Q2 2011 www.businessmonitor.com VietnaM agribusiness Report INCLUDES BMI'S FORECASTS ISSN 1759-1740 Published by Business Monitor International Ltd VIETNAM AGRIBUSINESS REPORT Q2 2011 INCLUDES 5-YEAR FORECASTS TO 2015 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Production Date: March 2011 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 © 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 Vietnam Agribusiness Report Q2 2011 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2011 CONTENTS Executive Summary SWOT Analysis Vietnam Agriculture SWOT Vietnam Political SWOT Vietnam Economic SWOT Vietnam Business Environment SWOT 10 Industry Forecast Scenario 11 Vietnam Sugar Outlook 11 Table: Vietnam – Sugar Production, Consumption & Trade 11 Table: Vietnam – Sugar Production, Consumption & Trade 13 Vietnam Livestock Outlook 14 Table: Vietnam – Poultry Production, Consumption & Trade 14 Table: Vietnam – Pork Production, Consumption & Trade 15 Table: Vietnam – Beef & Veal Production, Consumption & Trade 15 Table: Vietnam – Poultry Production, Consumption & Trade 18 Table: Vietnam – Pork Production, Consumption & Trade 18 Table: Vietnam – Beef & Veal Production, Consumption & Trade 18 Vietnam Coffee Outlook 20 Table: Vietnam – Coffee Production & Consumption 21 Table: Vietnam – Coffee Production & Consumption 23 Vietnam Dairy Outlook 24 Table: Vietnam – Milk Production & Consumption 25 Table: Vietnam – Butter Consumption & Trade 25 Table: Vietnam – Cheese Consumption & Trade 25 Table: Vietnam – Milk Production & Consumption 27 Table: Vietnam – Butter Consumption & Trade 27 Table: Vietnam – Cheese Consumption & Trade 27 Vietnam Grains Outlook 29 Table: Vietnam – Corn Production, Consumption & Trade 29 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 Competitive Landscape 36 Table: Agricultural Commodity Producers & Traders 36 Table: Agribusiness Suppliers 36 Table: Integrated Agricultural Producers 37 Commodity Price Analysis 39 Monthly Softs Update 39 Cocoa 39 Table: Cocoa 39 Coffee 40 Table: Coffee 40 Milk 41 Table: Milk 41 Sugar 42 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2011 Table: Sugar 42 Grains Update 43 Corn 43 Table: Corn 43 Rice 44 Table: Rice 44 Soybean 45 Table: Soybean 45 Wheat 46 Table: Wheat 46 Downstream Supply Chain Analysis 47 Industry Forecast Scenario 47 Food 47 Food Consumption 47 Table: Food Consumption Indicators Historical Data & Forecasts 48 Canned Food 49 Confectionery 49 Table: Value/Volume Sales of Selected Food Sub-Sectors Historical Data & Forecasts 50 Trade 51 Table: Vietnam Food & Drink Trade Indicators Historical Data & Forecasts 52 Mass Grocery Retail 53 Table: Vietnam MGR Indicators Value Sales by Format Historical Data & Forecasts 55 Table: Grocery Retail Sales by Format - Historical Data & Forecasts (%) 55 Macroeconomic Forecast 56 Table: Vietnam - Economic Activity, 2008-2015 58 Industry Trend Analysis 59 Proliferation Of Modern Retail Set To Continue In Vietnam 59 Fuel Inflation To Dampen Consumer Spending And Retail Growth 61 Beer Sector Shaping Up As An Exciting Long-Term Growth Opportunity 63 Table: Booming Alcoholic Drinks Market 64 Vietnam Shaping Up As An Exciting Long-Term Consumer Play 65 BMI Forecast Modelling 68 How We Generate Our Industry Forecasts 68 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2011 Executive Summary BMI View: Vietnam's agriculture industry will continue to produce surpluses in coffee and rice - but few other commodities Indeed, with a rising population and incomes, the country will remain a net importer of all livestock and dairy goods over the forecast period Although the Vietnamese government is investing in several sectors to increase production, most of the industry, barring rice, will remain importdependent and vulnerable to changes in global agricultural prices We note that since joining the WTO in 2007, Vietnam has striven hard to meet an array of agriculture production standards especially in the area of food health safety issues, also known as Sanitary and Phytosanitary (SPS) rules To date it has already submitted 22 notifications to the WTO Vietnam has also engaged other countries such as the Netherlands in private-public partnerships (PPPs) to improve on production standards for sectors such as fisheries and livestock Key Trends: Coffee production growth to 2014/15: 27.8% to 23.2mn 60kg bags Given that Vietnam is the world's largest exporter of robusta coffee, greater export opportunities will be the main driver of production Rice production growth to 2014/15: 12.3% to 28.1mn tonnes We not foresee expansion through increase in area harvested but through yield improvements that are already the highest in the South East Asia region Fluid milk consumption growth to 2014/15: 43.6% to 247,900 tonnes As incomes rise and dietary preferences change, we are confident of strong consumption growth emerging from Vietnam, especially from its low base 2011 Real GDP Growth: 6.3% (down from 6.8% in 2010; predicted to average 7.0% from 2010 until 2015) Consumer Price Inflation: 12% y-o-y in February 2011 (forecast to average 11.5% in 2011) Industry Developments Vietnam's growing coffee consumption - which we forecast to grow 27.8% by 2014/15 - might make the sector seem like fertile ground for foreign entrants, especially in the higher-end coffee business However, BMI believes that the current strong hold that local players have on the industry, as well as heavy regulation, dampens the attractiveness of the sector to foreign entrants Indeed, our current Risk/Reward ratings for the Vietnamese drinks industry stand at a lowly 54 out of 100, suggesting that the landscape for foreign coffee retailers might not be as promising as expected The main factors contributing to this © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2011 outlook are the large rural-urban divide, as well as poor physical and labour infrastructure - both of which are important aspects to ensure returns to investment in high-end coffee franchises Despite virtually flat production growth in recent years and even a slight decrease in 2009/10, we believe Vietnam's rice sector will experience considerable growth over our forecast period, buoyed by improvements in infrastructure, higher yields and increased domestic demand Compared with many of its agricultural sub-sectors, Vietnamese rice is actually very competitive relative to many of its regional peers and is well positioned to ensure the country remains a net exporter Indeed, it will continue to be one of the world's few rice exporters, the second largest in 2009/10 As Vietnam is highly dependent on imports of dairy products to meet its domestic needs, local dairy prices are very vulnerable to higher international milk prices Indeed, milk prices have risen some 20% year-on-year in February 2011 Vietnamese dairy consumers will be confronted with higher diary product prices, especially milk powder prices in the medium term Anecdotal reports in late March 2011 claimed that prices of imported milk products such as milk powder had risen by 18% on the back of an 8.5% Vietnamese Dong devaluation Given the low incomes earned by the average worker, we think these milk price hikes will only place these products further out of reach of the masses and might lead to substitution effects in the short-to-medium term © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2011 SWOT Analysis Vietnam Agriculture 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 It also enjoys relatively high rice yields compared to its regional counterparts 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 agrofood products With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period to 2015, 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 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 2011 Vietnam Political SWOT Strengths Weaknesses Opportunities Threats The Communist Party government appears committed to market-oriented reforms, although specific economic policies will undoubtedly be discussed at the 2011 National Congress The one-party system is generally conducive to short-term political stability Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent The government recognises the threat that corruption poses to its legitimacy, and has acted to clamp down on graft among party officials Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system The slowdown in growth in 2009 and 2010 is likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable Relations with China have deteriorated over the past year due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause widescale environmental damage © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2011 Vietnam Economic SWOT Strengths Weaknesses Opportunities Threats Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.6% annually between 2000 and 2009 The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004 Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable as the global economy continues to suffer in 2010 The fiscal picture is clouded by considerable 'off-the-books' spending The heavily-managed and weak dong currency reduces incentives to improve quality of exports, and also serves to keep import costs high, thus contributing to inflationary pressures WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2011 High Lending Rates Threatens Investment Growth Aggressive economic policies by the Vietnamese government have led to mounting inflationary pressures in recent months Consumer price inflation (CPI) accelerated from 7.6% y-o-y in January to 11.8% in December, averaging 9.2% for 2010 This contributed to a rise in production costs and higher lending rates for businesses We expect lending rates, which are currently in the range of 14.0-17% to remain elevated and to put a damper on gross fixed capital formation (GFCF) growth in 2011 Furthermore, rising production costs are likely to lead to lower profit margins for businesses, lowering the incentive for businesses to invest in expanding operations Accordingly, we are forecasting a subdued 7.0% growth in private investments in 2011 Strong Performance In Spite Of Growing Trade Deficit Despite a widening trade deficit of US$3.8bn in Q410, compared to US$2.2bn in Q310, Vietnam's economy managed to grow by 20.4% q-o-q in Q410 Although we acknowledge that seasonal factors were largely responsible for the spike in domestic demand - historical data shows the final quarter in previous years seeing a significant spike in domestic demand - we believe private consumption will remain robust in the coming months Judging from the better-than-expected performance in domestic demand in Q410, we believe consumer sentiment will continue to improve and this in turn supports our view that private consumption will remain strong in 2011 Rising wages in Vietnam is also likely to support consumer spending in the coming months We believe that robust private consumption will result in import growth outpacing export growth and a deteriorating trade deficit in 2011 The recent rise in crude oil prices represents a threat to the trade deficit as Vietnam remains a significant net importer of refined crude Should crude prices continue to rise in the coming months, we expect this to have a negative impact on the trade deficit and real GDP growth We are maintaining our forecast for the trade deficit to widen from an estimated 7.0% of GDP in 2010 to 8.0% of GDP in 2011 Accordingly, we see this as a reason for our subdued real GDP growth forecast of 6.3% in 2011 © Business Monitor International Ltd Page 57 Vietnam Agribusiness Report Q2 2011 Table: Vietnam - Economic Activity, 2008-2015 2008 2009e 2010e 2011f 2012f 2013f 2014f 2015f 1485038 1658389 1953223 2326853 2641667 2985462 3358614 3761091 89.8 92.8 101.9 117.8 133.8 155.1 179.1 206.1 6.3 5.3 6.8 6.3 7.2 7.2 7.2 7.2 1041 1063 1153 1320 1483 1703 1948 2220 86.2 87.3 88.4 89.3 90.2 91.1 92.0 92.8 Industrial production 1,2 index, % y-o-y, ave 13.6 6.7 14.0 10.0 15.0 16.0 17.0 16.0 Unemployment, % of labour force, eop 4.7 6.0 5.0 6.0 5.0 5.0 5.0 5.0 Nominal GDP, VNDbn Nominal GDP, US$bn Real GDP growth, % change y-o-y GDP per capita, US$ Population, mn e f Notes: BMI estimates BMI forecasts at 1994 prices; Sources: General Statistics Office World Bank/BMI calculation/BMI © Business Monitor International Ltd Page 58 Vietnam Agribusiness Report Q2 2011 Industry Trend Analysis Proliferation Of Modern Retail Set To Continue In Vietnam The footprints of modern retailers are rapidly spreading across Vietnam Yet despite the rapid influx of foreign investment in the expansion of modern retail stores across the country in recent years, Vietnam's grocery sector remains relatively underdeveloped, with informal grocery stores accounting for an estimated 85% of retail food sales However, we believe the spread of modern retail into the food sector will only accelerate in the years to come, which should push Vietnam's retail sector up the ranks of investment attractiveness The opportunities present in the food retail sector are tremendous, which ties in nicely Vietnam Has Plenty Of Room For Growth Selected Countries Mass Grocery Retail Sales (% chg y-o-y) to our optimism in the Vietnamese domestic demand story A domestic demand-led economy and a very enticing demographic play, Vietnam has the further benefit of a rapidly growing middle class With incomes remaining low, Vietnamese shopping baskets are still largely filled with food staples, and independent grocery stores generally suffice to meet these daily essential needs These consumption habits are, Source: Statistical Agencies, BMI, Trade Press however, set to evolve considerably over the coming decade Growing affluence in the secondary and tertiary towns and cities in Vietnam has resulted in consumers increasingly looking to trade up to modern retailing methods and away from traditional, informal formats Accompanied by growing purchasing power, consumers particularly in suburban areas - are paying greater attention to product quality, hygiene and service Supermarkets and hypermarkets provide more compelling alternatives to independent stores in these aspects, and the opening of these modern retail stores should accelerate going forward as a growing number of consumers yearn for a more conducive shopping experience © Business Monitor International Ltd Page 59 Vietnam Agribusiness Report Q2 2011 Understandably, the pockets of wealth in less-urbanised areas are attracting the attention of foreign retailers Stretching its retailing footprint beyond the big cities, where it is already enjoying rapid growth, French retailer Groupe Casino opened its 14th Vietnamese outlet in the city of Nam Dinh and hopes to replicate its urban success in the smaller provinces and cities German mass grocery retail (MGR) operator Metro Cash & Carry is also looking further afield for strong growth opportunities by opening distribution centres in the provinces of Binh Dinh, An Giang and Binh Duong as well as in the southern city of Vung Tau Yet domestic retailers not intend to let these massive growth opportunities slip through their fingers Interestingly, domestic retailers have sought partnerships with foreign retailers in expanding their retail reach rather than going it alone A recent example would be Trung Nguyen Group 's partnership with Japanese retailer AEON 's convenience subsidiary Ministop to develop a convenience store chain in Vietnam This strategy can be linked to the capital springboard and expertise provided by foreign retailers By linking up with a financially powerful, expansion-oriented foreign retailer, domestic retailers should find themselves in a stronger position to contend with growing competition from big multinational retailers For now, traditional retail stores will continue to dominate Vietnam's retail landscape Eventually, however, retailers could find it increasingly difficult to expand their networks in big cities, which are witnessing rapid crowding Such a scenario would, in turn, prompt retailers to turn to under-retailed areas in search of future growth, encouraging the spread of modern retail across the country © Business Monitor International Ltd Page 60 Vietnam Agribusiness Report Q2 2011 Fuel Inflation To Dampen Consumer Spending And Retail Growth The inflationary burden on the Vietnamese consumer just got heavier With Brent crude prices reaching highs not seen since mid-2008, Vietnamese manufacturers and suppliers have announced that they will increase their sale prices from March 2011, as they contend with soaring electricity and fuel prices The impact of this inflationary environment on the Vietnamese consumer has been exacerbated by the devaluation of the dong and the 300 basis point (bps) worth of interest rate hikes seen in February Clearly, Vietnamese consumers have quickly found themselves in a tight spot, suggesting that they are likely to tighten their belts this year Such a scenario would, in turn, present negative implications for retail sales growth in the country In response to the respective 20% and 15% increases in petrol and electricity prices announced Retail Sales To Take A Hit From Food Inflation Mass Grocery Retail Sales, % chg y-o-y by the government, the majority of Vietnamese manufacturers and suppliers will raise their sale prices from March 2011 The spontaneous eruption of political unrest across the Middle East, with revolutionary fervour engulfing Egypt and Libya, has driven Brent crude above the US$116.7/bbl mark, and this has sparked increases in gasoline and diesel prices in Vietnam These price increases have Source: BMI, Trade Press naturally trickled down to retailers Faced with the threat of surging transportation costs and sale prices from manufacturers, Vietnamese retailers have hiked prices of perishable products, which are directly exposed to petrol and electricity price increases, by 10-18% On the other hand, prices of non-perishable goods, which bear indirect influences to inflationary trends in fuel and electricity, have been increased by 5% This inflationary environment should place a particularly tight squeeze on the Vietnamese consumer Travel expenses and utilities bills have pushed higher in recent weeks, putting greater stress on consumer purchasing power © Business Monitor International Ltd Page 61 Vietnam Agribusiness Report Q2 2011 Given that Vietnamese consumers spend a significant proportion of their household budgets on food, higher food prices are likely to trigger reduced spending on non-essential food and beverage products (such as seafood) this year Vietnamese retailers are likely to feel the squeeze from both ends On the one hand, operational fees of retailers have been rising due to higher utilities costs, thus placing a greater burden on retailers' margins On the other hand, retailers could find it challenging to register strong revenue growth this year as consumers lessen their purchases Against this backdrop of weakened consumer spending, Vietnamese retailers have cautioned that sales are expected to decrease by at least 30% in 2011 With this in mind, we have revised our mass grocery retail growth forecast for 2011 from 18.2% to 15.9% (see chart) © Business Monitor International Ltd Page 62 Vietnam Agribusiness Report Q2 2011 Beer Sector Shaping Up As An Exciting Long-Term Growth Opportunity Vietnam's positive consumer outlook, rising tourism levels and ongoing investments by domestic brewers are strong demand triggers for beer sales over the near term These growth drivers, coupled with impressive sales figures from leading brewers Habeco and Sabeco , have prompted us to revise our 2011 forecast for beer volume upwards Over the long term, the outlook for the Vietnamese beer sector is very positive as well, as the brewing industry gradually moves towards premiumisation on the back of rising consumer affluence A sanguine near-term consumer picture in Vietnam is a major positive underpinning our optimistic beer sector outlook Vietnam's rising disposable incomes and improving consumer confidence ensure that domestic demand remains robust to buoy growth in the country's consumer-facing sectors Underlining the state of consumer confidence and strong domestic demand, retail sales rose by 23.6% year-on-year (yo-y) in January 2011 from 11.6% (y-o-y) in December 2010 Ongoing strengthening in the Vietnamese tourism sector - Stuck At The Bottom tourist arrivals increased from 2010 GDP per Capita 428,300 in November to 449,600 in December - spells optimism for higher beer sales over the coming quarters as well Vietnam remains a developing, low-income country, and the domestic beer sector is arguably more reliant on tourist arrivals to drive value sales Tourists generally have a greater penchant for higher-value items and have the purchasing power to afford the higher-priced consumer goods Source: Statistical Agencies Combining these factors (increasing tourism levels and a brighter near-term consumer picture) with continued dynamism in the Vietnamese beer sector, and it is clear that the sector is set for sturdy growth this year Market leaders Sabeco and Habeco, which control an estimated 35% and 20% of the domestic beer market respectively, have continued to ramp up their production capacities and these expansionary activities should stimulate stronger value sales going forward Sabeco, for instance, started operating its new breweries such as Saigon-Phu Ly Brewery in May 2010, Saigon-Song Lam Brewery and Saigon- © Business Monitor International Ltd Page 63 Vietnam Agribusiness Report Q2 2011 Quang Ngai Brewery in June last year, and this greater production capacity should leave it poised to meet surging beer demand Underlining this optimistic near-term outlook for the Vietnamese beer sector, Sabeco reported a 21% increase in its total production output (a good proxy for domestic demand) for 2010 and is forecasting a 20% growth in its total production output for 2011 Habeco's results also point to strong demand in the beer market, with production output reaching 600mn litres of beer in 2010, which exceeded its forecast of 588mn litres Taking into account the aforementioned positives and bullish production figures from Vietnam's leading brewers, we have therefore upgraded our growth forecast for the beer sector to 17.7% for 2011 (see table) Over the longer-term horizon, the premiumisation trend is expected to gain increasing traction as Vietnamese consumers increase in affluence and gradually trade up to higher-priced beer brands Through 2015, BMI is forecasting a 52.9% growth in alcoholic value sales, overshadowing a 80.6% growth in volume sales, which suggests that an increasing number of consumers will be graduating to higher-value beer products This strong growth potential has already attracted significant investments from major brewers such as Asia Pacific Breweries and Carlsberg , and more multinational brewers are likely to jump into the fray over the coming years and further stimulate dynamism to buoy beer sales Table: Booming Alcoholic Drinks Market 2009e 2010f 2011f 2012f 2013f 2014f 2015f 28,055,19 30,915,91 34,558,53 38,553,50 42,839,24 47,595,75 52,847,80 4.55 10.20 11.78 11.56 11.12 11.10 11.03 Alcoholic drinks sales (mn litres) 1,946 2,396 2,819 3,266 3,786 4,389 5,091 Beer sales (mn litres) 1,931 2,381 2,803 3,250 3,769 4,373 5,074 Alcoholic drinks sales (VNDmn) Alcoholic sales growth, VND, (y-o-y) Source: General Statistical Office, Intracen, OECD, Trade press, BMI © Business Monitor International Ltd Page 64 Vietnam Agribusiness Report Q2 2011 Vietnam Shaping Up As An Exciting Long-Term Consumer Play A very dynamic consumer story is taking shape in Vietnam In the near term, rising wages and improving tourist arrivals will continue to instil dynamism to the consumer-facing scene in the country and buoy food and drink (F&D) consumption growth Longer-term, Vietnam continues to strengthen its appeal as one of the most attractive propositions among the Asian Pacific economies, as the increasingly-affluent Vietnamese consumer gradually trades up to higher-value F&D products The near-term consumer picture is very positive The Vietnamese tourism sector has gone from strength to strength in recent months and this continuing high level of tourism should provide strong support to domestic F&D consumption levels, particularly for higher-value items that tourists generally have a greater penchant for Monthly tourist arrivals have increased by a massive 58.5%, from 283,626 visitors in December 2004 to 449,600 visitors in December 2010 Private Consumption And Tourism Lifts Retail Sales Monthly Tourist Arrivals and Total Retail Sales (VND bn) Source: General Statistics Office Meanwhile, Vietnam's rising disposable incomes and improving consumer confidence ensure that domestic demand remains robust to buoy growth in the country's consumer sectors Underlining the effervescent state of consumer confidence in the economy and strong domestic demand, retail sales rose by 23.6% in January 2011, from an 11.6% growth in December 2010 (see chart) Over the coming decade, Vietnam's consumer sector is expected to emerge as arguably one of the AsiaPacific region's most dynamic behind India, China and Indonesia We continue to believe that Vietnam © Business Monitor International Ltd Page 65 Vietnam Agribusiness Report Q2 2011 holds many of the vital ingredients for robust domestic demand growth: not least, a large and young population, rising affluence and sturdy long-term economic growth Vietnam has been and will remain one of the fastest-growing economies in the Asia-Pacific region, with GDP growth forecast to average 7.2% annually between 2011 and 2020 This economic boom will continue to fuel job creation and fuel an emergence of a new affluent consumer class in the country, which has an interest and can afford to participate in modern retailing methods such as mass grocery retailing (MGR) The country's favourable demographic profile is another major positive underpinning its bright consumer outlook The massive size of Vietnam's consumer market (the country has a population of 88.4mn) and the relative immaturity of the country's food, drink and retail sectors means that there remains tremendous scope for growth for consumerfacing players Favourable Demographics Perhaps more importantly, Vietnam Population Breakdown By Age Group Vietnam also boasts a massive youth population - around 36.6% of the country's population is aged below 15 years old (which compares very favourably to 30.6% in China) - and the maturation of this young population should drive up the demand for higher-value F&D products such as functional and processed food or renowned Western brands backed by investment in promotion and marketing (see chart) Source: BMI forecast The aforementioned domestic demand credentials and a relatively relaxed regulatory environment will stand Vietnam in good stead to attract investments from the world's major F&D players, which could further stimulate consumer interest in modern retailing methods and higher-value F&D products Singapore MGR operator NTUC Fairprice is the latest company to jump on board the inbound investment bandwagon in Vietnam, joining the likes of South Korean retailer Lotte , Japan's FamilyMart and German retailer Metro as it looks to capitalise on the country's emerging market potential While UK retailer Tesco has stayed silent on speculation that it is weighing up an entry into the Vietnamese market, © Business Monitor International Ltd Page 66 Vietnam Agribusiness Report Q2 2011 we would not be surprised if Vietnam were to emerge on the retailer's long-term radar, given the highgrowth retail prospects in the country Clearly, investments in the retail sector will only intensify going forward and consumption habits should move up several notches over the coming years, as the variety of consumer products and demand increase Risks To Outlook This bright consumer outlook is, however, not without risks Vietnam's consumer price inflation (CPI) has continued to accelerate in January, supporting our view that the State Bank of Vietnam (SBV) will be under increasing pressure to hike its interest rates in order to keep a lid on these inflationary pressures (see chart) Further Rate Hikes Could Be In The Pipeline Food Prices (% chg y-o-y) and Consumer Price Inflation (% chg y-o-y) Source: General Statistics Office Although food price inflation (the main driver of Vietnam's CPI) has trended lower in recent months, we note that there is a strong possibility of the SBV tightening its monetary policy aggressively in 2011, should food prices start to accelerate strongly While BMI is factoring in only a single rate hike for 2011, risks of additional rate hikes are rapidly building, and a tighter credit environment could bear a dampening effect on consumer confidence and domestic demand © Business Monitor International Ltd Page 67 Vietnam Agribusiness Report Q2 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 Example of Rice Consumption Model: © Business Monitor International Ltd Page 68 Vietnam Agribusiness Report Q2 2011 (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 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 © Business Monitor International Ltd Page 69 Vietnam Agribusiness Report Q2 2011 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 [...].. .Vietnam Agribusiness Report Q2 2011 Vietnam Business Environment SWOT Strengths Weaknesses Opportunities Threats Vietnam has a large, skilled and low-cost workforce that has made the country attractive to foreign investors Vietnam' s location - its proximity to China and South East Asia, and its good sea... possibly see output fall later in our forecast period © Business Monitor International Ltd Page 13 Vietnam Agribusiness Report Q2 2011 Vietnam Livestock Outlook BMI Supply View: Vietnam' s livestock industry has historically suffered from under-investment and competition from cheaper imports Within the Vietnamese livestock industry, pig farming is by far the most significant sector, with pork production,... upside risks to our forecasts © Business Monitor International Ltd Page 19 Vietnam Agribusiness Report Q2 2011 Vietnam Coffee Outlook BMI Supply View: Vietnam' s coffee sector has grown significantly over the last 20 years, with yields doubling over that time, while the area planted has expanded from 42,000 hectares to over 509,000 Vietnam is the world's biggest producer of robusta coffee, with more than... Business Monitor International Ltd Page 23 Vietnam Agribusiness Report Q2 2011 Vietnam Dairy Outlook BMI Supply View: Vietnamese dairy consumption has expanded significantly in the last 15 years, driven by relatively large increases in domestic consumption, as well as rising incomes which have fostered increased milk consumption In fact, per capita milk consumption in Vietnam has virtually doubled between... Zealand-based Fonterra has also been ramping up its domestic production and exploring new regional export markets, including Vietnam © Business Monitor International Ltd Page 26 Vietnam Agribusiness Report Q2 2011 Table: Vietnam – Milk Production & Consumption 2006 2007 2008 2009e 2010e 2011f Milk Production, '000 1,2 tonnes 216.0 234.4 262.2 283.4 342.5 379.0 Liquid Milk Consumption, 3 '000 tonnes 158.8... forecasts, as it places the dairy industry at risk of a similar scandal at home, which would further tar the image of dairy products in Vietnam © Business Monitor International Ltd Page 28 Vietnam Agribusiness Report Q2 2011 Vietnam Grains Outlook BMI Supply View: Vietnamese corn production is forecast to reach 5.3mn tonnes in 2010/11, a 4.5% year-on-year (y-o-y) improvement due to a slight increase... dip by 3.7% y-o-y in 2008/09 on the back of tighter credit regulations throughout Vietnam then © Business Monitor International Ltd Page 30 Vietnam Agribusiness Report Q2 2011 Vietnam Rice Outlook BMI Supply View: Despite virtually flat production growth in recent years and even a slight decrease in 2009/10, BMI believes Vietnam' s rice sector will experience considerable growth over our forecast period,... = 2008-09; Sources: USDA, BMI © Business Monitor International Ltd Page 32 Vietnam Agribusiness Report Q2 2011 Lower Exports in 2011 Vietnam contributes to roughly 5% of total world production but is responsible for close to 20% of total rice trade Despite expectations for an overall year-on-year 1.2% increase in output, the Vietnam Food Association (VFA) has projected lower rice exports of 6.0mn tonnes... sizeable target underlines the apparent potential of domestic consumption © Business Monitor International Ltd Page 20 Vietnam Agribusiness Report Q2 2011 Table: Vietnam – Coffee Production & Consumption Coffee Production, '000 1,2 60kg bags Coffee Consumption, 3 '000 60kg bags e 2010e 2011f 2012f 2013f 2014f 2015f 18,161.36 18,438.76 19,403.86 20,593.71 21,865.04 23,205.46 1,100.94 1,189.02 1,292.39... this, farmers encouraged by high robusta prices are reportedly increasing the area devoted to coffee, in many cases pushing into forest land © Business Monitor International Ltd Page 21 Vietnam Agribusiness Report Q2 2011 MARD is also planning on establishing a new quality benchmark for coffee destined for the export market, according to a Reuters report released in December 2009 The ministry will assist ... -1 87.30 -1 98.20 -2 29.70 -2 60.20 -2 92.80 -3 25.70 Notes: BMI estimates BMI forecasts Sources: USDA, BMI © Business Monitor International Ltd Page 14 Vietnam Agribusiness Report Q2 2011 Table: Vietnam. .. completeness of any information hereto contained Vietnam Agribusiness Report Q2 2011 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2011 CONTENTS Executive Summary ... 200 8-0 9; Sources: General Statistics Office of Vietnam, BMI FAPRI, BMI Table: Vietnam – Butter Consumption & Trade 2006 2007 2008 2009e 2010e 2011f 6.6 5.3 6.2 6.7 7.2 7.8 -6 .6 -5 .3 -6 .2 -6 .7 -7 .2