Q1 2010 www.businessmonitor.com VeneZueLa agribusiness Report INCLUDES 5-YEAR FORECASTS TO 2014 ISSN 2040-0489 Published by Business Monitor International Ltd Venezuela Agribusiness Report Q1 2010 Including 5-year industry forecasts by BMI Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication Date: December 2009 Business Monitor International Mermaid House, Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2009 Business Monitor International All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Venezuela Agribusiness Report Q1 2010 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 CONTENTS SWOT Analysis .6 Venezuela Agricultural SWOT Industry Forecast Scenario .7 Venezuela Grain Outlook Table: Venezuela Wheat Consumption & Trade Table: Venezuela Corn Production, Consumption & Trade Table: Venezuela Wheat Consumption & Trade Table: Venezuela Corn Production, Consumption & Trade 10 Venezuela Cocoa Outlook 11 Table: Venezuela Cocoa Production, Consumption & Trade 12 Table: Venezuela Cocoa Production, Consumption & Trade 12 Venezuela Sugar Outlook 13 Table: Venezuela Sugar Production, Consumption & Trade 14 Table: Venezuela Sugar Production, Consumption & Trade 15 Venezuela Dairy Outlook 17 Table: Venezuela Milk Production & Consumption 18 Table: Venezuela Butter Production, Consumption & Trade 18 Table: Venezuela Cheese Production, Consumption & Trade 18 Table: Venezuela Whole Milk Powder Production, Consumption & Trade 19 Table: Venezuela Milk Production & Consumption 20 Table: Venezuela Butter Production, Consumption & Trade 21 Table: Venezuela Cheese Production, Consumption & Trade 21 Table: Venezuela Whole Milk Powder Production, Consumption & Trade 21 Venezuela Coffee Outlook 23 Table: Venezuela Coffee Production, Consumption & Trade 24 Table: Venezuela Coffee Production, Consumption & Trade 26 Venezuela Livestock Outlook 27 Table: Venezuela Poultry Production, Consumption & Trade 28 Table: Venezuela Pork Production, Consumption & Trade 28 Table: Venezuela Beef & Veal Production, Consumption & Trade 29 Table :Venezuela Poultry Production, Consumption & Trade 30 Table: Venezuela Pork Production, Consumption & Trade 30 Table: Venezuela Beef & Veal Production, Consumption & Trade 30 Competitive Landscape 32 Table: Agricultural Commodity Producers & Traders 32 Table: Agribusiness Suppliers 33 Table: Integrated Agricultural Producers 34 Commodity Price Analysis 35 Corn 35 Table: Corn 35 Rice 36 Table: Rice 36 Soy 37 Table: Soybean 37 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 Wheat 38 Table: Wheat 38 Softs Update 39 Cocoa 39 Table: Cocoa 39 Coffee 40 Table: Coffee 40 Milk 41 Table: Milk 41 Sugar 42 Table: Sugar 42 Downstream Supply Chain Analysis 43 Industry Forecast Scenario – Food 43 Food Consumption 43 Venezuela: Food Consumption Indicators Historical Data & Forecasts 44 Canned Food 45 Venezuela: Canned Food Value/Volume Sales Historical Data & Forecasts 45 Confectionery 46 Confectionery Value/Volume Sales - Historical Data & Forecasts 47 Trade 48 Venezuela: Food, Drink & Tobacco Trade Historical Data & Forecasts (US$mn) 49 Industry Forecast Scenario – Retail 50 Industry Forecast Scenario – Retail 50 Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 51 Sales Breakdown by Retail Format Type 51 Macroeconomic Forecast 52 Table: Venezuela - Economic Activity 54 BMI Forecast Modelling 55 How We Generate Our Industry Forecasts 55 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 Executive Summary Venezuela's food and agriculture industries were as eventful as ever in the second half of 2009 As much of the country suffered from intense water shortages owing to poor rains, government seizures of land and processing facilities continued apace In December, the agriculture minister said the government had seized almost half a million hectares of supposedly unproductive farmland in 2009 Many landowners who have had land seized have denied claims that it was being underused The government is hoping that it will be able to boost production on the seized land once Venezuela emerges from the El Niño-related drought that gripped the country in the second half of 2009 In 2010, the agriculture ministry has pledged to concentrate on improving government-controlled land with new irrigation projects rather than seizing yet more new land This will be welcomed by nervous farmers With Venezuela set for another year of recession in 2010, the government will need to see success with its land seizures if food imports are not to rise again Land has not been the only factor of production to take the government's eye in 2009 The second half of the year saw the seizure of a number of sugar mills and coffee roasters The temporary takeover of coffee company Fama de America in August was made permanent in November Cafea, a smaller roaster based in Táchira State, was also acquired by the government At the time of writing, the government was in discussions with one of the country's other coffee majors, Cafe Madrid, over the formation of a joint venture An outright government acquisition is still by no means out of the question, however In October 2009, the Venezuelan government seized two sugar mills in the western border states of Táchira and Zulia El Universal reported that the Ministry of Agriculture and Lands said the seizures were needed as the mills' owners had put the desire for excessive profits before the needs of their workers and the general public The owners of the Zulia mill had raised the ire of the government in September by declaring a temporary shutdown leaving around 1,000 employees out of work The seizures mean that six of Venezuela's 15 sugar mills are under government control The moves puts the government among the major players in both the sugar and coffee sectors President Hugo Chávez is banking on the government's acquisitions in the sectors to allow it to ensure regular supplies of sugar and coffee at the official prices After years of underinvestmnet in capacity expansion, however, we are somewhat doubtful that the government will be able to guarantee enough supplies to the market anytime soon We expect localised supply shortages to continue and many consumers will be forced to turn to the blackmarket for supplies of key staples © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 SWOT Analysis Venezuela Agricultural SWOT Strengths Weaknesses Opportunities Threats Venezuela's tropical climate allows for production of a diversified range of agricultural products Venezuelan cocoa and coffee are known for their high-quality and cocoa especially is sought after by producers of premium chocolate Despite having large areas of fertile arable land, lack of investment in agriculture has left Venezuela a major food importer High food price inflation and frequent supply shortages have dampened growth in food consumption Price controls in place since 2003 squeeze the profits of producers and are a disincentive to invest in increasing production The government has shown interest in revitalising coffee and cocoa production after years of decline The government has introduced a number of programmes to help small holders increase production including finance and subsidies Falling oil revenues are bringing more attention to increasing agricultural production to reduce the cost of food imports The threat of land seizures and nationalisation inhibits investment in agriculture in Venezuela The fall in oil prices will severely limit the amount of money the government will be able to spend on agriculture © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 Industry Forecast Scenario Venezuela Grain Outlook BMI Supply View: Venezuela is a major net importer of grain Though production has risen rapidly this decade, consumption has also risen fuelled by the fast oil-driven GDP growth through the middle years of this decade Corn is Venezuela's major grain crop The vast majority of Venezuela's corn crop is grown in the central states of Barinas, Portuguesa and Guárico While the area planted to corn has risen by around 50% from the end of the 1990s, with Venezuela's agricultural sector relatively undeveloped there is still plenty of room for further expansion The viability of corn production in Venezuela is heavily dependent on government policy In the 1980s, the country's agricultural sector was heavily regulated and high tariffs were imposed on grain imports This saw corn production more than double in the second half of the 1980s With little competition from imports, however, productivity remained low When the market was opened up in the 1990s, domestic farmers found it hard to compete with imports and production fell Production has since climbed back up reaching an estimated 2.00mn tonnes in 2009 The government had been hoping for a larger crop, but poor rains at the beginning of the year have reduced output In 2010, we now forecast production to fall sharply owing to the drought that gripped Venezuela in the second half of 2009 We forecast output to fall 17.5% year-on-year (y-o-y) to 1.65mn tonnes This is a large downward revision from our previous forecast owing to the increasingly poor climatic conditions through the end of 2009 Out to the end of our forecast period to 2014, the level of production will be highly reliant on the ability of Chávez' government to support the agricultural sector Without continued support, many of the newly opened farmland would return to fallow Despite this risk, we expect output to continue to rise and are forecasting production to grow 18.3% from the 2009 level to reach 2.37mn tonnes in 2014 Wheat production in Venezuela is negligible BMI Demand View: Demand for feed corn has risen rapidly since the economic recovery began in 2004 Through the end of the 1990s and the first couple of years of this decade, demand for corn shot up driven by the expansion of the poultry sector As the economy went into meltdown in 2002, however, demand for corn collapsed as poultry output fell almost 25% in the space of a year Since then, feed consumption has climbed back up Demand for corn for food has also risen strongly in the past few years as Venezuela's economy has grown Corn is a staple food in Venezuela Corn flour is used to make arpea, a flat unleavened bread Total corn consumption rose 67.6% from 2004 to 2009, outstripping growth in production Imports come primarily from the US Despite the forecast contractions in Venezuela's economy in 2009 and 2010 - BMI estimates Venezuela's GDP to have fallen 3.0% y-o-y in 2009 and is © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 forecasting for a 4.2% drop in 2010 - demand for corn should hold up fairly well as it is one of the cheapest foods available and the price is kept down by government price controls Wheat consumption has been gaining in popularity this decade as Venezuelan consumers have had more money to spend on food Consumption of both bakery goods and pasta has been rising Price controls mean pasta has become far more affordable The majority of pasta produced is lower grade and must be sold at a government-set price Some high grade pasta is also produced which can be sold at market prices The high prices on the world market in 2008 saw consumption fall and we expect consumption growth to remain subdued on the coming years as Venezuela's economy struggles Demand should pick up in the later years of our forecast period, though we expect consumption in 2014 to be below the record level seen in 2007 Table: Venezuela Wheat Consumption & Trade Wheat Consumption, '000 tonnes Wheat Net Trade Balance, '000 tonnes 2009f 2010f 2011f 2012f 2013f 2014f 1,500.0 1,465.6 1,483.2 1,546.3 1,612.0 1,686.0 -1,500.0 -1,465.6 -1,483.2 -1,546.3 -1,612.0 -1,686.0 Notes: f=BMI forecast Source: USDA, BMI Table: Venezuela Corn Production, Consumption & Trade 2009f 2010f 2011f 2012f 2013f 2014f Corn Production, '000 tonnes 2,000.0 1,650.7 2,048.3 2,149.7 2,251.0 2,366.0 Corn Consumption, '000 tonnes 3,100.0 3,020.8 3,139.4 3,261.0 3,386.0 3,544.0 Corn Net Trade Balance, '000 tonnes -1,200.0 -1,741.2 -1,194.5 -1,234.1 -1,280.0 -1,365.0 Notes: f=BMI forecast Source: USDA, BMI Drought To See Production Fall The dry conditions in the second half of 2009 brought about by the El Niño-Southern Oscillation phenomenon will have a major impact on 2009/10 crop production In the central state of Guárico, one of the country's largest corn producing states, 2009/10 corn production is expected to plummet more than © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 50% Production in the other key grain producing states of central Venezuela will also be badly hit While an increase in the area planted will compensate for some of the fall in yields, we still expect production to be down sharply The drought did bring some good news for grain producers In December, Reuters quoted the agriculture minster saying that the pace of land seizures would slow in 2010 as the authorities focused on improving irrigation on the land already seized Mixed Results For Chavez' Production Drive Since President Hugo Chávez came to power in 1999, production has increased again After rising gradually in the first half of this decade, production rose rapidly from 2005 as the oil wealth pouring into the country allowed more investment in agriculture From 2004 to 2008, corn production grew 56.5% to 2.00mn tonnes This was driven by a large increase in the area planted unde the government's National Sowing Plan Chávez' stated aim is to not only end Venezuela's reliance on imported corn, but to build up a surplus for export Since coming to office, Chávez has redistributed millions of hectares of land to the poor and invested billions of dollars in agriculture While the rise in production shows that the policy has enjoyed some success for grains, there are still problems Many of the people granted rights to farmland have little experience of agriculture There have also been complaints that promised training and inputs such as seed and equipment has been slow to materialise, leaving land fallow Another brake on the expansion of grain production are controlled farmgate prices The farmgate price of corn was raised by 30% in April 2008 and again by 24% in July 2009 Producers are also given direct subsidy payments and access to cheap fertilizer Despite this, farmers are still complaining that the farmgate price is too low, threatening future production Table: Venezuela Wheat Consumption & Trade Wheat Consumption, '000 tonnes Wheat Net Trade Balance, '000 tonnes 2004 2005 2006 2007 2008 2009f 1,537.0 1,502.0 1,688.0 1,755.0 1,500.0 1,500.0 -1,537.0 -1,502.0 -1,688.0 -1,762.0 -1,500.0 -1,500.0 Notes: f=BMI forecast Source: USDA, BMI © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 Companies appear to have capped their investment programmes, limiting investments to the bare minimum necessary to maintain production, which will severely limit the industries' long-term growth prospects This move led to inflationary consequences, while food's exemption from value-added tax (VAT), introduced in January 2007, has done little to stem the tide of price increases Y-o-y inflation came in at 23% in 2007 and 32% in 2008 In US dollar terms, per capita food consumption (food and drink, excluding alcoholic drinks) is now expected to fall over the forecast 2009-2014 period (by over 14%, although it will increase by a staggering 250% in local currency), due to a loss of purchasing power and the weakening of the local currency against the US dollar Per capita consumption of food (as expressed in US dollars) is expected to contract by 5% this year, by 18.3% in 2010, by 9.1% in 2011 and by 0.1% in 2012, before starting to grow again in 2013, to reach US$502 in 2014 a level seen back in 2005/6 BMI is currently forecasting that inflation will come in at 40% by the end of 2009 The spiralling cost of consumer goods has eliminated many of the benefits of Chávez's wealth redistribution programmes As a result, Chávez is eager to gain control over food production and distribution With the president's popularity among poorer Venezuelans directly tied to the price of food, Chávez's new power to expropriate food firms is likely to be a key plank of the government's efforts to reduce inflation Venezuela: Food Consumption Indicators Historical Data & Forecasts 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f 31.1 34.4 37.4 43.4 56.2 78.0 105.8 136.9 166.9 Food consumption (US$bn) LHS 14.51 16.03 17.43 16.88 14.04 13.00 13.23 14.41 15.90 Per capita food consumption (VEB) 1,141 1,237 1,321 1,506 1,913 2,608 3,473 4,409 5,278 Per capita food consumption (US$) 532.2 576.9 615.9 585.4 478.2 434.7 434.1 464.1 502.7 Total Food consumption y-o-y growth (local currency, %) 12.40 10.43 8.75 16.13 29.41 38.89 35.65 29.32 21.96 7.86 7.02 5.81 4.94 4.38 4.06 3.82 3.69 3.62 Food consumption (VEBbn) Food consumption as % GDP NB nominal growth rate; exchange rate for US$ values varies with year; f=BMI forecast Source: National Institute of Statistics, BMI © Business Monitor International Ltd Page 44 Venezuela Agribusiness Report Q1 2010 Canned Food Over the 2004 to 2009 review period, canned food values rose from VEB646mn Canned Food Market (US$301.2mn) to a projected VEB706mn 2003-2014f (US$247.6) The values in 2009 suffered due to the impact of inflation (hence the diminishing US dollar values) and falling consumer purchasing power, despite the economical nature of the canned foodstuffs and their durability, which have increased their attractiveness in the times of economic downturn Nevertheless, 2009 volume sales fell on the 2008 levels, which we not foresee being reached again for the duration of the forecast period The f=BMI forecast Source: National Institute of Statistics, BMI value of canned foods will post a 50.7% increase in local currency terms, although the bolivar devaluation will result in a 63.1% value reduction in US dollar terms, through to 2014 Venezuela: Canned Food Value/Volume Sales Historical Data & Forecasts 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f 353.7 356.5 359.3 355.2 352.4 353.5 354.7 355.9 357.5 Canned food sales (VEBmn) 673 678 680 706 744 806 887 977 1,064 Canned food sales (US$mn) 313.9 316.4 316.9 274.6 186.0 134.4 110.9 102.9 101.4 Canned food sales (000 tonnes) f=BMI forecast Source: National Institute of Statistics, BMI © Business Monitor International Ltd Page 45 Venezuela Agribusiness Report Q1 2010 Confectionery Over the 2001 to 2007 period, confectionery value sales in Venezuela increased by over 50% Confectionery Market 2000-2014f in US dollar terms, to VEB851mn (US$397mn) In 2008, 52% of the overall market was accounted for by chocolate confectionery, followed by sugar confectionery and gum with market shares of 41% and 7%, respectively Over the next two years, value sales, as expressed in local currency, are forecast to post a 215% increase However, in US dollars, values are expected to fall by 22.85%, due to the devaluation of bolivar, with the gum subsegment being the worst affected, f=BMI forecast Source: National Institute of Statistics, BMI and chocolate the least A young population and busier lifestyles have led to growing demand for on-the-go snacks, but Venezuelan consumers have been forced over recent years to adapt consumption patterns to cope with rising prices and limited product availability For many consumers, confectionery has thus returned to being a luxury product, with product availability through the government-subsidised Mercal network, which is intended to provide discount food staples for the impoverished, being at best limited Therefore, we forecast a virtual stagnation of confectionary volumes in the 2009-2014 period, with a growth of only 1.39% over the five years in question Additionally, the figure of 26,960 tonnes sold in 2008 will not be repeated until after the end of the forecast period, as the sector's development is negatively impacted by the expected reduction in volume sales during 2009 and 2010, of 4.99% and 3.63%, respectively © Business Monitor International Ltd Page 46 Venezuela Agribusiness Report Q1 2010 Confectionery Value/Volume Sales - Historical Data & Forecasts 2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f Total confectionery sales (000 tonnes) 23.29 25.00 26.40 26.96 25.61 24.69 24.77 25.24 25.51 25.97 Total confectionery sales growth, tonne, (y-o-y) 7.88 7.35 5.60 2.12 -4.99 -3.63 0.36 1.87 1.08 1.81 Total confectionery sales (VEBmn) 721 772 815 851 993 1,216 1,590 2,072 2,610 3,128 Total confectionery sales growth, VEB, (y-o-y) 10.16 7.14 5.56 4.48 16.66 22.47 30.73 30.27 25.96 19.87 Gum sales (VEBmn) 51.5 53.6 55.8 57.6 65.8 77.9 98.2 124.3 153.4 181.5 Sugar confectionery sales (VEBmn) 309 328 343 356 411 497 643 831 1,040 1,242 Chocolate confectionery sales (VEBmn) 360 390 416 438 517 641 849 1,117 1,416 1,705 Total confectionery sales (US$mn) 336.0 360.0 380.0 397.0 386.1 304.1 265.1 259.0 274.7 297.9 Gum sales (US$mn) 24.00 25.00 26.00 26.84 25.57 19.48 16.36 15.53 16.15 17.29 Sugar confectionery sales (US$mn) 144.0 153.0 160.0 165.9 159.7 124.4 107.2 103.8 109.5 118.3 Chocolate confectionery sales (US$mn) 168.0 182.0 194.0 204.3 200.8 160.3 141.5 139.6 149.1 162.4 f=BMI forecast Source: National Institute of Statistics, BMI © Business Monitor International Ltd Page 47 Venezuela Agribusiness Report Q1 2010 Trade Venezuela's trade balance, as expressed in US Trade Market dollar terms, will stagnate at around US$2.4bn 2002-2014f over most of the forecast period Both imports and exports will be negatively impacted by the domestic and global economic crisis and currency devaluation, with the latter also suffering due to the worsening political situation In the period between 2009 and 2014, the value of exports is expected to post an 18% drop in US dollars, with imports growing at just under 3.4% Diplomatic relations with neighbouring Colombia are rocky, with the conflict also potentially spilling over into f=BMI forecast Source: National Institute of Statistics, BMI commerce, despite the notable contribution of Colombian imports as a share of overall imports into Venezuela Trade between Venezuela and Colombia reached around US$7bn in 2008, with goods imported from Colombia including milk and other food items that have often been in short supply due to government-imposed price controls Dependent On Colombia Additionally, the threat to Venezuela Imports 2008 appropriate Colombian assets in Venezuela could affect several Colombian food and drink firms Firms which have interests in Venezuela include dairy producer Alpina and food producer Grupo Nacional de Chocolates, which owns Venezuelan meat firm Industrias Alimenticias Hermo Venezuela In addition, Colombia's largest retailer, Exito, owns a minority stake in Venezuelan supermarket chain f=BMI forecast Source: National Institute of Statistics, BMI Cativen With Chávez already driven to nationalise large parts of the country's food production industry including plants owned by US © Business Monitor International Ltd Page 48 Venezuela Agribusiness Report Q1 2010 major Cargill and Venezuela-based Empresas Polar - in an effort to cut inflation and counter shortages, all of these firms could soon find themselves in the firing line Even more significant would be a long-term decline in trading relations between the two countries For example, Grupo Nacional de Chocolates currently generates around 10% of its sales in Venezuela and an official or unofficial boycott of Colombian products would significantly affect revenues Any action would likely be met with retaliation in Colombia, with Venezuelan Empresas Polar one firm that could be damaged by a retaliatory boycott Anecdotal evidence suggests that the trade between the two nations has already been impacted, with local newspaper El Universal reporting that imports of dairy products have been hit because Colombian suppliers are now reluctant to offer credit lines to Venezuelan importers The paper has also reported that the trade crisis has meant that there had not been any imports of meat for the thirty days to midSeptember 2009 Colombian President Alvaro Uribe recently toured the border region to assure local producers that the government had a plan to lessen the impact via a reduction in the local sales tax and an improvement in road links with the rest of Colombia Meanwhile Venezuelan President Chávez has suggested that alternative imports will be sourced from Brazil and Argentina These moves suggest that neither government expects a speedy resolution to the dispute Venezuela: Food, Drink & Tobacco Trade Historical Data & Forecasts (US$mn) 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f Exports 125.9 122.7 120.3 82.1 79.1 76.2 73.2 70.3 67.3 Imports 2,298 2,659 2,722 2,454 2,347 2,392 2,438 2,486 2,536 Balance -2,172 -2,537 -2,601 -2,372 -2,268 -2,316 -2,365 -2,416 -2,469 f=BMI forecast Source: National Institute of Statistics, BMI © Business Monitor International Ltd Page 49 Venezuela Agribusiness Report Q1 2010 Industry Forecast Scenario – Retail The country's mass grocery retailers benefited from high GDP growth rates between 2004 and Value Sales by Format - Historical Data & Forecasts 2007, as proceeds from the windfall oil revenues were redirected into the non-oil economy This increased the disposable incomes of the poorer segments of the population, although poverty and underemployment rates remain at worrying levels However, the ongoing contraction in investment in Venezuela and slowdown in private consumption support BMI's view that f=BMI forecast Source: National Institute of Statistics, BMI the country's economy will now contract by 3.0% in 2009 and 4.2% in 2010 In real terms, per capita consumption of food is expected to contract in 2009 and 2010, with consumers impacted by runaway inflation, which is particularly high for food and drink products Private-sector retailers, in order to survive and prosper in Venezuela, have two options they can look to cater to middle- and upper-income groups and differentiate themselves with a greater variety of highquality products, or they can develop a price structure that allows them to offer a wide range of everyday, staple food and drink products at 'loss leading' prices, while making acceptable margins on other, highervalue items Either way, the market is very tough, especially as private MGRs are competing against Mercal, the state-owned retailer, which is subsidised by the government and whose expansion is being funded from state coffers flush with oil revenues So far, however, there have been no firm reports that MGRs are planning to change their expansion plans SHV Makro Venezuela, for example, remains intent on going forward with its new Mikro discountformat stores Nevertheless, we expect most retailers to adopt a wait-and-see approach for the moment, considering the uncertain economic environment BMI's forecasts to 2014 rest on the assumption that Venezuela's MGRs will press ahead with their expansion plans, including the opening of new outlets in areas and cities so far dominated by traditional stores Even when the economic uncertainties are omitted, the competitive environment in Venezuela is perhaps the toughest in Latin America, with private-sector retailers going head-to-head with the government-subsidised Mercal grocery chain As the firm does not operate on a profit-and-loss basis, and has almost unlimited (for now) access to expansion capital, its existence creates quite a challenge for the country's other retailers © Business Monitor International Ltd Page 50 Venezuela Agribusiness Report Q1 2010 Thanks to bumper oil receipts and a policy of income redistribution over the review period, sales at MGRs have grown very quickly in the five years to 2008 However, because of the slowdown in the economy, local currency devaluation and ongoing supply problems, consumer confidence has taken a hit Therefore, in the five years to 2014, total MGR sales are expected to fall by just under 20% in US dollar terms, despite a 227% increase in local currency, to reach VEB103.4bn (US$9.85bn) In overall value terms, the convenience format is expected to be the main beneficiary of this projection by far, although a large proportion of this growth will be accounted for by Mercal Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f Supermarkets (VEBbn) 7.869 8.813 9.870 10.660 12.745 16.041 21.354 28.322 36.112 43.575 Hypermarkets (VEBbn) 12.467 13.464 14.541 15.704 18.171 22.219 28.796 37.389 46.995 56.210 Convenience (VEBbn) 0.251 0.324 0.415 0.529 0.712 1.023 1.520 2.175 2.907 3.607 Total mass grocery retail sector (VEBbn) 20.586 22.601 24.826 26.893 31.629 39.284 51.670 67.886 86.014 103.392 Total mass grocery retail sector growth, VEB, (y-o-y) 8.98 9.79 9.85 8.32 17.61 24.20 31.53 31.38 26.70 20.20 Supermarkets (US$bn) 3.669 4.109 4.602 4.971 4.955 4.010 3.559 3.540 3.801 4.150 Hypermarkets (US$bn) 5.813 6.278 6.780 7.323 7.064 5.555 4.799 4.674 4.947 5.353 Convenience (US$bn) 0.117 0.151 0.193 0.247 0.277 0.256 0.253 0.272 0.306 0.344 Total mass grocery retail sector (US$bn) 9.599 10.539 11.576 12.540 12.296 9.821 8.612 8.486 9.054 9.847 f=BMI forecast Source: National Institute of Statistics, BMI Sales Breakdown by Retail Format Type 2009 2019f Organised/MGR 55% 61% Non-organised/Independent 45% 39% Source: BMI © Business Monitor International Ltd Page 51 Venezuela Agribusiness Report Q1 2010 Macroeconomic Forecast Economy To Remain Highly Choppy In 2010 BMI View: Real GDP growth came in at -2.4% y-o-y in Q209 While this was the worst figure in 23 quarters, oil-fuelled government spending prevented a more intense collapse Although we remain very bearish Venezuela's medium-term economic growth outlook, we have revised our 2009 real GDP forecast up to -3.0% due to the rebound in oil prices and ongoing government pump-priming Nevertheless, we expect the recession to extend into 2010, with our growth projection currently at -4.2% While the Q209 2.4% y-o-y contraction in real GDP marked the first since Q303, we had expected to see a larger contraction in both public and private investment As it turned out, the strong rebound in oil prices supported heavy fiscal spending, which also cushioned private sector expenditure as the authorities resisted the rebalancing of the economy The second quarter dip dragged growth in the first half of 2009 to -1.0% y-o-y Private Consumption Falling Slowly Private consumption contracted by 2.7% y-o-y in Q209, down from 8.2% y-o-y growth in Q208 As we have previously argued, we believe that private consumption must fall as a percentage of GDP in order for a sustainable recovery to take place, and this appears to be happening, albeit slowly Indeed, private consumption made up 70.0% of GDP in Q209, down from 73.6% in Q109 We still believe that the consumer retrenchment has a long way to go as imported inflation continues to rise and real incomes are squeezed - a major factor behind our bearish 2010 growth forecast Government Consumption Holding Up Strongly Government consumption was the strongest component of Venezuelan GDP in Q209, expanding for a 26th consecutive quarter at 2.9% pace This was testament to the willingness of the authorities to continue pursuing expansionary policies, and with oil revenues roaring back, sustained fiscal profligacy poses the largest upside risk to our 2009 growth forecast (at the possible expense of future growth) Fixed Investment A Mixed Picture Overall, gross fixed capital formation (GFCF) held up relatively well given the deterioration in the Venezuelan business environment, with the Q209 figure falling by just 2.4% y-o-y We continue to believe, though, that this masks a sharp contraction in private sector investment and a rise in governmentfunded projects The US$2.5bn outflow of foreign direct investment (FDI) by overseas businesses in © Business Monitor International Ltd Page 52 Venezuela Agribusiness Report Q1 2010 Q209 highlights the collapse in total private sector investment owing largely to the uncertain political climate This is also supported by the relative outperformance of public sector output relative to private sector output as the following chart shows While public sector production expanded by 2.7% y-o-y during the quarter, private sector production contracted by 4.1% This is in line with a view we have held since 2007, and we continue to see the former outperform at the expense of the latter as state-takeovers of private businesses continue Net Exports A Rare Positive The most positive development came in the form of an improvement in net exports, which made the largest positive contribution to headline growth equal to 1.7% percentage points While this largely reflected a fall in imports (which fell 7.7% y-o-y) as opposed to a surge in exports (which fell 8.7%), it is at least a step in the right direction After the 4.5% y-o-y rise in imports in Q109, we displayed concerns that a high import reliance would continue to undermine the economic transition While this remains a key risk due to the heavy dependence on food and manufacturing overseas goods, that imports declined by more than domestic demand in Q209 suggests that the weaker black-market exchange rate is beginning to have the much-needed effect of reducing the leakage of demand Risks To Outlook We have previously cautioned that the Venezuelan government would seek to promote economic growth at all costs as the economy slows down, and this remains our baseline view However, our core outlook suggested that lower oil prices would reduce the government's scope for such expansion As such, the largest risk to our 2009 real GDP growth forecast comes from a continued climb in oil prices, which would allow government spending and investment to remain elevated, supporting private consumption via the multiplier effect Going forward, though, we still see 2010 being more challenging than 2009 from a growth perspective, particularly if the government continues to use all its bullets in the short term and oil prices once again take a turn lower © Business Monitor International Ltd Page 53 Venezuela Agribusiness Report Q1 2010 Table: Venezuela - Economic Activity 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 304.1 396.1 489.7 643.7 878.7 1281 1922 2768 3713 4617 141.8 184.7 228.3 300.2 408.7 427.2 384.4 395.4 412.6 419.8 10.3 10.3 8.4 4.8 -3.0 -4.2 3.3 2.8 2.6 2.9 5296 6773 8218 10606 14176 14544 12849 12974 13290 13273 26.80 27.30 27.80 28.30 28.80 29.40 29.90 30.50 31.00 31.60 Industrial production index, % y-o-y, ave 11.3 10.1 6.9 4.8 1.0 1.3 2.3 3.2 3.3 3.1 Unemployment, % of labour force, eop 12.3 10.0 8.0 8.3 8.8 9.5 10.5 11.5 11.5 11.5 Nominal GDP, VEFbn Nominal GDP, US$bn Real GDP growth, % change y-o-y GDP per capita, US$ Population, mn f 1 Notes: BMI forecasts Sources: BCV, IMF BMI Calculation; IMF; BCV © Business Monitor International Ltd Page 54 Venezuela Agribusiness Report Q1 2010 BMI Forecast Modelling How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a ‘general-to-specific’ method BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary During periods of ‘industry shock’, for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact Effective forecasting depends on appropriately-selected regression models BMI selects the best model according to various different criteria and tests, including, but not exclusive to: R2 tests explanatory power; Adjusted R2 takes degree of freedom into account Testing the directional movement and magnitude of coefficients Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) All results are assessed to alleviate issues related to auto-correlation and multi-collinearity BMI uses the selected best model to perform forecasting It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s industry forecasting Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Within the Agribusiness industry, this intervention might include, but is not exclusive to, technology development that might influence future output levels (for example greater use of biotechnology), dramatic changes in local production levels due to public or private sector investment, the regulatory environment and specific areas of legislation, such as import and export tariffs and farm subsidies, changes in lifestyles and general societal trends, the formation of bilateral and multilateral trading agreements and political factors The following two examples show the demand (consumption) and the supply (production) of rice Note: the explanatory variables for both of them are quite similar, but the underlying economic theory is different © Business Monitor International Ltd Page 55 Venezuela Agribusiness Report Q1 2010 Example of Rice Consumption Model: (Rice Consumption)t = β0 + β1*(Real Private Consumption per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Population)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt Where: β are parameters for this function Real Private Consumption per capita has a positive relationship with Rice Consumption, if rice is a normal good in a particular country If rice is an inferior good in a country, the relationship is negative So the sign of β1 is determined by a specific product within a specific country When Inflation is high, people with rational expectations will consume ‘today’ rather than wait for ‘tomorrow’s high price to come Higher rice demand in Year t due to higher inflation in that year leads to an assumed positive sign of β2 The relationship between Real Lending Rate and Rice Consumption is expected to be negative When real lending rates increase, disposable incomes, especially for those with mortgage burdens etc, will decrease So the sign of β3 is expected to be negative Of course, other things being equal, growth in rice consumption can also be caused by growth in population Consequently, positive sign of β4 is expected Government Expenditure typically causes total disposable incomes to rise So the sign of β5 is expected to be positive Human behaviour has a trend: A high level of food consumption in previous years means there is very likely to be a high level of food consumption the next year So the positive sign of β6 is expected ε is the error/residual term Example of Rice Production Model: (Rice Production)t = β0 + β1*(Real GDP per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Rural Population)t + β5*(Government Expenditure)t + β6*(Food Production)t-1 + εt Where: The same as above, the relationship between Real GDP per capita and rice production depends on whether rice is normal or inferior good in that country © Business Monitor International Ltd Page 56 Venezuela Agribusiness Report Q1 2010 If high inflation is caused by food prices increasing, farmers will be more profitable Then they will supply more agricultural product (e.g rice) to increase their marginal (extra) profit, although this is tempered by the rising cost of other inputs in line with inflation There is a global move towards corporate farming, away from small holdings, in order to achieve greater agricultural productivity Corporate farming means more investment in the modes of production i.e agricultural machinery Higher real lending rates discourage investment, which in turn reduce production BMI assumes only the rural population has a positive effect on agricultural product supply With supportive government policy, other things being equal, rice production is expected to go up Government Expenditure is likely to play some role in supporting agribusiness Again, previous food production positively affects this year’s prediction y affects this year’s prediction © Business Monitor International Ltd Page 57 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... consumption of grain © Business Monitor International Ltd Page 10 Venezuela Agribusiness Report Q1 2010 Venezuela Cocoa Outlook BMI Supply View: Cocoa, like coffee, was once a mainstay of the Venezuelan economy Since the middle of the last century, however, interest in the commodity has waned as focus turned to oil and production declined Venezuela now produces only around 0.5% of total world output,... consumption to accelerate in 2010 as Venezuela is expected to suffer a second successive year of economic contraction With food prices still rising consumers are likely to see their budgets pressed even further in the coming year To 2014, forecast cocoa consumption to fall to 14,020 tonnes © Business Monitor International Ltd Page 11 Venezuela Agribusiness Report Q1 2010 Table: Venezuela Cocoa Production,... cocoa farms in neighbouring Brazil However, with much of Venezuela' s stock of cocoa trees fairly old, it remains vulnerable to the disease which would severely hamper attempts to revitalise the sector © Business Monitor International Ltd Page 12 Venezuela Agribusiness Report Q1 2010 Venezuela Sugar Outlook BMI Supply View: Sugar production in Venezuela has risen rapidly over the last few years, growing... plants in Venezuela, with the first four to be completed by the end of 2009 Unless sugar cane production can be significantly raised, this will put further pressure on the countries already face tight sugar supplies © Business Monitor International Ltd Page 16 Venezuela Agribusiness Report Q1 2010 Venezuela Dairy Outlook BMI Supply View: The past few years have been eventful for the dairy sector in Venezuela, ... 17 Venezuela Agribusiness Report Q1 2010 consumption to grow 2.6% to reach 80.41 tonnes in 2014 and butter consumption to grow by 2.4% to 3,780 tonnes in 2014 Table: Venezuela Milk Production & Consumption Milk Production, '000 tonnes 1 Liquid Milk Consumption, '000 tonnes 1 2009f 2010f 2011f 2012f 2013f 2014f 1,354.0 1,347.8 1,356.6 1,364.8 1,372.7 1,381.2 194.4 194.6 194.2 193.9 193.6 193.3 2009f 2010f... the border With BMI forecasting Venezuela' s GDP to have contracted 3.0% in 2009 and then again by 4.2% in 2010, growth in dairy consumption could be hit harder than we currently forecast Much will depend on the success of the government's production policies and on the price control regime © Business Monitor International Ltd Page 22 Venezuela Agribusiness Report Q1 2010 Venezuela Coffee Outlook BMI Supply... Consumption, '000 tonnes 1 Cheese Net Trade Balance, '000 1 tonnes 1 Notes: f=BMI forecast Source: FAPRI, BMI © Business Monitor International Ltd Page 18 Venezuela Agribusiness Report Q1 2010 Table: Venezuela Whole Milk Powder Production, Consumption & Trade 2009f 2010f 2011f 2012f 2013f 2014f 28.7 28.6 28.7 28.8 29.0 29.2 Whole Milk Powder Consumption, '000 1 tonnes 125.1 125.9 127.1 128.6 130.2 131.8 Whole... the state in the dairy sector will not be © Business Monitor International Ltd Page 19 Venezuela Agribusiness Report Q1 2010 welcome news for other players The move followed the purchase of a dairy processing plant from Parmalat in November 2007 In August 2008, the US Department of Agriculture (USDA) reported that the Venezuelan government had taken over 87 dairy farms in Zulia state While the government... 2014, we do expect sugar consumption to remain below the high 2009 level © Business Monitor International Ltd Page 13 Venezuela Agribusiness Report Q1 2010 Table: Venezuela Sugar Production, Consumption & Trade Sugar Production, '000 tonnes 1 Sugar Consumption, '000 tonnes 1 2009f 2010f 2011f 2012f 2013f 2014f 621.0 558.9 583.3 611.9 641.0 672.9 1,100.0 990.1 990.5 1,000.8 1,031.0 1,062.0 -450.0 -438.5... Business Monitor International Ltd Page 25 Venezuela Agribusiness Report Q1 2010 decade, before creeping back up to its current 1.9kg per year as incomes rose and the government controlled the retail price Table: Venezuela Coffee Production, Consumption & Trade Coffee Production, '000 60kg bags 1 Coffee Consumption, '000 60kg bags e 1 f 2005 2006 2007 2008 2009e 2010f 800.00 820.00 862.00 900.00 845.00 ... 3.7 3.7 3.7 3.7 3.8 -2 .3 -2 .3 -2 .4 -2 .4 -2 .4 -2 .5 2009f 2010f 2011f 2012f 2013f 2014f 64.2 65.7 66.5 67.7 68.8 70.1 78.3 79.1 79.5 79.8 80.1 80.4 -1 4.1 -1 3.4 -1 3.0 -1 2.1 -1 1.3 -1 0.3 Notes: f=BMI... 3.3 3.0 4.0 3.7 3.7 -1 .6 -1 .8 -1 .6 -2 .6 -2 .3 -2 .3 2004 2005 2006 2007 2008 2009f 60.0 59.3 58.9 63.0 63.9 64.2 70.0 70.0 71.0 73.4 75.8 78.3 -1 0.0 -1 0.7 -1 2.1 -1 0.4 -1 1.9 -1 4.1 Notes: f=BMI forecast... -1 ,537.0 -1 ,502.0 -1 ,688.0 -1 ,762.0 -1 ,500.0 -1 ,500.0 Notes: f=BMI forecast Source: USDA, BMI © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2010 Table: Venezuela