Q3 2013 www.businessmonitor.com VIETNAM AGRIBUSINESS REPORT INCLUDES 5-YEAR FORECASTS TO 2017 ISSN 1759-1740 Published by:Business Monitor International Vietnam Agribusiness Report Q3 2013 INCLUDES 5-YEAR FORECASTS TO 2017 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: June 2013 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2013 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, 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4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2013 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 2013 CONTENTS BMI Industry View SWOT 10 Agribusiness 10 Business Environment 12 Industry Forecast 13 Dairy Outlook 13 Table: Vietnam Milk Production & Consumption, 2012-2017 14 Table: Vietnam Butter Consumption, 2012-2017 14 Table: Vietnam Cheese Consumption, 2012-2017 14 Table: Vietnam Milk Production & Consumption, 2007-2012 19 Table: Vietnam Cheese Consumption, 2007-2012 19 Table: Vietnam Butter Consumption, 2007-2012 19 Livestock Outlook 21 Table: Vietnam Beef & Veal Production & Consumption, 2012-2017 23 Table: Vietnam Pork Production & Consumption, 2012-2017 23 Table: Vietnam Poultry Production & Consumption, 2012-2017 23 Table: Vietnam Beef & Veal Production & Consumption, 2007-2012 31 Table: Vietnam Pork Production & Consumption, 2007-2012 31 Table: Vietnam Poultry Production & Consumption, 2007-2012 31 Coffee Outlook 33 Table: Vietnam Coffee Production & Consumption, 2012-2017 35 Table: Vietnam Coffee Production & Consumption, 2007-2012 41 Rice Outlook 42 Table: Vietnam Rice Production & Consumption, 2012-2017 44 Table: Vietnam Rice Production & Consumption, 2007-2012 48 Grains Outlook 49 Table: Vietnam Corn Production & Consumption, 2012-2017 50 Table: Vietnam Corn Development Production Plan & Bmi Forecasts 51 Table: Vietnam Corn Production & Consumption, 2007-2012 53 Commodities Price Analysis 55 Monthly Softs Update 55 Table: Select Commodities - Performance & BMI Forecasts 64 Table: BMI Commodities Strategy 65 Monthly Grains Update 66 Table: Select Commodities - Performance & BMI Forecasts 72 Table: BMI Commodities Strategy 73 Upstream Analysis 74 Asia GM Outlook 74 Table: Philippines Corn Estimates 79 Table: Select Countries - GM Crops, 2012 80 © Business Monitor International Page Vietnam Agribusiness Report Q3 2013 Asia Machinery Outlook 80 Asia Fertiliser Outlook 86 Table: Global Benchmark Fertiliser Prices (US$/tonne FOB, reported prices at the end of quarter) 89 Downstream Analysis 93 Food 93 Food Consumption 93 Table: Food Consumption Indicators - Historical Data & Forecasts, 2010-2017 94 Canned Food 95 Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2010-2017 95 Confectionery 96 Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2010-2017 97 Pasta 97 Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 98 Dairy 100 Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 100 Drink 101 Alcoholic Drinks 101 Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2010-2017 104 Hot Drinks 105 Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2010-2017 106 Soft Drinks 107 Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2010-2017 108 Table: Carbonates Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 109 Mass Grocery Retail 109 Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2010-2017 112 Table: Grocery Retail Sales By Format (%) 112 Regional Overview 113 Regional Overview 113 Competitive Landscape 118 Table: Vietnam - Major Agribusiness Companies (US$mn) 118 Company Profile 119 Charoen Pokphand Foods PLC 119 Table: Charoen Pokphand Foods' Financial Highlights, 2008-2012 127 Demographic Forecast 129 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 130 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 131 Table: Vietnam's Key Population Ratios, 1990-2020 132 Table: Vietnam's Rural And Urban Population, 1990-2020 132 Methodology 133 © Business Monitor International Page Vietnam Agribusiness Report Q3 2013 BMI Industry View BMI View: The agriculture industry (including forestry and aquaculture) contributes to more than 20% of Vietnam's GDP and employs almost half its population It holds strong growth opportunities in terms of production, exports and retail sales, more specifically with regard to the coffee and livestock sectors However, some industries face large risks in terms of losing their competitive advantage as other Asian countries step up production, particularly of rice and coffee We believe Vietnam will have to significantly ramp up investment in crop productivity to avoid being left behind, and if it wants to be able to produce more value-added crops and maintain its status as an export spearhead Rice King Commodity Vietnam - BMI Agribusiness Market Value By Commodity (% of total) Note: The BMI Market Value is an addition of all domestically produced commodities' value (calculated by multiplying the production with the international benchmark prices, converted in US$/tonne); e/f = BMI estimate/ forecast Source: BMI Key Forecasts ■ Rice consumption growth to 2017: 7.8% to 21.3mn tonnes Rice remains the major food staple in Vietnam, and we 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 © Business Monitor International Page Vietnam Agribusiness Report Q3 2013 ■ ■ ■ ■ ■ ■ Corn production growth to 2016/17: 29.2% to 6.4mn tonnes Although acreage is likely to remain stagnant or diminish; current yield immaturity means significant gains are still available via this avenue, especially as robust local corn prices provide incentives to farmers Domestic consumption will be another important driver Milk production growth to 2016/17: 25.7% to 416,000 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 BMI universe agribusiness market value: US$21.5bn in 2013 (down from US$22.5bn in 2012); growth expected to average -1.2% annually between 2013 and 2017 2013 real GDP growth: 6.3% (up from 5.0% in 2012; predicted to average 6.9% over 2013-2017) 2013 consumer price index: 6.5% year-on-year (down from 9.3% in 2012; predicted to average 5.5% over 2013-2017) 2013 central bank policy rate: 7.00% (down from 9.00% in 2012; predicted to average 6.40% over 2012-2017) Key Revisions To Forecasts ■ ■ 2013/14 coffee production forecast revised up, to 21.8mn 60kg bags (compared with a previous forecast of 18.6mn bags) Concerns over a prolonged drought in the Central Highlands that hindered coffee tree blossoms have now eased Drought-affected areas began to receive rain in late March and received normal precipitation in April and May 2012/13 rice production forecast revised up, to 27.5mn tonnes (compared with a previous forecast of 27.0mn tonnes) Favourable weather conditions during planting allowed for expanded crops in the Mekong River Delta region for spring and autumn crops Key Developments As rice harvested area broadly stagnates, production growth in 2012/13 and 2013/14 will almost entirely rely on yield improvements Increases in yields are resulting from the introduction of better rice varieties The Ministry of Agriculture and Rural Development is also currently encouraging farmers to implement the large-scale farm model (between 50ha and 100ha), under which farmers consolidate individual small farms into larger farms to reduce per hectare production costs stemming from land preparation, irrigation, planting and harvesting Vietnamese yields currently stand well above neighbouring countries but still have room before reaching Australian rice yields of 9.2tonne/ha, which are the world's highest Vietnam's livestock sector, and especially the pork sector, went through challenging times in 2012 due to a rise in feed ingredient prices, lower demand and plummeting domestic prices Many farmers were forced to reduce or suspend their operations in order to limit losses, with as many as 30-50% of individual farmers in © Business Monitor International Page Vietnam Agribusiness Report Q3 2013 southern provinces abandoning their farms We expect profitability issues in the Vietnamese livestock sector to ease slightly in 2013, helped by falling grain prices following an arduous 2012 Livestock domestic prices are also likely to recover, driven by lower supply We forecast livestock production growth to slow in 2012/13 Meanwhile, foreign and locally owned feed companies such as Charoen Pokphand Vietnam Livestock, Japfa Comfeed Vietnam and GreenFeed Vietnam Corporation have announced investments to increase feed production capacity Favoured by stable and elevated robusta prices, Vietnam has seen its area dedicated to coffee increase strongly in the past years Planted area has increased from around 500,000 hectares (ha) in 2005/06 to over 640,000 in 2012/13, according to estimates by the agriculture ministry and the US Department of Agriculture However, quality has not followed, and farmers have faced many difficulties, including inclement weather, falling yields and lower coffee quality The productivity drop by low yielding and aging coffee trees remains a concern for the industry but has been offset somewhat by additional output from newly productive or replanted coffee areas over the past three years © Business Monitor International Page Vietnam Agribusiness Report Q3 2013 Operational Losses CPF - Revenue Growth, % chg y-o-y (RHS) & Income, THBmn (LHS) Source: CPF CPF's aquaculture breeding business was one of the main reasons for the lacklustre performance Revenue for this segment dropped by 9.4% y-o-y in Q113 to THB11.5bn while CPF's total revenue jumped 19.0% y-o-y The ongoing early mortality syndrome (EMS) disease in CPF's shrimp population across its farms in Asia has hammered the high margin shrimp business The animal feed and poultry segment performed well in Q113, with sales growing 24.8% y-o-y Thailand's domestic livestock prices rebounded after being weak over FY12, with broiler slaughterhouse prices averaging THB40.7/kg over the quarter, up 17.3% y-o-y © Business Monitor International Page 121 Vietnam Agribusiness Report Q3 2013 Improving Margin Outlook Thailand - Swine/Corn & Broiler/Corn Domestic Price Ratio Note: An increase in the ratio implies livestock prices outperformance Source: BMI, CPF Performance in Q213 is likely to disappoint, as the effects of EMS is likely to continue to put pressure on CPF's earnings Moreover, CP Pokphand (CPP), one of CPF's main growth drivers since it was acquired in 2012, is expected to suffer a slowdown in revenue due to the large outbreak of avian influenza in China in April 2013 The Chinese feed business, which now contributes to around 28% of CPF's total revenue, may see a slowdown in sales growth due to the decrease in headcount in poultry farms arising from lower domestic demand for chicken meat and declining prices However, we continue to believe CPF's performance is likely to pick up in H213 Regarding margins, we note that broiler and pork prices in Thailand have continued to surge since the start of FY2013 in January, which is likely to further underpin the recovery in the livestock segment Feed prices are likely to ease, especially corn prices, as Thailand is expected to record a production surplus in 2012/13, while international prices will average lower in 2013, at Usc650/bushel Soybean prices will remain elevated and average USc1,480/bushel that year, above the five-year average © Business Monitor International Page 122 Vietnam Agribusiness Report Q3 2013 CPF Falls In 2012 Select Companies - Operating (LHS) & Profit Margins (%) Note: We have chosen to include FY2012 annual results, but People's Food Holdings already announced Q113 results, Tyson Q213 results and Nippon Meat Packers Q413 results Source: BMI, Bloomberg Strong Margins But High Debt Levels CPF usually enjoys relatively strong margins relative to its peers Operating and profit margins decreased in FY12 due to a challenging environment However, profit margins remained above the industry average Moreover, the uptrend in margins recorded in recent years is likely to resume in FY13 due to improving livestock prices in Thailand and lower feed ingredients costs Similarly, the deterioration in FY12 of CPF's cash flow position (free cash flow came in negative for the first time in four years) is expected to improve this year as performance returns to normal levels With the exception of FY12, the company has had positive cash flows from operations in recent years as well as higher free cash flow/revenue ratios than its peers We remain cautious on CPF's debt position, as its total debt/EBITDA ratio increased in FY12 and now is over 8x, the highest among its peers for the second consecutive year The company recently announced it plans to reduce its debt levels in order to fund its overseas expansion plan in food business This will be done through the sale of noncore assets, such as plots of land, or the partial sale of its recentlyacquired 74% stake in CPP (it aims to hold at least 51% after the sale) Neither definite timeline nor details over the future investments have yet been set © Business Monitor International Page 123 Vietnam Agribusiness Report Q3 2013 Increase In Debt Select Companies - Net Debt/EBITDA Note: We have chosen to include FY2012 annual results but, People's Food Holdings already announced Q113 results, Tyson Q213 results and Nippon Meat Packers Q413 results Source: BMI, Bloomberg Company Strategy We continue to foresee long-term growth potential for the company, as we view their overseas expansion and increased focus on the feed and food segments positively CPF has been enjoying some of the highest return on common equity (RoE) levels among its peers, and RoE came in at 22.3% in FY12, compared with 10.0% for Tyson Foods and 4.1% for Nippon Meat Packers With widespread operations across Asian countries and further overseas expansionary plans, we believe CPF is well-positioned to benefit from fastgrowing food consumption in emerging markets, especially in Asia This strategy will also help the company to partly overcome non-tariff trade barriers that occur in the food industry We forecast poultry consumption to showcase strong growth between 2012 and 2017 in the countries where CPF is established, with poultry demand growing 25.2% to 16.9mn tonnes in China, 35.1% to 1.1mn tonnes in Vietnam and 11.3% to 1.5mn tonnes in Turkey © Business Monitor International Page 124 Vietnam Agribusiness Report Q3 2013 Diversification Strategy CPF - Revenues By Region (LHS) & By Product (% of total) Source: BMI, CPF The acquisition of 74% of CPP, the largest feedmill producer in China and the largest agri-industry operator in Vietnam, in March 2012 is partially responsible for the increased exposure to these markets CPF is now able to benefit from the ongoing consolidation of the livestock sector in China, as the shift from backyard farming to industrialised production will boost demand for feed This scenario may also play out in Vietnam, where we believe a consolidation of the sector is imminent We also favour CPF's goal to focus on value-added food products while replicating in overseas markets its successful integrated formula implemented in Thailand CPF's plans to shift away from the volatile farm business, which accounted for 31% of revenue in FY12 (compared with 43% in FY11), towards more stable-margin feed and food businesses could help reduce its earnings volatility © Business Monitor International Page 125 Vietnam Agribusiness Report Q3 2013 Improved Performance Looking Ahead Charoen Pokphand Foods, SET Index & Bloomberg World Food Index, Rebased Note: January 2013 = 100 Source: BMI, Bloomberg Valuation CPF's 12-month trailing price-to-earnings ratio (PE) decreased in recent months to 11.7x, which is significantly below competitors' average of 24.3x (the average is dragged higher by People's Foods Holdings, whose PE stands at 40.6x) and the SET Index PE (on which CPF is listed) of 18.4x In May 2012, the company's PE was at 15.3x, compared with an average of 15.2x for its peers We believe this makes CPF relatively cheap historically and relative to its peers, and underlines our positive view on the company's performance in H213 and over the long term © Business Monitor International Page 126 Vietnam Agribusiness Report Q3 2013 Heading Up In H213 CPF - Share Price (THB) & RSI (below) Source: BMI, Bloomberg Technical Analysis CPF's share price has showed weakness since May 2012, but it has most likely bottomed out, and we see support coming at THB30.0 A break of resistance now coming at THB33.0 would be bullish for the share price Table: Charoen Pokphand Foods' Financial Highlights, 2008-2012 Revenues* © Business Monitor International 2008 2009 2010 2011 2012 156,237.6 165,063.0 189,048.5 206,099.5 357,175.2 Page 127 Vietnam Agribusiness Report Q3 2013 Charoen Pokphand Foods' Financial Highlights, 2008-2012 - Continued 2008 2009 2010 2011 2012 15.9 5.6 14.5 9.0 73.3 3,480.8 11,503.7 12,065.5 14,702.7 8,077.4 2.2 7.0 6.4 7.1 2.3 3,128.4 10,190.2 13,562.6 15,837.0 18,789.9 Profit Margin 2.0 6.2 7.2 7.7 5.3 Net Debt/EBITDA 5.4 2.0 2.3 2.3 8.6 Earnings Per Share* 0.4 1.5 2.0 2.4 2.6 PE Ratio 7.2 7.5 12.1 13.9 12.6 Revenues Growth Operating Income* Operating Margin Net Income* * In mn THB Source: BMI, Bloomberg © Business Monitor International Page 128 Vietnam Agribusiness Report Q3 2013 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements The accompanying charts detail Vietnam's population pyramid for 2011, the change in the structure of the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life expectancy The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split Source: World Bank, UN, BMI © Business Monitor International Page 129 Vietnam Agribusiness Report Q3 2013 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2012e 2015f 2020f 67,102 74,008 78,758 83,161 87,848 89,730 92,443 96,355 0-4 years 9,340 9,212 7,002 6,776 7,186 7,186 7,026 6,529 5-9 years 8,685 9,193 9,124 6,921 6,703 6,885 7,143 6,982 10-14 years 7,504 8,604 9,142 9,038 6,844 6,539 6,668 7,104 15-19 years 7,127 7,408 8,535 9,064 8,963 8,161 6,806 6,628 20-24 years 6,492 7,003 7,305 8,420 8,954 9,115 8,892 6,745 25-29 years 5,893 6,361 6,879 7,167 8,284 8,602 8,862 8,803 30-34 years 4,884 5,779 6,250 6,765 7,058 7,475 8,202 8,779 35-39 years 3,965 4,794 5,688 6,163 6,677 6,770 6,991 8,131 40-44 years 2,420 3,884 4,710 5,614 6,086 6,304 6,609 6,925 45-49 years 2,039 2,358 3,802 4,653 5,548 5,761 6,012 6,536 50-54 years 1,933 1,968 2,287 3,739 4,580 4,936 5,449 5,914 55-59 years 1,946 1,843 1,887 2,201 3,617 4,001 4,446 5,305 60-64 years 1,544 1,822 1,737 1,767 2,076 2,573 3,455 4,268 65-69 years 1,283 1,391 1,659 1,582 1,621 1,649 1,927 3,233 70-74 years 919 1,084 1,194 1,439 1,389 1,384 1,438 1,729 1,127 1,305 1,559 1,852 2,264 2,388 2,516 2,743 Total 75+ years f = BMI forecast Source: World Bank, UN, BMI © Business Monitor International Page 130 Vietnam Agribusiness Report Q3 2013 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2012 2015f 2020f 0-4 years 13.92 12.45 8.89 8.15 8.18 8.01 7.60 6.78 5-9 years 12.94 12.42 11.58 8.32 7.63 7.67 7.73 7.25 10-14 years 11.18 11.63 11.61 10.87 7.79 7.29 7.21 7.37 15-19 years 10.62 10.01 10.84 10.90 10.20 9.10 7.36 6.88 20-24 years 9.68 9.46 9.27 10.13 10.19 10.16 9.62 7.00 25-29 years 8.78 8.60 8.73 8.62 9.43 9.59 9.59 9.14 30-34 years 7.28 7.81 7.94 8.14 8.03 8.33 8.87 9.11 35-39 years 5.91 6.48 7.22 7.41 7.60 7.55 7.56 8.44 40-44 years 3.61 5.25 5.98 6.75 6.93 7.03 7.15 7.19 45-49 years 3.04 3.19 4.83 5.59 6.32 6.42 6.50 6.78 50-54 years 2.88 2.66 2.90 4.50 5.21 5.50 5.89 6.14 55-59 years 2.90 2.49 2.40 2.65 4.12 4.46 4.81 5.51 60-64 years 2.30 2.46 2.21 2.12 2.36 2.87 3.74 4.43 65-69 years 1.91 1.88 2.11 1.90 1.85 1.84 2.08 3.36 70-74 years 1.37 1.46 1.52 1.73 1.58 1.54 1.56 1.79 75+ years 1.68 1.76 1.98 2.23 2.58 2.66 2.72 2.85 f = BMI forecast Source: World Bank, UN, BMI © Business Monitor International Page 131 Vietnam Agribusiness Report Q3 2013 Table: Vietnam's Key Population Ratios, 1990-2020 Dependent ratio, % of total working age Dependent population, total, '000 Active population, % of total Active population, total, '000 Youth population, % of total working age Youth population, total, '000 1990 1995 2000 2005 2010 2012 2015f 2020f 75.5 71.2 60.5 49.7 42.1 40.9 40.6 41.6 28,859 30,790 29,679 27,609 26,006 26,031 26,717 28,321 57.0 58.4 62.3 66.8 70.4 71.0 71.1 70.6 38,243 43,218 49,079 55,552 61,842 63,699 65,725 68,034 66.8 62.5 51.5 40.9 33.5 32.4 31.7 30.3 25,529 27,009 25,268 22,735 20,732 20,610 20,837 20,615 8.7 8.7 9.0 8.8 8.5 8.5 8.9 11.3 3,330 3,780 4,411 4,874 5,274 5,421 5,881 7,706 Pensionable population, % of total working age Pensionable population, '000 f = BMI forecast; 0>15 plus 65+, as % of total working age population; 0>15 plus 65+; 15-64, as % of total population; 15-64; 0>15, % of total working age population; 0>15; 65+, % of total working age population; 65+ Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2012 2015f 2020f Urban population, % of total 20.3 22.2 24.3 26.4 28.7 29.7 31.2 33.9 Rural population, % of total 79.7 77.8 75.7 73.6 71.3 70.3 68.8 66.1 Urban population, '000 13,438.6 16,201.6 18,865.4 21,940.1 25,212.5 26,649.9 28,842.1 32,664.4 Rural population, '000 52,761.4 56,778.4 58,770.0 61,166.2 62,635.9 63,080.4 63,600.5 63,690.7 f = BMI forecast Source: World Bank, UN, BMI © Business Monitor International Page 132 Vietnam Agribusiness Report Q3 2013 Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined 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 ensure 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 that the explanatory variables for both of them are quite similar, but the underlying economic theory is different © Business Monitor International Page 133 Vietnam Agribusiness Report Q3 2013 Example of rice consumption model: (Rice Consumption)t = β0 + β1*(Real Private Consumption per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Population)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt Where: ■ β are parameters for this function ■ Real private consumption per capita has a positive relationship with rice consumption, if rice is a normal good in a particular country If rice is an inferior good in a country, the relationship is negative So the sign of β1 is determined by a specific product within a specific country ■ When inflation is high, people with rational expectations will consume 'today' rather than wait for 'tomorrow's high price to come Higher rice demand in year t due to higher inflation in that year leads to an assumed positive sign of β2 ■ The relationship between real lending rate and rice consumption is expected to be negative When real lending rates increase, disposable incomes, especially for those with mortgage burdens etc, will decrease So the sign of β3 is expected to be negative ■ Of course, other things being equal, growth in rice consumption can also be caused by growth in population Consequently, positive sign of β4 is expected ■ ■ ■ Government expenditure typically causes total disposable incomes to rise So the sign of β5 is expected to be positive Human behaviour has a trend: A high level of food consumption in previous years means there is very likely to be a high level of food consumption the next year So the positive sign of β6 is expected ε is the error/residual term Example of rice production model: (Rice Production)t = β0 + β1*(Real GDP per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Rural Population)t + β5*(Government Expenditure)t + β6*(Food Production)t-1 + εt Where: ■ The same as above, the relationship between real GDP per capita and rice production depends on whether rice is normal or inferior good in that country ■ If high inflation is caused by food prices increasing, farmers will be more profitable Then they will supply more agricultural product (eg, rice) to increase their marginal (extra) profit, although this is tempered by the rising cost of other inputs in line with inflation ■ There is a global move towards corporate farming, away from small holdings, in order to achieve greater agricultural productivity Corporate farming means more investment in the modes of production i.e agricultural machinery Higher real lending rates discourage investment, which in turn reduce production © Business Monitor International Page 134 Vietnam Agribusiness Report Q3 2013 ■ BMI assumes only the rural population has a positive effect on agricultural product supply ■ With supportive government policy, other things being equal, rice production is expected to go up Government expenditure is likely to play some role in supporting agribusiness ■ Again, previous food production positively affects this year's prediction © Business Monitor International Page 135 [...]... of 8.9% © Business Monitor International Page 24 Vietnam Agribusiness Report Q3 2013 Changing Meat Consumption Trends Vietnam - Livestock Consumption (% of total meat consumption) e/f = BMI estimate/forecast Source: BMI © Business Monitor International Page 25 Vietnam Agribusiness Report Q3 2013 Feed And Animal Breeding Subsectors More Profitable While Vietnamese livestock production companies (except... foreign companies Mainly Foreign Companies Vietnam - Feed Production By Company, 2011 (% of total) Source: BMI, Vietnam Animal Feed Association © Business Monitor International Page 28 Vietnam Agribusiness Report Q3 2013 Local Feed Company Expands Vietnam' s feed industry is one of the world's fastest agribusiness markets It is estimated that approximately a third of Vietnam' s feed is prepared in backyard... International Page 22 Vietnam Agribusiness Report Q3 2013 Table: Vietnam Beef & Veal Production & Consumption, 2012-2017 2012 2013f 2014f 2015f 2016f 2017f Beef & Veal Production, '000 tonnes 1 285.0 290.0 280.0 275.0 270.0 267.0 Beef & Veal Consumption, '000 tonnes 1 295.0 300.0 313.5 329.2 345.7 363.0 Notes: f BMI forecasts Sources: 1 USDA Table: Vietnam Pork Production & Consumption, 2012-2017 2012 2013f 2014f... standards Vietnam still imports 75% of its dairy products needs, while Thailand is 75% self-sufficient Moreover, Thailand has higher dairy cow efficiency © Business Monitor International Page 17 Vietnam Agribusiness Report Q3 2013 than Vietnam and China, as dairy cows yield, per year, 3,380kg of milk per head, compared with 2,060kg/ head in China and 2,170kg/head in Vietnam Lower Productivity In Vietnam. .. least significant of Vietnam' s livestock sectors and is expected to fall by 6.7% to 267,000 tonnes © Business Monitor International Page 21 Vietnam Agribusiness Report Q3 2013 Strong Consumption Potential Vietnam - Population (mn) & GDP Per Capita (US$, % chg y-o-y) Source: BMI, Asian Development Bank, Vietnam General Statistics Office, UN BMI Demand View: Meat consumption in Vietnam has risen significantly.. .Vietnam Agribusiness Report Q3 2013 SWOT Agribusiness SWOT Analysis Strengths ■ The natural fertility of Vietnam around the Red River Delta in the north and the Mekong River Delta in the south provides the country with a strong agricultural base ■ Vietnam is the world's second largest exporter of rice and coffee It also enjoys... Finally, CPV plans on establishing two other feed mills in southern Vietnam Japfa Comfeed Vietnam also plans on building two new mills before 2015, including one in Hoa Binh, which will have a capacity of 156,000 tonnes per year © Business Monitor International Page 29 Vietnam Agribusiness Report Q3 2013 Imbalances To Be Maintained Vietnam - Poultry & Pork Production & Consumption ('000 tonnes) f =... International Page 34 Vietnam Agribusiness Report Q3 2013 Table: Vietnam Coffee Production & Consumption, 2012-2017 2012e Coffee Production, '000 60kg bags 1 Coffee Consumption, '000 60kg bags 2 2013f 2014f 2015f 2016f 2017f 24,800.0 23,450.0 21,800.0 22,475.8 20,902.5 19,439.3 1,635.4 1,807.1 1,996.8 2,200.5 2,425.0 2,672.3 Notes: e BMI estimates f BMI forecasts Sources: 1 USDA, Vietnam Coffee and Cocoa... and the ongoing spread © Business Monitor International Page 13 Vietnam Agribusiness Report Q3 2013 of modern, organised retail will all prove supportive of strong dairy consumption growth, even if forecast higher global dairy prices limit the growth outlook to some extent Table: Vietnam Milk Production & Consumption, 2012-2017 2012e 2013f 2014f 2015f 2016f 2017f Milk Production, '000 tonnes 1,2 331.0... forecasts Sources: 1 USDA Table: Vietnam Poultry Production & Consumption, 2012-2017 2012 2013f 2014f 2015f 2016f 2017f Poultry Production, '000 tonnes 1 750.0 780.0 820.0 863.0 907.0 954.0 Poultry Consumption, '000 tonnes 1 793.5 837.1 887.4 940.6 1,001.8 1,071.9 Notes: f BMI forecasts Sources: 1 USDA © Business Monitor International Page 23 Vietnam Agribusiness Report Q3 2013 Sector Profitability Improves, ... year-on-year (y-o-y) to 780,000 tonnes in 2012/13 Pork production is also expected to grow by 2.5% y-o-y on the back of higher number of pigs (estimated at 26.7mn in mid-2012, up 1.5% y-o-y)... contained Vietnam Agribusiness Report Q3 2013 INCLUDES 5-YEAR FORECASTS TO 2017 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: June 2013. .. 2012; predicted to average 6.9% over 201 3-2 017) 2013 consumer price index: 6.5% year-on-year (down from 9.3% in 2012; predicted to average 5.5% over 201 3-2 017) 2013 central bank policy rate: 7.00%