Vietnam agribusiness report q2 2016

• The announcement in Q415 by Cargill that it will build a new feed mill in Vietnam confirms our positive view on the country's feed and livestock sector and our view that local corn and

Q2 2016 www.bmiresearch.com

VIETNAM

AGRIBUSINESS REPORT

INCLUDES 5-YEAR FORECASTS TO 2020

INCLUDES 5-YEAR FORECASTS TO 2020

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2016

© 2016 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor

International Ltd, 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

INCLUDES 5-YEAR FORECASTS TO 2020

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: March 2016

© 2016 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor

International Ltd, 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 10

Agribusiness 10

Industry Forecast 12

Grains Outlook 12

Table: Vietnam - Grains Production And Consumption Outlook 13

Table: Vietnam - Risks To Grains Outlook 13

Table: Corn Production & Consumption (Vietnam 2013-2020) 16

Rice Outlook 17

Table: Vietnam - Rice Production And Consumption Outlook 18

Table: Vietnam - Risks To Rice Outlook 18

Table: Rice Production & Consumption (Vietnam 2013-2020) 21

Dairy Outlook 22

Table: Vietnam - Dairy Production And Consumption Outlook 23

Table: Vietnam - Risks To Dairy Outlook 23

Table: Vietnam - Planned Investment In Milk Production Capacity 25

Table: Dairy Production & Consumption (Vietnam 2013-2020) 28

Livestock Outlook 29

Table: Vietnam - Livestock Production And Consumption Outlook 29

Table: Vietnam - Risks To Livestock Outlook 30

Table: Livestock Production & Consumption (Vietnam 2013-2020) 34

Coffee Outlook 35

Table: Vietnam - Coffee Production And Consumption Outlook 36

Table: Vietnam - Risks To Coffee Outlook 36

Table: Coffee Production & Consumption (Vietnam 2013-2020) 41

Commodities Price Analysis 42

Global - Global Commodities Strategy 42

Table: Select Commodities - Performance And BMI Forecasts 42

Upstream Analysis 44

Asia GM Outlook 44

Table: Selected Countries - GM Crops Use (mn hectares) 47

Asia Machinery Outlook 49

Table: Select Countries - Average Size Of Farms, Hectares 52

Asia Fertiliser Outlook 55

Downstream Analysis 60

Food 60

Canned Food 61

Confectionery 62

Pasta 62

Dairy 63

Regional Overview 64

Table: Impact Of El Niño On Crops 64

Competitive Landscape 69

Table: Major Agribusiness Companies (USDmn) 69

Demographic Forecast 70

Table: Population Headline Indicators (Vietnam 1990-2025) 71

Table: Key Population Ratios (Vietnam 1990-2025) 71

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 72

Table: Population By Age Group (Vietnam 1990-2025) 72

Table: Population By Age Group % (Vietnam 1990-2025) 73

Methodology 75

Industry Forecast Methodology 75

Sector-Specific Methodology 76

BMI Industry View

BMI View: Recent developments in the country's economic and business environments add further weight

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

Agribusiness Market Value

BMI Market Value By Commodity (2005-2020)

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

2005 2006

2007 2008

2009 2010

2011 2012

2013e 2014e

2015e 2016f

2017f 2018f

2019f 2020f 0 10 20 30 40 50

BMI Calculation/FAO

Key Forecasts

■ Sugar consumption growth to 2020: 23.0% to 2.4mn tonnes Rising income, population and growing

consumption of manufactured food products will help sugar consumption grow quickly in the comingyears Domestic production growth will not be able to keep up with consumption expansion

• Coffee production growth to 2019/20: 13.2% to 31.6mn 60kg bags After more than a decade of strong

output growth, coffee production expansion will slow down in the coming years Low coffee prices andthe attractiveness of alternative crops such as pepper will lead to a slowdown in new planted area growth

• Milk production growth to 2019/20: 61.9% to 876,000 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

• 2016 BMI universe agribusiness market value: USD44.1bn (up from USD43.4bn in 2015; growth

expected to average 3.3% annually between 2016 and 2019)

• 2016 real GDP growth: 6.6% (down from 6.7% expected in 2015; predicted to average 6.4% over

2015-2020)

• 2016 consumer price index: 2.1% y-o-y (up from 0.8% expected in 2015; predicted to average 4.3%

over 2015-2020)

Key Developments

Along with other Asian and African countries, Vietnam's agricultural sector is being affected by the return

of El Niño in 2015/16 Meteorologists believe that the phenomenon - which emerged in May 2015 - iscurrently in its decreasing phase and should dissipate in Q316 However, El Niño has had a strong impact

on precipitation levels in South and South East Asia so far this season In fact, after a period of dry weatherrecorded in August-October 2015, Vietnam and its neighbours have had to face another dry episode sinceJanuary 2016, located around the Mekong river area According to Vietnam's Ministry of Agriculture, inMarch 2016 the water level of the Mekong River - the country's rice and fruit basket - was down to itslowest level since 1926 during planting season for the key winter/spring rice crop

Dry weather and the lack of water for irrigation, coupled with the ongoing government plan to switchacreage from rice to corn production will make rice production decline for the first time since 2010/11 in2015/16

Looking at coffee production in the 2016/17 season, for which the harvest will start in September 2016, webelieve production growth will again be weak relative to the strong growth recorded until 2014 Apart from

the dry weather, farmers have to battle with low robusta prices Some farmers with old coffee trees (which

make up to a third of total acreage) are not replanting their land with coffee trees, switching instead to othermore profitable crops (especially pepper and fruits)

Improvement in Vietnam's economic activity in 2016 will help consumer spending increase after weakdemand in 2014 weighed on demand for value-added agricultural products, including dairy

The stronger economic outlook, coupled with some reforms regarding foreign investment and State OwnedEnterprises are attracting a growing amount of domestic and foreign investors and reaffirm our bullish view

on the agribusiness sector Vietnam is seeing a wave of private investment in its upstream (farming) anddownstream (dairy product manufacturing and distribution) dairy sector The feed sector is also attracting

investors, with Cargill announcing in Q415 it will build two new feed mills in Vietnam, adding to the 10

the company already owns in the country

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

■ Vietnam enjoys relatively good international price competitiveness for rice and coffee

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

to more developed international competitors

■ There is little land available for further expansion, meaning future production growthwill mainly rely on yield growth

■ 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

■ The improvement in trade openness (Trans-Pacific Partnership, ASEAN EconomicCommunity, EU-Vietnam free trade agreement, etc.) will help Vietnam's exportsincrease in the coming years

■ A move towards higher-quality products, especially in the coffee and dairy sectors,will help to improve Vietnam's product competitiveness

SWOT Analysis - Continued

■ Vietnam's fast-growing population of more than 80mn and our forecastfor Vietnamese GDP per capita to grow rapidly will both offer a large and growingmarket for agro-food products

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 increaselabour costs and competition for land use, threatening competitiveness and curtailingfurther the area available for expansion of agriculture

■ Climate change and rising sea levels will reduce arable land in the Mekong Delta andcoastal areas of the Central region unless active protection policies are implemented.This would then weigh on production growth in two of Vietnam's main agricultural-producing regions

Industry Forecast

Grains Outlook

BMI View: Corn is one of Vietnam's most important food crops, along with rice Production growth will

accelerate in the coming years, due to the ongoing government push to make rice farmers shift to the cultivation of other grains, which they hope will help avoid paddy overproduction and develop local feed output However, the sector is encountering many challenges, including high production costs and high post-harvest losses, and we believe Vietnam will continue to record a large deficit and growing corn imports.

Latest Developments

■ Vietnam's Ministry of Agriculture and Rural Development (MARD) continues to incentivise rice farmers

to shift to the cultivation of other grains, including corn, in order to avoid paddy overproduction and todevelop local feed output As such, corn plantings and production growth have been accelerating since

2014 and grew by a robust 6.0% y-o-y in 2014/15, compared with the 0.8% average growth recordedover 2008/09-2012/13 Corn output expansion will remain strong in the ongoing 2015/16 season, growing

by 6.0% to 5.8mn tonnes

■ We have revised up our corn consumption estimates due to the dynamism in the livestock and dairyproduction sectors We now see corn consumption reaching 9.7mn tonnes by 2020 (9.1mn tonnespreviously) compared with 7.2mn tonnes in 2015 Imports will continue to accelerate in the comingyears

• The announcement in Q415 by Cargill that it will build a new feed mill in Vietnam confirms our positive

view on the country's feed and livestock sector and our view that local corn and soybean consumptionwill grow at a robust pace in the coming years The new USD30mn feed mill will have a total capacity of260,000 tonnes per year and will become operational in 2017 Cargill currently has 10 animal feed mills

in Vietnam

Table: Vietnam - Grains Production And Consumption Outlook

Ave growth rate 2015/16-2019/20 Drivers

Corn production 5.7% The ongoing push by the government to make farmers shift from rice to corn

cultivation will help corn area harvested grow in the coming years Yields will also slowly grow, especially as robust local corn prices provide incentives to farmers to invest more in crops (in fertilisers for example) As such, corn production growth will accelerate Despite the potential for corn production given the robust growth of the livestock and aquaculture industries, the sector

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

Corn

consumption 6.1% Corn consumption almost doubled from 2005 to 2014 (partly due to low baseeffects), and we expect demand to remain robust, with growth accelerating in

the coming years The demand gains will mainly come from growth in the livestock sector, as beef, veal and poultry production is expected to register strong growth.

Trade - Corn production will expand at a slower pace than consumption and we see

Vietnam's corn production deficit to widen in the coming years The country has been importing increasing amounts of corn in recent years, with imports averaging 2.5mn tonnes over the past three years We forecast the deficit to reach 2.5mn tonnes in 2020 compared with 1.7mn tonnes in 2015.

Government's Plan To Boost Corn Production Leading To Lower Imports

Vietnam's Ministry of Agriculture and Rural Development (MARD) is implementing a programme forshifting acreage from rice to other cash crops, with a focus on corn and soybean The goal of the plan is toavoid paddy overproduction, prevent downward pressure on rice prices and increase feed supply Theministry is supporting the change with a VND2mn/ha help for input costs (seeds, fertilisers, pesticides) and

about VND700,000/ha for land preparation costs for those who shift from rice to corn or soybean This newpolicy is a clear change to support dynamics in Vietnam, where rice production has long been the focus.Vietnam is already seeing the impact of the policy, as domestic corn production is accelerating However,consumption is expanding at a faster pace, which will keep imports on an uptrend.

A Greater Need For Feed

The need to increase corn and soybean production is all the more salient given that imports of feed

ingredients have skyrocketed in recent years in line with the development of the livestock sector Beef,poultry and pork meat production has been growing at a hefty 7.0% annually over the past 10 years,

supported by growing domestic demand for more protein

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

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

Booming Feed Imports

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

Source: BMI, USDA, ITC

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

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

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

Corn Production Push Insufficient To Supply Feed Demand

We believe that Vietnam's plan to reduce its dependence on imported feed from 70% to 50% out to 2020will prove difficult The country is likely to remain largely dependent on imported feed in the coming fiveyears Corn and soybean productivity is low in this traditional rice-producing country and will take years to

see improvement Vietnam's corn yields are lagging its neighbours, at 4.50 tonnes/ha, compared with6.03 tonnes/ha in China and 5.35 tonnes/ha in Laos Meanwhile, the scale of soybean production remainsextremely low, at around 200,000 tonnes, compared with consumption of 1mn tonnes annually.

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

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

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

Table: Corn Production & Consumption (Vietnam 2013-2020)

2013 2014 2015 2016f 2017f 2018f 2019f 2020f

Corn production, '000 tonnes 4,780.0 5,150.0 5,460.0 5,787.6 6,105.9 6,460.1 6,815.4 7,210.7

Corn consumption, '000 tonnes 6,450.0 6,800.0 7,200.0 7,668.0 8,128.1 8,615.8 9,132.7 9,680.7

f = BMI forecast Source: USDA, BMI

Rice Outlook

BMI View: Vietnam is and will remain a key grower and provider of rice in the world However,

production growth is slowing down, due to the government's push to foster feed grain production and the country's livestock sector.

as a result of El Niño This kept yields at around 5.8tonne/ha, same than in 2013/14

■ The El Niño-related episodes of dry weather recorded since H115 and the lack of water for irrigation,coupled with the ongoing government plan to switch acreage from rice to corn production, will make riceproduction decline for the first time since 2010/11 in 2015/16 We have revised down our rice productionforecast and now expect output to come in at 28.0mn tonnes, down 0.5% y-o-y

■ Exports will be broadly in line with historical averages in 2015/16, at around 6.5-7.0mn tonnes AlthoughThailand make a big come back on international rice markets after its 2011-2014 Rice Pledging

Programme made its exports uncompetitive, Vietnam's rice remain quite competitive China, Vietnam'slargest market, will see strong import growth in 2016

Table: Vietnam - Rice Production And Consumption Outlook

Ave growth rate 2015/16-2019/20 Drivers

Rice production 1.6% Production growth will slow down significantly in the coming years due

to the government's push to foster feed grain production and the country's livestock sector However, Vietnam will remain a very large producer of rice Vietnamese rice is very competitive relative to many of its regional peers and is well positioned to benefit from both regional and global demand growth, especially when compared to many of Vietnam's other agricultural sub-sectors Another advantage of Vietnamese rice is its relatively higher yields The government is looking to increase the area planted with hybrid rice varieties by 50%, and this bolsters our outlook for the country's rice production capabilities over the long term in spite

of the limits to cultivated area expansion.

Rice consumption 2.5% Rice remains the major food staple in Vietnam, and we do not see this

changing over our forecast period However, rising interest in other foods such as wheat-based goods - supported by growing affluence - will restrict demand for rice Ultimately, demand growth will be influenced by population growth, as per capita consumption is expected to remain roughly the same while the population continues to diversify its diet on the back of rising incomes.

Trade - Vietnam will remain one of the world's top rice exporters, competing with

Thailand for markets in China, South East Asia and Africa.

Source: BMI

Table: Vietnam - Risks To Rice Outlook

Period Risks

Short term

(two-year horizon) Downside risk to production - Unseasonal weather.

Long term

(five-year horizon) Upside risk to production - The government may drop its support to corn and soybean production,which would lead to a reacceleration in rice production.

Source: BMI

Structural Trends

Slower Production Growth On Push To Corn Output

Vietnam's goal to incentivise feed grain production at the expense of rice will limit the growth of area underrice cultivation in the coming years As a result, we expect most the rice production growth will come fromyield improvements Since 2013, the government has been trying to make rice farmers switch to corn andsoybean, proposing support of VND2mn per hectare (/ha) for input costs (seeds, fertilisers, pesticides) and

about VND700,000/ha for land preparation costs for those who shift from rice to corn or soybean This newpolicy is a clear change to government support dynamics in Vietnam, where rice production has long beenthe focus Incentivised by elevated public subsidies for rice production, farmers have planted the grainacross the country, even in areas with unfavourable soil conditions As a result, rice production has grown

by a healthy 2.3% annually since 1999/00

However, Vietnam now struggles to export its large rice surpluses, as competitors export higher-quality rice(eg, from main rival Thailand) or rice at a lower price (eg, from India) The country is therefore eager todiversify its crops The need to increase corn and soybean production is all the more salient given thatimports of feed ingredients have skyrocketed in recent years in line with the development of the livestocksector

Stiff Competition

Select Countries - Rice Export Prices (USD/tonne)

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

Emphasis On Yields

In order to support rice production via the improvement in rice yields, in 2008, the government startedencouraging farmers to implement the Large Scale Farm model (between 50-100 ha), where farmers

consolidate individual small farms into larger farms to lower per hectare production costs on land

preparation, irrigation, planting and harvesting costs Most of the production input (fertiliser, pesticide,machinery) is supported by a trading company In return, the company will purchase directly most of therice products from farmers, without going through middle-men In 2011, over 85% of paddy farminghouseholds were cultivating rice in plots of 0.5ha or less We believe this plan will help yields grow.Vietnamese yields currently stand well above neighbouring countries, but still have room to reach

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

Remaining A Key Rice Exporter

Although rice production growth is slowing down significantly, Vietnam will remain a key rice exporter inthe coming years However, international competition is fierce, amidst the return of Thailand on the exportmarket after its Rice Pledging Scheme led to a drop in Thai rice competitiveness Secondary exportersincluding Myanmar and Cambodia are also seeing their exports grow

Back To Third Position

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

Source: USDA, BMI

Table: Rice Production & Consumption (Vietnam 2013-2020)

2013 2014 2015 2016f 2017f 2018f 2019f 2020f

Rice production, '000 tonnes 27,510.0 28,150.0 28,160.0 28,019.2 28,635.6 29,208.3 29,792.5 30,418.1

Rice consumption, '000 tonnes 20,800.0 21,380.0 21,765.0 22,287.4 22,822.3 23,370.0 23,954.2 24,577.1

BMI Calculation/USDA

Dairy Outlook

BMI View: We are positive on Vietnam's dairy sector, as we expect it to maintain high-growth momentum

due to a growing customer base, low milk consumption per capita, rising disposable income and increasing health awareness among consumers Milk production also has bright days ahead, amidst an investment spree within local dairy companies to expand upstream capacity.

Latest Developments

■ Dairy companies operating in Vietnam - whether they import their products or manufacture them inVietnam - have been going through challenging times, amidst elevated input costs (milk powder prices),slower domestic demand growth in 2014 for dairy, as well as stiffening domestic competition withseveral new local entrants and the presence of many established international brands Although thesituation has improved somewhat in 2015 as international milk powder prices have eased andconsumption is picking up, elevated competition and government price controls will limit profitability inthe coming quarters

■ The ongoing improvement in Vietnam's economic activity, which started in 2015 and will continue in

2016, will help consumer spending increase this year after weak demand in 2014 weighed on dairy sales

■ Several local companies, including Vinamilk and Hanoi Milk, are investing heavily in their upstream

capacity and are building several new dairy farms As such, Vietnam's milk production growth willaccelerate in the coming years, growing by 10% in 2016

Table: Vietnam - Dairy Production And Consumption Outlook

Ave growth rate 2015/16-2019/20 Drivers

Milk production 10.1% Milk production will accelerate significantly in the coming years, due to the

ongoing large public and private sector investments in dairy farms, which are part

of the effort to reduce the country's growing import dependency Vietnam will see the opening of several dairy farms in the coming years and a dramatic increase in cattle numbers Commercialisation will also play a key role as larger, more efficient farms come to play a greater role in milk production Finally, the sector is likely to benefit from the continued increase in yields, which have risen almost 130% over the past decade and are, given the new investment in the sector, expected to continue rising.

Milk

consumption 6.4% Dairy consumption will also accelerate and exceed production growth in thecoming years, driven by rising incomes, population growth and the growth in a

modern retail supply chain Intense competition between companies as well as government policy will keep dairy products prices in check for now, which will also favour demand.

Processed

products

consumption

Whole milk powder: 5.1%

Butter: 7.4%

Cheese: 9.7%

Demand for high-value dairy products will also be strong, driven by the rise of India's young demography and growing urban middle class eager to try new products Butter and cheese consumption will grow at a faster rate as they come from a low base Controls over whole milk powder prices will support demand for this product Condensed milk and yoghurt are other highly popular dairy

products.

Trade - Vietnam is a net importer of dairy products: it imports large quantities of milk

powder from New Zealand due to the absence of local milk production Dairy exports have started to pick up in recent years, along with Vinamilk's internationalisation strategy The company mainly exports to South East Asia and the Middle East.

Source: BMI

Table: Vietnam - Risks To Dairy Outlook

Period Risks

Short term (two-year horizon) Downside risk to production - El Niño-related dry weather may limit dairy herd expansion(2015/16).

Long term (five-year horizon)

Downside risks to consumption - 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 our production and consumption forecasts, as it places the dairy industry at risk of a health scandal, which would further tarnish the image of dairy products in Vietnam.

Source: BMI

Small Regional Importer

Select Countries - Dairy Imports (USDmn)

Note: The columns represent Vietnam's imports Source: Trade Map, BMI

Structural Trends

Private Investment To Support Production Growth

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

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

After having invested heavily in downstream projects over recent years, Vinamilk is now aggressivelydeveloping its upstream capacity and is building new dairy farms Sourcing 60-70% of its needs from itsown farms (as Vinamilk plans to do by 2024) will help the company rely less on foreign raw materials, forwhich prices are often volatile

Table: Vietnam - Planned Investment In Milk Production Capacity

Company Domestic milk supply Current milk production

capacity (tonne/day) Projects

Vinamilk Collecting milk from

private farmers (80,000

cows) & from its own 5

farms (9,000 cows).

550 Plans to spend USD140mn to build 4 more farms

in 2014-2016 This will bring herd to 100,000 in

2017 and 120,000-140,000 in 2020 (from contracted farmers and own farms).

TH Milk Collecting milk from its

own dairy farms only

(45,000 cows)

400 TH milk invested USD1.2bn to develop its farms

until 2017 Total number of cows projected to grow to 137,000 in 2017, providing 50% of its milk needs This will double dairy output to

1,000-1,200 tonne.

Nutifood - - Nutifood, Hoang Anh Gia Lai Corp and Vissan will

invest over USD529mn together in a livestock and dairy farm (120,000 milking cows) by end 2017 Friesland

Campina

Vietnam

Collecting milk from

private farmers 230 It plans to collect at least 7,000 tonnes of milk peryear from private farms by 2018.

Source: BMI

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

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

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

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

yoghurt manufacturing plant operated by NutiFood

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

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

Increasing Domestic Competition Weighting On Margins

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

a result of higher competition The government's clampdown in 2014 on the price of certain milk powderprices for children has also played a part in this trend Moreover, operating costs of dairy companies hasincreased, as they have ramped up advertisement in an effort to maintain their market share As a result,margins in the sector have been on a downtrend

Liquid Milk Still The Dominant Product

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

Source: VPBS, Bloomberg, BMI

Consumers Eyeing Value-Added Dairy Products

Consumers in Vietnam and in Asian countries in general mainly consume fresh milk, produced locally.However, consumers are slowly turning to more value-added products In Vietnam, for example, theconsumption of ultra-high temperature (UHT) or sterilised liquid milk has a 90% penetration in cities and70% penetration in rural areas, while infant milk powder has a 43% penetration in cities and 30% in ruralareas, according to a consumer panel made in 2012 by Kantar Worldpanel For functional dairy products(eg, products that provide health benefits beyond their inherent nutritional value, or probiotics in the case of

drinking yogurt or milk), penetration rates drop to less than 20% in cities and below 5% in rural areas Inurban areas, the fastest retail growth, both in terms of volume and value, is currently coming from infantmilk powder and functional products In rural areas, most dairy product consumption is blossoming, withinfant milk powder, UHT liquid milk and cup yogurt recording the most robust growth.

Large Opportunities Across Products

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

Note: DY = Drinking Yogurt Source: Kantar Worldpanel

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 to increase production of raw liquid milk to 1mn tonnes (from an estimated 382,000tonnes in 2012) will prove challenging

Table: Dairy Production & Consumption (Vietnam 2013-2020)

2013e 2014e 2015e 2016f 2017f 2018f 2019f 2020f

Milk market value, % of total 0.7 0.6 0.6 0.7 0.8 0.8 0.9 0.9 Milk production, '000 tonnes 450.0 490.5 541.0 595.1 656.4 722.0 796.4 876.0 Milk production, % y-o-y 17.8 9.0 10.3 10.0 10.3 10.0 10.3 10.0 Liquid milk consumption, '000 tonnes 200.1 209.0 220.5 233.7 248.9 265.1 282.3 300.7 Liquid milk consumption, % y-o-y 8.0 4.4 5.5 6.0 6.5 6.5 6.5 6.5 Butter consumption, '000 tonnes 13.5 14.3 15.2 16.3 17.5 18.8 20.2 21.8

Cheese consumption, '000 tonnes 5.0 5.3 5.7 6.2 6.8 7.5 8.3 9.1 Cheese consumption, % y-o-y 4.2 6.0 8.0 9.0 9.5 10.0 10.0 10.0 Whole milk powder consumption, '000 tonnes 35.0 35.5 36.6 38.2 40.0 42.0 44.3 47.0 Whole milk power consumption, % y-o-y 6.1 1.4 3.0 4.5 4.7 5.0 5.5 6.0

National Sources/BMI

Livestock Outlook

BMI View: Despite going through hard times over recent years owing to disease outbreaks, soaring input

costs and competition from cheap imports, we expect Vietnam's livestock production to grow strongly over the medium term, led by poultry production 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.

■ Vietnam's livestock sector will continue to expand in 2016, helped by the improvement in economicactivity and the return to profitability after a few challenging years in 2012 and 2013

■ Cargill announced in Q415 that it will build a new feed mill in Vietnam, which confirms our positive

view on the country's feed and livestock sector and our view that local corn and soybean consumptionwill grow at a robust pace in the coming years The new USD30mn feed mill will have a total capacity of260,000 tonnes per year and will become operational in 2017 Cargill currently has 10 animal feed mills

in Vietnam

Table: Vietnam - Livestock Production And Consumption Outlook

Ave growth rate 2015/16-2019/20 Drivers

Trade - Vietnam started importing meat in 2006 and its imports have been on an uptrend

ever since Consumption will continue to rise at a faster pace than production across the segment and we forecast growing import needs in the coming years The poultry production deficit will reach around 150,000 tonnes each by

2020, compared with 40,000 tonnes now Meanwhile, its beef deficit will reach 100,000 tonnes by 20120, compared with 53,000 tonnes now The country will remain broadly self sufficient in pork meat.

Source: BMI

Table: Vietnam - Risks To Livestock Outlook

Source: BMI

Structural Trends

Vietnam Among Top Six Fastest-Growing Meat Consumers Globally

A set of six countries - Vietnam, Pakistan, Indonesia, the Philippines, Colombia and Nigeria - will be globaloutperformers in terms of meat consumption growth out to 2020 They will account for most of the globalgrowth in meat import demand over the period, which they will source from growing surpluses in thelargest meat consuming countries: Brazil, the US, the EU, China and India

Despite individual differences in terms of meat preferences, these countries consistently rank among thefastest-growing consumers of poultry, pork and beef This outperformance is due to continued growth inGDP and population, as well as a solid base in both metrics at the start of our forecast period A countrymust have already passed a threshold in absolute GDP per capita before additional income translates intoadditional meat demand

Vietnam will see the strongest and most diversified growth in its meat consumption, with fast gains in allthree meat categories This is because Vietnam will see the strongest growth in GDP per capita which,combined with an absence of cultural hindrances in consumption of any of the three meats, will translateinto Vietnam leading demand growth for poultry, pork and beef

Growth In GDP Per Capita From Solid Base To Stimulate Meat Demand

Select Countries - Real GDP Per Capita In 2015 ('000 USD) & Average Yearly Growth In Real GDP Per

Capita USD 2016-2020 (%)

Note: Real GDP per capita, USD 2010 prices & exchange rate Source: National Sources, BMI.

Meat Imports On The Rise

Although livestock production will record robust growth in the coming years, in line with the trend recordedover recent years, output will not manage to keep up with consumption growth The large number of small-scale farms, the dependence on imported breeding stock, the recurrence of disease outbreaks, technicallimitations and poor slaughtering facilities will limit the expansion of the poultry and pork sectors in thecoming years

Meanwhile, the Vietnamese economy is increasingly liberalising its trade It is part of the ASEAN

Economic Community (AEC), which is supposed to start on December 31, 2015, as well as of the Pacific Partnership (TPP), which will liberalise trade within 12 member countries Vietnam also reached anagreement in principles on a free trade agreement with the European Union in 2015 The actual decrease ontariffs and non-tariff barriers to trade will take years to be implemented in the case of the AEC, and the TPPneeds to be ratified before it takes effect However, we believe these trade deals point at a clear

Trans-liberalisation of trade for Vietnam, including agriculture products Given the low competitiveness of

Vietnam's livestock production, this trade liberalisation trend is likely to lead to growing imports of meat inthe coming years Several members of the AEC, TPP and EU are large exporters of meat, including

Thailand, the US and Canada We forecast poultry and pork imports to grow at the fastest pace

Growing Imbalances

Vietnam - Livestock Production Balance ('000 tonnes)

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 utilised this opportunity to control Vietnam's most lucrativehusbandry sub-sectors, such as feed production, live animal breeding and veterinary services and medicine

Of the total capital investment in the livestock sector in 2012, investment in the production of meat onlyaccounted for 4.1% (USD15.1mn), while investments in feed production accounted for 94.9%

(USD346.8mn) Investors are drawn to invest in the production of animal feed as domestic supply does notmeet demand and the livestock sector will increasingly depend on imports Domestically produced animalfeed only represents around 50-60% of the country's total demand Foreign-owned millers control around50% of total domestic production

In comparison to the attractive feed sector, the livestock industry is still heavily traditional with small-scaleand dispersed farms The domestic livestock sector will continue to face structural challenges, namely highinterest rates and a lack of foreign investment into the sector Indeed, livestock farmers must bear interestrates of around 13-15%, while foreign companies enjoy 1-4% rates Moreover, the livestock businessgenerates volatile and low profits and holds important risks Disease outbreaks are still very much likely,while insurance schemes and the public policy on aid against disasters and diseases are underdeveloped.

US Is A Key Provider

Vietnam - Livestock Imports By Country (% of value imported)

Source: Comtrade, BMI

Local Feed Sector 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 foreign yard scraps However, itscommercial feed output is 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 U.S.-based Cargill, according to the

Ministry of Industry and Trade These companies continue to invest heavily in Vietnam's feed sector

Local companies are also expanding: GreenFeed Vietnam Corporation and the Hong Ha Nutrition Joint

Stock Co opened new production capacity in recent years.

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

Table: Livestock Production & Consumption (Vietnam 2013-2020)

2013 2014 2015e 2016f 2017f 2018f 2019f 2020f

Livestock market value, % of total 23.4 21.5 22.5 22.9 22.9 22.6 22.4 22.2 Poultry production, '000 tonnes 745.0 774.8 814.0 858.8 910.3 969.5 1,027.6 1,094.4

Poultry consumption, '000 tonnes 790.0 821.6 853.0 908.4 973.9 1,050.8 1,141.2 1,247.3 Poultry consumption, % y-o-y 1.9 4.0 3.8 6.5 7.2 7.9 8.6 9.3 Pork production, '000 tonnes 2,350.0 2,420.5 2,500.0 2,577.5 2,652.2 2,729.2 2,811.0 2,895.4

Pork consumption, '000 tonnes 2,315.0 2,380.0 2,435.0 2,503.2 2,585.8 2,676.3 2,772.6 2,875.2

Beef & veal production, '000 tonnes 370.8 374.5 378.0 387.1 396.4 406.3 416.4 426.8 Beef & veal production, % y-o-y -3.0 1.0 0.9 2.4 2.4 2.5 2.5 2.5 Beef & veal consumption, '000 tonnes 410.0 416.2 431.0 448.2 466.2 484.8 504.2 524.4 Beef & veal consumption, % y-o-y 2.5 1.5 3.6 4.0 4.0 4.0 4.0 4.0

National Sources/BMI

Coffee Outlook

BMI View: In spite of low international coffee prices and some structural challenges in the industry,

Vietnam's coffee sector continues to expand, but at a slow pace The sector is undergoing some positive changes which will help the country maintain its status as the largest exporter of Robusta coffee globally in the coming years The ongoing tree replanting programme, coupled with the government's goal to boost the processing sector and improve exports of value-added coffee products, will boost export earnings in the medium term.

Latest Developments

■ Vietnam recorded its first decline in six years in the 2014/15 season, following the 2013/14 bumper crop.Weather was dry in some of the main growing coffee regions over a large period of 2014 Moreover,yields decreased after the exceptional harvest of 2013/14

■ We maintain our view for the Vietnamese coffee crop to grow modestly in the 2015/16 season, for whichthe harvest is currently ongoing Production will grow by 1.4% to 28.3mn 60kg bags, after outputdecreased by a steep 6.4% in 2014/15 Vietnam's coffee regions have been recording weak rainfall overmost of 2015, but farmers have been irrigating trees according to local sources, which should limit theimpact of dry weather on yields Meanwhile, although area under coffee cultivation will stagnate in 2015

as some farmers switch to pepper production, coffee area remains elevated after several years of stronggrowth Cultivated area probably reached around 670,000ha in 2014, compared with 555,000ha in 2010and 497,000ha in 2005 according to Vietnam's Ministry of Agriculture

■ Looking at the 2016/17 season for which the harvest will start in September 2016, we believe productiongrowth will again be weak relative to the strong growth recorded until 2014 Farmers with old coffeetrees (which make up to a third of total acreage) are turning to other more profitable crops (especiallypepper and fruits) due to low coffee prices Production will grow by a weak 3.0% y-o-y to 29.1mn bags

■ Coffee supply in Vietnam is currently quite ample as exports have been weak in 2015, a result of weakerglobal demand for coffee in general and for Robusta in particular due to the competitiveness of Arabicabeans Moreover, Vietnamese farmers have been hoarding their beans in an - unsuccessful - intent to prop

up prices As a result of elevated carry-over stocks, Vietnam's coffee exports will be strong in 2015/16and grow at a faster pace than production

Table: Vietnam - Coffee Production And Consumption Outlook

Ave growth rate 2015/16-2019/20 Drivers

Coffee production 2.5% After more than a decade of strong output growth, coffee production

expansion will slow down in the coming years Low coffee prices and the attractiveness of alternative crops such as pepper will lead to a slowdown in new planted area growth Production growth will increasingly rely on yield improvement, as the country will continue to reap the fruits of its replanting programme with higher-yielding trees Export opportunities, coming from the increasing demand from emerging markets of Robusta coffee, will continue to support production However, we believe production will record large swings due to the vulnerability of old trees (which still represent a large part of the total trees) to diseases.

Coffee consumption 12.5% Coffee consumption is accelerating in Vietnam As GDP and the population

increase, spending on food and drink items such as coffee will increase as well 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 1.38kg per capita in 2015, one of the highest growth rates out of all coffee-exporting countries over the period Coffee consumption per capita is forecast to expand to 2.10kg per capita by 2019 The Ministry of Agriculture and Rural Development (MARD) has said it hopes to boost domestic consumption to 10-15% of the national coffee crop We do not believe this will be achieved in our forecast period, but the existence of such a sizeable target underlines the apparent potential of domestic consumption Trade - Coffee has proven to be one of main agricultural export engines of the

Vietnamese economy, and the bulk of Vietnam's coffee production is for exports We expect Vietnam to remain a key player in international markets in the coming years and to slowly increase its exports, partly due to growing demand for soluble coffee in Asia Production surplus will reach 27.7mn bags

in 2020, compared with the average 24.1mn bags recorded over 2011-2015.

Source: BMI

Table: Vietnam - Risks To Coffee Outlook

Period Risks

Short term

(two-year horizon) Downside risk to production - Weak prices, El Niño-related dry weather (2016/17 crop).

Long term

(five-year horizon) Downside risk to production - With Vietnam's coffee industry so dependent on exports, ourforecasts for production will be heavily dependent on world demand and prices for Robusta

coffee Should global consumption decrease and/or international coffee prices remain low for several years, Vietnam's production could undershoot our growth forecast.

Source: BMI

Structural Trends

2014-2020 Coffee Plan: Positive For The Sector

Vietnam's coffee sector has grown significantly over the last 20 years, with yields doubling and the areaplanted expanding from 42,000ha to more than 660,000ha Vietnam is the world's biggest producer ofrobusta coffee, with more than 95% of its coffee output consisting of the Robusta variety and only around2-3% of production devoted to the premium Arabica variety The Vietnamese coffee market year runs fromOctober to September, and harvesting takes place between November and February

Vietnam's coffee sector is now undergoing some positive changes, which will help the country maintain itsstatus as the largest exporter of Robusta coffee globally in the coming years The ongoing tree replantingprogramme, coupled with the government's goal to improve exports of value-added coffee products,

is improving the outlook for coffee production and export earnings in the medium term

MARD has unveiled a coffee plan for the 2014-2020 period, focusing mainly on a tree replanting

programme and on the development of the processing sector According to MARD, about 86,000ha, orabout 13% of total planted area, is planted with trees over 20 years old that need replanting soon About140,000-150,000ha are made up of 15-20 year old trees that will need to be replanted on a five-to-10 yearhorizon Old trees usually yield less than 2,000kg per hectare (/ha), compared with Vietnam's average of2,500-2,600kg/ha Younger trees can yield up to 4,000-5,000kg/ha

Vietnam Enjoys High Yields

Select Countries - Coffee Yields (kg/ha)

Source: FAO, USDA

Following years of targeting 500,000ha as the optimal and sustainable level of Vietnamese area planted forcoffee, which had been in order to avoid overproduction, the Vietnamese government recently increased thetarget to 600,000ha, taking into account the continued expansion of coffee area across at least 10 provinces.Total area currently stands at 665,000ha

Meanwhile, the Vietnamese government plans to move up the coffee value chain and boost exports ofprocessed coffee, which currently account for only around 5% of total volume exported

Arduous Move Up In The Coffee Value-Chain

In spite of the government's effort to address some of the coffee sector's weaknesses, the sector still faces anumber of challenges First, the implementation of the coffee plan will be problematic and slow Thegovernment has already been trying to incentivise replanting over recent years, and the Vietnam Bank forAgriculture and Rural Development set aside VND12.5trn with low interest loans for coffee replanting over