.0% respectively We forecast porkconsumption to reach 2.2mn tonnes in 2017, with beef consumption reaching 363,000 tonnes We believepork consumption will continue to be the dominant meat consumed, comprising more than 60% of totalmeat consumption A household survey conducted in 2010 found that 40% of household meat expenditurewas spent on pork, with preference given to fresh pork over chilled or processed meat

Table: Vietnam Beef & Veal Production & Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 USDA.

Table: Vietnam Pork Production & Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 USDA.

Table: Vietnam Poultry Production & Consumption, 2012-2017

Notes: f BMI forecasts Sources: 1 USDA.

Sector Profitability Improves, But Challenges Remain

Vietnam's livestock sector, especially the pork sector, had a challenging 2012 owing to a rise in feedingredient prices, lower demand and plummeting domestic prices Media reports over the use of bannedgrowth hormones in farms led to consumer substitution to alternative protein sources such as seafood.Prices decreased by around 14% over the year, reaching VND43,000/kg (US$2.07/kg) in December,according to industry sources By contrast, feed ingredient prices have risen relentlessly on the back ofelevated grain prices As a result, many farmers were forced to reduce or suspend their operations in order

to limit losses, with as many as 30-50% of individual farmers in southern provinces abandoning their farms.Owners of large farms with more than 1,000 head have reduced their herd size by up to 70%

We expect profitability issues in the Vietnamese livestock sector to ease slightly in 2013, helped by

decreasing grain prices following an arduous 2012 Livestock domestic prices are also likely to recover,driven by lower supply We forecast livestock production growth to slow down in 2012/13, with porkoutput expanding by a mild 1.3% year-on-year (y-o-y), compared with a 10-year average growth rate of5.3% Poultry production will grow by 4.0% y-o-y, which is still significantly lower 10-year average of8.9%

Changing Meat Consumption Trends

Vietnam - Livestock Consumption (% of total meat consumption)

e/f = BMI estimate/forecast Source: BMI

Feed And Animal Breeding Subsectors More Profitable

While Vietnamese livestock production companies (except feed companies) struggle to stay afloat amidfinancial and output woes, foreign rivals have used this opportunity to control Vietnam's most lucrativehusbandry sub-sectors, such as feed production, live animal breeding as well as veterinary services andmedicine Of the total capital investment in the livestock sector in 2012, investment in the production ofmeat only accounted for 4.1% (US$15.1mn), while investments in feed production accounted for 94.9%(US$346.8mn) Investors are drawn to invest in the production of animal feed as domestic supply does notmeet demand and the livestock sector largely depends on imports In 2012, domestically produced animalfeed reached 12.7mn tonnes, accounting for 56% of the country's total demand Foreign-owned millersmade up to 52% of total domestic production The most recent investment in the sector was from CharoenPokphand Food-owned CP Vietnam, which will put into operation two new feed mills in 2013

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

In spite of all those challenges, we continue to hold a positive view on the livestock industry in the mediumterm Rising income and changing diets will support production out to 2016/17, with poultry output growthoutperforming the rest of the industry

On The Recovery

Select Companies - Revenue Growth (% chg y-o-y)

Source: BMI, Bloomberg

Fragmented Feed Industry Disadvantages Local Companies

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

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

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

example, the three main companies dominating the landscape are China-based CP Vietnam Livestock Corporation, Indonesia-based Japfa and Malaysian company Emivest; these firms supply around 6mn

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

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

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

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

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

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

Mainly Foreign Companies

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

Source: BMI, Vietnam Animal Feed Association

Local Feed Company Expands

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

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

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

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

CP Vietnam Livestock announced in March 2012 it is investing US$100mn in several core businesses in

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

Imbalances To Be Maintained

Vietnam - Poultry & Pork Production & Consumption ('000 tonnes)

f = BMI forecast Source: BMI, USDA

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

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

inaugurated in 2012 an animal production line in Ha Nam Province The factory is expected to raise itscapacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago This hascome on the back of VND150bn (US$7.1mn) invested in 2011

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

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

Sources: 1 USDA.

Table: Vietnam Pork Production & Consumption, 2007-2012

Sources: 1 USDA.

Table: Vietnam Poultry Production & Consumption, 2007-2012

Sources: 1 USDA.

Risks To Outlook

Should the government specify the regulatory environment around disease and disaster aid policies, andimprove lending conditions for the domestic sector, the meat production sector is likely to finally attractmore investment This poses an upside risk to our production forecasts In an attempt to help the industry,the Vietnamese government issued a document in early August 2012 showing the State Bank of Vietnamasked commercial banks to offer an annual lending rate at 11% on loans to agricultural firms Meanwhile,the National Assembly has offered a 30% reduction of corporate income tax in 2012 to agricultural

enterprises Although these policies will not completely eliminate difficulties, they are a first step towardsthe improvement of the sector's outlook.

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 a return to more normal fiscal and monetary policy, couldadversely affect livestock consumption growth Prolonged demand sluggishness would also weigh onproduction growth

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

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

Coffee Outlook

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

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

After reaching a record high in 2011/12 thanks to excellent growing conditions, Vietnam's coffee crop washampered by inclement weather in 2012/13, and production dropped by 5.4% year-on-year (y-o-y) to23.5mn 60kg bags Production was hurt by unseasonal rains during the blossoming period (January toMarch) Looking at the 2013/14 crop whose season starts in October with the harvest, we have revised upour estimate and see output rebounding strongly, to 25.5mn bags, up 8.7% y-o-y Following a dry periodearly this year, rain has been improving the prospect for production There is likely some decline in

productivity due to the lack of moisture during much of the fruiting and fruit-filling stages, but recent rains

in major growing areas have mitigated the impact of the drought for the time being The Vietnam Coffeeand Cocoa Association, the industry body known as Vicofa, forecast in early June that the 2013/2014 outputwould fall by as much as a quarter due to a drought We see this forecast as overly pessimistic and aimed atinflating prices The USDA estimates the yield at 2.25 tonnes/hectare (ha), compared with 2.44 tonnes/ha in2011/12 As a result of the production decline, 2012/13 exports are likely to slow down after the exceptional2011/12 season

Out to 2016/17, we expect production to decline by 20.8% to 19.6mn bags, as Vietnam's tree replantingprogramme will last years in being implemented Ageing trees will exacerbate the two-year cycles, leading

to big swings in production growth However, export opportunities, coming from the increasing demandfrom emerging markets of robusta coffee, will continue to support production

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

to increase Urbanisation and the spread of Western-style coffee shops are expected to add to this trend.Coffee consumption grew impressively by 56.8% from 0.44kg per capita in 2005 to 1.07kg per capita in

2012, one of the highest growth rates out of all coffee-exporting countries over the period We predict thatconsumption will rise 9.6% in 2013 and 8.9% in 2014 to reach 2.0mn bags that year, boosted by the

rebound in economic growth and the ever expanding coffee retail industry That said, we note that coffeeconsumption growth comes from a relatively low base, and we expect 63.1% growth to 2.7mn bags over ourforecast period to 2017 compared to the 2012 levels Coffee consumption per capita is forecast to expand by58.5% to 1.7kg per capita by 2017 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 ofdomestic consumption

Table: VIETNAM Coffee Production & Consumption

Coffee Production, '000 60kg bags 1 24,800.0 23,450.0 25,500.0 23,205.0 21,348.6 19,640.7

Notes: f BMI forecasts Sources: 1 USDA, Vietnam Coffee and Cocoa Association; 2 USDA.

Risk To Exports From Coffee Trading Industry Debt Woes

Although coffee bean production is thriving, increasing by 8.6% annually on average between 2003/04 and2013/14, the coffee export sector is facing a debt crisis This serious situation poses downside risks toexports volumes in 2013/14 and beyond, as trading companies lack funds to operate normally and ship thebeans

Of the 127 local coffee export firms that operated in Vietnam a year ago, 56 have ceased trading or shifted

to other businesses after taking out loans they cannot repay, according to industry reports While it used to

be one of the national largest coffee exporters two years ago, the Vinacafe Buon Ma Thuot, a subsidiary ofthe state-run Vietnam National Coffee Corporation, has had to stop buying and exporting coffee, as it hasrun out of capital while many of its assets have been suspended by banks over unsettled debts Truong Nganhas to repay VND600bn (US$28.85mn) debt owed to seven banks from which it borrowed at interest rates

of 20% The company revealed the banks tried in June 2013 to take the coffee stored in its warehouse ascollateral The 3,000 tonnes of coffee in the store was estimated at only VND100bn, one-sixth of the totaldebt The banks representatives alleged that Truong Ngan had used the same volume of coffee as its

mortgage at many banks at the same time

This example highlights the deep debt crisis the export industry in facing, plagued by decreasing robustaprices, tax evasion, mismanagement, insolvency, high interest rates and a credit squeeze Many coffeeoperators are trapped with crippling debt and banks are reluctant to lend them more money Vietnam's creditcrunch is blamed largely on state-owned enterprises that borrowed big during the economic boom of the

past decade and squandered cash on failed investments, which has left banks crippled by one of Asia'shighest bad-debt ratios.

Still Elevated

Vietnam - Coffee Prices In Daklak (VND/kg)

Source: BMI, Bloomberg

Coffee trading companies took on debt at exorbitant interest rates in 2011 in order to stockpile coffee inanticipation of a price surge Robusta prices rallied to a three-year peak around US$2,600/tonne in early

2011 but then plunged to the current level below US$2,000/tonne, leaving trading companies with highdebt Prices averaged 9.5% lower y-o-y in 2012 and have broadly stabilised in 2013 The value of non-performing loans or debts in the sector likely to go unpaid stands at VND8,000bn ($379mn), or 60% of allcoffee industry loans, according to the Deputy Agriculture Minister

In an attempt to support its biggest currency earner among agriculture exports - and to avoid increasingbanks' non performing loans -, the government last month extended the loan repayment period for coffeefirms from 12 to 36 months Meanwhile, banks are very reluctant to lend to coffee exporters, even at 10 to16.5%

The Vietnam Coffee and Cocoa Association (Vicofa) has sought government approval to stockpile 300,000tons - a fifth of the country's output - to try to boost prices, and offer exporters soft loans to finance

purchases of beans from farmers But the last such stockpiling effort in 2010 was a failure, with only 60,000

of the 200,000-ton target stored because of logistical glitches and slow disbursement of funds

As a result, we expect the trading sector to continue facing challenging times in the coming quarters, puttingclear downside risks to exports volumes

Little Change Ahead

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

Source: USDA, BMI

Major Robusta Grower

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

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

of the superior-quality bean to 96,000 tonnes by 2020, from output of 48,000 tonnes in 2011/12, in a bid toreap more benefits from coffee plantations, as the arabica variety is normally sold for around double theprice of robusta Vietnam intends to expand Arabica area in northern and central regions to 40,000ha over

the coming eight years, from the current 32,000-35,000ha (there is no official agency providing exact data

on area planted to coffee) International prices continue to provide a strong incentive for farmers to expandcoffee cultivation in Vietnam

Declining Productivity On Instable Weather

Due to a decline in production, Vietnam's exports are unlikely to repeat 2011/12's exceptional season

in 2012/13 and 2013/14 Exports for the first eight months of the 2012/13 season have reached 18.19mnbags, down 3.1% y-o-y We believe total exports for the season will slightly exceed the USDA's estimates

of 22.5mn bags, down 7.8% compared to 2011/12 For 2013/14, the USDA pegged exports at 21.3mntonnes

Favoured by stable and elevated robusta prices, Vietnam has seen its area dedicated to coffee increasestrongly in the past years Planted area has increased from around 500,000 hectares (ha) in 2005/06 to morethan 640,000 ha in 2012/13 according to estimates by the Ministry of Agriculture and Rural Development(MARD) and the USDA However, the quality has not followed, and farmers have faced many difficulties,including inclement weather, decreasing yield and coffee quality The USDA pegged the coffee yields in2013/14 at 2.1 tonne/ha, compared with 2.32 tonne/ha in 2012/13 and 2.44 tonne/ha in 2011/12

The effects of low yielding and aging coffee trees on production remains a concern for the industry but isoffset by additional output from newly productive or replanted coffee areas over the past three years.Domestic prices are unlikely to ease significantly in 2013 and 2014 given the decline in production

Vietnamese coffee prices generally trade at a discount to the ICE robusta futures However, Vietnam hasenjoyed a premium over international prices since the end of 2012 due to the dry spell and as farmers haveheld back stocks in hopes that prices would rise further

In fact, the MARD plans to focus on quality rather than on plantation expansion It aims at reducing plantedarea back to 500,000ha by 2020 and to 479,000ha by 2030 However, given the coffee price

competitiveness, the reduction in planted area is unlikely to happen Vietnam plans to develop high yieldcoffee breeding varieties through replanting programmes of old trees According to the MARD, there areabout 140,000-160,000 ha of aged trees needed to be replanted in the next 5-10 years, and about 200,000 ha

by 2020 The Bank of Vietnam announced in May that the sector will receive preferential credit loans ofVND8-10trn (US$381-476mn) from now until 2016 to help implement the programme of old coffee cropsrecultivation

Slower Exports

Vietnam- Coffee Exports ('000 tonnes)

Source: BMI, Vicofa

Increasing Weight On The International Market

Coffee has proven to be one of main agricultural export engines of the Vietnamese economy and the bulk ofVietnam's coffee production is for exports Only about 6% of total production is for domestic consumption.Vietnamese exports have been exceptionally strong and well above annual averages in 2011/12, mainly due

to the bumper crop and relatively high Robusta prices on the international markets The total value of alltypes of coffee exports hit a record US$3.7bn in 2012, up 34.5% y-o-y We expect Vietnam to remain a keyplayer on international markets in the coming years and to slowly increase its exports, partly due to growingdemand for soluble coffee in Asia MARD encourages domestic players to diversify their exports towardshigher-value processed coffee products, such as soluble coffee Exports of processed coffee started in2003/04 and have been slowly increasing in the past few years, reaching 2.0% of total exports in 2011/12

Low Value-Added Exports

Vietnam - Coffee Exports ('000 60kg bags)

f = BMI forecast Source: BMI, USDA, Vicofa

Although exports are likely to slow down in 2012/13 as production declines, they will remain well above10-year average of 16.8mn bags Relatively high exports from Vietnam, coupled with strong supply fromBrazil, Colombia and Indonesia will help global prices averaging lower in 2013 and 2014, at USc170/lb andUSc150/lb, respectively

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