Q3 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 Q3 2010 Including 5-year industry forecasts by BMI Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication Date: May 2010 Business Monitor International Mermaid House, Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2010 Business Monitor International All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Agribusiness Report Q3 2010 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2010 CONTENTS Executive Summary SWOT Analysis Vietnam Agricultural SWOT Vietnam Political SWOT Vietnam Economic SWOT Vietnam Business Environment SWOT 10 Supply Demand Analysis 11 Vietnam Sugar Outlook 11 Table: Vietnam Sugar Production, Consumption & Trade 12 Vietnam Livestock Outlook 13 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 17 Table: Vietnam – Coffee Production & Consumption 19 Vietnam Dairy Outlook 20 Table: Vietnam – Milk Production & Consumption 21 Table: Vietnam – Butter Production, Consumption & Trade 21 Table: Vietnam – Cheese Production, Consumption & Trade 22 Table: Vietnam – Whole Milk Powder Production, Consumption & Trade 22 Vietnam Grains Outlook 23 Table: Vietnam – Corn Production, Consumption & Trade 23 Vietnam Rice Outlook 24 Table: Vietnam – Rice Production, Consumption & Trade 26 Competitive Landscape 27 Table: Agricultural Commodity Producers & Traders 27 Table: Agribusiness Suppliers 28 Table: Integrated Agricultural Producers 29 Commodity Price Analysis 30 Grains Update 30 Corn 30 Table: Corn 30 Rice 31 Table: Rice 31 Soy 32 Table: Soybean 32 Wheat 33 Table: Wheat 33 Softs Update 34 Cocoa 34 Table: Cocoa 34 Coffee 35 Table: Coffee 35 Milk 36 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2010 Table: Milk 36 Sugar 37 Table: Sugar 37 Industry Forecast Scenario 38 Food Consumption 38 Table: Food Consumption Indicators Historical Data & Forecasts, 2007-2014 39 Canned Food 40 Confectionery 40 Table: Value/Volume Sales of Selected Food Subsectors - Historical Data & Forecasts 41 Trade 42 Table: Vietnam Food & Drink Trade Indicators Historical Data & Forecasts 43 Retail 44 Table: Vietnam MGR Indicators Value Sales by Format Historical Data & Forecasts 46 Grocery Retail Sales by Format - Historical Data & Forecasts (%) 46 Economic Outlook 47 Table: Vietnam - Economic Activity, 2007-2014 49 2011 Demand Challenges Show Why Selectivity Is Key 50 BMI Forecast Modelling 53 How We Generate Our Industry Forecasts 53 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2010 Executive Summary BMI View: Vietnam is import-dependent for a number of its food staples The country's agricultural resources are under pressure from strong population growth and rapid urbanisation, and yet positive production outlooks for well-invested industry subsectors suggests that significant improvements can be made if private and public sector investment were more forthcoming Vietnam's strong economic growth outlook and accordant increased food demand should push the matter of food security even further up the political agenda in the coming years Key Industry Data ! Rice Production to grow by 18% to 2013/14; year-on-year (y-o-y) contraction of 0.5% forecast for 2009/10, due to weather effects and lingering base effects of strong 2007/08 harvest ! Coffee Production to grow by 23% to 2013/14; y-o-y contraction of 1.8% on 2009/10 due to unseasonal weather in the early flowering season ! Milk Production to grow by 41% to 2014 thanks to sustained industry investment ! Poultry, pork and beef Production to increase by 33%, 31% and 21% respectively to 2014 as industry benefits from government support and strong domestic demand Macroeconomic Data ! GDP Growth Forecast 2010: 4.4% (down from 5.3% in 2009) ! Consumer Price Index (% chg y-o-y) Forecast 2010: 10.2% (up from 7% in 2009) ! Population Forecast 2010: 89.2mn (from 88mn in 2009) Industry Focus BMI believes that Vietnam's dairy sector should gain a strong boost following a US$350mn investment by TH Milk Joint Stock Company in April 2010 to enhance cattle-raising and milk processing in Nghe An province The project includes the construction of a 10,000 hectare pasture farm for up to 45,000 heads of cattle within two years, and US$100mn for a processing factory designed to produce up to 530mn litres of milk per year, which would make it the largest factory of its kind in Vietnam © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2010 We are also optimistic on the outlook for Vietnamese coffee, despite recent evidence suggesting that efforts to provide value exports over volume exports are not paying off Rather than investing in tree replanting to improve bean quality, farmers have been prioritising increased acreage However, the government has shown commitment to lifting quality and supporting export prices by recently buying up large quantities of coffee While this poses some short-term problems - such as farmers hording in the hope of getting higher government prices - the state's involvement should ensure output growth; this is after all a highly economically important agricultural subsector in export terms © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 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 Q3 2010 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 Q3 2010 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 2007 ! 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 Q3 2010 Trade BMI expects Vietnam's food, drink and tobacco trade balance to remain very Trade Figures (US$mn) 2005-2014 healthy to 2014 Exports are set to grow by 64.2% 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, e/f=BMI estimate/forecast Source: General Statistical Office, Intracen, OECD, Trade press, BMI 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 Import growth is forecast to be 52.9% to 2014 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 In the coming year, we expect upward pressure on rice prices, as we see a possibility that India, which has in recent years alternated with Vietnam as the second-largest rice exporter in the world after Thailand, will have to import rice for the first time in 21 years after a dismal monsoon Adverse weather is also hurting domestic production in the Philippines, the largest rice importer in the world, with these developments having an impact on Vietnam's trade balance © Business Monitor International Ltd Page 42 Vietnam Agribusiness Report Q3 2010 Table: Vietnam Food & Drink Trade Indicators Historical Data & Forecasts 2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f Exports (US$mn) 6,566 8,097 9,074 10,585 9,706 10,747 11,833 13,050 14,412 Imports (US$mn) 2,314 2,693 3,065 3,479 3,206 3,502 3,804 4,136 4,501 Balance (US$mn) 4,252 5,404 6,010 7,106 6,500 7,245 8,029 8,914 9,911 e/f = BMI estimate/forecast Source: UNCTAD, © Business Monitor International Ltd Page 43 Vietnam Agribusiness Report Q3 2010 Retail BMI is forecasting phenomenal growth Value Of MGR Formats (VNDmn) in Vietnam's MGR industry to 2014, as 2005-2014 the market assumes one of the highest growth 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 over 72%, with all modern formats present in the country supermarkets, hypermarkets and convenience stores -contributing to this development There are two primary drivers of this e/f=BMI estimate/forecast Source: General Statistical Office, Trade press, BMI growth forecast One is Vietnam's economic 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 Recognising the importance of investing in infrastructure, the government is making headway in improving its dilapidated infrastructure with construction on a number of ports, power plants and road projects commenced in 2009 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 foreign direct investment (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 © Business Monitor International Ltd Page 44 Vietnam Agribusiness Report Q3 2010 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 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 65.2% 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 Nevertheless, this subsector can be expected to attract growing interest from retailers, with Japanese convenience retailer FamilyMart having recently opened its first outlet in Ho Chi Minh City as it looks to capitalise on the city's young and increasingly busy population Vietnamese consumers are most familiar with the standard supermarket format, as well as with hypermarkets, owing to its popular combination of both food and non-food items Therefore, these two formats are set to witness the strongest levels of growth at 73.9% and 73% 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 45 Vietnam Agribusiness Report Q3 2010 Table: Vietnam MGR Indicators Value Sales by Format Historical Data & Forecasts 2007 2008e 2009f 2010f 2011f 2012f 2013f 2014f Supermarkets (VNDbn) 1,660 2,021 2,187 2,385 2,729 3,052 3,400 3,803 Hypermarkets (VNDbn) 657 822 899 992 1,126 1,259 1,404 1,556 Convenience (VNDbn) 608 690 738 796 897 992 1,094 1,220 Total mass grocery retail sector (VNDbn) 2,925 3,533 3,824 4,173 4,752 5,303 5,898 6,578 Total mass grocery retail sector growth, VND, (y-o-y) 18.67 20.79 8.24 9.12 13.88 11.61 11.22 11.53 Supermarkets (US$bn) 0.1010 0.1230 0.1230 0.1273 0.1455 0.1672 0.1915 0.2205 Hypermarkets (US$bn) 0.0400 0.0500 0.0506 0.0529 0.0600 0.0690 0.0791 0.0902 Convenience (US$bn) 0.0370 0.0420 0.0415 0.0425 0.0478 0.0543 0.0616 0.0707 Total mass grocery retail sector (US$bn) 0.1780 0.2150 0.2151 0.2227 0.2534 0.2906 0.3323 0.3813 e/f = BMI estimate/forecast Source: Company information, Trade press, BMI Grocery Retail Sales by Format - Historical Data & Forecasts (%) Organised/MGR Nonorganised/Independent 2008 2018f 22 94 78 f = BMI forecast; Source: BMI Research © Business Monitor International Ltd Page 46 Vietnam Agribusiness Report Q3 2010 Economic Outlook Policy Tightening To Slow Growth BMI View: The strong domestic demand-driven recovery in Vietnam brought real GDP growth to 6.9% y-o-y in Q409, and full-year expansion to 5.3% We believe a sharp tightening of fiscal and monetary policy will be needed in 2010 to avoid overheating and to plug a widening trade deficit We thus maintain our below-consensus forecast of real GDP growth dropping to 4.4% in 2010 Our outlook on Vietnam has essentially not changed since early Q409 when it became increasingly clear that the economy was overheating We thus went from expecting a gradual economic recovery in 2010 to a double-dip scenario with real GDP expansion dipping to 4.4% in 2010 after a forceful economic recovery in the three last quarters of 2009 This was based on our expectations that fiscal and monetary policy would have to be tightened sharply in H110 in order to rein in the widening trade deficit and halt inflationary pressures With Vietnam having effected yet another devaluation of the dong in February, less than three months after the previous devaluation in late November, our conviction in this view is even stronger Indeed, the stimulus-driven economic recovery roared on in Q409 with real GDP growth clocking 6.9% y-o-y, the highest outturn since Q108 As illustrated in the chart below, Q409 saw the manufacturing sector come back in force with its contribution to real GDP growth rising from 0.6 percentage points (pp) in Q309 to 1.7pp The industrial output reading of 13.4% y-o-y in December confirmed that momentum was still strong in the industrial sector going into 2010 The construction sector also recovered forcefully in 2009 after a bleak 2008, with growth rising to 13.2% y-o-y in Q409 Meanwhile, the service sector continued to perform well, with growth rising from 6.6% y-o-y in Q309 to 8.7% in Q409 The unexpectedly strong Q409 reading helped bring full-year growth in 2009 to 5.3%, slightly above our 5.1% forecast (largely due to an upward revision of Q309 growth) While this is the lowest annual growth rate since the 4.8% posted in 1999, it still compares favourably with Vietnam's emerging markets peers, both in Asia and globally However, the recovery from the 3.1% y-o-y real GDP growth nadir in Q109 has been largely due to the stimulus policies of the government, which has seen M2 money supply growth at 28.7% and credit growth rise to 38% in 2009, at the same time as the budget deficit widened to an estimated 8.9% of GDP Policy Tightening Needed To Stabilise Economy While successful in reviving growth, the strong fiscal and monetary stimuli has aggravated Vietnam's already precarious balance-of-payments position, with the monthly trade deficit widening to US$2.1bn in November The 3.0% devaluation of the dong on November 25 only helped the trade deficit correct from US$2.1bn in November to US$1.9bn in December, and we believe the traction from the February © Business Monitor International Ltd Page 47 Vietnam Agribusiness Report Q3 2010 devaluation will be equally poor This is because the devaluations have not been coupled with any serious efforts to quell domestic demand, which continues to expand at a markedly higher pace than the rest of the global economy Indeed, the State Bank of Vietnam (SBV) has decided to keep the benchmark base rate on hold at 8.00% in January and February after having raised it by 100bps on December This was in spite of inflation rising to a nine-month high of 7.6% y-o-y (1.4% m-o-m) in January, with significant upward pressure noticeable in the leading food and foodstuff categories The authorities have instead opted for asking commercial banks to restrict lending for imports of cars, mobile phones and other high-value consumer goods and to support import-substituting industries in order to keep the trade deficit within the US$14.5bn target set up for 2010 However, the efficacy of such measures is highly in doubt, and we believe that a sharp tightening of fiscal and monetary policy will be needed in 2010 to bring the economy back onto an even keel We are expecting the SBV to raise the Vietnam base rate by a further 400bps in H110 to 12.00% by mid-year while curbs on fiscal spending are imposed to bring domestic demand into line with external demand (exports grew by 9.8% y-o-y in Q409 as compared to a 29.7% expansion in imports) and thus reduce the trade deficit Double Dip Still Core Scenario 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 devaluations 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 This would bring a double dip for Vietnam, with annual real GDP growth dipping again to 4.4% in 2010 after the policy-induced recovery in Q209-Q409 before recovering to 5.5% in 2011 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 © Business Monitor International Ltd Page 48 Vietnam Agribusiness Report Q3 2010 We expect the slowdown in growth in 2008 to 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 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 44.0 out of 100 in our shortterm economic risk ratings Risks To Outlook The key risk to our outlook is the scenario of policy paralysis ahead of the National Congress in January 11 in which fears about the political repercussions of an economic slowdown prevents the Politburo agreeing on a needed tightening of fiscal and monetary policy This scenario would see real GDP growth come in higher in 2010, but at the cost of significantly higher levels of inflation and slower growth in succeeding years Table: Vietnam - Economic Activity, 2007-2014 2007 2008e 2009e 2010f 2011f 2012f 2013f 2014f 1144014 1478695 1645481 1843741 2074296 2311999 2589237 2885435 71.1 89.8 91.8 94.6 106.4 115.6 129.5 144.3 8.5 6.2 5.3 4.4 5.5 6.0 6.8 6.9 835 1035 1043 1060 1177 1262 1394 1533 85.6 86.8 88.0 89.2 90.4 91.6 92.8 94.1 Industrial production 1,4 index, % y-o-y, ave 16.7 14.6 7.6 10.0 12.0 14.0 14.0 14.0 Unemployment, % of labour force, eop 4.6 5.0 5.5 5.5 5.0 4.5 4.0 4.0 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: IMF (General Statistics Office) IMF; General Statistics Office © Business Monitor International Ltd Page 49 Vietnam Agribusiness Report Q3 2010 Industry Trend Analysis 2011 Demand Challenges Show Why Selectivity Is Key Capitalising on the brighter Asian Looking Strong consumer demand picture for 2010, Hong Kong-headquartered Dairy Farm International Holdings has confirmed Dairy Farm International Holdings Daily Share Price (US$) and Volumes Traded that in the year to May it traded ahead of the same period of 2009 Reflected in the retailer's share price, which reached a high of US$7.21 on April 12, the early year performance will leave Dairy Farm confident of exceeding 2009's 4% annual revenue growth in 2010 BMI remains optimistic about Dairy Farm's long-term future, for the reasons discussed below However, we Source: BMI caution that Asian retail will throw up a couple of major short-term challenges We like Dairy Farm's long-term growth prospects for a number of reasons: ! The retailer is increasingly exposed to emerging markets (EMs), which offer stronger longerterm growth prospects than the North Asian markets (Hong Kong, Taiwan, Macau and China) on which Dairy Farm currently relies for the bulk of its revenue To 2014, annual mass grocery retail (MGR) sales growth in India, Vietnam and Indonesia will average 26%, 11.5% and 10.5% respectively, as opposed to 2.5% for Hong Kong and 4% for Taiwan China is of course a North Asian exception - Chinese MGR growth is forecast to average 10.9% annually to 2014 ! Emerging Asia is BMI's top EM pick in terms of medium-term economic growth prospects We forecast EM aggregate growth of 5.3% in 2010, dropping to 5% in 2011 before climbing again to 5.6% in 2012 For emerging Asia these forecasts stand at a stronger 7.3%, 6.5% and 7.3% respectively This will feed through into higher disposable incomes and stronger demand for non-essential goods to the significant benefit of the retail sector © Business Monitor International Ltd Page 50 Vietnam Agribusiness Report Q3 2010 ! With solid earnings growth in 2009 and a relatively low debt burden, Dairy Farm is well positioned to ramp up capital expenditure, with its EM-dominant East Asia division (Malaysia, Indonesia, Vietnam and Brunei) set to continue receiving the lion's share of new investment ! Committed solely to Asia, Dairy Farm does not risk overextending itself by aggressively entering other high-growth EMs in the quest to become a fully-diversified multinational ! Present in many retail categories, including a substantial non-food footprint, Dairy Farm has avoided the trap of detrimentally pursuing non-core retail interests by leveraging all available synergies between its various retail businesses The company shares logistics, procurement, finance and IT functions across all of its businesses This streamlined model is highly supportive of expansion Noting the bright long-term picture, BMI would nonetheless flag the probability of some short-term (late 2010, early 2011) industry weakness, Looking Up But Uncertainty Lingers In 2011 Real GDP Growth (% chg y-o-y) in Dairy Farm International Operating Markets the company's prospects influenced by our 'Three Asias' macroeconomic view - the three Asias being: India and China; the trade-dependent economies; and the domestic demand-driven states (see Business Monitor Online, 'Macro Strategy: 'Three Asias' Revisited', March 30 2010) ! We expect Chinese Source: National Statistics Offices, IMF, BMI overheating to lead to a secondary slowdown in 2011 BMI currently forecasts below consensus real GDP growth of 7.5% in China in 2011 A less aggressive credit stimulus and early monetary normalisation will leave India poised to outperform China However, Dairy Farm's operation in India is only a fledgling one; the company remains far more reliant on China ! Singapore, Taiwan and Hong Kong - all of which Dairy Farm is exposed to - will experience uncertainty in 2011, the latter two showing a particularly sharp slowdown relative to 2010 levels (see above chart), as trade links with China weigh on growth We not expect any sharp retail reversal of the sort seen in 2009 However, the process of premiumisation will certainly be affected © Business Monitor International Ltd Page 51 Vietnam Agribusiness Report Q3 2010 ! Less exposed to Chinese uncertainty, a potential US slowdown and acute eurozone weakness are the Asian domestic demand economies and in this sense Vietnam and Indonesia are likely to grow in importance to Dairy Farm Nonetheless, neither is without its risks Fiscal and monetary tightening could weigh on demand in Vietnam, while political uncertainly continues to muddy the investment climate in Indonesia The above highlights the risks to which Dairy Farm is exposed in Asia and indeed emphasises the importance of its ongoing expansion into emerging Asia, particularly the strong private consumption-led states of India and Indonesia However, the above cannot mask the enormous opportunity that the Asian consumer presents to expansionary retailers and what the longer-term outlook for the sector in the region means for Dairy Farm © Business Monitor International Ltd Page 52 Vietnam Agribusiness Report Q3 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 53 Vietnam Agribusiness Report Q3 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 54 Vietnam Agribusiness Report Q3 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 55 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...].. .Vietnam Agribusiness Report Q3 2010 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 links... country with reports of government vets exaggerating the number of animals vaccinated to claim vaccination fees The prevalence of small-scale 'backyard' poultry producers also makes implementing an effective system difficult © Business Monitor International Ltd Page 15 Vietnam Agribusiness Report Q3 2010 Table: Vietnam – Poultry Production, Consumption & Trade 2005 2006 2007 2008 2009e 2010f 2011f 2012f... 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 © Business Monitor International Ltd Page 11 Vietnam Agribusiness Report Q3 2010 from Thailand, a major sugar exporter Tariffs on imports... to boost skills levels could leave Vietnam a second-rate economy for an indefinite period © Business Monitor International Ltd Page 10 Vietnam Agribusiness Report Q3 2010 Supply Demand Analysis Vietnam Sugar Outlook BMI Supply View: On the back of a bad year for the Vietnamese sugar industry in 2008/09, output is expected to come in at a more familiar 1.1mn tonnes in 2009/10 Representing an improvement... a secondary economic slowdown Such a scenario would likely see our consumption growth forecast be missed © Business Monitor International Ltd Page 19 Vietnam Agribusiness Report Q3 2010 Vietnam Dairy Outlook BMI Supply View: To 2014, BMI is forecasting Vietnamese fluid milk production growth of 40.9% Dramatic increases in cattle numbers and increased public and private sector investment in an effort... numbered 19,800 in 2006 with an average of just 5.3 cows per farm © Business Monitor International Ltd Page 20 Vietnam Agribusiness Report Q3 2010 Table: Vietnam – Milk Production & Consumption Milk Production, '000 1,2 tonnes Liquid Milk Consumption, 3 '000 tonnes 2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 197.7 216 234.4 262.2 283.4 295.7 314.5 337.6 367.9 399.3 152 158.8 127.6 156.3... -9.2 -10 Butter Production, '000 1 tonnes 1 Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI © Business Monitor International Ltd Page 21 Vietnam Agribusiness Report Q3 2010 Table: Vietnam – Cheese Production, Consumption & Trade 2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 0 0 0 0 0 0 0 0 0 0 Cheese Consumption, 1 '000 tonnes 1.1 1.1 0.7 0.7 0.7 0.8 1 1.2 1.5 1.9 Cheese Net Trade 1 Balance,... planted with hybrid seeds by 2010 This would involve a 50% increase in the area currently planted with the seeds, although no data is yet available to show how successful this drive has been so far Affordability of these seed variants has been cited as a possible barrier to targets being met © Business Monitor International Ltd Page 25 Vietnam Agribusiness Report Q3 2010 Table: Vietnam – Rice Production,... Page 34 Vietnam Agribusiness Report Q3 2010 Coffee Front-month (May) coffee headed Front-Month Coffee lower in April, but appears well USc/lb supported in the USc128-130/lb region We expect persistent production problems in Colombia combined with lingering uncertainty over the quality of the impending Brazilian 2010/ 11 coffee crop to underpin prices over the coming months However, given that the 2010/ 11... estimate/forecast Source: USDA, BMI Risks To Outlook Disease poses a major downside risk to our forecasts for livestock production in Vietnam It is a particular risk for our poultry and pork output forecasts © Business Monitor International Ltd Page 16 Vietnam Agribusiness Report Q3 2010 A reduction in consumer spending, as a result of the return to more normal fiscal and monetary policy could adversely affect ... tonnes -6 .1 -6 .6 -5 .3 -6 .2 -6 .7 -7 .2 -7 .8 -8 .4 -9 .2 -1 0 Butter Production, '000 tonnes Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI © Business Monitor International Ltd Page 21 Vietnam Agribusiness. .. 630.9 688.3 746.5 -5 -2 6 -1 16 -1 95 -1 90 -1 87.3 -1 98.2 -2 29.7 -2 60.2 -2 92.8 Poultry Net Trade Balance, '000 tonnes Notes: e/f=BMI estimate/forecast Source: USDA, BMI Table: Vietnam – Pork Production,... Trade Balance, '000 tonnes -1 .1 -1 .1 -0 .7 -0 .7 -0 .7 -0 .8 -1 -1 .2 -1 .5 -1 .9 Cheese Production, '000 tonnes Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI Table: Vietnam – Whole Milk Powder