Q3 2014 www.businessmonitor.com VIETNAM AGRIBUSINESS REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 1759-1740 Published by:Business Monitor International Vietnam Agribusiness Report Q3 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: May 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2014 Business Monitor International All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Agribusiness Report Q3 2014 CONTENTS BMI Industry View SWOT 10 Agribusiness 10 Business Environment 12 Industry Forecast 13 Dairy Outlook 13 Table: Butter Production & Consumption (Vietnam 2013-2018) 14 Table: Cheese Production & Consumption (Vietnam 2013-2018) 14 Table: Milk Production & Consumption (Vietnam 2013-2018) 14 Table: Whole Milk Powder Consumption (Vietnam 2013-2018 15 Table: Butter Production & Consumption (Vietnam 2008-2013) 20 Table: Cheese Production & Consumption (Vietnam 2008-2013) 20 Table: Milk Production & Consumption (Vietnam 2008-2013) 20 Table: Whole Milk Powder Consumption (Vietnam 2008-2013 20 Livestock Outlook 22 Table: Beef Production & Consumption (Vietnam 2013-2018) 23 Table: Pork Production & Consumption (Vietnam 2013-2018) 23 Table: Poultry Production & Consumption (Vietnam 2013-2018) 23 Table: Beef Production & Consumption (Vietnam 2008-2013) 28 Table: Pork Production & Consumption (Vietnam 2008-2013) 28 Table: Poultry Production & Consumption (Vietnam 2008-2013) 29 Coffee Outlook 30 Table: Coffee Production & Consumption (Vietnam 2013-2018) 31 Table: Coffee Production & Consumption (Vietnam 2008-2013) 36 Rice Outlook 38 Table: Rice Production & Consumption (Vietnam 2012-2018) 39 Table: Rice Production & Consumption (Vietnam 2008-2013) 42 Grains Outlook 43 Table: Corn Production & Consumption (Vietnam 2013-2018) 44 Table: Corn Production & Consumption (Vietnam 2008-2013) 48 Featured Analysis 49 Bright Outlook For Agribusiness In Vietnam 49 Commodities Price Analysis 55 Monthly Softs Update 55 Table: Select Commodities - Performance & BMI Forecasts 64 Monthly Grains Update 64 Table: Selected Commodities - Performance & Forecasts 74 Upstream Analysis 75 Asia GM Outlook 75 © Business Monitor International Page Vietnam Agribusiness Report Q3 2014 Table: Select Countries - GM Crops Use In 2012 81 Asia Fertiliser Outlook 81 Table: India - Fertiliser Subsidies, INR/kg 85 Asia Machinery Outlook 88 Table: China Grain Public Production Support Programme (CNYbn) 91 Table: Select Countries - Average Size Of Farms, 95 Downstream Analysis 99 Food 99 Food Consumption 99 Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018 101 Canned Food 102 Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018 102 Confectionery 103 Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 104 Pasta 106 Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 106 Dairy 108 Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 109 Drink 110 Alcoholic Drinks 110 Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 112 Hot Drinks 115 Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 116 Soft Drinks 117 Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 119 Mass Grocery Retail 121 Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 123 Table: Grocery Retail Sales By Format (%) 124 Regional Overview 125 Table: Hourly Textile Industry Wages By Country (USD) 129 Table: Select Countries - Biofuel Blending Mandates & Programmes 131 Competitive Landscape 132 Table: Major Agribusiness Companies (USDmn) 132 Company Profile 133 Global Company Strategy 133 Table: Vinamilk's Financial Highlights, 2008-2013 141 Demographic Forecast 143 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 144 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 145 Table: Vietnam's Key Population Ratios, 1990-2020 146 Table: Vietnam's Rural And Urban Population, 1990-2020 146 Methodology 147 Industry Forecast Methodology 147 © Business Monitor International Page Vietnam Agribusiness Report Q3 2014 Sector-Specific Methodology 148 © Business Monitor International Page Vietnam Agribusiness Report Q3 2014 BMI Industry View BMI View: Recent adjustments in our outlook for Vietnam's economy and business environment add further weight to our positive view on the country's agribusiness sector The industry holds strong growth opportunities in terms of production, exports and retail sales, particularly with regard to the rice, coffee, livestock and dairy sectors However, Vietnam is facing growing competition in its key markets, and the fulfilment of its promising potential will only be achieved if the country steps up its competitiveness and improves product quality and supply chain efficiency Vietnam will have to significantly ramp up investment in crop productivity in order to avoid being left behind, and if it wants to succeed in producing more value-added crops and maintaining its status as an export spearhead Agribusiness Market Value BMI Market Value By Commodity (% of Total) (2010-2018) 60 40 20 -20 2010 2011 2012 2013e Cocoa market value, % of total Sugar market value, % of total Milk market value, % of total Grains market value, % of total 2014f 2015f 2016f 2017f 2018f Livestock market value, % of total Cotton market value, % of total Palm Oil market value, % of total e/f= BMI estimate/forecast, Source: FAO/ BMI Calculation Key Forecasts ■ Rice consumption growth to 2018: 4.0% to 22.2mn 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 2014 • Corn production growth to 2017/18: 32.9% to 6.4mn tonnes Although acreage is likely to remain stagnant or diminish; current yield immaturity means significant gains are still available, especially as robust local corn prices provide incentives to farmers Domestic consumption will be another important driver • Milk production growth to 2017/18: 21.9% to 484,700 tonnes Dramatic increases in cattle numbers and increased public and private sector investment - part of the effort to reduce the country's growing import dependency - will be the main boost to growth Commercialisation will also play a key role as larger, more efficient farms come to play a greater role in milk production • BMI universe agribusiness market value: USD25.7bn in 2014 (down from USD27.3bn in 2012); growth expected to average -1.2% annually between 2013 and 2017 • 2014 real GDP growth: 5.9% (up from 5.4% in 2013; predicted to average 6.3% over 2014-2018) • 2014 consumer price index: 5.8% year-on-year (y-o-y) (down from 6.6% in 2013; predicted to average 5.2% over 2014-2018) • 2014 central bank policy rate: 7.00% (same than in 2013; predicted to average 6.20% over 2014-2018) Key Developments Vietnam's coffee exports in 2013/14 are likely to bounce back following the decline in 2012/13's outbound shipments Vietnam's production surplus is forecast to swell to 26.2mn bags in 2013/14, compared with the five-year average of 20.0mn bags Exports could therefore reach 25-26mn bags, up by around 4-6% y-o-y and compared with the five-year average of 20.3mn bags After a slow start at the beginning of the season in October, exports have picked up strongly since February October 2013-May 2014 exports reached 1.3mn tonnes, up 15.6% y-o-y Exports will remain strong in the coming months as farmers try to benefit from the recent rally in international and domestic coffee prices The ongoing restructuring of Vietnam's largest coffee export company, Vinacafe, is reflective of the difficulties facing the country's coffee export industry It also highlights the government's push to restructure ailing state-owned enterprises, which we see as a positive development The ongoing difficulties in the coffee export sector are the result of a combination of factors, including the extensive use of short-term debt to fund long-term projects, high interest rates, and poor management and futures trading abilities Although the extension of loan terms and decreasing interest rates will give a breath of fresh air to exporting companies, the sector's outlook remains hindered by overcapacity in the beans processing industry and bad management practices Vietnam's livestock sector, and especially the pork sector, went through challenging times in 2012 and 2013 due to a rise in feed ingredient and fuel prices, lower demand and plummeting domestic prices As a result, many farmers were forced to reduce or suspend their operations in order to limit losses, with as many as © Business Monitor International Page Vietnam Agribusiness Report Q3 2014 30-50% of individual farmers in southern provinces abandoning their farms, while owners of large farms with more than 1,000 head have reduced their herd size by up to 70% The situation has been improving since H213, as pork prices are starting to recover, and consumers are showing more confidence in the pork market While we believe pork and poultry production growth will remain below historical averages, foreign and locally owned feed companies such as Charoen Pokphand Vietnam Livestock, Japfa Comfeed Vietnam and GreenFeed Vietnam Corporation have announced investments to increase feed production capacity © Business Monitor International Page Vietnam Agribusiness Report Q3 2014 SWOT Agribusiness SWOT Analysis Strengths ■ The natural fertility of Vietnam around the Red River Delta in the north and the Mekong River Delta in the south provides the country with a strong agricultural base ■ Vietnam is the world's second largest exporter of rice and coffee It also enjoys relatively high rice yields compared with its regional counterparts ■ Agricultural productivity has improved considerably since the opening up of the economy in 1986 Weaknesses ■ Vietnam enjoys relatively good international price competitiveness for rice and coffee ■ Much of Vietnam's agriculture is based on small-scale farms with poor yields relative to more developed international competitors ■ Transportation and production infrastructure is often poor, making getting crops to market difficult and negatively affecting quality Opportunities ■ Since the opening up of the economy in 1986, which allowed more private involvement in agriculture, yields have improved dramatically and look set to continue doing so ■ Vietnam's fast-growing population of more than 80mn provides a large market for agro-food products ■ With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period, consumers will have more money to spend on food, spurring growth in agricultural production ■ A move towards higher-quality products, especially in the coffee and dairy sectors, will help to improve Vietnam's product competitiveness © Business Monitor International Page 10 Vietnam Agribusiness Report Q3 2014 temporarily stagnant domestic demand, which has been hurting the company's performance since Q313 However, selling prices increased at a slower pace than input costs, as the company decided to absorb some of the elevated milk powder costs in order to maintain market share amid intense competition in Vietnam's dairy sector We believe Vinamilk's results will continue to disappoint in the coming quarters on the back of low consumer confidence and spending, and the government's recent decision to cap prices for children's dairy products Vietnam's government decided to impose as of June 2014 price caps on 25 powder milk products for children younger than for the top five producers and importers, including Vinamilk, Friesland Campina Vietnam, Nestlé Vietnam, Mead Johnson Vietnam and 3A Nutrition Vietnam The maximum retail price is determined by the wholesale price and related costs, but cannot exceed the 15% of wholesale price ceiling As a result of this law, selling price increases for these products will most likely slow significantly in 2014 after dairy products prices increased by around 30% annually between 2009 and 2012, according to the government Stricter regulation in Vietnam's dairy market - which has traditionally been little regulated, especially for the children's products - will limit earnings growth for Vinamilk in the coming years Bottoming Out? Vinamilk - Select Margins (%) Source: Vinamilk © Business Monitor International Page 136 Vietnam Agribusiness Report Q3 2014 Moreover, margins are likely to continue to stagnate if not fall slightly in the coming months as a result of the severe increase in milk powder prices between Q412 and Q114 Indeed, the impact on margins is usually felt with a two-quarter lag, and global milk and milk powder prices have remained elevated in Q114 We expect margins to start recovering from H214, as we see milk prices averaging significantly lower in 2014 and 2015 as dairy herds are recovering in the main producing countries (see 'Milk To Average US$19.00/cwt In 2014', March 18) More Headwinds For Vinamilk In Near Term Global - Whole Milk Powder Prices (USD/tonne) Source: Global Dairy Trade Company Strategy We see long-term growth potential for Vinamilk given the strong growth potential for dairy consumption in Vietnam and the Asian region, the company's investment in supply chain and capacity expansion, and its strong financial position The company is well positioned to benefit from the industry's growth, as it has a well-known brand (a recent survey by Kantar Worldpanel indicates Vinamilk's products are consumed by 94% of households in Vietnam) and a large distribution network © Business Monitor International Page 137 Vietnam Agribusiness Report Q3 2014 We believe Vinamilk's strategy of developing mainly in the domestic market, and more specifically in value-added segments, will be to its benefit Vinamilk boasts large market shares in key domestic markets for which we forecast strong consumption growth in the coming years For example, Vinamilk has a 40% market share in Vietnam's liquid milk segment, for which we forecast consumption to expand by 36.1% between 2013 and 2018, to 272,400 tonnes, on the back of increased urbanisation, Westernisation and the ongoing spread of organised retail networks Moreover, Vinamilk plans to scale up its production and market share in the powdered milk segment (which currently only accounts for 20% of its total sales in Vietnam), for which we believe demand will rise by 24.3% over the coming five years Vinamilk On Top Select Companies - Operating (LHC) & Profit (RHC) Margins, % Source: Bloomberg With new downstream projects coming online soon (a second powdered milk factory and a liquid milk factory was completed in FY13), the company is now heavily investing in upstream capacity and plans to build three new dairy farms in 2014 and 2015 Vinamilk, which sources 25% of its raw milk from smallscale farms in Vietnam, is ramping up its cow farming business and aims to source 60-70% of its raw milk needs from internally owned farms by 2024 We also highlight Vinamilk's export growth potential Exports (mainly to Iraq, Cambodia, the Philippines, Thailand and Australia) accounted for 14% of total revenue as of FY13, compared with 10% in FY07 Exports are likely to see sustained growth in the coming years, as they will benefit from access to new © Business Monitor International Page 138 Vietnam Agribusiness Report Q3 2014 markets such as the US, and the full implementation of the ASEAN Economic Community in the coming years Although the current 2015 timeline for integration looks unlikely, we expect closer commercial and financial ties with lower import tariffs across the region in the coming years Vinamilk is trying to capitalise on looser investment regulations in the region It announced in January 2014 the creation of Angkor Dairy in Cambodia, and plans to start building a factory in the country in FY14 in order to save costs Positive Picture Vinamilk - Free Cash Flow (VNDmn) Source: Vinamilk Strong Margins And Low Debt Levels Vinamilk enjoys the strongest margins relative to its peers (despite the recent decline in margins), thanks to its ability to control expenses and maintain a very low level of debt Operating and profit margins have been on an uptrend lately at a time when global milk prices have been historically high Profit margins reached 21.1% in FY13, significantly higher than the Asia dairy industry average of 7.7% Moreover, Vinamilk's liquidity, efficiency and solvency ratios are generally higher than its peers Vinamilk also regularly records positive and growing free cash flows despite having invested heavily in FY13 This bodes well for the © Business Monitor International Page 139 Vietnam Agribusiness Report Q3 2014 company's expansion plans We therefore believe Vinamilk will remain an outperformer in the industry over a multi-quarter horizon owing to its efficiency, cost control and emphasis on high-growth demand markets Improved Performance Over Longer Term Select Companies & Ho Chi Minh Index (VNI), Rebased Note: January 2014 = 100 Source: BMI, Bloomberg Valuation We believe Vinamilk has now relatively low valuations relative to historical levels and to peers Vinamilk's 12-month trailing price/earnings ratio (PE) decreased significantly since November 2013 and is now standing at a 15 month low of 15.7x This is close to its three-year average of 14.8x and to the current PE of the VNI of 13.2x It is significantly below its competitors' average of 34.5x (the average is pushed higher by Bright Dairy and Nestlé India) © Business Monitor International Page 140 Vietnam Agribusiness Report Q3 2014 Eventually Heading Up Vinamilk - Share Price, VND (daily chart) Source: BMI, Bloomberg Share Price Analysis We believe Vinamilk's share price has now bottomed out after recording weakness since May 2014 The share price is likely to recover in the coming months and will break above short-term resistance coming at VND120,000, heading towards VND140,000 The share price is unlikely to go beyond that level given the lacklustre outlook for margins in Q214 Table: Vinamilk's Financial Highlights, 2008-2013 2008 2009 2010 2011 2013 8,209 10,614 15,753 21,627 30,949 Revenues Growth 25.6 29.3 48.4 37.3 16.5 Operating Income* 1,248 2,340 3,347 4,317 7,295 Operating Margin 15.2 22 21.2 20 23.6 Net Income* 1,250 2,376 3,616 4,218 6,534 Profit Margin 15.2 22.4 23 19.5 21.1 Revenues* © Business Monitor International Page 141 Vietnam Agribusiness Report Q3 2014 Vinamilk's Financial Highlights, 2008-2013 - Continued Net Debt/EBITDA EPS (VNDmn) 2008 2009 2010 2011 2013 -0.4 -1.1 -0.5 -0.8 -0.8 1,559 4,632 4,556 5,145 7,839 * In VNDbn; margins in %; na = not available Sources: BMI, Bloomberg © Business Monitor International Page 142 Vietnam Agribusiness Report Q3 2014 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 143 Vietnam Agribusiness Report Q3 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050 Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695 Total © Business Monitor International Page 144 Vietnam Agribusiness Report Q3 2014 Vietnam's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 12 17 21 24 30 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12 © Business Monitor International Page 145 Vietnam Agribusiness Report Q3 2014 Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued 100+ years 1990 1995 2000 2005 2010 2013e 2015f 2020f 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Key Population Ratios, 1990-2020 Dependent ratio, % of total working age Dependent population, total, '000 1990 1995 2000 2005 2010 2013e 75.8 71.0 61.3 50.8 42.9 41.4 2015f 2020f 41.3 41.9 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 Active population, total, '000 58.5 62.0 66.3 70.0 70.7 70.8 70.5 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 Youth population, total, '000 60.9 50.9 40.9 33.6 32.1 31.7 30.2 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age Pensionable population, total, '000 10.0 10.1 10.3 9.9 9.3 9.3 9.6 11.6 3,934 4,491 5,190 5,579 5,823 6,037 6,343 7,965 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286 e/f = BMI estimate/forecast Source: World Bank, UN, BMI © Business Monitor International Page 146 Vietnam Agribusiness Report Q3 2014 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined Common to our analysis of every industry is the use of vector autoregressions Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis Such single-variable analysis is called univariate modelling We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA) In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting BMI mainly uses ordinary least squares estimators In order to avoid relying on subjective views and encourage the use of objective views, we use a 'general-to-specific' method BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary During periods of 'industry shock', for example, if poor weather conditions impede agricultural output, dummy variables are used to determine the level of impact Effective forecasting depends on appropriately selected regression models We select the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account; ■ Testing the directional movement and magnitude of coefficients; ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); ■ All results are assessed to alleviate issues related to auto-correlation and multicollinearity; © Business Monitor International Page 147 Vietnam Agribusiness Report Q3 2014 Human intervention plays a necessary and desirable role in all or our industry forecasting Experience, expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Sector-Specific Methodology Within the Agribusiness industry, issues that might result in human intervention could include but are not exclusive to: ■ Technology development that might influence future output levels (for example greater use of biotechnology); ■ Dramatic changes in local production levels due to public or private sector investment; ■ The regulatory environment and specific areas of legislation, such as import and export tariffs and farm subsidies; ■ Changes in lifestyles and general societal trends; ■ The formation of bilateral and multilateral trading agreements, and political factors The following two examples show the demand (consumption) and the supply (production) of rice Note that the explanatory variables for both are quite similar, but the underlying economic theory is different Example Of Rice Consumption Model (Rice consumption)t = β0 + β1*(real private consumption per capita)t + β2*(inflation)t + β3*(real lending rate)t + β4*(population)t + β5*(government expenditure)t + β6*(food consumption)t-1 + εt Where: ■ β are parameters for this function ■ Real private consumption per capita has a positive relationship with rice consumption, if rice is a normal good in a particular country If rice is an inferior good in a country, the relationship is negative So the sign of β1 is determined by a specific product within a specific country ■ When inflation is high, people with rational expectations will consume today rather than wait for tomorrow's high price to come Higher rice demand in year t due to higher inflation in that year leads to an assumed positive sign of β2 ■ 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 © Business Monitor International Page 148 Vietnam Agribusiness Report Q3 2014 ■ ■ ■ Government expenditure typically causes total disposable incomes to rise So the sign of β5 is expected to be positive Human behaviour has a trend: A high level of food consumption in previous years means there is very likely to be a high level of food consumption the next year So the positive sign of β6 is expected ε is the error/residual term Example Of Rice Production Model (Rice production)t = β0 + β1*(real GDP per capita)t + β2*(inflation)t + β3*(real lending rate)t + β4*(rural population)t + β5*(government expenditure)t + β6*(food production)t-1 + εt Where: ■ The same as above: the relationship between real GDP per capita and rice production depends on whether rice is normal or inferior good in that country ■ If high inflation is caused by food prices increasing, farmers will be more profitable Then they will supply more agricultural product (eg rice) to increase their marginal (extra) profit, although this is tempered by the rising cost of other inputs in line with inflation ■ There is a global move towards corporate farming, away from small holdings, in order to achieve greater agricultural productivity Corporate farming means more investment in the modes of production, ie agricultural machinery Higher real lending rates discourage investment, which in turn reduce production ■ BMI assumes that 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 149 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... companies © Business Monitor International Page 26 Vietnam Agribusiness Report Q3 2014 Mainly Foreign Companies Vietnam - Feed Production By Company, 2011 (% of total) Source: BMI, Vietnam Animal Feed Association Local Feed Company Expands Vietnam' s feed industry is one of the world's fastest agribusiness markets It is estimated that approximately a third of Vietnam' s feed is prepared in backyard farms from... Consumption (Vietnam 2013-2018) e/f = BMI estimates/forecasts Sources: FAPRI, BMI Table: Milk Production & Consumption (Vietnam 2013-2018) Milk Production, '000 tonnes Milk production, % y-o-y Liquid Milk Consumption, '000 tonnes e/f = BMI estimates/forecasts Sources: General Statistics Office of Vietnam, BMI, FAPRI © Business Monitor International Page 14 Vietnam Agribusiness Report Q3 2014 Table:... implemented This would then weigh on production growth in two of Vietnam' s main agriculturalproducing regions © Business Monitor International Page 11 Vietnam Agribusiness Report Q3 2014 Business Environment SWOT Analysis Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country attractive to foreign investors ■ Vietnam' s location - its proximity to China and South East... International Page 31 Vietnam Agribusiness Report Q3 2014 Slower Exports Vietnam - Coffee Exports ('000 tonnes) Source: BMI, Vicofa Crisis Brewing For Coffee Exporters The ongoing restructuring of Vietnam' s largest coffee export company, Vinacafe, is a clear evidence of the difficulties of the coffee export industry Vinacafe, a state-owned enterprise that owns more than 25 subsidiary units, is Vietnam' s largest... Ahead Vietnam - Coffee Area By Region, 2012 & 2020 Goal (% of total) Source: USDA, BMI © Business Monitor International Page 34 Vietnam Agribusiness Report Q3 2014 Major Robusta Grower Vietnam is the world's largest 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 We expect Vietnam. .. consumption forecasts, as it places the dairy industry at risk of a health scandal, which would further tarnish the image of dairy products in Vietnam © Business Monitor International Page 21 Vietnam Agribusiness Report Q3 2014 Livestock Outlook BMI Supply View: Within the Vietnamese livestock industry, pig farming is by far the most dominant sector, with pork production comprising about two-thirds of total... fresh pork over chilled or processed meat © Business Monitor International Page 22 Vietnam Agribusiness Report Q3 2014 Table: Beef Production & Consumption (Vietnam 2013-2018) Beef & veal production, '000 tonnes Beef & veal production, % y-o-y Beef & veal consumption, '000 tonnes Beef & veal consumption, % y-o-y 2013 2014f 2015f 2016f 2017f 2018f 402.0 404.0 407.0 409.0 413.0 417.0 0.5 0.5 0.7 0.5 1.0... 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 © Business Monitor International Page 12 Vietnam Agribusiness Report Q3 2014 Industry Forecast Dairy Outlook BMI Supply View: We hold a positive outlook on Vietnam' s dairy sector We expect it to maintain its strong growth momentum on the back of a growing... Livestock announced in March 2012 it is investing USD100mn in several core businesses in Vietnam, including feed mills, farms, processed food, ready-to-eat food and CP shops, its distribution store © Business Monitor International Page 27 Vietnam Agribusiness Report Q3 2014 The company plans on establishing four feed mills in Vietnam in the coming year The feed mill in Hai Duong province near Hanoi, has started... could pose upside risks to our forecasts © Business Monitor International Page 29 Vietnam Agribusiness Report Q3 2014 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 ... Monitor International Page Vietnam Agribusiness Report Q3 2014 Sector-Specific Methodology 148 © Business Monitor International Page Vietnam Agribusiness Report Q3 2014 BMI Industry View... predicted to average 6.3% over 201 4-2 018) • 2014 consumer price index: 5.8% year-on-year (y-o-y) (down from 6.6% in 2013; predicted to average 5.2% over 201 4-2 018) • 2014 central bank policy rate:... International Page 22 Vietnam Agribusiness Report Q3 2014 Table: Beef Production & Consumption (Vietnam 201 3-2 018) Beef & veal production, '000 tonnes Beef & veal production, % y-o-y Beef & veal consumption,