Q2 2014 www.businessmonitor.com VIETNAM AGRIBUSINESS REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 1759-1740 Published by:Business Monitor International Vietnam Agribusiness Report Q2 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: March 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2014 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 2014 CONTENTS BMI Industry View SWOT 10 Agribusiness 10 Business Environment 12 Industry Forecast 13 Dairy Outlook 13 Table: Vietnam Butter Production, 2013-2018 14 Table: Vietnam Cheese Consumption, 2013-2018 14 Table: Vietnam Milk Production & Consumption, 2013-2018 14 Table: Vietnam Whole Milk Powder Consumption, 2013-2018 14 Table: Vietnam Butter Consumption, 2008-2013 21 Table: Vietman Cheese Consumption, 2009-2013 21 Table: Vietnam Milk Production & Consumption, 2008-2013 21 Table: Vietnam Whole Milk Powder Consumption, 2008-2013 21 Livestock Outlook 23 Table: Vietnam Beef & Veal Production & Consumption, 2013-2018 25 Table: Vietnam Pork Production & Consumption, 2013-2018 25 Table: Vietnam Poultry Production & Consumption, 2013-2018 25 Table: Vietnam Beef & Veal Production & Consumption, 2008-2013 32 Table: Vietnam Pork Production & Consumption, 2008-2013 32 Table: Vietnam Poultry Production & Consumption, 2008-2013 32 Coffee Outlook 34 Table: Vietnam Coffee Production & Consumption, 2013-2018 35 Table: Vietnam Coffee Production & Consumption, 2008-2013 41 Rice Outlook 43 Table: Vietnam Rice Production & Consumption, 2013-2018 45 Table: Vietnam Rice Production & Consumption, 2008-2013 49 Grains Outlook 51 Table: Vietnam Corn Production & Consumption, 2013-2018 52 Table: Vietnam Corn Development Production Plan & BMI Forecasts 52 Table: Vietnam Corn Production & Consumption, 2008-2013 54 Featured Analysis 56 Bright Outlook For Agribusiness In Vietnam 56 Table: Vietnam - Select Commodities Production & Consumption 61 Commodities Price Analysis 63 Monthly Softs Update 63 Table: Select Commodities - Performance & BMI Forecasts 70 Table: BMI Commodities Strategy 71 Monthly Grains Update 72 Table: Select Commodities - Performance & Forecasts 80 © Business Monitor International Page Vietnam Agribusiness Report Q2 2014 Table: BMI Commodities Strategy 81 Upstream Analysis 82 Asia GM Outlook 82 Table: Philippines Corn Estimates 86 Table: Select Countries - GM Crops Use In 2012 87 Asia Fertiliser Outlook 88 Table: Global Benchmark Fertiliser Prices (US$/tonne FOB, reported prices at the end of quarter) 91 Downstream Analysis 95 Drink 95 Alcoholic Drinks 95 Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 97 Hot Drinks 100 Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 101 Soft Drinks 102 Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 104 Mass Grocery Retail 106 Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 108 Table: Grocery Retail Sales By Format (%) 109 Food 110 Food Consumption 110 Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018 112 Canned Food 113 Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018 113 Confectionery 114 Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 115 Pasta 117 Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 117 Dairy 119 Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 120 Regional Overview 121 Table: Select Countries - Biofuel Blending Mandates & Programmes 123 Competitive Landscape 127 Table: Major Agribusiness Companies (US$mn) 127 Company Profile 128 Vinamilk 128 Table: Vinamilk's Financial Highlights, 2007-2013 137 Demographic Forecast 138 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 139 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 140 Table: Vietnam's Key Population Ratios, 1990-2020 141 Table: Vietnam's Rural And Urban Population, 1990-2020 141 Methodology 142 © Business Monitor International Page Vietnam Agribusiness Report Q2 2014 Industry Forecast Methodology 142 Sector-Specific Methodology 143 © Business Monitor International Page Vietnam Agribusiness Report Q2 2014 BMI Industry View BMI View: Recent adjustments in our outlook for Vietnam's economy and business environment add further weight to our positive view on the country's agribusiness sector The industry holds strong growth opportunities in terms of production, exports and retail sales, particularly with regard to the rice, coffee, livestock and dairy sectors However, Vietnam is facing growing competition in its key markets, and the fulfilment of its promising potential will only be achieved if the country steps up its competitiveness and improves product quality and supply chain efficiency Vietnam will have to significantly ramp up investment in crop productivity in order to avoid being left behind, and if it succeeds in producing more value-added crops and maintaining its status as an export spearhead Rice The King Commodity Vietnam - BMI Agribusiness Market Value By Commodity (% of total) Note: The BMI Market Value is an addition of all domestically produced commodities' value (calculated by multiplying the production with the international benchmark prices, converted in US$/tonne); f = BMI forecast Source: BMI Key Forecasts ■ Rice consumption growth to 2018: 4.0% to 20.9mn tonnes Rice remains the major food staple in Vietnam, and we not see this changing over our forecast period However, rising interest in other © Business Monitor International Page Vietnam Agribusiness Report Q2 2014 foods such as wheat-based goods - supported by growing affluence - will restrict demand for rice, and over the forecast period we expect production growth to significantly outpace that of consumption • Corn production growth to 2017/18: 28.9% to 6.2mn tonnes Although acreage is likely to remain stagnant or diminish; current yield immaturity means significant gains are still available via this avenue, especially as robust local corn prices provide incentives to farmers Domestic consumption will be another important driver • Milk production growth to 2016/17: 21.9% to 484,700 tonnes Dramatic increases in cattle numbers and increased public and private sector investment - part of the effort to reduce the country's growing import dependency - will be the main boost to growth Commercialisation will also play a key role as larger, more efficient farms come to play a greater role in milk production • BMI universe agribusiness market value: US$25.7bn in 2014 (down from US$27.3bn in 2012); growth expected to average -1.2% annually between 2013 and 2017 • 2014 real GDP growth: 5.9% (up from 5.4% in 2013; predicted to average 6.3% over 2014-2018) • 2014 consumer price index: 5.8% year-on-year (y-o-y) (down from 6.6% in 2013; predicted to average 5.2% over 2014-2018) • 2014 central bank policy rate: 7.00% (same than in 2013; predicted to average 6.20% over 2014-2018) Key Revisions To Forecasts ■ 2013/14 coffee production forecast revised up, to 27.5mn 60kg bags (compared with a previous estimate at 24.5mn bags) Concerns over a prolonged drought spell in Central Highlands that hindered coffee trees blossoms, have now eased Moreover, cultivated area of higher yielding trees has been growing at a faster pace than expected Key Developments Despite the rebound in production, Vietnam's coffee exports in 2013/14 will probably see slow growth due to low robusta prices and a growing coffee export sector crisis Coffee prices in Vietnam have been on a declining trend for the past two years, and have averaged US$1,708/tonne in the past six months (September-February), down 10.9% y-o-y As a result, coffee farmers have been hoarding beans in order to obtain better prices later on Meanwhile, although coffee bean production is thriving, the coffee export sector is facing a debt crisis The government scrapped the value added tax on coffee exports in January 2014 in order to help the sector, but uncertainty around this policy has also limited exports since the start of the year Following the exceptional 2011/12 production and export season, exports were weak in 2012/13, amounting 23.8mn bags, down 2.5% y-o-y Exports slew down even more since the beginning of the 2013/14 season in October The ongoing restructuring of Vietnam's largest coffee export company, Vinacafe, is reflective of the difficulties facing the country's coffee export industry It also highlights the government's push © Business Monitor International Page Vietnam Agribusiness Report Q2 2014 to restructure ailing state-owned enterprises, which we see as a positive development The ongoing difficulties in the coffee export sector are the result of a combination of factors, including the extensive use of short-term debt to fund long-term projects, high interest rates, and poor management and futures trading abilities Although the extension of loan terms and decreasing interest rates will give a breath of fresh air to exporting companies, the sector's outlook remains hindered by overcapacity in the beans processing industry and bad management practices Vietnam's livestock sector, and especially the pork sector, went through challenging times in 2012 and 2013 due to a rise in feed ingredient and fuel prices, lower demand and plummeting domestic prices As a result, many farmers were forced to reduce or suspend their operations in order to limit losses, with as many as 30-50% of individual farmers in southern provinces abandoning their farms, while owners of large farms with more than 1,000 heads have reduced their herd size by up to 70% The situation has been improving since H213, as pork prices are starting to recover, and consumers are showing more confidence in the pork market However, we believe pork and poultry production growth will remain below historical averages Meanwhile, foreign and locally-owned feed companies such as Charoen Pokphand Vietnam Livestock, Japfa Comfeed Vietnam and GreenFeed Vietnam Corporation have announced investments to increase feed production capacity © Business Monitor International Page Vietnam Agribusiness Report Q2 2014 SWOT Agribusiness SWOT Analysis Strengths ■ 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 rice and coffee It also enjoys relatively high rice yields compared with its regional counterparts ■ Agricultural productivity has improved considerably since the opening up of the economy in 1986 Weaknesses ■ Vietnam enjoys relatively good international price competitiveness for rice and coffee ■ Much of Vietnam's agriculture is based on small-scale farms with poor yields relative to more developed international competitors ■ Transportation and production infrastructure is often poor, making getting crops to market difficult and negatively affecting quality Opportunities ■ Since the opening up of the economy in 1986, which allowed more private involvement in agriculture, yields have improved dramatically and look set to continue doing so ■ Vietnam's fast-growing population of more than 80mn provides a large market for agro-food products ■ With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period, consumers will have more money to spend on food, spurring growth in agricultural production ■ A move towards higher-quality products, especially in the coffee and dairy sectors, will help to improve Vietnam's product competitiveness © Business Monitor International Page 10 Vietnam Agribusiness Report Q2 2014 grow by 5.9% and 6.4% in 2014 and 2015 respectively, compared with 5.6% on average in the past three years Exports momentum will also remain strong, as Vinamilk's capacity expands However, margins are likely to continue to stagnate if not fall slightly Indeed, the impact on margins on changes in milk products is usually felt with a two quarters lag on margins (see chart), and global milk (and milk powder prices, the input for Vinamilk, which imports the powder mainly from New Zealand) have remained elevated in Q413 and since the start of 2014 Skyrocketing Milk Prices Weighing On Margins Vinamilk - Margins (%) Source: Vinamilk We expect margins to recover from H214, as we see milk prices averaging significantly lower in 2014 and 2015 as dairy herds are recovering in the US and Australia and increasing quickly in New Zealand Moreover, we expect value added dairy product prices to remain stable and enable margins for dairy processors to recover (see 'Turning More Positive On US And EU Dairy Processors' February 14 and 'Milk To Average US$16.00/cwt In 2014' November 28, 2013) © Business Monitor International Page 131 Vietnam Agribusiness Report Q2 2014 More Headwinds In Near Term Vinamilk Gross Margin (LHS, %, quarters lag) & Average Whole Milk Powder Prices (RHS, US$/ tonne) Source: BMI, Vinamilk, JP Morgan, Global Dairy Trade Company Strategy We see long-term growth potential for Vinamilk given the strong growth potential for dairy consumption in Vietnam and the region, the company's investment in supply chain and capacity expansion, and its strong financial position The company is well positioned to benefit from the industry's growth, as it has a well-known brand (a recent survey by Kantar Worldpanel indicates Vinamilk's products are consumed by 94% of households in Vietnam) and a large distribution network We believe Vinamilk's strategy of developing mainly in the domestic market, and more specifically in value-added segments, will be to its benefit Vinamilk boasts large market shares in key domestic markets for which we forecast strong consumption growth in the coming years For example, Vinamilk has a 40% market share in Vietnam's liquid milk segment, for which we forecast consumption to expand by 36.1% between 2013 and 2018, to 272,400 tonnes, on the back of increased urbanisation, Westernisation and the ongoing spread of organised retail networks Moreover, Vinamilk plans to scale up its production and market share in the powdered milk segment (which currently only accounts for 20% of its total sales in Vietnam), for which we believe demand will rise by 24.5% over the coming five years © Business Monitor International Page 132 Vietnam Agribusiness Report Q2 2014 Vinamilk On Top Select Companies - Operating (LHC) & Profit (RHC) Margins, % Note: FY13 for Vinamilk and Modern Dairies 2013 YTD (Q113-Q313) for others Source: Bloomberg With new downstream projects coming online soon (a second powdered milk factory and a liquid milk factory completed in FY13), the company is now heavily investing in upstream capacity and plans to spend VND1,555bn (US$73mn) in 2013-2015 Vinamilk, which sources 25% of its raw milk from small-scale farms in Vietnam, is ramping up its cow farming business and aims to source 40% of its raw milk needs from internally owned farms by 2016 We also highlight Vinamilk's export growth potential Exports (mainly to Iraq, Cambodia, the Philippines, Thailand and Australia) accounted for 14% of total revenue as of FY13, compared with 10% in FY07 Exports are likely to see sustained growth in the coming years, as they will benefit from access to new markets such as the US, and the full implementation of the ASEAN Economic Community in the coming years Although the current 2015 timeline for integration looks unlikely, we expect closer commercial and financial ties with lower import tariffs across the region in the coming years Vinamilk is trying to capitalise on loser investment regulations in the region It announced in January 2014 the creation of Angkor Dairy in Cambodia, and plans to start building a factory in the country in FY14 in order to save costs © Business Monitor International Page 133 Vietnam Agribusiness Report Q2 2014 Positive Picture Vinamilk - Free Cash Flow (VNDmn) Source: Vinamilk Strong Margins And Low Debt Levels Vinamilk enjoys the strongest margins relative to its peers (despite the recent decline in margins), thanks to its ability to control expenses and maintain a very low level of debt Operating and profit margins have been on an uptrend lately at a time when global milk prices have been historically high Profit margins reached 21.1% in FY13, significantly higher than the Asia dairy industry average of 5.9% Moreover, Vinamilk's liquidity, efficiency and solvency ratios are generally higher than its peers Vinamilk also regularly records positive and growing free cash flows despite having invested heavily in FY13 This bodes well for the company's future expansion plans We therefore believe Vinamilk will remain an outperformer in the industry over the long term due to its efficiency, cost control and emphasis on high-growth demand markets © Business Monitor International Page 134 Vietnam Agribusiness Report Q2 2014 Improved Performance Ahead Vinamilk, Ho Chi Minh Index (VNI), Nestlé India & Inner Mongolia Yili, Rebased Note: January 2013 = 100 Source: BMI, Bloomberg Valuation Vinamilk's 12-month trailing price/earnings ratio (PE) decreased slightly since December 2013 and is now standing at a nine months low of 18.0x However, this is still elevated historically, as in January 2013 PE was at 14.5x This is also higher than the VNI PE of 14.0x, but significantly below its competitors' average of 38.7x (the average is pushed higher by Bright Dairy and Nestlé India) © Business Monitor International Page 135 Vietnam Agribusiness Report Q2 2014 Heading Up Vinamilk - Share Price, VND (daily chart) & RSI (below) Source: BMI, Bloomberg Share Price Analysis We believe Vinamilk's share price could record some weakness in the near term, as margins will continue to be hampered by elevated milk prices The share price could break below support coming at VND139,000 However, the share price is likely to recover from H214 with the improvement in performance It will © Business Monitor International Page 136 Vietnam Agribusiness Report Q2 2014 eventually break above resistance coming at VND142,000 An upside break at this level would be bullish for the share price Table: Vinamilk's Financial Highlights, 2007-2013 2007 2008 2009 2010 2011 2012 2013 6,538 8,209 10,614 15,753 21,627 26,562 30,949 Revenues Growth 4.7 25.6 29.3 48.4 37.3 22.8 16.5 Operating Income* 633 1,248 2,340 3,347 4,317 6,206 7,295 Operating Margin 9.7 15.2 22.0 21.2 20.0 23.4 23.6 Net Income* 963 1,250 2,376 3,616 4,218 5,819 6,534 Profit Margin 14.7 15.2 22.4 23.0 19.5 21.9 21.1 Net Debt/EBITDA -1.1 -0.4 -1.1 -0.5 -0.8 -0.8 -0.8 na 1,559 4,632 4,556 5,145 6,981 7,839 Revenues* EPS * In VNDbn; margins in %; na = not available Sources: BMI, Bloomberg © Business Monitor International Page 137 Vietnam Agribusiness Report Q2 2014 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 138 Vietnam Agribusiness Report Q2 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050 Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695 Total © Business Monitor International Page 139 Vietnam Agribusiness Report Q2 2014 Vietnam's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 12 17 21 24 30 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12 © Business Monitor International Page 140 Vietnam Agribusiness Report Q2 2014 Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued 100+ years 1990 1995 2000 2005 2010 2013e 2015f 2020f 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Key Population Ratios, 1990-2020 Dependent ratio, % of total working age Dependent population, total, '000 1990 1995 2000 2005 2010 2013e 75.8 71.0 61.3 50.8 42.9 41.4 2015f 2020f 41.3 41.9 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 Active population, total, '000 58.5 62.0 66.3 70.0 70.7 70.8 70.5 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 Youth population, total, '000 60.9 50.9 40.9 33.6 32.1 31.7 30.2 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age Pensionable population, total, '000 10.0 10.1 10.3 9.9 9.3 9.3 9.6 11.6 3,934 4,491 5,190 5,579 5,823 6,037 6,343 7,965 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286 e/f = BMI estimate/forecast Source: World Bank, UN, BMI © Business Monitor International Page 141 Vietnam Agribusiness Report Q2 2014 Methodology Industry Forecast Methodology 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 Common to our analysis of every industry is the use of vector autoregressions Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis Such single-variable analysis is called univariate modelling We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA) In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting BMI mainly uses ordinary least squares estimators; 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, if poor weather conditions impede 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 multicollinearity © Business Monitor International Page 142 Vietnam Agribusiness Report Q2 2014 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 ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Sector-Specific Methodology Within the Agribusiness industry, issues that might result in human intervention could include but are 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 that the explanatory variables for both are quite similar, but the underlying economic theory is different 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 © Business Monitor International Page 143 Vietnam Agribusiness Report Q2 2014 ■ 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 (eg 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, ie 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 © Business Monitor International Page 144 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... International Page 21 Vietnam Agribusiness Report Q2 2014 The lack of a national quality control body for dairy products will continue to place downside risks to our production and consumption forecasts, as it places the dairy industry at risk of a health scandal, which would further tarnish the image of dairy products in Vietnam © Business Monitor International Page 22 Vietnam Agribusiness Report Q2 2014 Livestock... companies © Business Monitor International Page 29 Vietnam Agribusiness Report Q2 2014 Mainly Foreign Companies Vietnam - Feed Production By Company, 2011 (% of total) Source: BMI, Vietnam Animal Feed Association Local Feed Company Expands Vietnam' s feed industry is one of the world's fastest agribusiness markets It is estimated that approximately a third of Vietnam' s feed is prepared in backyard farms from... International Page 24 Vietnam Agribusiness Report Q2 2014 Table: Vietnam Beef & Veal Production & Consumption, 2013-2018 2013 2014f 2015f 2016f 2017f 2018f Beef & Veal Production, '000 tonnes 402.0 404.0 407.0 409.0 413.0 417.0 Beef & Veal Consumption, '000 tonnes 414.0 418.1 439.0 461.0 484.0 508.3 f = BMI forecasts Source: USDA Table: Vietnam Pork Production & Consumption, 2013-2018 2013 2014f 2015f 2016f... significant of Vietnam' s livestock sectors and is expected to grow by a low 3.7% over the 2012/13 level to 417,000 tonnes © Business Monitor International Page 23 Vietnam Agribusiness Report Q2 2014 Strong Consumption Potential Vietnam - Population (mn) & GDP Per Capita (US$, % chg y-o-y) Source: BMI, Asian Development Bank, Vietnam General Statistics Office, UN BMI Demand View: Meat consumption in Vietnam. .. Table: Vietnam Poultry Production & Consumption, 2013-2018 2013 2014f 2015f 2016f 2017f 2018f Poultry Production, '000 tonnes 760.0 815.0 859.0 906.3 956.1 1,008.7 Poultry Consumption, '000 tonnes 790.0 829.5 883.4 940.8 1,008.6 1,088.3 f = BMI forecasts Source: USDA © Business Monitor International Page 25 Vietnam Agribusiness Report Q2 2014 Sector Profitability Improves, But Challenges Remain Vietnam' s... implemented This would then weigh on production growth in two of Vietnam' s main agriculturalproducing regions © Business Monitor International Page 11 Vietnam Agribusiness Report Q2 2014 Business Environment SWOT Analysis Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country attractive to foreign investors ■ Vietnam' s location - its proximity to China and South East... 18.7% y-o-y © Business Monitor International Page 35 Vietnam Agribusiness Report Q2 2014 Slower Exports Vietnam- Coffee Exports ('000 tonnes) Source: BMI, Vicofa Crisis Brewing For Coffee Exporters The ongoing restructuring of Vietnam' s largest coffee export company, Vinacafe, is a clear evidence of the difficulties of the coffee export industry The Vietnam National Coffee Corporation (Vinacafe), a stateowned... 2013e 2014f 2015f 2016f 2017f 2018f 36.8 38.4 40.1 41.9 43.8 45.8 e/f = BMI estimates/forecasts Sources: FAPRI © Business Monitor International Page 14 Vietnam Agribusiness Report Q2 2014 Private Investment To Support Production Growth The recent announcement by dairy company FrieslandCampina and agricultural bank Rabobank that the two institutions will team up to improve the quality of milk in Vietnam. .. of its raw milk materials, mainly from Australia and New Zealand Pressure from high milk prices is likely to ease from 2014, as we expect prices to head down on a rebound in supply © Business Monitor International Page 18 Vietnam Agribusiness Report Q2 2014 Highly Concentrated Market Vietnam - Liquid & Powdered Milk Production Market Share (% of total) Source: BMI, Bloomberg Thailand's Fears Over Trade... times that of Dutch Mill, Thailand's leading milk producer In Cambodia, where Thai milk used to dominate the market, cheaper Vietnamese dairy products have been gaining market share © Business Monitor International Page 19 Vietnam Agribusiness Report Q2 2014 Mostly New Zealand Vietnam - Milk & Milk Products Imports By Country, 2010 (% of total) Source: BMI, USDA We believe that Thai dairy farmers' fears ... predicted to average 6.3% over 201 4-2 018) • 2014 consumer price index: 5.8% year-on-year (y-o-y) (down from 6.6% in 2013; predicted to average 5.2% over 201 4-2 018) • 2014 central bank policy rate:... 29 Vietnam Agribusiness Report Q2 2014 Mainly Foreign Companies Vietnam - Feed Production By Company, 2011 (% of total) Source: BMI, Vietnam Animal Feed Association Local Feed Company Expands Vietnam' s.. .Vietnam Agribusiness Report Q2 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: March 2014