Q3 2011 www.businessmonitor.com VeneZueLa agribusiness Report INCLUDES BMI'S FORECASTS ISSN 2040-0489 Published by Business Monitor International Ltd VeneZueLa AGRIBUSINESS REPORT Q3 2011 INCLUDES 5-YEAR FORECASTS TO 2015 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: July 2011 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 © 2011 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, 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+44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2011 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 2011 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2011 CONTENTS Executive Summary Key Forecasts Key Trends and Developments SWOT Analysis Venezuela agriculture SWOT Venezuela Political SWOT Venezuela Economic SWOT 10 Venezuela Business Environment SWOT 11 Industry Forecast Scenario 12 Venezuela Grain Outlook 12 Venezuela Wheat Consumption & Trade 13 Venezuela Corn Production, Consumption & Trade 14 Venezuela Wheat Consumption & Trade 17 Venezuela Corn Production, Consumption & Trade 17 Venezuela Sugar Outlook 18 Venezuela Sugar Production, Consumption & Trade 19 Venezuela Sugar Production, Consumption & Trade 21 Venezuela Coffee Outlook 23 Venezuela Coffee Production & Consumption 24 Venezuela Coffee Production & Consumption 27 Venezuela Cocoa Outlook 29 Venezuela Cocoa Production, Consumption & Trade 29 Venezuela Cocoa Production, Consumption & Trade 31 Venezuela Livestock Outlook 33 Venezuela Livestock Outlook 33 Venezuela Poultry Production, Consumption & Trade 34 Venezuela Pork Production, Consumption & Trade 35 Venezuela Beef & Veal Production, Consumption & Trade 35 Venezuela Poultry Production, Consumption & Trade 38 Venezuela Pork Production, Consumption & Trade 38 Venezuela Beef & Veal Production, Consumption & Trade 38 Venezuela Dairy Outlook 40 Venezuela Milk Production & Consumption 41 Venezuela Butter Production, Consumption & Trade 41 Venezuela Cheese Production, Consumption & Trade 42 Venezuela Whole Milk Powder Production, Consumption & Trade 42 Venezuela Milk Production & Consumption 45 Venezuela Butter Production, Consumption & Trade 45 Venezuela Cheese Production, Consumption & Trade 46 Venezuela Whole Milk Powder Production, Consumption & Trade 46 Commodity Price Analysis 47 Monthly Softs Update 47 Cocoa 47 COCOA 48 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2011 Coffee 49 COFFEE 50 Milk 51 MILK 52 Sugar 52 SUGAR 53 Monthly Grains Update 54 Corn 54 CORN 55 Rice 55 RICE 56 Soybean 57 SOYBEAN 58 Wheat 58 WHEAT 59 Downstream Supply Chain Analysis 60 Consumer Outlook 60 Food 62 Table: Venezuela Food Consumption Indicators - Historical Data & Forecasts 62 Canned Food 63 Table: Canned Food Value/Volume Sales Historical Data & Forecasts 63 Confectionery 64 Table: Confectionery Value/Volume Sales - Historical Data & Forecasts 65 Mass Grocery Retail 66 Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 67 Table: Sales Breakdown by Retail Format Type 67 Trade 68 Table: Food & Drink Trade Balance Historical Data & Forecasts 69 Economic Analysis 70 Macroeconomic Forecast 74 Venezuela - Economic Activity 76 Global Food & Drink View 77 Food & Drink Roundup Q111: Core Views 77 BMI FOOD & DRINK CORE VIEWS 82 BMI Forecast Modelling 83 How We Generate Our Industry Forecasts 83 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2011 Executive Summary BMI View: On April 21 2011, Venezuela departed from the Community of Andean Nations (CAN) The decision to withdraw was taken in 2006, in opposition to Peru and Colombia signing free trade agreements (FTA) with the United States However, in the weeks leading up to the end of Venezuela's subscription to CAN, President Hugo Chávez travelled extensively throughout the Andean region to strengthen bilateral relations, leading to the signing of trade agreements with Bolivia, Colombia and Ecuador and ongoing trade negotiations with Peru The exit from CAN should not, therefore, impact too strongly on the country's agricultural sector Also through Q211, Venezuela's agricultural sector has been hit by further heavy rains and landslides, that killed at least 21 people and caused extensive damage to infrastructure Almost 300,000 acres of agricultural land in the northwestern state of Zulia were flooded, badly damaging milk and livestock production Key Forecasts We anticipate that demand for butter and cheese will remain strong over our forecast period, as government price controls make them affordable for lower income consumers After growing by 13.0% from 2005-2010, we forecast growth in cheese consumption to increase by 14.2% from 2010-2015 to reach 126,530 tonnes We see growth in butter consumption increasing from 12.8% from 2005-2010 to 22.7% from 2010-2015 to reach 3,038 tonnes at the end of our forecast period We now see coffee production increasing by 3.1% y-o-y in 2010/11 to reach 748,000 bags The 2011/12 harvest should benefit from the renewal of fertilisation programmes as part of the government's Agricultural Plan We currently forecast a y-o-y increase of 12.3% to take output to 840,000 bags The heavy rains in December 2010 hit the 2010/11 corn harvest and we forecast production rising by just 4.3% y-o-y to 1.71mn tonnes Out to the end of our forecast period to 2014/15, we expect output to continue to rise and are forecasting production to grow by 27.1% on the 2009/10 level to reach 2.08mn tonnes We see beef production falling by 1.7% y-o-y to 342,200 tonnes in 2010/11 due to high energy and feed costs and consequent lack of profitability for producers Furthermore, heavy rains and mudslides from February-May 2011 flooded pasture lands in northwestern Venezuela, impacting livestock production © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2011 We estimate that sugar production fell by 27.1% y-o-y in 2009/10 to 485,000 tonnes The lack of profitability has deterred investment and many mills now stand idle We see production increasing by only 4.3% y-o-y in 2010/11 to 505,800 tonnes as land expropriations and price controls continue to take their toll Over our forecast period to 2014/15, we expect sugar production to increase by 17.7% on the low 2009/10 level to reach 571,000 tonnes Key Trends and Developments In April 2011, the Venezuelan government declared cocoa to be a primary need, or basic staple product, and unveiled plans to form the Corporación Socialista del Cacao Venezolano (Socialist Corporation of Venezuelan Cocoa) to administer all aspects of the cocoa supply chain The corporation will bring together public and private sector companies and other organisations and associations involved in cocoa production and distribution The government has previously criticised the cocoa sector for focusing primarily on the export market and serving the interests of elite classes The costs of milk production in Venezuela have shot up by almost 30% over the past 14 months, according to a study by the Venezuelan Cattle Federation, Fedenaga The study, carried out in the highland dairy-producing region of Merida State, showed that rising prices of vaccines, medicines, antibiotics, oil and other inputs had pushed up production costs by 29.8% This is making dairy production increasingly unsustainable: farmgate prices remain at VEF2.20/litre, while producers claim that the real cost of production is VEF3.26 According to Fedenaga, in order to make ends meet, small and medium-sized producers are reducing feed supplies and cutting back on investment, which will further damage output The federation called for the government to review the remit of the National Fund for Dairy Production, which currently does not grant any additional support to smaller producers In April 2011, the governments of Colombia and Venezuela reached an agreement to restore trade relations following a meeting in Cartagena on April At the end of July 2009, Chávez froze diplomatic relations with Colombia in response to Colombia allowing US troops to operate out of Colombian bases in their fight against drug production The agreement will ensure that cross-border trade is not damaged by Venezuela's exit from the Community of Andean Nations trade pact as from April 22 - the departure was prompted by Venezuela's opposition to free trade agreements signed between Colombia and Peru with the US The new Colombia-Venezuela agreement included the offer to export 100,000 tonnes of Colombian dairy products across the border, including liquid, evaporated and powdered milk, cheese, butter, whey and milk-based drinks The deal also opens the way for the sale of 6,500 heads of Colombian cattle, in addition to 3,000 live cattle, 3,500 pregnant cows, 60,000 day-old chicks and 100,000 hatching eggs © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2011 In January 2011, the government launched Mission Agro Venezuela, a new programme designed to support the country's agricultural production The programme aims to boost domestic production and lessen reliance on imports, thus improving Venezuela's food security Mission Agro Venezuela will provide low-interest loans, machinery and technical assistance to the country's agricultural producers - from small to large-scale landowners VEF9.9bn (US$2.3bn) has been committed to the programme As part of the programme, a census is also being carried out of Venezuela's agricultural sector By mid-April, 586,000 growers had registered for the programme, according to government data In April 2011, over 20,000 producers received government assistance of VEF554mn (US$129mn) through the Mission Agro Venezuela programme at an event at Municipio Ture, in Portuguesa State According to Juan Carlos Loyo, the Minister for Agriculture and Lands, the funds will support the development of an additional 150,000 hectares of farmland for the cultivation of rice and white and yellow corn In May 2011, the government approved a 30% increase in the farmgate prices of corn, rice and soybeans, which will come into effect on August 15 Producers' associations had been petitioning the government to raise the controlled prices since the beginning of 2011, to counter the rise in input costs that have hit farmers The price of white corn will rise from VEF1.15 to VEF1.50 per kilo, while yellow corn will increase from VEF1.02 to VEF1.33 per kilo On June 2011, the government announced an increase in the controlled price of sugar from VEF3.73 per kilo to VEF4.89 This should bring some relief to beleaguered producers who have seen profitability eroded in recent years However, the move may prove insufficient to reverse the sector's decline: producers had requested for the regulated price to rise to VEF6.40 per kilo © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2011 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 2011 contracted 1.8% in Q111 and we see oil production stalling over the next few years as this trend of limited investment continues Furthermore, we also note that the construction sector contracted by a massive 7.7% y-o-y in Inflating Growth Q111, also due to a Venezuela - Money Supply (M2), % chg y-o-y dearth of investment Perhaps more concerning is that while private consumption did post yearon-year increases, we believe that it was largely the result of government Source: BMI, BCV consumption Indeed, the government became the primary importer in the country, in particular bringing in staple and intermediary goods, which helped retail sales growth reach an average of 42.7% y-o-y during the first two months of 2011 As such, we highlight that in order for Q111 growth rates to be sustained, the government will have to continue pursuing expansive monetary and fiscal policies, which we believe will become increasingly difficult Government Stimulus Running Out Of Stimulus A slowdown of the government's expansive macroeconomic policies and the absence of private investment will pose the largest drags on the economy Indeed, it will become increasingly difficult for the government to continue the recent pace of monetary and fiscal expansion - which has seen money supply growth accelerate from 14% y-o-y in September 2010 to 28% in March, and transfer expenditures reaching to 9.0% of GDP by Q310 (the most recent data) We believe a continuation of the current policy mix is likely to continue creating inflationary pressures, which will not only reduce consumers' purchasing power, but could also lead to another devaluation of the currency (although not our core view at present) Moreover, our Oil and Gas team expects prices of Brent crude to moderate in H211, to average US$103/bbl in 2011, which would reduce the amount of revenues available for the government © Business Monitor International Ltd Page 71 Venezuela Agribusiness Report Q3 2011 Levelling Off Venezuela - Oil Production & Exports Source: BMI, BCV The second biggest drag on the economy will be a continued shortfall of private investment, which is unlikely to pick over the medium term Given the current set of unfavourable policies aimed at the private sector—reflected by Venezuela's poor Business Environment rating score of 32.3, relative to Colombia's 49.6 and Peru's 51.0—we believe the situation will not improve in the run up to the 2012 Presidential elections To compensate for the lack of activity in the private sector, the government will be forced to continue intervening in the economy, further crowding out private firms Along with high inflation rates, which averaged 29.1% y-o-y in the first three months of 2011, these obstacles will deter businesses from investing any time soon Indeed, our infrastructure team forecasts for the sector, which is highly dependent on long-term investment, is a meagre growth of -0.1% in 2011 and 0.9% in 2012 Investors Asking Questions In the context of a poor business environment, investors will be extremely attentive to the trajectory of oil prices and the performance of state-owned oil giant PdVSA Furthermore, amongst other factors such as political risk, a slowdown in economic activity over the coming quarters could dent any optimism created on the back of Q111 numbers This could lead to declines in investor appetite for Venezuelan debt, which would make it that much harder for the government to sustain the current economic policy mix Risks To Outlook In the light of upcoming presidential elections in 2012, the economy's growth path will depend significantly on the trajectory of oil prices The government will no doubt want to spend more to stimulate the economy and import more to meet private consumers' demand in search for votes © Business Monitor International Ltd Page 72 Venezuela Agribusiness Report Q3 2011 Therefore, as long as oil prices remain high, the government's fiscal outlook should remain adequate On the other hand, a reversal in prices, although not in our core scenario, would be a cause of concern Moreover, unless the government is capable of fomenting the private investment and increasing domestic production, over the next few years the country will continue to depend on oil prices and the goodwill of fixed income investors © Business Monitor International Ltd Page 73 Venezuela Agribusiness Report Q3 2011 Macroeconomic Forecast Oil To Drive Shaky Recovery In 2011 BMI View: We expect Venezuela to post real GDP growth at 1.9% in 2011 and 2.4% in 2012, up from the 1.4% contraction of 2010 While this implies that the economy is beginning to recover from its deep recession, huge structural imbalances within the economy to remain, and we believe that this recovery will be driven in large part by rising oil prices In our view Venezuela's economic recovery from its two-year recession will be shaky, as we expect positive real GDP growth to be accompanied by chronic inflation, more nationalisations and stagnant oil production Given that these factors are likely to weigh on private consumption and fixed investment, we believe that the majority of economic expansion will be fuelled by higher oil prices and the resulting uptick in petroleum-related activity Moreover, this is likely to leave the country more reliant on the oil industry than ever before, and more vulnerable to exogenous shocks Our forecasts for real GDP growth to come in at 1.9% in 2011 and 2.3% in 2012 imply that the economy will not return to its pre-recession size until Q412 at the earliest Inflation and Nationalisations Key Obstacles: The Venezuelan government's distortive economic policy mix underpins the country's weak growth outlook Supply side shortages combined with the recent currency devaluation have pushed inflation to the highest level in the region, at 29.8% y-o-y in February, providing little incentive for banks to lend out money to fund consumption or investment In addition, the ever-present threat of state appropriation, which is likely to rise in the run up to the 2012 presidential election, will in our view continue to threaten foreign investment Oil The Only Comfort: In the face of these economic challenges, Venezuela has become increasingly dependent on the oil industry as a source of finance and economic growth Indeed, oil accounts for over 95% of the country's exports, a significant portion of fiscal revenues, and the petroleum sector directly makes up over 10% of GDP While the lack of investment into the sector may limit future domestic production, rising global oil prices helped to pull the economy out of recession in late 2010 This offers some optimism for Venezuelan domestic demand, as the outlook for oil prices is still good - our commodities team project the OPEC Basket to average US$85.0 per barrel (bbl) in 2011 and US$90.0bbl in 2012, up from US$83.0bbl in 2010 - meaning that increased revenue activity should continue to feed through into other areas of the economy over the medium term Petrodollars Offer Boost to Demand We expect the increased number of Petrodollars in the economy to have a positive impact on private consumption, particularly as the state will be able to fund an increasing volume of direct transfers Private consumption also stands to benefit from a gradual decline in inflation over the coming years Indeed, even © Business Monitor International Ltd Page 74 Venezuela Agribusiness Report Q3 2011 though inflation will remain elevated, given that it is such a politically-sensitive issue, we believe that Chávez will be particularly aggressive with his subsidies and price caps in order to rein in the headline figure in the run up to the presidential election in 2012 In light of this, we are projecting private consumption to positively contribute a mild 1.8 percentage points (pp) and 1.4pp to real GDP in 2011 and 2012 respectively The outlook for GFCF in Venezuela is more mixed, and we maintain our long-held view that there will be a marked split between the type of investment that Venezuela receives Traditional investment from local companies is likely to remain subdued, along with a large proportion of foreign direct investment, due to both the inflation and nationalisation risks from the Chávez regime That said, the outlook for investment from China and other politically-allied counties, including Turkey, Belarus and Russia, is more encouraging in our view as they try to gain access to Venezuela's vast oil wealth On balance, with several multibillion dollar investments already in the pipeline, for example the railway scheme financed by the Chinese, we project GFCF to contribute 0.2pp and 0.5pp to real GDP growth in 2011 and 2012 respectively Given that we anticipate a mild uptick in domestic demand, we also expect a concomitant increase in import demand over the medium term Even though exports receipts will rise in line with the price of oil, we believe imports will grow faster, leading to deterioration in the country's net export position While Venezuela's strict currency controls could cap the total number of imports, repeated debt issuances combined with increased dollar revenues from state-owned oil company Petróleos de Venezuela (PDVSA) should provide enough supply to support this scenario Overall, we project net exports to negatively contribute 0.7pp in 2011 and 0.3pp in 2012 to headline real GDP growth Risks to Outlook The risks to our outlook are well balanced, and in a large part depend on the trajectory of global oil prices On the one hand, higher-than-expected prices in 2011 and beyond could provide a significant boost to the state's coffers, increase the supply of dollars in the economy and stimulating private consumption On the other hand, while not our core scenario, lower-than-expected prices could the opposite, and could even drag the economy back into recession again Elsewhere, we see political risks in the run up to the election as a major risk to our outlook While it is too early to determine exactly what will unfold in Venezuela over the next couple of years, we caution that the scope for political unrest could still derail this fragile economic recovery © Business Monitor International Ltd Page 75 Venezuela Agribusiness Report Q3 2011 Venezuela - Economic Activity 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Nominal GDP, VEFbn 643.7 830.8 1056.5 1355.5 1725.7 2116.7 2482.3 2854.6 Nominal GDP, US$bn 300.2 387.4 245.7 315.2 335.1 282.2 248.2 248.2 3.2 -2.5 -1.4 1.9 2.3 2.4 2.9 2.7 10606 13436 8366 10536 10994 9090 7848 7704 27.9 28.4 28.8 29.3 29.7 30.2 30.6 31.0 Industrial production index, % y-o-y, ave 4.8 1.0 1.3 2.3 3.2 3.3 3.1 2.9 Unemployment, % of labour force, eop 8.3 8.8 9.5 10.5 11.5 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; World Bank/BMI calculation/BMI; BCV © Business Monitor International Ltd Page 76 Venezuela Agribusiness Report Q3 2011 Global Food & Drink View Food & Drink Roundup Q111: Core Views Developments within the global food and drink industry in the past three months have continued to reflect and support BMI's core industry views Of particular importance in the last quarter has been the impact of rising commodity prices - a factor that BMI was particularly quick to recognise was likely to impact margins and also the valuation of food and drink firms Rising global prices are also becoming an increasingly important factor in emerging markets, where surging inflation threatens to undermine confidence and put downwards pressure on growth in spending power Over the quarter we have seen encouraging signs of a consumer recovery in several important developed markets, including the US, Germany and France However, we expect high unemployment, fiscal austerity measures and looming rate hikes to put pressure on growth rates over the longer term Growth in emerging markets has continued to impress and for many firms has acted to offset the lacklustre rates of growth in developed markets Commodity Prices Pressuring Margins In October 2010 the food and drink team wrote that 'the weakness of the consumer recovery and the increase in commodity prices mean that there is significant potential for the food sector to underperform the wider equity index' This view has played out extremely well, with the Stoxx Food and Beverage Index significantly underperforming the Global Index in the past four months (see first chart) The accuracy of this prediction can be partly linked to our correct view on commodity prices In October, the commodities team expected grain prices to continue moving higher due to a significant deterioration in northern hemisphere harvests, which was expected to have a knock-on effect on other important inputs such as dairy and meat The situation has played out very much in line with this prediction, with food commodities outpacing the wider commodity index over the past six months Most major food groups have now reported their results for the fourth quarter of 2010 and they tell a clear story, with margins falling due to rising costs In response food groups have announced that they will begin to raise prices more aggressively in 2011 and firms such as Unilever have suggested that they have learnt from the experience of 2008, when they priced up and down effectively However, BMI is concerned that the consumer environment could make price increases harder to implement than in the past, with the slow pace of economic recovery continuing to weigh on consumer confidence and with retailers very reluctant to accept price increases In addition, since 2008 consumer savviness has increased in many important markets - for example private labels and discount stores have made huge strides in the US and parts of Europe where they had previously had little presence, such as in Spain and Italy, meaning © Business Monitor International Ltd Page 77 Venezuela Agribusiness Report Q3 2011 that any attempt to pass on price increases could simply strengthen the trend towards lower priced products and retail formats Underperfoming A general ramp up in commodity prices, including in a sharp increase in the price of Stoxx Global 1800 Food & Beverage Index vs Stoxx Global 1800 Index energy, has acted to drive up inflation in both developed and emerging markets This has led to a general move towards hawkishness among central banks In emerging markets, food inflation has been particularly rampant, with double-digit levels of growth seen in many parts of the market Given the disproportionate impact of rising prices on poorer sections of societies in countries such as Source: BMI, Reuters China and Brazil, such governments are under pressure to cool down their economies and they have already begun raising interest rates We are pencilling in further rate hikes in these and several other important emerging markets including India and Indonesia over the coming year, which will put downwards pressure on growth momentum Signs Of A Consumer Recovery In Developed Markets In line with our expectations the consumer sector in developed markets struggled to deliver significant growth through much of 2010, with price sensitivity the preeminent theme and private labels and the discount sector gaining ground However, there were some positive signs starting to emerge towards the end of the year and we now believe that 2011 could be the real year of recovery For example, in the US there were signs that the US discount sector - characterised by the firms Family Dollar and Dollar General - which delivered dynamic growth during the downturn, started to slow towards the end of 2010 BMI believes this lower rate of growth (combined with improving results at mainstream retailers) can be attributed to an upturn in consumer confidence in the second half of 2010, combined with an improved outlook for GDP growth in 2011 The big downside risks for the US economy in 2011 - that taxes rise and unemployment benefits are not extended - actually turned into a major upside surprise in December 2010, after Congress not only approved an extension of the income tax regime and unemployment © Business Monitor International Ltd Page 78 Venezuela Agribusiness Report Q3 2011 benefits, but also cut payroll taxes by two percentage points This improvement in the consumer outlook will be greeted warmly by most retailers, but for discount operators, which have thrived thanks to the weak economic environment, a stronger retail sector could actually have a detrimental impact on results This is borne out by Family Dollar's sales growth slowing as 2010 progressed, with comparable sales in December climbing by just 4% Slow Improvement A similar story was seen in Europe, where the movement Unemployment (% of labour force, year average) towards discount stores seems to have peaked in many important markets, including Germany, the UK and France Germany proved to be one of the country's best positioned to bounce back from the economic downturn and this has been reflected in the relative growth of the retail sector For example, German retailer Rewe registered growth of 4% in its German sales during the year This growth was driven by the company's supermarket outlets, with growth up by 6.4%, f = BMI forecast Source: BLS, BMI but was weighed down by the underperformance of the company's Penny discount stores, which registered a 1.2% contraction in revenues The outperformance of the supermarket sector is in line with a strengthening of the domestic consumer market and is reminiscent of the two years leading up to the economic crisis, when questions were asked about the long-term prospects for the discount sector in the German market Emerging Markets Look Ever More Attractive Despite these signs of recovery in developed markets, we continue to believe that the pace of growth in the consumer sector over the next five years is unlikely to match the boom levels seen in the years leading up to the financial crisis Fiscal austerity measures are only now starting to be felt by the average consumer, while rising inflation means that consumers may also soon have to contend with rising interest rates and mortgage repayments Unemployment across the US and eurozone is also remaining stubbornly high and looks unlikely to fall significantly until we are some way into the economic recovery BMI has a relatively pessimistic outlook for employment in the US, believing that the credit boom actually masked massive structural problems in the US economy, for which there is no quick fix Because of this, we are © Business Monitor International Ltd Page 79 Venezuela Agribusiness Report Q3 2011 forecasting that unemployment will not go back to its pre-crisis lows over the next ten years (see second chart) Taken together this relatively muted outlook for demand over the longer term serves to underline our core view regarding the importance of emerging markets (EM) Over the past three months this strategy has once again been in the spotlight At 2011's CAGNY investment conference a large number of firms focused on the potential for growth in EM US multinationals have in general been slower than their European counterparts to embrace the EM opportunity (see third chart) However, this is gradually changing with firms such as Heinz and Campbell Soup all now paying much greater attention to their international operations Heinz was among the companies talking up its potential for EM European Firms In Front Revenues From Emerging Markets (%) growth and used the conference to announce an increase in its EM targets The firm now aims to generate 30% of its revenues from EM over the next five years, having previously had a goal of 20% by 2015 Heinz is a clear example of what can be achieved in a relatively short space of time through targeted investment in EM In the final quarters of 2010, Heinz was generating nearly 18% of its sales from EM This is up from just 14% in the previous Source: Nestle, Investor Relations, BMI Estimates financial year and demonstrates its rapid pace of expansion in this area, with the firm gaining significant ground in key markets such as China and Mexico The speed at which concentrated efforts can deliver results is illustrated by the success of Heinz's ketchup brand in Mexico, where distribution agreements with leading retailers and fast food outlets have seen its market share increase from 1% to 12% in just two years Us-food group Kellogg was also talking up its EM growth potential, stating that it expects around twothirds of its future growth to come from developing and emerging markets This is likely to be built around organic growth due to the lack of a significant cereal culture in many of the most important EMs (a fact that means there are a very limited number of suitable EM targets) and Kellogg is focusing on generating growth by stimulating the overall category and per capita consumption of cereal in countries © Business Monitor International Ltd Page 80 Venezuela Agribusiness Report Q3 2011 where it is not normally part of the diet As an example, the firm is pushing its Special K brand in South Korea, Mexico and Colombia by focusing on its weight-loss benefits Other firms focusing on the EM opportunity during the conference included coffee and jam maker JM Smucker and spice maker McCormick Currently Smucker generates nearly all of its revenues in North America, but used the conference to reveal it was exploring plans to enter the attractive Chinese market The firm revealed it was exploring a number of avenues for market entry, including an acquisition of or partnership with a local firm With a debt-to-EBITDA ratio of only 0.89, Smucker looks well positioned to make acquisitions and it has previously demonstrated an appetite for large-scale transformational takeovers Meanwhile, McCormick announced a target of generating 12% of its revenues from EM by 2015, which compares to 9% at present The firm highlighted the tremendous opportunity in India, where consumers traditionally buy spices in bulk, but where middle-class consumers are increasingly 'seeking the higher quality and convenience of branded products' With even medium-sized producers now seeking out acquisitions in EM, the battle to acquire attractive assets can only intensify, with a positive result for EM valuations While acquisitions can be a straightforward way to gain EM exposure, particularly for firms that have little or none, the success of Heinz has also demonstrated the enormous amount that can be done by simply investing in distribution and marketing, with many developed market firms already in possession of brands and products that have enormous potential for growth in EM countries Big Deals Could Be Back On the Agenda Strong growth in EMs combined with a return to growth in developed markets means that many firms look to be feeling more confident about their long-term prospects and we believe that this could spur a significant ramp up in M&A activity in 2011 During much of 2010 there was a general attitude of caution, with firms waiting to see which way the global economy was moving before committing to any big deals In Q111 we saw the first tentative steps in this direction, with PepsiCo purchasing a 66% stake in Russia's Wimm-Bill-Dann for US$3.8bn, General Mills looking set to buy a 50% stake in Yoplait for EUR800mn and Diageo agreeing to acquire Turkey's Mey Icki for US$2.1bn All of the major deals concluded by consumer groups in Q111 were bolt-on acquisitions and we are yet to see a return to the more transformative deals seen in the years leading up to the financial crisis, such as InBev's acquisition of Anheuser-Busch or Pernod Ricard's purchase of Absolut Maker Vin & Spirit However, with economies of scale such an important force in the food and drink sector, these kinds of deals are sure to eventually re-emerge and we think that they could once again be on the cards in 2011 Firms that we think are in a strong financial position to fund major acquisitions during 2011 include Diageo, Nestlé and SABMiller, with acquisitions seen as a viable way to prop up relatively lacklustre sales growth in developed markets One of our long-term core views is that multinationals with balanced developed and EM portfolios are best positioned for growth For EM-based firms this means that we see acquisitions in developed markets © Business Monitor International Ltd Page 81 Venezuela Agribusiness Report Q3 2011 are a priority as they look to develop better rounded companies with less volatile earnings This trend has been evident over the last six months with Colombia's largest food company Grupo Nacional de Chocolates announcing it is to purchase US cookie producer Fehr Foods for US$84mn, while Chilean wine producer Concha y Toro is to buy California-based Fetzer Vineyards from US drinks firm Brown Forman This follows on from Mexican bakery firm Grupo Bimbo announcing in November it is to acquire Sara Lee's North American bakery business for US$925mn and is a trend that we expect to gather pace as major firms in the EMs of Asia and Latin America start to look to develop businesses that can truly compete on a global scale BMI FOOD & DRINK CORE VIEWS Short-term Outlook Higher input costs will affect margins and raise tensions between producers and retailers Rising inflation will put pressure on demand in emerging markets Developed market growth returning but unlikely to match levels seen years leading up to the financial crisis due to: Government fiscal policy - austerity Government monetary policy - increasing likelihood of rate hikes due to rising inflation Long-term Outlook MNCs with balanced developed and EM portfolios are best positioned for growth 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 Brand builders will continue to leave sectors under threat from private labels 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 be the highest growth sector in developed markets Consolidation will continue as producers seek greater efficiencies Beverage companies will continue to invest in diversification away from carbonated beverages and into healthier subsectors Source: BMI © Business Monitor International Ltd Page 82 Venezuela Agribusiness Report Q3 2011 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 83 Venezuela Agribusiness Report Q3 2011 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 84 Venezuela Agribusiness Report Q3 2011 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 85 [...]... Ltd Page 21 Venezuela Agribusiness Report Q3 2011 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 22 Venezuela Agribusiness Report Q3 2011 Venezuela Coffee Outlook BMI Supply View: The best Venezuelan coffee... International Ltd Page 11 Venezuela Agribusiness Report Q3 2011 Industry Forecast Scenario Venezuela Grain Outlook BMI Supply View: Venezuela is a major net importer of grain Though production rose rapidly through the first decade of the 21st century, consumption has also risen, fuelled by oil-driven economic growth Corn is Venezuela' s major grain crop The vast majority of Venezuela' s corn is grown... activity Tensions between Venezuela and Colombia remain heightened owing to the former's belligerent rhetoric However, we continue to view the possibility of outright military conflict as improbable given underlying economic interdependencies Strengths Weaknesses © Business Monitor International Ltd Page 9 Venezuela Agribusiness Report Q3 2011 Venezuela Economic SWOT Venezuela is rich in natural... State In May 2010, Venezuelan officials seized control of a Fama de América processing plant in the state of Carabobo after talks to agree a price for the © Business Monitor International Ltd Page 26 Venezuela Agribusiness Report Q3 2011 plant broke down In January 2011, the Dutch Longreef Investment Group, which was a shareholder in Fama de América, announced that it would sue the Venezuelan government... would sell Venezuelan coffee at its forecourts in the US While production is not yet large enough to meet both domestic demand and support an export industry, if Venezuelan coffee could find popularity on world markets as neighbouring Colombian coffee has done, then investment in the sector could increase © Business Monitor International Ltd Page 28 Venezuela Agribusiness Report Q3 2011 Venezuela Cocoa... BMI © Business Monitor International Ltd Page 29 Venezuela Agribusiness Report Q3 2011 Chávez Government Creates Socialist Corporation For Cocoa Sector In April 2011, the Venezuelan government declared cocoa to be a primary need, or basic staple product and unveiled plans to form the Corporación Socialista del Cacao Venezolano (Socialist Corporation of Venezuelan Cocoa) to administer all aspects of the... 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 32 Venezuela Agribusiness Report Q3 2011 Venezuela Livestock Outlook BMI Supply View: After strong growth in the 1990s and the first few years of the 21st century, Venezuelan beef production... exchange rate at VEF4.3/US$ in January 2011 Throughout 2010, Venezuela used two exchange rates for US dollars: VEF4.3 and VEF2.6, depending on the category of the product Sugar was one of the commodities that benefited from the preferential exchange rate; hence, sugar imports will be considerably © Business Monitor International Ltd Page 19 Venezuela Agribusiness Report Q3 2011 more expensive going forward... rather than relying on oil and public investment (both of which are dependent on high oil prices) Strengths Weaknesses © Business Monitor International Ltd Page 10 Venezuela Agribusiness Report Q3 2011 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.. .Venezuela Agribusiness Report Q3 2011 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 ... tonnes -2 37.03 -2 76.96 -2 82.07 -2 89.69 -2 69.80 -2 94.52 e f Notes: BMI estimates BMI forecasts Sources: USDA, BMI © Business Monitor International Ltd Page 34 Venezuela Agribusiness Report Q3 2011 Venezuela. .. -1 ,550.1 -1 ,475.2 -1 534.7 -1 ,586.9 -1 ,644.4 -1 ,702.7 f Notes: BMI estimates BMI forecasts Sources: USDA, BMI © Business Monitor International Ltd Page 13 Venezuela Agribusiness Report Q3 2011 Venezuela. .. completeness of any information hereto contained Venezuela Agribusiness Report Q3 2011 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2011 CONTENTS Executive Summary