Q4 2011 www.businessmonitor.com VeneZueLa agribusiness Report INCLUDES BMI'S FORECASTS ISSN 2040-0489 Published by Business Monitor International Ltd VENEZUELA AGRIBUSINESS REPORT Q4 2011 INCLUDES 5-YEAR FORECASTS TO 2015 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: October 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, 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 2011 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2011 CONTENTS Executive Summary SWOT Analysis Venezuela Agricultural SWOT Venezuela Political SWOT Venezuela Economic SWOT 10 Venezuela Business Environment SWOT 10 Supply Demand Analysis 11 Venezuela Grain Outlook 11 VENEZUELA Wheat Production, Consumption & Trade 12 VENEZUELA Corn Production, Consumption & Trade 13 VENEZUELA Wheat Production, Consumption & Trade 16 VENEZUELA Corn Production, Consumption & Trade 16 Venezuela Sugar Outlook 18 VENEZUELA Sugar Production, Consumption & Trade 19 VENEZUELA Sugar Production, Consumption & Trade 21 Venezuela Coffee Outlook 22 VENEZUELA Coffee Production, Consumption & Trade 23 VENEZUELA Coffee Production, Consumption & Trade 26 Venezuela Cocoa Outlook 28 VENEZUELA Cocoa Production, Consumption & Trade 28 VENEZUELA Cocoa Production, Consumption & Trade 30 Venezuela Livestock Outlook 32 VENEZUELA Poultry Production, Consumption & Trade 33 VENEZUELA Pork Production, Consumption & Trade 34 VENEZUELA Beef & Veal Production, Consumption & Trade 34 VENEZUELA Poultry Production, Consumption & Trade 37 VENEZUELA Pork Production, Consumption & Trade 37 VENEZUELA Beef & Veal Production, Consumption & Trade 37 Venezuela Dairy Outlook 38 VENEZUELA Milk Production, Consumption & Trade 39 VENEZUELA Butter Production, Consumption & Trade 39 VENEZUELA Cheese Production, Consumption & Trade 40 VENEZUELA Whole Milk Powder Production, Consumption & Trade 40 VENEZUELA Milk Production, Consumption & Trade 43 VENEZUELA Butter Production, Consumption & Trade 43 VENEZUELA Cheese Production, Consumption & Trade 43 VENEZUELA Whole Milk Powder Production, Consumption & Trade 44 Commodity Price Analysis 45 Monthly Grains Update 45 Corn 45 Rice 46 Soybean 47 Wheat 48 Monthly Softs Update 49 Cocoa 49 Coffee 50 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2011 Palm Oil 51 Sugar 52 Industry Forecast Scenario 53 Food 53 Table: Food Consumption Indicators Historical Data & Forecasts 55 Table: Canned Food Value/Volume Sales Historical Data & Forecasts 56 Table: Fish 57 Table: Oils & Fats 58 Table: Confectionery Value/Volume Sales Historical Data & Forecasts 60 Mass Grocery Retail 62 Table: Mass Grocery Retail Value Sales by Format Historical Data & Forecasts 62 Table: Sales Breakdown by Retail Format Type (%) 63 Table: Food & Drink Trade Balance Historical Data & Forecasts 64 Macroeconomic Forecast 65 TABLE: VENEZUELA - ECONOMIC ACTIVITY 67 BMI Forecast Modelling 68 How We Generate Our Industry Forecasts 68 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2011 Executive Summary BMI View: Venezuela's inflation rate accelerated even faster than expected during Q311, reaching 28.9% in July, and averaging 26.7% for the period from January to July The inflation rate was further fuelled after the move in June by the government of President Hugo Chávez to increase price caps on regulated food products - including beef, bread, corn meal, milk and sugar - in order to ease concerns over shortages Despite increasing the mandated price for certain produce, the government remains committed to the price control regime In a bid to combat inflation, on July 14 2011, President Chávez signed into law a new price control mechanism aimed to combat speculation and hoarding The Law for the Protection and Defence of Economic Rights for People to Access Goods and Services (or Law for Just Prices and Costs) permits the government to impose upper limits on the price charged for a range of goods and services, including prepared food stuffs such as the ubiquitous arpeas The government frequently holds the private sector responsible for the country's spiralling inflation by artificially inflating prices Chávez argues that the new law will stabilise prices by preventing hoarding and excess profiteering Key Forecasts We see real GDP growing by 1.9% year-on-year (y-o-y) in 2011 However, inflation is forecast to reach 29.0% In 2010/11 we anticipate that sugar production will increase by only 1.5% y-o-y to 492,300 tonnes on the low 2009/10 level as land expropriations and price controls continue to take their toll We see only minimal growth of 0.3% y-o-y in 2011/12 Over our forecast period to 2014/15, we expect sugar production to increase by 11.8% on the 2009/10 level to reach 542,100 tonnes We now forecast that coffee production will decline by 4.1% y-o-y to 695,000 bags in 2010/11, with domestic demand expected to outstrip supply for the third successive year In 2011/12, we currently forecast a y-o-y increase of 15.4% to take output to 802,000 bags In 2011, we expect the reliance on imports to continue to shore up demand for poultry and see consumption increasing by 2.0% y-o-y at 904,000 tonnes High import prices and a drop in domestic production are likely to impact on beef consumption and we currently forecast demand to dip by 1.6% y-o-y to 492,200 tonnes Out to 2015, poultry demand is forecast to grow by 9.0% on the 2010 level to 967,000 tonnes, while beef consumption is projected to rise by 9.3% to reach 546,300 tonnes Cheese production grew strongly from 2004/05-2009/10, increasing by 32.7% to 78,720 tonnes Out to 2014/15, we forecast cheese production to grow 12.8% on the 2009/10 level to reach © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2011 88,820 tonnes We believe that butter production remained flat between 2004/05 and 2009/10, at 1,900 tonnes The sector is underdeveloped and in need of modernisation We see production increasing only marginally over our forecast period and have pencilled in an increase of 0.7% on the 2009/10 level to take output to 1,910 tonnes in 2014/15 Key Trends And Developments The Venezuelan livestock sector continues to be held back by the government-controlled price regime which is squeezing profitability and holding back production The mandated price for beef was last reviewed in 2008 and with input costs rising, producers have long been pressing for the maximum sale and retail prices to be increased In June 2011, the government announced an increase of 29.2% in the cost of a kilo of prime beef, from VEF17.60 to VEF22.74 The maximum prices of second and third class beef, live cattle and carcass meat were all raised The news will be welcomed by producers; however, some producers' representatives have argued that the price adjustments not go far enough to compensate for the increases in production costs In July 2011, the Cuban agriculture ministry announced that more than 900 Cuban agricultural specialists are currently advising Venezuelan farmers as part of the Bolivarian Alliance for the Americas (ALBA) regional cooperation organisation The Cuban experts have a range of specialisms, including plant health experts, veterinarians and irrigation technicians and are training Venezuelan producers in areas such as organic farming and environmental sustainability In August 2011, the Colombian Trade Minister Sergio Diaz-Granados announced that the Venezuelan government had repaid debt worth US$820mn owed to Colombian exporters This leaves US$450mn in debt still outstanding The Venezuelan government has launched an investigation into the claims after accusing importers of inflating the debt to obtain foreign currency, which is restricted by the Venezuelan government Some of these debts related to the agricultural sector, with Venezuela importing significant quantities of livestock and other produce from across the border The resolution of the trade dispute with Colombia will help to ease concerns about food shortages in Venezuela Venezuela's trade deficit for coffee continues to widen As a result of falling domestic output, the government has had to resort to increased imports to guarantee supply, with imports rocketing to 205,000 60kg bags in 2009/10 and a forecast 335,000 bags in 2010/11 Much of this has come from Brazil and Nicaragua As recently as 2005, Venezuela was a net exporter of coffee This has further exacerbated tensions in the sector, with producers claiming that the government is effectively subsidising foreign coffee producers, as the price paid for imported coffee can be more than 50% more than the fixed price for domestic producers © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2011 In September 2011, Empresas Polar - Venezuela's largest food and drinks company - struck back at government accusations that its Harina Pan pre-cooked corn flour is no longer a Venezuelan brand José Villalba, the president of the Autonomous Service for Intellectual Property (SAPI), a government office which registers trademarks and invention patents, had previously stated that the Harina Pan brand, which is emblematic of the production of the traditional arepa dish, is no longer Venezuelan, as the company had sold the rights to the Canadian firm Deutsche Tran Trustee Inc (DTTI) In response, Empresas Polar published a press release countering the claim and stating that, 'Harina Pan has always been and always will be a Venezuelan product.' The company claimed that the government was seeking to create confusion among the product's customers in order to detract attention from the problems facing the producers of white corn who are struggling to source domestic raw materials, as well as the difficult situation facing manufacturers of pre-cooked corn flour, who are incurring losses as a result of the government's price controls The dispute highlights the widespread discord surrounding the lack of profitability resulting from the fixed price regime, as well as the politics of nationalism that continue to exert a strong force over the agro-industrial sector Expropriations continue to hit the agroindustrial sector In July 2011, Chávez's government expropriated rice producer Llano Arroz and put the firm under the control of state-owned Arroz del Alba, calling for the company to be transformed into a 'socialist unit of production', with workers taking on far more decision-making power © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2011 SWOT Analysis Venezuela Agricultural 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 2011 Venezuela Political SWOT Strengths Weaknesses Setting Venezuela apart from its neighbours, the country has enjoyed a long tradition of democracy, with elections held regularly since 1959 A consistently high electoral turnout points to a strong level of public participation in politics The military has traditionally played a dominant role in politics and possible future intervention by disgruntled officers - especially following the attempted coup in 2002 - is not beyond the realms of possibility The meltdown of the traditional party structure has left a political vacuum where the opposition should be Relations between President Hugo Chávez and the US remain strained, as Chávez has accused Washington of interfering in Venezuela's domestic affairs and threatened to cut off oil supplies to the US Opportunities Given prudent investment, areas such as infrastructure and education could flourish thanks to the fiscal windfalls brought by devaluation of the bolivar and elevated oil prices, bringing longer-term stability to the economy and diminishing the risks of civil turbulence Threats President Chávez's ability to rule by decree continues to undermine the country's democratic institutions The national assembly has pushed through several laws that were previously overturned in the constitutional referendum in 2007 The weakening of democracy in the country threatens to raise political risk and poses a threat to private business activity Tensions between Venezuela and Colombia remain heightened owing to the former's belligerent rhetoric However, we continue to view the possibility of outright military conflict as improbable given underlying economic interdependencies © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2011 Table: Fish 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Frozen fish production, tonnes 122,931 91 117,068 46 113,969 34 118,234 98 123,509 78 129,047 96 135,938 06 142,593 42 Frozen fish production, tonnes, % chg y-o-y 6.39 -4.77 -2.65 3.74 4.46 4.48 5.34 4.90 Frozen fish sales, tonnes 135,174 44 131,497 72 128,310 34 132,624 52 137,928 76 143,497 86 150,419 34 157,106 56 Frozen fish sales, tonnes, % chg y-o-y 12.24 -2.72 -2.42 3.36 4.00 4.04 4.82 4.45 Frozen fish sales, kg per capita 4.84 4.63 4.45 4.53 4.64 4.76 4.92 5.06 Frozen fish exports, tonnes 189.50 82.88 123.73 114.96 106.18 97.41 88.63 79.86 Frozen fish exports, tonnes, % chg y-o-y -23.65 -56.26 49.29 -7.09 -7.63 -8.26 -9.01 -9.90 Frozen fish imports, tonnes 12,432.0 14,512.1 14,464.7 14,504.4 14,525.1 14,547.3 14,569.9 14,593.0 Frozen fish imports, tonnes, % chg y-o-y 142.08 16.73 -0.33 0.27 0.14 0.15 0.16 0.16 Frozen fish balance, tonnes 12,242.5 14,429.2 14,341.0 14,389.5 14,418.9 14,449.9 14,481.2 14,513.1 Frozen fish balance, tonnes, % chg y-o-y 150.49 17.86 -0.61 0.34 0.20 0.21 0.22 0.22 Preserved fish (other) production, tonnes 55,550.3 53,964.4 53,126.2 54,279.9 55,706.5 57,204.4 59,068.0 60,868.0 Preserved fish (other) production, tonnes, % chg y-o-y 3.73 -2.85 -1.55 2.17 2.63 2.69 3.26 3.05 Preserved fish (other) sales, tonnes 83,573.7 86,596.7 85,512.8 87,221.7 88,902.0 90,744.7 92,979.8 95,159.0 22.77 3.62 -1.25 2.00 1.93 2.07 2.46 2.34 Preserved fish (other) sales, kg per capita 2.99 3.05 2.97 2.98 2.99 3.01 3.04 3.07 Preserved fish (other) exports, tonnes 4,775.05 3,770.76 2,928.49 3,285.48 3,506.22 3,669.41 3,816.61 3,967.04 -4.44 -21.03 -22.34 12.19 6.72 4.65 4.01 3.94 32,798.5 36,403.0 35,315.0 36,227.3 36,701.6 37,209.7 37,728.4 38,258.0 Preserved fish (other) sales, tonnes, % chg y-oy Preserved fish (other) exports, tonnes, % chg yo-y Preserved fish (other) imports, tonnes © Business Monitor International Ltd Page 57 Venezuela Agribusiness Report Q4 2011 Table: Fish Preserved fish (other) imports, tonnes, % chg yo-y Preserved fish (other) balance, tonnes Preserved fish (other) balance, tonnes, % chg y-o-y 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f 68.05 10.99 -2.99 2.58 1.31 1.38 1.39 1.40 28,023.4 32,632.2 32,386.6 32,941.8 33,195.4 33,540.3 33,911.8 34,290.9 92.99 16.45 -0.75 1.71 0.77 1.04 1.11 1.12 e/f = BMI estimate/forecast Source: United Nations, BMI Table: Oils & Fats 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f 17,925.8 17,191.0 16,802.6 17,337.2 17,998.2 18,692.2 19,555.7 20,389.7 5.45 -4.10 -2.26 3.18 3.81 3.86 4.62 4.26 381,557 36 297,081 36 289,596 86 296,081 86 299,837 22 303,845 26 308,092 31 312,381 00 Crude soya-bean oil sales, tonnes, % chg y-oy 41.77 -22.14 -2.52 2.24 1.27 1.34 1.40 1.39 Crude soya-bean oil sales, kg per capita 13.66 10.47 10.04 10.11 10.09 10.07 10.07 10.07 Crude soya-bean oil exports, tonnes 3.59 3.38 3.17 2.97 2.76 2.55 2.35 2.14 -5.44 -5.76 -6.11 -6.51 -6.96 -7.48 -8.09 -8.80 363,635 11 279,893 70 272,797 36 278,747 60 281,841 72 285,155 53 288,538 92 291,993 37 44.22 -23.03 -2.54 2.18 1.11 1.18 1.19 1.20 363,631 52 279,890 32 272,794 19 278,744 63 281,838 96 285,152 97 288,536 58 291,991 23 44.22 -23.03 -2.54 2.18 1.11 1.18 1.19 1.20 Crude soya-bean oil production, tonnes Crude soya-bean oil production, tonnes, % chg y-o-y Crude soya-bean oil sales, tonnes Crude soya-bean oil exports, tonnes, % chg yo-y Crude soya-bean oil imports, tonnes Crude soya-bean oil imports, tonnes, % chg yo-y Crude soya-bean oil balance, tonnes Crude soya-bean oil balance, tonnes, % chg y-o-y © Business Monitor International Ltd Page 58 Venezuela Agribusiness Report Q4 2011 Table: Oils & Fats 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Corn oil production, tonnes 32,275.1 32,453.6 32,547.9 32,418.0 32,257.5 32,088.9 31,879.2 31,676.6 Corn oil production, tonnes, % chg y-o-y -0.69 0.55 0.29 -0.40 -0.50 -0.52 -0.65 -0.64 53,250.4 69,924.7 69,727.6 69,836.3 69,798.3 69,761.2 69,685.8 69,620.4 22.93 31.31 -0.28 0.16 -0.05 -0.05 -0.11 -0.09 1.91 2.46 2.42 2.38 2.35 2.31 2.28 2.24 Corn oil exports, tonnes 19.98 23.12 26.25 29.38 32.52 35.65 38.78 41.91 Corn oil exports, tonnes, % chg y-o-y 18.59 15.68 13.55 11.93 10.66 9.63 8.79 8.08 Corn oil imports, tonnes 20,995.2 37,494.2 37,206.0 37,447.6 37,573.3 37,707.9 37,845.3 37,985.6 Corn oil imports, tonnes, % chg y-o-y 93.76 78.58 -0.77 0.65 0.34 0.36 0.36 0.37 Corn oil balance, tonnes 20,975.2 37,471.1 37,179.7 37,418.3 37,540.8 37,672.2 37,806.5 37,943.7 Corn oil balance, tonnes, % chg y-o-y 93.88 78.64 -0.78 0.64 0.33 0.35 0.36 0.36 Corn oil sales, tonnes Corn oil sales, tonnes, % chg y-o-y Corn oil sales, kg per capita e/f = BMI estimate/forecast Source: United Nations, BMI © Business Monitor International Ltd Page 59 Venezuela Agribusiness Report Q4 2011 Confectionery Between 2004 and 2009, confectionery Confectionery Sales sales value in Venezuela increased by 2007-2015 more than 40% in US dollar terms to US$437mn In 2009, 52% of the overall market was accounted for by chocolate confectionery, followed by sugar confectionery and gum with market shares of 41% and 7% respectively A young population and busier lifestyles have led to growing demand for on-thego snacks, but Venezuelan consumers have been forced over recent years to adapt consumption patterns to cope with e/f = BMI estimate/forecast Source: National Institute of Statistics, BMI rising prices and limited product availability For many consumers, confectionery has thus returned to being a luxury product, with product availability through the government-subsidised Mercal network, which is intended to provide discount food staples for the impoverished, being limited at best Therefore, we forecast a virtual stagnation of confectionery volumes in the 2010-2015 period, with growth of only 11% over the five years in question Table: Confectionery Value/Volume Sales Historical Data & Forecasts 2008 2009 2010 2011f 2012f 2013f 2014f 2015f Total confectionery sales (tonnes) 26,960.2 25,659.0 25,187.0 25,691.4 26,104.9 26,674.4 27,345.9 27,993.5 Total confectionery sales growth (tonnes) % chg yo-y 2.12 -4.83 -1.84 2.00 1.61 2.18 2.52 2.37 Total confectionery sales (VEBmn) 851 937 1,089 1,263 1,451 1,667 1,882 2,100 Total confectionery sales growth (VEB) % chg y-oy 4.48 10.08 16.23 15.90 14.90 14.93 12.87 11.60 Gum sales (VEBmn) 57.6 62.4 70.5 79.8 89.9 101.6 113.1 124.8 Sugar confectionery sales (VEBmn) 356 388 449 517 590 676 760 846 Chocolate confectionery sales (VEBmn) 438 487 570 666 770 890 1,009 1,129 397.0 437.0 253.3 271.5 241.8 208.4 188.2 182.6 Total confectionery sales (US$mn) © Business Monitor International Ltd Page 60 Venezuela Agribusiness Report Q4 2011 Table: Confectionery Value/Volume Sales Historical Data & Forecasts 2008 2009 2010 2011f 2012f 2013f 2014f 2015f Gum sales (US$mn) 26.84 29.09 16.40 17.17 14.99 12.70 11.31 10.85 Sugar confectionery sales (US$mn) 165.9 181.1 104.4 111.2 98.4 84.4 76.0 73.5 Chocolate confectionery sales (US$mn) 204.3 226.8 132.6 143.2 128.4 111.2 100.9 98.2 e/f=BMI estimate/forecast Source: National Institute of Statistics, BMI © Business Monitor International Ltd Page 61 Venezuela Agribusiness Report Q4 2011 Mass Grocery Retail The country's mass grocery retailers benefited from high GDP growth rates between 2004 and 2007, as proceeds from the windfall oil revenues were redirected into the non-oil economy This increased the disposable incomes of the poorer segments of the population, although poverty and underemployment rates remained high However, the ongoing contraction in investment in Venezuela and slowdown in private consumption support BMI's view that the country's economy contracted in 2010 In real terms, per capita consumption of food is expected to contract in 2010, with consumers affected by runaway inflation, which is particularly high for food and drink products Even when the economic uncertainties are omitted, the competitive environment in Venezuela is perhaps the toughest in Latin America, with private-sector retailers going head-to-head with the governmentsubsidised Mercal grocery chain As the firm does not operate on a profit-and-loss basis and has almost unlimited (for now) access to expansion capital, its existence creates quite a challenge for the country's other retailers Because of the slowdown in the economy, local currency devaluation and ongoing supply problems, consumer confidence has taken a hit Therefore, in the five years to 2015, total mass grocery retail sales are expected to fall by just over 29% in US dollar terms despite a 89% increase in local currency terms In overall value terms, the supermarket format is expected to be the main beneficiary of this projection, although a large proportion of this growth will be accounted for by Mercal Table: Mass Grocery Retail Value Sales by Format Historical Data & Forecasts 2008 2009 2010 2011f 2012f 2013f 2014f 2015f Supermarkets (VEBbn) 10.660 12.011 13.724 15.806 18.205 20.841 23.449 26.099 Hypermarkets (VEBbn) 15.704 17.685 20.194 23.153 26.455 30.175 33.860 37.612 Convenience (VEBbn) 0.529 0.689 0.872 1.092 1.340 1.617 1.891 2.170 Total mass grocery retail sector (VEBbn) 26.893 30.385 34.790 40.051 45.999 52.633 59.200 65.882 Total mass grocery retail sector growth (VEB) % chg y-o-y 0.86 0.76 -100.00 0.00 0.00 0.00 4.971 5.600 3.192 2.605 2.345 2.269 Supermarkets (US$bn) © Business Monitor International Ltd 3.399 3.034 Page 62 Venezuela Agribusiness Report Q4 2011 Table: Mass Grocery Retail Value Sales by Format Historical Data & Forecasts 2008 2009 2010 2011f 2012f 2013f 2014f 2015f Hypermarkets (US$bn) 7.323 8.246 4.696 4.979 4.409 3.772 3.386 3.271 Convenience (US$bn) 0.247 0.321 0.203 0.235 0.223 0.202 0.189 0.189 12.540 14.168 8.091 8.613 7.667 6.579 5.920 5.729 Total mass grocery retail sector (US$bn) e/f=BMI estimate/forecast Source: National Institute of Statistics, BMI Table: Sales Breakdown by Retail Format Type (%) 2009 2019f Organised/MGR 55 61 Nonorganised/Independent 45 39 Source: BMI Trade Venezuela's trade balance, as Exports, Imports, Trade 2007-2015 expressed in US dollar terms, will stagnate at around -2.5bn over most of the forecast period Both imports and exports will be negatively impacted by the domestic and global economic crisis and currency devaluation, with the latter also suffering due to the worsening political situation In the period between 2010 and e/f = BMI estimate/forecast Source: United Nations Conference On Trade and Development (up to 2006), BMI 2015, the value of exports is expected to post a nearly 17% drop in US dollar terms, with imports growing at 21% © Business Monitor International Ltd Page 63 Venezuela Agribusiness Report Q4 2011 Table: Food & Drink Trade Balance Historical Data & Forecasts 2008 2009 2010 2011f 2012f 2013f 2014f 2015f Exports (food, drink & tobacco) (US$mn) 120.3 82.1 79.4 76.7 74.0 71.3 68.7 66.0 Imports (food, drink & tobacco) (US$mn) 2,722 2,429 2,359 2,605 2,665 2,727 2,791 2,858 -2,601 -2,347 -2,280 -2,528 -2,591 -2,655 -2,722 -2,792 Balance (US$mn) e/f=BMI estimate/forecast Source: United Nations Conference On Trade and Development (up to 2006), BMI © Business Monitor International Ltd Page 64 Venezuela Agribusiness Report Q4 2011 Macroeconomic Forecast Faster Growth Not Sustainable BMI View: Venezuela's real GDP growth of 4.5% y-o-y in Q111 surprised to the upside, but as it was driven by expansionary government policies we believe this pace of growth is unsustainable Hence, any sharp correction in oil prices could impact the country's already precarious business environment and could lead to investors shying away from Venezuelan debt While Venezuela's strong 4.5% y-o-y real GDP growth rate posted in Q111 poses upside risks to our fullyear forecast of 1.9% for 2011, underlying indicators suggest this pace is not sustainable Not only was the strong outturn boosted by base effects, but we remain concerned that the main driver of growth was government consumption - which rose by 10.4% y-o-y in Q111 Although private consumption also showed a positive reading of 3.7% y-o-y, we believe that this was primarily a symptom of expansionary monetary and fiscal policy that will have to be reined in Indeed, the government's high dependence on elevated oil prices in order to support these policies and the shortfall of private investment will continue to pose downside risks to our growth outlook Government Help Still Needed A breakdown of the data shows that while government and private consumption were the main drivers of growth, other sectors disappointed, which suggests that the outlook for the economy as a whole remains weak Due to a perennial lack of investment in the oil sector, and despite high crude prices, the sector 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 note that the construction sector contracted by a massive 7.7% y-o-y in Q111, also due to a dearth of investment Perhaps more concerning is that while private consumption did post y-o-y increases, we believe that it was largely the result of government 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 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 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 © Business Monitor International Ltd Page 65 Venezuela Agribusiness Report Q4 2011 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 The second-biggest drag on the economy will be a continued shortfall of private investment, which is unlikely to pick up 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, are for 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, among 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 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 for 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 66 Venezuela Agribusiness Report Q4 2011 TABLE: VENEZUELA - ECONOMIC ACTIVITY 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Nominal GDP, VEFbn 668.0 700.2 1,011.8 1,298.1 1,652.6 2,027.0 2,377.1 2,733.6 Nominal GDP, US$bn 311.5 326.5 235.3 301.9 320.9 270.3 237.7 237.7 4.8 -3.3 -1.4 1.9 2.3 2.4 2.9 2.7 11,006 11,325 8,011 10,090 10,528 8,704 7,515 7,377 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 67 Venezuela Agribusiness Report Q4 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 68 Venezuela Agribusiness Report Q4 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 If high inflation is caused by food prices increasing, farmers will be more profitable Then they will supply more agricultural product (e.g rice) to increase their marginal (extra) profit, although this is tempered by the rising cost of other inputs in line with inflation © Business Monitor International Ltd Page 69 Venezuela Agribusiness Report Q4 2011 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 70 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... 16 Venezuela Agribusiness Report Q4 2011 allow grain prices to rise, consumption would be hit On the other hand, if oil prices rise faster than we expect, a recovery in government revenues could see increased investment in agriculture and continued stronger-than-expected growth in both production and consumption of grain © Business Monitor International Ltd Page 17 Venezuela Agribusiness Report Q4 2011. .. International Ltd Page 12 Venezuela Agribusiness Report Q4 2011 VENEZUELA Corn Production, Consumption & Trade 2011f 2012f 2013f 2014f 2015f Corn Production, '000 1 tonnes 1,705.2 1,786.3 1,872.3 1,973.6 2,075.9 Corn Consumption, '000 1 tonnes 3,457.9 3,513.3 3,600.8 3,707.9 3,807.5 f 1 Notes: BMI forecasts Sources: USDA, BMI Grain Producers Receive Boost From Agro Venezuela Programme In January 2011, the government... Monitor International Ltd Page 10 Venezuela Agribusiness Report Q4 2011 Supply Demand Analysis 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 in... forecast period VENEZUELA Poultry Production, Consumption & Trade 2011f 2012f 2013f 2014f 2015f Poultry Production, '000 1 tonnes 627.4 637.8 648.6 660.6 672.7 Poultry Consumption, 1 '000 tonnes 904.3 919.9 938.3 930.5 967.2 f 1 Notes: BMI forecasts Sources: USDA, BMI © Business Monitor International Ltd Page 33 Venezuela Agribusiness Report Q4 2011 VENEZUELA Pork Production, Consumption & Trade 2011f 2012f... in the possession of FARC guerrillas that apparently originated from the Venezuelan army Following the dispute, Chávez vowed to cut trade with © Business Monitor International Ltd Page 34 Venezuela Agribusiness Report Q4 2011 Colombia and find alternative sources of vital imports Tensions continued in Q40 9 with Venezuelan troops reportedly blowing up foot bridges between the two countries in mid-November... 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 21 Venezuela Agribusiness Report Q4 2011 Venezuela Coffee Outlook BMI Supply View: The best Venezuelan coffee comes from the... 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 25 Venezuela Agribusiness Report Q4 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 27 Venezuela Agribusiness Report Q4 2011 Venezuela Cocoa... BMI © Business Monitor International Ltd Page 28 Venezuela Agribusiness Report Q4 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... per tonne So far Venezuela' s cocoa has been largely free of the witch's broom fungus which 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 31 Venezuela Agribusiness Report Q4 2011 Venezuela Livestock ... completeness of any information hereto contained Venezuela Agribusiness Report Q4 2011 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q4 2011 CONTENTS Executive Summary ... Page Venezuela Agribusiness Report Q4 2011 In September 2011, Empresas Polar - Venezuela' s largest food and drinks company - struck back at government accusations that its Harina Pan pre-cooked... and increasing stocks-to-use ratios Front-Month Rough Rice US$/cwt Source: BMI © Business Monitor International Ltd Page 46 Venezuela Agribusiness Report Q4 2011 Soybean Front-month soybean declined