Q2 2012 www.businessmonitor.com VeneZueLa agribusiness Report INCLUDES BMI'S FORECASTS ISSN 2040-0489 Published by Business Monitor International Ltd VENEZUELA AGRIBUSINESS REPORT Q2 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: April 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 Q2 2012 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q2 2012 CONTENTS BMI Industry View SWOT Analysis Venezuela Agriculture SWOT Venezuela Political SWOT Venezuela Economic SWOT 10 Venezuela Business Environment SWOT 10 Supply Demand Analysis 11 Venezuela Livestock Outlook 11 Table: Venezuela Poultry Production & Consumption, 2011-2016 12 Table: Venezuela Pork Production & Consumption, 2011-2016 13 Table: Venezuela Beef & Veal Production & Consumption, 2011-2016 13 Table: Venezuela Poultry Production & Consumption, 2008-2012 16 Table: Venezuela Pork Production & Consumption, 2008-2012 16 Table::Venezuela Beef & Veal Production & Consumption, 2008-2012 16 Venezuela Grain Outlook 17 Table: Venezuela Wheat Production & Consumption, 2011-2016 19 Table: Venezuela Corn Production & Consumption, 2011-2016 19 Table: Venezuela Wheat Production & Consumption, 2008-2012 23 Table: Venezuela Corn Production & Consumption, 2008-2012 23 Venezuela Coffee Outlook 23 Table: Venezuela Coffee Production & Consumption, 2011-2016 25 Table: Venezuela Coffee Production & Consumption, 2008-2012 28 Commodity Price Analysis 29 Corn 29 Rice 29 Soybean 30 Wheat 31 Monthly Softs Update 32 Cocoa 32 Coffee 32 Palm Oil 33 Sugar 34 Downstream Analysis 35 Food 37 Total Food Consumption 37 Table: Venezuela Food Consumption Indicators - Historical Data & Forecasts, 2009-2016 37 Canned And Prepared Food 38 Table: Canned Food Value/Volume Sales - Historical Data & Forecasts, 2009-2016 38 Table: Fish, 2009-2016, 2009-2016 39 Edible Oil 40 Table: Oils And Fats, 2009-2016 40 Confectionery 41 Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2009-2016 41 Mass Grocery Retail 42 Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 42 Table: Sales Breakdown by Retail Format Type 42 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q2 2012 Trade 43 Table: Food & Drink Trade Balance - Historical Data & Forecasts 43 Economic Analysis - Massive Growth Challenge Beyond The Election 43 Table: Venezuela - Economic Activity 46 Country Snapshot: Venezuela Demographic Data 47 Section 1: Population 47 Table: Demographic Indicators, 2005-2030 47 Table: Rural/Urban Breakdown, 2005-2030 48 Section 2: Education And Healthcare 48 Table: Education, 2002-2005 48 Table: Vital Statistics, 2005-2030 48 Section 3: Labour Market And Spending Power 49 Table: Employment Indicators, 2001-2006 49 Table: Consumer Expenditure, 2000-2012 (US$) 49 Global Food & Drink View 50 Food & Drink Roundup Q112: Core Views 50 Table: Core Views 61 BMI Forecast Modelling 62 How We Generate Our Industry Forecasts 62 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q2 2012 BMI Industry View BMI View: Data for 2011 from the Ministry of Agriculture and Lands demonstrate mixed results for the first year of President Hugo Chávez's government's two-year plan for the agricultural sector, the Plan Bienal para la Producción de Alimentos 2011-2012 The plan aimed to improve access to capital for small- and medium-scale producers, and, according to the ministry's data, 75,000 producers received VEF2.7bn (US$627.9mn) in order to boost production The first year has met with some success: production of beans, cotton, yucca and some vegetables increased However, yellow corn production reached only 62.1% of the target of 1.39mn tonnes for 2011; white corn, soy oil and pulses production hit only 50.0%, 38.3% and 42.1% respectively of official targets Overall crop area fell by 7.8% year-onyear (y-o-y), and unemployment in the agricultural sector also increased by 5.8% over the year Agricultural production was hard hit by heavy rains which caused significant damage to both crops and infrastructure In addition to extreme weather conditions, Chávez's Gran Misión Agro Venezuela (Great Venezuelan Agricultural Mission) has also been held back by shortages of technical staff and equipment, delays in financing to farmers and inefficient production techniques Despite the plan's failure to reach its first-year targets, in late January, Chávez announced the relaunching of the Gran Misión Agro Venezuela on his radio and television show 'Aló, Presidente' As part of the relaunch, Chávez announced the creation of the Organo Superior de Agricultura, a new body which will be headed by Chávez himself, along with Elías Jaua, vice president and new minister of agriculture One of the main goals of the Organo Superior will be to increase land for livestock production, which currently stands at just 800,000 hectares, with the aim of growing the national herd to 20 million heads by 2019 Chávez called for the cooperation of local government to achieve these goals He also pledged a further VEF114mn (US$26.5mn) in investment to improve the agricultural transport network Key Forecasts BMI forecasts that GDP will increase by 2.5% y-o-y in 2012 and 2.2% in 2013, with growth driven primarily by the oil sector However, with presidential elections in October 2012, attempts to keep domestic demand elevated will see inflation levels remaining high We currently forecast end-2012 inflation of 26.0%, the highest in Latin America In 2010/11, we estimate that corn production rose by just 4.7% y-o-y on the low 2009/10 harvest to 1.71mn tonnes In 2011/12, we see production increasing by 4.5% y-o-y to 1.79mn tonnes as the area harvested increases to an expected 450,000 hectares Out to the end of our forecast period in 2016, the level of production will be highly reliant on the government's ability to support the agricultural sector Without continued support, much of the newly opened farmland will very likely return to fallow Despite this risk, we expect output to continue to rise and forecast production to grow by 27.4% on the 2011 level to reach 2.18mn tonnes © Business Monitor International Ltd Page Venezuela Agribusiness Report Q2 2012 Poultry production has been hit by high input costs, farmgate price controls and increasing competition from imports We estimate that output fell by 3.8% y-o-y in 2010/11 to take production to 625,000 tonnes and we forecast a further decline of 3.0% in 2011/12 to 606,000 tonnes Out to 2016, we see production increasing by 4.5% on the 2011 level to reach 653,000 tonnes, still some way below the level seen in the early years of the 21st century In 2010/11, the reliance on imports continued to shore up beef consumption and we estimate that consumption increased by 2.0% y-o-y to 533,500 tonnes High import prices and a drop in domestic production are likely to constrain beef consumption in the short term, and we currently forecast demand to grow by 0.9% y-o-y in 2011/12 to 538,300 tonnes Out to 2016, demand for beef is forecast to grow by 7.4% on the 2011 level to 573,000 tonnes Key Trends And Developments Vice President Elías Jaua was appointed as the new minister of agriculture and lands in late January after Juan Carlos Loyo resigned from the post, citing ill health New appointments have also been announced for senior positions within the Ministry of Agriculture Faiez Kassen Castillo was named vice minister for agricultural economics; Tatiana Pug was appointed president of the National Institute for Agriculture Research; Pedro Moreno Montes was named as the new president of the Institute for Comprehensive Agricultural Health; Javier Ramos was made acting president of the National Institute for Rural Development; and Eduardo Hurtado León will head the Venezuelan Agricultural Bank Also in late January, President Hugo Chávez stepped up pressure on banks to grant loans to small- and medium-sized producers He stressed that he would consider nationalising the banks if they fail to observe Venezuelan law, which states that banks must grant agricultural loans Chávez also announced that rather than being granted directly to producers, agricultural loans would now be transferred to the executive office to establish a new fund, which small- and medium-sized producers will be able to access The announcement has not been universally welcomed within the agricultural sector Pedro Rivas, president of the National Confederation of Agricultural Products (Fedeagro), expressed fears that the new fund may exclude private producers There were widespread food shortages in 2011, including basic food items such as powdered milk, oil and beef There was restricted availability of coffee, precooked corn flour and margarine for the second half of 2011 According to economic research firm Datanálisis, the shortage index for December 2011 was 24.8%, in comparison with 8.0% at the beginning of the year In March 2012, it was reported in the local press that the Supreme Court had granted an application seeking to annul the expropriation of agricultural supply company Agroisleña In late © Business Monitor International Ltd Page Venezuela Agribusiness Report Q2 2012 September 2010, the Chávez government announced the seizure of Spanish-owned Agroisleña, the largest private agricultural supply distributor in Venezuela Following its nationalisation, Agroisleña was renamed Agrotiendas and managed by the Agricultural Inputs, Supplies and Services Trading Company (Ecisa), which is part of the Ministry of Agriculture and Lands Despite Ecisa's goals to strengthen the distribution model for the agricultural sector, Ministry of Agriculture data indicate that Agrotiendas has been hit by limited supply owing to lack of transportation equipment and poor cold storage facilities This has represented a further obstacle for Venezuela's grain producers, who are already struggling to cope with rising prices and farmgate price controls © Business Monitor International Ltd Page Venezuela Agribusiness Report Q2 2012 SWOT Analysis Venezuela Agriculture SWOT Strengths Venezuela's tropical climate allows for production of a diversified range of agricultural products Venezuelan cocoa and coffee are known for their high quality; cocoa especially is sought after by producers of premium chocolate Weaknesses 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 investing in increasing production Opportunities Threats The government has shown interest in revitalising coffee and cocoa production after years of decline The government has introduced a number of programmes, including financing and subsidies, to help small holders increase production 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 Q2 2012 Venezuela Political 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 in January 2010, 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) © Business Monitor International Ltd Page Venezuela Agribusiness Report Q2 2012 However, in line with one of BMI's near-term core views that commodity prices will continue to moderate and pose less of a threat to consumer goods producers and retailers, we are already witnessing gradual improvements in the earnings performances of some of the major F&D players Both Conagra and General Mills registered an improvement in the second quarter ending November 27 Conagra's operating profit for this period was up by 2.8%, thanks to the strength of its commercial food business, while General Mills' operating profit fell by a slightly less rapid rate, coming in 12.9% lower We think this pattern of gradual improvement is set to continue over the coming months Our Commodities team forecasts additional relief for producers Fundamentally, the global agriculture market remains better supplied than it was during the 2008 food crisis, implying lower risks of food price inflation occurring as a result of supply shortages Secondly, government policies aimed at protecting the end consumer from food price appreciation, such as releasing government stocks, will continue to mitigate the impact of higher food prices Lastly, a global economic slowdown is likely to depress demand and taken together these factors mean we are forecasting lower average prices for most agricultural commodities during 2012 (see table) US Consumer Improving, Demand Remains Sluggish In Australia And Japan US, Japan And Australia Private Consumption Growth, local currency, % chg y-o-y f = BMI forecast Source: ABS, Cabinet Office, BEA Domestic Demand Uncertainties Abound In Developed Markets Meanwhile, we maintain our expectations of a subdued demand environment in developed markets such as Australia and Japan The Australian consumer will continue to face troubles that will hamper its consumption and we expect growth in private consumption to slow, coming in at 1.5% in 2012 and 1.7% in 2013 (see chart) As interest rates rise and debt repayments grow, a larger proportion of disposable income will be used to repay debt, forcing households to cut back on consumption goods With the announcement of job cuts by a number of financial institutions and manufacturers, a poor employment © Business Monitor International Ltd Page 51 Venezuela Agribusiness Report Q2 2012 outlook is likely to put a further drag on private consumption activity as consumers look to save more for the uncertainties that lie ahead In Japan, the temporary boost to private consumption witnessed in the aftermath of the Tohoku disaster has already given way to structural weakness Faced with domestic demand pressures, Asahi witnessed a decline of 4.7% in its domestic alcoholic drinks sales in FY2011 Similarly, Sapporo and Kirin reported a decline of 4.0% and 9.5% respectively in their domestic alcoholic drinks sales for the year ending December 2011 With weak asset prices placing pressure on consumer purchasing power, we believe the Japanese consumer will maintain a conservative stance over the coming quarters, although factors such as a strong currency and low unemployment should provide some support to domestic demand While consumer goods producers will continue to face demand headwinds in Australia and Japan in the coming quarters, the near-term future for the US consumer is certainly looking brighter than before Although a full recovery of the US housing market could take several years to play out and will be marred by volatility, we believe recovery could start to accelerate over the coming months from extremely depressed levels Moreover, with unemployment edging down towards 8% and initial jobless claims continuing to decline, the trend in labour market metrics is slowly improving These dynamics are typically positive for both sentiment and purchasing power Improving Demand Climate In US Prompts Loosening Of Purse Strings While the value theme will remain well-entrenched across the developed world in the near future, particularly in markets such as Japan and Australia, there are signs that an improvement in consumer confidence is fuelling a gradual shift of consumption away from the private label and discount retail sectors in the US US private label specialist TreeHouse Foods has been forced to issue a profit warning after registering a drop in volumes during the fourth quarter of 2011 The firm reported that its volumes in December fell by 8%, and this major sales decline during the important festive period potentially points to a wider movement away from the private label sector amid improving domestic demand conditions The latest results posted by US discount retailer Family Dollar also fit with our view that the discount retail format's rate of growth could be set to gradually decline as the US economic situation improves Family Dollar registered total sales growth of 7.6% for its fiscal first quarter (ending November 26 2011), but comparable-store sales growth came in at a more muted 4.1%, which compares unfavourably with its Q110 like-for-like sales growth of 6.9% © Business Monitor International Ltd Page 52 Venezuela Agribusiness Report Q2 2012 Casino Outperforming Tesco And Carrefour Selected MGR Companies Share Price (Rebased 14/3/2011) Source: Bloomberg EM-Oriented Companies To Perform Strongly Bearing out one of our core views that companies with a strong emerging market (EM) profile will continue to outperform, France-based retailer Casino posted solid results for 2011 - a year when rivals Tesco, Carrefour and Walmart struggled to make much headway Of the major retailers based in developed markets it is Casino rather than Walmart or Tesco that has greatest exposure to EMs For the 12 months to the end of December 2011, Casino registered an 18.2% increase in sales, while net incomes increased by 6.6% This robust sales showing was thanks to changes in its consolidation scope, with the company buying up Carrefour's operations in Thailand, upping its stake in Brazil's CBD and benefitting from the merger of CBD with local electronics good specialist Casas Bahia Casino's well-balanced portfolio has helped its share price outperform most of its global rivals since the beginning of 2009 and its strong EM base, combined with a steady domestic operation, suggests that this outperformance could be set to continue (see chart) © Business Monitor International Ltd Page 53 Venezuela Agribusiness Report Q2 2012 The importance of building a strong EM business, particularly European Firms In Front Revenues From Emerging Markets (%) when demand in the developed world remains sluggish, is further underlined by the underperformance of US food firms to their European counterparts US food firms are generally less exposed to EMs than their European peers (see chart) This has meant on average they have underperformed over the last five years in terms of organic revenue growth Source: Nestle, Investor Relations, BMI Estimates However, the major US food producers are already looking to address their weakness in this regard and have been largely ramping up their expansions in the EMs through mergers and acquisitions (M&A) First, we have Kellogg announcing the purchase of Pringles from Proctor & Gamble (P&G) for US$2.7bn Kellogg has always been in a bit of a tricky situation because cereal is not a common option in key EMs such as China and India, while future growth is also hampered by high levels of lactose intolerance in many major EMs On this front, Kellogg's acquisition of popular snack brand Pringles should allow it to circumnavigate the unique consumer preferences in the EMs, facilitating its expansionary ambitions A second move is General Mills' reported acquisition of Brazil-based Yoki in a deal worth US$1.2bn We estimate that General Mills only derives 10% of its revenues from EMs, but with this single acquisition (which has yet to be officially confirmed) this would rise to 13.5%, showing how quickly things can change if firms are willing to invest Other US companies that are keen to be making these types of acquisitions are Heinz, Campbell Soup, Hershey and Sara Lee All will be anxious to increase their EM exposure and will be currently sizing up which markets and categories offer the best opportunities For Heinz and Hershey, the route to international growth looks relatively straightforward Heinz has already found success for its core condiment portfolio in markets such as Russia and Mexico, and looks like it has a portfolio that is well suited to EM expansion In contrast, Campbell Soup has struggled in EMs, with packaged soup having failed to find a receptive market in countries where homemade soup is often a cheap and tasty staple The firm may therefore need to copy Kellogg's example and branch out into a new category if it is to benefit from the EM opportunity © Business Monitor International Ltd Page 54 Venezuela Agribusiness Report Q2 2012 The opportunities on offer in EMs may be difficult to exploit for some consumer-facing companies Global consumer goods players Nestlé and Danone are overhauling their business models in China amid intensifying domestic competition Chinese dairy companies Mengniu and Yili, for instance, are looking to capture a greater market among the country's middle classes by continually innovating and introducing more upmarket products While better product quality and a stronger brand appeal were typically viewed as the competitive strengths of foreign consumer players such as Danone, domestic companies are quickly playing catch up in these regards Faced with the rapid emergence of competition from domestic players, Nestlé plans to shut down one of its three ice cream factories in China so as to channel more resources into building a stronger foothold in the higher-end market segments Nestlé aims to boost sales through distribution channels such as hotels and restaurants Danone, meanwhile, is suspending production at its Shanghai yogurt plant as part of its restructuring strategy to focus on premium brands in China In the retail space, Walmart is facing a tough predicament in China as well The loss of valuable brand control and the risks of having one's brands mismanaged under a franchising model have been cited as some of the major drawbacks of expanding through this operating model, and these problems have clearly caught up with Walmart Walmart has been punished 21 times in the city since 2006 for alleged violations such as mislabeling products, false advertising and selling products that were already past their expiry dates Although Walmart prides itself on offering quality grocery products at low prices, it has struggled to achieve price leadership against the more cost-effective traditional retailers and has arguably not lived up to its assurance of providing quality products Moreover, by positioning itself as a low-end retailer, Walmart is seemingly striking the wrong chord with its main clientele, which is the middle class Therefore, we stress the importance for consumer-facing companies to get their strategies and positioning right in order to really enjoy success in the developing world For Nestlé and Danone, we believe it would make strategic sense for them to focus on improving their product quality and further leverage on their global brand appeal in China, particularly amid dampened consumer confidence in domestically-produced goods For Walmart, it would probably better by positioning itself at the higher-end of the Chinese retail market as well as provide sales-related incentives to keep its objectives aligned with its franchisees' From Emerging To Frontier While EMs will continue to hold immense appeal to the global F&D players, the flurry of expansionary activities across the frontier markets is likely to heat up over the coming years as well Netherlands-based brewer Heineken boosted its stake in Haitian brewer Brasserie Nationale D'Haiti (Brana) from 22.5% to 95%, which fits with our core view that major multinationals will increasingly look for frontier market investments as the opportunities within traditional EMs become scarcer as competition increases As another case in point, confectionery producer Mars has started construction of a new chocolate facility in Saudi Arabia The move reflects growing demand for confectionery products in Middle East, where Mars already operates one facility, in Dubai, producing Mars, Galaxy and Snickers Meanwhile, Cereal © Business Monitor International Ltd Page 55 Venezuela Agribusiness Report Q2 2012 Partners Worldwide, a joint venture between food giants Nestlé and General Mills, has opened a new cereal factory in Turkey The facility required an investment of TRY85mn and will supply cereal products to the Turkish market as well as 14 other countries across the Middle East and North Africa The decision to use the country as a launch pad to the wider region fits with Turkey's rapidly improving business environment and private sector mentality, and we would expect more companies to use the country as a base to expand their reach into the high potential markets across the Middle East and North Africa Pursuing Innovation To Improve Differentiation Another of BMI's longer-term core views is the ramping up of product innovation among F&D companies as they seek differentiation and further market share gains US coffee giant Starbucks looks set to roll out its new coffee capsule products across Europe, which are recently launched in the US, in a move that will see it attempt to gain share from Nestlé However, BMI believes this move may take a while to make a meaningful contribution to Starbucks' results, with the firm facing an uphill battle in tempting consumers away from Nestlé's ubiquitous Nespresso format The company also plans to increase the customers' exposure to Starbucks products in Europe, with the Financial Times reporting that the firm is exploring ways to sell Starbucks coffee through vending machines and on trains and aeroplanes In the US, ruling out the prospect of stronger growth through store expansions, the ramping up of its product offerings is arguably the most viable strategic option available for Starbucks to secure its domestic growth prospects Starbucks' plans to move into the US alcoholic drinks sector clearly underscore the importance of product diversification in its growth strategy However, we are cautiously optimistic about this strategy On the one hand, expansions into alcoholic drinks should prove supportive of higher margins for Starbucks On the other hand, given that the positioning of Starbucks as a premium coffee giant is already well-entrenched among local consumers, it could potentially lose some of its core customers who are looking to indulge themselves in the 'Starbucks coffee experience' Trans-Asian soft drinks manufacturer Fraser and Neave (F&N) is also looking to hop on the innovation bandwagon to lock in its future prospects F&N plans to invest more heavily in research and development to create new products such as its recently-launched carbonated soft drink Clearly Citrus to compensate the potential loss of revenues as a result of the termination of its bottling agreement with The Coca-Cola Company Burgeoning Global Appetite For Functional Foods Fuelled by growing health awareness and rising consumer affluence, consumers across the global markets are quickly developing a bigger appetite for functional food products In a bid to tap into the functional food potential, Nestlé and Danone are reportedly looking to acquire baby formula producer Wyeth, which is valued at around US$10bn An acquisition of Wyeth would represent a chance to gain control of a slew © Business Monitor International Ltd Page 56 Venezuela Agribusiness Report Q2 2012 of well-known infant formula brands that could expedite their expansions in the fast-growing baby formula market While PepsiCo is gradually calibrating its portfolio away from soft drinks and salty snacks, we have questioned whether PepsiCo's starting position puts it in a strong position to capture the opportunities in healthy categories It is PepsiCo's move into the dairy sector that is perhaps the most transformational for the group PepsiCo's ambitions in this sector were underlined by the purchase of Russia's Wimm-BillDann (WBD) and the establishment of a joint venture in 2009 with Saudi Arabia's Almarai The response to PepsiCo's strategy of expanding in the diary sector has been less than enthusiastic among investors, which fits with our analysis Consumers in every part of the world are sometimes willing to put health concerns to one side and indulge themselves In emerging markets these types of indulgent purchases are likely to rise in line with increased affluence and offset any downwards pressure from increased health-consciousness PepsiCo's existing portfolio is well tailored to meet this growing demand and an attempt to reshape its business is likely to require significant funds that could be better spent in ensuring that it is capable of meeting the growing demand for 'fun-for-you' products in emerging markets PepsiCo seems to want to transform itself into Danone and the fear that it is steaming off in a new direction and not playing to its strengths may be partly behind its recent underperformance Coca-Cola And PepsiCo Spearheading Diversification Away From Carbonates A notable trend that we have observed in the global F&D space is the continued diversification among beverage producers away from carbonated drinks Over the past quarter, Coca-Cola and PepsiCo were some of the bigger names that have been spearheading this trend, particularly in EMs Coca-Cola India, the local subsidiary of Coca-Cola, is forming an independent business division to lift its stake in the expanding non-carbonates market, which will be responsible for the innovation, sale and distribution of juices, energy drinks and powdered drinks With their sights set firmly on the opportunities provided by a growing health awareness trend in India, PepsiCo and domestic drinks producer Tata Global Beverages plan to ramp up their product portfolio of functional beverages through their local joint venture NourishCo NourishCo will be introducing a new range of functional drinks over the next 18-24 months and it aims to generate overall revenues of INR7bn (US$141.8mn) Although the low purchasing power of Indian consumers means that the lower-value carbonates are likely to remain the beverage of choice for most consumers, rising incomes and an emerging trend of health awareness are fuelling demand for non-carbonates such as fruit juices and energy drinks, and companies such as Coca-Cola and PepsiCo are likely to accelerate their portfolio expansion initiatives to capitalise on this opportunity Consolidation To Drive M&A Activity Consolidation will remain apace in the global F&D space as companies seek greater efficiencies by improving their domestic scale Interestingly, this trend has been largely fuelled by M&A rather than © Business Monitor International Ltd Page 57 Venezuela Agribusiness Report Q2 2012 organic growth, which can be linked to the benefits of reaping immediate scale through inorganic expansions Russian-based vodka producer Russian Standard has made an offer to Poland-based Central European Distribution Corp (CEDC) that could see it take a 32.99% stake in the business A combination between Russian Standard and CEDC would create a regional spirits giant, combining Russian Standard's strength in the premium end of the market with CEDC's strength in the economy and mid-price sectors Meanwhile, soft drink firm Coca-Cola FEMSA continues to drive consolidation within Mexico's soft drink sector, announcing that it is to purchase the drinks arm of Mexican group Fomento Queretano The deal is worth MXN6.6bn (including MXN1.2bn of Queretano's debt) and represents FEMSA's third major acquisition in Mexico's soft drink sector in 2011 FEMSA revealed that its recent acquisitions in Mexico will increase its Mexican volumes and revenues by 30%, representing a substantial increase in the firm's exposure to the market As Mexico's largest bottler, FEMSA cannot take its eye off the ball here, and we see this consolidation as a sensible strategy given the weakness of the market However, over the longer term we think FEMSA will remain primarily focused on international growth; the structure of the acquisition (based on shares rather than cash) would support our view that the firm is preparing for major acquisitions outside of its domestic market Further bearing out the consolidation trend in the global F&D markets, Swedish confectionery producers Cloetta and Leaf International have announced plans to merge their operations The combined portfolio will see Cloetta's strength in chocolate confectionery complimented by Leaf's strong position in the pastilles, gum and sugar confectionery categories, with brands including Cloetta, Läkerol, Malaco, Red Band and Chewits We believe it will be in the sugar confectionery area that the combined firm will seek to drive expansion, with the popular Cloetta brand used to back a number of sugar confectionery products currently in the Leaf stable The merger would also create a firm with scale to expand internationally, with the business already having a sizeable base in both Netherlands and Italy © Business Monitor International Ltd Page 58 Venezuela Agribusiness Report Q2 2012 AB InBev And SABMiller Have Massive Financial Power To Flaunt Selected Brewers Market Capitalisation, US$mn (LHS) & Debt-To-EBITDA Ratio (RHS) Y= last financial year, Y-1 = the previous financial year and so on Source: Bloomberg, investor relations More recently, the sale of Chinese brewer Kingway Brewery's beer assets, which represents an enticing opportunity for multinational and domestic brewers to consolidate a stronger presence in the Chinese beer market, has unsurprisingly stirred massive interest among domestic and foreign brewers alike China Resources Snow Breweries (CR Snow), Beijing Yanjing Brewery and Anheuser-Busch InBev (AB InBev) are reportedly among the frontrunners to make the acquisition While AB InBev's massive financial scale could give it a slight edge over CR Snow, we believe that the latter has its fair chance of success in acquiring Kingway's brewery assets Through the sale of its non-core assets, as well as fiscal prudence and strong earnings growth on the back of cost cutting at the acquired Anheuser-Busch business, AB InBev's total debt-to-EBITDA ratio has been cut down from a five-year high of 7.8 to 3.2 in its last financial year, implying that it now has a stronger financial capacity for deals (see chart) However, we acknowledge that CR Snow has the backing of its parent company SABMiller, which is also a financial colossus, and certainly has plenty of scope to carry out the acquisition While Beijing Yanjing Brewery is also in the running, we believe that its smaller financial clout probably places it in a weaker position to contend against the financially powerful AB InBev and CR Snow for the acquisition Private Equity Companies Attracted To Unfashionable Categories We have introduced a new core view this quarter: private equity (PE) firms to develop a stronger interest in unfashionable F&D categories Two newly announced deals have highlighted PE's attraction to relatively unfashionable parts of the food sector In the US, PE firm Centre Partners announced the acquisition of frozen food manufacturer Bellisio Foods while in Europe PE firm Manfield Partners announced the acquisition of two canned food units from Japanese conglomerate Mitsui & Co BMI has previously highlighted the sector's interest in parts of the industry that are largely stagnant, or even © Business Monitor International Ltd Page 59 Venezuela Agribusiness Report Q2 2012 in decline, with the PE industry attracted by the relatively low valuations and potential for restoring growth through investment in marketing and innovation These PE firms saw a chance to reinvigorate a category that had declined, partly due to a lack of investment, while being able to pick up major brands for relatively affordable prices Innovations in the frozen food sector have since been stepped up, with improvements in taste and convenience filtering through the sector Canned food is also a sector in decline in many developed markets but looks increasingly like a sector in demand by PE firms The canned food units acquired by Manfield Partners include canned and tinned seafood, fruit and vegetables in the UK and the Netherlands, with combined revenues of around GBP75mn Another canned food producer in the hands of PE owners is US-based Bumble Bee Foods, formerly owned by Centre Partners but now in the hands of Lion Capital The PE firms currently investing in these categories will of course be thinking of their eventual exit strategy Given the lack of interest from major brand builders, these exits have previously been primarily through the sale to another PE fund However, we expect more deals to take the form of an IPO A well run, steadily expanding food business will always attract defensive investors and the international scale of companies such Birds Eye Iglo and Findus will certainly make them suitable for a wide variety of European funds However, nobody wants to invest in a shrinking category and to ensure that they generate a return on the investment these firms will have to continue investing in innovation in a bid to win back consumers that have moved away from the frozen and canned sectors © Business Monitor International Ltd Page 60 Venezuela Agribusiness Report Q2 2012 Table: Core Views Short-term Outlook Raw material prices will trend lower in 2012 and become less of a threat to both producers and retailers Developed markets still feeling the pinch with economic weakness and political uncertainty weighing on spending Tentative signs of improvement in US consumer market The value theme is still very important across the developed world with price consciousness inherent Long-term Outlook Companies with strong Emerging Market exposure will continue to outperform Multinationals will increasingly pursue frontier market investments Investment in innovation will increase as producers seek differentiation; emphasis will be placed on protecting innovations Some consumer goods manufacturers will continue to leave sectors under threat from private labels while others will calibrate their portfolios toward private labels to capitalise on their growing demand Government legislation will play an increasing role in marginalising unhealthy food and beverage products Premiumisation will re-emerge as a key driving force behind revenue growth Demand for convenience in retail and food will continue to grow Functional foods will provide considerable opportunities in developed markets in particular Consolidation will continue as producers seek greater efficiencies Beverage companies will continue to invest in diversification away from carbonated beverages and into healthier sub-sectors Private Equity companies will continue to be attracted to unfashionable categories Source: BMI © Business Monitor International Ltd Page 61 Venezuela Agribusiness Report Q2 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 Example of Rice Consumption Model: © Business Monitor International Ltd Page 62 Venezuela Agribusiness Report Q2 2012 (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 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 © Business Monitor International Ltd Page 63 Venezuela Agribusiness Report Q2 2012 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 64 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... International Ltd Page 18 Venezuela Agribusiness Report Q2 2012 Table: Venezuela Wheat Production & Consumption, 2011-2016 Wheat Consumption, 1 '000 tonnes f 2011 2012 2013 2014 2015 2016 1,500.0 1,530.0 1,582.0 1,639.4 1,697.5 1,756.2 1 Notes: BMI forecasts Sources: USDA Table: Venezuela Corn Production & Consumption, 2011-2016 Corn Production, '000 tonnes 1 Corn Consumption, '000 tonnes f 1 2011 2012 2013 2014... in 2012, with domestic production unlikely to make up the difference As a result, we see consumption dipping by 6.6% y-o-y to 1.14mn bags in 2012 Out to 2016, we see demand growing by 8.8% on the 2011 level to 1.33mn bags © Business Monitor International Ltd Page 24 Venezuela Agribusiness Report Q2 2012 Table: Venezuela Coffee Production & Consumption, 2011-2016 Coffee Production, '000 60kg bags 2012. .. investment (domestic and foreign) © Business Monitor International Ltd Page 10 Venezuela Agribusiness Report Q2 2012 Supply Demand Analysis Venezuela Livestock Outlook BMI Supply View: After strong growth in the 1990s and the first few years of the 21st century, Venezuelan beef production has gone into reverse in the past few years Venezuela was self-sufficient in beef in 2003, but by 2009 imports accounted... International Ltd Page 22 Venezuela Agribusiness Report Q2 2012 1.60mn tonnes, a similar total to that seen in 1997/98 In addition, Venezuela is expected to import some 1.55mn tonnes of wheat Table: Venezuela Wheat Production & Consumption, 2008 -2012 Wheat Consumption, '000 tonnes f 1 2008 2009 2010 2011 2012 1,500.0 1,550.0 1,550.0 1,500.0 1,530.0 2008 2009 2010 2011 2012 1,800.0 1,800.0 1,634.0 1,710.0 1,786.3... forecast period Table: Venezuela Poultry Production & Consumption, 2011-2016 Poultry Production, '000 tonnes 1 Poultry Consumption, '000 tonnes e 1 f 2011 2012 2013 2014 2015 2016 625.0 606.0 622.0 632.0 644.0 653.0 780.6 788.4 800.2 816.2 836.6 857.5 1 Notes: BMI estimates BMI forecasts Sources: USDA © Business Monitor International Ltd Page 12 Venezuela Agribusiness Report Q2 2012 Table: Venezuela Pork Production... for domestic producers © Business Monitor International Ltd Page 25 Venezuela Agribusiness Report Q2 2012 Venezuela And Colombian Announce Binational Coffee Plan In March 2011, it was announced that officials from the Colombian and Venezuelan governments are developing a joint plan to support coffee growers on both sides of the Colombia -Venezuela border in areas that have been hard-hit by the long-running... USc1,280/bushel and average slightly lower at USc1,250/bushel in 2012 and USc1,200/bushel in 2013 This is because we expect the global market to move from a 7.3mn tonne © Business Monitor International Ltd Page 30 Venezuela Agribusiness Report Q2 2012 deficit in 2011/12 to a 3.3mn tonne surplus in 2012/ 13 Indeed, we forecast a strong US crop in 2012/ 13, which should loosen supply on the market after the... MYR3,500/tonne level While we expect the market to remain tight in 2012, we foresee overall stable production and consumption limiting the upside for prices in 2012 We therefore maintain our fundamental view that a © Business Monitor International Ltd Page 33 Venezuela Agribusiness Report Q2 2012 better-supplied palm oil market in 2012 should limit the upside for prices With the global surplus forecast.. .Venezuela Agribusiness Report Q2 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... time to come The government's highly interventionist stance towards food production and supply in Venezuela means that meat production will be highly dependent on government policy If © Business Monitor International Ltd Page 16 Venezuela Agribusiness Report Q2 2012 prices are subjected to further controls as Venezuela' s economy contracts, production could fall further as more operators leave the sector ... And 2030 (mn, total) 7 0-7 4 7 0-7 4 6 0-6 4 6 0-6 4 5 0-5 4 5 0-5 4 4 0-4 4 4 0-4 4 3 0-3 4 3 0-3 4 2 0-2 4 2 0-2 4 1 0-1 4 1 0-1 4 0-4 -1 .5 0-4 -1 .0 -0 .5 0.0 Male 0.5 1.0 1.5 -3 .0 -2 .0 -1 .0 0.0 2030 Female 1.0 2.0 2005... soya-bean oil imports, tonnes, % change y-o-y -2 3.03 -2 .52 2.17 1.10 1.17 1.18 1.19 1.20 Crude soya-bean oil balance, tonnes -2 79,890 -2 72,835 -2 78,754 -2 81,832 -2 85,1278 -2 88,494 -2 91,930 -2 95,438... tonnes, % change y-o-y Corn oil balance, tonnes Corn oil balance, tonnes, % change y-o-y -3 7,471.11 -3 7,180.86 -3 7,418.57 -3 7,540.68 -3 7,671.68 -3 7,805.50 -3 7,942.19 -3 8,081.81 78.64 -0 .77 0.64 0.33