Q1 2012 www.businessmonitor.com VeneZueLa agribusiness Report INCLUDES BMI'S FORECASTS ISSN 2040-0489 Published by Business Monitor International Ltd VENEZUELA AGRIBUSINESS REPORT Q1 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: January 2012 Business Monitor International 85 Queen Victoria Street London EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2012 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 2012 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2012 CONTENTS Executive Summary Key Forecasts SWOT Analysis Venezuela Agriculture SWOT Venezuela Political SWOT Venezuela Economic SWOT Venezuela Business Environment SWOT Supply Demand Analysis 10 Venezuela Coffee Outlook 10 Venezuela Coffee Production & Consumption 11 Venezuela Grain Outlook 15 Venezuela Wheat Production & Consumption 16 Venezuela Corn Production & Consumption 17 Venezuela Wheat Production & Consumption 19 Venezuela Corn Production & Consumption 19 Venezuela Sugar Outlook 20 Venezuela Sugar Production & Consumption 21 Venezuela Sugar Production & Consumption 23 Venezuela Livestock Outlook 24 Venezuela Poultry Production & Consumption 25 Venezuela Pork Production & Consumption 26 Venezuela Beef & Veal Production & Consumption 26 Venezuela Poultry Production & Consumption 28 Venezuela Pork Production & Consumption 28 Venezuela Beef & Veal Production & Consumption 28 Venezuela Cocoa Outlook 29 Venezuela Cocoa Production & Consumption 30 Venezuela Cocoa Production & Consumption 32 Commodity Price Analysis 33 Monthly Grains Update 33 Corn 33 Rice 34 Soybean 35 Wheat 36 Monthly Softs Update 37 Cocoa 37 Coffee 38 Palm Oil 39 Sugar 40 Industry Forecast Scenario 41 Macroeconomic Forecast 44 Venezuela - Economic Activity 46 Industry Trend Analysis 47 Soft Drink Firms Targeted By New Price Cap Laws 47 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2012 BMI Forecast Modelling 49 How We Generate Our Industry Forecasts 49 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2012 Executive Summary BMI View: The agricultural sector is set to see a boost in funding in 2012 Venezuela's budget bill for 2012 contains provision for an increase in spending of almost VEF3bn (US$697mn) to boost agricultural production and improve food security Much of the additional funding would be directed towards the government's Misión AgroVenezula programme, which was established in early 2011 with the aim of boosting agricultural production by providing low-cost loans and technical assistance to small-scale farmers The increased financing would be used to improve infrastructure, including roads and irrigation systems, and to boost investment in machinery, warehouse storage and national seed production In total, the 2012 budget bill sees government spending increase to almost US$70bn, up from US$47.7bn in 2011, with the transportation infrastructure and energy sectors also set to receive increased funding Key Forecasts BMI believes that increased government spending in the run up to the October 2012 presidential elections will drive private consumption growth to 3.0% in 2012 through more social transfers, with overall real GDP growth forecast at 2.3% However, the country continues to battle with steep inflation, which we see remaining elevated at 26.0% in 2012, down from an estimated 29.0% in 2011 We now believe that demand for poultry fell by 3.0% y-o-y in 2011 as production fell and exports were also down on the previous year We see consumption remaining static in 2012 Out to 2016, we forecast that demand for poultry will grow by 5.4% on the 2011 level to reach 910,000 We forecast only marginal growth of 0.6% y-o-y in beef production in 2011/12 as the sector continues to be held back by a lack of profitability due to high input costs and government price controls, along with increased competition from imports from Brazil and Nicaragua Out to 2015/16, we see production increasing by just 4.8% on the 2010/11 level to reach 351,000 tonnes Imports of coffee are forecast to fall by around 115,000 bags in 2012, with domestic production unlikely to make up the difference As a result, we see coffee consumption dipping by 2.2% y-o-y to 1.13mn bags Out to 2016, we see demand growing by 13.9% on the 2011 level to 1.31mn bags As a result of rising wheat prices on the international market, we estimate that consumption declined by 3.0% y-o-y in 2011 to 1.50mn tonnes We forecast growth will pick up 2.0% in 2012 to 1.53mn tonnes as prices fall back Out to 2016, we see consumption growing by 17.1% on the relatively low 2011 level to reach 1.76mn tonnes Key Trends And Developments In early December 2011, the Chávez government announced that it would enter into partnership with Mexican firm Gruma, the world's largest producer of corn flour for tortillas The Venezuelan government had previously stated its intention to nationalise the assets of Gruma subsidiary Monaca The © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2012 announcement, which resulted from a meeting between Chávez and his Mexican counterpart President Felipe Calderón held in Caracas, will see the establishment of two joint ventures, one focusing on the production of corn flour and rice, and the second producing pasta, wheat flour and oatmeal The move was welcomed by President Calderón as providing a stronger legal platform for encouraging other Mexican firms to invest in Venezuela On October 6, the Venezuelan government signed bilateral agreements worth an estimated US$8bn at a meeting in Caracas between President Hugo Chávez and the Russian Deputy Prime Minister Igor Sechin The agreement is a further indication of the deepening strategic relationship between the two nations The agricultural sector is set to benefit, as the agreement opens the way for the export of Venezuelan cocoa and flowers to Russia, as well as setting out a joint project to grow and export Venezuelan plantains The areas of development, technical and military cooperation and energy are also set to benefit from the new bilateral accords The Law for Fair Prices and Costs, first signed into law in July 2011, came into effect on November 22 The law aims to combat Venezuela's spiralling inflation, which is estimated to come in at 29% in 2011, by stabilising prices, introducing price caps, combating speculation and hoarding and guaranteeing access to goods The government is now beginning to implement the law by setting maximum prices for personal hygiene, food and household products A second phase of implantation will begin in January 2012 and will see revised pricing structures for medical products Expropriations continue to hit the agroindustrial sector On November 1, President Chávez announced the immediate expropriation of 290,000 hectares of farmland in 11 ranches owned by Agroflora, a subsidiary of the British beef producing firm Vestey Group Agroflora is engaged in the production of cattle, beef and buffalos President Chávez announced the news during a live broadcast on state television channel Vive, claiming that under the terms of the Food Security and Sovereignty Law, land is 'social property' Chávez claimed that the forced expropriation came following the breakdown in negotiations with Agroflora over a compensation agreement for the land Italian dairy firm Parmalat could be the next company to see its assets nationalised In November, President Chávez accused the firm of monopolising milk supplies and hoarding produce, following the discovery of 210,000 tonnes of powdered milk in a warehouse in the northwestern state of Mérida Swiss processing company Nestlé was fined almost US$90,000 for hoarding 260,000 tonnes of milk in early December There have been shortages of powdered milk at government-regulated prices for much of 2011 and the Institute for the Defence of People's Access to Goods and Services (Indepabis) has stepped up its efforts to prevent hoarding and price speculation Powdered milk, coffee and other products can be found on the black market, but costs are often twice the government-legislated price © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2012 SWOT Analysis Venezuela Agriculture 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 Falls in the oil price 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 2012 Venezuela Political SWOT Strengths Weaknesses Setting Venezuela apart from its neighbours, the country has enjoyed a long tradition of democracy, with elections held regularly since 1959 A consistently high electoral turnout points to a strong level of public participation in politics The military has traditionally played a dominant role in politics and possible future intervention by disgruntled officers - especially following the attempted coup in 2002 - is not beyond the realms of possibility The meltdown of the traditional party structure has left a political vacuum where the opposition should be Relations between President Hugo Chávez and the US remain strained, as Chávez has accused Washington of interfering in Venezuela's domestic affairs and threatened to cut off oil supplies to the US Opportunities Given prudent investment, areas such as infrastructure and education could flourish thanks to the fiscal windfalls brought by devaluation of the bolivar and elevated oil prices, bringing longer-term stability to the economy and diminishing the risks of civil turbulence Threats President Chávez's ability to rule by decree continues to undermine the country's democratic institutions The national assembly has pushed through several laws that were previously overturned in the constitutional referendum in 2007 The weakening of democracy in the country threatens to raise political risk and poses a threat to private business activity Tensions between Venezuela and Colombia remain heightened owing to the former's belligerent rhetoric However, we continue to view the possibility of outright military conflict as improbable given underlying economic interdependencies © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2012 Venezuela Economic SWOT Strengths Weaknesses Venezuela is rich in natural resources In particular, it has huge oil and gas reserves (it is the world's fifth largest crude producer) and is one of the main suppliers to the US The oil boom has allowed the government to accumulate international reserves Although oil is one of the country's strengths, a high level of dependence on the energy sector makes the economy increasingly vulnerable to economic shocks in the long term The lack of transparency in the government's fiscal accounts is a source of concern Opportunities Following the devaluation of the bolivar, the non-oil sector has an opportunity to benefit from increased competitiveness Threats Inflation remains dangerously high despite the extensive price control system and successive interest rate hikes Further erosion of domestic productive capacity is likely to raise inflationary pressures in the economy, possibly bringing on hyperinflation The sustainability of economic growth will depend on boosting private investment, rather than relying on oil and public investment (both of which are dependent on high oil prices) Venezuela Business Environment SWOT Strengths Venezuela is an important supplier of oil to the US and is a member of OPEC Home to some of the largest oil reserves in the world, the Orinoco region will provide opportunities for large-scale investment Weaknesses A lack of domestic and international investment, largely as a result of the uncertain political environment, could undermine the long-term growth outlook Privatisation has ground to a halt since President Hugo Chávez took office, with the administration instead preferring production-sharing agreements to encourage foreign direct investment Opportunities Government support for businesses, through a range of low interest rate loans, is available The government fund for industrial credit provides large sums of money for small- and medium-sized businesses Threats The implementation of stringent foreign currency controls has hit the business community hard This has restricted import growth, as businesses lack the currency to purchase raw materials State expropriation of 'idle' plants and proposals for land reform will act as a disincentive for prospective investment (domestic and foreign) © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2012 Coffee Front-month coffee has rallied slightly in November, mainly on concerns over output in Colombia after an excessive rainy season However, we continue to believe that prices peaked in Q111 and anticipate further moderation as Brazil enters the up-year of its biennial production cycle in 2012/13 Moreover, despite current issues, we believe replanting programs in Colombia should enable production to recover to previous peak levels by 2014/15 This underpins our view for the global market to move from a 11.1mn bag deficit in 2011/12 to a 2.1mn bag surplus in 2012/13 Thus, we forecast global coffee prices to average lower at USc200/lb in 2012 Down The Slope Front-Month Coffee, USc/lb Source: BMI, Bloomberg © Business Monitor International Ltd Page 38 Venezuela Agribusiness Report Q1 2012 Palm Oil Front-month palm oil rallied through multi-month resistance in November, in line with our view that prices will prove resilient in Q411 This was on the back of strong import demand and a slowdown in production We maintain our view for long-term price appreciation and would not be surprised to see prices climb to MYR3,500/tonne in the coming months Our view is further reinforced by seasonal trends, which dictate that end-of-year festivities and the Chinese New Year celebrations in early 2012 should keep prices elevated We maintain our view for prices to remain historically high due to the tight supply, forecasting prices to average at MYR3,200/tonne in 2012 Punching Higher Three-Month Palm Oil, MYR/tonne (Weekly Chart) Source: BMI, Bloomberg © Business Monitor International Ltd Page 39 Venezuela Agribusiness Report Q1 2012 Sugar Front-month sugar has continued to edge lower in November, vindicating our view for a medium-term trend of lower prices In 2012 we forecast prices to continue moderating and to average lower at USc22.50/lb over the year on the back of an overall better supply picture from India and Thailand In particular, we expect that in 2012, India could potentially export twice the amount of sugar it has shipped out in 2011 That said, we note that the anticipated fall in Brazilian output and concerns over renewed port congestion issues should prevent a drastic correction in prices by offering a measure of support Turning Sour Front-Month Sugar, USc/lb (Weekly Chart) Source: BMI, Bloomberg © Business Monitor International Ltd Page 40 Venezuela Agribusiness Report Q1 2012 Industry Forecast Scenario Government Consumption To Drive Limited Growth In 2012 BMI View: We expect an uptick in government expenditures in the run-up to the October 2012 presidential elections to drive private consumption growth to 3.0% in 2012 through more social transfers Overall, we are forecasting real GDP growth of 2.3% in 2012 We expect real GDP growth in Venezuela in 2012 to come in at 2.3%, the lowest in South America We believe this subdued growth will be the result of the country's poor investment picture and of the overvalued exchange rate which will continue to drive imports higher As a result, private and government consumption will be the only positive contributors to real GDP growth, by 2.1 and 0.6 percentage points (pps), respectively, in 2012 Government Consumption To Continue Growing Before 2012 Elections We expect government consumption to drive modest real GDP growth in 2012 following massive borrowing by the government in 2011 Even though average Brent oil prices are likely to moderate from US$106/bbl in 2011 to US$102/bbl in 2012, according to our Oil and Gas team, these prices are still historically high and will give some leeway to the government in the run-up to the October 2012 presidential elections Private And Government Consumption Key Venezuela - Contribution To Real GDP Growth Per Expenditure (pp) Source: BMI, BCV © Business Monitor International Ltd Page 41 Venezuela Agribusiness Report Q1 2012 Consequently, we forecast government consumption to grow by 3.2% in 2012 However, this is a less impressive figure than the 6.0% we expect for 2011 for two reasons First, strong growth in 2011 benefited from significant base effects, on the back of the negative real growth rates registered in 2010 Second, real government consumption growth in 2011 took place against a backdrop of a 32.1% y-o-y increase of the average price of Brent oil from 2010 to 2011 while we forecast a moderate 3.8% decline of oil prices in 2012 Moderate Private Consumption Driven By Government Spending While we expect elevated inflation and higher government spending to continue driving private consumption in 2012, we forecast private consumption to rise by a relatively subdued 3.0% in 2012 Recently released Q311 data shows that private consumption contributed 3.0 percentage points (pps) to the headline 4.2% y-o-y real GDP growth that quarter This is the highest reading since Q308 and we believe was primarily down to the uptick in government spending Indeed, President Hugo Chávez has implemented a string of new social policies such as a new programme to provide US$100 a month to poor Venezuelan children, launched on December 12 These new programmes are expected to drive private consumption growth higher in 2012 in the run-up to the presidential elections Looking forward, we doubt the current economic policy mix, with the government spending more and more each year to boost private consumption, can be sustained much longer, which raises downside risks to private consumption after the 2012 elections (See our online service, November 23, No Devaluation Until After 2012 Elections) Oil Prices To Moderate In 2012 Venezuela - Oil Exports & Brent Prices Source: BMI, Bloomberg © Business Monitor International Ltd Page 42 Venezuela Agribusiness Report Q1 2012 We believe fixed investment will act as a drag on real GDP growth in 2012 as the country's poor business environment (the worst in Latin America according to our proprietary ratings) fails to attract significant foreign investment flows except from political allies such as China However, since our Asia team forecasts a hard landing in China in 2012, we believe these investment flows are likely to dry out as China's appetite for Venezuelan oil assets ebbs away Venezuela's unattractive business environment is exemplified by the country's failure to develop its gas sector, notably in Mariscal Sucre project where Petróleos de Venezuela has not been able to attract a partner, despite sitting on the world's ninth largest reserves We forecast that investment will subtract 0.3 pp from the headline real GDP growth in 2012 Net Exports To Act As A Drag On Growth We expect weaker external demand to lead to slower real growth in exporst in 2012, which we forecast to come in at 4.0%, down from 6.0% in 2011, while we forecast import growth to come in at 3.0% in 2012 on the back of subdued private consumption growth Given the country's deteriorating productivity, highlighted by Venezuela's failure to export anything but oil (which accounts for 95.2% of total exports as of Q211), we believe Venezuelans can only afford the current level of imports/GDP (46.6%) on the back of the government's subsidizing imports through the overvalued fixed exchange rate The official exchange rate, which is currently pegged at VEF4.30/US$, when the unofficial rate trades at VEF9.02/US$ according to local sources, inflates Venezuelans' purchasing power which translates in an elevated level of imports and negatively affects Venezuelan producers who cannot compete with foreign imports We expect the official exchange rate to remain elevated until the presidential elections ( See our online service, November 23, 'No Devaluation Until After 2012 Elections', ) which will result in net exports subtracting 0.6pp from headline real GDP growth in 2012 Risks To Outlook Due to Venezuela's reliance on oil exports to finance government expenditure and stimulate private consumption, the risks to the country's 2012 and beyond outlook are predominantly linked to oil prices Despite our forecasts for a hard landing in China and a recession for the Eurozone in 2012, our Oil & Gas team maintains its forecast for elevated Brent oil prices on the back of a tight global oil market (See our online service, November 25, 'Oil Price Outlook, December 2011') Nevertheless, even though this is not BMI's core scenario, we could see significant downside risks to our real GDP growth forecast in the event oil prices were to decline more than expected © Business Monitor International Ltd Page 43 Venezuela Agribusiness Report Q1 2012 Macroeconomic Forecast Limited Growth Recovery In 2012 BMI View: As a result of a significant uptick in government expenditures, we are revising up our real growth projection for Venezuela from 1.9% to 2.8% in 2011 Nevertheless, with oil prices looking weak and the outlook for the private sector still precarious, we hold to our 2.3% real GDP projection for 2012 Uncertainty surrounding the outcome of 2012's general election is clouding Venezuela's long-term economic outlook, but over the next 12 months we expect growth to remain far below pre-crisis levels While we have raised our 2011 real GDP growth forecast from 1.9% to 2.8% on the back of elevated government expenditure, precarious oil prices and a private sector still dogged by high inflation and ongoing appropriation of assets persuade us to hold to our weak 2.3% real GDP growth projection for 2012 Private Consumption To Remain Low in 2011 and 2012 While higher social spending and high inflation tend to increase private consumption by reducing consumers' propensity to save, we doubt household expenditure in Venezuela will grow by more than 2.5% and 2.0% in 2011 and 2012 respectively Indeed, real private consumption managed to grow by only 2.6% y-o-y in Q211, down from 3.6% y-o-y in Q111, meaning in real terms it still remains below 2008 levels Such weak growth highlights just how ineffective government spending has been in stimulating domestic consumption and paints a concerning picture for the shape of growth in the run-up to the elections On the government expenditure front, we not expect stagnating oil revenues to have a significant impact on spending levels yet, as President Hugo Chávez will no doubt seek to boost a dwindling support base by increasing social spending According to GDP figures for the first half of 2011, increased government expenditure already appears to be bearing fruit, contributing a solid 2.3 percentage points (pp) to headline growth in H111, compared with just 0.2pp for the same period in 2010, prompting us to revise up our full-year growth forecast That said, this level of spending is at odds with the ongoing decline in oil output levels - despite seeing its share of world oil reserves triple in size since Chávez became president in January 1999, daily oil production has declined by 18.3% over the same period implying fiscal unsustainability in the long term Fixed Investment To Remain Stable In The Short Term Since we expect the government to continue spending over the next 12 months regardless of the near-term trajectory of the global oil process, the biggest question mark over near-term growth is whether Venezuela can continue attracting investment from politically allied economies For instance, in September the Chinese Development Bank lent an additional US$4bn to the government, meaning that Chinese loans to Venezuela now amount to US$32bn Venezuela intends to pay back those loans with oil, scheduling to increase oil exports to China from 400,000 barrels per day (b/d) currently to 1.0mn b/d in © Business Monitor International Ltd Page 44 Venezuela Agribusiness Report Q1 2012 2012 In addition to Chinese funding, Venezuela has also received similar loan agreements from Russia, and we see few signs that these capital flows will dry up before the election, which could prove supportive of growth There are also ample reasons for politically allied countries to continue investing in Venezuela For instance, our Oil & Gas team highlights the need for substantial investments into tar oil fields which the government is seeking to develop If oil prices can remain sufficiently elevated to continue attracting capital into such projects, despite a difficult operating environment, this could place moderate upside risks to our 2012 growth forecast Nevertheless, with the economy registering only one quarter of positive year-on-year growth in gross fixed capital formation over the last nine, and oil demand looking weaker, the prospect of further politically allied investment is not sufficient for us to revise our bearish take on Venezuela's investment environment Net Exports Contribution To Continue To Decline We expect Venezuela's net exports position will remain weak despite its massive oil exports, a result of two dynamics weighing on the country's external sector First, a moderation in oil prices in 2012 is likely to lead to a decline in oil exports receipts Second, the deterioration of the domestic manufacturing sector implies stronger future demand for imports Therefore, while we expect a net surplus in the trade balance, the deterioration in terms of trade will subtract 0.7pp in 2011 and 0.3pp in 2012 from headline GDP growth Looking To The Long Term Due to Venezuela's reliance on oil exports to finance government expenditure and stimulate private consumption, the risks to the country's long-term outlook are predominantly linked to oil prices Despite not being our core scenario, a global slowdown triggered by a Chinese hard landing or a double-dip recession in the US and Europe would severely impact demand for oil and lead to a decline of oil export receipts which could be catastrophic for the government's expansive expenditure plans Furthermore, the high costs of exploiting Venezuelan oil - notably in the Orinoco field - means we could see foreign investment and oil output fall if prices were to decline below a certain level © Business Monitor International Ltd Page 45 Venezuela Agribusiness Report Q1 2012 Table: Venezuela - Economic Activity, 2011 - 2016 2011f 2012f 2013f 2014f 2015f 2016f Nominal GDP, VEFbn 1,357.5 1,728.3 2,119.8 2,486.0 2,858.9 3,287.7 Nominal GDP, US$bn 315.7 335.6 282.6 248.6 248.6 263.0 2.8 2.3 2.3 2.9 2.7 2.4 10,552 11,011 9,103 7,860 7,716 8,013 29.4 29.9 30.3 30.8 31.2 31.7 Industrial production index, % y-o-y, ave 2.3 3.2 3.3 3.1 2.9 2.6 Unemployment, % of labour force, eop 10.5 11.5 11.5 11.5 11.5 11.5 Real GDP growth, % change y-o-y GDP per capita, US$ Population, mn f 3 Notes: BMI forecasts Sources: BCV, IMF BMI Calculation; World Bank/BMI calculation/BMI; BCV © Business Monitor International Ltd Page 46 Venezuela Agribusiness Report Q1 2012 Industry Trend Analysis Soft Drink Firms Targeted By New Price Cap Laws The Venezuelan government of President Hugo Chávez has enacted a new law imposing price freezes across a range of fast moving consumer goods Vice President Elias Jaua announced that prices would be frozen on 18 products until a fair maximum price is determined under a new audit procedure The products affected include natural water, fruit juice and a range of personal care and cleaning products The food and drink firms that could be impacted by the measures include Empresas Polar and CocaCola Femsa, which are the major players in the soft drink sector, and Nestlé, which has a strong position in the bottled water sector The new guidelines published in the Official Gazette on November 18 2011 state that the companies operating in the selected sectors must now register with the national price regulator To this body they must disclose information about their production and distribution costs along with details of their sources for raw materials Through an analysis of this information, the regulator will then decide on new price caps The body will be able to impose sanctions on firms that fail to adhere to these measures ranging from fines to full appropriation Give Them More Regulation Venezuela - Main Points Of The Law On Fair Prices And Costs Source: BMI, Local Press & Public Sources © Business Monitor International Ltd Page 47 Venezuela Agribusiness Report Q1 2012 These efforts are in a bid to stem the country's very high levels of inflation, but we not believe the new law is sufficient to address the structural nature of Venezuela's inflationary problems The government continues to assert that inflation in Venezuela is driven primarily by producers' speculative behaviour, while negating its own role in eroding the productive capacity of the private sector As the 2012 elections approach we believe the increase in price regulation could prompt more nationalisations to prevent hoarding by producers, further crippling the industrial and food sectors As domestic production falls and supply becomes more reliant on expensive imports, we forecast that consumer prices will accelerate Compounding this we expect the government to continue pumping money into the economy in order to keep spending elevated ahead of the elections M2 money supply accelerated to 35.6% y-o-y in June from 28% y-o-y in March as the government sought to support private consumption through transfer payments, effectively creating demand-side pressures on prices As such, we forecast end-of-year inflation to reach 29% in 2011 and remaining at 26% by end-2012 The government argues that the creation of the supervisory agencies, which were expected to begin operating in Q411, aims to end speculation by producers However, we believe that increased regulation will continue to cripple the performance of private companies, which once under duress will become easier targets for nationalisation Both Coca-Cola Femsa and Empresas Polar, which bottle Pepsi products, have previously come under the spotlight of the government Empresas Polar is Venezuela's largest private company and is regularly singled out by Chávez as a firm that could be nationalised if it fails to abide by the government's socialist ideals Meanwhile Coca-Cola Femsa has had a strained relationship with the Venezuelan administration ever since it entered the market FEMSA took over the country's Coca-Cola franchise in 2003 from Hit de Venezuela, owned by Venezuelan mogul Oswaldo Cisneros Former workers of Hit, who lost their jobs following the change of ownership, have carried out a sustained campaign against FEMSA, demanding compensation This negative publicity, along with the existing bad feeling towards a brand with its origins in the US, has been picked up on by allies of President Chávez on the National Assembly who have previously advocated the complete appropriation of FEMSA's assets © Business Monitor International Ltd Page 48 Venezuela Agribusiness Report Q1 2012 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 49 Venezuela Agribusiness Report Q1 2012 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 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 © Business Monitor International Ltd Page 50 Venezuela Agribusiness Report Q1 2012 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 51 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... At the © Business Monitor International Ltd Page 14 Venezuela Agribusiness Report Q1 2012 end of July 2008, Venezuela- owned petrol station chain Citgo Petroleum Corporation announced that it would sell Venezuelan coffee at its forecourts in the US While production is not yet large enough to meet both domestic demand and support an export industry, if Venezuelan coffee could find popularity on world markets... tonnes Wheat production in Venezuela is negligible as the country does not have a suitable climate for growing wheat Venezuela is therefore reliant on imports to meet domestic demand, with the majority coming from the US and Canada Venezuelan wheat imports totalled an estimated 1.47mn tonnes in 2011 In © Business Monitor International Ltd Page 15 Venezuela Agribusiness Report Q1 2012 March 2011, wheat... see the growth slowing and consumption increasing by just 0.7% y-o-y in 2012 Out to 2016, we expect sugar consumption to grow by 3.9% on the high 2011 level to reach 1.35mn tonnes © Business Monitor International Ltd Page 20 Venezuela Agribusiness Report Q1 2012 Table: Venezuela Sugar Production & Consumption, 2011 - 2016 2011 2012 2013 2014 2015 2016 492.3 493.5 507.7 525.0 542.1 558.0 1,297.6 1,307.3... Consumption, 2011 - 2016 2011 2012 2013 2014 2015 2016 Poultry Production, '000 1 tonnes 627.4 615.0 622.0 632.0 644.0 653.0 Poultry Consumption, 1 '000 tonnes 860.4 860.4 873.3 866.0 887.6 909.8 f 1 Notes: BMI forecasts Sources: USDA © Business Monitor International Ltd Page 25 Venezuela Agribusiness Report Q1 2012 Table: Venezuela Pork Production & Consumption, 2011 - 2016 2011 2012 2013 2014 2015 2016... 125.0 125.0 125.0 126.0 Pork Consumption, '000 1 tonnes 129.0 133.0 129.0 134.0 134.0 134.8 2010 2011 2012 f 1 Notes: BMI forecasts Sources: USDA Table: Venezuela Beef & Veal Production & Consumption, 2007 - 2012 2007 © Business Monitor International Ltd 2008 2009 Page 28 Venezuela Agribusiness Report Q1 2012 Beef & Veal Production, 1 '000 tonnes 365.0 305.0 290.0 348.0 335.0 337.0 Beef & Veal Consumption,... International Ltd Page 17 Venezuela Agribusiness Report Q1 2012 development of an additional 150,000 hectares of farmland for the cultivation of rice and white and yellow corn Government Sparks Empresas Polar Controversy In September 2011, Empresas Polar, Venezuela' s largest food and drinks company, struck back at government accusations that its Harina Pan pre-cooked corn flour is no longer a Venezuelan brand... (USDA) In addition, Venezuela is expected to have imported some 1.6mn tonnes of wheat Table: Venezuela Wheat Production & Consumption, 2007 - 2012 Wheat Consumption, 1 '000 tonnes f 2007 2008 2009 2010 2011 2012 1,697.0 1,500.0 1,550.0 1,550.0 1,503.5 1,533.6 1 Notes: BMI forecasts Sources: USDA Table: Venezuela Corn Production & Consumption, 2007 - 2012 2007 2008 2009 2010 2011 2012 Corn Production,.. .Venezuela Agribusiness Report Q1 2012 Supply Demand Analysis Venezuela Coffee Outlook BMI Supply View: The best Venezuelan coffee comes from the Maracaibo region, in the far west of the country, along the border with Colombia However, as with other agricultural... restrictive policies Threat Of Seizures Continues In March 2011, the Venezuelan government ordered an inspection of the El Palmar sugar mill and has threatened to expropriate it, according to a report by El Universal newspaper The government is currently © Business Monitor International Ltd Page 21 Venezuela Agribusiness Report Q1 2012 in control of eight sugar mills, which were expropriated following... Chávez said that he planned to build 14 ethanol 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 23 Venezuela Agribusiness Report Q1 2012 Venezuela Livestock Outlook BMI Supply View: After strong ... completeness of any information hereto contained Venezuela Agribusiness Report Q1 2012 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q1 2012 CONTENTS Executive Summary ... level © Business Monitor International Ltd Page 45 Venezuela Agribusiness Report Q1 2012 Table: Venezuela - Economic Activity, 2011 - 2016 2011f 2012f 2013f 2014f 2015f 2016f Nominal GDP, VEFbn... International Ltd Page 14 Venezuela Agribusiness Report Q1 2012 end of July 2008, Venezuela- owned petrol station chain Citgo Petroleum Corporation announced that it would sell Venezuelan coffee at