Q2 2010 www.businessmonitor.com VietnaM agribusiness Report INCLUDES 5-YEAR FORECASTS TO 2014 ISSN 1759-1740 Published by Business Monitor International Ltd Vietnam Agribusiness Report Q2 2010 Including 5-year industry forecasts by BMI Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication Date: January 2009 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 © 2009 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 Vietnam Agribusiness Report Q2 2010 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2010 CONTENTS Executive Summary SWOT Analysis .6 Vietnam Agricultural SWOT Industry Forecast Scenario .7 Vietnam Sugar Outlook Table: Vietnam Sugar Production, Consumption & Trade Table: Vietnam Sugar Production, Consumption & Trade 10 Vietnam Livestock Outlook 11 Table: Vietnam Poultry Production, Consumption & Trade 12 Table: Vietnam Pork Production, Consumption & Trade 12 Table: Vietnam Beef & Veal Production, Consumption & Trade 12 Table: Vietnam Poultry Production, Consumption & Trade 16 Table: Vietnam Pork Production, Consumption & Trade 16 Table: Vietnam Beef & Veal Production, Consumption & Trade 16 Vietnam Coffee Outlook 18 Vietnam Coffee Outlook 18 Table: Vietnam Coffee Production & Consumption 19 Table: Vietnam Coffee Production & Consumption 20 Vietnam Dairy Outlook 22 Table: Vietnam Milk Production & Consumption 23 Table: Vietnam Butter Production, Consumption & Trade 23 Table: Vietnam Cheese Production, Consumption & Trade 23 Table: Vietnam Whole Milk Powder Production, Consumption & Trade 24 Table: Vietnam Milk Production & Consumption 26 Table: Vietnam Butter Production, Consumption & Trade 26 Table: Vietnam Cheese Production, Consumption & Trade 27 Table: Vietnam Whole Milk Powder Production, Consumption & Trade 27 Vietnam Grains Outlook 29 Table: Vietnam Corn Production, Consumption & Trade 30 Table: Vietnam Corn Production, Consumption & Trade 30 Vietnam Rice Outlook 31 Table: Vietnam Rice Production, Consumption & Trade 32 Table: Vietnam Rice Production, Consumption & Trade 34 Industry Business Environment Overview 36 Global Agribusiness Business Environment Ratings 36 Global Agribusiness Business Environment Ratings 40 Competitive Landscape 42 Table: Agricultural Commodity Producers & Traders 42 Table: Agribusiness Suppliers 43 Table: Integrated Agricultural Producers 44 Commodity Price Analysis 45 Grains Update 45 Corn 45 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2010 Table: Corn 45 Rice 46 Table: Rice 46 Soy 47 Table: Soybean 47 Wheat 48 Table: Wheat 48 Softs Update 49 Cocoa 49 Table: Cocoa 49 Coffee 50 Table: Coffee 50 Milk 51 Table: Milk 51 Sugar 52 Table: Sugar 52 Downstream Supply Chain Analysis 53 Industry Forecast Scenario – Food 53 Food Consumption 53 Table: Food Consumption Indicators Historical Data & Forecasts 54 Canned Food 55 Confectionery 55 Table: Value/Volume Sales of Selected Food Sub-Sectors Historical Data & Forecasts 56 Trade 57 Vietnam Food & Drink Trade Indicators Historical Data & Forecasts (US$mn) 57 Industry Forecast Scenario – Retail 58 Table: Vietnam MGR Indicators Value Sales by Format, Historical Data & Forecasts 60 Grocery Retail Sales by Format - Historical Data & Forecasts (%) 60 Economic Outlook 61 Table: Vietnam - Economic Activity 63 Industry Trend Analysis 64 Fund To Improve Farmers Earnings Potential 64 BMI Forecast Modelling 66 How We Generate Our Industry Forecasts 66 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2010 Executive Summary In the final quarter of 2009, Vietnam was hit by a succession of storms Typhoon Ketsana which hit the country in late September was followed by Typhoon Mirinae which made land on the south central coast in early November The damage for the most of Vietnam's commodities was fairly localised with only a small impact on total production For Vietnam's valuable coffee crop, however, the storms have been more damaging The heavy rains disrupted the harvesting and drying process This will see both production and quality fall in 2010 The storms also hit some of Vietnam's major cane growing areas on the central coast This contributed to a fall in cane production The shortage of cane combined with the rapid surge in the price of sugar on the world market has seen the prices received by farmers for their cane rise rapidly This is good news for the sector and should see sugar production increase in the 2010/11 harvest year following two years of low output Low cane prices and high input costs in previous years has seen many farmers abandon cane production, replacing it with other crops such as corn and cassava Much of the problem of low profitability is down to the low yields for sugar cane production in Vietnam With the start of the cool season an old enemy of Vietnam's poultry sector returned after being absent since June Highly pathogenic avian influenza (HPAI) was found in a poultry flock in the northern province of Lai Chau in November Almost 2,000 birds were culled in the incident Outbreaks continued across the country through December Unless effective measures can be put in place to stop the return of the disease every cool season, it will continue to be a major threat to the country's poultry producers Vietnam's pork producers were also having a tough time in the final quarter of last year In the last few months of 2009 the price of pork in Vietnam fell sharply An abundance of supply is being blamed for the fall This is bad news for the country's pork producers who have had a difficult time over the past couple of years with high feed and fuel prices in 2008 followed by the economic slump in 2009 Pork producers in China suffered a similar problem in the first half of 2009 but a combination of government action and a return of demand saw prices rise again in the second half of the year We not expect any government help for Vietnam's producers, but demand is likely to pick up in the run up to the Tết festival in midFebruary This should mop up the excess of supply and bring prices back up © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2010 SWOT Analysis Vietnam Agricultural SWOT Strengths Weaknesses Opportunities Threats The natural fertility of Vietnam around the Red River Delta in the north and the Mekong River Delta in the south provides the country with a strong agricultural base Vietnam is the world's second largest exporter of both rice and coffee Agricultural productivity has improved considerably since the opening up of the economy in 1986 Much of Vietnam's agriculture is based on small-scale farms with poor yields in comparison to more developed international competitors Transportation and production infrastructure is often poor, making getting crops to market difficult and negatively affecting quality Since the opening up of the economy in 1986, allowing more private involvement in agriculture, yields have improved dramatically and look set to continue doing so over our forecast period to 2013 Vietnam's fast-growing population of over 80mn provides a large market for agro-food products With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period to 2014, consumers will have more money to spend on food, spurring growth in agricultural production Poor knowledge of good farming practices and hygiene standards leaves Vietnamese agriculture open to disease outbreaks of the kind that have plagued the livestock industry in recent years The slowing world economy threatens demand for key exports such as coffee and could lead to domestic food consumption growth falling short of expectations The rising population and increasing industrialisation of the economy will increase competition for land use, curtailing the area available for expansion of agriculture © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2010 Industry Forecast Scenario Vietnam Sugar Outlook BMI Supply View: Sugar production in Vietnam is estimated to have fallen 18.0% to 1.00mn tonnes in 2009 owing to a reduction in the area planted and poor yields Half of the country's 40 sugar mills were forced to finish production early owing to a lack of sugar cane The mills have a combined annual processing capacity of 12.3mn tonnes of raw sugar cane, but in 2009 only around 10mn tonnes of cane was produced, according to reports sourcing the Vietnamese Sugar Cane Association What was bad news for the millers was good news for at least some farmers as competition for the dwindling stocks of cane saw prices shoot up to around 50% above the price paid for cane at the same time in the 2008 season Input costs such as fuel and fertiliser have also fallen sharply since 2008 While this should have seen farmers profits rise substantially, many complained that the price rise came too late as they had already sold their crop at lower prices In 2009/10, we now expect only moderate growth in sugar production as a large area of cane production was damaged by bad weather in late 2009 BMI Demand View: Sugar consumption in Vietnam has grown rapidly since the start of this decade Between 2000 and 2008, annual consumption grew 47.4% to 1.40mn tonnes This has been driven by rising incomes allowing consumers to spend more on non-essential food and drink Despite the rapid growth, sugar consumption is still low compared to Vietnam's South East Asian neighbours Vietnam's sugar consumption in 2008 was more than a third less than Thailand's and slightly lower even than Malaysia, which has a population of less than a third of that of Vietnam This implies that sugar consumption in Vietnam will continue to increase as incomes rise towards those seen in other countries in the region While the slowdown in Vietnam's economy in 2009 and 2010 will slow growth in sugar consumption, we still expect to see consumption rise 25.9% over our forecast period to 2014 to reach 1.83mn tonnes This will be driven by increasing consumption of confectionery and soft drinks among Vietnam's young population In 2009 sugar consumption is estimated at 1.45mn tonnes The poor sugar crop in 2009 caused retail prices to rise In October 2009, prices were reportedly almost double the level at the same time in 2009 Prices peaked in November before falling slightly into December owing to increased supplies We expect retail sugar prices to remain elevated at least until after the Tết festival in mid-February The high price and continued economic worries will see consumption growth fall again in 2010 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2010 Table: Vietnam Sugar Production, Consumption & Trade Sugar Production, '000 tonnes 1,2 Sugar Consumption, '000 tonnes 2009e 2010f 2011f 2012f 2013f 2014f 1,000.0 1,057.0 1,206.0 1,244.0 1,291.0 1,341.0 1,450.0 1,481.0 1,551.0 1,630.0 1,715.0 1,825.0 -490.0 -424.5 -344.8 -385.9 -424.7 -484.7 Sugar Net Trade Balance ('000 tonnes) Notes: e/f=BMI estimate/forecast In all instances year indicates data for harvest year ending that calendar year i.e 2009 = 2008-09; Source: USDA, BMI High Cane Prices To Boost Production In 2008/09, Vietnamese sugar production suffered as farmers moved away from cane production owing to the low returns Farmers found that with cane yields in Vietnam low and input costs high, they were left with little profit This saw many farmers abandon cane production in favour of other crops such as corn or cassava For the 2009/10 crop, however, farmers have been enjoying far higher returns In the Mekong Delta in December 2009 the price for sugar cane was reaching almost VND1mn/tonne, more than double the price a year earlier The price has been supported by a fall in cane production following the twin typhoons of Ketsana and Mirinae which lashed Vietnam in September and October damaging plantations particularly in the south-central coast The surge in sugar price, both domestically and on the world market, has also been supportive of prices While we not see the high cane prices lasting beyond next year, the strong profits enjoyed by cane farmers should see the area planted for the 2010/11 crop increase allowing sugar production to return to the high level seen in 2007/08 Full Potential Not Yet Met In 1995, recognising the potential of the sugar production sector and the rising domestic demand for the commodity, the Vietnamese government launched a programme to more than double production to 1mn tonnes by 2000 The government encouraged foreign involvement in the milling sector and provided cheap credit and assurance of infrastructure improvement Sugar production grew rapidly, rising to 0.95mn tonnes in 2000 and 1.21mn tonnes the following year Since then however, the sector has stagnated The 1.21mn tonnes produced in 2001 was not been repeated until last year and Vietnam has slipped back to being a net sugar importer This can be explained by the inefficiency of production in the newly expanded industry Sugar in Vietnam is considerably more expensive than in other sugar producing countries in the region such as Thailand and Australia Vietnamese sugar producers have been protected by high tariffs and restrictive import regulations This uncompetitiveness has inhibited the development of a sugar export industry Even with © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2010 the protection, many mills have still made losses over the past few years Domestic prices are undermined by the smuggling of cheaper Thai sugar into the country via Cambodia The industry is now in a state of transition as international agreements are forcing Vietnam to cut protection Under the ASEAN Free Trade Area (AFTA) agreement, by 2011 Vietnam has to reduce tariffs on sugar imports from ASEAN members to a maximum of 5% This will expose the country to imports from Thailand, a major sugar exporter Tariffs on imports from other countries will also have to be reduced by 2011 in line with WTO commitments made by the government The government has been trying to increase efficiency in the sector to prepare it for greater integration with the world economy by encouraging farmers to plant high-yielding cane varieties and improving mechanization of cane production In 2007, the government presented a plan for the development of the sector to 2010 and further until 2020 By 2010, the plan aimed for annual production of 1.5mn tonnes of sugar from 19.3mn tonnes of sugar cane Obviously this will not be met To this the plan envisioned 300,000 hectares (ha) planted to sugarcane and yields of 65 tonnes/ha Average yields are still some way off this level and cane production in 2009 is estimated at only around 10mn tonnes, though the year before the figure stood at 12.1mn tonnes By 2020, the plan is aiming for production of 2.1mn tonnes to be achieved through increasing cane yields and the sugar content of cane To achieve these ambitious aims the government has put a moratorium on the building of new mills so that technology in existing mills can be improved Provincial authorities will assist mills in organising the zones where their cane will come from and assist in improving farming practices Financially, the government has committed to investing in importing and propagating new cane varieties and improving infrastructure such as reservoirs and irrigation canals While the government support for the sector is encouraging, we believe the sector will struggle to produce enough sugar for domestic consumption Once tariffs are lowered by 2011, it is likely that the government will have to support the sector by other means if production is not to be set back as it is unlikely that Vietnamese-produced sugar will be able to compete with imports by then We forecast only modest growth in production of 34.1% to the end of our forecast period in 2014 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2010 Canned Food Canned Food Sales Confectionery Sales by Sub-sector (VNDmn) 2005-2014 2005-2014 e/f=BMI estimate/forecast Source: General Statistical Office, Intracen, OECD, Trade press, BMI e/f = BMI estimate/forecast Source: General Statistics Office, Company information, Trade press, BMI BMI is forecasting volume growth of 31.3% and value sales growth of 46.6% in the country's canned food industry, with busy, modern lifestyles in major cities fuelling the demand for convenient, processed food Growing awareness of hygiene concerns and food origin that tend to coincide with improved living standards, as well as being the result of numerous regional health scares, will further encourage consumers to purchase processed foods over fresh produce, while strong investment (both internal and external) in this sector should also help to fuel sales growth Meanwhile, city workers are increasingly cutting back on restaurant meals and opting for canned and processed foods in order to save money; canned and processed foods are up to 20-30% cheaper than fresh ingredients According to retailer Saigon Co-op, processed food saw a growth rate of 60% in the first half of 2008 Confectionery The country's confectionery industry is also predicted to experience strong growth to 2014 BMI is forecasting growth of 21.2% in volume sales terms and 42.9% in value sales terms Rising disposable incomes will encourage the consumption of these non-essential goods, while continued exposure to Western brands and consumption habits will also contribute to the growth of the industry The latter driver will in particular be responsible for value sales growth, since it should lead to the emergence of new premium and added-value brands, which carry higher sales prices Companies such as South Korea's Orion Confectionery and Lotte Confectionery, which are planning investments for the industry, should ensure that it continues to grow at a rapid rate through product innovation and ongoing marketing and promotional initiatives Meanwhile, Vietnam is investing heavily in its cocoa industry, which should help the confectionery sector With many countries in the region experiencing moderate-to-high GDP growth, the appetite for © Business Monitor International Ltd Page 55 Vietnam Agribusiness Report Q2 2010 luxury goods has increased exponentially However, cocoa production within the region is nowhere near high enough to meet this demand, resulting in the need to import cocoa and value-added derivatives from further afield The existence of a strong cocoa industry in the area would not only benefit Vietnamese cocoa farmers, it would also give rise to the opportunity for investing in cocoa processing and value addition Moreover, neighbouring countries will have access to a supply of value-added cocoa at a relatively cheap price Not only would this feed the growing demand for luxury goods, resulting from strong economic performances, it could also improve trade relations in the region, thus leading to further investment Table: Value/Volume Sales of Selected Food Sub-Sectors Historical Data & Forecasts 2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 2014f 6.85 7.32 7.83 8.37 8.07 8.42 8.94 9.46 10.01 10.60 Canned food sales (VNDmn) 258,0 79 281,6 19 303,8 62 326,6 39 342,4 18 365,0 90 395,4 21 425,6 96 459,5 07 501,9 45 Canned food sales (US$mn) 15.71 17.14 18.49 19.88 18.77 18.72 20.28 23.01 26.26 30.42 Confectionery sales ('000 tonnes) 86.1 89.9 94.0 97.0 94.7 97.5 101.6 105.7 110.1 114.7 Confectionery sales growth, tonne, (y-o-y) 4.49 4.41 4.56 3.23 -2.41 2.96 4.23 4.03 4.12 4.24 Chocolate sales (VNDmn) 1,652, 642 1,868, 367 2,051, 391 2,340, 058 2,486, 256 2,697, 941 2,971, 924 3,247, 774 3,555, 323 3,915, 344 Sugar confectionery sales (VNDmn) 1,785, 248 1,885, 208 1,997, 886 2,169, 421 2,257, 958 2,377, 049 2,513, 627 2,657, 945 2,820, 576 3,005, 969 Gum sales (VNDmn) 412,3 10 417,0 64 422,0 82 429,3 77 432,0 77 437,8 68 446,2 69 454,3 43 463,2 12 473,1 36 Confectionery sales (VNDmn) 3,850, 200 4,170, 639 4,471, 359 4,938, 856 5,176, 291 5,512, 858 5,931, 821 6,360, 062 6,839, 112 7,394, 449 8.57 8.32 7.21 10.46 4.81 6.50 7.60 7.22 7.53 8.12 Chocolate sales (US$mn) 100.6 113.7 124.8 142.4 136.3 138.4 152.4 175.6 203.2 237.3 Sugar confectionery sales (US$mn) 108.6 114.7 121.6 132.0 123.8 121.9 128.9 143.7 161.2 182.2 Gum sales (US$mn) 25.09 25.38 25.69 26.13 23.69 22.45 22.89 24.56 26.47 28.67 Confectionery sales (US$mn) 234.3 253.8 272.1 300.5 283.8 282.7 304.2 343.8 390.8 448.1 Canned food sales ('000 tonnes) Confectionery sales growth, VND, (y-o-y) e/f = BMI estimate/forecast Source: General Statistics Office, Company information, Trade press, BMI © Business Monitor International Ltd Page 56 Vietnam Agribusiness Report Q2 2010 Trade Trade Figures (US$mn) BMI expects Vietnam's food, drink and tobacco 2005-2014 trade balance to remain very healthy to 2014 Exports are set to grow by 60.1% to 2014, growth had been forecast to be higher owing to sustained government efforts to improve local food production and agricultural industries, which will boost output and make more produce available for export, as well as improving the quality competitiveness of local exports However, the global financial crisis is now forecast to affect demand for Vietnamese exports in the short term Import growth is forecast to be 47.2% to 2014 e/f=BMI estimate/forecast Source: General Statistical Office, Intracen, OECD, Trade press, BMI In the long term, increased urbanisation and continued exposure to Western influences are expected to result in growing import demand, while increasingly busy lifestyles and rising interest in branded produce will lead to growth in the processed-food industry In order to meet this demand, local manufacturers will be forced to import the necessary raw ingredients Beyond 2014, the government will be hopeful that its investments, and its efforts to attract foreign investors, will pay off, and that much of this new and specific type of demand will be able to be accommodated domestically In September 2008, Ugandan President Yoweri Museveni announced that the African country is looking to increase production of robusta coffee, with the aim of overtaking Vietnam and Colombia and becoming the leading supplier of the commodity However, BMI opines that Vietnam's preferential access to virtually the same export markets as Uganda, together with the former's comparative advantage in coffee production, means that competing on export volumes alone would be fruitless for Uganda Vietnam Food & Drink Trade Indicators Historical Data & Forecasts (US$mn) 2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 2014f Exports 6,566 8,097 9,074 10,585 8,849 9,562 10,346 11,640 12,831 14,164 Imports 2,314 2,693 3,065 3,479 2,715 2,891 3,082 3,391 3,679 3,996 Balance 4,252 5,404 6,010 7,106 6,134 6,671 7,264 8,249 9,151 10,168 e/f = BMI estimate/forecast Source: UNCTAD, BMI © Business Monitor International Ltd Page 57 Vietnam Agribusiness Report Q2 2010 Industry Forecast Scenario – Retail BMI is forecasting phenomenal growth in Vietnam's MGR industry to 2014, as the market assumes one of the highest growth Value Of Mass Grocery Retail Market Formats (VNDmn) 2005-2014 forecasts in the Asia Pacific region and with it the tag of one of the retail industry's brightest new prospects To 2014, BMI expects the value of sales through modern retail outlets in Vietnam to increase by an incredible 69.0%, with all modern formats present in the country supermarkets, hypermarkets and convenience stores contributing to this development There are two primary drivers of this growth forecast One is Vietnam's economic e/f=BMI estimate/forecast Source: General Statistical Office, Trade press, BMI development The country has proved successful at attracting multinational investment, in spite of its often-restrictive foreign investment policies and underdeveloped infrastructure This investment has led to job creation, which in turn has led to the emergence of a new consumer class in the country in major urban centres at least which has an interest and can afford to participate in modern consumption methods such as mass grocery retailing With Vietnam increasingly becoming one of South East Asia's top attractions, the country's high tourism levels will also assist the emergence of modern retail, particularly in the convenience sector However, Vietnam's MGR sector is still dominated by independent stores, although smaller players are being pressured by the growing presence of multinationals Traditionally, multinational penetration was restricted by legislation prohibiting foreign investors from holding shares in local retail entities However, the government is now prioritising FDI inflows and WTO-membership trading opportunities over the livelihood of traditional retail operators However, while multinationals pose a serious threat to local enterprises operating in the attractive urban centres of Hanoi and Ho Chi Minh City, secondary and tertiary towns and cities in outlying provinces could actually reap considerable benefits from multinational investment Thai Binh province is an excellent example of this Growing affluence is resulting in consumers in the province increasingly looking to trade up to modern retail outlets and away from traditional, independent formats; rapid industrialisation and urbanisation are only accelerating this process Multinational sector involvement will lead to rapid crowding in Vietnam's major urban centres, forcing retailers to turn to unexplored regions in search of growth Public-sector retail investment, which will stimulate increased consumer demand and © Business Monitor International Ltd Page 58 Vietnam Agribusiness Report Q2 2010 accelerate the establishment of industry best practices, could see provinces like Thai Bihn become a beneficiary of this crowding The convenience retail sector is actually set to be the slowest growth format in Vietnam over the forecast period albeit at an impressive 62.6% to 2014 The reason for this is the format's low starting point As much as modern retail is being embraced by certain consumer groups, the concept is still very much in its infancy Accordingly, the demand for convenience, with the pay-off of higher prices, is not yet on the agenda for most consumers they are still familiarising themselves with the modern format in general Consequently, the standard supermarket, with which the Vietnamese population is more familiar, and the hypermarket, owing to its popular combination of both food and non-food items, are set to witness the strongest growth over the forecast period, at 70.3% and 71.3%, respectively In addition, the supermarket and hypermarket formats are set to receive the most attention from new retail investors, owing to their greater per-store profitability levels, which will be of vital importance in a market where foreign investment in store openings is still limited Regardless of these limitations, it is this investment that is set to be the second key driver of industry growth In line with its WTO accession requirements, the government has started to liberalise many of its key industry sectors retail being one such industry The country has acknowledged the need for foreign investment if it is to get in line with industry best practices and accordingly it has started granting licences to international operators to establish store networks within the country Hong Kong's Dairy Farm and South Korea's Lotte Shopping are two such recent examples Investment of this nature and the ability of these companies to offer low prices owing to their purchasing power will further stimulate interest in modern retail This will be particularly true among those price-sensitive consumers who are still wary of the concept If there can be a downside in the case of such an impressive retail growth forecast, it comes in the form of Vietnam's majority rural population, which drags down food consumption levels in the market to enormously unattractive levels The risk for retailers is that, as soon as the country's major cities start to become overcrowded, there are few other communities that can support modern retail development at present Even the low prices offered by discounters would be unlikely to attract buyers in rural communities, for whom self-sufficiency and wet markets remain the sole methods of consumption This crowding is, however, still a long way off and retailers will invest in Vietnam, confident of the country's economic development expanding the consumer base, in line with their own need to expand © Business Monitor International Ltd Page 59 Vietnam Agribusiness Report Q2 2010 Table: Vietnam MGR Indicators Value Sales by Format, Historical Data & Forecasts 2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 2014f Supermarkets (VNDbn) 1,150 1,397 1,660 2,021 2,176 2,404 2,694 2,988 3,317 3,705 Hypermarkets (VNDbn) 411 526 657 822 888 991 1,108 1,232 1,371 1,521 Convenience (VNDbn) 477 542 608 690 740 807 894 982 1,081 1,203 Total mass grocery retail sector (VNDbn) 2,038 2,465 2,925 3,533 3,804 4,202 4,696 5,203 5,769 6,429 Total mass grocery retail sector growth, VND, (y-o-y) 13.76 20.97 18.67 20.79 7.66 10.47 11.77 10.78 10.89 11.44 Supermarkets (US$bn) 0.0700 0.0850 0.1010 0.1230 0.1193 0.1233 0.1381 0.1615 0.1895 0.2246 Hypermarkets (US$bn) 0.0250 0.0320 0.0400 0.0500 0.0487 0.0508 0.0568 0.0666 0.0784 0.0922 Convenience (US$bn) 0.0290 0.0330 0.0370 0.0420 0.0406 0.0414 0.0459 0.0531 0.0618 0.0729 Total mass grocery retail sector (US$bn) 0.1240 0.1500 0.1780 0.2150 0.2085 0.2155 0.2408 0.2812 0.3297 0.3896 e/f = BMI estimate/forecast Source: Company information, Trade press, BMI Grocery Retail Sales by Format - Historical Data & Forecasts (%) Organised/MGR Non-organised/Independent 2008 2018f 22 94 78 f = BMI forecast; Source: BMI Research © Business Monitor International Ltd Page 60 Vietnam Agribusiness Report Q2 2010 Economic Outlook Double Dip Now Our Core Scenario BMI View: With Vietnam's balance of payments yet again approaching breaking point, we expect a sharp tightening of fiscal and monetary policy in 2010, which will see real GDP growth dip to 4.4% from an expected 5.1% in 2009 This will raise criticism of economic policy at the 11th National Congress in January 2011, but we expect the market reform agenda to be maintained We have shifted our Vietnam growth outlook from expecting a gradual economic recovery in 2010 to a double-dip scenario with real GDP expansion dipping from an expected 5.1% in 2009 to 4.4% in 2010 This is based on our expectations that fiscal and monetary policy will have to be tightened sharply in early 2010 in order to rein in the widening trade deficit and halt inflationary pressures Our outlook for Vietnam has much in common with that for China However, while the policy aims of the respective governments are similar, we view the macroeconomic concerns in Vietnam as more alarming, at least in the short term, as Hanoi's fiscal and monetary resources are considerably more limited As a consequence, we find it likely that the inevitable shift towards tighter monetary and fiscal policy will come earlier in Vietnam than in China Indeed, while Hanoi's fiscal and monetary stimulus has helped economic growth recover from a low of 3.1% y-o-y in Q109 to 5.2% in Q309, it has also been a key factor, in our view, behind a considerable widening of the trade deficit over the same period to US$1.9bn in October While the return to positive growth in G3 markets in H209 and 2010 should give some support to Vietnamese exports, we believe a continuation of the current accommodative policy would lead to a further widening of the trade deficit With Vietnam's foreign exchange reserves in Q409 estimated to be below the three months of imports seen as a minimum, we believe drastic policy action will be needed to avoid a balance-of-payments crisis This will include: • A downward adjustment of the dong towards our VND19,000/US$ end-2009 forecast, from VND17,862/US$ on November 6, to stem the outflow of US dollars through the trade channel • A hiking of policy rates to uphold public confidence in the dong, stem capital outflows, and contain upward pressure on inflation through higher import prices We are now expecting 500bps of hikes in 2010, bringing the Vietnam base rate from 7.00% in November 2009 to 12.00% © Business Monitor International Ltd Page 61 Vietnam Agribusiness Report Q2 2010 • A reduction of the fiscal deficit from VND118trn (US$6.6bn), or 7.2% of GDP, to VND105trn (US$5.9bn), or 5.7% of GDP, in 2010 on the back of reductions in both current and capital expenditure growth Implications For Growth We expect the fiscal and monetary tightening to lead to a double dip in growth after the tentative rebound seen in the last three quarters of 2009 We are expecting real GDP growth to come in at 4.4% in 2010, as weak growth in G3 markets will weigh on exports and prevent a marked improvement in net exports in spite of the devaluation of the dong This will mean that the slowdown in domestic demand will be harder felt With inflation expected to average roughly 9.0% in 2010, we expect government consumption to decrease by 3.5% in real terms, which will shave 0.3 percentage points (pp) off headline growth A more marked effect will be coming from a slowdown in private consumption growth as credit conditions are tightened We expect private consumption growth (in real terms) to slow to 2.3% from an expected 4.9% in 2009 and 9.2% in 2008 This should see the contribution to growth from private consumption decrease to 1.6pp in 2010 from 3.3pp in 2009 and a massive 6.0pp in 2008 We are, on the other hand, expecting an increase in the contribution from gross fixed capital formation from 0.4pp to 1.1pp as FDI disbursements, down 12.1% y-o-y to US$8bn in January-October 2009, recover and state-and aid-financed projects gather pace However, the precarious state of the property market, where activity and prices have been supported by the loan-subsidy programme, is a risk to this forecast While only a minority of property purchases are financed through bank lending, higher interest rates should still have an impact on the market and on commercial and residential construction Policy Rebalancing Needed At 2011 Party Congress We expect the slowdown in growth in 2009 and 2010 to make economic policy the main matter of debate during the Communist Party of Vietnam (CPV)'s 11th National Congress scheduled for January 2011 The macroeconomic rollercoaster ride experienced in recent years has raised criticism against Prime Minister Nguyen Tan Dung, the most important proponent of economic reform, from more conservative members in the Politburo We believe the mainstay of the CPV is still behind Nguyen's reform agenda, meaning that there will be no drastic shift in the socio-economic development strategy for 2011-2016 However, we expect measures to be taken to achieve greater macroeconomic stability, including a reduction of official growth targets, a shift in monetary policy towards inflation targeting and increased © Business Monitor International Ltd Page 62 Vietnam Agribusiness Report Q2 2010 exchange rate flexibility This is likely to come at a cost to economic growth in the short term, and we are consequently forecasting real GDP growth of 5.5% and 6.0% in 2011 and 2012, respectively, as the global economic environment is expected to be less conducive than in the 2003-2007 boom years A failure to take a decision on rebalancing economic policy would, on the other hand, mean a high risk of a continuation of macroeconomic volatility as expressed in Vietnam's score of 43.8 out of 100 in our shortterm economic risk ratings Table: Vietnam - Economic Activity 2006 2007 2008 2009 2010 2011 2012 2013 2014 Nominal GDP, VNDbn 974266.2 1144014.6 1478695.0 1628770.2 1825074.8 2053254.8 2288454.8 2562685.6 2855652.5 Nominal GDP, US$bn 60.9 71.1 89.8 85.7 96.1 108.1 123.7 138.5 154.4 Real GDP growth, % change y-o-y 8.2 8.5 6.2 5.1 4.4 5.5 6.0 6.8 6.9 GDP per capita, US$ 724 835 1035 974 1077 1195 1350 1492 1640 84.4 85.6 86.8 88.0 89.2 90.4 91.6 92.8 94.1 Industrial production index, % y-o-y, ave 1,4 16.8 16.7 14.9 6.8 10.0 12.0 14.0 14.0 14.0 Unemployment, % of labour force, eop 4.8 4.6 5.0 5.5 5.5 5.0 4.5 4.0 4.0 Population, mn e f Notes: BMI estimates BMI forecasts at 1994 prices; Sources: IMF (General Statistics Office); IMF; General Statistics Office © Business Monitor International Ltd Page 63 Vietnam Agribusiness Report Q2 2010 Industry Trend Analysis Fund To Improve Farmers Earnings Potential Rice farmers in the world's second largest exporter, Vietnam, are seeking a fund to support production and exports and subsequently benefit producers Despite averagely exporting around 5mn tonnes of rice on a yearly basis - and even 6mn tonnes this year - year-on-year (y-o-y) shipment values have been dwindling and producers believe that the importance of rice to the local economy, both as a consumption good and a cash crop, should see the industry afforded greater levels of support, as rice farmers earn less than those cultivating other crops despite the fact that government policy is heavily centred on economically important rice exports Volumes Rising, Values Falling It is estimated that the South East Vietnam Rice Historical & Forecast ('000 tonnes) Asian nation in the first nine months of 2009 alone exported some 4.9mn tonnes of rice, fetching US$2bn; an increase of 40% in volume terms y-o-y, yet a notable 6.2% reduction in terms of value Notwithstanding that a global surplus, plus lower than average y-o-y demand growth, have had a pronounced dampening effect on prices, Vietnamese rice farmers definitely appear to be at a disadvantage when compared to their counterparts in neighbouring countries e/f = BMI estimate/forecast Source: BMI The proposed fund would be set up by Viet Nam Farmers Association and the Viet Nam food Association The fund would provide support in infrastructure, farming techniques, technology and storage Furthermore, farmers would receive support in holding onto their grains, in order to sell at the optimum time in terms of price and demand A notable caveat to earnings is the fact that farmers cannot sell directly to exporters, instead going through intermediaries, whose interests lie in keeping the purchase price minimal to widen margins Therefore enhanced relations between farmers and businesses should help improve earning potential © Business Monitor International Ltd Page 64 Vietnam Agribusiness Report Q2 2010 Furthermore, in line with plans to decrease domestic area under cultivation by 300,000 hectares over the next ten years, the creation of extra employment in the processing sub-sector will further serve to minimise the potential for disenchantment among producers Investment in agriculture is an area that Vietnam's government can take much credit for, and the improvements in agricultural output seen in recent years is a major reason why Vietnam has been second only to China in y-o-y GDP growth However, for the agricultural sector to realise its full potential, domestic processing is an area that could be considerably improved, as the quality of machinery and technology is still relatively underdeveloped © Business Monitor International Ltd Page 65 Vietnam Agribusiness Report Q2 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 66 Vietnam Agribusiness Report Q2 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 67 Vietnam Agribusiness Report Q2 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 68 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... pick up again in 2010 Out to 2014, we forecast chicken consumption to grow by 40.9% to 746,500 tonnes in 2014 and pork consumption to grow 32.3% to reach 2.51mn tonnes in 2014 © Business Monitor International Ltd Page 11 Vietnam Agribusiness Report Q2 2010 Table: Vietnam Poultry Production, Consumption & Trade Poultry Production, '000 tonnes 1 Poultry Consumption, '000 tonnes 1 2009e 2010f 2011f 2012f... forecast As seen in 2008, Vietnam' s coffee crop is vulnerable to poor weather conditions and the country is frequently in the path of typhoons The damage caused by adverse weather conditions is exacerbated by the often low-quality plant stock © Business Monitor International Ltd Page 21 Vietnam Agribusiness Report Q2 2010 Vietnam Dairy Outlook BMI Supply View: Milk production in Vietnam has grown rapidly... Source: FAPRI, BMI Table: Vietnam Cheese Production, Consumption & Trade Cheese Production, '000 tonnes 1 Cheese Consumption, '000 tonnes 1 Cheese Net Trade Balance, '000 1 tonnes 1 Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI © Business Monitor International Ltd Page 23 Vietnam Agribusiness Report Q2 2010 Table: Vietnam Whole Milk Powder Production, Consumption & Trade 2009e 2010f 2011f 2012f 2013f... also used in shrimp feed and with Vietnam among the world's largest producers of farmed shrimp, this should also boost consumption © Business Monitor International Ltd Page 29 Vietnam Agribusiness Report Q2 2010 Table: Vietnam Corn Production, Consumption & Trade Corn Production, '000 tonnes 1,2 Corn Consumption, '000 tonnes 2 Corn Net Trade Balance, '000 tonnes 2 2009e 2010f 2011f 2012f 2013f 2014f 4,530.0... corn in Vietnam will be highly dependent on the livestock industry due to the use of corn for feed Further disease outbreaks or a fall in demand for meat would likely dampen corn consumption and could lead farmers to switch to other crops, placing risks on our production forecasts © Business Monitor International Ltd Page 30 Vietnam Agribusiness Report Q2 2010 Vietnam Rice Outlook BMI Supply View: Vietnam. .. the highs of 2008, meat consumption growth will slow as consumers are forced to cut back on non-essential food items © Business Monitor International Ltd Page 17 Vietnam Agribusiness Report Q2 2010 Vietnam Coffee Outlook BMI Supply View: Vietnam is the world's biggest producer of robusta coffee with more than 95% of its coffee output given to the cheaper bean and only around 2-3% of production devoted... coffee crop We do not believe this will be achieved in our forecast period © Business Monitor International Ltd Page 18 Vietnam Agribusiness Report Q2 2010 Table: Vietnam Coffee Production & Consumption Coffee Production, '000 60kg bags 1,2 Coffee Consumption, '000 60kg bags 3 2009e 2010f 2011f 2012f 2013f 2014f 19,670.00 17,366.00 18,521.00 19,673.00 21,093.00 22,611.00 1,064.00 1,101.00 1,189.00 1,292.00... previously If the ministry follows through with the plans, it will be good news for Vietnam' s coffee sector which suffers from a perception of low quality © Business Monitor International Ltd Page 19 Vietnam Agribusiness Report Q2 2010 Vicofa is also pushing for the development of more coffee processing facilities in Vietnam This would allow the country to move up the coffee value chain and reap a higher... estimate/forecast In all instances year indicates data for harvest year ending that calendar year i.e 2 3 2009 = 2008-09; Source: USDA, Vietnam Coffee and Cocoa Association, BMI, USDA, BMI © Business Monitor International Ltd Page 20 Vietnam Agribusiness Report Q2 2010 Risks To Outlook With Vietnam' s coffee industry so dependent on exports, our forecasts for production will be heavily dependent on world demand and... see output fall later in our forecast period © Business Monitor International Ltd Page 10 Vietnam Agribusiness Report Q2 2010 Vietnam Livestock Outlook BMI Supply View: Despite going through hard times over recent years with disease outbreaks, soaring input costs and competition from cheap imports, we expect Vietnam' s livestock production to see strong growth over the medium term Rising incomes will ... 2,507.00 -4 4.00 -5 7.70 -1 19.10 -1 27.50 -1 10.80 -9 1.10 2009e 2010f 2011f 2012f 2013f 2014f 260.00 261.80 274.10 285.40 299.20 314.10 509.00 535.50 560.70 583.20 634.20 688.10 -2 49.00 -2 73.65 -2 86.64 -2 97.76... International Ltd Page 30 Vietnam Agribusiness Report Q2 2010 Vietnam Rice Outlook BMI Supply View: Vietnam enjoyed a good rice harvest in 2008 with production up 6.3% year-on-year (y-o-y) to 24.38mn tonnes... -1 9.00 -6 .00 -3 0.00 -4 4.00 -5 7.70 2005 2006 2007 2008 2009e 2010f 220.00 230.00 240.00 250.00 260.00 261.80 239.00 258.00 329.00 448.00 509.00 535.50 -1 9.00 -2 8.00 -8 9.00 -1 98.00 -2 49.00 -2 73.65 Poultry