Q4 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 Q4 2010 INCLUDES 5-YEAR FORECASTS TO 2014 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication Date: October 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 Q4 2010 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2010 CONTENTS Executive Summary SWOT Analysis Venezuela Agriculture SWOT Venezuela Political SWOT Venezuela Economic SWOT Venezuela Business Environment SWOT Industry Forecast Scenario 10 Venezuela Dairy Outlook 10 VENEZUELA Milk Production & Consumption 11 VENEZUELA Butter Production, Consumption & Trade 11 VENEZUELA Cheese Production, Consumption & Trade 11 VENEZUELA Whole Milk Powder Production, Consumption & Trade 12 VENEZUELA Milk Production & Consumption 14 VENEZUELA Butter Production, Consumption & Trade 14 VENEZUELA Cheese Production, Consumption & Trade 15 VENEZUELA Whole Milk Powder Production, Consumption & Trade 15 Venezuela Livestock Outlook 17 VENEZUELA Poultry Production, Consumption & Trade 18 VENEZUELA Pork Production, Consumption & Trade 18 VENEZUELA Beef & Veal Production, Consumption & Trade 19 VENEZUELA Poultry Production, Consumption & Trade 21 VENEZUELA Pork Production, Consumption & Trade 21 VENEZUELA Beef & Veal Production, Consumption & Trade 21 Venezuela Cocoa Outlook 22 VENEZUELA Cocoa Production, Consumption & Trade 23 VENEZUELA Cocoa Production, Consumption & Trade 24 Venezuela Sugar Outlook 25 VENEZUELA Sugar Production, Consumption & Trade 26 VENEZUELA Sugar Production, Consumption & Trade 28 Venezuela Coffee Outlook 30 VENEZUELA Coffee Production & Consumption 31 VENEZUELA Coffee Production & Consumption 34 Venezuela Grain Outlook 35 VENEZUELA Wheat Consumption 36 VENEZUELA Corn Production, Consumption & Trade 36 VENEZUELA Wheat Consumption 38 VENEZUELA Corn Production, Consumption & Trade 38 Competitive Landscape 40 Table: Agricultural Commodity Producers & Traders 40 Table: Agribusiness Suppliers 41 Table: Integrated Agricultural Producers 42 Commodity Price Analysis 43 Softs Update 43 Cocoa 43 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2010 Table: Cocoa 43 Coffee 44 Table: Coffee 44 Milk 45 Table: Milk 45 Sugar 46 Table: Sugar 46 Grains Update 47 Corn 47 Table: Corn 47 Rice 48 Table: Rice 48 Soybean 49 Table: Soybean 49 Wheat 50 Table: Wheat 50 Downstream Supply Chain Analysis 51 Industry Forecast Scenario 51 Consumer Outlook 51 Food 54 Total Food Consumption 54 Table: Venezuela Food Consumption Indicators - Historical Data & Forecasts 54 Canned Food 55 Table: Canned Food Value/Volume Sales - Historical Data & Forecasts, 2007-2014 55 Confectionery 56 Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2007-2014 57 Mass Grocery Retail 58 Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts, 2007-2014 59 Table: Sales Breakdown by Retail Format Type 59 Trade 60 Food & Drink Trade Balance - Historical Data & Forecasts 61 Macroeconomic Forecast 62 Industry Trend Analysis 64 Appropriation Remains Key Risk But Stronger Opposition And Drop In Inflation Seen As Positive 64 Company News Alert 66 AmBev Seeks Additional Scale In Difficult Venezuelan Market 66 Global Food & Drink View 68 Food and Drink Roundup : Core Views 68 BMI Food & Drink Core Views 72 BMI Forecast Modelling 73 How We Generate Our Industry Forecasts 73 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2010 Executive Summary BMI View: Following a 5.8% year-on-year (y-o-y) contraction in Q110, the Venezuelan economy grew by 10.4% quarter-on-quarter (q-o-q) in Q2, representing growth of -1.9% y-o-y Although it appears that the worst of the recession could be over, Venezuela's fragile economy remains in the grip of runaway inflation, with BMI holding to our forecast that inflation will reach 40.0% by the end of 2010 Indeed, food prices have increased by 41% in the past 12 months, despite the fact that the government has rolled out a popular chain of supermarkets selling food at discounted prices The Chávez administration has also been rocked by further criticism of its poor and corrupt management of food supply, as reports in the local and international press in June 2010 claimed that 80,000 tonnes of rotting food - including meat and powdered milk - had been found in warehouses belonging to the government The scandal came just weeks before crucial legislative elections held on September 26, which weakened Chávez's domination of the national assembly However, the thawing of diplomatic tensions with Colombia may help to ease concerns of Venezuela's food supply problems Cross-border trade had been suspended since July 2009, when Chávez broke off diplomatic relations with former Colombian President Álvaro Uribe, in retaliation against accusations that Venezuela was aiding guerrillas belonging to the Fuerzas Armadas Revolucionarias de Colombia (FARC) However, following the election of new Colombian President Juan Manuel Santos, it was announced in August 2010 that the two countries had resumed diplomatic relations and made a commitment to improve security along their shared border to prevent drug traffickers and guerrillas taking shelter or launching attacks from the area The agreement opens up the prospect of resuming trade, which should help improve supply of meat and dairy products in Venezuelan shops Key Views Corn production is forecast to fall by 23.3% year-on-year (y-o-y) in 2009/10, due to severe droughts and the constraints placed on producers by the government's restrictive farmgate prices 2009/10 coffee production is forecast to sink to 744,000 tonnes, down by 12.0% y-o-y due to dry weather conditions and poor management of the sector Production is forecast to fall again to 689,000 tonnes in 2010/11 and for the second year in succession, domestic demand is expected to outstrip supply Venezuela has therefore been forced to turn to imports, primarily from Brazil, in order to guarantee supply Venezuela is also being forced to increase its sugar imports as domestic production plummets We see production falling by 9.9% y-o-y in 2009/10 to 599,100 tonnes This has led to severe supply shortages; © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2010 however, the arrival of around 700,000 tonnes of imports, primarily from Brazil, has eased restrictions and in 2009/10, we see sugar consumption increasing by 13.2% y-o-y to 1.19mn tonnes On September 1, the Venezuelan government announced that it would authorise increases in the price of corn, rice and sunflower seeds at the production stage, in order to encourage planting of these crops for the 2010/11 harvest The move came following sustained complaints from Venezuelan agricultural producers that the regulated farmgate prices had not been adjusted in line with rising costs The price for a kilogram of yellow corn increased by 27.5% from VEF0.80 to VEF1.02, while a kilo of white corn rose by 27.8% from VEF0.90 to VEF1.15 Venezuelan imports of dairy products and poultry from Argentina have increased dramatically through 2010 Cheese imports shot up by 235% y-o-y in volume terms during the first seven months of 2010 to reach 1,924 tonnes The influx of imported produce is expected to impact negatively on domestic producers who have long complained to the government about the excess of cheap imported goods © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 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 Q4 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 Q4 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 Q4 2010 Macroeconomic Forecast Recession Easing BMI View: While we are still forecasting a 3.8% y-o-y contraction in Venezuelan real GDP for 2010, contrary to consensus we believe the worst of the recession has passed Although the consumption and net export outlook remains weak, an uptick in government consumption and investment from China is likely to help push the economy towards our above-consensus projection of 3.2% y-o-y in 2011 While we maintain our forecast for a 3.8% y-o-y real GDP contraction in Venezuela for 2010, with the economy posting its strongest headline figure for four consecutive quarters in Q210, at -1.9% y-o-y, it appears that the worst of the recession has passed This latest data implies growth is in line to hit our long-held end of year target of -3.8%, a level that consensus has converged to over the last few months While we see nothing to suggest President Hugo Chávez's distortive economic policies will let up anytime soon, in contrast to the recent downward trend in consensus we actually believe there are a number of risks to the upside of our growth forecast As a result, we would not be surprised to see better than expected growth in H210, and are forecasting real GDP growth above consensus at 3.2% y-o-y in 2011 Domestic Demand Still Very Weak Private Consumption Constrained By Inflation: Representing 70% of nominal GDP, private consumption is the most important determinant of Venezuela's economic trajectory With negative real interest rates of -12% in August, there is still little incentive for commercial banks to lend out money, particularly as we project consumer price inflation to hit 25% y-o-y by end-2010 (from 30% in August) Indeed, the chart below demonstrates the downward trend in client loan growth, and until there is a significant uptick in lending, something looking highly unlikely over the medium term, consumption should remain in decline due to lack of access to credit Moreover, higher inflation will continue to exacerbate the weak consumption outlook, due to the persistent erosion of real wages and reduction of what little disposable income there is left in the economy Investment Outlook Still Weak: Despite the recent US$650mn settlement on the forced nationalisation of cement producer Holcim, the country's business environment remains dismal, with a score of 4.4 out of 100 in the 'investor protections' subcomponent of our proprietary business environment ratings, ranking the Venezuela 163rd of 167 economies worldwide As a result, we see little scope for a major uptick in gross fixed capital formation (GFCF) originating from the private sector anytime soon, as the risk of government expropriation remains very high Indeed, recent GFCF growth figures reflect the perceived risk of Chávez's socialist policies, with four consecutive quarters of contraction continuing in Q210 with a 0.8% y-o-y drop © Business Monitor International Ltd Page 62 Venezuela Agribusiness Report Q4 2010 That said, following years of underinvestment in the country's major industries, notably the infrastructure sector, we believe there is considerable potential for profitable return on investments in Venezuela While the private sector may unable or unwilling to exploit such opportunities, bilateral investment from overseas allies is likely to increase, a view supported by the recent rise in foreign direct investment (FDI) from China, in the form of US$600mn investment in the Puerto Cabello port and US$7.5bn in Venezuela's railways (see our online service, September 3, 'Chinese Investment Not Enough') However, given that this uptick in investment is likely to be drawn out over a number of years, we are still forecasting a 10% y-o-y contraction in fixed investment for 2010 Government Consumption To Rise: Given that 2010 is an election year, we expect government consumption to peak in Q310 in the run up to the legislative vote on September 26, as Chávez tries to build support for the ruling Partido Socialista Unido de Venezuela (PSUV) In Q210 government consumption was the only component of GDP that contributed positively to growth, at 0.5 percentage points (pps), and this is likely to rise throughout the remainder of the year Furthermore, should the government's social development fund, which is to be financed by US$3bn of Petróleos de Venezuela (PdVSA) debt, start spending, we believe there is additional potential for increased public consumption to limit the severity of recession in H210 Forex Regulations Hit Net Exports: Imports picked up recently, rising 41.0% quarter-on-quarter (q-o-q) in Q210 We attribute much of this growth to an increased supply of dollars in the economy, as the government's new exchange rate system is providing on average, an additional US$50mn a day to the foreign exchange markets The rise in imports coincided with a 2.2% q-o-q contraction in exports, meaning the country's net exports contributed -0.7pp to GDP in Q210 We also have concerns over the country's ability to maintain current levels of oil production (see our online service, September 8, 'Oil Production Decline Highlights Production Concerns') and a sustained decline in oil exports over the medium term would lead to a greater deterioration in net exports That said, we are still projecting -28.1% y-o-y for net exports in 2010, and a more moderate -3% y-o-y in 2011 Risks To Outlook The major risks to outlook come to the upside For one, Venezuela's recession in the latter stages of 2009 and early 2010 was exacerbated by severe droughts, as the Guri dam, which is responsible for 70% of national power ground to a halt With local sources suggesting the dam is near maximum capacity (270 metres), industrial production could pick up dramatically in H210 (albeit from a very low base), providing a much-needed boost to the national accounts Secondly, with our Commodities team forecasting relatively stable oil prices in 2010 and 2011, a sharp uptick in global demand could significantly boost earnings for the largest industry in the economy, although this is not our core scenario at present © Business Monitor International Ltd Page 63 Venezuela Agribusiness Report Q4 2010 Industry Trend Analysis Appropriation Remains Key Risk But Stronger Opposition And Drop In Inflation Seen As Positive Venezuelan president Hugo Chávez has again signalled his intention to nationalise large parts of the country's food industry by announcing the expropriation of assets belonging to two major agribusiness firms During his weekly television address Chávez announced that all of the land owned by a subsidiary of UK-based meat producer Vestey Foods Group would be nationalised and that property owned by Spanish-Venezuelan agricultural input provider Agroislena would also be taken over Food shortages coupled with the rising cost of living are one of the most serious threats to Chávez's popularity and in response he has made it clear that he intends to nationalise large parts of the food industry This process has seen the government seize control of plants belonging to the country's largest food firm Empresas Polar, US food giant Cargill, Mexican bread maker Gruma and also take almost full control of the nations coffee industry with the seizure of the country's two largest coffee processors, Fama de America and Café Madrid In 2010 the process took a new turn with Chávez turning his attention to the retail sector and taking control of the Exito retail network controlled by French grocery giant Casino The latest acquisitions come after the president's ruling party lost its two-thirds majority in the country's September 26 elections and seem to indicate that Chávez remains convinced that such nationalisations can bring down food prices, which have been one of the principal factors behind a drop in his popularity The moves again highlight the risk posed to any firms operating in the country, although a stronger opposition could provide some limit on the presidential power to force through nationalisations and also hint at the possible appeal of an alternative in the 2012 presidential elections Greater scrutiny within the legislature could provide something of a curb on Chávez's regime; BMI believes a weaker policymaking process could be favourable for Venezuela, as more checks and balances are placed on Chávez's distortive economic policies As a result, the current pace of the so called 'Bolivarian revolution' is likely to slow down in our view, meaning some possible respite for food companies currently threatened by nationalisation A second factor at work to limit the speed of appropriations is a dip in the inflation rate since Chávez took control of the black market for US dollars Following years of distortive economic policies, a major lack of domestic food (and other goods) supplies has increased Venezuela's reliance on imports, consequently making price stability heavily contingent on the exchange rate After the government devalued the Bolivar in January, inflation moved sharply higher, from 19.8% year-on-year (y-o-y) in January to 45.4% © Business Monitor International Ltd Page 64 Venezuela Agribusiness Report Q4 2010 y-o-y in June (see chart) However, a decision to take control of the black market exchange rate in June means that the government has almost total control over the currency market and has meant that CPI has fallen from 31.8% y-o-y to 28.5% y-o-y in September Coming Down Venezuela - Inflation, CPI y-o-y % chg And m-o-m % chg annualised 3mma Source: BMI, BCV We had previously forecast that inflation could reach 40% by the end of 2010 50% by the end of 2011, a situation that may have forced the government to adopt increasingly drastic attempts to gain control of the food market However, an increased control of the exchange rate is looking like a possible quick-fix method to control domestic prices and can therefore be expected to continue - effectively meaning that the Venezuelan state is providing hefty discounts for all imported goods A drop in inflation and increased political opposition can both be viewed as positive for companies threatened by nationalisation However, this has to be balanced against the fact that the nationalisation rhetoric has not subsided, while the decision to appropriate assets belonging to Vestey and Agroislena suggests that other leading food companies will still have to factor in this risk when weighing up the viability and earnings potential of their Venezuelan operations © Business Monitor International Ltd Page 65 Venezuela Agribusiness Report Q4 2010 Company News Alert AmBev Seeks Additional Scale In Difficult Venezuelan Market AmBev, the Latin American arm of brewing giant Anheuser-Busch InBev, has announced that it is merging its Venezuelan operations with local brewer Cerveceria Regional The Venezuelan firm is part of the Cisneros Group and the deal will see Cerveceria Regional take an 85% stake in the combined operations, with AmBev retaining a 15% share The move can be interpreted as an attempt to build scale and market share in the difficult, but high potential Venezuelan market Over the past few years, the alcoholic drinks industry in Venezuela has been under attack from Venezuela's president, Hugo Chávez, who has introduced a raft of new taxes on beer and spirits and has made it more difficult for importers to access the US dollars they need to purchase branded spirits from multinational firms Chávez has attacked the lack of morals in Venezuela's society and raised concerns that too many Venezuelans drink beer on street corners Chávez began his crusade against the alcohol industry by banning beer trucks that traditionally acted as mobile markets selling beer in the country's poorer neighbourhoods In addition, Chávez announced that stores near schools, churches and cultural centres would not be allowed to sell alcohol and that the government would no longer make government dollars available to import luxury spirits such as whiskies Despite these moves, in the years leading up to the economic downturn, alcohol consumption continued to rise at both ends of the socioeconomic spectrum Venezuela already has the highest per capita beer consumption rate in Latin America and between 2002 and 2007 consumption in volume terms increased by 13% However, consumption has been hit by the economic recession and BMI is forecasting that this, when combined with government measures to reduce consumption combined, will take their toll over our forecast period We expect that beer volumes will post negative growth in 2010 and that volume growth of only 1.8% will be seen over our five-year forecast period In fact, it will only be in 2014 that beer volume sales will return to their 2008 levels © Business Monitor International Ltd Page 66 Venezuela Agribusiness Report Q4 2010 The strong growth in the years leading up to the downturn hint Zero Growth In US$ Terms Venezuela Food Consumption at the opportunities on offer in the country In line with our wider view of Venezuela, 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 NB nominal growth rate; exchange rate for US$ values varies with year; e/f=BMI estimate/forecast Source: National Institute of Statistics, BMI 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 our consumption forecasts © Business Monitor International Ltd Page 67 Venezuela Agribusiness Report Q4 2010 Global Food & Drink View Food and Drink Roundup : 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 In major developed markets, fiscal austerity measures and slow recovery in employment continue to weigh on our expectations for growth in the medium term However, over the last quarter, emerging markets have again demonstrated their ability to outperform the wider market and have continued to attract investment One major trend during the quarter has been the increased role of private equity groups in the food and drink sector, which we think is indicative of its 'safe haven' status and the uncertainty surrounding the strength of the wider economic recovery Slow Pace of Recovery Weak Recovery In Private Sector Employment US - Employment ('000s) In many markets the strength of the recovery has disappointed, with little sign of a resurgence in consumer demand across the US, Western Europe or emerging markets that were particularly hard hit by the downturn such as Venezuela and Romania In line with our wider economic outlook and our core short-term view, we believe the recovery in demand will continue to be muted in developed markets Our caution can be traced to the fact that unemployment in many Source: Bureau of Labor Statistics markets remains high (see first chart) and shows little sign of retracing, with companies still wary about the strength of the recovery and holding back on hiring Meanwhile, many consumers who are still in employment have yet to be hit in the pocket by the downturn, but this is set to change as fiscal austerity measures are implemented A rapid drop in interest rates, monetary expansion and the delaying of tax rises and spending cuts has so far cushioned the impact of the financial crisis for many consumers However, with these factors set to unwind going into 2011, any uptick in consumer spending is expected to remain relatively weak As such, we forecast that the next 12 months will continue to be difficult for many producers, with much of the growth over the period likely to be attributed to base effects rather than a resumption of strong demand growth or premiumisation © Business Monitor International Ltd Page 68 Venezuela Agribusiness Report Q4 2010 Mixed Picture In Emerging Markets Over the last few months, emerging markets Heinz Off The Pace Revenues From Emerging Markets (%) have again shown their importance, delivering significant outperformance over their developed market peers, in line with our core long term view However, even in those markets that bounced back strongly from the global downturn, such as Brazil and China, we remain cautious, due to signs of slowing growth in H210 as the knock-on effects from a weaker US and eurozone weigh on global demand Despite this relatively subdued short-term outlook, the long-term picture is undoubtedly Y = last financial year, Y-1 = previous financial year etc Source: Investor Relations, Bloomberg, BMI favourable and investment continues to flow into the most attractive regions Notable investments over the last quarter have included Diageo and Heineken building new plants in South Africa and Starbucks buying outs its local partner to take full control of its Brazilian operations - a move that we see as a prelude to a significant uptick in investment Japanese firms, faced with the prospect of flatlining demand in their domestic market, have continued to push aggressively into the rest of Asia and are starting to look further afield Drinks producer Suntory is reportedly considering purchases in emerging Europe, the Middle East and North Africa following its 2009 acquisition of Europe-based Orangina © Business Monitor International Ltd Page 69 Venezuela Agribusiness Report Q4 2010 As the battle for market share in the major emerging markets become more competitive, another of our Excise Hammer Blow Russia Beer Sales (Volume) - Historical Data & Forecasts 2002-2014 core views is that firms will increasingly look further afield for growth One firm that is already making this leap is Nestlé, which over the last quarter stepped up its focus on frontier markets by announcing it was to invest close to US$45mn in the Democratic Republic of Congo and that it was to become a majority shareholder in the Guatemalan Mahler Group - a development that ties in with our f = BMI forecast Source: SABMiller, Baltika, Trade Press, BMI favourable outlook for the Central American region as a whole Multinational firms that have been slower to jump aboard the emerging market bandwagon now have to play catch-up and most have announced a new focus on their emerging market businesses One firm that fits this profile is Heinz, which has significantly less emerging markets exposure than its peers (see second chart) The firm's CEO, William Johnson, said in early September that it 'continues to look for those M&A opportunities that exist in emerging markets and I can tell you we are not spending much time looking for M&A opportunities in the US or Western Europe, our focus is entirely on the emerging world' This announcement was soon followed by the disclosure of plans for major expansion in Vietnam Drop In Tax Revenues Leads to Increased Concern About Alcohol Abuse Our core view that government legislation will continue to play a role in marginalising unhealthy foods and drinks has come to fore in the alcohol sector over the latest quarter, with a rise in excise duties in several key markets This trend is likely to have been accelerated by a drop in tax revenues as a result of the downturn, with excise duties an easy way for governments to help prop up their tax income Perhaps the most significant movement has been in Russia, where restrictions on the sale of alcohol and hefty tax hikes have led to higher average prices and a significant drop in consumption BMI forecasts a 10% drop in beer volumes during 2010 (see third chart) Other markets hit by tax hikes include Turkey, Greece and Spain In Turkey, a 35% duty increase since the start of the year has led us to cut our forecasts by 3.5%, while a rise in duty on spirits in Greece is expected to put significant downward pressure on consumption over our five-year forecast period Spirits sales are already in decline due to the country's economic turmoil and three increases in the tax rate since © Business Monitor International Ltd Page 70 Venezuela Agribusiness Report Q4 2010 the start of 2010 have put further pressure on the sector Meanwhile, the industry association for the Spanish spirits sector, Federación Española de Bebidas Espirituosas (FEBE), has said that a planned increase in sales tax there could lead to a 10% decline in spirits sales - a view that is also reflected in our forecasts Private Equity Sniffing Out Food Opportunities One trend that has only emerged in the last few months has been a significant increase in private equity (PE) activity within the food and drink sector Assets are being shifted between different private equity funds (secondary buyouts), while the industry is also taking a leading role in acquiring assets put up for sale by major multinationals On the sell side, PE firms are eager to exit investments and book profits after being unable to so for the last two years when deal activity was frozen over A secondary buyout is currently an attractive exit route thanks to the guaranteed price of return This is in contrast to a backdrop of ongoing volatility in equity markets and the recent underperformance of IPOs In general, IPO exits have traded down in the aftermarket and this trend was cemented by the July floatation of online grocery retailer Ocado, which traded down after launch There has also been a dearth of strategic acquirers, with many major players still focused on maintaining their earnings and building up their balance sheets rather than investing for longer term growth While this appears to be gradually changing as 2010 goes on, an expected uptick in activity following Kraft's successful capture of Cadbury has failed to materialise in any meaningful way On the buy side, the relative ease of secondary buyouts offers funds the opportunity to put to work the pile of capital they are sat upon PE firms are happy to invest in relatively low growth defensive assets rather than return capital to investors unused, and we believe the defensive nature of food is one factor drawing in private equity investors, with a moderate return regarded as preferable to no return at all PE also has a track record of success in the sector, with investment in neglected brands and segments generating significant returns It is notable that the businesses being snapped up, such as frozen food group Findus Italy, frozen food retailer Picard Surgeles and potentially United Biscuits, are in relatively unfashionable parts of the industry Here, PE firms see opportunities that multinationals, focused on more high profile parts of their operations such as functional products and emerging markets, have ignored © Business Monitor International Ltd Page 71 Venezuela Agribusiness Report Q4 2010 BMI Food & Drink Core Views Short-term Outlook Consumer demand in developed markets remains too weak to support a strong rebound in sector growth A stuttering recovery in the US and Eurozone will increasingly way on the performance of emerging Markets Commodity price volatility will continue to affect producer earnings Premiumisation will remain on hold Private labels and off-trade alcohol drinks will outperform their respective sectors Discount grocery retailers will continue to gain market share Government fiscal policy - austerity - will be unsupportive of industry growth Government monetary policy - the reduced likelihood of further rate hikes - will help limit demand destruction Major takeovers will remain scarce leaving room for the private equity sector to step in We continue to favour private consumption-led economies, over export-oriented states for consumer goods investment Long-term Outlook Companies with strong Emerging Market exposure will continue to outperform Emerging Market multinationals will increasingly pursue frontier market investments Tension between producers and retailers will remain 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; notably alcohol 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 72 Venezuela Agribusiness Report Q4 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 73 Venezuela Agribusiness Report Q4 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 74 Venezuela Agribusiness Report Q4 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 75 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... forecasting Venezuela' s GDP to contract by 3.8% in 2010, © Business Monitor International Ltd Page 15 Venezuela Agribusiness Report Q4 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 16 Venezuela Agribusiness Report Q4 2010 Venezuela. .. in 2010 as Venezuela is expected to suffer a second successive year of economic contraction With food prices still rising consumers are likely to see their budgets pressed even further in the coming year To 2014, forecast cocoa consumption to fall to 13,980 tonnes © Business Monitor International Ltd Page 22 Venezuela Agribusiness Report Q4 2010 VENEZUELA Cocoa Production, Consumption & Trade 2009e 2010f... International Ltd Page 34 Venezuela Agribusiness Report Q4 2010 Venezuela Grain Outlook BMI Supply View: Venezuela is a major net importer of grain Though production rose rapidly through the first decade of the 20th century, consumption has also risen, fuelled by the fast oil-driven GDP growth through the middle years of this decade Corn is Venezuela' s major grain crop The vast majority of Venezuela' s corn... Ltd Page 21 Venezuela Agribusiness Report Q4 2010 and supply in Venezuela means that meat production will be highly dependent on government policy If prices are subjected to further controls as Venezuela' s economy contracts, production could fall further as more operators leave the sector Another factor that will have a great influence over demand for livestock is the price of oil With Venezuela so... International Ltd Page 14 Venezuela Agribusiness Report Q4 2010 VENEZUELA Cheese Production, Consumption & Trade 2005 2006 2007 2008 2009e 2010f Cheese Production, '000 1 tonnes 59.3 63.4 70.1 70.6 74.2 75.4 Cheese Consumption, 1 '000 tonnes 70.0 71.0 73.4 75.9 79.0 79.7 Cheese Net Trade 1 Balance, '000 tonnes -10.7 -12.1 -10.4 -11.9 -14.1 -4.3 1 Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI VENEZUELA Whole... 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 24 Venezuela Agribusiness Report Q4 2010 Venezuela Sugar Outlook BMI Supply View: The Venezuelan sugar sector has declined dramatically in the past 24... 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 26 Venezuela Agribusiness Report Q4 2010 March 9, the government moved in to run Santa Elena mill... to build 14 ethanol plants in Venezuela, with the first four to be completed by the end of 2009 Unless sugar cane production can be significantly raised, this will put further pressure on the countries already face tight sugar supplies © Business Monitor International Ltd Page 29 Venezuela Agribusiness Report Q4 2010 Venezuela Coffee Outlook BMI Supply View: The best Venezuelan coffee comes from the... BMI VENEZUELA Cheese Production, Consumption & Trade 2009e © Business Monitor International Ltd 2010f Page 11 Venezuela Agribusiness Report Q4 2010 Cheese Production, '000 1 tonnes 74.2 75.4 76.6 78.1 79.5 81.3 Cheese Consumption, 1 '000 tonnes 79.0 79.7 80.2 80.5 80.7 81.1 Cheese Net Trade 1 Balance, '000 tonnes -14.1 -4.3 -3.6 -2.3 -1.2 0.2 1 Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI VENEZUELA. . .Venezuela Agribusiness Report Q4 2010 Industry Forecast Scenario Venezuela Dairy Outlook BMI Supply View: The past few years have been eventful for the dairy sector in Venezuela, as the government has begun to exert itself by taking over farms and one of the country's leading milk processing ... Page Venezuela Agribusiness Report Q4 2010 Executive Summary BMI View: Following a 5.8% year-on-year (y-o-y) contraction in Q110, the Venezuelan economy grew by 10.4% quarter-on-quarter (q-o-q)... completeness of any information hereto contained Venezuela Agribusiness Report Q4 2010 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2010 CONTENTS Executive Summary ... tonnes -1 ,200.0 -1 ,274.0 -1 ,228.8 -1 ,225.7 -1 ,222.3 1,221.5 Notes: e/f=BMI estimate/forecast Source: USDA, BMI © Business Monitor International Ltd Page 36 Venezuela Agribusiness Report Q4 2010