Venezuela agribusiness report q3 2010

Q3 2010 www.businessmonitor.com VeneZueLa agribusiness Report INCLUDES 5-YEAR FORECASTS TO 2014 ISSN 2040-0489 Published by Business Monitor International Ltd VENEZUELA AGRIBUSINESS REPORT Q3 2010 INCLUDES 5-YEAR FORECASTS TO 2014 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication Date: July 2010 Business Monitor International Mermaid House, Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2010 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 Q3 2010 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2010 CONTENTS Executive Summary SWOT Analysis Venezuela Agriculture SWOT Venezuela Political SWOT Venezuela Economic SWOT Venezuela Business Environment SWOT Industry Forecast Scenario 10 Venezuela Coffee Outlook 10 Table: Venezuela –Coffee Production & Consumption 11 Table: Venezuela –Coffee Production, Consumption & Trade 14 Venezuela Dairy Outlook 15 Table: Venezuela –Milk Production & Consumption 16 Table: Venezuela –Butter Production, Consumption & Trade 16 Table: Venezuela –Cheese Production, Consumption & Trade 16 Table: Venezuela –Whole Milk Powder Production, Consumption & Trade 17 Table: Venezuela –Milk Production & Consumption 18 Table: Venezuela –Butter Production, Consumption & Trade 19 Table: Venezuela –Cheese Production, Consumption & Trade 19 Table: Venezuela –Whole Milk Powder Production, Consumption & Trade 19 Venezuela Sugar Outlook 21 Table: Venezuela –Sugar Production, Consumption & Trade 22 Table: Venezuela –Sugar Production, Consumption & Trade 24 Venezuela Cocoa Outlook 26 Table: Venezuela – Cocoa Production, Consumption & Trade 26 Table: Venezuela – Cocoa Production, Consumption & Trade 27 Venezuela Grains Outlook 29 Table: Venezuela – Wheat Production, Consumption & Trade 30 Table: Venezuela – Corn Production, Consumption & Trade 30 Table: Venezuela – Wheat Production & Consumption 31 Table: Venezuela – Corn Production, Consumption & Trade 32 Venezuela Livestock Outlook 33 Table: Venezuela – Poultry Production, Consumption & Trade 34 Table: Venezuela – Pork Production, Consumption & Trade 34 Table: Venezuela – Beef & Veal Production, Consumption & Trade 35 Table: Venezuela – Poultry Production, Consumption & Trade 37 Table: Venezuela – Pork Production, Consumption & Trade 37 Table: Venezuela – Beef & Veal Production, Consumption & Trade 37 Competitive Landscape 39 Table: Agricultural Commodity Producers & Traders 39 Table: Agribusiness Suppliers 40 Table: Integrated Agricultural Producers 41 Commodity Price Analysis 42 Grains Update 42 Corn 42 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2010 Table: Corn 42 Rough Rice 43 Table: Rice 43 Soybean 44 Table: Soybean 44 Wheat 45 Table: Wheat 45 Softs Update 46 Cocoa 46 Table: Cocoa 46 Coffee 47 Table: Coffee 47 Milk 48 Table: Milk 48 Sugar 49 Table: Sugar 49 Downstream Supply Chain Analysis 50 Industry Forecast Scenario 50 Consumer Outlook 50 Food 53 Total Food Consumption 53 Table: Colombia Food Consumption Indicators – Historical Data & Forecasts 53 Canned Food 54 Table: Canned Food Value/Volume Sales – Historical Data & Forecasts 54 Confectionery 55 Table: Confectionery Value/Volume Sales – Historical Data And Forecasts 55 Mass Grocery Retail 57 Table: Venezuela Mass Grocery Retail Value Sales By Format – Historical Data And Forecasts 58 Table: Sales Breakdown by Retail Format Type 58 Trade 59 Table: Food And Drink Trade Balance – Historical Data And Forecasts 60 Macroeconomic Forecast 61 Table: Venezuela - Economic Activity, 2007-2014 62 BMI Forecast Modelling 63 How We Generate Our Industry Forecasts 63 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2010 Executive Summary BMI View: The Venezuelan agriculture industry's woes continue to mount under the constraints of President Hugo Chávez's 'socialist revolution.' The government continued to tighten its grip on production in Q210 as it decreed the takeover of the assets of Venezuela-based assets of Mexican food-processor Gruma Chávez has also renewed his threat to expropriate Polar, the largest local private food processor, brewer and miller Although the government's centralised, state-controlled policies were designed to boost local production, they have in practice had the opposite effect Venezuela is set to fall further into recession in 2010, with BMI forecasting the economy to shrink by 3.6%, following an estimated 3.3% contraction in 2009 Rising inflation is pushing up production costs, but strict government controls on food prices have meant shrinking profit margins for domestic producers and retailers The resulting food shortages have been exacerbated by the continued disputes with Colombia that have seen imports to Venezuela grind to a halt The government has responded to the growing food supply crisis with a series of raids through June 2010 designed to clamp down on retailers accused of hoarding food and selling it at above the authorised price At least 40 butchers were arrested in early May on charges of selling beef for higher than the regulated price Eight butchers have been found guilty and fined US$3,000 A further 32 butchers are yet to be tried; if convicted, they too face heavy fines or between two and six years in prison ! Production of beef and poultry in 2010 are forecast to rise by 10.3% year-on-year (y-o-y) to reach 317,800 tonnes The trade spat with Colombia has halted exports of beef, giving a boost to local producers Poultry output is also forecast to increase by 2.5% y-o-y to 696,700 tonnes The increase in March 2010 to the state-regulated price for poultry to VEF13.83 per kilogram should also provide a boost for producers ! Corn production is forecast to increase by 14.9% to 1.55mn tonnes in 2009/10, after three years of successive declines Production was hit by extreme droughts in 2008/09 and has also been negatively affected by regulated farmgate prices and retail prices, which farmers complain have not been adequately adjusted in line with rising costs, which have been driven upwards by high inflation ! In April 2010, the Venezuelan government raised the state-controlled price caps for milk and dairy products by as much as 30% The increase was in response to spiralling costs following the 50% devaluation of the bolívar in early January 2010 The price of fluid milk was raised by 30% to VEF4.15 (US$0.97) per 900ml container, while the costs of white cheeses and powdered milk were also increased In recent years, demand for fluid milk in particular has regularly outstripped supply The government hopes that the increase in authorised prices will provide an incentive to producers and head off the danger of future food shortages © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2010 ! We now see coffee production falling for a second successive year in 2009/10 due to dry weather related to the El Niño-Southern Oscillation in the Pacific Low prices have also meant that farmers continue to turn to more profitable crops As a result, we forecast production to sink to 813,400 tonnes, down by 3.8% y-o-y ! Venezuela's sugar sector continues to struggle from a lack of investment and strictly controlled prices Despite two increases in the official cost of sugar on the domestic market in October 2009 and March 2010, producers are still reluctant to devote acreage to sugar or to invest further in the sector Of the market price of VEF3.73 per kilogram, cane producers were receiving just VEF1.20 per kilogram when delivered to the processor; far short of the production cost of VEF2.60 per kilogram We forecast production to decline by 9.9% y-o-y to 599,100 tonnes, following a 14.7% y-o-y decline in 2008/09 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2010 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 Q3 2010 Venezuela Political SWOT ! 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 something of 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 its domestic affairs and has threatened to cut off oil supplies to the US Opportunities ! If invested prudently in areas such as infrastructure and education, the fiscal windfalls brought by the devaluation of the bolivar and elevated oil prices could help bring longer-term stability to the economy in turn 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 a number of laws that were previously overturned in the constitutional referendum in 2007 The weakening of democracy in the country threatens to seriously raise political risk and poses a threat to private business activity ! Tensions between Venezuela and Colombia remain heightened, due to the former's belligerent rhetoric and recent destruction of bridges straddling the border Although we continue to view the possibility of outright military conflict as improbably, given underlying economic interdependencies, we caution that risks of a confrontation have risen Strengths Weaknesses © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2010 Venezuela Economic SWOT ! 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 A devaluation of the bolivar, which could result from a decline in oil prices, would significantly 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) Strengths Weaknesses Venezuela Business Environment SWOT ! 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 ! 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 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 targets large sums of money at 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) Strengths Weaknesses © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2010 Consumption Under Pressure Zero Growth In US$ Terms Our forecasts for food consumption Venezuela Food Consumption highlight the impact of the current stagflationary environment While total food consumption is expected to advance rapidly in nominal, local currency terms (see chart 3), the inflationary environment is expected to continue to erode the value of the Venezuelan bolívar, meaning that in US dollar terms food consumption is expected to fall significantly in 2010 and register little growth over the next five years In a high inflationary environment our US dollar figures, derived from our forecasts for NB nominal growth rate; exchange rate for US$ values varies with year; e/f=BMI estimate/forecast Source: National Institute of Statistics, BMI the future exchange rate, provide a truer reflection of the underlying growth rates All Is Not Lost Despite the difficult environment, BMI does not believe that Venezuela is beyond reprieve and the risks to our forecast are therefore weighted to the upside Although the Venezuelan economy is likely to experience a tough time over the next two years, we believe that the country's significant oil reserves and well-educated population means that there is significant economic growth potential over the long term Should Chávez remain in power beyond the 2012 presidential elections, we expect a further deterioration in the country's investment outlook and economic growth potential However, if we see a change of leadership in 2012 and a shift to a more moderate administration, we believe that the Venezuelan economy has the potential to experience solid rates of economic expansion over the long term, with positive implications for food and drink spending © Business Monitor International Ltd Page 52 Venezuela Agribusiness Report Q3 2010 Food Total Food Consumption Venezuela Food Consumption BMI is currently forecasting that 2005-2014 inflation will come in at 40% by the end of 2010 The spiralling cost of consumer goods has eliminated many of the benefits of President Hugo Chávez's wealth-redistribution programmes In US dollar terms, per capita food consumption (food and drink, excluding alcoholic drinks) is now expected to fall over the forecast 2009-2014 period (by over 32%, although it will increase by a staggering 213% in local currency), due to a loss of purchasing power and the NB nominal growth rate; exchange rate for US$ values varies with year; f=BMI forecast Source: National Institute of Statistics, BMI weakening of the local currency against the US dollar Per capita consumption of food (as expressed in US dollars) is expected to contract by 40.5% in 2010, then pick up slightly again in 2011 and 2012 before dropping back again in 2013 and 2014, reaching US$469 in the latter year Table: Colombia Food Consumption Indicators – Historical Data & Forecasts 2005 2006 2007 2008f 2009f 2010f 2011f 2012f 2013f 2014f Food consumption (VEBbn) 27.7 31.1 34.4 37.4 43.1 52.3 70.5 94.8 122.0 148.3 Food consumption (US$bn) 12.91 14.51 16.03 17.43 20.11 12.17 15.16 15.81 15.24 14.83 Per capita food consumption (VEB) 1,034 1,141 1,237 1,321 1,496 1,782 2,357 3,112 3,928 4,688 Per capita food consumption (US$) 482.4 532.2 576.9 615.9 697.6 414.4 506.8 518.6 491.0 468.8 Total Food consumption y-o-y growth (local currency, %) 12.40 12.40 10.43 8.75 15.39 21.33 34.73 34.49 28.59 21.59 Per capita food consumption growth (y-o-y) 10.34 10.33 8.40 6.76 13.27 19.10 32.26 32.02 26.23 19.36 Food consumption as % GDP 9.11 7.86 7.02 5.81 5.19 4.69 4.34 4.05 3.88 3.80 NB nominal growth rate; FX for US$ varies with year; f=BMI forecast Source: National Institute of Statistics, BMI © Business Monitor International Ltd Page 53 Venezuela Agribusiness Report Q3 2010 Canned Food Canned Food Market Over the 2004 to 2009 review period, 2005-2014 canned food value rose from VEB646mn (US$301.2mn) to a projected VEB695mn (US$324mn) The values in 2009 suffered owing to the impact of inflation (hence the diminishing US dollar values) and falling consumer purchasing power, despite the economical nature of canned foodstuffs and their durability, which have increased their attractiveness in times of economic downturn Nevertheless, 2009 volume sales fell on e/f=BMI estimate/forecast Source: National Institute of Statistics, BMI 2008 levels, which we not foresee being reached again for the duration of the forecast period The value of canned foods will post a 42% increase in local currency terms, although the bolivar devaluation will result in a 69.5% value reduction in US dollar terms, through to 2014 Table: Canned Food Value/Volume Sales – Historical Data & Forecasts 2005 2006 2007 2008f 2009f 2010f 2011f 2012f 2013f 2014f 348.5 353.7 356.5 359.3 356.3 353.4 354.4 355.6 356.9 358.5 Canned food sales (VEBmn) 658 673 678 680 695 721 771 838 914 987 Canned food sales (US$mn) 307.0 313.9 316.4 316.9 324.0 167.6 165.7 139.7 114.3 98.7 Canned food sales (000 tonnes) e/f=BMI estimate/forecast Source: National Institute of Statistics, BMI © Business Monitor International Ltd Page 54 Venezuela Agribusiness Report Q3 2010 Confectionery Confectionery Sales Over the 2001 to 2007 period, 2005-2014 confectionery sales value in Venezuela increased by over 50% in US dollar terms to VEB815mn (US$380mn) In 2008, 52% of the overall market was accounted for by chocolate confectionery, followed by sugar confectionery and gum with market shares of 41% and 7% respectively A young population and busier lifestyles have led to growing demand for on-thego snacks, but Venezuelan consumers have been forced over recent years to f=BMI forecast Source: National Institute of Statistics, BMI adapt consumption patterns to cope with rising prices and limited product availability For many consumers, confectionery has thus returned to being a luxury product, with product availability through the government-subsidised Mercal network, which is intended to provide discount food staples for the impoverished, being at best limited Therefore, we forecast a virtual stagnation of confectionery volumes in the 2009-2014 period, with a growth of only 1.1% over the five years in question Additionally, the figure of 26,960 tonnes sold in 2008 will not be repeated until after the end of the forecast period, as the sector's development is negatively impacted by the expected reduction in volume sales during 2009 and 2010, of 3.78% and 3.73% respectively Table: Confectionery Value/Volume Sales – Historical Data And Forecasts 2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f Total confectionery sales (000 tonnes) 23.29 25.00 26.40 26.96 25.94 24.97 25.01 25.50 25.76 26.23 Total confectionery sales growth, tonne, (y-o-y) 7.88 7.35 5.60 2.12 -3.77 -3.76 0.17 1.96 1.02 1.82 Total confectionery sales (VEBmn) 721 772 815 851 937 1,089 1,381 1,776 2,218 2,645 Total confectionery sales growth, VEB, (y-o-y) 10.16 7.14 5.56 4.48 10.08 16.18 26.79 28.66 24.88 19.24 51.5 53.6 55.8 57.6 62.4 70.6 86.4 107.9 131.8 155.0 Gum sales (VEBmn) © Business Monitor International Ltd Page 55 Venezuela Agribusiness Report Q3 2010 Table: Confectionery Value/Volume Sales – Historical Data And Forecasts Sugar confectionery sales (VEBmn) 309 328 343 356 388 447 561 715 887 1,053 Chocolate confectionery sales (VEBmn) 360 390 416 438 487 571 733 953 1,199 1,437 Total confectionery sales (US$mn) 336.0 360.0 380.0 397.0 437.0 253.2 296.9 296.0 277.3 264.5 Gum sales (US$mn) 24.00 25.00 26.00 26.84 29.09 16.43 18.58 17.98 16.48 15.50 Sugar confectionery sales (US$mn) 144.0 153.0 160.0 165.9 181.1 104.0 120.7 119.2 110.9 105.3 Chocolate confectionery sales (US$mn) 168.0 182.0 194.0 204.3 226.8 132.8 157.7 158.9 149.9 143.7 e/f=BMI estimate/forecast Source: National Institute of Statistics, BMI © Business Monitor International Ltd Page 56 Venezuela Agribusiness Report Q3 2010 Mass Grocery Retail The country's mass grocery retailers MGR Value Sales By Format 2005-2014 benefited from high GDP growth rates between 2004 and 2007, as proceeds from the windfall oil revenues were redirected into the non-oil economy This increased the disposable incomes of the poorer segments of the population, although poverty and underemployment rates remain at worrying levels However, the ongoing contraction in investment in Venezuela and slowdown in private consumption support BMI's view that the country's economy will f=BMI forecast Source: National Institute of Statistics, BMI contract in 2010 In real terms, per capita consumption of food is expected to contract in 2010, with consumers affected by runaway inflation, which is particularly high for food and drink products Even when the economic uncertainties are omitted, the competitive environment in Venezuela is perhaps the toughest in Latin America, with private-sector retailers going head-to-head with the governmentsubsidised Mercal grocery chain As the firm does not operate on a profit-and-loss basis, and has almost unlimited (for now) access to expansion capital, its existence creates quite a challenge for the country's other retailers Thanks to bumper oil receipts and a policy of income redistribution over the review period, sales at MGRs have grown very quickly in the five years to 2008 However, because of the slowdown in the economy, local currency devaluation and ongoing supply problems, consumer confidence has taken a hit Therefore, in the five years to 2014, total MGR sales are expected to fall by just over 37% in US dollar terms, despite a 192% increase in local currency, to reach VEB89.1bn (US$8.9bn) In overall value terms, the convenience format is expected to be the main beneficiary of this projection by far, although a large proportion of this growth will be accounted for by Mercal © Business Monitor International Ltd Page 57 Venezuela Agribusiness Report Q3 2010 Table: Venezuela Mass Grocery Retail Value Sales By Format – Historical Data And Forecasts 2005 2006 2007 2008f 2009f 2010f 2011f 2012f 2013f 2014f Supermarkets (VEBbn) 7.869 8.813 9.870 10.660 12.104 14.380 18.542 24.321 30.782 36.974 Hypermarkets (VEBbn) 12.467 13.464 14.541 15.704 17.685 20.535 25.799 33.073 41.204 49.009 Convenience (VEBbn) 0.251 0.324 0.415 0.529 0.689 0.912 1.317 1.882 2.514 3.118 20.586 22.601 24.826 26.893 30.478 35.827 45.658 59.277 74.500 89.102 8.98 9.79 9.85 8.32 13.33 17.55 27.44 29.83 25.68 19.60 Supermarkets (US$bn) 3.669 4.109 4.602 4.971 5.644 3.344 3.987 4.054 3.848 3.697 Hypermarkets (US$bn) 5.813 6.278 6.780 7.323 8.246 4.776 5.548 5.512 5.151 4.901 Convenience (US$bn) 0.117 0.151 0.193 0.247 0.321 0.212 0.283 0.314 0.314 0.312 Total mass grocery retail sector (US$bn) 9.599 10.539 11.576 12.540 14.212 8.332 9.819 9.879 9.312 8.910 Total mass grocery retail sector (VEBbn) Total mass grocery retail sector growth, VEB, (y-o-y) f=BMI forecast Source: National Institute of Statistics, BMI Table: Sales Breakdown by Retail Format Type 2009 2019f Organised/MGR 55% 61% Non-organised/Independent 45% 39% Source: BMI © Business Monitor International Ltd Page 58 Venezuela Agribusiness Report Q3 2010 Trade Venezuela's trade balance, as expressed in US dollar terms, will stagnate at Trade Figures 2005-2014 around US$2.4bn over most of the forecast period Both imports and exports will be negatively impacted by the domestic and global economic crisis and currency devaluation, with the latter also suffering due to the worsening political situation In the period between 2009 and 2014, the value of exports is expected to post an 18% drop in US dollars, with imports growing at just under 3.4% Diplomatic relations with neighbouring Colombia are rocky, with f=BMI forecast Source: United Nations Conference On Trade and Development (up to 2006), BMI the conflict also potentially spilling over into commerce, despite the notable contribution of Colombian imports as a share of overall imports into Venezuela Trade between Venezuela and Colombia reached around US$7bn in 2008, with goods imported from Colombia including milk and other food items that have often been in short supply due to government-imposed price controls Additionally, the threat to appropriate Colombian assets in Venezuela could affect several Colombian food and drink firms Firms which have interests in Venezuela include dairy producer Alpina and food producer Grupo Nacional de Chocolates, which owns Venezuelan meat firm Industrias Alimenticias Hermo Venezuela © Business Monitor International Ltd Page 59 Venezuela Agribusiness Report Q3 2010 Even more significant would be a long- Dependent On Colombia term decline in trading relations between Venezuela Imports 2008 the two countries For example, Grupo Nacional de Chocolates currently generates around 10% of its sales in Venezuela and an official or unofficial boycott of Colombian products would significantly affect revenues Any action would likely be met with retaliation in Colombia, with Venezuelan Empresas Polar one firm that could be damaged by a retaliatory boycott Anecdotal evidence suggests that the f=BMI forecast Source: National Institute of Statistics, BMI trade between the two nations has already been impacted, with local newspaper El Universal reporting that imports of dairy products have been hit because Colombian suppliers are now reluctant to offer credit lines to Venezuelan importers The paper also reported that the trade crisis meant that there had not been any imports of meat for the thirty days to mid-September 2009 Colombian President Álvaro Uribe recently toured the border region to assure local producers that the government had a plan to lessen the impact via a reduction in the local sales tax and an improvement in road links with the rest of Colombia Meanwhile, Venezuelan President Hugo Chávez has suggested that alternative imports will be sourced from Brazil and Argentina These moves suggest that neither government expects a speedy resolution to the dispute Table: Food And Drink Trade Balance – Historical Data And Forecasts 2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f Exports (food, drink & tobacco) (US$mn) 257.7 125.9 122.7 120.3 82.1 79.1 76.2 73.2 70.3 67.3 Imports (food, drink & tobacco) (US$mn) 2,166 2,298 2,659 2,722 2,461 2,354 2,399 2,445 2,494 2,544 -1,908 -2,172 -2,537 -2,601 -2,379 -2,275 -2,323 -2,372 -2,424 -2,477 Balance (US$mn) f=BMI forecast Source: United Nations Conference On Trade and Development (up to 2006), BMI © Business Monitor International Ltd Page 60 Venezuela Agribusiness Report Q3 2010 Macroeconomic Forecast Recovery Prospects Remain Dim BMI View: Q409 GDP data confirmed our view that the Venezuelan economy will lag the rest of the region recovery-wise Post-devaluation government pump priming notwithstanding, we believe that private consumption and investment will continue to sag in 2010, weighed upon by blistering inflation, continued power shortages and President Hugo Chávez's ongoing hectoring of businesses Fourth quarter GDP data for Venezuela came in very close to our estimates, with real output contracting by 5.8% y-o-y This deterioration brought the full-year decline in GDP to 3.3% - we had pencilled in a 3.0% fall - marking the worst year since 2003 The government has pinned a large part of the blame on OPEC mandated oil production cuts and other exogenous factors, but we believe that the causal cocktail is more complex than this On the expenditure side of the equation domestic demand remained very soft, with private consumption falling by 6.8% y-o-y and shaving a whole 4.9 percentage points (pp) of growth Meanwhile, gross fixed capital formation recorded a sizeable 19.6% y-o-y drop, making its contribution to the headline figure a negative 6.9pp A fairly accommodative fiscal stance - real government spending rose by 2.1% y-o-y - did little to counteract these bleak dynamics, with a mere 0.4pp added to growth The fall-off in investment is hardly surprising in view of President Hugo Chávez's rough handling of the private sector, which has manifested itself in continued nationalisations and a plethora of unhelpful stipulations Poor access to hard currency - something that we not expect to change in any major way after the devaluation - has also placed serious constraints on investment, as many businesses have been forced to price capital goods imports at the expensive black market exchange rate Needless to say, persistently high inflation also makes the process of planning ahead very challenging, with few fixed points upon which to anchor revenue forecasts On the supply side, the picture looks equally glum with the all-important oil-sector extending its tumble in the final three months of 2009 Oil-sector production fell by 10.2% y-o-y, faster than the 9.2% drop registered in the preceding quarter The government has said that oil-output averaged 3.0mn barrels per day last year, with 364,000bpd trimmed to comply with OPEC quotas Non-oil output extended its decline too, falling by 4% The sharpest drops were recorded in sectors such as 'transport and storage' and 'trade and repair services', which contracted by 16.9% and 13.9%, respectively Going forward we remain sceptical about the recovery prospects in 2010, as evidenced by our out-ofconsensus projection for a 3.8% fall in growth - the government projects 0.5% growth Forced electricity rationing and recurring blackouts in conjunction with a likely uptick in inflation as a result of the devaluation will in our view continue to suppress domestic demand Although Chávez in all probability will open the fiscal taps wider ahead of September's legislative elections we believe that the real impact © Business Monitor International Ltd Page 61 Venezuela Agribusiness Report Q3 2010 of this on economic activity will be highly transient The main upside risk to our downbeat forecast would be a continued climb in oil prices, which would shore up domestic liquidity and possibly help cushion domestic consumption However, even in this scenario, we have a hard time envisaging anything but a sub-trend growth year for Venezuela Table: Venezuela - Economic Activity, 2007-2014 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f Nominal GDP, VEFbn 489.7 643.7 830.8 1115.1 1626.2 2341.7 3141.8 3906.7 Nominal GDP, US$bn 228.3 300.2 386.4 371.7 325.2 334.5 349.1 355.2 8.4 4.8 -3.3 -3.8 3.2 2.8 2.6 2.9 8218 10606 13402 12656 10870 10976 11243 11229 27.8 28.3 28.8 29.4 29.9 30.5 31.0 31.6 Industrial production index, % y-o-y, ave 6.9 4.8 1.0 1.3 2.3 3.2 3.3 3.1 Unemployment, % of labour force, eop 8.0 8.3 8.8 9.5 10.5 11.5 11.5 11.5 Real GDP growth, % change y-o-y GDP per capita, US$ Population, mn e f Notes: BMI estimates BMI forecasts Sources: BCV, IMF BMI Calculation; IMF; BCV © Business Monitor International Ltd Page 62 Venezuela Agribusiness Report Q3 2010 BMI Forecast Modelling How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a ‘general-to-specific’ method BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary During periods of ‘industry shock’, for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact Effective forecasting depends on appropriately-selected regression models BMI selects the best model according to various different criteria and tests, including, but not exclusive to: ! R2 tests explanatory power; Adjusted R2 takes degree of freedom into account ! Testing the directional movement and magnitude of coefficients ! Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ! All results are assessed to alleviate issues related to auto-correlation and multi-collinearity BMI uses the selected best model to perform forecasting It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s industry forecasting Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Within the Agribusiness industry, this intervention might include, but is not exclusive to, technology development that might influence future output levels (for example greater use of biotechnology), dramatic changes in local production levels due to public or private sector investment, the regulatory environment and specific areas of legislation, such as import and export tariffs and farm subsidies, changes in lifestyles and general societal trends, the formation of bilateral and multilateral trading agreements and political factors The following two examples show the demand (consumption) and the supply (production) of rice Note: the explanatory variables for both of them are quite similar, but the underlying economic theory is different © Business Monitor International Ltd Page 63 Venezuela Agribusiness Report Q3 2010 Example of Rice Consumption Model: (Rice Consumption)t = β0 + β1*(Real Private Consumption per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Population)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt Where: ! β are parameters for this function ! Real Private Consumption per capita has a positive relationship with Rice Consumption, if rice is a normal good in a particular country If rice is an inferior good in a country, the relationship is negative So the sign of β1 is determined by a specific product within a specific country ! When Inflation is high, people with rational expectations will consume ‘today’ rather than wait for ‘tomorrow’s high price to come Higher rice demand in Year t due to higher inflation in that year leads to an assumed positive sign of β2 ! The relationship between Real Lending Rate and Rice Consumption is expected to be negative When real lending rates increase, disposable incomes, especially for those with mortgage burdens etc, will decrease So the sign of β3 is expected to be negative ! Of course, other things being equal, growth in rice consumption can also be caused by growth in population Consequently, positive sign of β4 is expected ! Government Expenditure typically causes total disposable incomes to rise So the sign of β5 is expected to be positive ! Human behaviour has a trend: A high level of food consumption in previous years means there is very likely to be a high level of food consumption the next year So the positive sign of β6 is expected ! ε is the error/residual term Example of Rice Production Model: (Rice Production)t = β0 + β1*(Real GDP per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Rural Population)t + β5*(Government Expenditure)t + β6*(Food Production)t-1 + εt Where: ! The same as above, the relationship between Real GDP per capita and rice production depends on whether rice is normal or inferior good in that country © Business Monitor International Ltd Page 64 Venezuela Agribusiness Report Q3 2010 ! If high inflation is caused by food prices increasing, farmers will be more profitable Then they will supply more agricultural product (e.g rice) to increase their marginal (extra) profit, although this is tempered by the rising cost of other inputs in line with inflation ! There is a global move towards corporate farming, away from small holdings, in order to achieve greater agricultural productivity Corporate farming means more investment in the modes of production i.e agricultural machinery Higher real lending rates discourage investment, which in turn reduce production ! BMI assumes only the rural population has a positive effect on agricultural product supply ! With supportive government policy, other things being equal, rice production is expected to go up Government Expenditure is likely to play some role in supporting agribusiness ! Again, previous food production positively affects this year’s prediction ! y affects this year’s prediction © Business Monitor International Ltd Page 65 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... forecasting Venezuela' s GDP to have contracted 3.3% in 2009 and then again by 3.6% in 2010, growth in dairy consumption could be hit harder than we currently forecast Much will depend on the success of the government's production policies and on the price control regime © Business Monitor International Ltd Page 20 Venezuela Agribusiness Report Q3 2010 Venezuela Sugar Outlook BMI Supply View: The Venezuelan... International Ltd Page 18 Venezuela Agribusiness Report Q3 2010 Table: Venezuela –Butter Production, Consumption & Trade 2005 2006 2007 2008 2009e 2010f Butter Production, '000 1 tonnes 1.5 1.4 1.4 1.4 1.3 1.3 Butter Consumption, '000 1 tonnes 3.3 3.1 4.0 3.7 3.9 4.0 -1.8 -1.6 -2.6 -2.3 -2.3 -2.7 Butter Net Trade 1 Balance, '000 tonnes 1 Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI Table: Venezuela –Cheese... seeking a third term, Colombia will have a new president in 2010 This will present a good opportunity to reset relations between the two countries and normalise trade relations © Business Monitor International Ltd Page 13 Venezuela Agribusiness Report Q3 2010 Table: Venezuela –Coffee Production, Consumption & Trade 2005 2006 2007 2008 2009e 2010f Coffee Production, '000 1 60kg bags 800.00 820.00 862.00... consumption to increase © Business Monitor International Ltd Page 21 Venezuela Agribusiness Report Q3 2010 only marginally in 2010 as consumers' ability to purchase is constrained To 2014, we expect sugar consumption to grow by 9.8% on the high 2009 level to reach 1.15mn tonnes Table: Venezuela –Sugar Production, Consumption & Trade 2009e 2010f 2011f 2012f 2013f 2014f 665.0 599.1 608.5 630.0 651.0 675.0... experienced in recent months could, therefore, continue to hit the Venezuelan market unless the government relaxes its restrictive policies Seizures Continue Into 2010 In the first quarter of 2010, the government took control of another two of the country's sugar mills On © Business Monitor International Ltd Page 22 Venezuela Agribusiness Report Q3 2010 March 9, the government moved in to run Santa Elena mill... 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 25 Venezuela Agribusiness Report Q3 2010 Venezuela Cocoa Outlook BMI Supply View: Cocoa, like coffee, was once a mainstay of the Venezuelan economy... © Business Monitor International Ltd Page 26 Venezuela Agribusiness Report Q3 2010 to increase production and the government has also reportedly invested US$2mn in reopening a chocolate factory in Sucre State As the price of oil slides, other potential export earners, such as cocoa, could see increased interest In June 2010, a new Socialist Corporation of Venezuelan Cacao was launched to administer... devastated cocoa farms in neighbouring Brazil However, with much of Venezuela' s stock of cocoa trees fairly old, it remains vulnerable to the disease which would severely hamper attempts to revitalise the sector © Business Monitor International Ltd Page 28 Venezuela Agribusiness Report Q3 2010 Venezuela Grains Outlook BMI Supply View: Venezuela is a major net importer of grain Though production rose... Business Monitor International Ltd Page 29 Venezuela Agribusiness Report Q3 2010 as Venezuela' s economy has grown Corn is a staple food in Venezuela and corn flour is used to make arpea, a flat unleavened bread Total corn consumption rose 73.0% from 2004 to 2009, outstripping growth in production Imports come primarily from the US However, we see demand dipping in 2010, due to reduced demand for feed from... Table: Venezuela – Wheat Production & Consumption Wheat Consumption, 1 '000 tonnes Wheat Net Trade 1 Balance, '000 tonnes 2005 2006 2007 2008 2009e 2010f 1,502.0 1,688.0 1,755.0 1,500.0 1,500.0 1,525.2 -1,502.0 -1,688.0 -1,762.0 -1,500.0 -1,500.0 -1,525.2 1 Notes: e/f=BMI estimate/forecast Source: USDA, BMI © Business Monitor International Ltd Page 31 Venezuela Agribusiness Report Q3 2010 Table: Venezuela ... '000 tonnes -1 4.1 -4 .3 -3 .6 -2 .3 -1 .2 0.2 Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI © Business Monitor International Ltd Page 16 Venezuela Agribusiness Report Q3 2010 Table: Venezuela. .. ('000 tonnes) -2 18.0 -1 44.0 -1 75.0 -3 89.0 -4 50.0 -4 38.5 Notes: e/f=BMI estimate/forecast Source: USDA, BMI © Business Monitor International Ltd Page 24 Venezuela Agribusiness Report Q3 2010 Risks... tonnes -1 ,200.0 -1 ,150.1 -1 ,120.5 -1 ,119.9 -1 ,119.0 -1 ,120.0 Notes: e/f=BMI estimate/forecast Source: USDA, BMI © Business Monitor International Ltd Page 30 Venezuela Agribusiness Report Q3 2010