Vietnam agribusiness report q4 2014

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

Q4 2014 www.businessmonitor.com VIETNAM

AGRIBUSINESS REPORT

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© 2014 Business Monitor International

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor

International, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 9

Agribusiness 9

Business Environment 11

Industry Forecast 12

Dairy Outlook 12

Table: Butter Consumption (Vietnam 2013-2018) 13

Table: Cheese Consumption (Vietnam 2013-2018) 13

Table: Milk Production & Consumption (Vietnam 2013-2018) 13

Table: Whole Milk Powder Consumption (Vietnam 2013-2018) 14

Table: Butter Consumption (Vietnam 2008-2013) 19

Table: Cheese Consumption (Vietnam 2008-2013) 19

Table: Milk Production & Consumption (Vietnam 2008-2013) 19

Table: Whole Milk Powder Consumption (Vietnam 2008-2013) 19

Livestock Outlook 21

Table: Beef Production & Consumption (Vietnam 2013-2018) 22

Table: Pork Production & Consumption (Vietnam 2013-2018) 22

Table: Poultry Production & Consumption (Vietnam 2013-2018) 22

Table: Beef Production & Consumption (Vietnam 2008-2013) 27

Table: Pork Production & Consumption (Vietnam 2008-2013) 27

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

Coffee Outlook 29

Table: Coffee Production & Consumption (Vietnam 2013-2018) 30

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

Rice Outlook 37

Table: Rice Production & Consumption (Vietnam 2012-2018) 38

Table: Rice Production & Consumption (Vietnam 2008-2013) 41

Grains Outlook 42

Table: Corn Production & Consumption (Vietnam 2013-2018) 43

Table: Corn Production & Consumption (Vietnam 2008-2013) 47

Featured Analysis 48

Vietnam's Uncompetitive Sugar Sector At Risk From ASEAN Integration 48

Table: VIETNAM SUGAR PRODUCTION & CONSUMPTION, 2013-2018 53

Commodities Price Analysis 54

Monthly Softs Strategy 54

Table: Select Commodities - Performance & BMI Forecasts 62

Monthly Grains Strategy 63

Table: Select Commodities - Performance & BMI Forecasts 72

Upstream Analysis 73

Asia GM Outlook 73

Table: Select Countries - GM Crops Use 79

Asia Fertiliser Outlook 80

Table: India - Fertiliser Subsidies, INR/kg 84

Asia Machinery Outlook 86

Table: China Grain Public Production Support Programme (CNYbn) 86

Table: Selected Countries - Average Size Of Farms, Hectares 90

Downstream Analysis 94

Food 94

Food Consumption 94

Table: Food Consumption Indicators - Historical Data & Forecasts (Vietnam 2011-2018) 96

Canned Food 96

Table: Food Consumption Indicators - Historical Data & Forecasts (Vietnam 2011-2018) 97

Confectionery 98

Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2011-2018) 102

Pasta 104

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 104

Dairy 104

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 105

Drink 106

Alcoholic Drinks 106

Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 108

Hot Drinks 109

Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Vietnam 2013-2018) 110

Soft Drinks 111

Table: Soft Drinks Sales, Production & Trade (Vietnam 2013-2018) 112

Mass Grocery Retail 114

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Vietnam 2013-2018) 118

Table: Grocery Retail Sales By Format (%) 118

Regional Overview 119

Table: Indonesia & Malaysia Palm Oil Refining Capacity & Utilisation Rate 121

Table: Selected Countries - Biofuel Blending Mandates & Programmes 125

Competitive Landscape 127

Table: Major Agribusiness Companies (USDmn) 127

Demographic Forecast 128

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 129

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 130

Table: Vietnam's Key Population Ratios, 1990-2020 131

Table: Vietnam's Rural And Urban Population, 1990-2020 131

Methodology 132

Industry Forecast Methodology 132

Sector-Specific Methodology 133

BMI Industry View

BMI View: Recent adjustments in our outlook for

Vietnam's economy and business environment add

further weight to our positive view on the country's

agribusiness sector The industry holds strong

growth opportunities in terms of production, exports

and retail sales, particularly with regard to the rice,

coffee, livestock and dairy sectors However,

Vietnam is facing growing competition in its key

markets, and the fulfilment of its promising potential

will only be achieved if the country steps up its

competitiveness and improves product quality and

supply chain efficiency Vietnam will have to

significantly ramp up investment in crop

productivity in order to avoid being left behind, and

if it wants to succeed in producing more value-added

crops and maintaining its status as an export

spearhead

Key Forecasts

■ Rice consumption growth to 2018: 5.1% to 22.1mn tonnes Rice remains the major food staple in

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

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

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

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

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

• BMI universe agribusiness market value: USD27.7bn in 2015 (down from USD27.9bn expected in 2014); growth expected to average 2.8% annually between 2015 and 2018.

• 2015 real GDP growth: 6.4% (up from 5.7% expected in 2014; predicted to average 6.5% over

2015-2018)

Agribusiness Market Value

BMI Market Value By Commodity (2005-2018)

Grains market value, % of total Sugar market value, % of total Livestock market value, % of total

2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

0 20 40 60

-20

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

• 2015 consumer price index: 5.3% year-on-year (y-o-y) (down from 5.8% expected in 2014; predicted

to average 5.0% over 2015-2018)

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

over 2015-2018)

Key Revisions To Forecasts

■ 2014/15 coffee production forecast revised down, to 28.1mn 60kg bags (compared with a previous

expectation for 28.4mn bags) Some parts of Daklak, the largest coffee-producing region, have recordeddrier-than-usual weather over recent months

Key Developments

After decades of active support to the rice sector, Vietnam is shifting its attention to corn and soybeanproduction in order to address its soaring animal feed deficit and to avoid rice oversupply This plan islikely to take years before farmers switch away from rice and manage to improve yields for alternativegrains and oilseeds The eventual increase in domestic feed output is likely to favour the development of thelivestock sector This policy will reduce slightly the area under rice cultivation in the coming years As aresult, we expect most of the rice production growth will come from yield improvements

We believe the recent collapse in Thai rice prices will limit Vietnam's share of global exports in 2013/14and 2014/15 but expect Vietnam's market share to rebound over the long term Stocks in Thailand reached arecord 18.0mn tonnes during 2013/14, and the government has only recently started to sell inventories at aloss These dynamics will give a competitive advantage to Thai rice supplies in the near term and preventsignificant growth in Vietnam's share of the global rice market We do not expect the Thai government tocontinue supporting rice farmers through similar mechanisms We therefore believe Vietnam will makefurther competitiveness gains in the coming years, further undercutting Thailand's market share in the longterm

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

difficulties of the country's coffee export industry Moreover, it highlights the government's push

to restructure ailing state-owned enterprises, which we see as a positive development for the economy Theongoing difficulties in the coffee export sector are the result of a conjunction of factors, including theextensive use of short-term debt to fund long-term projects, high interest rates and poor management andfutures trading abilities Although the extension of loan terms and decreasing interest rates will give a breath

of fresh air to exporting companies, the sector's outlook remains hindered by overcapacity in the processing industry and bad management practices

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

relatively high rice yields compared with its regional counterparts

economy in 1986

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

to more developed international competitors

market 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

agro-food products

period, consumers will have more money to spend on food, spurring growth inagricultural production

will help to improve Vietnam's product competitiveness

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

competition for land use, curtailing the area available for expansion of agriculture

coastal areas of the Central region unless active protection policies are implemented.This would then weigh on production growth in two of Vietnam's main agricultural-producing regions

Business Environment

SWOT Analysis

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

attractive to foreign investors

- 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

Transparency 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

liberalisation 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

levels could leave Vietnam a second-rate economy for an indefinite period

Industry Forecast

Dairy Outlook

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

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

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

Recent investment in the dairy sector, in line with the development of milk farms and dairy farms, hasboosted the industry's short-term outlook Milk production grew by an average 8.4% annually over the pastfive seasons In 2013/14, we see output showing strong growth, of 5.0% year-on-year (y-o-y) to reach417,500 tonnes Out to 2017/18, we are forecasting Vietnamese fluid milk production growth of 21.9% onthe 2012/13 level to 484,700 tonnes Dramatic increases in cattle numbers and increased public and privatesector investment - part of the effort to reduce the country's growing import dependency - will be the mainboost to growth Commercialisation will also play a key role as larger, more efficient farms come to play agreater role in milk production A sustained period of high global milk prices on the back of rising globaldemand and supply sluggishness will also prove supportive of production and encourage producers toconsider the long-term impact of their approach to cattle farming Finally, the sector is likely to benefit fromthe continued increase in yields, which have risen almost 130% over the past decade and are expected tocontinue to do so given new investment in the sector

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

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

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

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

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

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

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

Table: Butter Consumption (Vietnam 2013-2018)

2013e 2014f 2015f 2016f 2017f 2018f

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

Table: Cheese Consumption (Vietnam 2013-2018)

2013e 2014f 2015f 2016f 2017f 2018f

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

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

2013e 2014f 2015f 2016f 2017f 2018f

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

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

2013e 2014f 2015f 2016f 2017f 2018f

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

Private Investment To Support Production Growth

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

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

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

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

production growth

Access To US Confirms Vinamilk's Long-Term Opportunities

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

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

Strong Growth

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

Source: BMI, Bloomberg

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

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

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

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

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

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

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

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

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

Well Diversified

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

Source: BMI, Vinamilk

Thailand's Fears Over Trade Liberalisation Overplayed

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

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

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

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

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

Mostly New Zealand

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

Source: BMI, USDA

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

Strong Government Support

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

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

Table: Butter Consumption (Vietnam 2008-2013)

2008 2009 2010 2011 2012 2013e

e = estimate Source: FAPRI, BMI

Table: Cheese Consumption (Vietnam 2008-2013)

2008 2009 2010 2011 2012 2013e

e = estimate Source: FAPRI, BMI

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

2008 2009 2010 2011 2012 2013e

e = estimate Source: National sources, BMI

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

2008 2009 2010 2011 2012 2013e

e = estimate Source: FAPRI, BMI

Risks To Outlook

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

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

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

Livestock Outlook

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

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

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

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

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

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

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

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

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

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

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

2013 2014f 2015f 2016f 2017f 2018f

f = forecast Source: USDA, BMI

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

2013 2014f 2015f 2016f 2017f 2018f

f = forecast Source: USDA, BMI

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

2013 2014f 2015f 2016f 2017f 2018f

f = forecast Source: USDA, 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 gain greater control of Vietnam'smore lucrative husbandry sub-sectors, such as feed production, live animal breeding, as well as veterinaryservices and medicine Of the total capital investment in the livestock sector in 2012, investment in theproduction of meat only accounted for 4.1% (USD15.1mn), while investment in feed production accountedfor 94.9% (USD346.8mn) Investors have been encouraged to invest in the production of animal feedbecause domestic supply does not meet demand, and the livestock sector largely depends on imports In

2012, domestically produced animal feed reached 12.7mn tonnes, accounting for 56% of the country's totaldemand Foreign-owned millers accounted for around 52% of total domestic production

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

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

On The Recovery

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

Source: BMI, Bloomberg

Fragmented Feed Industry Disadvantages Local Companies

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

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

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

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

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

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

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

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

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

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

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

Mainly Foreign Companies

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

Source: BMI, Vietnam Animal Feed Association

Local Feed Company Expands

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

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

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

Ministry of Industry and Trade Vietnam currently has 59 foreign-invested firms and joint ventures whichhold more than 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 (CPV) announced in March 2012 it is investing USD100mn in several core

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

distribution store A feed mill in Hai Duong province, near Hanoi, has started operations recently, withannual capacity of 720,000 tonnes CPV is also expanding in Binh Dinh, where the facility, which will becompleted in 2014, will have an annual capacity of 216,000 tonnes Finally, CPV plans on establishing twoother feed mills in southern Vietnam Japfa Comfeed Vietnam also plans on building two new mills before

2015, including one in Hoa Binh, which will have a capacity of 156,000 tonnes per year

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

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

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

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

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

2008 2009 2010 2011 2012 2013

Source: USDA, BMI

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

2008 2009 2010 2011 2012 2013

Source: USDA, BMI

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

2008 2009 2010 2011 2012 2013

Source: USDA, BMI

Risks To Outlook

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

improvement of the sector's outlook

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

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

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

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

Coffee Outlook

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

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

Vietnam recorded its second largest coffee crop ever in the 2013/14 season, of 28.7mn 60kg bags, up by8.3% year-on-year (y-o-y), mainly due to expansion in area under coffee cultivation Production will recordits first decline in six years in the 2014/15 season starting in October with the harvest, following the

2013/14 bumper crop We have revised down our forecast and now see production coming in at 28.1mn60kg bags, down 2.0% y-o-y, in 2014/15, compared with a previous forecast of 28.4mn bags

Out to 2017/18, we expect production to rise 10.3% on the 2012/13 level, to 29.2mn bags, as Vietnamcontinues to reap the fruits of its replanting programme However, we believe production will see largeswings owing to the vulnerability of old trees (which still represent a large part of the total trees) to

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

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

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

2013, one of the highest growth rates out of all coffee-exporting countries over the period We predict thatconsumption will rise 11.0% in 2014 and 12.3% in 2015 to reach 2.3mn bags that year, boosted by therebound in economic growth and the ever expanding coffee retail industry That said, we note that coffeeconsumption growth comes from a relatively low base, and we expect 64.0% growth on the 2013 level to3.2mn bags by 2018 Coffee consumption per capita is forecast to expand to 1.88kg per capita by 2018 TheMinistry of Agriculture and Rural Development has said it hopes to boost domestic consumption to 10-15%

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

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

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

2013 2014f 2015f 2016f 2017f 2018f

Coffee production, '000 60kg bags 26,450.0 28,650.0 28,077.0 29,059.7 29,117.8 29,176.1

Coffee consumption, '000 60kg bags 1,825.0 2,025.8 2,274.9 2,559.3 2,879.2 3,239.1

f = forecast Source: National sources, BMI

Production To Decline In 2014/15, Recovering In 2015/16

Vietnam's coffee production will record its first decline in six years in the 2014/15 season starting inOctober with the harvest, following the 2013/14 bumper crop We have revised down our forecast and nowsee production coming in at 28.1mn 60kg bags, down 2.0% y-o-y, compared with a previous forecast of28.4mn bags The decline will be due to a return to average yields after the exceptional harvest of 2013/14.Moreover, some parts of Daklak, the largest coffee producing region, have recorded drier than usualweather over the past months, according to World Ag Weather The weather outlook would worsen furtherdue to the potential development of El Niño this year Although the probability of a return of El Niño in

2014 has eased in recent months, the Australian Bureau of Meteorology estimates there is still a 50%chance of the weather phenomenon developing from December This weather event brings hot and dryweather to Vietnam and poses downside risks to our 2014/15 coffee production forecast

Declining Production

Vietnam - Coffee Production, Exports & Ending Stocks ('000 60 kg bags)

f = forecast Source: BMI, USDA

Production is likely to recover in 2015/16 assuming normal weather, as yields will be boosted by theongoing tree replanting programme Although old plantations still form the majority of coffee estates inVietnam, the opening of new plantations with higher yielding tree varieties is accelerating Newly plantedtrees can yield around 6-7 tonnes/ha, compared with 2.3 tonnes/ha on average in recent years and

1.5 tonnes/ha in the least efficient estates Area under coffee cultivation is unlikely to grow significantly inthe coming years, as the government plans to limit plantation expansion in order to avoid oversupply.Moreover, coffee plantations are competing for space with other agricultural commodities, including rubberand pepper

Strong Export Growth In 2014/15 Despite Production Decline

In spite of the decline in production, ample supply due to large stocks will help Vietnam's coffee exportsincrease quite strongly in 2014/15 Moreover, the production surplus will remain elevated, at around25.8mn bags, compared with the five-year average of 22.2mn bags Exports are expected to grow by 8.1%y-o-y to 28.0mn bags

Slower Exports

Vietnam - Coffee Exports ('000 tonnes)

Source: BMI, Vicofa

Crisis Brewing For Coffee Exporters

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

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

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

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

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

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

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

from Vietnam's stock exchange due to rising losses

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

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

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

enterprises (SOEs) - as is the case with Vinacafe - as a positive development for the economy (see 'More Restructuring To Come For SOEs', September 26 2013) By privatising SOEs and channelling more

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

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

Little Change Ahead

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

Source: USDA, BMI

Major Robusta Grower

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

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

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

The Question Of Planted Area

Favoured by stable and elevated robusta prices, Vietnam has seen its area dedicated to coffee increasestrongly in the past years Planted area has increased from around 500,000ha in 2005/06 to more than640,000ha in 2012/13, according to estimates by the Ministry of Agriculture and Rural Development(MARD) and the US Department of Agriculture However, the quality has not followed, and farmers havefaced many difficulties, including inclement weather and decreasing coffee quality Coffee yields havepicked up strongly in the past two seasons, as the results of the replanting programme going on for severalyears now are starting to be seen Yields are estimated at 2.63tonne/ha in 2013/14, compared with

2.47tonne/ha last season and the 2008/09-2011/12 average of 2.20tonne/ha

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

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

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

Increasing Weight On The International Market

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

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

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

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

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

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

2008 2009 2010 2011 2012 2013

Coffee production, '000 60kg bags 18,000.0 16,980.0 18,500.0 19,450.0 26,000.0 26,450.0

Coffee consumption, '000 60kg bags 850.0 950.0 1,200.0 1,337.0 1,665.0 1,825.0

Source: National sources, BMI

Risks To Outlook

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

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

productive coffee areas could offset this potential drop in supply

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

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

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

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

Rice Outlook

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

boosted by higher yielding rice varieties and better culture management Output grew by a strong 31%between 2009/10 and 2012/13 In the 2013/14 season, which started in January 2014, Vietnam's riceproduction is forecast to reach a new record high, although year-on-year (y-o-y) growth will remain modest.Output is projected to increase by 1.0% y-o-y, to 27.8mn tonnes, which compares with five-year averageannual growth of 2.5%

Area under cultivation is likely to decline slightly to 7.8mn hectares (ha) in 2013/14, while yields will reach

an all time high of 5.8 tonnes/ha due to favourable weather conditions and adequate supplies of irrigationwater Current indications show a slight contraction in planted area of the two remaining crops followingthe Vietnamese government's efforts to shift paddy land to other crops, including corn and soybeans.Vietnam's Ministry of Agriculture and Rural Development (MARD) is looking to transition

100,000-110,000ha of current rice-cultivated area into corn and soybean fields out to 2015 in order to avoidpaddy overproduction, prevent downward pressure on prices and increase feed supply This policy is likely

to limit slightly the area under rice cultivation in the coming years, leaving Vietnam reliant on yield

improvement for rice production growth

The push to reduce rice plantings will also have an impact on rice production in the 2014/15 season Weforecast output to decline slightly, by 0.1% y-o-y Area under cultivation will fall to below 7.8mn ha.Elevated production in 2013/14 and 2014/15 will support the country's export capacity as well as thecontinuous discount Vietnamese rice prices enjoy relative to global prices We forecast the country's riceproduction balance to remain elevated during this season and the upcoming one - at 6.6mn tonnes in2013/14 and 6.3mn tonnes in 2014/15, compared with the five year average of 6.4mn tonnes This will helpVietnam maintain broadly stable rice exports, at around 6.5mn-6.7mn tonnes

Compared with many of its agricultural sub-sectors, Vietnamese rice is very competitive relative to many ofits regional peers and is well positioned to benefit from both regional and global demand growth Anotheradvantage 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 outlook for the country's rice productioncapabilities over the long term Over our five-year forecast period to 2017/18, we expect rice output to grow

by 8.8% to 29.9mn tonnes

BMI Demand View: We forecast a modest consumption increase of 1.0% in both 2014 and 2015, to

21.4mn tonnes in 2015 Over the longer term, we expect consumption to climb by 5.1% to 22.1mn tonnes in

2018 compared with the 2013 level Rice remains the major food staple in Vietnam, and we do not see thischanging 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 expectproduction 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 thepopulation continues to diversify its diet on the back of rising incomes As such, the country will remainone of the world's top rice exporters

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

2012 2013 2014f 2015f 2016f 2017f 2018f

Rice production, '000 tonnes 27,150.0 27,500.0 27,780.0 27,752.2 28,501.5 29,214.1 29,915.2

Rice consumption, '000 tonnes 19,650.0 21,000.0 21,210.0 21,422.1 21,636.3 21,852.7 22,071.2

f = forecast Source: USDA, BMI

Slower Production Growth Owing To Corn Focus

Vietnam's plan to shift acreage from rice to other cash crops is likely to reduce slightly the area under ricecultivation in the coming years As a result, we expect most the rice production growth will come fromyield improvements MARD has submitted to the prime minister a proposed programme for shifting acreagefrom rice to other cash crops, with a focus on corn and soybean Over the period to 2015, MARD aims totransition 100,000-110,000ha of rice-cultivated area into corn and soybean fields The winter and earlyautumn rice crops will be most directly affected by the proposed programme; these crops usually generatelow yields due to lack of water and recurrent attacks from pests and diseases The ministry proposes support

of VND2mn/ha for input costs (seeds, fertilisers, pesticides) and about VND700,000/ha for land preparationcosts for those who shift from rice to corn or soybean This new policy is a clear change to support

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

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

However, Vietnam now struggles to export its large rice surpluses as competitors export higher-quality rice(such as main rival Thailand) or rice at a lower price (such as India) The country is therefore eager to

diversify its crops The need to increase corn and soybean production is all the more salient given thatimports of feed ingredients have skyrocketed in recent years in line with the development of the livestocksector.

In order to support rice production via the improvement in rice yields, the government is currently

encouraging farmers to implement the large scale farm model (between 50ha and 100ha), where farmersconsolidate individual small farms into larger farms to lower per hectare production costs on land

preparation, irrigation, planting and harvesting costs In 2011, more than 85% of paddy-farming householdswere cultivating rice in plots of 0.5ha or less Since the implementation of the plan in 2011/12, the total area

of large scale farms has reached 100,000ha In the coming years, we expect that most of the increase in riceproduction will come from yield improvement Vietnamese yields currently stand well above neighbouringcountries, but still have room to reach Australian rice yields of 9.2 tonnes/ha, which are the world's highest

Exports Still Elevated Despite Decline

Vietnam - Rice Production, Exports & Endings Stocks ('000 tonnes)

f = forecast Source: BMI, USDA