Vietnam agribusiness report q4 2010

Q4 2010 www.businessmonitor.com VietnaM agribusiness Report INCLUDES 5-YEAR FORECASTS TO 2014 ISSN 1759-1740 Published by Business Monitor International Ltd VIETNAM AGRIBUSINESS REPORT Q4 2010 INCLUDES 5-YEAR FORECASTS TO 2014 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication Date: September 2010 Business Monitor International Mermaid House, Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2010 Business Monitor International All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained VIETNAM AGRIBUSINESS REPORT Q4 2010 INCLUDES 5-YEAR FORECASTS TO 2014 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication Date: September 2010 Business Monitor International Mermaid House, Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2010 Business Monitor International All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Agribusiness Report Q4 2010 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q4 2010 CONTENTS Executive Summary SWOT Analysis Vietnam Political SWOT Vietnam Economic SWOT Vietnam Business Environment SWOT Industry Forecast Scenario 10 Vietnam Sugar Outlook 10 Table: Vietnam – Sugar Production, Consumption & Trade 10 Table: Vietnam – Sugar Production, Consumption & Trade 12 Vietnam Livestock Outlook 13 Table: Vietnam – Poultry Production, Consumption & Trade 13 Table: Vietnam – Pork Production, Consumption & Trade 14 Table: Vietnam – Beef & Veal Production, Consumption & Trade 14 Table: Vietnam – Poultry Production, Consumption & Trade 17 Table: Vietnam – Pork Production, Consumption & Trade 17 Table: Vietnam – Beef & Veal Production, Consumption & Trade 17 Vietnam Coffee Outlook 19 Table: Vietnam – Coffee Production & Consumption 20 Table: Vietnam – Coffee Production & Consumption 22 Vietnam Dairy Outlook 23 Table: Vietnam – Milk Production & Consumption 23 Table: Vietnam – Butter Production, Consumption & Trade 24 Table: Vietnam – Cheese Production, Consumption & Trade 24 Table: Vietnam – Milk Production & Consumption 26 Table: Vietnam – Butter Production, Consumption & Trade 27 Table: Vietnam – Cheese Production, Consumption & Trade 27 Vietnam Grains Outlook 29 Table: Vietnam – Corn Production, Consumption & Trade 29 Table: Vietnam – Corn Production, Consumption & Trade 30 Vietnam Rice Outlook 31 Table: Vietnam – Rice Production, Consumption & Trade 31 Table: Vietnam – Rice Production, Consumption & Trade 33 Competitive Landscape 35 Table: Agricultural Commodity Producers & Traders 35 Table: Agribusiness Suppliers 36 Table: Integrated Agricultural Producers 37 Commodity Price Analysis 38 Grains Update 38 Corn 38 Table: Corn 38 Rice 39 Table: Rice 39 Soybean 40 Table: Soybean 40 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q4 2010 Wheat 41 Table: Wheat 41 Softs Update 42 Cocoa 42 Table: Cocoa 42 Coffee 43 Table: Coffee 43 Milk 44 Table: Milk 44 Sugar 45 Table: Sugar 45 Downstream Supply Chain Analysis 46 Food 46 Industry Forecast Scenario 46 Food Consumption 46 Table: Food Consumption Indicators Historical Data & Forecasts 47 Canned Food 48 Confectionery 48 Table: Canned Food And Confectionery Sales Indicators Historical Data & Forecasts 49 Trade 50 Vietnam Food & Drink Trade Indicators - Historical Data & Forecasts 51 Mass Grocery Retail 52 Table: Vietnam MGR Indicators Value Sales by Format Historical Data & Forecasts 54 Grocery Retail Sales by Format Historical Data & Forecasts (%) 54 Macroeconomic Forecast 55 Table: Vietnam - Economic Activity, 2007-2014 56 Industry Trend Analysis 57 Table: Vietnam -Rice Production, Consumption & Trade 58 BMI Forecast Modelling 59 How We Generate Our Industry Forecasts 59 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q4 2010 Executive Summary BMI View: Consistent economic growth have led to double-digit consumption growth forecasts across all agricultural sectors in Vietnam However, the industry will continue to produce surpluses in coffee and rice - but few other commodities Indeed, with a rising population and incomes, the country will remain a net importer of all livestock and dairy goods over the forecast period Although the Vietnamese government is investing in several sectors to increase production, most of the industry, barring rice, will remain import-dependent and vulnerable to changes in global agricultural prices Key Trends: ! Sugar production growth to 2014: 26% to 1.26mn tonnes Gains will be driven by stronger domestic demand and an increase in yields Despite this, the country will likely remain a net sugar importer, as demand is expected to outstrip supply ! Corn Consumption growth to 2013/14: 51% to 8.1mn tonnes Animal feed will remain the primary use for corn to 2014 and beyond (feed accounted for 73% of total demand in 2009) and consequently our demand outlook for corn is very closely linked to our Vietnamese livestock forecasts ! Pork production growth to 2014: 31% to 2.4mn tonnes Rising incomes will stimulate domestic meat consumption growth and production will increase to keep pace Furthermore, the livestock industry has become a key focus of government efforts to modernise food processing ! 2010 Real GDP Growth: 6% (up from 5.3% in 2009; predicted to average 6.3% from 2010 until 2014) ! Consumer Price Inflation: 8% y-o-y in July 2010 (up from 3% y-o-y in July 2009) Industry Developments Vietnam's coffee sector has grown significantly over the last 20 years, with yields doubling over that time, while the area planted has expanded from 42,000 hectares to over 509,000 over that time Out to 2013/14, we expect production growth of 23% to 22.8mn bags, as the Vietnamese government is aiming to increase 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 the world's largest exporter of robusta coffee © Business Monitor International Ltd Page Vietnam Agribusiness Report Q4 2010 Despite virtually flat production growth in recent years and even a slight decrease in 2009/10, we believes Vietnam's rice sector will experience considerable growth over our forecast period, buoyed by improvements in infrastructure, higher yields and increased domestic demand Compared with many of its agricultural sub-sectors, Vietnamese rice is actually very competitive relative to many of its regional peers and is well positioned to ensure the country remains a net exporter Indeed, it will continue to be one of the world's few rice exporters, the second largest in 2009/10 Vietnamese dairy consumption has expanded significantly in the last 15 years, driven by relatively large increases in domestic consumption and rising incomes, which have fostered increased milk consumption To 2013/14, we are forecasting 40.9% growth in Vietnamese fluid milk production to 400,000 tonnes Dramatic increases in cattle numbers and increased public and private sector investment, in an effort to reduce the country's growing import dependency, will support the strong growth Commercialisation will also play a key role as larger, more efficient farms begin to play a greater part in total milk production © Business Monitor International Ltd Page Vietnam Agribusiness Report Q4 2010 SWOT Analysis Vietnam Political SWOT Strengths Weaknesses Opportunities Threats ! The Communist Party government appears committed to market-oriented reforms, although specific economic policies will undoubtedly be discussed at the 2011 National Congress The one-party system is generally conducive to short-term political stability ! Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia ! Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party ! There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent ! The government recognises the threat that corruption poses to its legitimacy, and has acted to clamp down on graft among party officials ! Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system ! The slowdown in growth in 2009 and 2010 is likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule ! Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable ! Relations with China have deteriorated over the past year due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause widescale environmental damage © Business Monitor International Ltd Page Vietnam Agribusiness Report Q4 2010 Vietnam Economic SWOT Strengths Weaknesses Opportunities Threats ! Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.6% annually between 2000 and 2009 ! The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004 ! Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable as the global economy continues to suffer in 2010 The fiscal picture is clouded by considerable 'off-the-books' spending ! The heavily-managed and weak dong currency reduces incentives to improve quality of exports, and also serves to keep import costs high, thus contributing to inflationary pressures ! WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition ! The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector ! Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s ! Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis ! Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy © Business Monitor International Ltd Page Vietnam Agribusiness Report Q4 2010 processing is an area that could be considerably improved to help the agricultural sector realise its full potential This would take pressure off the need to import luxury goods like chocolate, while giving the Vietnamese economy a chance to ease its current-account deficit The ongoing expansion of the mass grocery retail (MGR) industry will also drive up per capita food consumption levels, provided goods sold through such outlets remain competitively priced Ultimately, food consumption growth will be driven by the government's ability to harness rural spending power and by modern retailers' ability to find a model that stirs consumer interest, without forgetting that price will remain the major purchasing determinant BMI upwardly revised its food consumption figures for Vietnam in Q208 following the release of segmented household expenditure figures by the General Statistics Office of Vietnam (GSO) These figures reflect reported food and beverage spending; however, BMI would urge some caution when viewing the figures, owing to the potential for the under-reporting of far lower consumption levels among some rural groups We will continue to benchmark GSO data against other available sources to provide the most accurate assessment of the food consumption outlook Table: Food Consumption Indicators Historical Data & Forecasts 2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f Food consumption (US$bn) 9.93 11.23 12.75 14.60 14.35 14.68 16.75 19.13 21.75 24.75 Food consumption (VNDbn) 163,1 39 184,5 34 209,4 27 239,9 71 255,2 43 275,0 03 314,0 28 349,0 59 386,1 45 426,9 91 Per capita food consumption (US$) 119.3 133.1 148.9 168.3 163.1 164.6 185.3 208.8 234.3 263.1 Per capita food consumption (VND) 1,960, 800 2,186, 400 2,446, 582 2,764, 637 2,900, 791 3,083, 134 3,473, 533 3,809, 859 4,159, 338 4,537, 628 Total food consumption growth (y-o-y) 14.61 13.12 13.49 14.58 6.36 7.74 14.19 11.16 10.62 10.58 Per capita food consumption growth (y-oy) 13.00 11.51 11.90 13.00 4.92 6.29 12.66 9.68 9.17 9.09 Food consumption as % GDP 19.44 18.94 18.31 16.23 15.51 14.92 15.14 15.10 14.91 14.80 NB Excludes beverage consumption e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 47 Vietnam Agribusiness Report Q4 2010 Canned Food Canned Food Sales BMI is forecasting volume 2004-2014 growth of 24.2% and value sales growth of 48.7% in Vietnam's canned food industry, with busy, modern lifestyles in major cities fuelling the demand for convenient, processed food Growing awareness of hygiene concerns and food origin that tend to coincide with improved living standards, as well as being the result of numerous regional health scares, will further encourage consumers to purchase processed e/f=BMI estimate/forecast Source: General Statistical Office, Company information, Trade press, BMI foods over fresh produce, while strong investment (both internal and external) in this sector should also help to fuel sales growth Meanwhile, city workers are increasingly cutting back on restaurant meals and opting for canned and processed foods in order to save money; canned and processed foods are up to 2030% cheaper than fresh ingredients According to retailer Saigon Co-op, processed food saw a growth rate of 60% in the first half of 2008 Confectionery The country's confectionery Confectionery Sales industry is also predicted to 2004-2014 experience strong growth to 2014 BMI is forecasting growth of over 17% in volume sales terms and 44.7% in value sales terms Rising disposable incomes will encourage the consumption of these non-essential goods, while continued exposure to Western brands and consumption habits will also contribute to the growth of the industry The latter driver will in particular be responsible e/f = BMI estimate/forecast Source: General Statistics Office, Company information, Trade press, BMI for value sales growth, since it should lead to the emergence of new premium and added-value brands, © Business Monitor International Ltd Page 48 Vietnam Agribusiness Report Q4 2010 which carry higher sales prices Companies such as South Korea's Orion Confectionery and Lotte Confectionery, which are planning investments for the industry, should ensure that it continues to grow at a rapid rate through product innovation and ongoing marketing and promotional initiatives Meanwhile, Vietnam is investing heavily in its cocoa industry, which should help the confectionery sector With many countries in the region experiencing moderate-to-high GDP growth, the appetite for luxury goods has increased exponentially However, cocoa production within the region is nowhere near high enough to meet this demand, resulting in the need to import cocoa and value-added derivatives from further afield The existence of a strong cocoa industry in the area would not only benefit Vietnamese cocoa farmers, it would also give rise to the opportunity for investing in cocoa processing and value addition Moreover, neighbouring countries will have access to a supply of value-added cocoa at a relatively cheap price Not only would this feed the growing demand for luxury goods, resulting from strong economic performances, it could also improve trade relations in the region, thus leading to further investment Table: Canned Food And Confectionery Sales Indicators Historical Data & Forecasts Canned food sales ('000 tonnes) Canned food sales (VNDmn) Canned food sales (US$mn) 2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 6.85 7.32 7.83 8.37 8.59 8.75 9.19 9.66 10.15 10.67 258,054 281,592 303,833 326,608 341,895 361,544 396,564 429,337 464,645 508,377 15.71 17.14 18.49 19.88 19.23 19.30 21.15 23.53 26.18 29.47 Confectionery sales ('000 tonnes) 86.1 89.9 94.0 97.0 99.1 100.4 103.9 107.6 111.6 116.0 Confectionery sales growth, tonne, (y-o-y) 4.49 4.41 4.56 3.23 2.16 1.26 3.50 3.58 3.67 3.99 Chocolate sales (VNDmn) 1,652, 484 1,868, 188 2,051, 194 2,339, 833 2,492, 883 2,677, 794 2,996, 985 3,297, 271 3,620, 229 3,994, 113 Sugar confectionery sales (VNDmn) 1,785, 076 1,885, 027 1,997, 694 2,169, 213 2,253, 956 2,358, 818 2,513, 311 2,666, 779 2,834, 112 3,023, 570 Gum sales (VNDmn) 412,271 417,024 422,042 429,336 433,373 438,680 449,149 458,521 468,417 478,850 3,849, 831 4,170, 239 4,470, 930 4,938, 382 5,180, 212 5,475, 292 5,959, 444 6,422, 572 6,922, 757 7,496, 534 8.57 8.32 7.21 10.46 4.90 5.70 8.84 7.77 7.79 8.29 Chocolate sales (US$mn) 100.6 113.7 124.8 142.4 140.2 142.9 159.8 180.7 204.0 231.5 Sugar confectionery sales (US$mn) 108.6 114.7 121.6 132.0 126.8 125.9 134.0 146.1 159.7 175.3 Gum sales (US$mn) 25.09 25.38 25.69 26.13 24.37 23.42 23.95 25.12 26.39 27.76 Confectionery sales (US$mn) 234.3 253.8 272.1 300.5 291.3 292.3 317.8 351.9 390.0 434.6 Confectionery sales (VNDmn) Confectionery sales growth, VND, (yo-y) e/f = BMI estimate/forecast Source: General Statistics Office, Company information, Trade press, BMI © Business Monitor International Ltd Page 49 Vietnam Agribusiness Report Q4 2010 Trade BMI expects Vietnam's food, drink and tobacco trade balance to remain very Food & Drink Trade Figures 2004-2014 healthy to 2014 Exports are set to grow by 64.2% to 2014, growth had been forecast to be higher owing to sustained government efforts to improve local food production and agricultural industries, which will boost output and make more produce available for export, as well as improving the quality competitiveness of local exports However, the global financial crisis is now forecast to affect demand for Vietnamese exports in the short term, as weak growth in G3 markets e/f=BMI estimate/forecast Source: UNCTAD, BMI will weigh on exports and prevent a marked improvement in net exports in spite of the devaluation of the dong Import growth is forecast to be 52.9% to 2014 In the long term, increased urbanisation and continued exposure to Western influences are expected to result in growing import demand, while increasingly busy lifestyles and rising interest in branded produce will lead to growth in the processed-food industry In order to meet this demand, local manufacturers will be forced to import the necessary raw ingredients Beyond 2014, the government will be hopeful that its investments, and its efforts to attract foreign investors, will pay off, and that much of this new and specific type of demand will be able to be accommodated domestically In September 2008, Ugandan President Yoweri Museveni announced that the African country is looking to increase production of robusta coffee, with the aim of overtaking Vietnam and Colombia and becoming the leading supplier of the commodity However, BMI opines that Vietnam's preferential access to virtually the same export markets as Uganda, together with the former's comparative advantage in coffee production, means that competing on export volumes alone would be fruitless for Uganda In the coming year, we expect upward pressure on rice prices, as we see a possibility that India, which has in recent years alternated with Vietnam as the second-largest rice exporter in the world after Thailand, will have to import rice for the first time in 21 years after a dismal monsoon Adverse weather is also hurting domestic production in the Philippines, the largest rice importer in the world, with these developments having an impact on Vietnam's trade balance With strong demand on the export market for © Business Monitor International Ltd Page 50 Vietnam Agribusiness Report Q4 2010 Vietnam's rice, due to the poor outlook for India's 2010 rice crop and threats of drought in Indonesia, prices may rise rapidly and this should mean an increase in export revenues in 2010 Vietnam Food & Drink Trade Indicators - Historical Data & Forecasts 2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 2014f Exports (US$mn) 6,566 8,097 9,074 10,58 9,706 10,74 11,83 13,05 14,41 15,93 Imports (US$mn) 2,314 2,693 3,065 3,479 3,206 3,502 3,804 4,136 4,501 4,903 Balance (US$mn) 4,252 5,404 6,010 7,106 6,500 7,245 8,029 8,914 9,911 11,03 e/f = BMI estimate/forecast Source: UNCTAD, BMI © Business Monitor International Ltd Page 51 Vietnam Agribusiness Report Q4 2010 Mass Grocery Retail MGR Sales By Format BMI is forecasting phenomenal 2004-2014 growth in Vietnam's MGR industry to 2014, as the market assumes one of the highest growth forecasts in the Asia Pacific region and with it the tag of one of the retail industry's brightest new prospects To 2014, BMI expects the value of sales through modern retail outlets in Vietnam to increase by over 72%, with all modern formats present in the country supermarkets, hypermarkets and convenience e/f=BMI estimate/forecast Source: General Statistical Office, Trade press, BMI stores contributing to this development There are two primary drivers of this growth forecast One is Vietnam's economic development The country has proved successful at attracting multinational investment, in spite of its often-restrictive foreign investment policies and underdeveloped infrastructure This investment has led to job creation, which in turn has led to the emergence of a new consumer class in the country in major urban centres at least which has an interest and can afford to participate in modern consumption methods such as mass grocery retailing With Vietnam increasingly becoming one of South East Asia's top attractions, the country's high tourism levels will also assist the emergence of modern retail, particularly in the convenience sector Recognising the importance of investing in infrastructure, the government is making headway in improving its dilapidated infrastructure with construction on a number of ports, power plants and road projects commenced in 2009 However, Vietnam's MGR sector is still dominated by independent stores, although smaller players are being pressured by the growing presence of multinationals Traditionally, multinational penetration was restricted by legislation prohibiting foreign investors from holding shares in local retail entities However, the government is now prioritising foreign direct investment (FDI) inflows and WTO-membership trading opportunities over the livelihood of traditional retail operators However, while multinationals pose a serious threat to local enterprises operating in the attractive urban centres of Hanoi and Ho Chi Minh City, secondary and tertiary towns and cities in outlying provinces could actually reap considerable benefits from multinational investment Thai Binh province is an excellent example of this Growing affluence is resulting in consumers in the province increasingly © Business Monitor International Ltd Page 52 Vietnam Agribusiness Report Q4 2010 looking to trade up to modern retail outlets and away from traditional, independent formats; rapid industrialisation and urbanisation are only accelerating this process Multinational sector involvement will lead to rapid crowding in Vietnam's major urban centres, forcing retailers to turn to unexplored regions in search of growth Public-sector retail investment, which will stimulate increased consumer demand and accelerate the establishment of industry best practices, could see provinces like Thai Bihn become a beneficiary of this crowding The convenience retail sector is actually set to be the slowest growth format in Vietnam over the forecast period albeit at an impressive 65.2% to 2014 The reason for this is the format's low starting point As much as modern retail is being embraced by certain consumer groups, the concept is still very much in its infancy Accordingly, the demand for convenience, with the pay-off of higher prices, is not yet on the agenda for most consumers they are still familiarising themselves with the modern format in general Nevertheless, this subsector can be expected to attract growing interest from retailers, with Japanese convenience retailer FamilyMart having recently opened its first outlet in Ho Chi Minh City and with plans to have 300 stores in five years, as it looks to capitalise on the city's young and increasingly busy population Vietnamese consumers are most familiar with the standard supermarket format, as well as with hypermarkets, owing to its popular combination of both food and non-food items Therefore, these two formats are set to witness the strongest levels of growth at 73.9% and 73% respectively In addition, the supermarket and hypermarket formats are set to receive the most attention from new retail investors, owing to their greater per-store profitability levels, which will be of vital importance in a market where foreign investment in store openings is still limited Regardless of these limitations, it is this investment that is set to be the second key driver of industry growth In line with its WTO accession requirements, the government has started to liberalise many of its key industry sectors retail being one such industry The country has acknowledged the need for foreign investment if it is to get in line with industry best practices and accordingly it has started granting licences to international operators to establish store networks within the country Hong Kong's Dairy Farm and South Korea's Lotte Shopping are two such recent examples Investment of this nature and the ability of these companies to offer low prices owing to their purchasing power will further stimulate interest in modern retail This will be particularly true among those price-sensitive consumers who are still wary of the concept If there can be a downside in the case of such an impressive retail growth forecast, it comes in the form of Vietnam's majority rural population, which drags down food consumption levels in the market to enormously unattractive levels The risk for retailers is that, as soon as the country's major cities start to become overcrowded, there are few other communities that can support modern retail development at present Even the low prices offered by discounters would be unlikely to attract buyers in rural communities, for whom self-sufficiency and wet markets remain the sole methods of consumption This © Business Monitor International Ltd Page 53 Vietnam Agribusiness Report Q4 2010 crowding is, however, still a long way off and retailers will invest in Vietnam, confident of the country's economic development expanding the consumer base, in line with their own need to expand Table: Vietnam MGR Indicators Value Sales by Format Historical Data & Forecasts 2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 2014f Supermarkets (VNDbn) 1,150 1,397 1,660 2,021 2,187 2,385 2,729 3,052 3,400 3,803 Hypermarkets (VNDbn) 411 526 657 822 899 992 1,126 1,259 1,404 1,556 Convenience (VNDbn) 477 542 608 690 738 796 897 992 1,094 1,220 Total mass grocery retail sector (VNDbn) 2,037 2,465 2,925 3,533 3,824 4,173 4,752 5,303 5,898 6,578 Total mass grocery retail sector growth, VND,(y-o-y) 13.76 20.97 18.67 20.79 8.24 9.12 13.88 11.61 11.22 11.53 Supermarkets (US$bn) 0.070 0.085 0.101 0.123 0.123 0.127 0.145 0.167 0.191 0.220 Hypermarkets (US$bn) 0.025 0.032 0.040 0.050 0.050 0.052 0.060 0.069 0.079 0.090 Convenience (US$bn) 0.029 0.033 0.037 0.042 0.041 0.042 0.047 0.054 0.061 0.070 Total mass grocery retail sector (US$bn) 0.124 0.150 0.178 0.215 0.215 0.222 0.253 0.290 0.332 0.381 e/f = BMI estimate/forecast Source: Company information, Trade press, BMI Grocery Retail Sales by Format Historical Data & Forecasts (%) Organised/MGR Non-organised/Independent 2008 2018f 22 94 78 f = BMI forecast; Source: BMI © Business Monitor International Ltd Page 54 Vietnam Agribusiness Report Q4 2010 Macroeconomic Forecast Private Consumption And Infrastructure Investment Cushion External Weakness BMI View: Economic indicators in July provided an optimistic outlook for Vietnam's economic growth in H210 We believe private consumption and investment in infrastructure development will continue to be the main drivers of economic growth going forward However, we see external demand weakness leading to a widening of the trade deficit, which will be a drag on growth Therefore, we are maintaining our real GDP growth forecast of 6.0% and 5.5% for 2010 and 2011 respectively Vietnam recorded an impressive real GDP growth of 6.3% y-o-y in Q210 as the economy heads towards the government's growth target of 6.5% for 2010 Economic indicators in July also reinforced the government's aggressive target after industrial production came in at a better-than-expected 16.0% y-o-y in July To a certain extent, the encouraging numbers helped to alleviate concerns that weakening external demand from the US and EU would be a drag on the economy Industrial production accelerated after slowing down for three consecutive months, falling from 5.0% m-o-m in April to 3.3% and 2.2% in May and June respectively This prompted the Vietnamese government and the State Bank Of Vietnam (SBV) to exert pressure on commercial banks to lower lending rates in June However, we expect loan growth to remain weak on a historical basis in H210 due to the threat of higher inflation, which forces commercial banks to keep lending rates high at around 12-14% Therefore, we not see business investments contributing significantly to industrial production growth going forward Instead, we see private consumption and government-supported infrastructure investment as the main drivers of economic growth in H210 Retail Sales and Tourist Arrivals Point To Strong Domestic Demand Retail sales came in at 35.3% y-o-y in July, reflecting the strong momentum in consumer demand We see retail sales as a relatively good indicator of consumer demand as private spending makes up 85.8% of the indicator Given that retail sales tends to accelerate in the second half of the year largely due to the holiday season, we believe private consumption will play a more significant role in providing support for economic growth in H210 We note that the retail sector is heavily dependent on tourist arrivals As the accompanying chart shows, the correlation between tourist arrivals and private consumption is strong Tourist arrivals rose 47.5% y-o-y in July, in line with strengthening retail sales figures The tourism industry's pace of growth also highlighted the industry's growing potential as a source of economic growth for Vietnam going forward The government announced in July that it has set a target for Ho Chi Minh City to host million foreign visitors by 2015, raising the tourism industry's revenues from an expected US$2.1bn in 2010 to US$3.15bn by 2015 (see 'Infrastructure Development Key To Sustaining Growth', July 13 2010) We believe the government's tax policies aimed at promoting investment in the tourism sector will continue to provide support for the industry's growth in H210 © Business Monitor International Ltd Page 55 Vietnam Agribusiness Report Q4 2010 Infrastructure Development To Support Construction Industry And Jobs Growth In a previous report (see 'Aggressive Government Policies Risk Overheating', July 2), we highlighted that infrastructure projects that are already initiated, such as the construction of a number of ports, roads and thermal power plants, will continue to provide support for the construction sector in H210 and 2011 We believe growth on this front will help to support demand for building materials such as cement and steel, which Vietnam produces domestically, thus having positive spillover effects Indeed, looking at the breakdown of industrial production data in July, cement production increased by 27.4% y-o-y, while steel production remained stable at 1.5% y-o-y External Demand Weakness Supports Forecast In line with our view that strong private consumption will drive domestic demand in H210, we expect the trade deficit to widen in 2010 The construction sector's need to import large quantities of materials and capital goods for ongoing infrastructure projects will also keep imports elevated over the coming month Furthermore, with Vietnam's exports remaining concentrated on the US and EU, the country's trade deficit looks set to widen significantly based on our view of a slowdown in the US and EU in H210 (see chart) The widening trade deficit will no doubt be a drag on Vietnam's economic growth in H210 Therefore we are maintaining our real GDP growth forecast for 2010 at 6.0%, slightly lower than the government's target of 6.5% Table: Vietnam - Economic Activity, 2007-2014 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f 1144014 1478695 1645481 1869502 2103348 2344535 2625877 2926496 71.1 89.8 92.4 95.9 107.9 117.2 131.3 146.3 8.5 6.2 5.3 6.0 5.5 6.0 6.8 6.9 835 1042 1058 1085 1208 1300 1442 1591 85.2 86.2 87.3 88.4 89.3 90.2 91.1 92.0 Industrial production 1,4 index, % y-o-y, ave 16.7 14.6 7.6 10.0 12.0 14.0 14.0 14.0 Unemployment, % of labour force, eop 4.6 5.0 5.5 5.5 5.0 4.5 4.0 4.0 Nominal GDP, VNDbn Nominal GDP, US$bn Real GDP growth, % change y-o-y GDP per capita, US$ Population, mn e f Notes: BMI estimates BMI forecasts at 1994 prices; Sources: IMF (General Statistics Office) World Bank/BMI calculation/BMI; General Statistics Office © Business Monitor International Ltd Page 56 Vietnam Agribusiness Report Q4 2010 Industry Trend Analysis Floor Price Rise Indicative Of Rising Rice Export Demand BMI believes that Vietnam's decision to raise the floor price for its top quality rice is another bullish signal for the sector, as demand for Vietnamese rice has led exporters to raise by 8% the floor for high end 5% broken grain rice, a price closer to that of world leading exporter Thailand The sector had a poor year in 2009/10, as dry weather in main growing regions impacted yields Nonetheless, with global rice prices rising after a significant fall in H110 and increasing demand from Bangladesh and China, we expect Vietnamese rice production to improve Breaking Higher moderately over the medium term Vietnam 5% Broken Grade Rice FOB Saigon (US$/T) We have revised down our 2009/10 rice production figure to 24.16mn tonnes on the back of water shortages in the Mekong Delta, which is responsible for half the country's rice output Droughts also hit the central region - a relatively minor production area - resulting in 100,000 hectares of rice being damaged Overall, the production problems resulted in an 8% decrease in rice exports year-on-year (y-o-y) in H110 Source: BMI Despite the concerns, global rice prices fell significantly in H110, as an anticipated rebound in Indian production sent prices falling © Business Monitor International Ltd Page 57 Vietnam Agribusiness Report Q4 2010 In recent months, however, Turning Around In 2010 increased demand for Vietnam Rice Exports By Value (US$ Mn) Vietnamese rice has seen local prices in the region rise Already H210 paddy prices in the Mekong Delta have risen to 4,000-4,600 dong (USc21-24) per kg during the week of August 13, approximately a 10% week-on-week growth Although some of this increase has come from government stockpiling (which is often done when global prices are depressed), heightened demand from large buyers such as China and Bangladesh has also helped to Source: BMI inflate prices Some traders have been saying that Chinese buyers have purchased as much as 600,000 tonnes of rice in order to offset droughts that have been causing yields to fall in some areas, particularly in the south close to the Vietnamese border Indeed, the Vietnamese government has recently taken steps to warn exporters to ensure they have enough stocks to amply supply the domestic market in the event that large orders come in The increased demand, even if only temporary, will help exporters regain some of their lost revenues due to the poor output as well as falling rice prices However, with rice prices currently rebounding and demand from China and Bangladesh increasing, BMI maintains a bullish stance on the medium- and long-term outlook for the sector In 2010/11, we are forecasting Vietnamese rice production to rise by 6% to 25.1mn tonnes Table: Vietnam -Rice Production, Consumption & Trade Rice Production, '000 tonnes 1,2 Rice Consumption, '000 tonnes 2009e 2010f 2011f 2012f 2013f 2014f 24312.0 24180.0 25699.0 26613.0 27589.0 28580.0 19150.0 19222.0 19677.0 20195.0 20714.0 21257.0 5450.0 6102.0 7422.0 8253.0 9135.0 10051.0 Rice Net Trade Balance, '000 tonnes e f Notes: BMI estimates BMI forecasts In all instances year indicates data for harvest year ending that calendar year i.e 2009 = 2008-09; Sources: USDA, BMI © Business Monitor International Ltd Page 58 Vietnam Agribusiness Report Q4 2010 BMI Forecast Modelling How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a ‘general-to-specific’ method BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary During periods of ‘industry shock’, for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact Effective forecasting depends on appropriately-selected regression models BMI selects the best model according to various different criteria and tests, including, but not exclusive to: ! R2 tests explanatory power; Adjusted R2 takes degree of freedom into account ! Testing the directional movement and magnitude of coefficients ! Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ! All results are assessed to alleviate issues related to auto-correlation and multi-collinearity BMI uses the selected best model to perform forecasting It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s industry forecasting Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Within the Agribusiness industry, this intervention might include, but is not exclusive to, technology development that might influence future output levels (for example greater use of biotechnology), dramatic changes in local production levels due to public or private sector investment, the regulatory environment and specific areas of legislation, such as import and export tariffs and farm subsidies, changes in lifestyles and general societal trends, the formation of bilateral and multilateral trading agreements and political factors The following two examples show the demand (consumption) and the supply (production) of rice Note: the explanatory variables for both of them are quite similar, but the underlying economic theory is different © Business Monitor International Ltd Page 59 Vietnam Agribusiness Report Q4 2010 Example of Rice Consumption Model: (Rice Consumption)t = β0 + β1*(Real Private Consumption per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Population)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt Where: ! β are parameters for this function ! Real Private Consumption per capita has a positive relationship with Rice Consumption, if rice is a normal good in a particular country If rice is an inferior good in a country, the relationship is negative So the sign of β1 is determined by a specific product within a specific country ! When Inflation is high, people with rational expectations will consume ‘today’ rather than wait for ‘tomorrow’s high price to come Higher rice demand in Year t due to higher inflation in that year leads to an assumed positive sign of β2 ! The relationship between Real Lending Rate and Rice Consumption is expected to be negative When real lending rates increase, disposable incomes, especially for those with mortgage burdens etc, will decrease So the sign of β3 is expected to be negative ! Of course, other things being equal, growth in rice consumption can also be caused by growth in population Consequently, positive sign of β4 is expected ! Government Expenditure typically causes total disposable incomes to rise So the sign of β5 is expected to be positive ! Human behaviour has a trend: A high level of food consumption in previous years means there is very likely to be a high level of food consumption the next year So the positive sign of β6 is expected ! ε is the error/residual term Example of Rice Production Model: (Rice Production)t = β0 + β1*(Real GDP per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Rural Population)t + β5*(Government Expenditure)t + β6*(Food Production)t-1 + εt Where: ! The same as above, the relationship between Real GDP per capita and rice production depends on whether rice is normal or inferior good in that country © Business Monitor International Ltd Page 60 Vietnam Agribusiness Report Q4 2010 ! If high inflation is caused by food prices increasing, farmers will be more profitable Then they will supply more agricultural product (e.g rice) to increase their marginal (extra) profit, although this is tempered by the rising cost of other inputs in line with inflation ! There is a global move towards corporate farming, away from small holdings, in order to achieve greater agricultural productivity Corporate farming means more investment in the modes of production i.e agricultural machinery Higher real lending rates discourage investment, which in turn reduce production ! BMI assumes only the rural population has a positive effect on agricultural product supply ! With supportive government policy, other things being equal, rice production is expected to go up Government Expenditure is likely to play some role in supporting agribusiness ! Again, previous food production positively affects this year’s prediction ! y affects this year’s prediction © Business Monitor International Ltd Page 61 [...]... International Ltd Page 22 Vietnam Agribusiness Report Q4 2010 Vietnam Dairy Outlook BMI Supply View: Vietnamese dairy consumption has expanded significantly in the last 15 years, driven by relatively large increases in domestic consumption, as well as rising incomes which have fostered increased milk consumption In fact, per-capita milk consumption in Vietnam has virtually doubled between 2000 and 2010 to 2kg per... Agribusiness Report Q4 2010 Finally, the lack of a national quality control body for dairy products will continue to place downside risks on our production and consumption forecasts, as it places the dairy industry at risk of a similar scandal at home, which would further tar the image of dairy products in Vietnam © Business Monitor International Ltd Page 28 Vietnam Agribusiness Report Q4 2010 Vietnam Grains... possibly see output fall later in our forecast period © Business Monitor International Ltd Page 12 Vietnam Agribusiness Report Q4 2010 Vietnam Livestock Outlook BMI Supply View: Vietnam' s livestock industry has historically suffered from under-investment and competition from cheaper imports Within the Vietnamese livestock industry, pig farming is by far the most significant sector, with pork production,... upside risks to our forecasts © Business Monitor International Ltd Page 18 Vietnam Agribusiness Report Q4 2010 Vietnam Coffee Outlook BMI Supply View: Vietnam' s coffee sector has grown significantly over the last 20 years, with yields doubling over that time, while the area planted has expanded from 42,000 hectares to over 509,000 Vietnam is the world's biggest producer of robusta coffee, with more than... production for some time to come, Vietnamese coffee growers will only benefit from increased domestic demand for higher quality coffees if investment in quality improvement is made © Business Monitor International Ltd Page 21 Vietnam Agribusiness Report Q4 2010 Table: Vietnam – Coffee Production & Consumption Coffee Production, '000 1,2 60kg bags 2005 2006 2007 2008 2009e 2010f 14,500.00 13,666.00 19,500.00.. .Vietnam Agribusiness Report Q4 2010 Vietnam Business Environment SWOT Strengths Weaknesses Opportunities Threats ! Vietnam has a large, skilled and low-cost workforce, that has made the country attractive to foreign investors ! Vietnam' s location - its proximity to China and South East Asia, and its good sea links... Ltd Page 23 Vietnam Agribusiness Report Q4 2010 Table: Vietnam – Butter Production, Consumption & Trade 2009e 2010f 2011f 2012f 2013f 2014f Butter Production, '000 1 tonnes 0.0 0.0 0.0 0.0 0.0 0.0 Butter Consumption, '000 1 tonnes 6.7 7.2 7.8 8.4 9.2 10.0 -6.7 -7.2 -7.8 -8.4 -9.2 -10.0 Butter Net Trade 1 Balance, '000 tonnes 1 Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI Table: Vietnam – Cheese... International Ltd Page 26 Vietnam Agribusiness Report Q4 2010 Table: Vietnam – Butter Production, Consumption & Trade 2005 2006 2007 2008 2009e 2010f Butter Production, '000 1 tonnes 0.0 0.0 0.0 0.0 0.0 0.0 Butter Consumption, '000 1 tonnes 6.1 6.6 5.3 6.2 6.7 7.2 -6.1 -6.6 -5.3 -6.2 -6.7 -7.2 Butter Net Trade 1 Balance, '000 tonnes 1 Notes: e/f=BMI estimate/forecast Source: FAPRI, BMI Table: Vietnam – Cheese... support the sector by other means to keep production on course, as it is unlikely that Vietnameseproduced sugar will be able to compete with imports by then © Business Monitor International Ltd Page 11 Vietnam Agribusiness Report Q4 2010 Table: Vietnam – Sugar Production, Consumption & Trade 2005 2006 2007 2008 2009e 2010f 980.0 930.0 1,100.0 1,220.0 1,000.0 1,102.0 Sugar Consumption, '000 2 tonnes 1,225.0... import tariff on corn to be cut © Business Monitor International Ltd Page 14 Vietnam Agribusiness Report Q4 2010 from 8% to 4% to help livestock producers In May 2009, the Ministry of Finance reported that frozen meat imports had been falling by around 20% month-on-month following the March tariff hike While meat import volumes were reportedly low through the middle months of 2009, this did little to help ... 746.50 -1 90.00 -1 87.30 -1 98.20 -2 29.70 -2 60.20 -2 92.80 Notes: e/f=BMI estimate/forecast Source: USDA, BMI © Business Monitor International Ltd Page 13 Vietnam Agribusiness Report Q4 2010 Table: Vietnam. .. completeness of any information hereto contained Vietnam Agribusiness Report Q4 2010 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q4 2010 CONTENTS Executive Summary ... International Ltd Page 17 Vietnam Agribusiness Report Q4 2010 Consumption, '000 tonnes Beef & Veal Net Trade Balance, '000 tonnes -1 9.00 -2 8.00 -8 9.00 -1 98.00 -2 49.00 -2 73.65 Notes: e/f=BMI estimate/forecast