Vietnam agribusiness report q4 2013

Q4 2013 www.businessmonitor.com VIETNAM AGRIBUSINESS REPORT INCLUDES 5-YEAR FORECASTS TO 2017 ISSN 1759-1740 Published by:Business Monitor International Vietnam Agribusiness Report Q4 2013 INCLUDES 5-YEAR FORECASTS TO 2017 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: September 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, 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 2013 CONTENTS BMI Industry View 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 20 Table: Vietnam Cheese Consumption, 2007-2012 21 Table: Vietnam Butter Consumption, 2007-2012 21 Livestock Outlook 22 Table: Vietnam Beef & Veal Production & Consumption, 2012-2017 24 Table: Vietnam Pork Production & Consumption, 2012-2017 24 Table: Vietnam Poultry Production & Consumption, 2012-2017 24 Table: Vietnam Beef & Veal Production & Consumption, 2007-2012 32 Table: Vietnam Pork Production & Consumption, 2007-2012 32 Table: Vietnam Poultry Production & Consumption, 2007-2012 32 Coffee Outlook 34 Table: VIETNAM Coffee Production & Consumption 35 Table: VIETNAM Coffee Production & Consumption 43 Rice Outlook 44 Table: VIETNAM Rice Production & Consumption 46 Table: Vietnam Rice Production & Consumption, 2007-2012 50 Grains Outlook 51 Table: VIETNAM Corn Production & Consumption 52 Table: Vietnam Corn Development Production Plan & Bmi Forecasts 53 Table: VIETNAM Corn Production & Consumption 55 Commodities Price Analysis 57 Monthly Softs Strategy 57 Table: Select Commodities - Performance & BMI Forecasts 65 Table: BMI Commodities Strategy 66 Monthly Grains Strategy 67 Table: Select Commodities - Performance & BMI Forecasts 75 Table: BMI Commodities Strategy 76 Upstream Analysis 77 Drink 77 Alcoholic Drinks 77 © Business Monitor International Page Vietnam Agribusiness Report Q4 2013 Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2010-2017 79 Hot Drinks 80 Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2010-2017 81 Soft Drinks 82 Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2010-2017 83 Table: Carbonates Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 84 Mass Grocery Retail 84 Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2010-2017 87 Table: Grocery Retail Sales By Format (%) 87 Food 88 Food Consumption 88 Table: Food Consumption Indicators - Historical Data & Forecasts, 2010-2017 89 Canned Food 90 Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2010-2017 90 Confectionery 91 Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2010-2017 92 Pasta 92 Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 93 Dairy 95 Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2010-2017 95 Downstream Analysis 97 Asia GM Outlook 97 Table: Philippines Corn Estimates 101 Table: Select Countries - GM Crops, 2012 102 Asia Machinery Outlook 102 Table: China Grain Public Production Support Programme (CNYbn) 104 Asia Fertiliser Outlook 109 Table: Global Benchmark Fertiliser Prices (US$/tonne FOB, reported prices at the end of quarter) 112 Regional Overview 116 Regional Overview - Asia 116 Table: Select Companies - Palm Oil Landbank, 2012 121 Competitive Landscape 124 Competitive Landscape 124 Table: Vietnam - Major Agribusiness Companies (US$mn) 124 Company Profile 125 Charoen Pokphand Foods PLC 125 Table: Charoen Pokphand Foods' Financial Highlights, 2008-2012 134 Demographic Forecast 135 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 136 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 137 Table: Vietnam's Key Population Ratios, 1990-2020 138 Table: Vietnam's Rural And Urban Population, 1990-2020 138 Methodology 139 © Business Monitor International Page Vietnam Agribusiness Report Q4 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 Q4 2013 • Corn production growth to 2016/17: 28.0% to 6.0mn 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$21.32bn in 2013 (down from US$22.47bn in 2012); growth expected to average -1.3% annually between 2013 and 2017 • 2013 real GDP growth: 5.3% (up from 5.2% in 2012; predicted to average 6.4% over 2013-2017) • 2013 consumer price index: 7.0% year-on-year (y-o-y) (down from 9.3% in 2012; predicted to average 5.7% 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 Developments Vietnam Dairy Products Joint-Stock Company (Vinamilk) has been given the green light in July 2013 to export its products to the US market This reinforces our positive view of the company, as it will support Vinamilk's promising sales growth in the future We remain positive over Vinamilk's long-term prospects, given the strong growth potential for dairy consumption in Vietnam and the region, the company's investment in supply chain and capacity expansion and its strong financial position We also like Vinamilk's export growth potential Although coffee bean production is thriving, increasing by 8.6% annually on average between 2003/04 and 2013/14, the coffee export sector is facing a debt crisis This serious situation poses downside risks to exports volumes in 2013/14 and beyond, as trading companies lack funds to operate normally and ship the beans Of the 127 local coffee export firms that operated in Vietnam a year ago, 56 have ceased trading or shifted to other businesses after taking out loans they cannot repay Banks are very reluctant to lend to coffee exporters, even at a 10 to 16.5% interest rate Meanwhile, the Vietnam Coffee and Cocoa Association's attempt to support the sector will face difficulties As a result, we expect the trading sector to continue facing challenging times in the coming quarters, putting clear downside risks to exports volumes 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 Q4 2013 southern provinces abandoning their farms We expect profitability issues in the Vietnamese livestock sector to ease slightly in 2013, helped by decreasing 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 down 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 © Business Monitor International Page Vietnam Agribusiness Report Q4 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 relatively high rice yields compared with its regional counterparts ■ Agricultural productivity has improved considerably since the opening up of the economy in 1986 Weaknesses ■ 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 © Business Monitor International Page 10 Vietnam Agribusiness Report Q4 2013 Improving Margin Outlook Thailand - Feed & Livestock Price Ratios Note: An increase in the ratio implies livestock prices outperformance Source: BMI, CPF We continue to believe CPF's performance will 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 international prices will average significantly lower in 2013 and 2014, at USc600/bushel and USc525/ bushel respectively Soybean prices will also average lower compared to 2012, at Usc1,400/bushel in 2013 and Usc1,450/bushel in 2014 We also believe the export prospects will be stronger in the coming quarters, due to the Thai products' competitiveness in the European Union and Japan Indeed, the Thai baht depreciated by 12% since April 2013, while China's exports in Asia will be hampered by bird flu outbreak (see 'Thai Poultry Sector Riding Out Of The Gloom', August 19) The EMS impact on margins should decrease with time, as the treatment is underway © Business Monitor International Page 128 Vietnam Agribusiness Report Q4 2013 CPF Falls In 2012 Select Companies - Operating (LHS) & Profit Margins (%) 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 sustainable growth rate levels among its peers The sustainable growth rate came in at 12.8% in FY12, compared with 9.0% for Tyson Foods and 4.0% for Nippon Meat Packers With widespread operations across Asian countries and further overseas expansionary plans, we believe CPF is well-positioned to benefit from fast-growing 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 129 Vietnam Agribusiness Report Q4 2013 Diversification Strategy CPF - Revenues By Region (LHS) & By Product (% of total) Source: BMI, CPF The acquisition of 74% of C.P Pokphand (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 the more stable-margin feed and food businesses could help reduce its earnings volatility © Business Monitor International Page 130 Vietnam Agribusiness Report Q4 2013 Increase In Debt Select Companies - Net Debt/EBITDA 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 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 recently-acquired 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 Moreover, free cash flow from operations is likely to remain negative for a second consecutive year in FY13, as the company recorded operating losses in H113 This could weight on future investments © Business Monitor International Page 131 Vietnam Agribusiness Report Q4 2013 Improved Performance Looking Ahead Charoen Pokphand Foods, SET Index, SET Agri And Food 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 10.8x as of August 29, which is significantly below competitors' average of 22.7x (the average is dragged higher by People's Foods Holdings and Henan Shuanghui Investment & Development) and the SET Index PE (on which CPF is listed) of 15.7x In August 2012, the company's PE was at 13.1x, compared with an average of 23.3x for its peers We believe this makes CPF 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 132 Vietnam Agribusiness Report Q4 2013 Heading Up In H213 CPF - Share Price (THB, daily chart) & RSI (below) Source: BMI, Bloomberg © Business Monitor International Page 133 Vietnam Agribusiness Report Q4 2013 Share Price Analysis CPF's share price has showed weakness since May 2012, but we believe it has most likely bottomed out for now The relative strength index (RSI) is approaching oversold territory, and we see support coming at THB22.0 However, a break below this level would probably send the share price much lower, given the lack of significant support below that point Moreover, CPF's share price could be pushed down by further weakness on the broad SET index in the coming months Table: Charoen Pokphand Foods' Financial Highlights, 2008-2012 2008 2009 2010 2011 2012 156,237.6 165,063.0 189,048.5 206,099.5 357,175.2 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* Revenues Growth Operating Income* Operating Margin Net Income* * In mn THB Source: BMI, Bloomberg © Business Monitor International Page 134 Vietnam Agribusiness Report Q4 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 135 Vietnam Agribusiness Report Q4 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 136 Vietnam Agribusiness Report Q4 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 137 Vietnam Agribusiness Report Q4 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 138 Vietnam Agribusiness Report Q4 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 139 Vietnam Agribusiness Report Q4 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 140 Vietnam Agribusiness Report Q4 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 141 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... Page 28 Vietnam Agribusiness Report Q4 2013 Mainly Foreign Companies Vietnam - Feed Production By Company, 2011 (% of total) Source: BMI, Vietnam Animal Feed Association © Business Monitor International Page 29 Vietnam Agribusiness Report Q4 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... International Page 23 Vietnam Agribusiness Report Q4 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... production will remain the least significant of Vietnam' s livestock sectors © Business Monitor International Page 22 Vietnam Agribusiness Report Q4 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 over the last decade,... Thailand is 75% self-sufficient Moreover, Thailand has higher dairy cow efficiency 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 © Business Monitor International Page 19 Vietnam Agribusiness Report Q4 2013 Lower Productivity In Vietnam Select Countries - Dairy Cow Yields (kg/head) f = BMI forecast Source: BMI,... Charoen Pokphand Food-owned CP Vietnam, which will put into operation two new feed mills in 2013 © Business Monitor International Page 26 Vietnam Agribusiness Report Q4 2013 In comparison to the attractive feed sector, the livestock industry is still heavily traditional, with small-scale and dispersed farms Despite a slight improvement in profitability of the industry in 2013, the domestic livestock... Page 11 Vietnam Agribusiness Report Q4 2013 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 Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond Weaknesses ■ Vietnam' s... 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 30 Vietnam Agribusiness Report Q4 2013 Imbalances To Be Maintained Vietnam - Poultry & Pork Production & Consumption ('000 tonnes) f =... and the ongoing spread © Business Monitor International Page 13 Vietnam Agribusiness Report Q4 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... share © Business Monitor International Page 18 Vietnam Agribusiness Report Q4 2013 Mostly New Zealand Vietnam - Milk & Milk Products Imports By Country, 2010 (% of total) Source: BMI, USDA We believe that Thailand dairy farmers' fears regarding the trade liberalisation are relatively overplayed, as farmers already are relatively efficient by regional standards Vietnam still imports 75% of its dairy products... 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 24 Vietnam Agribusiness Report Q4 2013 Sector Profitability Improves, ... predicted to average 6.4% over 201 3-2 017) • 2013 consumer price index: 7.0% year-on-year (y-o-y) (down from 9.3% in 2012; predicted to average 5.7% over 201 3-2 017) • 2013 central bank policy rate:... 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)... Vietnam' s livestock sectors © Business Monitor International Page 22 Vietnam Agribusiness Report Q4 2013 Strong Consumption Potential Vietnam - Population (mn) & GDP Per Capita (US$, % chg y-o-y)