Vietnam agribusiness report q3 2012

The lack of a national quality control body for dairy products will continue to place downside risks to our production and consumption forecasts, as it places the dairy industry at risk

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REPORT Q3 2012

INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Production Date: June 2012

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Agriculture Swot 7

Vietnam Business Environment SWOT 8

Supply Demand Analysis 9

Vietnam Dairy Outlook 9

Table: Vietnam Milk Production & Consumption 10

Table: Vietnam Butter Consumption 10

Table: Vietnam Cheese Consumption 10

Table: Vietnam Whole Milk Powder Consumption 10

Table: Vietnam Milk Production & Consumption 11

Table: Vietnam Butter Consumption 11

Table: Vietnam Cheese Consumption 11

Table: Vietnam Whole Milk Powder Consumption 11

Vietnam Livestock Outlook 12

Table: Vietnam Poultry Production & Consumption 13

Table: Vietnam Pork Production & Consumption 13

Table: Vietnam Beef & Veal Production & Consumption 13

Table: Vietnam Poultry Production & Consumption 15

Table: Vietnam Pork Production & Consumption 16

Table: Vietnam Beef & Veal Production & Consumption 16

Vietnam Coffee Outlook 17

Table: Vietnam Coffee Production & Consumption & Trade 18

Table: Vietnam Coffee Production, Consumption & Trade 20

Vietnam Grains Outlook 21

Table: Vietnam Corn Production & Consumption 22

Table: Vietnam Corn Production & Consumption 23

Vietnam Rice Outlook 24

Table: Vietnam Rice Production & Consumption 25

Table: Vietnam Rice Production & Consumption 28

Commodity Price Analysis 29

Monthly Softs Update 29

Cocoa: Signs Of Life 30

Coffee: Holding Key Support 32

Palm Oil: Uptrend Intact 34

Sugar: Watching Brazilian Yields 35

Cotton: Downside Risks 37

Table: Select Commodities - Performance & BMI Forecasts 38

Monthly Grains Update 39

Wheat: Upside Risks Materialising 40

Corn: Moderation In Place 42

Soybean: Looking Weak 44

Rice: Temporary Strength 46

Table: Commodity Performance 46

Upstream Analysis 47

Tractor Growth In Asia Will Be Led By South Asian Countries 47

Asia Fertiliser: Reduced Government Subsidies & Fertiliser 'Rebalancing' 50

Table: Asia Fertiliser production & consumption 54

GM Seeds & Asia: Private-Public Partnerships The Way Forward 54

Downstream Analysis 60

Food 60

Table: Food Consumption Indicators -Historical Data & Forecasts 64

Table: Canned Food Value/Volume Sales-Historical Data & Forecasts 65

Table : Confectionery 66

Drink 67

Table: Alcoholic Drinks Value/Volume Sales - Historical Data & Forecasts 68

Table: Hot Drinks Volume Sales - Historical Data & Forecasts 69

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts 71

Table: Carbonates 72

Mass Grocery Retail 73

Table: Mass Grocery Retail Indicators Value Sales By Format -Historical Data & Forecasts 75

Table: Trade Indicators -Historical Data & Forecasts 76

Country Snapshot: Vietnam Demographic Data 77

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 78

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 79

Table: Vietnam's Key Population Ratios, 1990-2020 80

Table: Vietnam's Rural And Urban Population, 1990-2020 80

BMI Forecast Modelling 81

How We Generate Our Industry Forecasts 81

Executive Summary

BMI View: The Vietnamese government is increasing its efforts towards developing more public-private

partnerships in order to encourage organic farming and sustainable farming practises, especially for more export-orientated agriculture products such as rice and coffee As global demand for sustainably produced goods grows alongside environmental consciousness, Vietnam is likely to benefit

Key Forecasts

ƒ Milk consumption growth to 2016: 41.4% to 247,000 tonnes Urbanisation, increased

ownership of Western goods and the ongoing spread of modern, organised retail will prove supportive of strong dairy consumption growth, even if higher global dairy prices limit the growth outlook to some extent

ƒ Coffee production growth to 2015/16: 36.1% to 25.5mn bags Work on replacing

trees, many of which are more than 20 years old, will improve disease resistance and thus yields

in the long term Another growth driver will be export opportunities, given that Vietnam is the world's largest exporter of robusta coffee

ƒ Pork production growth to 2015/16: 13.1% to 2.2mn Consumption will outpace production,

and the country will therefore remain reliant on pork imports to satisfy demand

ƒ 2012 real GDP growth: 5.2% (down from 6.7% in 2011; predicted to average 6.7% over

Sustainably produced farm produce sells - especially to developed markets and environmentally

conscious customers - and the government of Vietnam knows it Through numerous public-private partnerships, the Vietnamese government has started to pursue sustainable farming practises, placing

significant emphasis on the coffee sector According to statistics from Nedcoffee Vietnam, the amount of

coffee produced under the UTZ Certified, 4C Association and Rainforest Alliance criteria has risen to 115,000 tonnes (or 1,916 60kg bags) of coffee beans in 2011 from close to zero a few years ago This

represents a small 10% of total national coffee production; BMI therefore expects this trend to gather

more traction given the government's strong support

We expect exports from Vietnam to remain strong in the coming months, as they are likely to stay very competitive globally This is despite foreign buyers cancelling orders for more than 90,000 tonnes of the country's rice in April and May because of a short-term rise in local prices compared with India In our view, this does not reflect the fundamental picture, as the country has a sufficient rice surplus to boost exports and prices are likely to remain very competitive, even compared with India Vietnam exported 2.5mn tonnes of rice since the start of the 2011/12 season, which means it still has the capacity to export about 4.5mn tonnes of rice before December

After discovering pork laced with clenbuterol and salbutamol in March, authorities have since conducted random tests of pork and pork products from numerous supermarkets in Ho Chi Minh The meat

inspected has not been found to contain any illegal substances; however, authorities said supermarkets will continue to be monitored

SWOT Analysis

Vietnam Agriculture Swot

Strengths ƒ 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

ƒ Vietnam is the world's second largest exporter of both rice and coffee It also enjoys relatively high rice yields compared with its regional counterparts

ƒ Agricultural productivity has improved considerably since the opening up of the economy in 1986

Weaknesses ƒ Much of Vietnam's agriculture is based on small-scale farms with poor yields in

comparison to more developed international competitors

ƒ Transportation and production infrastructure is often poor, making getting crops to market difficult and negatively affecting quality

Opportunities ƒ Since the opening up of the economy in 1986, which allowed more private

involvement in agriculture, yields have improved dramatically and look set to continue doing so over our forecast period to 2013

ƒ Vietnam's fast-growing population of more than 80mn provides a large market for agro-food products

ƒ With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period, consumers will have more money to spend on food, spurring growth in agricultural production

Threats ƒ 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

ƒ The rising population and increasing industrialisation of the economy will increase competition for land use, curtailing the area available for expansion of agriculture

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country

attractive to foreign investors

ƒ Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia, and beyond

Weaknesses ƒ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world

ƒ Vietnam remains one of the world's most corrupt countries According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries

Opportunities ƒ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-tech skills and know-how

ƒ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector This should offer foreign investors new entry points

Threats ƒ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

ƒ Labour unrest remains a lingering threat A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period

Supply Demand Analysis

Vietnam Dairy Outlook

BMI Supply View: Since the opening up of the economy in 1986, there has been considerable change in

the structure of the Vietnamese dairy industry The contribution of state farms, which were previously responsible for almost all milk production, has fallen to around just 5%, with the other 95% coming mainly from small- and medium-sized private farms

In 2011/12 we forecast milk production growth of 2.5% to 299,000 tonnes Out to 2015/16, we are forecasting Vietnamese fluid milk production growth of 24.8% on the 2010/11 level to 364,000 tonnes Dramatic increases in cattle numbers and increased public and private sector investment - part of the effort to reduce the country's growing import dependency - will be the main boost to growth

Commercialisation will also play a key role as larger, more efficient farms come to play a greater role in milk production A sustained period of high global milk prices on the back of rising global demand and supply sluggishness will also prove supportive of production and encourage producers to consider the long-term impact of their approach to cattle farming Finally, the sector is likely to benefit from the continued increase in yields, which have risen almost 130% over the past decade and are expected to continue to do so given the new investment in the sector

BMI Demand 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 Per capita milk consumption in Vietnam doubled between 2000 and 2009 to 12kg per person per year Despite this increase, the country remains below the regional average of 65kg Though there has been an increase in milk production over the years, the country produces neither cheese nor butter Condensed milk and yoghurt are also highly popular dairy products We expect the country to be increasingly reliant on dairy imports to meet its domestic needs

Vietnamese dairy consumption growth will remain strong over our forecast period to 2016 Strong economic growth will filter through into rising disposable incomes, pushing up demand for non-essential foodstuffs Through to 2016, we expect fluid milk consumption growth of 41.4% to 247,200 tonnes, while demand for butter, cheese and whole milk powder will soar 40.0%, 120% and 30% respectively, albeit from a far lower base Increased urbanisation, increased ownership of Western goods and the ongoing spread of modern, organised retail will all prove supportive of strong dairy consumption growth, even if the forecast higher global dairy prices limit the growth outlook to some extent

Table: Vietnam Milk Production & Consumption

Milk Production, '000 tonnes 1,2 291.6 299.0 309.7 325.0 342.0 364.0

Liquid Milk Consumption, '000 tonnes 3 174.8 184.2 204.1 217.8 232.3 247.2

Notes: f BMI forecasts 1 In all instances year indicates data for harvest year ending that calendar year i.e 2011 =

2008-09; Sources: 2 General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI

Table: Vietnam Butter Consumption

Butter Consumption, '000 tonnes 1 11.3 11.9 12.5 13.5 14.6 15.8

Notes: f BMI forecasts Sources: 1 FAPRI, BMI

Table: Vietnam Cheese Consumption

Cheese Consumption, '000 tonnes 1 3.5 6.3 3.6 4.9 6.1 7.7

Notes: f BMI forecasts Sources: 1 FAPRI, BMI

Table: Vietnam Whole Milk Powder Consumption

Whole Milk Powder Consumption, '000

Notes: f BMI forecasts Sources: 1 FAPRI

Vinamilk Continues Its Expansion

The Viet Nam Dairy Products Joint Stock Company (Vinamilk) has added Thailand to its portfolio of

export markets In February 2012, the company announced that it would begin exporting dairy products to Thailand in Q112 through a US$10mn deal signed in late 2011 In 2011, Vinamilk exported $140mn worth of products to 15 countries all over the world, a year-on-year increase of 72% Exporting countries

include US, Australia, Canada, Russia, Turkey, Iraq, South Korea and Cambodia In the domestic market, Vinamilk has a 30% share of the processed dairy sector

Table: Vietnam Milk Production & Consumption

General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI

Table: Vietnam Butter Consumption

Butter Consumption, '000 tonnes 1 10.8 10.8 10.8 10.8 11.3 11.9

Notes: 1 In all instances year indicates data for harvest year ending that calendar year i.e 2011 = 2008-09; Sources:

2

General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI Sources: 1 FAPRI, BMI

Table: Vietnam Cheese Consumption

Cheese Consumption, '000 tonnes 1 2.9 3.1 3.8 3.5 3.5 6.3

Notes: 1 In all instances year indicates data for harvest year ending that calendar year i.e 2011 = 2008-09; Sources:

2

General Statistics Office of Vietnam, BMI; 3 FAPRI, BMI Sources: 1 FAPRI, BMI Sources: 1 FAPRI, BMI

Table: Vietnam Whole Milk Powder Consumption

tightening weighs on our consumption growth forecasts, as it would force consumers to cut back on discretionary spending

The lack of a national quality control body for dairy products will continue to place downside risks to our production and consumption forecasts, as it places the dairy industry at risk of a health scandal, which would further tarnish the image of dairy products in Vietnam

Vietnam Livestock Outlook

BMI Supply View: Within the Vietnamese livestock industry, pig farming is by far the most significant

sector, with pork production comprising about two-thirds of total meat production in 2010/11 For

2011/12, we have revised our forecast for poultry production in line with official estimates and now expect it to remain stagnant at 350,000 tonnes We believe this is largely due to the threat of the avian flu, which is currently making its rounds across many regions in Vietnam and which is expected to curb output Pork production is also expected to remain steady at 1.96mn tonnes in 2011/12 Beef and veal production is forecast to fall by 1.7% to 285,000 tonnes in 2011/12

Despite going through hard times over recent years owing to disease outbreaks, soaring input costs and competition from cheap imports, we expect Vietnam's livestock production to grow strongly, led by poultry production, over the medium term Rising incomes will stimulate domestic meat consumption growth (owing to diet diversification), and production will increase to keep pace That said, we expect the country to continue being a net importer of livestock over our forecast period

We expect poultry production to rise by 23.5% to 432,100 tonnes over our forecast period to 2015/16 and for pork production to grow 13.1% from its 2011 level to 2.22mn tonnes over the same period The country will remain reliant on pork imports to satiate demand Beef production will remain the least significant of Vietnam's livestock sectors and is expected to fall by 7.2% to 269,000 tonnes, with growth coming from a low base

BMI Demand View: Meat consumption in Vietnam has risen significantly over the last decade, with per

capita consumption rising by 87% from 2001 to 2011 to reach 36.7kg per year Buoyed by strong income growth as well as population growth, we see healthy demand growth for livestock over the forecast period

to 2016 Poultry consumption is forecast to grow at 32.5% to 883,700 tonnes, while pork (from a higher base) and beef consumption will increase by 11.8% and 40.4% respectively Indeed, we forecast pork consumption to reach 2.2mn tonnes, with beef consumption reaching 897,400 tonnes We believe pork consumption will continue being the dominant meat consumed, comprising more than 60% of total meat consumption A household survey conducted in 2010 found that 40% of household meat expenditure was spent on pork, with preference given to fresh pork over chilled or processed meat

Table: Vietnam Poultry Production & Consumption

Poultry Production, '000 tonnes 1 350.0 350.0 370.0 390.0 410.0 432.1

Poultry Consumption, '000 tonnes 1 667.0 700.0 738.5 782.8 829.8 883.7

Notes: f BMI forecasts Sources: 1 USDA

Table: Vietnam Pork Production & Consumption

Pork Production, '000 tonnes 1 1,960.0 1,960.0 2,032.0 2,100.0 2,168.7 2,217.5Pork Consumption, '000 tonnes 1 1,995.0 2,035.0 2,085.9 2,138.0 2,195.5 2,248.5

Notes: f BMI forecasts Sources: 1 USDA

Table: Vietnam Beef & Veal Production & Consumption

Beef & Veal Production, '000 tonnes 1 290.0 285.0 280.0 275.0 272.0 269.0Beef & Veal Consumption, '000

Notes: f BMI forecasts Sources: 1 USDA

Pork Free From Chemical Additives

After discovering pork laced with clenbuterol and salbutamol in March, authorities have since conducted random tests of pork and pork products from numerous supermarkets in Ho Chi Minh The meat

inspected has not been found to contain any illegal substances; however, authorities said supermarkets will continue to be monitored

Fragmented Domestic Feed Industry Disadvantages Local Companies

The domestic livestock industry is made up of mainly small-scale or backyard farm operations, which have poor hygiene standards and are susceptible to epidemics The Vietnamese livestock sector is often plagued by disease outbreaks owing to the lack of proper sanitation facilities in farms and meat

production facilities Since 2009, the country's livestock sector has experienced multiple rounds of avian influenza, H5N1 bird flu virus, foot-and-mouth disease and porcine reproductive respiratory syndrome,

also known as blue ear disease In our view, disease outbreaks will constantly feature as a challenge to the industry as long as it remains fragmented and low in technology and health standards

The fragmented nature of the industry has thus resulted in foreign companies, with their sophisticated and larger-scale production facilities, dominating livestock production in Vietnam In the poultry sector, for

example, the three main companies dominating the landscape are China-based CP Vietnam Livestock Corporation, Indonesia-based Japfa and Malaysian company Emivest, supplying around 6mn chickens

to the domestic market monthly, leaving hundreds of domestic firms to compete for the remaining market share

Changing Meat Consumption Trends

Vietnam - Livestock Consumption By %

e/f = BMI estimate/forecast Source: BMI

It is estimated that approximately 20 of the foreign-owned feed companies control almost 70% of the Vietnamese animal feed industry and similar significant shares in the poultry and pork industry

According to reports, 30% of domestic firms have been forced out of the animal feed business as a result Another advantage that foreign firms enjoy in the sector is that they are not subject to the high lending costs that local famers have to pay Being able to rely on their parent companies also allows these foreign players to dig into deep pockets and purchase raw materials at lower costs in foreign currencies

Local Feed Company Expands

The dominance of foreign players in the livestock sector could be changing on the back of news that a

local feed company has shown significant development in a sector in which foreign firms such as Cargill and CP Foods traditionally dominate In February 2012, the Hong Ha Nutrition Joint Stock Co, a

privately owned Vietnamese animal feed company, inaugurated an animal production line in its newly

acquired 7 hectare factory in Dong Van Industrial Zone in Duy Tien District, in the northern Ha Nam Province The factory is expected to raise its capacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago This has come on the back of VND150bn (US$7.1mn)

invested last year

Livestock Industry Faces Crucial Challenges In Medium Term

Vietnam's commercial animal feed sector has grown at an annual rate of about 16% between 2005 and

2009, according to the Ministry of Agriculture and Rural Development This reflects the strong growth in livestock production in the country

While we are largely optimistic about the growth prospects for this industry, there are salient downside risks to this outlook We highlight three main challenges: high interest rates, a reliance on imports (which causes the livestock industry to be vulnerable to fluctuating input prices), and the fragmented nature of the market

Growing Poultry Deficit

Vietnam - Selected Livestock Estimates, 000 tonnes

f = BMI forecast Source: BMI

Table: Vietnam Poultry Production & Consumption

Poultry Production, '000 tonnes 1 344.0 350.0 340.0 350.0 350.0 350.0

Poultry Consumption, '000 tonnes 1 454.0 561.0 541.0 641.0 667.0 700.0

Notes: f BMI forecasts Sources: 1 USDA Sources: 1 USDA

Table: Vietnam Pork Production & Consumption

Pork Production, '000 tonnes 1 1,832.0 1,850.0 1,910.0 1,930.0 1,960.0 1,960.0

Pork Consumption, '000 tonnes 1 1,855.0 1,880.0 1,936.0 1,940.0 1,995.0 2,035.0

Notes: f BMI forecasts Sources: 1 USDA Sources: 1 USDA Sources: 1 USDA

Table: Vietnam Beef & Veal Production & Consumption

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, although it could also affect our beef outlook BMI

highlights that there have been reports that the highly pathogenic avian influenza has been found in numerous provinces such as Quang Tri,Thanh Hoa, Nam Dinh, Bac Ninh, Quang Nam and Quang Ninh

A reduction in consumer spending, as a result of the return to more normal fiscal and monetary policy, could adversely affect livestock consumption growth Prolonged demand sluggishness would also weigh

on production growth

Competition from cheap imports remains a risk to Vietnamese livestock farmers Efficiency

improvements are being made - as demonstrated by our robust production forecasts - and yet this risk might only be fully realised beyond 2012 once government intervention is reduced

An upside production risk is continued government investment If the sector continues to get investment from the government, the ensuing efficiency increases could pose upside risks to our forecasts

Vietnam Coffee Outlook

BMI Supply View: Vietnam's coffee sector has grown significantly over the last 20 years, with yields

doubling and the area planted expanding from 42,000 hectares (ha) to more than 509,000ha Vietnam is the world's biggest producer of robusta coffee, with more than 95% of its coffee output consisting of the robusta variety and only around 2-3% of production devoted to the premium Arabica variety The

Vietnamese coffee market year runs from October to September, and harvesting takes place between November and February

For the 2011/12 season, which started in October 2011, we forecast production to come in at 20.2mn 60kg bags, posting year-on-year (y-o-y) growth of 7.8% This will come from increases in yields on the back of improved production practices, which will help to compensate for losses linked to tree replanting

In fact, According to the Vietnam Coffee & Cocoa Association (Vicofa), about 137,000ha of old and quality coffee trees need to be replaced over the next five years in Vietnam's central highlands, which represents about 25% of total current production area In spite of this, the US Department of Agriculture (USDA) still forecasts coffee yields to increase from 2.1 tonnes/ha in 2010/11 to 2.2 tonnes/ha in

low-2011/12

Out to 2015/16, we expect production growth of 36.1% to 25.5mn bags as the Vietnamese government endeavours to increase the replanting of coffee trees Work on replacing trees, many of which are more than 20 years old, will improve disease resistance and thus yields in the long term Another growth driver will be export opportunities given that Vietnam is also the world's largest exporter of robusta coffee

Mostly In Daklak

Source: USDA, BMI

BMI Demand View: As GDP and population rise, spending on food and drink items such as coffee is

likely to increase Urbanisation and the spread of Western-style coffee shops are expected to add to this trend Coffee consumption grew impressively by 56.8% from 0.44kg per capita in 2005 to 0.69kg per capita in 2010, one of the highest growth rates out of all coffee-exporting countries over the period We predict that consumption will rise 11.3% in 2012 to 1.48mn bags That said, we note that coffee

consumption growth comes from a relatively low base, and we expect 66.0% growth to 2.2mn bags over our forecast period to 2016 Coffee consumption per capita is forecast to expand by 58.0% from 0.99kg per capita to 1.4kg per capita by 2016 The Ministry of Agriculture and Rural Development has said it hopes to boost domestic consumption to 10-15% of the national coffee crop We do not believe this will

be achieved in our forecast period, but the existence of such a sizeable target underlines the apparent potential of domestic consumption

Table: Vietnam Coffee Production & Consumption & Trade

Coffee Production, '000 60kg bags 1 18,735.0 20,200.0 21,200.0 22,578.0 24,212.0 25,504.6Coffee Consumption, '000 60kg

bags 2 1,325.0 1,475.0 1,629.9 1,801.0 1,990.1 2,199.1

Notes: f BMI forecasts Sources: 1 USDA, Vietnam Coffee and Cocoa Association; 2 USDA

Getting Into Sustainable Production

Sustainably produced farm produce sells - especially to developed markets and environmentally

conscious customers - and the government of Vietnam knows it Through numerous public-private partnerships, the Vietnamese government has started to pursue sustainable farming practises, placing

significant emphasis on the coffee sector According to statistics from Nedcoffee Vietnam, the amount of

coffee produced under the UTZ Certified, 4C Association and Rainforest Alliance criteria has risen to 115,000 tonnes (or 1,916 60kg bags) of coffee beans in 2011 from close to zero a few years ago This

represents a small 10% of total national coffee production; BMI therefore expects this trend to gather

more traction given the government's strong support

Surge In Coffee Exports In Line With Our View

We had previously highlighted that tighter credit conditions in the country might have limited the ability

of exporters to buy beans for stockpiling purposes and ensure a steady supply of exports The Vietnam central bank in early February 2012 decided to cut the compulsory reserve level for banks with large agriculture lending by 20% between February and July We believe that this will significantly loosen the tight credit conditions in the country By allowing more credit to the agriculture sector, this is likely to allow the market to be well supplied with beans for export

Stocks Getting Shipped

Vietnam Monthly Coffee Exports, '000 tonnes

Source: Vicofa, BMI

Increasing Foreign Competition

According to Vicofa, local exporters are facing increasing 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

BMI believes that any measure to curb such activity will only be a temporary solution The fragmented

structure of the industry results in local companies being less competitive than larger foreign companies

in terms of economies of scale and the ability to take out business loans We believe a greater

consolidation of the local industry and better development of networks between exporters and farmers is needed, especially once the coffee market eventually opens up to foreign wholesalers in accordance with WTO commitments

Vietnam Catching Up

Source: USDA

Domestic Demand Could Soar, But Poor Business Landscape Undermines Potential

While the vast majority of Vietnam's coffee will be destined for the export market, we expect domestic consumption to rise rapidly in the coming years A 2009 survey by the Policy and Strategy Institute on Agriculture and Rural Development on coffee drinking habits in Hanoi and Ho Chi Minh City clearly reinforces this view Results showed that coffee consumption was highest among the young and the well-educated living in urban areas and lowest among the elderly and in rural areas Consumption was also far higher in the south than in the north The USDA has also noted that 'domestic consumption has been increasing due to the effective marketing strategies of domestic coffee companies.'

Table: Vietnam Coffee Production, Consumption & Trade

Vietnam Coffee & Cocoa Association, 20% of the 2012/13 coffee crop is at risk because of rains in the central highlands which damaged trees during the flowering stage Older trees, which are half as

productive as younger ones, could also drag on overall yields as they rise to 30% of the total trees in plantation next year These pose salient downside risks to our projection for coffee output to reach

21.0mn bags in 2012/13

With Vietnam's coffee industry so dependent on exports, our forecasts for production will be heavily

dependent on world demand and prices for robusta coffee BMI is expecting prices to remain relatively

high over the medium term, but should further demand weakness - or indeed global oversupply - cause prices to come in lower than expected, production could undershoot our growth forecast

While Vietnam's coffee consumption forecast indicates significant growth, it is coming from a low base This highlights the fact that despite government efforts to lift local consumption, coffee remains a luxury, discretionary item Its status leaves it exposed to any period of reduced consumer confidence resulting from government monetary normalisation or a secondary economic slowdown Such a scenario would likely see our consumption growth forecast missed

Vietnam Grains Outlook

BMI Supply View: Vietnamese corn production is forecast to reach 5.0mn tonnes in 2011/12, a 6.5%

year-on-year (y-o-y) expansion on the back of a slight increase in area planted as well as higher yields This output maintains a decade-long trend of higher yields for the corn sector; yields increased by more than 50% from 2000/01 to 4.5mn tonnes per hectare (ha) in 2011/12 This is higher than the South East Asian average yield of 3.2mn tonnes/ha in 2010/11 according to the US Department of Agriculture Corn's harvested area also increased from 730,000ha in 2000/01 to 1.15mn in 2011/12 These increases have come as domestic consumption rose significantly on the back of improving incomes Indeed, as incomes have risen, consumers have been encouraged to buy more meat, of which corn is the main feedstock More than 80% of the country's total corn output goes towards the feed industry

To 2015/16, we expect corn production to increase by 57.5% to 7.3mn tonnes Acreage is likely to remain stagnant or diminish; current yield immaturity means significant gains are still available via this avenue, especially as robust local corn prices provide incentives to farmers The important growth driver will be domestic consumption, especially from the livestock sector Corn consumption doubled from 2005 to

2010 and we expect this trend to continue, although not at such a strong rate, to 2016 The demand gains will partly come from livestock growth, as beef, veal and poultry production are all expected to register strong growth As a result, Vietnam will very likely become increasingly reliant on corn imports to meet domestic demand

BMI Demand View: To 2016, corn consumption growth will continue to exceed that of production, at

51.4% This will increase the country's import dependency However, strong economic growth over our forecast period is likely to ensure that the impact of a rising import bill on consumption is deemed

manageable Animal feed will remain the primary use for corn to 2016 and beyond (according to the US Department of Agriculture, 80% of total corn consumption goes to animal feed use) Indeed, we have a positive view on livestock production to 2016 owing to income growth and the fact that the sector has been identified as a recipient of government modernisation efforts Bullish projections from the Food & Drink team reinforce this; we forecast per capita food consumption to grow by 45.5% to US$316.20 by

2016

Table: Vietnam Corn Production & Consumption

Corn Production, '000 tonnes 1 4,648.0 4,950.0 5,978.0 6,499.6 6,909.8 7,319.9

Corn Consumption, '000 tonnes 1 5,900.0 5,700.0 6,800.0 7,466.0 8,176.3 8,931.4

Notes: f BMI forecasts Sources: 1 USDA

Animal Feed Industry Faces Crucial Challenges In Medium Term

Vietnam's commercial animal feed sector has grown at an annual rate of about 16% between 2005 and

2009, according to the Ministry of Agriculture and Rural Development This reflects the strong growth in livestock production in the country

While we are largely optimistic about the growth prospects for this industry, there are salient downside risks to this outlook We highlight three main challenges: high interest rates, a reliance on imports (which causes the livestock industry to be vulnerable to fluctuating input prices), and the fragmented nature of the market

Reliance On Imports Increases Vulnerability To Price Fluctuations

Vietnam's dependency on imports to satisfy grains demand is expected to continue growing over the long term; this dynamic makes local livestock farmers highly vulnerable to fluctuations in international grain prices Import dependency for corn, for example, rose from 5.2% in 2005 to 19.0% in 2010 According to the Vietnam Animal Husbandry Department, animal feed manufacturers have increased their prices up to

a dozen times since early 2011, pushing current prices 40% higher y-o-y Higher animal feed costs, coupled with a shortage in output, has pushed the prices of live pigs up since the start of 2011, and they now cost VND64,000-70,000/kg

With consumption of meat growing steadily in Vietnam as incomes rise, we also expect imports of grain for animal feed to continue increasing Unless the government boosts domestic production of these grains

or improves storage conditions, the country will, in our view, remain largely vulnerable to grain price fluctuations in the coming years

Increasing Domestic Feed Production

f = BMI forecast Source: USDA, BMI

Table: Vietnam Corn Production & Consumption

Corn Production, '000 tonnes 1 4,648.0 4,950.0 5,978.0 6,499.6 6,909.8 7,319.9

Corn Consumption, '000 tonnes 1 5,900.0 5,700.0 6,800.0 7,466.0 8,176.3 8,931.4

Notes: f BMI forecasts Sources: 1 USDA

Risks To Outlook

We highlight downside risks to our corn production and consumption forecasts through to 2015/16 Corn, like many Vietnamese agricultural industries, is suffering from a reduction in acreage, a result of under-investment and the country's rapid pace of urbanisation We expect yield growth, coming from a fairly low base as it is, to be sufficient to support output growth in spite of stagnant or reduced acreage

However, the ongoing introduction of hardier and higher yielding crops will ultimately necessitate greater investment; corn prices will have to remain in favourable territory in the medium term to ensure that this investment is forthcoming

An important long-term downside consumption risk is that the country's dependence on imports could impede Vietnamese demand growth should a sustained period of inflated global corn prices occur Fiscal and monetary tightening also pose a risk to consumption growth Corn is not a luxury good, and thus demand will not retrench in line with tighter spending conditions However, corn production in the

country did dip by 3.7% y-o-y in 2008/09 on the back of tighter credit regulations throughout Vietnam during that time

Vietnam Rice Outlook

BMI Supply View: After a record year in 2010/11, we forecast Vietnamese rice production to stagnate at

26.5mn tonnes in 2011/12 The area harvested is expected to remain stable at 7.6mn hectares (ha), with yields increasing slightly to 5.58tonne/ha We believe this, combined with strong ending stocks (1.9mn tonnes in 2010/11), will support the country's export capacity as well as the continuous discount

Vietnamese rice prices enjoy compared with global prices We forecast the country's rice production balance - at 6.7mn tonnes - to be 24.1% higher than the five-year average, which would take exports to 7.0mn tonnes in 2011/12, according to the US Department of Agriculture (USDA)

Compared with many of its agricultural sub-sectors, Vietnamese rice is very competitive relative to many

of its regional peers and is well positioned to benefit from both regional and global demand growth Another advantage of Vietnamese rice is its relatively higher yields The government is looking to

increase by 50% the area planted with hybrid rice varieties, and this bolsters our bullish outlook for the country's rice production capabilities over the long term Over our five-year forecast period to 2015/16,

we expect rice output to grow by 12.8% to 29.7mn tonnes

country's rice in April and May because of a short-term rise in local prices compared with India In our view, this does not reflect the fundamental picture as the country has a sufficient rice surplus to boost exports and prices are likely to remain very competitive, even compared with India Vietnam exported 2.5mn tonnes of rice since the start of the 2011/12 season, which means it still has the capacity to export about 4.5mn tonnes of rice before December 2012

BMI Demand View: We forecast a modest consumption increase of 1.8% to 19.8mn tonnes in 2012

Over the longer term, we expect consumption to climb by 7.8% to 20.9mn tonnes in 2016 Rice remains the major food staple in Vietnam, and we do not see this changing over our forecast period However, rising interest in other foods such as wheat-based goods - supported by growing affluence - will restrict demand for rice, and over the forecast period we expect production growth to significantly outpace that of consumption Ultimately, demand growth will be influenced by population growth, as per-capita

consumption is expected to remain roughly the same as the population continues to diversify its diet on the back of rising incomes As such, the country will remain one of the world's top rice exporters

Table: Vietnam Rice Production & Consumption

Notes: f BMI forecasts Sources: 1 USDA

Exports To Remain Strong

We expect exports from Vietnam to remain strong in the coming months, as they are likely to stay very competitive globally This is despite foreign buyers cancelling orders for more than 90,000 tonnes of the country's rice in April and May because of a short-term rise in local prices compared with India In our view, this does not reflect the fundamental picture, as the country has a sufficient rice surplus to boost exports and prices are likely to remain very competitive, even compared with India Vietnam exported 2.5mn tonnes of rice since the start of the 2011/12 season, which means it still has the capacity to export about 4.5mn tonnes of rice before December

Usurping Thailand's Rice Throne In 2012

We believe that Vietnam will catch up with Thailand in terms of rice export volumes in 2012 This is mainly due to the impact of the Thai government's rice intervention programme, which is expected to keep Thai rice exports uncompetitive relative to other Asian exporters in the near term In fact, the USDA estimates that exports from the three top exporters - Thailand, Vietnam and India - will converge at 6.5mn tonnes each in 2011/12

A Tie Between Top Three Exporters In 2012

f = BMI forecast Source: USDA, BMI

Having said that, the country is facing fierce competition from India, whose re-entry on the non-basmati rice export market after a four-year export ban was sudden but buoyant Although we expect Vietnamese rice exports to stagnate at 7.0mn tonnes from 2011, Vietnam is likely to take over Thailand exports, forecasted at 6.5mn tonnes in 2012 However, Vietnam must now battle against India's rice exports made competitive thanks to a weakening rupee and high stocks India's exports are expected to reach Vietnam's level, at 7mn tonnes in 2012 From September 2011 (when the government lifted the export ban) to April

2012, Indian rice exports had already reached 4.2mn tonnes, while exports dropped by 58% y-o-y in Thailand and by 43% in Vietnam in the first quarter of 2012 Therefore, Vietnam's share of global exports could be lower than expected, as increased competition in the international rice markets could divert traditional importers to other suppliers, mainly India

Slow Start To The Year

Vietnam - Rice Exports, '000 tonnes

Source: General Statistics Office of Vietnam, BMI

Opening Up The Market

BMI believes that the impact of the Vietnamese rice market opening up to foreign traders from 2011

onwards poses a upside risk to production over the longer term Under WTO commitments, foreign traders are allowed to directly undertake rice trading in the country Previously, foreign companies were required to enter into joint ventures with local players In an effort to improve the capabilities of local rice exporters and prepare for the impending increase of competition with bigger more experienced foreign players, the government stepped up efforts to improve the local rice industry The government has

mandated that all rice exporters are required to have at least one rice storage warehouse with a minimum capacity of 5,000 tonnes of paddy and a rice processing facility with a minimum processing capacity of

10 tonnes per hour All rice exporters will have until September 2012 to take the necessary actions and adapt to these changes While this is likely to lead to a reduction in the 264 rice export companies in the country as of 2010, these developments also will very likely increase the industry's economies of scale and increase the competitiveness of the industry We believe that this development is a step in the right direction; a restructuring of the local rice industry will encourage consolidation and better prepare local players for eventual foreign competition in the sector

Table: Vietnam Rice Production & Consumption

Rice Production, '000 tonnes 1 22,922.0 24,375.0 24,393.0 24,993.4 26,300.0 26,455.0

Rice Consumption, '000 tonnes 1 18,775.0 19,400.0 19,000.0 19,150.0 19,400.0 19,750.0

Notes: f BMI forecasts Sources: 1 USDA Sources: 1 USDA

Risks To Outlook

There are upside risks to our Vietnamese rice consumption forecasts Rice remains a substantial part of the local diet, and any period of prolonged food price inflation or economic weakness would most likely see more consumers revert to traditional diets, therefore lifting overall demand

On the production side, we believe the gradual transformation of rice cultivation methods in Vietnam presents the main upside risk to our production forecasts in the long term The Cultivation Department of the Ministry of Agriculture and Rural Development of Vietnam is endeavouring to develop a large-scale rice farming model where neighbouring farmers work with businesses and government officials to

increase rice yields In the model, these businesses provide capital for farmers to increase farm inputs such as fertiliser and machinery They also provide a ready consumer network for farmers In return, they reserve the exclusive right to purchase after the harvest Currently, large-scale rice farms cover 10,000ha

of total rice area harvested The plan aims to expand this to 400,000-800,000ha by end-2012 and finally

to 1mn ha in 2015, or approximately 10% of total area harvested for rice We believe that this plan poses salient upside risks to our forecast for rice production growth

Commodity Price Analysis

Monthly Softs Update

We continue to forecast lower average prices in 2012 and 2013 for the majority of the softs complex, largely owing to improving supply prospects Many softs prices are close to, or on, long-term support, and we expect some consolidation in the coming weeks Sustained breaks below these levels would be bearish signals

ƒ We expect cocoa to be the outperformer amongst the softs complex in the coming weeks, as it is the only market to have weakening supply prospects going into Q312 This is aided by weak production from West Africa due to poor weather conditions

ƒ We expect coffee and sugar to consolidate around current key support levels For sugar, supply concerns from Brazil are likely to keep prices supported For coffee, historically low net speculative positions could limit downside pressure

ƒ Commodity prices in general could head sharply lower in the next few months if anxiety over eurozone debt concerns continue and the US dollar resumes its Q212 rally

Cocoa: Signs Of Life

Front-month cocoa has traded slightly higher in May in anticipation of the end of the main crop in West Africa In line with our view, production from the region (particularly top producers Ghana and Côte d'Ivoire) is expected to be slightly lower year-on-year in 2011/12 This is largely due to slightly drier weather conditions that limited yields Demand prospects also remain strong in Q212

Slowing Growth

Source: BMI, Bloomberg, Reuters

Nonetheless, supply will remain elevated by historical levels, and we continue to forecast a surplus for 2011/12 and a larger surplus for 2012/13 On the back of this, we forecast prices to average lower at GBP1,450/tonne in 2012 and GBP1,275/tonne in 2013

Showing Life

Source: BMI, Bloomberg

Coffee: Holding Key Support

Front-month coffee has traded virtually sideways in May and continues to hold support at around

USc175/lb The global coffee market is forecast to return to a surplus of around 9mn bags in the 2012/13 season (which begins in April) as Brazil begins its up-year harvest Global production will also be

boosted by growth in Vietnam and eventually Colombia, for which we forecast 6% output expansion in 2012/13 Ultimately, we continue to forecast lower average prices in 2012 (at USc200/lb) and 2013 (at USc185/lb)

However, we expect coffee to trade along long-term support in the coming weeks as historically low net speculative positions limit downside potential Moreover, we do not rule out a temporary bounce as production problems in the short term could catalyze an unwind of extremely bearish sentiment

Sentiment At A Bearish Extreme

Front-Month (ICE) Coffee, USc/lb & Non-Commercial Net Speculative Long

Positions

Source: Bloomberg, BMI

Palm Oil: Uptrend Intact

Three-month palm oil has reversed in May after a seven-month rally The pullback was anticipated and was primarily due to the rally in soybean prices losing steam (soy oil being a direct substitute for palm)

We are forecasting the global crude palm oil market to remain well supplied in the 2011/12 season, which will most likely keep a lid on prices However, the market is expected to tighten in 2012/13 as export growth slows significantly in top grower Indonesia This will partly be due to new export taxes in the country We expect the multiyear uptrend in prices to remain intact and see significant support for prices

in the MYR3,000/tonne area We forecast palm oil prices to average MYR3,200/tonne in 2012 and MYR 3,220/tonne in 2013

Cooling Off

Source: Bloomberg, BMI

Sugar: Watching Brazilian Yields

Front-month sugar has traded slightly lower in May, although we believe prices will consolidate around the significant USc20.00/lb level This is mainly due to rising supply concerns in Brazil, which are offsetting the bearish impact of greater Indian export capacity from India, the world's second largest producer and consumer

Nonetheless, production increases are expected from other large exporters (including Thailand and Australia) for the 2012/13 season, and we forecast the global sugar market to register increased surpluses

in both 2011/12 and 2012/13 at 9.1mn tonnes and 11mn tonnes respectively This underpins our view of lower average prices in 2012 at USc22.50/lb and 2013 at USc21.50/lb

High By Seasonal Standards

Source: BMI, Bloomberg

Cotton: Downside Risks

Front-month cotton has taken another leg lower and we note significant downside risks to our average price forecasts of USc95.00/lb for 2012 and USc105/lb for 2013 While the push below multiyear support around USc84.00/lb suggests additional weakness in the short-to-medium term, we still expect prices to regain some poise as we head into 2013 We forecast global production to tighten slightly in 2012/13 as lower prices have discouraged farmers from planting the crop, while global demand, driven by the

Chinese textile industry, is likely to recover The market will post a smaller surplus of 5.0mn 480lb bales

in 2012/13, after an 11.7mn bale surplus in 2011/12

Table: Select Commodities - Performance & BMI Forecasts

BMI 2013 (ave)

Palm Oil MYR/tonne -1.7 -10.3 3,245 3,310 3,200 3,220

Rough Rice US$/cwt 5.4 1.9 15.12 14.64 14.50 14.00Soybean USc/bushel 18.0 2.5 1,317 1,334 1,250 1,200

Source: BMI, Bloomberg

Monthly Grains Update

We maintain our view for the global grains market to be better supplied in the coming months, which will very likely take pressure off prices in the medium term However, we do not expect prices to collapse owing to uncertainty over weather conditions (potentially affecting supply) and the pace of economic recovery (possibly boosting demand) We highlight these key points:

ƒ Our view for significant upside risks in H112 as grain exports are in a seasonal trough is playing

out (see our online service, 'Grains: Upside Risk To Prices In H112', February 6) The

rising risk of export disruption linked to potential supply disruptions in the coming months makes a bullish breakout by prices possible, as we have already seen for wheat

ƒ We believe wheat prices have the most potential for upside in the coming months as dry weather has affected plantings in major producers These upside risks could spread to the corn and soybean markets, even though we see most of the gains in these markets, especially soybean, behind us now

ƒ Ultimately, we see upward momentum for grain prices waning once harvests gather steam in Q312, as we expect sufficient supply to keep global stocks-to-use ratios, especially for wheat, above 10-year averages

Wheat Surge

Source: BMI, Bloomberg, Note: Jan 2012=100