Q3 2011 www.businessmonitor.com VietnaM agribusiness Report INCLUDES BMI'S FORECASTS ISSN 1759-1740 Published by Business Monitor International Ltd VIETNAM AGRIBUSINESS REPORT Q3 2011 INCLUDES 5-YEAR FORECASTS TO 2015 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Production Date: June 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 Q3 2011 INCLUDES 5-YEAR FORECASTS TO 2015 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Production Date: June 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 Q3 2011 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2011 CONTENTS Executive Summary Key Trends: Industry Developments SWOT Analysis Vietnam Agriculture SWOT Vietnam Political SWOT Vietnam Economic SWOT Vietnam Business Environment SWOT 10 Industry Forecast Scenario 11 Vietnam Sugar Outlook 11 Vietnam Sugar Production & Consumption 11 Vietnam Sugar Production & Consumption 12 Vietnam Livestock Outlook 14 Vietnam Poultry Production & Consumption 14 Vietnam Pork Production & Consumption 15 Vietnam Beef & Veal Production & Consumption 15 Diseases Make Their Way Through Livestock Sector 16 Vietnam Poultry Production & Consumption 18 Vietnam Pork Production & Consumption 18 Vietnam Beef & Veal Production & Consumption 18 Vietnam Coffee Outlook 20 Vietnam Coffee Production & Consumption 21 Vietnam Coffee Production & Consumption 23 Vietnam Dairy Outlook 24 Vietnam Milk Production & Consumption 25 Vietnam Butter Consumption 25 Vietnam Cheese Consumption 25 Vietnam Milk Production & Consumption 27 Vietnam Butter Consumption 27 Vietnam Cheese Consumption 27 Vietnam Grains Outlook 28 Vietnam Corn Production & Consumption 28 Vietnam Corn Production & Consumption 29 Vietnam Rice Outlook 30 Vietnam Rice Production & Consumption 31 Vietnam Rice Production & Consumption 33 Commodity Price Analysis 34 Monthly Softs Update 34 Cocoa 34 COCOA 35 Coffee 36 COFFEE 37 Milk 38 MILK 39 Sugar 39 SUGAR 40 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2011 Monthly Grains Update 41 Corn 41 CORN 42 Rice 43 RICE 44 Soybean 45 SOYBEAN 46 Wheat 47 WHEAT 48 Downstream Supply Chain Analysis 49 Industry Forecast Scenario 49 Food 49 Food Consumption 49 Table: Vietnam Food Consumption Indicators 50 Canned Food 51 Table: Vietnam Canned Food Sales 51 Confectionery 52 Table: Vietnam Confectionery Sales 52 Trade 53 Table: Vietnam Food & Drink Trade Indicators 53 Mass Grocery Retail 54 Table: Vietnam MGR Indicators - Value Sales by Format - Historical Data & Forecasts 56 Grocery Retail Sales by Format - Historical Data & Forecasts (%) 56 Macroeconomic Forecast 57 Vietnam – Economic Activity 59 Industry Trend Analysis 60 Company News Alert - Meiji Looking For Dairy Growth Across South East Asia 60 Company News Alert - Vietnam Catching The Attention Of The Private Equity World 63 Global Food & Drink View 66 Food & Drink Roundup Q111: Core Views 66 BMI FOOD & DRINK CORE VIEWS 71 BMI Forecast Modelling 72 How We Generate Our Industry Forecasts 72 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2011 Executive Summary BMI View: Vietnam's agriculture industry (including forestry and aquaculture) contributes to more than 20% of the country's GDP and employs almost half of the country's population While the country is looking forward to higher agriculture export earnings in 2011, we note that more than 90% of Vietnamese agri-exports are in the form of preliminary processing with lower export prices relative to neighbouring countries Thus, the government plans to increase the 'value' of its exported products by at least 20% over the next ten years mainly through lifting the quality of agricultural outputs such as coffee and rice Investing in better technologies so as to increase the proportion of products meeting the Certification for Vietnam Good Agricultural Practice (VietGAP) will be vital To that end, the Ministry of Industry and Trade has pledged that it will invest more than VND20trn (US$1bn) to manufacture agricultural, forestry and fisheries equipment during that period Key Trends: Coffee consumption growth to 2015: 63.0% to 1.9mn 60kg bags Expanding incomes and increasing urbanisation will fuel coffee consumption growth over the coming years Rice production growth to 2014/15: 12.4% to 28.1mn tonnes We not foresee expansion through an increase in area harvested, but through yield improvements that are already the highest in the South East Asia region Pork consumption growth to 2015: 15.4% to 2.2mn tonnes As incomes rise and dietary preferences change, we are confident of strong consumption growth emerging from Vietnam, especially from its low base 2011f Real GDP Growth: 6.3% (down from 6.8% in 2010; predicted to average 7.0% from 2010 until 2015) Consumer Price Inflation: 19.9% y-o-y in May 2011 (forecast to average 11.5% in 2011) Industry Developments According to the Viet Nam Coffee and Cacao Association (Vicofa), local exporters are facing increased competition from foreign players in securing coffee bean stocks to be shipped out of the country Larger foreign players are currently allowed to invest only in cultivating, processing and preserving coffee for export, as well as 'the transfer of advanced technology' However, anecdotal evidence suggests that these companies have also been setting up unofficial networks to buy coffee stocks for export, thus depriving local exporters of coffee bean supply © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2011 BMI believes that the impact of the Vietnamese rice market opening up to foreign traders from 2011 onwards poses a likely upside risk to production over the longer term From 2011 onwards under WTO commitments, foreign traders will now be allowed to directly undertake rice trading in the country, instead of the previous requirements for foreign companies to enter in joint ventures with local players In efforts to improve the capabilities of local rice exporters, and prepare for the impending increase of competition with bigger more experienced foreign players, the government has stepped up efforts to improve the local rice industry, such as mandating a minimum number of rice storage facilities and better infrastructure According to reports, a 'new type' of H5N1 bird flu virus has been found circulating the northern, coastal and central regions The Animal Health Department has, since 2010, been vaccinating animals found with the H5N1 virus, but recent post-vaccination results suggest that the disease has mutated so that the vaccine has been rendered ineffective Given the small area in which the disease has been reported, we not think that the outbreak will spread to a national level, though a prolonged outbreak should increase imports of the meat in the medium term © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 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 Q3 2011 Vietnam Political SWOT Strengths Weaknesses Opportunities Threats The Communist Party of Vietnam remains committed to market-oriented reforms and we not expect major shifts in policy direction over the next five years The one-party system is generally conducive to short-term political stability Relations with the US have witnessed a marked improvement, 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 Macroeconomic instabilities in 2010 and 2011 are 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 recent years 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 2011 Industry Trend Analysis Company News Alert - Meiji Looking For Dairy Growth Across South East Asia Japanese dairy product manufacturer Meiji Holdings has big plans for South East Asia The company is planning to double its sales in the region from JPY9.7bn (US$120.0mn) to JPY20bn (US$247.4mn) through a five-year investment plan with its joint venture partner Charoen Pokphand Group (CP Group) CP-Meiji , the joint venture between Meiji and CP Group, plans to invest JPY5bn (US$61.8mn) within the next five years and will retain a strong focus on expanding its regional production capacity With already decent exposure to high-growth dairy markets such as Malaysia, as well as developed markets such as Singapore, CP-Meiji looks well placed to grow strongly outside of Japan Developed Dairy Market: Singapore Singapore An Affluent Market Selected Asian Countries GDP per capita, US$ (2011 vs 2020) Source: Statistical Agencies, World Bank CP-Meiji has established a strong presence across the South East Asian region, particularly in Malaysia and Singapore Although demand for CP-Meiji's dairy exports is realistically limited by Singapore's geographical constraints and small population size, the country, nonetheless, offers a strong scope for premiumisation with its existing high per capita income levels (see chart 1) Such affluence means that there is already a strong appetite for CP-Meiji's higher-value dairy products such as yogurts Given that CP-Meiji currently accounts for an estimated 35% of Singapore's pasteurised milk sales, the company's stronger push in the country should therefore prove very supportive of its margin growth © Business Monitor International Ltd Page 60 Vietnam Agribusiness Report Q3 2011 Fast-Maturing Dairy Markets: Thailand and Malaysia Of greater significance to CP-Meiji's long-term growth prospects is perhaps still the company's growing exposure to the high-growth dairy markets of Malaysia, Thailand, Indonesia and the Philippines With their relatively higher per capita dairy consumption levels, Malaysia and Thailand are among the more mature dairy markets in the South East Asian region The reasonably strong affluence enjoyed by consumers in Malaysia and Thailand, particularly when compared to their emerging market peers, has encouraged the ownership of white goods (see chart 1), which, in turn, bolstered the demand for dairy products Notably, Thais are more avid consumers of dairy products when compared with consumers of other countries in the region - Thai estimated per capita fluid milk consumption level of 15,242 tonnes in 2011 is almost seven times as high as that of its richer southern neighbour Malaysia Although dairy consumption levels in Thailand and Malaysia are high by regional standards (given their relative economic wealth), these levels are still quite low on a global scale, which suggests that there is still much more room to grow in developing dairy consumption levels in these countries Supported by rising disposable incomes and a continued interest in functional products, we are forecasting a compound annual average growth rate of 4.6% and 1.4% in volume terms in fluid milk consumption demand in Thailand and Malaysia respectively through to 2015 Demand for functional dairy products such as flavoured milk and yogurt, in particular, is likely to witness very strong uptake in these countries Emerging Dairy Markets: Indonesia, Philippines and Vietnam As the dairy markets of Thailand and Malaysia gradually mature over the next decade, it is the opportunities on offer in the relatively underdeveloped dairy markets of Indonesia, Vietnam and the Philippines that catch the eye, and CP-Meiji can look to ramp up its exposure in these markets to boost its long-term growth Low consumer affluence is a major restrictive factor behind the spread of dairy consumption in these markets, as consumers simply cannot afford the necessary white goods to store the perishable dairy products © Business Monitor International Ltd Page 61 Vietnam Agribusiness Report Q3 2011 Milking The Long-Term Potential Selected Countries Fluid Milk Consumption, in volume terms, % chg y-o-y Source: FAPRI, USDA, BMI Over the next decade, however, we expect consumers in Indonesia, Vietnam and the Philippines to quickly move up the income ranks, pushing up demand for non-essential foodstuffs Increased urbanisation, rising home ownership of white goods and the continued spread of modern, organised retail will all prove supportive of very dynamic dairy consumption growth in these countries (see chart 2) With per capita milk consumption levels remaining low in Indonesia, the Philippines and Vietnam, there is scope for potentially explosive growth prospects as demand takes off from a very low base © Business Monitor International Ltd Page 62 Vietnam Agribusiness Report Q3 2011 Company News Alert - Vietnam Catching The Attention Of The Private Equity World Global private equity (PE) firm Kohlberg Kravis Roberts & Co (KKR) has agreed to acquire a 10% stake in Vietnamese consumer goods producer Masan Consumer With rising incomes, favourable demographics and urbanisation providing exciting opportunities on the consumer side, it is unsurprising that Vietnam's domestic demand credentials have attracted the attention of KKR Another major positive behind Vietnam's investment appeal is the relatively underdeveloped nature of the country's consumerfacing sectors, which presents an abundance of opportunities for consumer goods players Although Vietnam's business environment will continue to prove challenging for investors, the positive dynamics of the Vietnamese consumer growth story should entice a greater number of hardy investors over the coming years Vietnam is emerging on the radars of PE investors looking to entrench themselves in the favourable consumer plays of emerging markets (EMs) KKR has agreed to acquire a 10% stake in Masan Consumer, the largest producer of condiments like fish, soy and chilli sauce and the second biggest producer of instant noodles in Vietnam, for US$159mn, marking the largest PE investment in the country Masan Consumer is a subsidiary of Masan Group , which is one of the largest private sector conglomerates in Vietnam Upon completion of the acquisition deal, Masan Group's equity stake in Masan Consumer will decrease from 86.6% to 78% The acquisitional interest of KKR in Masan Consumer forms part of the continued flurry of PE investments in the global food and drink (F&D) sector The continued focus on the food sector can be read as a sign of risk aversion, with investors remaining focused on defensive assets Given the performance-related profit structure of PE funds and the quickly-approaching deadlines that many are facing, firms are increasingly willing to invest in relatively low-growth defensive assets rather than return capital to investors unused KKR's acquisition also underlines the company's growing appetite for EM assets and its confidence in the domestic demand conditions of Vietnam Indeed, a very dynamic consumer story continues to take shape in Vietnam In the near term, rising wages and improving tourist arrivals will instil dynamism to the consumer-facing scenes in the country and buoy F&D consumption growth © Business Monitor International Ltd Page 63 Vietnam Agribusiness Report Q3 2011 Bottom Heavy Vietnam Demographic Breakdown Source: BMI, World Bank Longer term, Vietnam's economic boom will continue to fuel job creation and drive an emergence of a new affluent consumer class Perhaps more noteworthy of mention, however, is Vietnam's demographic profile The maturation of Vietnam's massive youthful population arguably provides the most exciting long-term opportunities at the mass market level as incomes rise and tastes and preferences evolve, representing an increasing appetite for Masan Consumer's processed food brands (see chart) Vietnam's appeal to KKR can also be partly attributed to the level of maturity in the country's consumer sectors The phenomenal long-term growth prospects of the Asian EM giants China and India have attracted a lot of investments from both local and foreign consumer goods manufacturers in recent years While there is still massive scope for growth in both of these markets, it could prove more challenging for KKR to successfully entrench itself here than in Vietnam Tingyi (Cayman Islands) and Hindustan Unilever are strong incumbents in the Chinese and Indian processed foods sub-sectors respectively, and clearly it would be difficult for KKR to pit itself against the dominance of these big players and establish strong presences in these countries While one might argue that KKR could look to acquire stakes in established players in China and India, these companies are already trading at relatively high price-toearnings ratios so any investment may be viewed as too expensive (see chart) © Business Monitor International Ltd Page 64 Vietnam Agribusiness Report Q3 2011 Expensive Valuations Selected Companies Forward Price-to-Earnings Ratio Source: Bloomberg, Company Financials Being a major producer of condiments and instant noodles, Masan Consumer represents a lucrative platform for KKR to leverage off Vietnam's private consumption boom Over the past two years, Masan Consumer grew its revenues by over 149% between 2008 and 2010, implying a rapidly-expanding consumer base for its products With plans to expand beyond the processed food sub-sectors into other consumer goods products, Masan Consumer is increasingly well-placed, in our opinion, to reap the attractive rewards on offer in Vietnam Looking ahead, Vietnam's exciting domestic demand prospects should encourage an increasing number of investors to take a closer look at the country Although Vietnam's business environment remains beset by challenges such as excessive red tape, corruption and a lack of financial transparency, its long-term potential has and will continue to attract hardy investors willing to weather the near-term risks in search of untapped opportunities - KKR's investment being a strong case in point © Business Monitor International Ltd Page 65 Vietnam Agribusiness Report Q3 2011 Global Food & Drink View Food & Drink Roundup Q111: Core Views Developments within the global food and drink industry in the past three months have continued to reflect and support BMI's core industry views Of particular importance in the last quarter has been the impact of rising commodity prices - a factor that BMI was particularly quick to recognise was likely to impact margins and also the valuation of food and drink firms Rising global prices are also becoming an increasingly important factor in emerging markets, where surging inflation threatens to undermine confidence and put downwards pressure on growth in spending power Over the quarter we have seen encouraging signs of a consumer recovery in several important developed markets, including the US, Germany and France However, we expect high unemployment, fiscal austerity measures and looming rate hikes to put pressure on growth rates over the longer term Growth in emerging markets has continued to impress and for many firms has acted to offset the lacklustre rates of growth in developed markets Commodity Prices Pressuring Margins In October 2010 the food and drink team wrote that 'the weakness of the consumer recovery and the increase in commodity prices mean that there is significant potential for the food sector to underperform the wider equity index' This view has played out extremely well, with the Stoxx Food and Beverage Index significantly underperforming the Global Index in the past four months (see first chart) The accuracy of this prediction can be partly linked to our correct view on commodity prices In October, the commodities team expected grain prices to continue moving higher due to a significant deterioration in northern hemisphere harvests, which was expected to have a knock-on effect on other important inputs such as dairy and meat The situation has played out very much in line with this prediction, with food commodities outpacing the wider commodity index over the past six months Most major food groups have now reported their results for the fourth quarter of 2010 and they tell a clear story, with margins falling due to rising costs In response food groups have announced that they will begin to raise prices more aggressively in 2011 and firms such as Unilever have suggested that they have learnt from the experience of 2008, when they priced up and down effectively However, BMI is concerned that the consumer environment could make price increases harder to implement than in the past, with the slow pace of economic recovery continuing to weigh on consumer confidence and with retailers very reluctant to accept price increases In addition, since 2008 consumer savviness has increased in many important markets - for example private labels and discount stores have made huge strides in the US and parts of Europe where they had previously had little presence, such as in Spain and Italy, meaning that any attempt to pass on price increases could simply strengthen the trend towards lower priced products and retail formats © Business Monitor International Ltd Page 66 Vietnam Agribusiness Report Q3 2011 A general ramp up in commodity prices, including in a sharp increase in the price of Underperfoming Stoxx Global 1800 Food & Beverage Index vs Stoxx Global 1800 Index energy, has acted to drive up inflation in both developed and emerging markets This has led to a general move towards hawkishness among central banks In emerging markets, food inflation has been particularly rampant, with double-digit levels of growth seen in many parts of the market Given the disproportionate impact of rising prices on poorer sections of societies in countries such as China and Brazil, such Source: BMI, Reuters governments are under pressure to cool down their economies and they have already begun raising interest rates We are pencilling in further rate hikes in these and several other important emerging markets including India and Indonesia over the coming year, which will put downwards pressure on growth momentum Signs Of A Consumer Recovery In Developed Markets In line with our expectations the consumer sector in developed markets struggled to deliver significant growth through much of 2010, with price sensitivity the preeminent theme and private labels and the discount sector gaining ground However, there were some positive signs starting to emerge towards the end of the year and we now believe that 2011 could be the real year of recovery For example, in the US there were signs that the US discount sector - characterised by the firms Family Dollar and Dollar General - which delivered dynamic growth during the downturn, started to slow towards the end of 2010 BMI believes this lower rate of growth (combined with improving results at mainstream retailers) can be attributed to an upturn in consumer confidence in the second half of 2010, combined with an improved outlook for GDP growth in 2011 The big downside risks for the US economy in 2011 - that taxes rise and unemployment benefits are not extended - actually turned into a major upside surprise in December 2010, after Congress not only approved an extension of the income tax regime and unemployment benefits, but also cut payroll taxes by two percentage points This improvement in the consumer outlook will be greeted warmly by most retailers, but for discount operators, which have thrived thanks to the weak economic environment, a stronger retail sector could actually have a detrimental impact on results © Business Monitor International Ltd Page 67 Vietnam Agribusiness Report Q3 2011 This is borne out by Family Dollar's sales growth slowing as 2010 progressed, with comparable sales in December climbing by just 4% Slow Improvement A similar story was seen in Europe, where the movement Unemployment (% of labour force, year average) towards discount stores seems to have peaked in many important markets, including Germany, the UK and France Germany proved to be one of the country's best positioned to bounce back from the economic downturn and this has been reflected in the relative growth of the retail sector For example, German retailer Rewe registered growth of 4% in its German sales during the year This growth was driven by the company's supermarket outlets, with growth up by 6.4%, f = BMI forecast Source: BLS, BMI but was weighed down by the underperformance of the company's Penny discount stores, which registered a 1.2% contraction in revenues The outperformance of the supermarket sector is in line with a strengthening of the domestic consumer market and is reminiscent of the two years leading up to the economic crisis, when questions were asked about the long-term prospects for the discount sector in the German market Emerging Markets Look Ever More Attractive Despite these signs of recovery in developed markets, we continue to believe that the pace of growth in the consumer sector over the next five years is unlikely to match the boom levels seen in the years leading up to the financial crisis Fiscal austerity measures are only now starting to be felt by the average consumer, while rising inflation means that consumers may also soon have to contend with rising interest rates and mortgage repayments Unemployment across the US and eurozone is also remaining stubbornly high and looks unlikely to fall significantly until we are some way into the economic recovery BMI has a relatively pessimistic outlook for employment in the US, believing that the credit boom actually masked massive structural problems in the US economy, for which there is no quick fix Because of this, we are forecasting that unemployment will not go back to its pre-crisis lows over the next ten years (see second chart) © Business Monitor International Ltd Page 68 Vietnam Agribusiness Report Q3 2011 Taken together this relatively muted outlook for demand over the longer term serves to underline our core view regarding the importance of emerging markets (EM) Over the past three months this strategy has once again been in the spotlight At 2011's CAGNY investment conference a large number of firms focused on the potential for growth in EM US multinationals have in general been slower than their European counterparts to embrace the EM opportunity (see third chart) However, this is gradually changing with firms such as Heinz and Campbell Soup all now paying much greater attention to their international operations Heinz was among the companies talking up its potential for EM European Firms In Front Revenues From Emerging Markets (%) growth and used the conference to announce an increase in its EM targets The firm now aims to generate 30% of its revenues from EM over the next five years, having previously had a goal of 20% by 2015 Heinz is a clear example of what can be achieved in a relatively short space of time through targeted investment in EM In the final quarters of 2010, Heinz was generating nearly 18% of its sales from EM This is up from just 14% in the previous Source: Nestle, Investor Relations, BMI Estimates financial year and demonstrates its rapid pace of expansion in this area, with the firm gaining significant ground in key markets such as China and Mexico The speed at which concentrated efforts can deliver results is illustrated by the success of Heinz's ketchup brand in Mexico, where distribution agreements with leading retailers and fast food outlets have seen its market share increase from 1% to 12% in just two years Us-food group Kellogg was also talking up its EM growth potential, stating that it expects around twothirds of its future growth to come from developing and emerging markets This is likely to be built around organic growth due to the lack of a significant cereal culture in many of the most important EMs (a fact that means there are a very limited number of suitable EM targets) and Kellogg is focusing on generating growth by stimulating the overall category and per capita consumption of cereal in countries where it is not normally part of the diet As an example, the firm is pushing its Special K brand in South Korea, Mexico and Colombia by focusing on its weight-loss benefits Other firms focusing on the EM opportunity during the conference included coffee and jam maker JM Smucker and spice maker © Business Monitor International Ltd Page 69 Vietnam Agribusiness Report Q3 2011 McCormick Currently Smucker generates nearly all of its revenues in North America, but used the conference to reveal it was exploring plans to enter the attractive Chinese market The firm revealed it was exploring a number of avenues for market entry, including an acquisition of or partnership with a local firm With a debt-to-EBITDA ratio of only 0.89, Smucker looks well positioned to make acquisitions and it has previously demonstrated an appetite for large-scale transformational takeovers Meanwhile, McCormick announced a target of generating 12% of its revenues from EM by 2015, which compares to 9% at present The firm highlighted the tremendous opportunity in India, where consumers traditionally buy spices in bulk, but where middle-class consumers are increasingly 'seeking the higher quality and convenience of branded products' With even medium-sized producers now seeking out acquisitions in EM, the battle to acquire attractive assets can only intensify, with a positive result for EM valuations While acquisitions can be a straightforward way to gain EM exposure, particularly for firms that have little or none, the success of Heinz has also demonstrated the enormous amount that can be done by simply investing in distribution and marketing, with many developed market firms already in possession of brands and products that have enormous potential for growth in EM countries Big Deals Could Be Back On the Agenda Strong growth in EMs combined with a return to growth in developed markets means that many firms look to be feeling more confident about their long-term prospects and we believe that this could spur a significant ramp up in M&A activity in 2011 During much of 2010 there was a general attitude of caution, with firms waiting to see which way the global economy was moving before committing to any big deals In Q111 we saw the first tentative steps in this direction, with PepsiCo purchasing a 66% stake in Russia's Wimm-Bill-Dann for US$3.8bn, General Mills looking set to buy a 50% stake in Yoplait for EUR800mn and Diageo agreeing to acquire Turkey's Mey Icki for US$2.1bn All of the major deals concluded by consumer groups in Q111 were bolt-on acquisitions and we are yet to see a return to the more transformative deals seen in the years leading up to the financial crisis, such as InBev's acquisition of Anheuser-Busch or Pernod Ricard's purchase of Absolut Maker Vin & Spirit However, with economies of scale such an important force in the food and drink sector, these kinds of deals are sure to eventually re-emerge and we think that they could once again be on the cards in 2011 Firms that we think are in a strong financial position to fund major acquisitions during 2011 include Diageo, Nestlé and SABMiller, with acquisitions seen as a viable way to prop up relatively lacklustre sales growth in developed markets One of our long-term core views is that multinationals with balanced developed and EM portfolios are best positioned for growth For EM-based firms this means that we see acquisitions in developed markets are a priority as they look to develop better rounded companies with less volatile earnings This trend has been evident over the last six months with Colombia's largest food company Grupo Nacional de Chocolates announcing it is to purchase US cookie producer Fehr Foods for US$84mn, while Chilean wine producer Concha y Toro is to buy California-based Fetzer Vineyards from US drinks firm Brown © Business Monitor International Ltd Page 70 Vietnam Agribusiness Report Q3 2011 Forman This follows on from Mexican bakery firm Grupo Bimbo announcing in November it is to acquire Sara Lee's North American bakery business for US$925mn and is a trend that we expect to gather pace as major firms in the EMs of Asia and Latin America start to look to develop businesses that can truly compete on a global scale BMI FOOD & DRINK CORE VIEWS Short-term Outlook Higher input costs will affect margins and raise tensions between producers and retailers Rising inflation will put pressure on demand in emerging markets Developed market growth returning but unlikely to match levels seen years leading up to the financial crisis due to: Government fiscal policy - austerity Government monetary policy - increasing likelihood of rate hikes due to rising inflation Long-term Outlook MNCs with balanced developed and EM portfolios are best positioned for growth Companies with strong Emerging Market exposure will continue to outperform Multinationals will increasingly pursue frontier market investments Investment in innovation will increase as producers seek differentiation; emphasis will be placed on protecting innovations Brand builders will continue to leave sectors under threat from private labels Government legislation will play an increasing role in marginalising unhealthy food and beverage products Premiumisation will re-emerge as a key driving force behind revenue growth Demand for convenience in retail and food will continue to grow Functional foods will be the highest growth sector in developed markets Consolidation will continue as producers seek greater efficiencies Beverage companies will continue to invest in diversification away from carbonated beverages and into healthier subsectors Source: BMI © Business Monitor International Ltd Page 71 Vietnam Agribusiness Report Q3 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 72 Vietnam Agribusiness Report Q3 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 73 Vietnam Agribusiness Report Q3 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 74 [...]... meat Vietnam Poultry Production & Consumption 2010e 2011f 2012f 2013f 2014f 2015f Poultry Production, '000 1 tonnes 350.00 360.60 376.70 392.10 406.40 419.30 Poultry Consumption, 1 '000 tonnes 577.90 628.50 695.20 762.40 829.20 895.00 f 1 Notes: BMI forecasts Sources: USDA, BMI © Business Monitor International Ltd Page 14 Vietnam Agribusiness Report Q3 2011 Vietnam Pork Production & Consumption 2010e 2011f... regulations throughout Vietnam then © Business Monitor International Ltd Page 29 Vietnam Agribusiness Report Q3 2011 Vietnam Rice Outlook BMI Supply View: Compared to some of its other agricultural sub-sectors, Vietnamese rice is actually very competitive relative to many of its regional peers and is well positioned to benefit from both regional and global demand growth Another advantage for Vietnamese rice... possibly see output fall later in our forecast period © Business Monitor International Ltd Page 13 Vietnam Agribusiness Report Q3 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.. .Vietnam Agribusiness Report Q3 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 7.2% annually between 2000 and 2010 The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate... disease contained © Business Monitor International Ltd Page 17 Vietnam Agribusiness Report Q3 2011 Vietnam Poultry Production & Consumption 2006 2007 2008 2009 2010 2011 Poultry Production, '000 1 tonnes 344.00 344.00 350.00 340.00 350.00 360.60 Poultry Consumption, 1 '000 tonnes 370.00 460.00 545.00 530.00 577.90 628.50 2006 2007 2008 2009 2010 2011 Pork Production, '000 1 tonnes 1,713.00 1,832.00 1,850.00... pose upside risks to our forecasts © Business Monitor International Ltd Page 19 Vietnam Agribusiness Report Q3 2011 Vietnam Coffee Outlook BMI Supply View: Vietnam' s coffee sector has grown significantly over the last 20 years, with yields doubling, 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 95% of... Business Monitor International Ltd Page 23 Vietnam Agribusiness Report Q3 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... International Ltd Page 24 Vietnam Agribusiness Report Q3 2011 Vietnam Milk Production & Consumption 2010 2011 2012 2013 2014 2015 Milk Production, '000 1,2 tonnes 294.4 315.5 339.6 363.4 387.2 410.7 Liquid Milk Consumption, 3 '000 tonnes 170.0 177.7 183.4 193.0 204.8 217.2 f 1 Notes: BMI forecasts In all instances year indicates data for harvest year ending that calendar year i.e 2011 = 2 3 2008-09; Sources:... 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 Q3 2011 Vietnam Milk Production & Consumption 2006 2007 2008 2009 2010 2011 Milk Production, '000 1,2 tonnes 216.0 234.4 262.2 283.4 294.4 315.5 Liquid Milk Consumption, 3 '000 tonnes 158.8 127.6... 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 27 Vietnam Agribusiness Report Q3 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 ... completeness of any information hereto contained Vietnam Agribusiness Report Q3 2011 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q3 2011 CONTENTS Executive Summary ... year i.e 2011 = 200 8-0 9; Sources: USDA, BMI © Business Monitor International Ltd Page 28 Vietnam Agribusiness Report Q3 2011 Vietnam Corn Production & Consumption 2006 2007 2008 2009 2010 2011 Corn... did 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 29 Vietnam Agribusiness Report Q3 2011 Vietnam Rice Outlook