BMI Vietnam Agribusiness Report Q2 2014

Q2 2014 www.businessmonitor.com

VIETNAM AGRIBUSINESS REPORT INCLUDES 5-YEAR FORECASTS TO 2018

ISSN 1759-1740 Published by:Business Monitor International

Vietnam Agribusiness Report Q2 2014 INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: March 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: [email protected] 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 Q2 2014

CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................. 10 Agribusiness ........................................................................................................................................... 10 Business Environment .............................................................................................................................. 12

Industry Forecast .............................................................................................................. 13 Dairy Outlook ......................................................................................................................................... 13 Table: Vietnam Butter Production, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table: Vietnam Cheese Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table: Vietnam Milk Production & Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table: Vietnam Whole Milk Powder Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table: Vietnam Butter Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Table: Vietman Cheese Consumption, 2009-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Table: Vietnam Milk Production & Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Table: Vietnam Whole Milk Powder Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Livestock Outlook .................................................................................................................................... 23 Table: Vietnam Beef & Veal Production & Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table: Vietnam Pork Production & Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table: Vietnam Poultry Production & Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table: Vietnam Beef & Veal Production & Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Table: Vietnam Pork Production & Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Table: Vietnam Poultry Production & Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Coffee Outlook ........................................................................................................................................ 34 Table: Vietnam Coffee Production & Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Table: Vietnam Coffee Production & Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Rice Outlook ........................................................................................................................................... 43 Table: Vietnam Rice Production & Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Table: Vietnam Rice Production & Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Grains Outlook ....................................................................................................................................... 51 Table: Vietnam Corn Production & Consumption, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Table: Vietnam Corn Development Production Plan & BMI Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Table: Vietnam Corn Production & Consumption, 2008-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Featured Analysis .............................................................................................................. 56 Bright Outlook For Agribusiness In Vietnam ................................................................................................. 56 Table: Vietnam - Select Commodities Production & Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Commodities Price Analysis ............................................................................................. 63 Monthly Softs Update ............................................................................................................................... 63 Table: Select Commodities - Performance & BMI Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Table: BMI Commodities Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Monthly Grains Update ............................................................................................................................ 72 Table: Select Commodities - Performance & Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

© Business Monitor International

Page 4

Vietnam Agribusiness Report Q2 2014 Table: BMI Commodities Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Upstream Analysis ............................................................................................................ 82 Asia GM Outlook ..................................................................................................................................... 82 Table: Philippines Corn Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Table: Select Countries - GM Crops Use In 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Asia Fertiliser Outlook ............................................................................................................................. 88 Table: Global Benchmark Fertiliser Prices (US$/tonne FOB, reported prices at the end of quarter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Downstream Analysis ....................................................................................................... 95 Drink .................................................................................................................................................... 95 Alcoholic Drinks .................................................................................................................................... 95 Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Hot Drinks .......................................................................................................................................... 100 Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Soft Drinks .......................................................................................................................................... 102 Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Mass Grocery Retail .............................................................................................................................. 106 Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Table: Grocery Retail Sales By Format (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Food ................................................................................................................................................... 110 Food Consumption .............................................................................................................................. 110 Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Canned Food ...................................................................................................................................... 113 Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Confectionery ...................................................................................................................................... 114 Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Pasta ................................................................................................................................................. 117 Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Dairy ................................................................................................................................................. 119 Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Regional Overview .......................................................................................................... 121 Table: Select Countries - Biofuel Blending Mandates & Programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Competitive Landscape .................................................................................................. 127 Table: Major Agribusiness Companies (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Company Profile .............................................................................................................. 128 Vinamilk .............................................................................................................................................. 128 Table: Vinamilk's Financial Highlights, 2007-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

Demographic Forecast ................................................................................................... 138 Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Methodology .................................................................................................................... 142

© Business Monitor International

Page 5

Vietnam Agribusiness Report Q2 2014 Industry Forecast Methodology .............................................................................................................. 142 Sector-Specific Methodology .................................................................................................................. 143

© Business Monitor International

Page 6

Vietnam Agribusiness Report Q2 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 succeeds in producing more value-added crops and maintaining its status as an export spearhead.

Rice The 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); f = BMI forecast. Source: BMI.

Key Forecasts ■

Rice consumption growth to 2018: 4.0% to 20.9mn tonnes. Rice remains the major food staple in Vietnam, and we do not see this changing over our forecast period. However, rising interest in other

© Business Monitor International

Page 7

Vietnam Agribusiness Report Q2 2014

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. • Corn production growth to 2017/18: 28.9% to 6.2mn 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: 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: US$25.7bn in 2014 (down from US$27.3bn 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 Revisions To Forecasts ■

2013/14 coffee production forecast revised up, to 27.5mn 60kg bags (compared with a previous estimate at 24.5mn bags). Concerns over a prolonged drought spell in Central Highlands that hindered coffee trees blossoms, have now eased. Moreover, cultivated area of higher yielding trees has been growing at a faster pace than expected.

Key Developments

Despite the rebound in production, Vietnam's coffee exports in 2013/14 will probably see slow growth due to low robusta prices and a growing coffee export sector crisis. Coffee prices in Vietnam have been on a declining trend for the past two years, and have averaged US$1,708/tonne in the past six months (September-February), down 10.9% y-o-y. As a result, coffee farmers have been hoarding beans in order to obtain better prices later on. Meanwhile, although coffee bean production is thriving, the coffee export sector is facing a debt crisis. The government scrapped the value added tax on coffee exports in January 2014 in order to help the sector, but uncertainty around this policy has also limited exports since the start of the year. Following the exceptional 2011/12 production and export season, exports were weak in 2012/13, amounting 23.8mn bags, down 2.5% y-o-y. Exports slew down even more since the beginning of the 2013/14 season in October.

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

© Business Monitor International

Page 8

Vietnam Agribusiness Report Q2 2014

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 30-50% of individual farmers in southern provinces abandoning their farms, while owners of large farms with more than 1,000 heads 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. However, we believe pork and poultry production growth will remain below historical averages. 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 9

Vietnam Agribusiness Report Q2 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 Q2 2014

SWOT Analysis - Continued

Threats

■

Poor knowledge of good farming practices and hygiene standards leaves Vietnamese agriculture open to disease outbreaks of the kind that have plagued the livestock industry in recent years.

■

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

■

Climate change and rising sea levels will reduce arable land in the Mekong Delta and coastal areas of the Central region unless active protection policies are implemented. This would then weigh on production growth in two of Vietnam's main agriculturalproducing regions.

© Business Monitor International

Page 11

Vietnam Agribusiness Report Q2 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 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 infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world.

■

Vietnam remains one of the world's most corrupt countries. According to Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123 out of 176 countries.

Opportunities

■

Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how.

■

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

Threats

■

Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern.

■

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

© Business Monitor International

Page 12

Vietnam Agribusiness Report Q2 2014

Industry Forecast Dairy Outlook BMI Supply View: We are positive about Vietnam's dairy sector. We expect it to maintain its strong growth momentum on the back of a growing customer base, low milk consumption per capita, rising disposable incomes and increasing health awareness among consumers. Distribution networks are expanding, and dairy producers are launching aggressive advertising campaigns. Since the opening up of the economy in 1986, there has been considerable change in the structure of the Vietnamese dairy industry. The contribution of state farms, which were previously responsible for almost all milk production, has fallen to around just 5%, with the other 95% coming mainly from small- and medium-sized private farms.

Recent investment in the sector, with the development of milk farms and dairy farms, has boosted the short term outlook. Production grew by 8.4% annually in the past five seaons. In 2013/14, we see output showing strong growth, of 5.0% year-on-year (y-o-y), reaching 417,600 tonnes that year. Out to 2017/18, we are forecasting Vietnamese fluid milk production growth of 21.9% on the 2012/13 level 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. A sustained period of high global milk prices on the back of rising global demand and supply sluggishness will also prove supportive of production and encourage producers to consider the long-term impact of their approach to cattle farming. Finally, the sector is likely to benefit from the continued increase in yields, which have risen almost 130% over the past decade and are expected to continue to do so given the new investment in the sector.

BMI Demand View: Vietnamese dairy consumption has expanded significantly in the last 15 years, driven by relatively large increases in domestic consumption as well as rising incomes. Per capita milk consumption in Vietnam more than doubled between 2000 and 2012 to 12kg per person per year. Despite this increase, the country remains below the regional average of 65kg. Though there has been an increase in milk production over the years, the country produces neither cheese nor butter. Condensed milk and yoghurt are highly popular dairy products. We expect the country to be increasingly reliant on dairy imports to meet its domestic needs.

Vietnamese dairy consumption growth will remain strong over our forecast period to 2018. Strong economic growth will filter through into rising disposable incomes, pushing up demand for non-essential foodstuffs. Through to 2018, we expect fluid milk consumption growth of 36.1% to 272,400 tonnes, while

© Business Monitor International

Page 13

Vietnam Agribusiness Report Q2 2014

demand for butter, cheese and whole milk powder will soar 46.9%, 229.6% and 24.3% respectively, albeit from far lower bases. Increased urbanisation, increased ownership of Western goods and the ongoing spread of modern, organised retail will all prove supportive of strong dairy consumption growth, even if forecast higher global dairy prices limit the growth outlook to some extent.

Table: Vietnam Butter Production, 2013-2018

2013e

2014f

2015f

2016f

2017f

2018f

13.4

14.5

15.7

16.9

18.3

19.7

Butter Consumption, '000 tonnes

e/f = BMI estimates/forecasts. Sources: FAPRI, BMI.

Table: Vietnam Cheese Consumption, 2013-2018

2013e

2014f

2015f

2016f

2017f

2018f

4.4

6.0

7.5

9.3

11.6

14.6

Cheese Consumption, '000 tonnes

e/f = BMI estimates/forecasts. Sources: FAPRI, BMI.

Table: Vietnam Milk Production & Consumption, 2013-2018

2013e

2014f

2015f

2016f

2017f

2018f

Milk Production, '000 tonnes

397.7

417.5

433.4

449.9

467.0

484.7

Liquid Milk Consumption, '000 tonnes

200.1

213.6

227.8

242.3

257.3

272.4

e/f = BMI estimates/forecasts. In all instances year indicates data for harvest year ending that calendar year i.e. 2011 = 2008-09. Sources: General Statistics Office of Vietnam, BMI, FAPRI.

Table: Vietnam Whole Milk Powder Consumption, 2013-2018

Whole Milk Powder Consumption, '000 tonnes

2013e

2014f

2015f

2016f

2017f

2018f

36.8

38.4

40.1

41.9

43.8

45.8

e/f = BMI estimates/forecasts. Sources: FAPRI.

© Business Monitor International

Page 14

Vietnam Agribusiness Report Q2 2014

Private Investment To Support Production Growth

The recent announcement by dairy company FrieslandCampina and agricultural bank Rabobank that the two institutions will team up to improve the quality of milk in Vietnam and Indonesia is the latest sign that the Vietnamese dairy sector has bright days ahead. The companies will provide US$30mn to support local dairy farmers by providing knowledge, financing (affordable loans) and expertise. The provided loans will be used to purchase cows, improve facilities and fund the installation of biomass units.

This move, coupled with the constant expansion of milk capacity (by Vinamilk, for example) and of manufacturing (Vietnamese company BIOMIN just opened a premix company), bodes well for milk production growth.

Access To US Confirms Vinamilk's Long-Term Opportunities

Vietnam Dairy Products Joint-Stock Company (Vinamilk) was 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 future sales growth. The company continued to record strong growth in Q313 (JulySeptember) with revenues growing by 21.3% y-o-y to VND8,028bn (US$381mn) and net income by 21.2% y-o-y to VND1,908bn (US$90mn). Margins retreated slightly in Q313 but remained above historical averages. Profit margins came in at 21.1%, down 0.02 percentage points y-o-y. The positive performance was mainly driven by a strong growth in export sales, which increased 115.6% y-o-y. Domestic sales were more moderate (at 8.8% y-o-y) and driven mostly by demand for powdered milk and Vinamilk's newly introduced value-added and premium products in the domestic market. Export sales now account for 18% of total sales (as of Q313), compared with 8.5% a year ago.

© Business Monitor International

Page 15

Vietnam Agribusiness Report Q2 2014

Strong Growth Vinamilk - Revenue Growth, % y-o-y (RHS) & Select Income, VNDmn (LHS)

Source: BMI, Bloomberg

We remain positive about 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 its 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.

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 has large market shares in key domestic markets for which we forecast strong consumption growth in the coming years. For example, Vinamilk enjoys a 40% market share in Vietnam's liquid milk segment, for which we forecast consumption to expand by 38.9% between 2012 and 2017, to 257,250 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 only accounts for 20% of total sales in Vietnam), for which we believe demand will rise by 19% over the coming five years.

© Business Monitor International

Page 16

Vietnam Agribusiness Report Q2 2014

Vinamilk On Top Selected Companies - Operating (LHC) & Profit (RHC) Margins, %

Source: Bloomberg

With new downstream projects coming online soon, the company is now heavily investing in upstream capacity and plans to spend VND1,555bn (US$73mn) in capex for the next three years. Vinamilk, which sources 25% of its raw milk from small-scales farms in Vietnam, is ramping up its cow farming business and aims to source 40% of its raw milk needs from internally-owned farms by 2016.

We also highlight Vinamilk's export growth potential. Exports (mainly to Iraq, Cambodia, the Philippines, Thailand and Australia) only accounted for 14% of total revenue in FY12, compared with 10% in FY07. Exports are likely to see sustained growth in the coming years, favoured by the access to new markets such as the US, and by the full implementation of the Association of Southeast Asian Nations Economic Community (AEC) in the coming years. Although the current 2015 timeline for integration looks unlikely, we do 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 and plans to build a factory in Cambodia in order to save costs.

Finally, high margins, combined with low debt levels and interest expenses, puts Vinamilk ahead of its peers (Megmilk, Mengniu and Namyang) in terms of financial performance.

© Business Monitor International

Page 17

Vietnam Agribusiness Report Q2 2014

Well Diversified Vinamilk - Revenue By Product (LHS) & Geography (RHS), 2012, % Of Total

Source: BMI, Vinamilk

Our view for international milk prices to remain elevated in H213 and to average higher over 2013 could hamper Vinamilk's performance over the coming quarters. Indeed, Vinamilk's gross margins are highly sensitive to global milk prices, as the company imports 70-75% of its raw milk materials, mainly from Australia and New Zealand. Pressure from high milk prices is likely to ease from 2014, as we expect prices to head down on a rebound in supply.

© Business Monitor International

Page 18

Vietnam Agribusiness Report Q2 2014

Highly Concentrated Market Vietnam - Liquid & Powdered Milk Production Market Share (% of total)

Source: BMI, Bloomberg

Thailand's Fears Over Trade Liberalisation Overplayed

Thai milk farmers and processors fear losing market share - both domestically and abroad - due to the AEC's impending import liberalisation in 2015. Vietnam's dairy sector, although still lagging being Thailand's, is developing rapidly, with milk production increasing by 18.3% on average in the past 10 years and forecast to soar by 20.9% on the 2011/12 level to 461,600 tonnes in 2016/17. Vietnam has been trying to upstage Thailand through massive dairy cow imports and rapid expansion of milk-processing facilities and dairy operations. Vietnam's state-owned dairy company Vinamilk now has a capacity that is three times that of Dutch Mill, Thailand's leading milk producer. In Cambodia, where Thai milk used to dominate the market, cheaper Vietnamese dairy products have been gaining market share.

© Business Monitor International

Page 19

Vietnam Agribusiness Report Q2 2014

Mostly New Zealand Vietnam - Milk & Milk Products Imports By Country, 2010 (% of total)

Source: BMI, USDA

We believe that Thai dairy farmers' fears regarding trade liberalisation are relatively overplayed, as farmers are already relatively efficient by regional standards. Vietnam still imports 75% of its dairy products needs, while Thailand is 75% self-sufficient. Moreover, Thailand has higher dairy cow efficiency than Vietnam and China, recording annual yields of 3,380kg of milk per head, compared with 2,060kg/head in China and 2,170kg/head in Vietnam.

Strong Government Support

The Ministry of Agriculture and Rural Development (MARD) continues to place a high priority on developing the country's dairy industry in an effort to keep up with the growing domestic demand for fresh milk. We believe the MARD's goal to increase dairy cattle herd to 500,000 head by 2020 (from 145,000 head in 2011) and production of raw liquid milk to 1mn tonnes (from an estimated 382,000 tonnes in 2012) is rather challenging.

© Business Monitor International

Page 20

Vietnam Agribusiness Report Q2 2014

Table: Vietnam Butter Consumption, 2008-2013

Butter Consumption, '000 tonnes

2008

2009

2010

2011

2012

2013e

10.8

10.8

10.8

11.3

12.5

13.4

e = BMI estimates. Sources: FAPRI, BMI.

Table: Vietman Cheese Consumption, 2009-2013

2008

2009

2010

2011

2012

2013e

3.1

3.8

3.5

3.5

4.0

4.4

Cheese Consumption, '000 tonnes

e = BMI estimates. Sources: 1 FAPRI, BMI.

Table: Vietnam Milk Production & Consumption, 2008-2013

2008

2009

2010

2011

2012

2013e

Milk Production, '000 tonnes

262.2

278.2

306.7

345.0

382.0

397.7

Liquid Milk Consumption, '000 tonnes

158.4

175.1

167.6

174.8

185.3

200.1

e = BMI estimates. In all instances year indicates data for harvest year ending that calendar year i.e. 2011 = 2008-09. Sources: General Statistics Office of Vietnam, BMI, FAPRI.

Table: Vietnam Whole Milk Powder Consumption, 2008-2013

Whole Milk Powder Consumption, '000 tonnes

2008

2009

2010

2011

2012

2013e

33.2

33.2

33.2

35.1

36.8

36.8

e = BMI estimates. Source: FAPRI.

Risks To Outlook

Another economic slowdown on the back of fiscal and monetary tightening would weigh on our consumption growth forecasts, as it would force consumers to cut back on discretionary spending.

© Business Monitor International

Page 21

Vietnam Agribusiness Report Q2 2014

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

© Business Monitor International

Page 22

Vietnam Agribusiness Report Q2 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 meat production as of 2011/12. Despite going through hard times over recent years owing to disease outbreaks, soaring input costs and competition from cheap imports, we expect Vietnam's livestock production to grow strongly, led by poultry production, over the medium term. Rising incomes will stimulate domestic meat consumption growth (owing to diet diversification), and production will increase to keep pace. That said, we expect the country to continue being a net importer of livestock over our forecast period.

We expect livestock production to recover slightly in 2013/14, following two years of challenging environment with elevated international feed prices. We see poultry production outperforming the rest of the complex, growing by a robust 7.2% year-on-year (y-o-y) to 815,000 tonnes in 2013/14. The pork sector, which was hurt in 2013 by news of use of banned substances to promote lean growth in pigs, will continue to record lacklustre activity. We forecast production to grow by a mild 1.8% y-o-y to 2.3mn tonnes in 2013/14. Beef and veal production is forecast to broadly stagnate in 2013/14 around 420,000 tonnes.

We see strong growth potential for the Vietnamese livestock industry, on the back of rising income. Poultry will record the strongest growth, and we forecast production to expand 32.7% to 1.0mn tonnes to 2017/18 compared to the 2012/13 level. Pork output should rise 12.0% to 2.5mn tonnes, which will not be enough to fill in the country's growing demand for the meat. The country will remain reliant on pork imports to satiate demand. Beef production will remain the least significant of Vietnam's livestock sectors and is expected to grow by a low 3.7% over the 2012/13 level to 417,000 tonnes.

© Business Monitor International

Page 23

Vietnam Agribusiness Report Q2 2014

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, with per capita consumption rising by over 100% from 2000 to 2013 to reach 37.1kg per year. Buoyed by strong income growth as well as population growth, we see healthy demand growth for livestock over 2013-2018. Poultry consumption is forecast to grow by 37.8% to 1.1mn tonnes, while pork (from a higher base) and beef consumption will increase by 18.8% and 22.8% respectively. We forecast pork consumption to reach 2.6mn tonnes, with beef consumption reaching 508,300 tonnes. We believe pork consumption will continue to be the dominant meat consumed, comprising more than 60% of total meat consumption. A household survey conducted in 2010 found that 40% of household meat expenditure was spent on pork, with preference given to fresh pork over chilled or processed meat.

© Business Monitor International

Page 24

Vietnam Agribusiness Report Q2 2014

Table: Vietnam Beef & Veal Production & Consumption, 2013-2018

2013

2014f

2015f

2016f

2017f

2018f

Beef & Veal Production, '000 tonnes

402.0

404.0

407.0

409.0

413.0

417.0

Beef & Veal Consumption, '000 tonnes

414.0

418.1

439.0

461.0

484.0

508.3

f = BMI forecasts. Source: USDA.

Table: Vietnam Pork Production & Consumption, 2013-2018

2013

2014f

2015f

2016f

2017f

2018f

Pork Production, '000 tonnes

2,220.0

2,260.0

2,327.8

2,380.2

2,432.5

2,487.3

Pork Consumption, '000 tonnes

2,200.0

2,255.0

2,329.4

2,410.9

2,505.0

2,612.7

f = BMI forecasts. Source: USDA.

Table: Vietnam Poultry Production & Consumption, 2013-2018

2013

2014f

2015f

2016f

2017f

2018f

Poultry Production, '000 tonnes

760.0

815.0

859.0

906.3

956.1

1,008.7

Poultry Consumption, '000 tonnes

790.0

829.5

883.4

940.8

1,008.6

1,088.3

f = BMI forecasts. Source: USDA.

© Business Monitor International

Page 25

Vietnam Agribusiness Report Q2 2014

Sector Profitability Improves, But Challenges Remain

Vietnam's livestock sector, especially the pork sector, experienced significant challenges in 2012 and 2013 on the back of a rise in feed ingredient and fuel prices, lower demand and plummeting domestic prices. Media reports on the use of banned growth hormones in swine farms led consumers to substitute to alternative protein sources such as seafood. Pork prices decreased by around 14% in 2012, to VND43,000/ kg (US$2.07/kg) in December of that year, according to industry sources. By contrast, feed ingredient prices have risen steadily on the back of elevated grain prices. As a result, 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 southern provinces abandoning their farms. Owners of large farms with more than 1,000 head are thought to have reduced their herd size by up to 70%.

In the first six months of 2013, the market price has been significantly below production costs; farms have therefore showed unprofitable or less profitable cash flows. Pork prices averaged around VND40,200/kg in southern regions over the first half of 2013, compared with production costs estimated at VND41,000/kg.

The situation has been improving since H213. Pork prices are starting to recover, and consumers are showing more confidence in the pork market and are spending on pork products. A survey done by the General Statistics Office showed the estimated total number of pigs to be 26.3 million in December 2013, only 0.9% lower y-o-y. Prices are currently around VND50,000/kg.

Production growth in the pork industry will remain below-par in 2013/14, expanding by 1.8% y-o-y, compared with the 10 year average of 6.1%. Poultry production will grow by a strong 7.2% in 2013/14 which is still significantly lower 10-year average of 8.5%.

© Business Monitor International

Page 26

Vietnam Agribusiness Report Q2 2014

Changing Meat Consumption Trends Vietnam - Livestock Consumption (% of total meat consumption)

e/f = BMI estimate/forecast. Source: BMI

Feed And Animal Breeding Subsectors More Profitable

While Vietnamese livestock production companies (except feed companies) struggle to stay afloat amid financial and output woes, foreign rivals have used this opportunity to gain greater control Vietnam's more lucrative husbandry sub-sectors, such as feed production, live animal breeding, as well as veterinary services and medicine. Of the total capital investment in the livestock sector in 2012, investment in the production of meat only accounted for 4.1% (US$15.1mn), while investment in feed production accounted for 94.9% (US$346.8mn). Investors have been encouraged to invest in the production of animal feed because domestic supply does not meet demand, and the livestock sector largely depends on imports. In 2012, domestically produced animal feed reached 12.7mn tonnes, accounting for 56% of the country's total demand. Foreign-owned millers accounted for around 52% of total domestic production. The most recent investment in the sector is from Charoen Pokphand Food-owned CP Vietnam, which planned to open two new feed mills in 2013.

© Business Monitor International

Page 27

Vietnam Agribusiness Report Q2 2014

Compared with 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 sector will continue to face structural challenges, namely high interest rates and a lack of foreign investment into the sector. Indeed, livestock farmers must bear interest rates of around 13-15%, while foreign companies enjoy 1-4% rates. Moreover, the livestock business generates volatile and low profits and presents important risks. Disease outbreaks are still very much a risk, while insurance schemes and the public policy on aid against disasters and diseases are under-developed.

In spite of all those challenges, we continue to hold a positive view on the livestock industry in the medium term. Rising income and changing diets will support production out to 2016/17, with poultry output growth outperforming the rest of the industry.

On The Recovery Select Companies - Operating (LHC) & Profit (RHC) Margins (%)

Source: BMI, Bloomberg

Fragmented Feed Industry Disadvantages Local Companies

The domestic livestock industry is made up of mainly small-scale or backyard farm operations that have poor hygiene standards and are susceptible to epidemics. The Vietnamese livestock sector is often plagued by disease outbreaks owing to the lack of proper sanitation facilities in farms and meat production facilities. Since 2009, the country's livestock sector has experienced multiple rounds of avian influenza, H5N1 bird

© Business Monitor International

Page 28

Vietnam Agribusiness Report Q2 2014

flu virus, foot-and-mouth disease and porcine reproductive respiratory syndrome, also known as blue ear disease. In our view, disease outbreaks will constantly feature as a challenge to the industry as long as it remains fragmented and low in technology and health standards.

The fragmented nature of the industry has thus resulted in foreign companies, with their sophisticated and larger-scale production facilities, dominating livestock production in Vietnam. In the poultry sector, for example, the three main companies dominating the landscape are China-based CP Vietnam Livestock Corporation, Indonesia-based Japfa and Malaysian company Emivest; these firms supply around 6mn chickens to the domestic market monthly, leaving hundreds of domestic firms to compete for the remaining market share.

Another advantage that foreign firms enjoy in the sector is that they are not subject to the high lending costs that local famers have to pay. Being able to rely on their parent companies also allows these foreign players to dig into deep pockets and purchase raw materials at lower costs in foreign currencies.

In 2012, 40 out of 243 Vietnamese feed manufacturers were forced to close their doors due to low profitability, as grains prices remained elevated and to fierce competition in Vietnam's feed industry, according to the Vietnam Feed Association. A large number of these companies were located in Dong Nai or Binh Duong, the region considered the southern hubs of the animal feed making industry in Vietnam. Most of the feed making plants with an annual capacity of at least 50,000 tons belong to foreign companies.

© Business Monitor International

Page 29

Vietnam Agribusiness Report Q2 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 domestic and far yard scraps. However, its commercial feed output it growing at an extremely rapid pace. The animal feed industry has been receiving significant - mainly foreign - investment in recent years, given the attractive prospects of the livestock and aquaculture industries of the country. Foreign-invested feed companies continue to meet most of the domestic demand, such as Thailand's Charoen Pokphand Group and US-based Cargill, according to the Ministry of Industry and Trade. Vietnam currently has 59 foreign-invested firms and joint ventures which hold over 50% of the domestic animal (compound) feed market share while 180 local firms retain the remaining 30%, according to the Vietnam Animal Feed Association. According to reports, 30% of domestic firms have been forced out of the animal feed business as a result.

CP Vietnam Livestock announced in March 2012 it is investing US$100mn 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 30

Vietnam Agribusiness Report Q2 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 operations recently, with annual capacity of 720,000 tonnes. CPV is also expanding in Binh Dinh, where the facility, which will be completed in 2014, will have an annual capacity of 216,000 tonnes. 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.

Imbalances To Be Maintained Vietnam - Poultry & Pork Production & Consumption ('000 tonnes)

f = BMI forecast. Source: BMI, USDA

Local companies are also expanding: GreenFeed Vietnam Corporation in April 2013 opened a new mill in Binh Dinh with initial capacity of 220,000 tonnes per year. The Hong Ha Nutrition Joint Stock Co inaugurated in 2012 an animal production line in Ha Nam Province. The factory is expected to raise its capacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago. This has come on the back of VND150bn (US$7.1mn) invested in 2011.

We believe the ongoing consolidation of the sector is likely to continue, with foreign livestock and feed companies buying local assets and increasing their exposure to the sector.

© Business Monitor International

Page 31

Vietnam Agribusiness Report Q2 2014

Table: Vietnam Beef & Veal Production & Consumption, 2008-2013

2008

2009

2010

2011

2012

2013

Beef & Veal Production, '000 tonnes

333.0

369.0

384.0

387.0

400.0

402.0

Beef & Veal Consumption, '000 tonnes

344.0

375.0

392.0

395.0

410.0

414.0

Source: USDA.

Table: Vietnam Pork Production & Consumption, 2008-2013

2008

2009

2010

2011

2012

2013

Pork Production, '000 tonnes

1,915.0

2,090.0

2,090.0

2,130.0

2,175.0

2,220.0

Pork Consumption, '000 tonnes

1,890.0

2,071.0

2,072.0

2,113.0

2,160.0

2,200.0

Source: USDA.

Table: Vietnam Poultry Production & Consumption, 2008-2013

2008

2009

2010

2011

2012

2013

Poultry Production, '000 tonnes

417.0

503.0

621.0

696.0

730.0

760.0

Poultry Consumption, '000 tonnes

499.0

538.0

660.0

754.0

775.0

790.0

Source: USDA.

Risks To Outlook

Should the government initiate regulatory changes related to disease control and disaster aid, and improve lending conditions for the domestic sector, the meat production sector is likely to finally attract more investment. This poses an upside risk to our production forecasts. In an attempt to aid the industry, the Vietnamese government issued a document in early August 2012 showing that the State Bank of Vietnam asked commercial banks to offer an annual lending rate at 11% on loans to agricultural firms. Meanwhile, the National Assembly offered a 30% reduction of corporate income tax in 2012 to agricultural enterprises. Although these policies will not completely eliminate difficulties, they are a first step towards the improvement of the sector's outlook.

© Business Monitor International

Page 32

Vietnam Agribusiness Report Q2 2014

Disease poses a major downside risk to our forecasts for livestock production in Vietnam. It is a particular risk for our poultry and pork output forecasts, although it could also affect our beef outlook.

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

Competition from cheap imports remains a risk to Vietnamese livestock farmers. Efficiency improvements are being made - as demonstrated by our robust production forecasts - and yet this risk might only be fully realised beyond 2012 once government intervention is reduced.

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

© Business Monitor International

Page 33

Vietnam Agribusiness Report Q2 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 its coffee output consisting of the robusta variety and only around 2-3% of production devoted to the premium arabica variety. The Vietnamese coffee market year runs from October to September, and harvesting takes place between November and February.

After reaching a record high in 2011/12 thanks to excellent growing conditions, Vietnam's coffee crop was hampered by inclement weather in 2012/13, and production broadly stagnated at 26.05mn 60kg bags. Production was hurt by unseasonal rains during the blossoming period (January to March).

Vietnam is on track to record its second largest coffee crop ever in the 2013/14 season, which started in October 2013 with the harvest. We have revised up our coffee production forecasts as cultivated area has been growing at a faster pace than expected. The robusta harvest is complete now, and we now believe output will record strong growth of 5.6% year-on-year (y-o-y), reaching 27.5mn bags (compared with a previous estimate of 24.5mn bags). Vietnam's production surplus is likely to swell to 25.5mn bags in 2013/14, compared with the five-year average of 20.0mn bags.

Following a dry period early this year, rain has been improving the prospects for production. There is likely some decline in productivity due to the lack of moisture during much of the fruiting and fruit-filling stages, but recent rains in major growing areas have mitigated the impact of the drought. The USDA estimates the yield at a hefty 2.63tonnes/hectare (ha) in 2013/14, compared with 2.47 tonnes/ha in 2012/13. As a result of the production increase, Vietnam's exports are likely to bounce back following the decline in 2012/13's outbound shipments.

Out to 2017/18, we expect production to rise by 7.4% on the 2012/13 level, to 28.0mn bags. Vietnam will continue to reap the fruits of its replanting programme. However, we believe production will record large swings, due to the vulnerability of old trees (which still represent a large part of the total trees) to diseases. Export opportunities, coming from the increasing demand from emerging markets of robusta coffee, will continue to support production.

BMI Demand View: As GDP and population rise, spending on food and drink items such as coffee is likely to increase. Urbanisation and the spread of Western-style coffee shops are expected to add to this trend. Coffee consumption grew impressively by 56.8% from 0.43kg per capita in 2005 to 1.21kg per capita in 2013, one of the highest growth rates out of all coffee-exporting countries over the period. We predict that

© Business Monitor International

Page 34

Vietnam Agribusiness Report Q2 2014

consumption will rise 11.0% in 2014 to reach 2.1mn bags that year, boosted by the rebound in economic growth and the ever expanding coffee retail industry. That said, we note that coffee consumption growth comes from a relatively low base, and we expect 81.0% growth to 3.3mn bags over our forecast period to 2018 compared to the 2013 levels. Coffee consumption per capita is forecast to expand to 2.10kg per capita by 2018. The Ministry of Agriculture and Rural Development has said it hopes to boost domestic consumption to 10-15% of the national coffee crop. We do not believe this will be achieved in our forecast period, but the existence of such a sizeable target underlines the apparent potential of domestic consumption.

Table: Vietnam Coffee Production & Consumption, 2013-2018

Coffee Production, '000 60kg bags Coffee Consumption, '000 60kg bags

2013e

2014f

2015f

2016f

2017f

2018f

26,050.0

27,500.0

27,637.5

27,692.8

27,831.2

27,970.4

1,848.2

2,051.4

2,318.1

2,619.5

2,960.0

3,344.8

e/f = BMI estimates/forecasts. Sources: USDA, Vietnam Coffee and Cocoa Association.

Slow Exports Growth In 2013/14

Despite the rebound in production, Vietnam's coffee exports in 2013/14 will probably see slow growth due to low robusta prices and a growing coffee export sector crisis. First, coffee prices in Vietnam have been on a declining trend for the past two years, and have averaged US$1,708/tonne in the past six months (September-February), down 10.9% y-o-y. As a result, coffee farmers have been hoarding beans in order to obtain better prices later on. Meanwhile, although coffee bean production is thriving, the coffee export sector is facing a debt crisis. Of the 127 local coffee export firms that operated in Vietnam a year ago, 56 have ceased trading or shifted to other businesses, as the industry is plagued by insolvency, high interest rates and a credit squeeze, according to industry reports. Bean hoarding from farmers and lower prices are aggravating the export sector' debt woes. The problems pose downside risks to exports volumes in 2013/14 and beyond, as trading companies lack funds to operate normally and ship the beans. The government scrapped the value added tax on coffee exports in January 2014, but uncertainty around this policy has also limited exports since the start of the year.

Following the exceptional 2011/12 production and export season, exports were weak in 2012/13, amounting 23.8mn bags, down 2.5% y-o-y. Exports slew down even more since the beginning of the 2013/14 season in October, reaching 9.67mn bags (580,000 tonnes) in the first five month, down 18.7% y-o-y.

© Business Monitor International

Page 35

Vietnam Agribusiness Report Q2 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. The Vietnam National Coffee Corporation (Vinacafe), a stateowned enterprise that owns more than 25 subsidiary units, is Vietnam's largest coffee exporter, ahead of Nestlé Vietnam and Trung Nguyen. Vinacafe's total debt, including its subsidiaries', amounted to VND2,970bn (US$141.7mn) in FY1212, while profits were at VND105bn (US$5mn). Vinacafe is not alone in its struggles, with reports that of the 127 local coffee export firms that operated in Vietnam a year ago, 56 have ceased trading or shifted to other businesses. Many coffee operators are trapped with crippling debt, and banks are reluctant to lend them more money. The value of non-performing loans or debts in the sector likely to go unpaid stands at VND8,000bn ($379mn), or 60% of all coffee industry loans, according to the country's deputy agriculture minister. Two major coffee exporters - An Giang Coffee and Thai Hoa - were forced to delist from Vietnam's stock exchange in the past 14 months due to rising losses.

The crisis is 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. In the hot growth

© Business Monitor International

Page 36

Vietnam Agribusiness Report Q2 2014

period of the coffee industry from 2008 to 2011, some companies accepted loan interest rates of 24% per annum. The extent of the damage was only revealed when robusta prices started to decrease in 2012. In addition, many exporters took on debt and invested heavily in storage capacity and bean processing plants, leaving the sector oversupplied. For example, Thai Hoa invested in two plants with a capacity of 110,000 tonnes a year in the central province of Quang Tri, which only had 5,000 hectares of coffee plantations with a maximum output of 10,000 tonnes, according to industry sources. The supply of raw materials in the province and its neighbours can only meet around 40% of the plants' capacity.

At A Three-Year Low Vietnam - Coffee Prices Fob (US$/tonne)

Source: BMI, Bloomberg

As a result of coffee exporters' inability to repay their debts, the government is stepping in to resolve the issue. It has allowed banks to triple the loan length for coffee export companies to 36 months and adopted a restructuring plan for Vinacafe in January 2013. The project will be concluded in 2015 and will make Vinacafe focus on its core business, including coffee production, processing and trading. The company is making an exit from non-core investments such as sugar, fertilisers, seeds and construction companies. The government is also adopting an aggressive stance for loss-making subsidiaries, as it decided to let Vinacafe Quang Tri One-member go bankrupt.

© Business Monitor International

Page 37

Vietnam Agribusiness Report Q2 2014

Although we believe the worst is over for the coffee export sector, significant challenges remain. The extension of loan terms gave exporters a bit of breathing space and will help them repay at least part of their debt. In addition we view the Vietnamese government's latest push to restructure ailing state-owned enterprises (as is the case with Vinacafe) as a positive development for the economy (see 'More Restructuring To Come For SOEs', September 26 2013). By privatising SOEs and channelling more economic resources towards supporting the private sector through infrastructure investment and tax incentives, we believe that Vietnam will become an even more attractive destination for foreign direct investment. However, the overcapacity of bean processing and poor management practices will hinder a complete recovery for coffee exporters in the short term. Moreover, we believe easy credit in Vietnam is now a thing of the past, and credit growth is unlikely to return to the high double-digit rates seen over the past decade. Banks are especially cautious on lending more to the coffee sector, which is likely to push more exporters out of the industry in the coming months. As such, we believe the government's move to extend loans may not be sufficient for an industry that is currently having difficulties covering its working capital needs.

Little Change Ahead Vietnam - Coffee Area By Region, 2012 & 2020 Goal (% of total)

Source: USDA, BMI

© Business Monitor International

Page 38

Vietnam Agribusiness Report Q2 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 to maintain its specialisation in robusta production, even if the government recently announced plans to expand arabica planting area and output. Vietnam expects to double production of the superior-quality bean to 96,000 tonnes by 2020, from output of 48,000 tonnes in 2011/12, in a bid to reap more benefits from coffee plantations, as the arabica variety is normally sold for around double the price of robusta. Vietnam intends to expand arabica area planted in northern and central regions to 40,000ha over the coming eight years, from the current 32,000-35,000ha (there is no official agency providing exact data on area planted to coffee). International prices continue to provide a strong incentive for farmers to expand coffee cultivation in Vietnam.

The Question Of Planted Area

Favoured by stable and elevated Robusta prices, Vietnam has seen its area dedicated to coffee increase strongly in the past years. Planted area has increased from around 500,000 ha in 2005/06 to over 640,000 ha in 2012/13 according to estimates by the Ministry of Agriculture and Rural Development (MARD) and the USDA. However, the quality has not followed, and farmers have faced many difficulties, including inclement weather and decreasing coffee quality. Coffee yields have picked up strongly in the past two seasons, as the results of the replanting programme going on for several years now are starting to be seen. Yields are estimated at 2.63tonne/ha in 2013/14, compared with 2.47tonne/ha last season and the 2008/09-2011/12 average of 2.20tonne/ha.

The MARD plans to focus on quality rather than on plantation expansion. It aims at reducing planted area back to 500,000 ha by 2020 and to 479,000 ha by 2030. However, given the coffee price competitiveness, the reduction in planted area is unlikely to happen. Vietnam plans to develop high yield coffee breeding varieties through replanting programmes of old trees. According to the MARD, there are about 140,000-160,000 ha of aged trees needed to be replanted in the next 5-10 years, and about 200,000 ha by 2020. The Bank of Viet Nam announced in May that the sector will receive preferential credit loans of VND8-10 trillion (US$381-476mn) from now until 2016 to help implement the programme of old coffee crops recultivation.

© Business Monitor International

Page 39

Vietnam Agribusiness Report Q2 2014

Increasing Weight On The International Market

Coffee has proven to be one of main agricultural export engines of the Vietnamese economy and the bulk of Vietnam's coffee production is for exports. Only about 6% of total production is for domestic consumption. Vietnamese exports were exceptionally strong and well above annual averages in 2011/12, mainly due to the bumper crop and relatively high robusta prices on the international markets. The total value of all types of coffee exports hit a record US$3.7bn in 2012, up 34.5% y-o-y. We expect Vietnam to remain a key player on international markets in the coming years and to slowly increase its exports, partly due to growing demand for soluble coffee in Asia. MARD encourages domestic players to diversify their exports towards higher-value processed coffee products, such as soluble coffee. Exports of processed coffee started in 2003/04 and have been slowly increasing in the past few years, reaching 2.0% of total exports in 2011/12.

Low Value-Added Exports Vietnam - Coffee Exports ('000 60kg bags)

f = BMI forecast. Source: BMI, USDA, Vicofa

Vietnam now accounts for 17.7% of the world's total exports and exports to more than 80 countries, with Germany, the US, Italy and Spain as its biggest clients. Vietnam overtook Colombia as the second largest exporter in 2000, and its impact on international markets has been steadily growing ever since.

© Business Monitor International

Page 40

Vietnam Agribusiness Report Q2 2014

Getting Into Sustainable Production

Sustainably produced farm produce is a top seller - especially to developed markets and environmentally conscious customers - and the government of Vietnam knows it. Through numerous public-private partnerships, the Vietnamese government has started to pursue sustainable farming practises, placing significant emphasis on the coffee sector. According to statistics from Nedcoffee Vietnam, the amount of coffee produced under the UTZ Certified, 4C Association and Rainforest Alliance criteria has risen to 115,000 tonnes (or 1,916 60kg bags) of coffee beans in 2011 from close to zero a few years ago. This represents a small 10% of total national coffee production; BMI therefore expects this trend to gather more traction given the government's strong support.

Table: Vietnam Coffee Production & Consumption, 2008-2013

Coffee Production, '000 60kg bags Coffee Consumption, '000 60kg bags

2008

2009

2010

2011

2012

2013e

18,000.0

16,980.0

18,500.0

19,450.0

26,000.0

26,050.0

850.0

950.0

1,200.0

1,337.0

1,665.0

1,848.2

e = BMI estimates. Sources: USDA, Vietnam Coffee and Cocoa Association.

Risks To Outlook

In the short term, we see downside risks to our 2014/15 production forecast, due to the drought-like conditions Vietnam has been experiencing since February 2014. Adverse weather conditions, if prolonged, will severely diminish the coffee production in the coming season.

In the long term, ageing coffee plantations pose downside threats to our production outlook. Old trees (older than 20 years) account for around 30% of the total production area, according to Vicofa, and approximately 137,000ha of old and low-quality coffee trees need to be replaced over the next five years. In August 2012, MARD approved a plan for Vietnam's coffee sector development to the year 2020, which aims at replacing ageing trees and adopting sustainable production practices in order to reap premium prices in developed countries. MARD plans to maintain the area under cultivation at 500,000ha by 2020, with an output of 2.4tonnes/ha, and 479,000ha with an output of 2.5tonnes/ha by 2030. However, if farmers do not receive enough support from the government for their replanting programme, the proportion of higher-yielding coffee trees could fall, weighing on the country's capacity to at least maintain production growth.

© Business Monitor International

Page 41

Vietnam Agribusiness Report Q2 2014

Favourable weather, improved inputs, better irrigation and fertilizer application practices, and more productive coffee areas could offset this potential drop in supply.

With Vietnam's coffee industry so dependent on exports, our forecasts for production will be heavily dependent on world demand and prices for robusta coffee. BMI is expecting prices to remain relatively high over the medium term, but should further demand weakness - or indeed global oversupply - cause prices to come in lower than expected, production could undershoot our growth forecast.

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

© Business Monitor International

Page 42

Vietnam Agribusiness Report Q2 2014

Rice Outlook BMI Supply View: Vietnam is a key grower and world provider of rice. Production is growing fast, boosted by higher yielding rice varieties and better culture management. Output grew by more than 25% between 2000 and 2012.After a record year in 2010/11, Vietnamese rice stagnated at 26.5mn tonnes in 2011/12. In 2012/13, we believe production came in at 27.6mn tonnes, up 1.7% year-on-year (y-o-y). Area harvested grew by 1.6% y-o-y to 7.86mn hectares (ha), and yields by 1.1% to 5.64tonne/ha, up by a mild 0.5% y-o-y. This will be another record high and well above 10-year average of 23.9mn tonnes.

In the 2013/14 season which started in January, we maintain our view that Vietnam's rice production will reach a new record high, although y-o-y growth will remain modest. Output is projected to increase by 0.5% y-o-y, to 27.7mn tonnes, which compares with five-year average annual growth of 2.5%. Area under cultivation is likely to decline slightly to 7.80mn ha, while yields will reach an all time high of 5.68tonne/ ha. Production growth in 2012/13 and 2013/14 and strong 2012/13 ending stocks - estimated at 2.3mn tonnes by the US Department of Agriculture (USDA) - will support the country's export capacity as well as the continuous discount Vietnamese rice prices enjoy relative to global prices. We forecast the country's rice production balance in 2013/14 - at 7.3mn tonnes - to be 10.6% higher than the five-year average, which would take exports to 6.8mn and 7.5mn tonnes, according to the Food and Agriculture Organization and USDA respectively, slightly higher than in 2012/13.

Looking at the 2014/15 season, we see production rising by 1.5% y-o-y following 2013/14 mild growth. However, we see downside risks coming from the probably return of El Niño Phenomenon, which usually brings dry weather to South East Asia and could hamper yields.

Compared with many of its agricultural sub-sectors, Vietnamese rice is very competitive relative to many of its regional peers and is well positioned to benefit from both regional and global demand growth. Another advantage of Vietnamese rice is its relatively higher yields. The government is looking to increase by 50% the area planted with hybrid rice varieties, and this bolsters our bullish outlook for the country's rice production capabilities over the long term. Over our five-year forecast period to 2017/18, we expect rice output to grow by 8.6% to 29.9mn tonnes.

© Business Monitor International

Page 43

Vietnam Agribusiness Report Q2 2014

Higher In Vietnam Selected Countries - Rice Yields (tonnes/ha)

f = BMI forecast. Source: BMI, USDA

BMI Demand View: We forecast a modest consumption increase of 1.4% to 20.3mn tonnes in 2014. Over the longer term, we expect consumption to climb by 4.0% to 20.9mn tonnes in 2018 compared to the 2013 level. Rice remains the major food staple in Vietnam, and we do not see this changing over our forecast period. However, rising interest in other foods such as wheat-based goods - supported by growing affluence - will restrict demand for rice, and over the forecast period we expect production growth to significantly outpace that of consumption. Ultimately, demand growth will be influenced by population growth, as per capita consumption is expected to remain roughly the same as the population continues to diversify its diet on the back of rising incomes. As such, the country will remain one of the world's top rice exporters.

© Business Monitor International

Page 44

Vietnam Agribusiness Report Q2 2014

Table: Vietnam Rice Production & Consumption, 2013-2018

2013e

2014f

2015f

2016f

2017f

2018f

Rice Production, '000 tonnes

27,550.0

27,680.0

28,095.2

28,713.3

29,316.3

29,931.9

Rice Consumption, '000 tonnes

20,065.0

20,345.9

20,488.4

20,631.8

20,734.9

20,859.4

e/f = BMI estimates/forecasts. Source: USDA.

Production Growth On Yield Improvements

As rice harvested area broadly stagnates, production growth in 2012/13 and 2013/14 will almost entirely rely on yield improvements. The USDA estimates rough rice yields will reach a record high of 5.7 tonnes/ha in 2013/14, compared with 5.66 tonnes/ha in 2012/13 and the 10-year average of 4.98 tonnes/ha. Increases in yields are resulting from the introduction of better rice varieties. The Ministry of Agriculture and Rural Development (MARD) is also encouraging farmers to implement the large-scale farm model (between 50ha and 100ha), under which farmers consolidate individual small farms into larger farms to reduce per hectare production costs stemming from land preparation, irrigation, planting and harvesting. In 2011, more than 85% of paddy farming households were cultivating rice in plots of 0.5ha or less. Since the implementation of the plan in 2011/12, the total area of large-scale farms has reached 100,000ha. In the coming years, we expect that most of the increase in rice production will come from yield improvement. Vietnamese yields currently stand well above neighbouring countries but still have room before reaching Australian rice yields of 9.2 tonne/ha, which are the world's highest.

© Business Monitor International

Page 45

Vietnam Agribusiness Report Q2 2014

Boasting From Low Prices Rice - CBOT Rough Rice & Select Countries Rice Export Price (US$/tonne)

Note: All export quotes are for 25% broken rice contracts. Source: BMI, FAO, Bloomberg

Exports To Remain Strong Despite Stiffer Competition

Competition is increasing among South Asian and South East Asian countries. As a result, Vietnamese rice exports between January and October 2013 amounted 6.0mn tonnes, according to official figures, down 12.6% y-o-y. India is increasing its market share in African countries, to which Vietnam usually exports more than 20% of its rice, and the country is likely to maintain high exports in 2012/13 and 2013/14. Meanwhile, Thai prices have corrected by almost 28% in the past 12 months. The premium of Thai rice over Vietnamese rice is now at its lowest level since October 2011, when Thailand implemented its Rice Pledging Scheme, which led to a significant increase in rice prices and a decline in exports. With the sharp improvement in Thailand's rice competitiveness, Vietnamese exporters are facing acute competition. Finally, China, which has been the largest Vietnamese rice buyer since the start of the year (accounting for roughly 22% of the total), is reducing its rice imports. These developments could be partially offset by increased demand from the Philippines following Typhoon Haiyan (see 'Typhoon Lifts Rice, Palm Oil Import Outlook', November 18 2013), a traditional client of Vietnam.

© Business Monitor International

Page 46

Vietnam Agribusiness Report Q2 2014

We expect rice exports from Vietnam to pick up and be strong overall over the year. Vietnamese export prices are still very competitive and are among the lowest in Asia. Supported by a flexible pricing strategy and efforts to move into new markets, exports in 2013/14 could reach 7.5mn tonnes, according to the USDA, exceeding 2012/13 levels of 7.2 mn tonnes.

A bright spot among bleak news is the current strength of China's imports. The country has stood out as the main destination for Vietnamese rice for the past year and is likely to maintain high imports in 2013/14 (at around 2.4mn tonnes, up 9.7% y-o-y) due to insufficient supply and high domestic prices. As traditional markets such as the Philippines and Indonesia increase their self-sufficiency ratios in the coming years, Vietnam is ramping up its efforts to export to African (Guinea) and American countries (Haiti, Chile, US).

Due to its stable export policy and strong production, Vietnam is likely to maintain its rank as the third largest rice exporter, competing with India and Thailand. Vietnamese authorities plan to export 6mn-7mn tonnes of rice annually until 2015.

Benefiting From Recent High Imports Vietnam - Total Exports, '000 tonnes (LHS) & Exports To China, % Of Total (RHS)

Source: BMI, China General Customs Administration, General Statistics Office Of Vietnam

© Business Monitor International

Page 47

Vietnam Agribusiness Report Q2 2014

Rice Cartel Plan Unlikely To Materialise

We believe Thailand's strong push to form a rice cartel along with five other Association of Southeast Asian Nations (ASEAN) countries in order to control and boost international rice prices is unlikely to materialise. In August 2012, the country revived its long-held goal to form a cartel and announced five rice-exporting nations in South East Asia (the traditional top two global rice exporters - Thailand and Vietnam - and their smaller neighbours Cambodia, Laos and Myanmar) are in talks to create a formal alliance aimed at boosting prices and increasing export revenues. The project primarily aims to encourage information sharing and cooperation in production and marketing, with the goal of increasing rice export prices by 10% annually.

Thailand has for many years toyed with the idea of using its dominant market position to influence the price of rice. This is a decade-long project, as Thailand has been unsuccessfully attempting to create an international alliance to coordinate rice prices since 2002. A project similar to the current one gained attention in 2008, but Thailand withdrew its proposal as it immediately came under strong criticism, both domestically and internationally.

Creating a cartel is increasingly essential for the country, as it will help plunging exports to recover and sustain the government rice mortgage scheme. The government has been paying above-market prices to its own farmers in a costly programme to boost rural incomes and is reluctant to increase the flow of rice to the market by lowering prices (see 'PTP Poised To Maintain Rice Policy', August 23 2012).

We reiterate our view that the rice cartel plan is unlikely to materialise for two main reasons. First, we do not expect Vietnam to participate in the cartel. The project can count on strong support from Thailand and Cambodia. However, Vietnam, which would be one of the two pillars of the project given the volume of its exports, has shown a clear scepticism towards such a plan in past years. The country's exports are benefiting from Thailand's rice scheme programme, and Vietnam has been making inroads into some markets traditionally dominated by Thailand. Indeed, Vietnam rice is now enjoying a US$100/tonne discount over Thai rice. Participating in the rice cartel would very likely lead to a compression of the price differentiation and could hamper Vietnamese exports. Moreover, the poor record of cooperation between Thailand and Vietnam is strongly weighing against the implementation of a rice cartel. Second, pro-cartel countries would most likely face fierce opposition from key rice importers and ASEAN members Indonesia and the Philippines.

We also highlight that conditions of the rice sectors in the various countries differ significantly, making cooperation difficult. Thailand and Vietnam are the two leading rice exporters in the world, while output from Cambodia, Laos and Myanmar is relatively meagre but improving. Laos is a net importer of rice, and

© Business Monitor International

Page 48

Vietnam Agribusiness Report Q2 2014

Cambodia and Myanmar export small quantities. A lack of adequate facilities and infrastructure such as rice mills, storage and transport is constraining production and export growth. Regulating supply of perishable and bulky agricultural commodities in these conditions will prove to be challenging.

Even if the cartel is formed, we believe it is unlikely to reach its goal of setting high prices. The five countries only account for 42% of total rice exports in the 2011/12 season, according the USDA, and have to face strong competition from India, Pakistan and the US. Moreover, major importers such as China, Japan, Indonesia and the Philippines produce large quantities of rice domestically, which will make it even harder for the cartel to be effective in setting market prices.

Table: Vietnam Rice Production & Consumption, 2008-2013

2008

2009

2010

2011

2012

2013e

Rice Production, '000 tonnes

24,375.0

24,393.0

24,993.4

26,370.0

27,100.0

27,550.0

Rice Consumption, '000 tonnes

19,400.0

19,000.0

19,150.0

19,400.0

19,788.0

20,065.0

e = BMI estimates. Source: USDA.

Risks To Outlook

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

On the production side, the risks to our output forecast for 2014/15 are skewed to the downside, due to potential weather problems. There are reports that the probability of El Niño returning in 2014 is growing according to various meteorologist departments. This phenomenon brings dry weather to Vietnam's main rice producing regions, which poses a downside risks to yields and production.

Over the long term, we believe the gradual transformation of rice cultivation methods in Vietnam presents the main upside risk to our production forecasts. The Cultivation Department of the MARD is endeavouring to develop a large-scale rice farming model whereby neighbouring farmers work with businesses and government officials to increase rice yields. In this model, businesses provide capital for farmers to increase farm inputs such as fertiliser and machinery. They also provide a ready consumer network for farmers. In return, they reserve the exclusive right to purchase after the harvest. Currently, large-scale rice farms cover

© Business Monitor International

Page 49

Vietnam Agribusiness Report Q2 2014

10,000ha of total rice area harvested. The plan aims to expand this to 1mn ha in 2015, or approximately 10% of total area harvested for rice. We believe that this plan poses salient upside risks to our forecast for rice production growth.

© Business Monitor International

Page 50

Vietnam Agribusiness Report Q2 2014

Grains Outlook BMI Supply View: Corn is one of Vietnam's most important food crops, along with rice, and the country has a significant production of corn, which has grown by a hefty 9.5% annually since 2000. In the 2012/13 season, which ended in April 2013, we believe production came in at 4.8mn tonnes, up 2.8% year-on-year (y-o-y). Looking at the 2013/14 season, we forecast Vietnam's corn production to maintain its decade-long expansion and to reach an all time high at 4.9mn tonnes, up 2.1% y-o-y. Following a long term trend, output growth will be driven by a sustained improvement in yields rather than area expansion. Area harvested is estimated to broadly stagnate at 1.1-1.2mn hectares (ha) according to the USDA and the Ministry of Agriculture and Rural Development (MARD) respectively. Yields should grow to 4.38-5.30tonne/ha, up 1.9% y-o-y according to those sources, which is higher than the South East Asian average yield of 3.42tonnes/ha in 2013/14.

Area harvested and yields increased by 24.2% and 38.3% respectively and between 2003/04 and 2012/13, as domestic corn consumption rose significantly on the back of improving incomes. Indeed, as incomes have risen, consumers have been encouraged to buy more meat, of which corn is the main feedstock. More than 80% of the country's total corn output goes towards the feed industry.

To 2017/18, we expect corn production to increase by 28.9% to 6.2mn tonnes. Acreage is likely to remain stagnant or diminish; current yield immaturity means significant gains are still available via this avenue, especially as robust local corn prices provide incentives to farmers. The important growth driver will be domestic consumption, especially from the livestock and aquaculture sectors. Despite the potential for corn production given the robust growth of the livestock and aquaculture industries, the sector is encountering many challenges, including high production costs and high post-harvest losses of 13-15% according to industry sources.

BMI Demand View: Corn consumption almost doubled from 2005 to 2013, and we expect this trend to continue, although not at such a strong rate. The demand gains will partly come from growth in the livestock sector, as beef, veal and poultry production are all expected to register strong growth.

To 2018, corn consumption growth will continue to exceed that of production, at 29.7% and will attain 8.2mn tonnes. As a result, Vietnam will very likely become increasingly reliant on corn imports to meet domestic demand. However, strong economic growth over our forecast period is likely to ensure that the impact of a rising import bill on consumption is deemed manageable. Animal feed will remain the primary use for corn to 2018 and beyond. Indeed, we have a positive view on livestock production to 2018 owing to income growth and the fact that the sector has been identified as a recipient of government modernisation

© Business Monitor International

Page 51

Vietnam Agribusiness Report Q2 2014

efforts. Bullish projections from our Food & Drink team reinforce this; we forecast per capita food consumption to grow by 147.3% to US$650.7 by 2018.

Table: Vietnam Corn Production & Consumption, 2013-2018

2013

2014f

2015f

2016f

2017f

2018f

Corn Production, '000 tonnes

4,780.0

4,880.0

5,172.8

5,483.2

5,812.2

6,160.9

Corn Consumption, '000 tonnes

6,300.0

6,646.5

6,998.8

7,362.7

7,752.9

8,171.6

f = BMI forecasts. Source: USDA.

Government's Plan To Boost Production

We believe the government's goal to produce 7.5mn tonnes of corn by 2020 is realistic. According to our forecast, production will miss this objective by only a couple hundred thousand tonnes. MARD plans to boost area under cultivation to 1.3mn ha and yields to 5.8 tonnes/ha. Moreover, corn production is likely to accelerate in the coming years, pushed by the booming demand for feed and by the commercialisation of genetically modified (GM) seeds.

Table: Vietnam Corn Development Production Plan & BMI Forecasts

Unit

2012

2013f

2014f

2015f

2020f

MARD Area

000 ha

1,200

1,200

1,200

1,200

1,300

MARD Yield

tonne/ha

5.0

5.2

5.3

5.4

5.8

MARD Production

000 tonnes

6,000

6,240

6,360

6,480

7,500

BMI Production

000 tonnes

4,700

4,800

5,050

5,353

na

na = not applicable. f = forecast. Source: BMI, MARD

The MARD is now conducting large-scale field trials of GM corn varieties and should grant the final approval for commercial GM corn production in the coming years. Vietnam already uses hybrid seeds to plant 90% of the annual corn area according to the Ministry, with imports accounting for 80% of the hybrid seeds used, coming from Thailand and Indonesia. We forecast poultry and pork production to grow by

© Business Monitor International

Page 52

Vietnam Agribusiness Report Q2 2014

32.7% and 12.0% to 2017/18 compared with the 2012/13 level. We expect corn production to grow by 28.9% to 6.2mn tonnes over the period.

Consumption Driven By Feed Vietnam - Corn (LHC) & Wheat (RHC) Consumption ('000 tonnes)

f = BMI forecast. Source: BMI, USDA

Structural Production Deficit Driven By Livestock Growth

Vietnam suffers from a structural deficit in corn, as its livestock and aquaculture industries maintain a healthy appetite for feed, while corn and soybean production remains relatively low and wheat output is non-existent. Corn production will come short of consumption by 1.2mn tonnes in 2013/14 as consumption is forecast to reach 6.6mn tonnes, up 5.5% y-o-y. As a result, Vietnam, which is traditionally highly dependent on grain imports, will see its imports grow in 2013/14. Lower international prices in 2013 compared with H212, especially regarding corn prices, will also encourage imports.

The local livestock industry generally uses cassava, wheat, broken rice and corn as feed. In recent years, rice and cassava have been more focused on export markets and fell short of supplying the domestic animal feed industry. Feed wheat has recently been an alternative source, but its use is based on its price competitiveness and its availability in the market. In 2013/14, the use of feed wheat for the local animal feed industry will stagnate around 1.5mn tonnes due to limited international supply and elevated import prices.

© Business Monitor International

Page 53

Vietnam Agribusiness Report Q2 2014

Soaring Feed Demand Vietnam - Corn Consumption (LHS) & Production Balance (RHS), '000 tonnes

f = BMI forecasts. Source: BMI, USDA, FAPRI

Vietnam's dependency on imports to satisfy grains demand is expected to continue to grow over the long term. Import dependency for corn, for example, rose from 5.2% in 2005 to 20.0% in 2012.

Table: Vietnam Corn Production & Consumption, 2008-2013

2008

2009

2010

2011

2012

2013

Corn Production, '000 tonnes

4,600.0

4,432.0

4,630.0

4,648.0

4,650.0

4,780.0

Corn Consumption, '000 tonnes

5,200.0

5,400.0

6,100.0

5,900.0

6,000.0

6,300.0

Source: USDA.

Risks To Outlook

We highlight downside risks to our corn production and consumption forecasts through to 2017/18. Corn, like many Vietnamese agricultural crops, is suffering from a reduction in acreage, a result of under-

© Business Monitor International

Page 54

Vietnam Agribusiness Report Q2 2014

investment and the country's rapid pace of urbanisation. We expect yield growth, coming from a fairly low base as it is, to be sufficient to support output growth in spite of stagnant or reduced acreage. However, the ongoing introduction of hardier and higher yielding crops will ultimately necessitate greater investment; corn prices will have to remain in favourable territory in the medium term to ensure that this investment is forthcoming.

An important long-term downside consumption risk is that the country's dependence on imports could impede Vietnamese demand growth should a sustained period of inflated global corn prices occur. Fiscal and monetary tightening also pose a risk to consumption growth. Corn is not a luxury good, and thus demand will not retrench in line with tighter spending conditions. However, corn production in the country did dip by 3.7% y-o-y in 2008/09 on the back of tighter credit regulations throughout Vietnam during that time.

© Business Monitor International

Page 55

Vietnam Agribusiness Report Q2 2014

Featured Analysis Bright Outlook For Agribusiness In Vietnam BMI View: Recent developments in the country's economic and business environment outlooks add further weight to our positive view on Vietnam'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 fulfillment of its promising potential will only be achieved if the country steps up its competitiveness and improves both product quality and supply chain efficiency.

Recent developments related to Vietnam's economy and business environment have added further weight to our already positive outlook on the country's agribusiness sector. Over the past decade, Vietnam's economic growth story has been marked by tumultuous periods of high inflation and currency volatility that weighed on export competitiveness. However, 2013 looks set to be a major turning point for the economy, with the government pushing for policies aimed at maintaining price stability, coupled with ongoing efforts to further address macroeconomic imbalances in the economy. Although Vietnam's agriculture sector will not be directly affected by these reforms, we believe the measures will still prove positive for overall agricultural production as well as the industry's business environment.

© Business Monitor International

Page 56

Vietnam Agribusiness Report Q2 2014

Highest Yields In South East Asia Selected Countries - Rough Rice Yields (tonnes/ha)

f = BMI forecast. Source: BMI, USDA

BMI believes credit conditions are likely to ease in the coming quarters as Vietnam rides out the credit crisis it has been experiencing in recent years. Given the ongoing challenges in the coffee export industry (see 'Crisis Brewing For Coffee Exporters', October 3), improving credit conditions will certainly benefit the agribusiness sector in the coming quarters.

The government is also taking a more aggressive stance towards the restructuring of state-owned enterprises, as it intends to channel greater economic resources towards supporting the private sector through infrastructure investment and tax incentives. Vietnam is eager to attract foreign investment into a host of sectors, including agriculture, and this is likely to provide a much-needed push towards efficiency improvement in the industry. Foreign direct investment (FDI) in agriculture is currently very modest, accounting for only 1-3% of Vietnam's total FDI. The government is pushing for the increase of public private partnership (PPP) programmes in various agriculture subsectors, such as cultivation, breeding and the seafood industry. However, the rise of PPPs in the primary sector will be slow unless the government sets up specific documents for PPPs in the agricultural field. So far, only investment in the infrastructure sector enjoys such a regulatory framework.

© Business Monitor International

Page 57

Vietnam Agribusiness Report Q2 2014

These developments reinforce our broader bullish view on Vietnam's agriculture sector, underpinned by increasing public support for the industry and a positive outlook on production and export potential in the coming years.

On the production side, the natural fertility of Vietnam's soil, along with increasing agricultural productivity, will support robust growth in various sectors, including rice, poultry and pork, and the dairy industry. We forecast output in each of these segments to grow by more than 10% between 2012 and 2017. The livestock sector is benefiting from ongoing industrialisation in the feed industry, which provides a good quality and regular supply of feed ingredients. Productivity is rising overall, driven by the slow improvement in cultivation and breeding practices. For example, milk yields grew by 225% from 0.8 tonnes/cow in 2000 to 2.6 tonnes/cow in 2012.

Vietnam Price Competitive Select Countries - 25% Broken Rice Export Prices (US$/tonne)

Source: BMI, FAO

Output growth will also be supported by strong demand for Vietnam's agricultural products from domestic and export markets. Economic and revenue growth, along with urbanisation, is fuelling consumption growth in key agricultural and food products. We forecast GDP per capita to grow by a hefty 153.3% between 2012

© Business Monitor International

Page 58

Vietnam Agribusiness Report Q2 2014

and 2020 to reach US$4,336. This will mostly benefit the Vietnamese dairy and livestock sectors, which are able to ramp up production to supply growing domestic demand.

Vietnam's export outlook also looks promising, as the country is relatively competitive compared with its traditional competitors, namely Thailand, Indonesia, India and Brazil. The country enjoys low labour costs, high productivity relative to its competitors, especially in the sectors of rice and coffee, and proximity to high import growth markets, notably China. Vietnam can also count on cheap - yet lower-quality - domestic products, which helps it to tap into price-sensitive markets such as China and African countries, particularly in terms of rice.

We expect Vietnam to retain its status as a leading exporter in key commodities such as rice and coffee. Competition will be fierce on the rice market, and Vietnam will be neck-and-neck with Thailand, in our view. Both countries are expected to record significant production surpluses in the coming years, of around 9mn tonnes for Vietnam and 10mn tonnes for Thailand. Coffee exports also have bright days ahead, particularly given that Vietnam's main competitor in the robusta market, Indonesia, is struggling to ramp up production. Demand in Vietnam's traditional coffee export markets (US, Europe, Japan) will continue to grow. In fact, our shipping team forecasts Vietnam to outperform Brazil and other major Asian agricultural exporters in term of agricultural export growth.

Low-Value Exports Coffee - Vietnam (LHC) & Brazil (RHC) Exports ('000 60 kg bags)

f = BMI forecast. Source: BMI, USDA, Vicofa

© Business Monitor International

Page 59

Vietnam Agribusiness Report Q2 2014

Long Road Ahead For Improvements In Competitiveness

However, Vietnam will only realize its agricultural potential it steps up its competitiveness, and the industry's overall business environment improves. If exports are still held back by a number of structural inefficiencies. With competition increasing in key markets due to production growth abroad and the upcoming implementation of the Association of Southeast Asian Nations Economic Community, Vietnam needs to step up investment if it is to remain competitive.

We believe Vietnam will need to boost quality and productivity in the agriculture industry. The consolidation of the sector will be a first step towards productivity gains, and could be reached either via a decrease in the number of farms, the creation of cooperatives, or the increased cooperation between producers and trading firms. The size of the average farm in Vietnam is stagnating at a low 0.6 hectares, and this relatively small scale reduces credit access and investment in infrastructure and technology. The improvement in infrastructure and the supply chain could also reduce transport and handling costs, pushing down final selling prices. For example, exports out of the Mekong Delta, the largest rice-producing region in the country, are being held back by dredging shortfalls in the Delta, and the Cai Cui port can only handle low volume boats.

© Business Monitor International

Page 60

Vietnam Agribusiness Report Q2 2014

Leaving Something To Be Desired Selected Countries - Long-Term Political & Economic Risk Ratings & Business Environment Ratings Components

Note: Score is out of 100. 100 being best, 0 worst. Source: BMI

The move towards quality improvements (via the improvement in cultivation techniques, the set-up of quality controls and harsher sanitary regulations, the creation of established brands, etc.) will help Vietnam move up the value chain, and allow the country to command higher export prices. This is mostly the case for the coffee sector, as Vietnam almost exclusively exports unprocessed coffee beans. In contrast, Brazil has managed to bring exports of processed roasted and soluble coffee to 13% of total shipments.

Table: Vietnam - Select Commodities Production & Consumption

2012

2013f

2014f

2015f

2016f

2017f

Rice Consumption, '000 tonnes

19,788.0

20,084.8

20,406.2

20,712.3

21,023.0

21,338.3

Rice Production, '000 tonnes

27,100.0

27,330.0

27,576.0

28,403.2

29,283.7

30,200.3

Milk Production, '000 tonnes

331.0

343.0

360.0

378.0

398.0

416.0

Liquid Milk Consumption, '000 tonnes

185.3

200.1

213.6

227.8

242.3

257.3

Poultry Production, '000 tonnes

750.0

780.0

820.0

863.0

907.0

954.0

Poultry Consumption, '000 tonnes

793.5

837.1

887.4

940.6

1,001.8

1,071.9

© Business Monitor International

Page 61

Vietnam Agribusiness Report Q2 2014

Vietnam - Select Commodities Production & Consumption - Continued

2012

2013f

2014f

2015f

2016f

2017f

Pork Production, '000 tonnes

2,000.0

2,026.0

2,100.0

2,168.7

2,217.5

2,266.4

Pork Consumption, '000 tonnes

1,980.0

2,007.7

2,057.9

2,113.3

2,164.3

2,210.6

24,800.0

23,450.0

24,500.0

23,520.0

24,225.6

24,952.4

1,665.0

1,824.8

1,987.3

2,211.8

2,450.7

2,715.4

Coffee Production, '000 60kg bags Coffee Consumption, '000 60kg bags

Notes: f= BMI forecasts; Sources: USDA; General Statistics Office of Vietnam, BMI, FAPRI, Vietnam Coffee and Cocoa Association.

© Business Monitor International

Page 62

Vietnam Agribusiness Report Q2 2014

Commodities Price Analysis Monthly Softs Update ■

We believe softs will continue to outperform grains in 2014, as we forecast higher prices over the year for cocoa, palm oil, sugar and coffee. In comparison, we forecast lower or stable prices for grains over the coming year.

■

Dry weather in Brazil since mid-January has pushed coffee and sugar prices sharply higher, putting upside risks to our price forecasts. However, we expect both markets to remain in surplus for the 2014/15 season and believe an additional price spike is unlikely. Prices will remain highly volatile in the very near term.

■

Encouraged by a technical break higher, we initiated a bullish May 2014 LIFFE cocoa view on January 31 (currently up by 0.43%) as the market is expected to remain in a structural deficit over the medium term.

Softs Outperformance To Continue S&P GSCI Grains Index & Select Commodities Prices, Rebased

Note: July 1 2013 = 100. Source: Bloomberg, BMI

Cocoa: Turning Bullish

We have entered a bullish view on May 2014 LIFFE cocoa in our commodities strategy table, as prices have recently broken above multi-year resistance, and fundamental factors suggest the recent rally in prices has

© Business Monitor International

Page 63

Vietnam Agribusiness Report Q2 2014

further room to run over the coming weeks. We believe the market will register large deficits over the coming years as demand growth from key markets (especially Europe) improves. Moreover, supply growth is unlikely to match this expansion owing to our view that the largest growers in West Africa will face structural constraints. Prices have broken above resistance, coming in at GBP1,800/tonne, and are expected to head towards GBP1,900-2,000/tonne in the coming months.

Heading Higher Second-Month LIFFE Cocoa, GBP/tonne (monthly chart)

Sources: Bloomberg, BMI

Overall, we are forecasting LIFFE cocoa to record the largest year-on-year price increase in 2014 of all the major soft commodities (we forecast prices to average roughly 17% higher in 2014, at GBP1,850/tonne). Prices will continue to strengthen in 2015, averaging GBP2,000/tonne that year.

Coffee: Waiting On The Weather

We believe coffee prices will remain supported in the near term, as dry and hot weather in Brazil is posing clear downside risks to production in the 2014/15 season. Much of the recent rally in coffee prices has been fuelled by worries over dry weather in Minas Gerais, a key growing region in Brazil that is responsible for

© Business Monitor International

Page 64

Vietnam Agribusiness Report Q2 2014

half of all Brazilian production. The region received little rain in the days leading up to mid-February, and meteorologists expect dryness and heat to linger in the near term, posing a threat to Brazil's coffee production in 2014/15. We currently forecast Brazilian production by increase by 8% on the last Brazilian up-year (2012/13), to 54mn bags in 2014/15. While we expect supply to fall to 46mn bags (below the lowest official estimate), a 4% y-o-y decrease despite the crop being in an up-year, we still expect the global market to remain in a 4mn bag surplus, only moderately below the five-year average.

Brazilian Weather Swing Factor Front-Month ICE Coffee, USc/lb (weekly chart) & RSI (below)

Source: Bloomberg, BMI

© Business Monitor International

Page 65

Vietnam Agribusiness Report Q2 2014

The risks to our price forecasts remain firmly to the upside. Should the dry weather continue into March, we will likely revise up our medium-term coffee price forecasts. For now, we continue to see prices averaging higher in 2014 and 2015, at USc120/lb and USc130/lb respectively after bottoming at USc100/lb in 2013.

More Room To Grow Front-Month ICE Coffee, USc/lb (LHS) & Net Speculative Long Positions (RHS)

Source: Bloomberg, BMI

Cotton: China And US Behind Easing Prices In 2014

Cotton prices are likely to remain supported in the coming months, as global supply remains tight. In its latest World Supply And Demand Estimate (WASDE), the US Department of Agriculture revised down slightly its estimates for the US's ending stocks, with the country recording a 24% decline in production in 2013/14. However, prices are unlikely to soar beyond the USc88.00/lb level. In fact, the rally in prices dating from late November seems to be losing steam: there is a bearish divergence on the daily relative strength index.

© Business Monitor International

Page 66

Vietnam Agribusiness Report Q2 2014

Short-Term Tightness Second-Month ICE Cotton, USc/lb (weekly chart)

Source: Bloomberg, BMI

Prices will head lower in H214, as we expect the global market will shift into a surplus in 2014/15, which will weigh on prices. We forecast a strong rebound in production in 2014/15, as plantings will be supported by favourable cotton prices relative to corn and by a return to normal weather in major producing countries. The first planting intentions surveys in the US point at a recovery in sowings. Moreover, China will end its market-distorting stockpiling policy for the 2014/15 crop and will release at least part of its hefty stocks on the domestic market, which will lead to lower domestic prices and import demand from the country that is traditionally the largest importer and consumer. We forecast prices to average lower over 2014, at USc80.00/lb, compared with USc83.36/lb in 2013. We see upside risks to this view owing to low plantings in China, a result of farmers' uncertainty regarding the shift in government support.

Palm Oil: Near-Term Strength

We believe three-month palm oil prices are likely to remain supported in the near term, trading within the MYR2,500-2,800/tonne range. Prices broke resistance at MYR2,700/tonne owing to supply concerns and lower stocks in Malaysia, as well as a result of strong demand from India. However, we do not believe

© Business Monitor International

Page 67

Vietnam Agribusiness Report Q2 2014

prices will record a significant rally beyond that level, as the global market remains relatively well supplied. Moreover, palm oil has lost some competitiveness to alternative cooking oils, with soy oil prices still hovering around multi-year lows.

Little Gains Ahead Three-Month MDE Palm Oil, MYR/tonne (monthly chart)

Source: Bloomberg, BMI

We believe palm oil prices will ease into H214 with the start of the seasonal pickup in production. Further gains in prices following strength in H114 will be capped by lacklustre demand growth over the year amid a slowdown in China's economy and low demand from the EU. Overall, prices will rebound in 2014 and average higher for the first time in three years, at MYR2,650/tonne. Prices are likely to continue on that trajectory in 2015 and average MYR2,700/tonne as production expansion continues to slow in Indonesia and Malaysia. The global surplus is forecast to decline to 810,000 tonnes in 2014/15, compared with 1.2mn tonnes in 2013/14.

© Business Monitor International

Page 68

Vietnam Agribusiness Report Q2 2014

Strong Demand India - Total Palm Oil Imports ('000 tonnes)

Source: India's Solvent Extractors Association

Sugar: Upside Risks From Brazil

We see upside risks to sugar prices in the near term owing to the ongoing dryness in Brazil's main growing regions. According to cane industry group UNICA, the drought will have an impact on 2014/15 sugar output in the country. Should the dry weather continue into March, sugar prices could head significantly higher.

The recent rally in prices has proved less spectacular for sugar than for coffee, as other sugar suppliers boast large supplies. The Thai and Indian harvests are now in full swing, and both countries are expected to record large supplies in 2013/14. In fact, India finally approved a raw sugar export subsidy in order to boost shipments. In addition, Chinese import demand will be weak in the coming months, as the country is carrying voluminous stocks.

© Business Monitor International

Page 69

Vietnam Agribusiness Report Q2 2014

Bottoming Out Front-Month ICE Sugar, USc/lb (monthly chart)

Source: Bloomberg, BMI

We believe sugar prices have now bottomed (at the USc15.00/lb level) and will average higher in the coming years, at USc17.00/lb in 2014 and USc18.50/lb in 2015. We forecast lower global production surpluses in 2014 and 2015 (at 2.6mn tonnes both years, compared with 3.5mn tonnes in 2013).

Table: Select Commodities - Performance & BMI Forecasts

Commodity Barley

Unit Spot Price

YTD (% chg)

1 Year (% chg)

2013 Ave

YTD (ave)

2014 (BMI ave)

2015 (BMI ave)

EUR/tonne

202

-2.4

-16.2

226

203

225

230

US$/cwt

20.32

8.8

17.3

18.08

20.03

16.00

15.50

GBP/tonne

1,858

7.4

32.7

1,576

1,794

1,850

2,000

USc/lb

153

37.9

11.5

126

125

120

130

USc/bushel

449

6.3

-35.5

578

433

425

425

Cotton

USc/lb

87.6

3.5

6.6

83.4

85.8

80.0

84.0

Feeder Cattle

USc/lb

172

2.9

19.9

151

169

na

na

Lean Hogs

USc/lb

97.2

13.8

17.1

89.4

86.8

na

na

Live Cattle

USc/lb

144

6.8

13.7

126

140

na

na

Class 3 Milk Cocoa (London) Coffee Corn

© Business Monitor International

Page 70

Vietnam Agribusiness Report Q2 2014

Select Commodities - Performance & BMI Forecasts - Continued

Commodity

Unit Spot Price

Palm Oil

YTD (% chg)

1 Year (% chg)

2013 Ave

YTD (ave)

2014 (BMI ave)

2015 (BMI ave)

MYR/tonne

2,726

3.7

8.8

2,405

2,573

2,650

2,700

US$/cwt

15.81

15.4

8.2

15.47

15.55

14.00

13.70

USc/lb

40.3

3.8

-23.3

45.8

38.1

na

na

Soybean

USc/bushel

1,360

3.6

-7.5

1,407

1,308

1,300

1,250

Soymeal

US$/tonne

457

4.3

7.4

433

436

na

na

USc/lb

16.16

-1.5

-10.2

17.47

15.55

17.00

18.50

USc/bushel

612

1.1

-16.5

684

580

610

625

Rough Rice Soy Oil

Sugar #11 Wheat

Note: Performance as of February 19 2014; Source: BMI, Bloomberg

Table: BMI Commodities Strategy

Entry Entry Date Level

Gain/ (Loss)

Rationale

31-Jan-14

1,844

0.43%

Persistent market deficits on the back of improving global demand and stagnating global supply growth.

-

-

-

-

09-Jan-14

126.25

4.75%

Chinese import growth to slow, supply to improve.

AGRICULTURE Bullish May 2014 LIFFE Cocoa

ENERGY -

METALS Bearish Iron Ore (SGX third-month swap)

Note: Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg

© Business Monitor International

Page 71

Vietnam Agribusiness Report Q2 2014

Monthly Grains Update ■

Grain prices will underperform softs in the coming quarters, benefiting from relatively strong supply.

■

Dry weather in Brazil presents upside risks to our price forecasts, but we anticipate only relatively minor downgrades in supply for the ongoing 2013/14 season.

■

Wheat prices will fail to break key resistance in the short term owing to increased competition among exporters.

■

Rice prices will face increased downside pressure in the short term, as the Thai rice purchasing programme is expected to come to an end.

Corn: More Range Trading Ahead

In our December Monthly Grains Strategy, we suggested that corn prices would find support in the USc400-425/bushel area, a view that has played out as of mid-February, and we continue to expect corn to trade within a range of USc425-475/bushel in the coming months. With the northern hemisphere harvests complete, attention will focus on South America, where we see downside risks to production due to hot and dry weather in Brazil. We believe corn prices will remain in this trading range over the coming months, as we expect a significant global market surplus of more than 50mn tonnes for the 2013/14 season, well above official estimates.

© Business Monitor International

Page 72

Vietnam Agribusiness Report Q2 2014

Sideways Trade To Come Front-Month CBOT Corn, USc/bushel (weekly chart) & RSI (below)

Sources: BMI, Bloomberg

We expect only a minor increase in US corn consumption for the 2014 calendar year, and this forms the basis for our view for a significant market surplus. We forecast US corn demand to increase by only 6% year-on-year to 278mn tonnes in 2014, in line with our expectations for subdued livestock production growth and declining ethanol production. By comparison, official forecasts have US consumption growth closer to 13%. We believe eventual downgrades to official consumption forecasts will lead to a loosening of

© Business Monitor International

Page 73

Vietnam Agribusiness Report Q2 2014

the corn market and forecast prices to average slightly below current levels at USc425/bushel in 2014 and 2015.

Optimistic Estimates United States - Y-o-Y Growth In Feed Demand & Livestock Production

Note: Livestock production includes beef, pork, and broiler poultry, Source: USDA

Rice: Weakness In H214

We believe rice prices will come under increasing downside pressure over the medium term after remaining supported in the months leading up to mid-February. Prices have remained strong largely because of poor production in the US, one of the few global rice exporters and also the location of the benchmark CBOT contract. We believe prices are likely to maintain multi-month support around US$15.50/cwt until Q314, when the new Asian harvests come online. We expect a recovery in global production in 2014/15 after 2013/14's disappointing output.

© Business Monitor International

Page 74

Vietnam Agribusiness Report Q2 2014

Supported For Now Front-Month CBOT Rough Rice, US$/cwt (weekly chart) & RSI (Below)

Source: BMI, Bloomberg

We believe the end of the government-sponsored Thai rice purchasing scheme will ultimately lead to a boost in exports and put considerable downside pressure on prices. Our long-held view that the government would have no option but to scrap the scheme is finally playing out (see 'Rice Scheme Days Numbered', June 10 2013), as the programme will not be extended beyond February. The end of the programme is likely to see Thai exports (which have already started to pick up in recent months) increase.

© Business Monitor International

Page 75

Vietnam Agribusiness Report Q2 2014

This underpins our forecast for prices to average US$14.00/cwt in 2014, well below the spot price of US $15.80/cwt.

Pickup Imminent Thailand - Rice Exports ('000 tonnes)

Source: BMI, Thai Rice Exporters Association

Soybean: Short-Term Upside Limited

Like corn, we see downside risks to the Brazilian soybean crop due to dry weather, but expect prices to hold resistance around USc1,360/bushel. Brazilian soybean production has been only mildly affected by the recent heat wave in Brazil thus far, but there remain downside risks to supply as some plantings have been delayed, leading to reduced yields. Elsewhere in South America, however, supply prospects are relatively strong, particularly in Argentina (the world's third largest producer), where we forecast supply to approach record highs in 2013/14.

© Business Monitor International

Page 76

Vietnam Agribusiness Report Q2 2014

Line In The Sand Front-Month CBOT Soybean, USc/bushel (weekly chart)

Source: BMI, Bloomberg

Looking ahead, we currently forecast prices to average below spot levels (currently trading around USc1,350/bushel), mainly due to increased US plantings. After a record corn crop in 2013/14, corn prices collapsed in H213, leaving the price ratio between soybean and corn (which generally compete for acreage) significantly in soybean's favour. We therefore forecast a significant increase in US soybean production and a decline in corn production in 2014/15. Consequently, we believe the soybean market will register a large surplus in 2015, leading the stocks-to-use ratio to climb above the 10-year average in 2014 and 2015. This

© Business Monitor International

Page 77

Vietnam Agribusiness Report Q2 2014

underpins our view for lower average soybean prices of USc1,300/bushel in 2014 and USc1,250/bushel in 2015.

Key For Plantings Price Ratio: CBOT Soybean / CBOT Corn

Note: An increase in the ratio implies soybean outperformance; Source: Bloomberg, BMI

Wheat: Export Competition To Weigh On Prices

We believe benchmark CBOT wheat prices will fail to break above key resistance over the coming months, as the market remains well supplied and concerns regarding US soil conditions subside. US wheat export demand has been strong in recent months, as EU prices have remained elevated since H213, while US prices collapsed over that time. In the weeks leading up to late February, prices also were bolstered by concerns over deteriorating soil conditions due to extremely cold weather in several key US wheatgrowing states.

© Business Monitor International

Page 78

Vietnam Agribusiness Report Q2 2014

Heading To Resistance Front-Month CBOT Wheat, USc/bushel (weekly chart) & RSI (below)

Source: BMI, Bloomberg

However, we believe the concerns over soil conditions will ease, as most areas received at least moderate snow cover. Moreover, the US is likely to face increased competition for export tenders in the coming months: We expect EU prices to remain subdued, and the 2013/14 Russian export season is likely to ramp up after a long delay. The Australian wheat crop is expected to reach a record high. This is likely to prevent prices from breaking above multi-month resistance around USc640/bushel. Overall, we expect the global

© Business Monitor International

Page 79

Vietnam Agribusiness Report Q2 2014

market to return to surplus for the 2013/14 season (which ends in June 2014), and see prices averaging lower in 2014 at USc610/bushel. A smaller surplus for the 2014/15 season underpins our view that prices will average slightly higher at USc625/bushel in 2015.

Greater Competition Select Countries - Wheat Export Price (US$/tonne)

Source: Bloomberg

Table: Select Commodities - Performance & Forecasts

Unit

Spot Price

YTD (% chg)

1 Year (% chg)

2013 ave

YTD (ave)

2014 (BMI ave)

2015 (BMI ave)

EUR/tonne

205

-0.8

-14.5

226

203

225

230

US$/cwt

20.5

9.8

19.5

18.08

20.05

16.00

15.50

GBP/tonne

1,839

6.3

31.5

1,576

1,795

1,850

2,000

USc/lb

176

58.7

24.6

126

128

120

130

USc/bushel

454

7.5

-35.2

578

434

425

425

Cotton

USc/lb

86.8

2.6

5.5

83.4

85.8

80.0

84.0

Feeder Cattle

USc/lb

171

2.7

21.6

151

169

na

na

Lean Hogs

USc/lb

97.2

13.8

17.1

89.4

87.1

na

na

Commodity Barley Class 3 Milk Cocoa (London) Coffee Corn

© Business Monitor International

Page 80

Vietnam Agribusiness Report Q2 2014

Select Commodities - Performance & Forecasts - Continued

Unit

Spot Price

YTD (% chg)

1 Year (% chg)

2013 ave

YTD (ave)

2014 (BMI ave)

2015 (BMI ave)

USc/lb

144

6.9

14.9

126

141

na

na

MYR/tonne

2,747

4.5

9.5

2,405

2,578

2,650

2,700

US$/cwt

15.80

15.4

8.2

15.47

15.56

14.00

13.70

USc/lb

40.7

4.7

-21.9

45.8

38.2

na

na

Soybean

USc/bushel

1,359

3.5

-8.4

1,407

1,310

1,300

1,250

Soymeal

US$/tonne

452

3.2

4.2

433

437

na

na

USc/lb

16.44

0.2

-10.4

17.47

15.60

17.00

18.50

USc/bushel

620

2.4

-16.1

684

581

610

625

Commodity Live Cattle Palm Oil Rough Rice Soy Oil

Sugar #11 Wheat

Note: Spot prices as of February 20, 2014; Source: Bloomberg

Table: BMI Commodities Strategy

Entry Date Entry Level

Gain/(Loss)

Rationale

AGRICULTURE Bullish May 2014 LIFFE Cocoa

31-Jan-14

1844

-0.49%

Persistent market deficits due to improving global demand and stagnating global supply growth.

-

-

-

-

126.25

4.82%

Chinese import growth to slow, supply to improve.

ENERGY -

METALS Bearish Iron Ore (SGX thirdmonth swap) 09-Jan-14

Note: Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg

© Business Monitor International

Page 81

Vietnam Agribusiness Report Q2 2014

Upstream Analysis Asia GM Outlook BMI View: Although Asia is an agricultural powerhouse, the level of genetically modified (GM) crop planting in the region is low. The adoption rate of GM crops will remain slow in the coming years, as many countries are still at early stages of field trials, which usually take years to complete. That said, Asian governments are slowly but surely opening up to receive GM seeds into their food crops. This could allow seed companies to reap significant rewards in the region over the long term, both in China, which already grows GM crops, and in frontier agricultural markets such as Bangladesh, Vietnam and Indonesia.

Despite possessing about 40% of total global agriculture land and close to half of the world's total population, Asia only accounts for 10.8% of genetically modified (GM) planted area globally. Asia clearly has potential to grow GM crops, with India, China, Pakistan, Australia, the Philippines and Myanmar the main countries in Asia Pacific currently growing GM crops.

Asia Still A Minor Player Select Regions - GM Crop Plantings In 2012 (% of global)

Source: BMI, ISAAA

© Business Monitor International

Page 82

Vietnam Agribusiness Report Q2 2014

Asia's current resistance to GM seed use can be attributed to the significant negative sentiment regarding GM food crops. In India and China, the total GM area only accounted for 5.3% and 3.5% of the respective countries' total arable land as of 2011. Crops permitted by the Indian and Chinese governments for GM planting are mainly for non-consumed and peripheral crops, such as cotton and some fruits and vegetables. Furthermore, India is tightening its stance on GM dissemination. Since January 2013, the labelling on packaged food containing ingredients derived from GM crops is mandatory, and the government shows no sign of resuming the approval process for GM eggplant since it stated a moratorium in 2010. In another example, Asia's strong negative reaction to the news that GM wheat - which is not approved for sale or consumption - had been discovered in the US in June 2013 is a clear sign that many countries on the continent are still reluctant to adopt GM food crops and are ready to swiftly stop shipments should GM crops be detected.

Towards A Slow Adoption Of Diversified GM Crops?

The adoption rate of GM crops in the region will remain slow in the coming years, as many countries are still at early stages of field trials, which usually take years to complete. However, Asian governments are slowly but surely opening up to receive GM seeds into their food crops.

China has commercialised six GM plants since 1997, but almost all of these are not currently actively planted because their biosafety certificates expired and were not renewed due to the lack of a commercial market. Looking ahead, we believe that the country will have little choice but to adopt large GM plantings for various crops, specifically rice and corn. China is already recording production deficits for corn and rice, and given the lack of land and the country's appetite for meat amid rising incomes, we believe the corn deficit is likely to widen in the coming years. China has been clearing new varieties of GM corn and soybean lately, from Latin America and the US, suggesting a trend of growing acceptance towards bioengineered seeds. In July 2013, it cleared new GM soybean varieties for import from Brazil. Chinesedeveloped GM varieties of corn and rice were granted biosafety certificates in 2009 and are still in the process of seed variety registration, which typically lasts around five years. However, China's regulatory infrastructure remains a strong obstacle to the fast commercialisation of a wider range of GM crops. Inadequate protection for intellectual property rights, lack of transparency in regulation and tight control over private sector research and development deter investment in the sector.

The ongoing uncertainty over China's approval of a genetically modified corn variety widely grown in the US is an illustration of the country's cautious stance on GM. China has been rejecting corn cargoes from the US that contained seed maker Syngenta's Agrisure Viptera variety, known as MIR 162, which has been

© Business Monitor International

Page 83

Vietnam Agribusiness Report Q2 2014

awaiting Beijing's acceptance for more than two years. We believe China is enforcing its GM laws more strictly - the country has been importing this GM variety since 2011 - in order to regulate its own corn market by preventing cheap imports and further declines in domestic corn prices. We believe China is likely to resort to this type of action in the future on an ad hoc basis. Overall however, imports of GM crops will remain strong in the coming years given the country's growing dependence on imports.

Broadly Planted, When Allowed Select Countries - GM Cotton Area Harvested In 2012 (% of total)

Source: BMI, ISAAA

Other countries are currently undergoing trials, and we continue to believe countries such as Vietnam, Indonesia and Bangladesh will be the next to grant commercial distribution of GM crops. Throughout 2012, Indonesia's government took additional steps to advance and simplify its agricultural biotechnology policies, albeit at a relatively slower pace over the previous year. We expect the commercialisation of GM feed enzymes, soybean, corn and sugar cane to come first.

© Business Monitor International

Page 84

Vietnam Agribusiness Report Q2 2014

High Adoption Rate India - GM Cotton Planted By State In 2012 (% of total)

Source: BMI, ISAAA

Indonesia has launched field trials for GM corn, sugar cane and potatoes, and Vietnam is field-testing corn. Government approval is likely to come in the coming years, especially for GM corn, which Indonesia and Vietnam already import from major GM growers in North America and Latin America. The move towards GM in Vietnam progressed significantly in 2013, as the Ministry of Agriculture and Rural Development created a legal framework and has given a green light to the development of food and feed GM crops in the country. This is likely to accelerate the adoption of GM corn and rice in the country, and cultivation could finally be permitted by 2015.

© Business Monitor International

Page 85

Vietnam Agribusiness Report Q2 2014

Table: Philippines Corn Estimates

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013e

Corn production ('000 onnes)

4,430

4,900

5,050

5,884

6,231

7,277

6,853

6,231

7,271

7,130

7,200

Total area ('000 ha)

2,410

2,527

2,442

2,571

2,648

2,661

2,684

2,499

2,545

2,470

2,498

Yield (tonnes/ ha)

1.9

2.1

2.2

2.4

2.5

2.6

2.6

2.6

2.7

2.8

2.8

GM corn area ('000 ha)

10.8

59.8

50.0

127.9

313.9

347.6

327.2

542.5

685.4

na

na

0.4

2.4

2.0

5.0

11.9

13.1

12.2

21.7

26.9

na

na

GM area (% of total)

e = estimate; na = not available. Source: BMI, USDA, Philippine Bureau of Plant Industry

Oceania Reluctant To Spread GM Cultivation

GM crops in Australia can count on support from the federal government in order to expand. Currently, the only GM food crops produced in the country are canola and cotton, but a variety of other GM foods can be imported and used as an ingredient in packaged foods. However, individual Australian states are much more cautious on GM and are slowing the adoption of GM crops. Various state governments have or had strict moratoriums on the cultivation of GM crops, including New South Wales, Victoria and Western Australia. The biotech debate is very important in Australia, and the ongoing heated controversy over Tasmania's extension of its current 13-year moratorium on GM crops, which expires in 2014, highlights the stance of Australians towards GM agriculture.

Meanwhile, New Zealand has heavy regulations and a cautious policy with regards to products derived from biotechnology. A genetic engineered (GE) equine influenza vaccine is the only GE product approved for use in New Zealand and its use is limited to trials for now.

South East Asia: Philippines The Leader; Thailand Still Reluctant

The Philippines remains a regional leader regarding GM adoption, as it is the only country in Asia to plant GM corn. GM rice (a variety called Golden Rice), GM cotton, eggplant and abaca are now under various stages of research and field trials. The adoption by Filipino farmers of GM corn for propagation continues to be significant, which bodes well for the future adoption rate of other GM crops.

© Business Monitor International

Page 86

Vietnam Agribusiness Report Q2 2014

Commercialisation is likely to have a knock-on effects in the region, as it could spur other countries to become less reluctant to introduce GM crops.

Thailand is not likely to adopt GM crops in the coming years, as the government adopted in 2011 a policy that aims to keep Thai rice free of GM organisms for the period 2011-2015. The process of approving field trials for Thailand's first biotech crop corn remains stalled, mainly due to a lack of political will. However, anti-GM activist groups claim that GM papaya seeds are widely distributed among Thai farmers and are currently grown in several provinces.

Table: Select Countries - GM Crops Use In 2012

Rank*

Country

Area Of GM Crop (mn ha)

GM Crops

2

Brazil

36.6

Soybean, maize, cotton

3

Argentina

23.9

Soybean, maize, cotton

5

India

10.8

Cotton

6

China

4.0

Cotton, papaya, poplar, tomato, sweet pepper

8

Pakistan

2.8

Cotton

9

South Africa

2.3

Maize, soybean, cotton

13

Australia

0.7

Cotton, canola

12

Philippines

0.8

Maize

14

Myanmar

0.3

Cotton

* World ranking, in terms of area planted to GM crop. Source: ISAAA, BMI

© Business Monitor International

Page 87

Vietnam Agribusiness Report Q2 2014

Asia Fertiliser Outlook BMI View: We believe Asia will remain the world's largest consumer of all three fertiliser types, as we expect the continent's agricultural production to increase in the coming years. The next challenge for farmers will be soaring input costs and fertiliser efficiency. China and India are looking to diversify potash procurement away from the Cantopex 'cartel' in favour of domestic and independent producers.

Fertiliser use in Asia has soared in recent years, especially in India, Pakistan and Malaysia, fuelled by growth in food consumption and governmental support via generous subsidies, especially in South Asian countries. China and India are the world's largest consumers of fertilisers. Overall, we expect the consumption of fertilisers in the region to grow rapidly, driven by rising rural incomes, greater availability of farm credit, contract farming and public/private awareness campaigns. Consequently, the region will remain reliant on imports of these nutrients.

Mainly Grains Select Countries - Use Of Fertilisers By Crop, 2008 (% of total)

Source: BMI, FAO

However, the region's dependence on imports of nitrogen might slowly decline and if planned facilities are commissioned in time, according to the UN Food and Agriculture Organization (FAO). In fact, many countries in the region, namely Brunei, Indonesia, Malaysia, Myanmar, the Philippines and Thailand, have large proven natural gas resources, which are needed for urea production.

© Business Monitor International

Page 88

Vietnam Agribusiness Report Q2 2014

Strong Demand Growth Select Regions - Fertiliser Demand Growth (% chg 2011-2015)

Source: BMI, FAO

Further Fertiliser Demand Growth In Asia In 2014/15

After a disappointing year for global and Asian fertiliser demand in 2012/13, consumption is expected to rebound in 2013/14, mainly driven by the recovery in demand in Asia. Although agricultural commodity prices are currently at relatively low levels, they will remain attractive and stimulate fertiliser application, as fertiliser prices are at multi-year lows. The International Fertilizer Industry Association (IFA) forecasts global demand to rise by 2.0% year-on-year (y-o-y) to 179.5mn tonnes nutrients, with potash recording the largest increase (2.6% y-o-y increase, to 28.7mn tonnes nutrients). Global demand for nitrogen and phosphate is expected to grow by 1.8% y-o-y to 109.6mn and 41.1mn tonnes respectively in 2013/14.

© Business Monitor International

Page 89

Vietnam Agribusiness Report Q2 2014

Asia-Driven Demand Global - Fertiliser Demand Variation (in mn tonnes nutrients per year)

Source: IFA

Asia is leading the rebound in demand this season, and India is likely to outperform the other major consumers of fertilisers in 2013/14 owing to a favourable monsoon, growth in crop production and elevated domestic commodities prices. The rebound in fertiliser demand will be mainly led by nitrogen consumption, as demand for phosphate and potash will be held back by the sustained reduction in subsidies for those nutrients. In particular, India's government reduced fertiliser subsidies by 20% in 2012/13 and 18% in 2013/14 in an effort to shore up its growing fiscal deficit. Given the projected headwinds for India's economy in the coming years, the government is unlikely to re-establish the subsidies. A new change or reduction in the subsidy policy is unlikely to occur before upcoming parliamentary elections in April-May 2014.

© Business Monitor International

Page 90

Vietnam Agribusiness Report Q2 2014

Low Fertiliser Prices Favour Application LHC: Urea Prilled Black Sea/India Basmati Rice In Delhi Price Ratio; RHC: Urea Prilled Black Sea/ China Rice Price Ratio

Note: An increase in the ratio suggests fertiliser prices are outperforming rice prices. Source: Bloomberg, BMI

China is expected to maintain its fairly strong fertiliser demand growth in 2013/14. We expect strong production growth in 2013/14 across various major crops in the country, which will encourage fertiliser consumption. Domestic grains and oilseeds prices are resilient despite the sharp drop in international quotes, which will push farmers to optimise plantings and application density in order to reap the maximum benefits from those prices.

Table: Global Benchmark Fertiliser Prices (US$/tonne FOB, reported prices at the end of quarter)

Q411 Q112

Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Ytd

Urea Prilled (Black Sea)

460

410

450

390

380

385

320

310

310

360

Urea Granular (Middle East)

425

460

460

415

410

410

330

320

375

410

DAP (US Gulf Export)

600

517

570

570

502

510

481

380

370

475

MOP (Granular Potash, Vancouver)

460

520

520

520

520

425

425

425

425

295

Source: Bloomberg

Looking at the 2014/15 season, the IFA forecasts global fertiliser demand to grow for a second consecutive year, by 2.7% y-o-y to 184.3mn tonnes, with potash consumption recording the strongest growth again.

© Business Monitor International

Page 91

Vietnam Agribusiness Report Q2 2014

Asia is likely to remain a key driver of demand growth. In India and China, fertiliser prices relative to grains prices remain attractive (see chart above). China's demand will continue to be favoured by the sustained increase in fertiliser subsidies and grains procurement prices.

Growing Imports Select Countries - Fertiliser Production Balance ('000 tonnes nutrients)

Source: IFA, BMI

Strongest Long-Term Demand Growth In China And India

Over the longer term, China and India are forecast to record the strongest demand growth for potash and nitrogen, according to the IFA and FAO. Our view that agricultural production expansion will be robust in these two countries is in line with this optimistic outlook. India will account for the largest share of the world's consumption increase between 2011/12 and 2015/16: around 30% for the two fertilisers. China is expected to account for 7% and 18% respectively of the increase in demand for nitrogen and potash respectively, according to the IFA and FAO. Brazil, Indonesia and Russia will also account for a large amount of future demand.

© Business Monitor International

Page 92

Vietnam Agribusiness Report Q2 2014

Low Asian Production Select Countries - Potash Production ('000 tonnes nutrients, LHS) & Reserves (mn tonnes nutrients, RHS)

Source: BMI, US Geological Survey

India's Pesticide Boom Past Its Peak

The July 2013 fatal poisoning of 23 children in Bihar, India - the result of contaminated school lunches has highlighted the significant safety concerns linked to pesticide use in the country. High usage rates mean the marginal benefit of increased pesticide and fertislier use in India is falling, and the profit boom for the pesticide industry is likely to be behind us. Most companies operating in the sector also have a strong presence in the fertiliser market, and we expect fertiliser sales growth to pick up at the expense of pesticides, which will help to keep margins in the sector stable in the coming years. Operating margins for the two largest fertiliser and pesticide companies (Godrej Industries and Deepak) have been trending lower in recent years (see 'Pesticide Boom Largely Behind Us', August 12 2013).

Diversifying Production And Procurement To Avoid Cantopex

China and India are looking to diversify potash procurement away from the Cantopex group in favour of domestic and independent producers that can offer more flexible terms and better prices. Both countries are

© Business Monitor International

Page 93

Vietnam Agribusiness Report Q2 2014

increasingly looking to develop their domestic fertiliser industries and to make acquisitions overseas. In China, because the country is the world's largest consumer of potash and produced only 39.2% of annual demand in 2010 (China is self-sufficient in nitrogen), it is still very reliant on imports, especially from North America. Recently, Chinese companies have signed various agreements to source potash from independent producers. Chinese investors are also backing potash projects in the nascent producing country of Laos.

© Business Monitor International

Page 94

Vietnam Agribusiness Report Q2 2014

Downstream Analysis Drink Alcoholic Drinks ■

2014 alcoholic drinks volume sales growth: +5.9%; compound annual growth rate (CAGR) 2014 to 2018: +4.5%.

■

2014 alcoholic drinks value (local currency) sales growth: +12.0%; CAGR to 2018: +8.7%.

■

2014 beer value (local currency) sales growth: +12.0%; CAGR to 2018: +8.7%.

■

2014 spirits value (local currency) sales growth: +11.0%; CAGR to 2018: +8.8%.

Alcoholic Drinks Sales 2011-2018

150M

0

100M 2018f

1,000

2017f

200M

2016f

2,000

2015f

250M

2014f

3,000

2013e

300M

2012e

4,000

Alcoholic Drinks Sales (mn litres) (LHS) Alcoholic drink sales, VNDmn (RHS)

e/f = BMI estimate/forecast. Source: General Statistics Office, Company information, BMI

In line with improved economic prospects and increasing domestic demand we maintain a very strong outlook for Vietnam's drinks industry. As it benefits from foreign investments and rising tourist arrivals, beer will continue to dominate the alcoholic drinks segment, and demonstrate a compound annual growth rate of 12% in local currency terms between 2014 and 2018.

© Business Monitor International

Page 95

Vietnam Agribusiness Report Q2 2014

Generally speaking, favourable demographic shifts, rising affluence, strong economic growth and a fastgrowing tourist industry imply massive scope for alcoholic drinks consumption, with beer, in particular, set to benefit. We expect premiumisation to pick up momentum in the Vietnamese alcoholic drinks sector, and for value sales growth to outpace that of volume sales over our forecast period to 2018. The emergence of a thriving tourist industry in Vietnam is also likely to bolster alcoholic drinks consumption given that tourists typically have a greater penchant for higher-value consumer products.

Beer will continue to dominate the alcoholic drinks sector, accounting for the vast majority of volume sales, and will thus also remain the main contributor to value sales. This is due to the strong interest the beer sector has been attracting from both local and international brewers, with volume sales expected to experience real growth of 24.9% to 2018. We also expect foreign brewers to take on a more prominent role in driving beer sales growth in Vietnam as they seek to enter emerging markets. As foreign brewers strengthen their competitive position, and as the local giants Habeco and Sabeco extend their presence beyond their regional strongholds, sector dynamism will intensify rapidly.

APB's recent investment in the Vietnamese beer industry is a strong testament to the sector's potential. APB will invest SGD90mn in expanding production at its Ho Chi Minh brewing joint venture by 50%. The company will increase output at the facility, which is a 60:40 joint venture(JV) with Saigon Trading, to 2.8mn hectolitres a year; it will also add a second canning facility and expand its warehouse space.

Similarly, Japanese brewer Sapporo has announced that it intends to increase its beer production in Vietnam fivefold in the period up to 2019. The company expects to produce 200,000 kilolitres of beer in the country by 2019, from its projected 40,000 kilolitres in 2014.

Additionally, Japanese brewer Asahi Group Holdings has announced that it intends to extend its operations across Asia through a series of acquisitions. Asahi President Naoki Izumiya said that the company had already identified viable targets in Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

Volume sales growth in the wine and spirits industries are also expected to be robust over our forecast period to 2018, albeit developing from much lower bases. Both are fairly immature industries, having been held back by an absence of multinational investment and by their relatively higher price tags. However, prolific wealth accrual among Vietnamese consumers is fuelling shifts in consumption habits towards higher-value alcoholic drink products, and this trend is particularly evident in the urban centres such as Ho Chi Minh City, Hanoi and Danang.

© Business Monitor International

Page 96

Vietnam Agribusiness Report Q2 2014

Exposure to Western cultures is also driving the local demand for spirits and wines. The biggest consumers of wine and spirits in Vietnam used to be Western expatriates and tourists, but local consumers are developing a strong appetite for these products in line with their rapidly growing affluence. The spread of organised retail in the country acts as another impetus behind spirits and wine sales, facilitating consumer reach to a greater variety of brands in supermarkets, hypermarkets and local wine stores.

Looking ahead, investments in the Vietnamese spirits and wine sub-sectors are expected to intensify as an increasing number of investors recognise the higher margin growth opportunities on offer in these subsectors, and this is likely to instil further dynamism to drive volume sales.

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

2,270.67

2,381.68

2,471.72

2,617.80

2,768.31

2,925.33

3,091.37

3,265.46

Alcoholic drinks sales, litres, % change yo-y

7.73

4.89

3.78

5.91

5.75

5.67

5.68

5.63

Alcoholic drinks sales, litres per capita

25.25

26.23

26.96

28.29

29.64

31.06

32.55

34.12

Alcoholic drinks sales, litres mn

Alcoholic drinks sales, VNDmn Alcoholic drinks sales, VND, % change yo-y

134,781,991 154,419,478 170,811,147 191,317,021 212,947,900 236,294,061 261,948,642 290,265,180

27.72

14.57

10.62

12.00

11.31

10.96

10.86

10.81

Alcoholic drinks sales, VND per capita

1,499,010

1,700,734

1,863,128

2,067,220

2,280,282

2,508,668

2,758,466

3,033,182

Alcoholic drinks sales, US $mn

6,524.86

7,398.00

8,172.78

9,303.04

10,474.56

11,689.05

13,097.43

14,659.86

Alcoholic drinks sales, US

%$18.23

13.38

10.47

13.83

12.59

11.59

12.05

11.93

© Business Monitor International

Page 97

Vietnam Agribusiness Report Q2 2014

Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 - Continued

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

72.57

81.48

89.14

100.52

112.16

124.10

137.92

153.19

2,251.49

2,362.01

2,451.32

2,596.22

2,745.30

2,900.79

3,065.22

3,237.59

Beer sales, litres, % change yo-y

7.79

4.91

3.78

5.91

5.74

5.66

5.67

5.62

Beer sales, litres per capita

25.04

26.01

26.74

28.05

29.40

30.80

32.28

33.83

change yo-y Alcoholic drinks sales, US $ per capita

Beer sales, litres mn

Beer sales, VNDmn Beer sales, VND, % change yo-y

131,710,794 150,984,783 167,035,324 187,108,141 208,239,672 231,035,226 256,093,902 283,750,064

27.92

14.63

10.63

12.02

11.29

10.95

10.85

10.80

Beer sales, VND per capita

1,464,853

1,662,905

1,821,943

2,021,742

2,229,866

2,452,836

2,696,812

2,965,101

Beer sales US $mn

6,376.18

7,233.45

7,992.12

9,098.38

10,242.97

11,428.90

12,804.70

14,330.81

Beer sales, US $, % change yo-y

18.41

13.44

10.49

13.84

12.58

11.58

12.04

11.92

Beer sales, US $ per capita

70.91

79.67

87.17

98.31

109.68

121.34

134.84

149.75

Wine sales, VNDmn

318,351.0

362,737.5

419,163.7

481,496.9

551,566.8

631,799.5

724,875.4

834,044.9

Wine sales, VND, %

28.22

13.94

15.56

14.87

14.55

14.55

14.73

15.06

© Business Monitor International

Page 98

Vietnam Agribusiness Report Q2 2014

Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 - Continued

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

3,540.62

3,995.09

4,572.04

5,202.67

5,906.27

6,707.64

7,633.35

8,715.51

Wine sales, US $mn

15.41

17.38

20.06

23.41

27.13

31.25

36.24

42.12

Wine sales, US $, % change yo-y

18.69

12.76

15.41

16.74

15.88

15.20

15.97

16.22

Wine sales, US $ per capita

0.17

0.19

0.22

0.25

0.29

0.33

0.38

0.44

Spirits sales, litres mn

15.30

15.62

16.01

16.81

17.81

18.88

19.96

21.07

Spirits sales, litres, % change yo-y

0.06

2.13

2.50

4.99

5.95

6.02

5.69

5.57

Spirits sales, litres per capita

0.17

0.17

0.17

0.18

0.19

0.20

0.21

0.22

2,752,846

3,071,958

3,356,659

3,727,382

4,156,660

4,627,035

5,129,864

5,681,070

18.75

11.59

9.27

11.04

11.52

11.32

10.87

10.75

30,616.46

33,833.71

36,612.88

40,275.14

44,510.23

49,123.95

54,020.36

59,365.45

Spirits sales, US $mn

133.27

147.17

160.61

181.25

204.46

228.89

256.49

286.92

Spirits sales, US $, % change yo-y

9.92

10.43

9.13

12.85

12.81

11.95

12.06

11.86

Spirits sales, US

1.48

1.62

1.75

1.96

2.19

2.43

2.70

3.00

change yo-y Wine sales, VND per capita

Spirits sales, VNDmn Spirits sales, VND, % change yo-y Spirits sales, VND per capita

© Business Monitor International

Page 99

Vietnam Agribusiness Report Q2 2014

Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 - Continued

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

$ per capita

e/f = BMI estimate/forecast. Source: General Statistics Office, company information, trade press, BMI

Hot Drinks ■

2014 coffee value (local currency) sales growth: +13.0%; CAGR to 2018: +9.5%.

■

2014 tea value (local currency) sales growth: +11.3%; CAGR to 2018: +8.8%.

Hot Drinks 2011-2018

50M 40M

25M

2018f

2017f

2016f

2015f

2014f

2012

2011

0M

2013e

20M

Coffee sales, VNDmn (LHS) Tea sales, VNDmn (RHS)

e/f = BMI estimate/forecast. Source: UN Industrial Commodity Statistics Database, UN Comtrade, BMI

Vietnam's sturdy economic growth over the next few years will continue to fuel demand for higher value food and beverage products such as coffee. Vietnam's massive youth population, for whom visiting cafés and drinking coffee is a growing lifestyle choice, is another major positive factor. As this group of young, aspirant consumers enters the workforce, the accordant rise in incomes will serve to further buoy the

© Business Monitor International

Page 100

Vietnam Agribusiness Report Q2 2014

demand for higher-value coffee products. The tea sector is also set to experience strong growth over our five-year forecast period, buoyed by rising incomes and increasing domestic demand.

These dynamics will continue to attract the sights of multinational coffee producers, in turn imbuing the sector with greater dynamism over our forecast period. As a case in point, Masan Consumer in 2011 acquired a 50.1% stake, valued at around VND1.07trn (US$51mn), in Vietnamese coffee producer Vinacafe Bien Hoa Joint-Stock Company. By acquiring a controlling stake in Vinacafe, Masan clearly was looking to put itself in a strong position to leverage on the exciting demand dynamics in the Vietnamese coffee sector.

Also looking to capitalise on Vietnam's coffee potential, Nestlé plans to increase its coffee sourcing from local farmers in Vietnam, and in 2011 committed to a new coffee factory in the country. The US$270mn factory was to be constructed in the south east province of Dong Nai and was to produce Nescafé-branded products for the domestic and international markets from 2013.

Philippine food major Jollibee Foods Corporation announced in early 2012 that it was to acquire a 50% interest in SuperFoods Group, which will give it a 49% stake in SF Vung Tau Joint Stock Company in Vietnam and a 60% share in Blue Sky Holdings in Hong Kong. The acquisition of a majority interest in the SuperFoods Group could expedite Jollibee's international push, given the former's reach across the coffee markets of Macau, Hong Kong and Vietnam.

In early 2013, US coffee chain Starbucks announced that it would debut in Vietnam's capital, Ho Chi Minh City, in February 2014 as it continues to develop its Asia Pacific business, where it has seen great success over the past few years.

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018

2011 Coffee sales, VNDmn Coffee sales,VND, % change y-o-y Coffee sales,VND per capita Coffee sales, US $mn Coffee sales, US$, % change y-o-y

2012

2013e

2014f

2015f

2016f

2017f

2018f

17,170,322 19,922,371 22,765,944 25,714,239 29,012,709 32,647,042 36,427,915 40,559,652 29.27

16.03

14.27

12.95

12.83

12.53

11.58

11.34

190,963.93 219,419.59 248,320.38 277,847.71 310,673.05 346,604.59 383,606.46 423,835.95 831.22

954.45

1,089.28

1,250.39

1,427.09

1,614.99

1,821.40

2,048.47

19.66

14.82

14.13

14.79

14.13

13.17

12.78

12.47

© Business Monitor International

Page 101

Vietnam Agribusiness Report Q2 2014

Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 - Continued

Coffee sales, US$ per capita

Tea sales, VNDmn Tea sales, VND, % change y-o-y

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

9.24

10.51

11.88

13.51

15.28

17.15

19.18

21.41

18,710,475 21,115,334 23,508,113 26,160,602 29,111,494 33,047,389 35,514,716 39,940,374 25.41

12.85

11.33

11.28

11.28

13.52

7.47

12.46

Tea sales, VND per capita 208,093.12 232,558.57 256,415.61 282,670.76 311,730.86 350,854.97 373,989.96 417,364.68 Tea sales, US$mn

905.78

1,011.60

1,124.79

1,272.09

1,431.95

1,634.80

1,775.74

2,017.19

Tea sales US$ % change y-o-y

16.09

11.68

11.19

13.10

12.57

14.17

8.62

13.60

Tea sales US$ per capita

10.07

11.14

12.27

13.75

15.33

17.36

18.70

21.08

e/f = BMI estimate/forecast. Source: General Statistics Office, company information, trade press, BMI

Soft Drinks ■

2014 soft drinks value (local currency) sales growth: +10.5%; CAGR to 2018: +7.5%.

■

2014 carbonated soft drinks value (local currency) sales growth: +12.7%; CAGR to 2018: +9.6%.

© Business Monitor International

Page 102

Vietnam Agribusiness Report Q2 2014

Soft Drinks 2011-2018 4,000

125M

100M 2,000

2018f

2017f

2016f

2015f

50M 2014f

2012

2011

0

2013e

75M

Soft drink sales (mn litres) (LHS) Soft drink sales, VNDmn (RHS)

e/f = BMI estimate/forecast. Source: Company information, Trade press, BMI

We are witnessing a rapid emergence of competition in the Vietnamese soft drinks market. The opportunities provided by an emerging middle class in Vietnam are firmly within the sights of domestic drinks producers such as PepsiCo Vietnam, Tan Hiep Phat and Coca-Cola Beverages Vietnam, and the companies' aggressive initiatives in terms of product innovation, portfolio expansion and advertising will only instil greater dynamism into the sector.

The maturation of a massive youth population and rising consumer affluence are translating into a burgeoning appetite for soft drinks. As consumers move up the income ladder over the coming years, an accelerating premiumisation momentum in the sector means that value sales are expected to increase more dynamically over our forecast period.

An intensifying influx of sector investments will provide another major impetus to drive industry growth. In particular, we expect domestic soft drinks manufacturers to ramp up their initiatives in terms of product innovation, portfolio expansion and marketing. In terms of portfolio expansion, local soft drink manufacturers are gradually calibrating their portfolio towards healthier and functional beverages such as fruit juices and ready-to-drink teas, as they look to tap into a growing health awareness trend in the country.

© Business Monitor International

Page 103

Vietnam Agribusiness Report Q2 2014

Reflecting a shift of consumer preferences towards healthier beverages, PepsiCo Vietnam and Coca-Cola Beverages Vietnam have been losing market share in recent years due to declining sales of carbonates, according to anecdotal reports. However, with the health awareness trend expected to remain well entrenched over the coming years, we expect more domestic soft drinks manufacturers such as PepsiCo Vietnam and Coca-Cola Beverages Vietnam to expand their non-carbonates offerings. As a case in point, Big C recently introduced its private label fruit juice range Casino Bio to cater to the burgeoning domestic demand for health and functional beverages.

As competition intensifies in the Vietnamese soft drinks market, domestic producers are also looking to differentiate themselves through branding and marketing initiatives. Coca-Cola Beverages Vietnam and Tan Hiep Phat have executed some of the biggest advertising campaigns in Vietnam through various formats such as print advertisements, television and the internet. These initiatives have not only bolstered consumer awareness of the different soft drinks brands but have also encouraged greater soft drinks consumption in the country.

Moreover, domestic soft drinks manufacturers will continue to engage in product innovation by offering different bottle formats and sizes in an attempt to cater to the varying consumer tastes and preferences. For instance, Coca-Cola Beverages Vietnam and PepsiCo Vietnam produce their soft drinks in varying sizes, and this has facilitated their reach to the end-consumer market. As more companies hop on the product innovation bandwagon, this will bring about greater dynamism in the sector and further fuel sales growth.

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Soft drink sales, litres mn

1820.11

1937.14

2044.14

2208.74

2382.40

2569.98

2755.33

2969.08

Soft drink sales, litres, % change y-o-y

7.41

6.43

5.52

8.05

7.86

7.87

7.21

7.76

Soft drink sales, litres per capita

20.24

21.34

22.30

23.87

25.51

27.28

29.02

31.03

58,936,203

68,557,713

75,572,321

83,484,322

91,207,122

21.69

16.33

10.23

10.47

9.25

Soft drink sales VNDmn Soft drink sales, VND, % change y-o-y

© Business Monitor International

99,566,244 109,131,706 119,924,341

9.16

9.61

9.89

Page 104

Vietnam Agribusiness Report Q2 2014

Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 - Continued

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Soft drink sales, VND per capita

663,755.8

855,353.4

Soft drink sales, US $mn

2,853.13

3,284.50

3,615.90

4,059.53

4,486.33

4,925.36

5,456.59

6,056.78

Soft drink sales, US$, % change y-o-y

12.65

15.12

10.09

12.27

10.51

9.79

10.79

11.00

Soft drink sales, US$ per capita

31.73

36.17

39.44

43.86

48.04

52.29

57.46

63.29

Carbonated soft drink sales, VNDmn

8,959,932

10,240,965

11,567,863

13,041,047

14,690,702

16,522,106

18,461,358

20,603,242

Carbonated soft drink sales, VND, % change y-o-y

27.69

14.30

12.96

12.74

12.65

12.47

11.74

11.60

Carbonated soft drink sales, VND per capita

99,650.07

112,791.22

126,176.90

140,911.24

157,310.55

175,410.62

194,408.50

215,297.58

Carbonated soft drink sales, US $mn

433.75

490.63

553.49

634.14

722.61

817.32

923.07

1,040.57

Carbonated soft drink sales, US$, % change y-o-y

18.20

13.11

12.81

14.57

13.95

13.11

12.94

12.73

Carbonated soft drink sales, US$ per capita

4.82

5.40

6.04

6.85

7.74

8.68

9.72

10.87

964,814.4 1,137,581.1 1,302,407.9 1,302,408.9 1,302,409.9 1,302,410.9

e/f = BMI estimate/forecast. Source: Company information, trade press, BMI

© Business Monitor International

Page 105

Vietnam Agribusiness Report Q2 2014

Mass Grocery Retail ■

2014 MGR sales (local currency) growth: +13.3%; compound annual growth rate (CAGR) 2014 to 2018: +9.9%.

■

2014 supermarket sales (local currency) growth: +13.9%; CAGR to 2018: +10.2%.

■

2014 hypermarket sales (local currency) growth: +13.7%; CAGR to 2018: +10.1%.

■

2014 convenience store sales (local currency) growth: +10.3%; CAGR to 2018: +8.3%.

Reflecting the long-term potential of the Vietnamese mass grocery retail (MGR) sector, we forecast real growth of 60.0% for overall MGR sales in local currency terms between 2014 and 2018. This growth forecast makes Vietnam one of the most attractive propositions in the Asia Pacific region. Owing to the higher profitability per store for supermarkets and hypermarkets, these formats will continue to garner the bulk of investment attention. Vietnamese consumers are most familiar with the standard supermarket format, and are increasingly showing a penchant for hypermarkets owing to their popular combination of food and non-food items.

We estimate Vietnam's MGR sales grew by 10.9% in 2013, slowing from growth in 2011 and 2012. The slowdown in 2013 can be attributed to the global headwinds of a potential hard landing in China, economic uncertainties in the US and sovereign debt concerns in the eurozone, which all weighed on consumer confidence that was already dented by rising unemployment in the manufacturing sector. However, we expect stronger growth to return this year, with us forecasting 13.3% in 2014.

Retail Fundamentals Remain Strong In Longer Term

Favourable demographics and robust economic growth largely underpin our optimism regarding the Vietnamese MGR growth story. According to our estimates, Vietnam's population is roughly 90mn and is forecast to grow over the forecast period to 2022. More importantly, Vietnam has a youthful demographic profile, implying attractive opportunities in the mass market.

Vietnam's rapid economic development also is likely to assist the emergence of a new consumer class - in major urban centres at least - that has an interest, and can afford to participate, in modern consumption methods such as mass grocery retailing. GDP per capita in Vietnam is forecast to more than double over our 10-year forecast period. This rise in purchasing power will only trigger a swathe of consumer spending across the country's retail scene.

© Business Monitor International

Page 106

Vietnam Agribusiness Report Q2 2014

Vietnam Unlikely To Reach Full Retail Potential In Near Term

Although Vietnam is equipped with the aforementioned elements that are necessary to support strong growth in mass grocery retailing, the country is unlikely to reach the full potential of its retail growth story in the near future. Organised retail accounts for only 15% of overall grocery sales in Vietnam, highlighting the prevalence of mom-and-pop shops. The relative immaturity of the Vietnamese MGR sector can be partly attributed to the country's restrictive business climate. Vietnam remains a risky place to do business, with the lack of transparency of laws and regulations, as well as restrictions on foreign investment, deterring less-hardy retailers from setting up shop in the country. The lack of an established transport infrastructure further complicates distribution efforts for MGR operators.

Foreign Interest Picking Up

Despite the challenges, foreign interest in the Vietnamese MGR sector will very probably continue to grow steadily over the coming years given the sector's hugely untapped potential. We believe that the bulk of multinational investment in the near future is likely to come from bigger retail names such as Aeon and Groupe Casino, which are eager to expand their emerging market footprint and have the financial capacity to deploy the necessary distribution infrastructure in the sector. After receiving the regulatory permit from the Vietnamese government, Japanese retailer Aeon plans to develop around 20 retail and trade centres nationwide by 2020, which will house both local and foreign MGR operators.

Interest from less-hardy foreign investors will also pick up, in our view, although such investment will largely take the form of joint ventures as foreign retailers leverage on the local market expertise and financial strength of their local counterparts. As a case in point, South Korean MGR player E-Mart recently reached an agreement with U&I Investment Corporation, to establish a joint venture (JV) in Vietnam with the aim of setting up retail stores in the country. Similarly, Singapore MGR operator NTUC FairPrice and Vietnam's Saigon Union of Trading Co-operatives are looking to establish a chain of hypermarkets in Vietnam through their local JV.

The latest multinational reported to be entering the market, as of summer 2013, is French retailer Auchan which, according to local sources, is set to inject US$500mn in the next decade.

© Business Monitor International

Page 107

Vietnam Agribusiness Report Q2 2014

Supermarket And Hypermarket Sectors The Outperformers

While the supermarket and hypermarket sub-sectors will feature most prominently on investors' radars, the convenience retail sector can be expected to increasingly attract interest from retailers. Accordingly, the demand for convenience with the pay-off of higher prices is not yet on the agenda for most consumers. However, with purchasing power on the rise, this will bring the concept of convenience retailing more within reach of the average consumer.

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 in the market to unattractive levels. The risk for retailers is that as soon as the country's major cities start to become saturated with business opportunities, few other communities exist that can currently support modern retail development. 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. However, this point is still a long way off. Retailers will invest in Vietnam in line with their own need to expand, confident of the country's economic development and growing consumer base.

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018

2012

2013e

Supermarkets (VNDbn)

65,373.55

73,643.31

82,028.05

93,457.02 106,475.86 120,406.89 135,536.54 151,791.74

Hypermarkets (VNDbn)

26,270.31

29,714.35

33,253.78

37,806.08

42,771.37

48,227.53

54,275.67

61,023.41

Convenience Stores (VNDbn)

19,828.26

21,664.35

23,301.52

25,705.44

28,409.65

31,389.82

34,673.20

38,289.61

Total mass grocery retail sector (VNDbn)

2014f

2015f

2016f

2017f

2018f

2011

111,472.12 125,022.01 138,583.35 156,968.54 177,656.88 200,024.24 224,485.41 251,104.76

Total mass grocery retail sector growth, VND, (y-o-y)

13.9

12.16

10.85

13.27

13.18

12.59

12.23

11.86

Supermarkets (US $bn)

3.16

3.53

3.92

4.54

5.24

5.96

6.78

7.67

Hypermarkets (US$bn)

1.27

1.42

1.59

1.84

2.10

2.39

2.71

3.08

Convenience Stores (US$bn)

0.96

1.04

1.11

1.25

1.40

1.55

1.73

1.93

© Business Monitor International

Page 108

Vietnam Agribusiness Report Q2 2014

Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 - Continued

Total mass grocery retail sector (US$bn)

5.40

5.99

6.63

7.63

8.74

9.89

11.22

12.68

e/f= BMI estimate/forecast. Source: Company information, Trade press, BMI

Table: Grocery Retail Sales By Format (%)

2012e

2022f

Organised/MGR

15

28

Non-organised/Independent

85

72

e/f= estimate/forecast. Source: BMI

© Business Monitor International

Page 109

Vietnam Agribusiness Report Q2 2014

Food Food Consumption ■

2014 total food consumption (local currency) growth: +19.2%; compound annual growth rate (CAGR) 2014 to 2018: +15.5%.

■

2014 per capita food consumption (local currency) growth: +18.1%; CAGR to 2018: +14.7%.

Food Consumption 2011-2018 1,500,000

15M

1,000,000

10M

2018f

2017f

2016f

2015f

2014f

0M

2013e

0 2012

5M

2011

500,000

Food consumption VNDbn (LHS) Food consumption, VND per capita (RHS)

e/f = BMI estimate/forecast. Source: General Statistics Office, BMI

Improvements in Vietnam's macroeconomic fundamentals suggest that its food sector will remain one of the most attractive investment opportunities in the region over the forecast period. Between 2014 and 2018 food consumption is projected to expand at a thoroughly impressive compound annual growth rate of 15.5%, posting an impressive 105.1% overall increase in local currency terms. An attractive demographic profile, rapid urbanisation and rapid expansion of country's mass grocery retail sector will fuel this growth over the longer term.

Currently, income levels in Vietnam are a long way behind those enjoyed in developed economies, and consumer purchases remain largely centred on food staples and daily necessities. However, as incomes start

© Business Monitor International

Page 110

Vietnam Agribusiness Report Q2 2014

to accelerate off a low base on the back of sturdy economic growth, consumer tastes and preferences are expected to calibrate towards the higher-value food and beverage segments, which will be very likely to guarantee a receptive and growing audience for branded food and beverage products in the medium term.

The massive potential provided by the burgeoning middle class in Vietnam is already attracting the sights of major consumer-facing players in the country. Private equity firm Kohlberg Kravis Roberts & Co (KKR), in early 2011, acquired a 10% stake in Masan Consumer, the largest producer of condiments including fish, soy and chilli sauce and the second biggest producer of instant noodles in Vietnam. This underlines its confidence in the opportunities available in the mass-market segment. In early 2013, KKR doubled its investment in Masan.

In particular, we expect functional food products to garner stronger appeal among Vietnamese consumers over the coming years. Given the nutritional health benefits of functional foods, these products have witnessed strong demand in Vietnam over the past few years in line with a growing shift towards health awareness. In 2000, the functional food market comprised only a dozen imported functional food products. By 2005-2006, domestically produced functional foods accounted for 33% of the entire food market, and in 2008 this figure had doubled, underlining the burgeoning demand for functional food products.

The ongoing expansion of the mass grocery retail 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.

© Business Monitor International

Page 111

Vietnam Agribusiness Report Q2 2014

Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018

2011

2012

2013e

2014f

2015f

396,467.8

441,791.9

504,206.3

601,208.9

725,087.1

11.19

11.43

14.13

19.24

20.60

4,409,413

4,865,776

5,499,648

6,496,188

7,764,357

Food consumption per capita, VND, % chg yo-y

10.12

10.35

13.03

18.12

19.52

19.00

18.26

17.91

Food consumption (US$bn)

19.19

21.17

24.12

29.23

35.67

43.05

51.88

62.27

Food consumption, US$, % change y-o-y

2.92

10.28

13.98

21.18

22.00

20.70

20.50

20.02

Food consumption per capita (US $)

213.46

233.11

263.14

315.89

381.92

457.05

546.29

650.65

Food consumption (VNDbn) Food consumption, VND, % chg yo-y Food consumption per capita (VND)

2016f

2017f

2018f

870,250.0 1,037,539.7 1,232,851.5

20.02

19.22

18.82

9,239,203 10,925,877 12,882,920

e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI

© Business Monitor International

Page 112

Vietnam Agribusiness Report Q2 2014

Canned Food ■

2014 canned food value sales (local currency) growth: +10.7%; CAGR to 2018: +7.4%.

Canned food sales are forecast to experience strong growth in Vietnam, in line with increasing urbanisation and growing affluence among consumers. Between 2014 and 2018 we forecast volume growth of 23.4%, and value growth of 42.8%. Indeed, demand for higher-value products such as canned foods is expected to pick up on the back of rising disposable incomes.

Vietnamese consumers are experiencing a growing awareness of hygiene concerns and food origin as their living standards improve and as numerous health scares lead to increased caution. This will further encourage consumers to purchase processed foods over fresh produce, and strong investment in this sector from both domestic and international operators will be very likely to 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, with major retailers such as Saigon Co-op reporting a recent spike in sales.

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

9,621.76

10,062.31

10,441.09

11,081.23

11,762.98

12,132.74

13,126.33

13,668.20

Canned food sales, units, % change y-o-y

3.83

4.58

3.76

6.13

6.15

3.14

8.19

4.13

Canned food sales, kg per capita

0.11

0.11

0.11

0.12

0.13

0.13

0.14

0.14

Canned food sales, tonnes

Canned food sales, VNDmn Canned food sales, VND, % change y-o-y

415,096.74 452,677.81 488,939.89 540,989.81 601,715.86 646,811.32 725,333.81 772,535.30 12.49

9.05

8.01

10.65

11.22

7.49

12.14

6.51

Canned food sales, VND per capita

4,616.60

4,985.67

5,333.13

5,845.51

6,443.28

6,867.02

7,638.17

8,072.76

Canned food sales, US$mn

20.10

21.69

23.39

26.31

29.60

32.00

36.27

39.02

Canned food sales, US$, % change y-o-y

4.13

7.92

7.87

12.45

12.51

8.11

13.35

7.58

Canned food sales, US$ per capita

0.22

0.24

0.26

0.28

0.32

0.34

0.38

0.41

e/f = BMI estimate/forecast. Source: General Statistics Office, company information, trade press, BMI

© Business Monitor International

Page 113

Vietnam Agribusiness Report Q2 2014

Confectionery ■

2014 confectionary value (local currency) sales growth: +10.7%; CAGR to 2018: +7.9%.

■

2014 chocolate value (local currency) sales growth: +11.9%; CAGR to 2018: +9.9%.

■

2014 sugar confectionary (local currency) sales growth: +9.6%; CAGR to 2018: +6.8%.

Confectionery Sales 2011-2018 225,000 50M 200,000

25M

2018f

2017f

2016f

2015f

150,000 2014f

2012

2011

0M

2013e

175,000

Confectionery sales, VNDmn (LHS) Confectionery sales, tonnes (RHS)

e/f = BMI estimate/forecast. Source: General Statistics Office, company information, trade press, BMI

The longer-term outlook for the Vietnamese confectionery market is positive. Factors such as rising purchasing power, favourable demographics, growing health awareness and continued investments in the sector will support confectionery demand, especially with regard to chocolate. ■

Rising Disposable Incomes: Rapid wealth accrual is likely to translate into a greater discretionary appetite for premium confectionery products. As an increasing number of domestic confectioners expand their upmarket product ranges, this is likely to bolster value sales growth over the coming years.

■

A Massive Youthful Population: 51.9% of the Vietnamese population is estimated to be younger than 30, and the maturation of this demographic group means that there are dynamic opportunities in the mass market. Moreover, this demographic group is generally more receptive to Western cultures, which will give an impetus to confectionery demand.

■

Growing Health Awareness: Health awareness is prompting shifts of consumption habits towards functional and healthy confectionery products. Capitalising on the growing trend, domestic confectioners

© Business Monitor International

Page 114

Vietnam Agribusiness Report Q2 2014

such as Tan Tan Food & Foodstuff and Vina Mit are expanding their functional product offerings. These products typically carry higher price tags, and their rising demand is likely to translate into higher value sales in the sector. ■

Continued Sector Investments: Sustained competition levels in the Vietnamese confectionery sector ensure that dynamism in the market is unlikely to cool off any time soon. Nabati Indonesia, a leading Indonesian biscuit producer, recently announced plans to start distributing its biscuit products in Vietnam - a testament to the attractiveness of the sector. Meanwhile, domestic confectioners such as Kinh Do are expected to continue to invest in broadening their product ranges and expanding their distribution channels.

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018

2011 Confectionery sales, tonnes

2012

2013e

2014f

2015f

2016f

2017f

2018f

164,815.74 167,979.82 173,192.25 181,310.47 190,617.32 199,339.80 210,528.96 220,143.75

Confectionery sales, tonnes, % change y-oy

2.83

1.92

3.10

4.69

5.13

4.58

5.61

4.57

Confectionery sales, kg per capita

1.83

1.85

1.89

1.96

2.04

2.12

2.22

2.30

Confectionery sales VNDmn Confectionery sales, VND, % change y-o-y Confectionery sales, VND per capita

20,109,914 22,411,420 24,641,932 27,266,415 30,150,945 33,014,226 36,491,849 39,884,680 22.20

11.44

9.95

10.65

10.58

9.50

10.53

9.30

223,657.33 246,833.31 268,782.78 294,619.31 322,861.48 350,502.89 384,279.72 416,782.70

Confectionery sales, US$mn

973.53

1,073.70

1,179.04

1,325.87

1,483.08

1,633.15

1,824.59

2,014.38

Confectionery sales, US$, % change y-o-y

13.11

10.29

9.81

12.45

11.86

10.12

11.72

10.40

Confectionary sales, US$ per capita

10.83

11.83

12.86

14.33

15.88

17.34

19.21

21.05

46,763.90

47,448.65

48,722.86

51,541.38

54,879.33

58,612.36

63,326.46

67,948.24

Chocolate sales, tonnes, % change y-oy

1.92

1.46

2.69

5.78

6.48

6.80

8.04

7.30

Chocolate sales, kg per capita

0.52

0.52

0.53

0.56

0.59

0.62

0.67

0.71

3,340,752

3,703,892

4,054,379

4,536,173

5,083,520

5,700,780

6,461,089

7,272,341

Chocolate sales VND, % change y-o-y

20.96

10.87

9.46

11.88

12.07

12.14

13.34

12.56

Chocolate sales VND per capita

37,155.00

40,793.67

44,223.30

49,014.30

54,435.21

60,523.61

68,038.91

75,993.74

Chocolate sales, tonnes

Chocolate sales, VNDmn

© Business Monitor International

Page 115

Vietnam Agribusiness Report Q2 2014

Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 - Continued

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

161.73

177.45

193.99

220.58

250.05

282.01

323.05

367.29

Chocolate sales, US$, % change y-o-y

11.97

9.72

9.32

13.71

13.36

12.78

14.56

13.69

Chocolate sales, US$ per capita

1.80

1.95

2.12

2.38

2.68

2.99

3.40

3.84

Chocolate sales US $mn

Sugar confectionery sales, VNDmn Sugar confectionary sales, VND, % change y-o-y Sugar confectionary sales, VND per capita Sugar confectionery sales US$mn

15,709,150 17,530,067 19,324,607 21,185,318 23,136,033 25,077,466 27,255,472 29,381,901

22.56

11.59

10.24

9.63

9.21

8.39

8.69

7.80

174,713.15 193,071.41 210,783.87 228,911.78 247,744.60 266,240.51 287,015.47 307,031.87 760.49

839.84

924.62

1,030.16

1,138.02

1,240.54

1,362.77

1,483.93

Sugar confectionary sales, US$, % change y-o-y

13.45

10.43

10.10

11.41

10.47

9.01

9.85

8.89

Sugar confectionary sales, US$ per capita

8.46

9.25

10.09

11.13

12.19

13.17

14.35

15.51

6,129.08

6,230.61

6,269.18

7,250.90

8,612.57

9,496.01

11,235.85

12,467.62

Gum sales, tonnes, % change y-o-y

1.75

1.66

0.62

15.66

18.78

10.26

18.32

10.96

Gum sales, kg per capita

0.07

0.07

0.07

0.08

0.09

0.10

0.12

0.13

1,060,011

1,177,461

1,262,944

1,544,923

1,931,391

2,235,979

2,775,288

3,230,437

20.75

11.08

7.26

22.33

25.02

15.77

24.12

16.40

11,789.18

12,968.24

13,775.62

16,693.22

20,681.67

23,738.77

29,225.35

33,757.08

Gum sales US$mn

51.32

56.41

60.43

75.12

95.00

110.61

138.76

163.15

Gum sales US$, % change y-o-y

11.77

9.93

7.12

24.32

26.46

16.43

25.45

17.58

Gum sales US$ per capita

0.57

0.62

0.66

0.81

1.02

1.17

1.46

1.70

Gum sales, tonnes

Gum sales VNDmn Gum sales, VNDmn, % change y-o-y Gum sales, VND per capita

e/f = BMI estimate/forecast. Source: General Statistics Office, company information, trade press, BMI

© Business Monitor International

Page 116

Vietnam Agribusiness Report Q2 2014

Pasta The Vietnamese pasta market is underdeveloped, although the product has become more recognisable in view of Westernisation of lifestyles, particularly in urban areas. Around half of the retail market is dominated by Barilla, with other prominent importers including Italpasta and Pasta Zara.

However, the market for instant noodles is well established, with the market supplied by a mixture of locally made (by companies such as Masan Consumer and Acecook Vietnam JSC) and imported products. Goods are receiving strong marketing and advertising support, especially as the more challenging economic times have prioritised non-discretionary spending. Instant noodles are expected to remain very popular, on account of their affordability, versatility as a cooking ingredient, wide-ranging availability and convenience.

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

25,401.54

28,189.69

31,220.68

34,739.13

38,752.37

38,752.37

42,808.98

42,808.98

14.01

10.98

10.75

11.27

11.55

0.00

10.47

0.00

18,484.38

22,059.82

25,865.49

30,164.19

34,975.21

35,784.64

40,666.02

41,502.54

Uncooked pasta sales, tonnes, % change y-o-y

25.63

19.34

17.25

16.62

15.95

2.31

13.64

2.06

Uncooked pasta sales, kg per capita

0.21

0.24

0.28

0.33

0.37

0.38

0.43

0.43

Uncooked pasta exports, tonnes

8,334.24

7,787.87

7,241.50

6,695.13

6,148.76

5,602.39

5,056.03

4,509.66

Uncooked pasta exports, tonnes, % change y-o-y

-6.15

-6.56

-7.02

-7.54

-8.16

-8.89

-9.75

-10.81

Uncooked pasta imports, tonnes

1,417.07

1,658.00

1,886.31

2,120.19

2,371.60

2,634.67

2,913.07

3,203.22

Uncooked pasta imports, tonnes, % change y-o-y

7.94

17.00

13.77

12.40

11.86

11.09

10.57

9.96

Uncooked pasta production, tonnes Uncooked pasta production, tonnes, % change y-o-y Uncooked pasta sales, tonnes

© Business Monitor International

Page 117

Vietnam Agribusiness Report Q2 2014

Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 - Continued

Uncooked pasta balance, tonnes Uncooked pasta balance, tonnes, % change y-o-y

Prepared pasta production, tonnes Prepared pasta production, tonnes, % change y-o-y Prepared pasta sales, tonnes

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

6,917.17

6,129.87

5,355.19

4,574.94

3,777.16

2,967.73

2,142.96

1,306.44

-8.60

-11.38

-12.64

-14.57

-17.44

-21.43

-27.79

-39.04

597,893.96 640,105.91 685,994.47 739,263.20 800,022.78 866,912.83 935,331.18

1,008,534.8 7

8.58

7.06

7.17

7.77

8.22

8.36

7.89

7.83

542,121.95 579,415.25 623,223.13 674,439.49 732,951.00 797,282.32 862,793.46 932,792.23

Prepared pasta sales, tonnes, % change y-o-y

8.87

6.88

7.56

8.22

8.68

8.78

8.22

8.11

Prepared pasta sales, kg per capita

6.03

6.38

6.80

7.29

7.85

8.46

9.09

9.75

Prepared pasta exports, tonnes

58,214.34

63,317.05

65,572.16

67,803.22

70,243.35

73,003.07

76,122.96

79,549.56

Prepared pasta exports, tonnes, % change y-o-y

5.74

8.77

3.56

3.40

3.60

3.93

4.27

4.50

Prepared pasta imports, tonnes

2,442.33

2,626.40

2,800.82

2,979.50

3,171.57

3,372.55

3,585.24

3,806.91

Prepared pasta imports, tonnes, % change y-o-y

3.37

7.54

6.64

6.38

6.45

6.34

6.31

6.18

55,772.01

60,690.65

62,771.34

64,823.72

67,071.78

69,630.52

72,537.72

75,742.65

Prepared pasta balance, tonnes

© Business Monitor International

Page 118

Vietnam Agribusiness Report Q2 2014

Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 - Continued

Prepared pasta balance, tonnes, % change y-o-y

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

5.85

8.82

3.43

3.27

3.47

3.81

4.18

4.42

e/f = BMI estimate/forecast. Source: United Nations, BMI

Dairy The Vietnamese dairy sector has experienced very strong growth in recent years. Key drivers of this growth have been increasing urbanisation and rising incomes, supported by a shift in consumer eating habits. Huge multinational companies have, in particular, managed to sway consumer preferences with their considerable advertising and promotional power. At the same time, the government is pouring investment in to the dairy industry, with a view to producing 3.4bn litres of fresh milk by 2025, which would generate export revenues of some US$200mn.

The local demand for dairy products is met by a combination of locally produced goods, which accounts for 20% of consumption, according to the US Department of Agriculture, and imports from countries including New Zealand, the US and Australia. Vietnam Dairy Products Co (Vinamilk) is one of the key players in the sector. Indeed, reflecting the promise of the Vietnamese dairy sector, Vinamilk aims to become one of the largest 50 dairy firms in the world. The company is also expanding internationally, as Vietnam is in a geographically strong place to take advantage of the growing Asian dairy story. Other prominent dairy producers include Dutch Lady, Hanoimilk and Anco.

© Business Monitor International

Page 119

Vietnam Agribusiness Report Q2 2014

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018

2011 Processed liquid milk production, tonnes

2013e

2014f

2015f

2016f

2017f

2018f

355,519.3 389,246.2 425,910.8 468,472.0 517,018.3 570,462.8 625,128.4 683,617.4

Processed liquid milk production, tonnes, % change y-o-y Processed liquid milk sales, tonnes

2012

20.74

9.49

9.42

9.99

10.36

10.34

9.58

9.36

190,395.0 201,348.0 210,765.4 226,680.7 243,630.6 261,404.5 280,020.4 299,495.0

Processed liquid milk sales, tonnes, % change y-o-y

4.87

5.75

4.68

7.55

7.48

7.30

7.12

6.95

Processed liquid milk sales, kg per capita

2.12

2.22

2.30

2.45

2.61

2.78

2.95

3.13

Butter sales, tonnes

12,385.38 13,200.10 13,900.60 15,084.45 16,345.25 17,667.34 19,052.07 20,500.67

Butter sales, tonnes, % change y-o-y

5.60

6.58

5.31

8.52

8.36

8.09

7.84

7.60

Butter sales, kg per capita

0.14

0.15

0.15

0.16

0.18

0.19

0.20

0.21

4,615.81

4,931.55

5,203.03

5,661.82

6,150.44

6,662.82

7,199.46

7,760.86

Cheese sales, tonnes, % change y-o-y

5.84

6.84

5.50

8.82

8.63

8.33

8.05

7.80

Cheese sales, kg per capita

0.05

0.05

0.06

0.06

0.07

0.07

0.08

0.08

Cheese sales, tonnes

Ice cream production, tonnes

25,191.39 27,531.60 30,075.65 33,028.85 36,397.33 40,105.69 43,898.78 47,957.16

Ice cream production, tonnes, % change y-o-y

11.61

9.29

9.24

9.82

10.20

10.19

9.46

9.24

e/f = BMI estimate/forecast. Source: United Nations, BMI

© Business Monitor International

Page 120

Vietnam Agribusiness Report Q2 2014

Regional Overview BMI View: The agricultural products trade in the Asia Pacific region is set to soar in the coming years as demand grows rapidly on the back of population and income growth and changing consumption habits. More specifically, trade among Asia Pacific countries is likely to intensify, especially in the livestock, sugar and dairy markets. The region boasts large producing countries with established companies that can provide countries in deficit with the needed products. Investment within the region as well as in Africa will also gather steam in the coming years.

1. Government Support For Production On The Rise

Asia is slowly ramping up its agricultural production support policies as countries aim to reach or maintain self-sufficiency in key commodities. We believe this trend will continue in the coming years as farmers battle with rising input costs. China and South East Asian countries will continue to ramp up their already generous support programmes, while Japan and South Korea will decrease their support levels. Episodic macroeconomic headwinds, which could hit governments' fiscal positions, might delay the increase of this support. This is the case for India and Indonesia in particular.

© Business Monitor International

Page 121

Vietnam Agribusiness Report Q2 2014

Three Profiles Select Countries - Agricultural Producer Support Estimate (% of total gross farm receipts)

Note: The producer support estimate is an indicator measured by the OECD of the gross transfers from consumers and taxpayers to support agricultural producers. Source: OECD, BMI

2. Asia's Up-And-Coming Ethanol Sector

Asia is one of the most dynamic continents in terms of production and use of ethanol. Buoyed by supportive government policies and strict mandates, Thailand and the Philippines are at the forefront of the region. Meanwhile, India and other South and South East Asian countries have faced mandate and logistics issues. Problems such as feedstock, production under-capacity, lack of investment in operations, and the political environment hinder progress towards fulfilling these mandates. In North Asia, overall reluctance to use food-based ethanol and limited production is likely to cap consumption growth in the medium term. China is the largest consumer of ethanol in the region and relatively self-sufficient, but severe constraints to production growth are threatening the sector's medium-term outlook. Japan would need to ramp up imports should it implement an ambitious fuel ethanol consumption plan.

© Business Monitor International

Page 122

Vietnam Agribusiness Report Q2 2014

Table: Select Countries - Biofuel Blending Mandates & Programmes

Official Ethanol Blending Mandate

Ethanol Actual Blend

Biodiesel Mandate

Biodiesel Actual Ethanol Mandate, Goal Blend

Australia

E6 in New South Wales

2.50%

B5 in New South Wales

3-4%

E5 mandate nationally has recently been presented to the Australian Federal Parliament

China

E10 in 10 provinces*

8-12%

none

none

E15 by 2020

India

E5

2-3%

none

none

Moving to E10 as soon as production is in place, and ultimately has set a goal of E20 by 2017

Indonesia

E3 (depending on industries)

0

B10 (depending on industries)

4-5%

E15 and B20 by 2025

Japan

na

0.10%

na

0%

Replacing fossil fuels with 500,000 kls (oil basis) of biofuels for the transportation sector by 2017

Malaysia

na

0%

B5

5%

Moving towards B10 blend, no date given

Philippines

E10

6-7%

B5 (from end 2013)

3-5%

B20 AND E20 by 2030

South Korea na

na

B2-2.5

na

na

Thailand

E10

10%

B5

4-6%

B7 mandate in 2014

Vietnam

na

na

na

na

E5 by end 2014

Note: na = not available/applicable; 'E' refers to ethanol blending mandate and 'B' to biodiesel blending mandates; *10 Provinces in China: Heilongjiang, Jilin, Liaoning, Anhui, Henan, Guangxi, Hubei, Hebei, Shandong and Jiangsu. Source: BMI, USDA, EIA

3. Asia's Foray Into African Farming: Early And Troubled Days

Despite media coverage about China's 'land grabs' in Africa, the country and the broader region remain a minor player in terms of agricultural investment in the African continent. Investment will intensify in the coming years, driven by supportive policies from African governments and the need to secure land. It will also come from a larger number of countries, as Singapore, Malaysia and Vietnam join India and China in their land acquisition efforts. So far, the bulk of investment is still in projects that are in early stages of development and are not yet operational. This highlights the challenges in acquiring land and growing crops in African countries.

© Business Monitor International

Page 123

Vietnam Agribusiness Report Q2 2014

Diversified Players Agriculture Investment In Africa By Country Of Origin (LHC) & Destination (% of total hectares acquired by Asian countries in Africa)

Source: BMI, GRAIN, IISD

4. Little To Expect For Now From New Biodiesel Mandates

With its ballooning current account deficit partly a result of oil imports, Indonesia is trying to accelerate its palm-oil-based biodiesel programme. Malaysia is eager to follow suit given the depressed palm oil prices and impact on its export earnings. We believe the countries' intention to boost domestic biofuel demand will have only mild positive effects for the local palm oil industry and palm oil prices, as the enactment of ambitious mandates will prove difficult. The Indonesian biodiesel sector is likely to outperform Malaysia's given lower production costs and a larger domestic market.

© Business Monitor International

Page 124

Vietnam Agribusiness Report Q2 2014

Stable For Now S&P GSCI Grains & Livestock Indexes, Front-Month CBOT Rough Rice (LHS) & EM Asia Food CPI (RHS), % chg y-o-y

Note: The EM Asia Food CPI is a simple average of the constituent countries' food CPI. It includes China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Sri Lanka, Taiwan, Thailand, Bangladesh and Vietnam. Source: BMI, Bloomberg.

5. Diverging Trends For Asian Food Price Inflation

After more than a year of food price disinflation between August 2011 and August 2012, food consumer price inflation (CPI) in Asia reaccelerated slightly in 2013, driven by the rally in grains prices in H212 and elevated rice prices. However, food prices in the region would have been on a downtrend since March 2013 if India and Indonesia were excluded, as food price inflation in these two countries came in strong in recent months. We expect food price inflation in emerging Asian countries to remain broadly stable following a slight and temporary reacceleration at the end of 2013. Skyrocketing basic food prices in India, Indonesia and Pakistan will continue to support the regional food price index. Meanwhile, other emerging countries in Asia will maintain low food price inflation, as rice prices retreat below current levels and grain prices remain relatively low.

© Business Monitor International

Page 125

Vietnam Agribusiness Report Q2 2014

Rising Income China - GDP Per Capita (US$, LHS) & Real GDP Growth, GDP Per Capita Growth (% y-o-y, RHS)

f = BMI forecasts. Source: National Bureau of Statistics, BMI

6. China Imports: Dawn Of An Agricultural Import Spree

Although China will remain fairly self-sufficient in most agricultural commodities owing to active official support for agriculture production, the country's share of international trade will continue to climb for selected commodities such as soybean, corn, sugar and meat. We expect China to record growing imbalances between production and consumption of selected commodities, as urbanisation and rising purchasing power are leading to a dietary pattern change from traditional food grain products to more meat and sugar.

© Business Monitor International

Page 126

Vietnam Agribusiness Report Q2 2014

Competitive Landscape Table: Major Agribusiness Companies (US$mn)

Company

Sub-Sector

Viet Nam Dairy Products JSC (Vinamilk)

Dairy

Kinh Do Corp

Market Reven Fiscal Capitalisati Employe ue Y/E on es

1472.8

12/20 13

5490.6

5389

Food Manufacturing (confectionery & snacks)

217.1

12/20 13

456.7

6789

Vinacafe Bien Hoa JSC

Coffee & Food Manufacturing

109.4

12/20 13

187.7

749

Hung Vuong

Seafood

368.5

12/20 12

162.1

6060

Societe De Bourbon Tay Ninh

Sugar & Real Estate

105.6

12/20 13

85.0

512

Tuong An Vegetable Oil JSC

Edible Oils & Fats

204.2

12/20 13

40.8

746

Lam Son Sugar

Sugar & Alcohol

86.4

12/20 13

28.0

890

Minh Phu Seafood

Seafood

528.8

12/20 13

87.5

10616

Southern Seed

Crop Seeds

28.9

12/20 13

33.3

396

Viet Thang Feed JSC

Animal Feed

190.3

12/20 13

37.8

602

Last updated March 5 2014. Source: BMI, Bloomberg

© Business Monitor International

Page 127

Vietnam Agribusiness Report Q2 2014

Company Profile Vinamilk Company Overview

Vietnam Dairy Products Joint Stock Company (Vinamilk) is the market leader in Vietnam's dairy industry. It produces more than 200 dairy products for domestic sale and for export. The company was founded in 1993 as a state-owned enterprise. The state's share was recently reduced to 50% to qualify for listing on the stock market. Vinamilk controls an estimated 75% of the high-growth Vietnamese dairy market. It exports to 26 countries, including Iraq, Cambodia and the Philippines.

SWOT Analysis

Strengths ■

Leading dairy producer in Vietnam in a high-growth market, enjoying a well-known brand and dominant market share in various dairy segments (liquid milk, yoghurt, condensed milk).

■

Extensive distribution network.

■

Diverse product range and constant product innovation.

■

Soaring demand for both primary and processed dairy products in the fast-growing local economy.

■

Strong financial fundamentals (no debt, good margins)

Weaknesses ■

Reliant on international supply from New Zealand for raw materials, making the company vulnerable to international milk supply and prices as well as to foreign exchange fluctuations.

■

Reliant on Vietnam for sales, with a vast low-income rural population. Vinamilk faces a limited market for fresh dairy if the Vietnamese market disappoints.

Opportunities ■

Gradual integration in the Association of Southeast Asian Nations (ASEAN) region could allow the company to grow exports and benefit from lower production costs via processing plants in countries within the region.

■

Experience in the emerging Vietnamese market is likely to increase Vinamilk's chances of success when exporting to other emerging South East Asian markets.

■

Vinamilk's recent investments in domestic capacity expansions and in New Zealand's Miraka will allow it to ease current supply shortages.

© Business Monitor International

Page 128

Vietnam Agribusiness Report Q2 2014

Threat ■

Growing competition in the South East Asian dairy sectors coming from Western brands. Vinamilk will have to keep up its expansionary activities in order to secure its market share.

■

Given the fact that dairy products are related to customers' health and especially children's health, a food safety or product quality scare could easily harm earnings.

Good Product Diversification Vinamilk - Revenue By Origin (LHC) & Products (RHC), 2012, % Of Total

Source: BMI, Vinamilk, Bloomberg

Company Core View

Over to next three-to-six months, we believe Vinamilk's share price will underperform the Ho Chi Minh Stock Index (VNI), given the subdued outlook for the company's margins in the coming quarters, and our constructive view for the VNI. This view is reinforced by Vinamilk's beta, which stands at 0.8, making the company a defensive stock. The company is likely to see its margins recover in the second half of 2014, due to easing international milk prices and firm demand for dairy products in Vietnam.

Latest Results

Vinamilk recorded disappointing results in Q413 (October-December) and FY13, mainly due to weaker demand and increasing input costs. Although revenue continued to record double-digit growth (15.9% in

© Business Monitor International

Page 129

Vietnam Agribusiness Report Q2 2014

Q413 to VND8,174bn and 16.5% in FY13 to VND30,949bn), the pace of expansion slew down. The company's revenue grew by 32.7% on average annually between FY08 and FY12. Cost of goods sold grew by 13.0% y-o-y in FY13. Net income declined in Q413, by 10.8% y-o-y to VND1,470bn and net income growth slew down significantly in FY13, as it came in at VND6,534bn, up by a mild 12.3% y-o-y (compared with the five year average of 45.3% annually). Margins continued on their downtrend in Q413, as global milk prices reached multi years highs. Profit margins came in at 18.0%, down 5.4 percentage points y-o-y.

Lower Growth Vinamilk - Revenue Growth, % y-o-y (RHS) & Select Income, VNDmn (LHS)

Source: BMI, Vinamilk

Export sales (up by almost 20% y-o-y) performed better than domestic sales (up by approximately 15% y-oy), which were mostly driven by demand for powdered milk and Vinamilk's newly introduced value-added and premium products in the domestic market. Export sales now account for 14% of total sales (as of Q413), compared with 8.5% a year ago.

We believe Vinamilk will maintain healthy growth rates in the coming quarters owing to steady GDP growth in Vietnam, which will support domestic dairy sales. BMI's Country Risk Team forecast GDP to

© Business Monitor International

Page 130

Vietnam Agribusiness Report Q2 2014

grow by 5.9% and 6.4% in 2014 and 2015 respectively, compared with 5.6% on average in the past three years. Exports momentum will also remain strong, as Vinamilk's capacity expands. However, margins are likely to continue to stagnate if not fall slightly. Indeed, the impact on margins on changes in milk products is usually felt with a two quarters lag on margins (see chart), and global milk (and milk powder prices, the input for Vinamilk, which imports the powder mainly from New Zealand) have remained elevated in Q413 and since the start of 2014.

Skyrocketing Milk Prices Weighing On Margins Vinamilk - Margins (%)

Source: Vinamilk

We expect margins to recover from H214, as we see milk prices averaging significantly lower in 2014 and 2015 as dairy herds are recovering in the US and Australia and increasing quickly in New Zealand. Moreover, we expect value added dairy product prices to remain stable and enable margins for dairy processors to recover (see 'Turning More Positive On US And EU Dairy Processors' February 14 and 'Milk To Average US$16.00/cwt In 2014' November 28, 2013).

© Business Monitor International

Page 131

Vietnam Agribusiness Report Q2 2014

More Headwinds In Near Term Vinamilk Gross Margin (LHS, %, 2 quarters lag) & Average Whole Milk Powder Prices (RHS, US$/ tonne)

Source: BMI, Vinamilk, JP Morgan, 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 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. 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 24.5% over the coming five years.

© Business Monitor International

Page 132

Vietnam Agribusiness Report Q2 2014

Vinamilk On Top Select Companies - Operating (LHC) & Profit (RHC) Margins, %

Note: FY13 for Vinamilk and Modern Dairies. 2013 YTD (Q113-Q313) for others. Source: Bloomberg

With new downstream projects coming online soon (a second powdered milk factory and a liquid milk factory completed in FY13), the company is now heavily investing in upstream capacity and plans to spend VND1,555bn (US$73mn) in 2013-2015. Vinamilk, which sources 25% of its raw milk from small-scale farms in Vietnam, is ramping up its cow farming business and aims to source 40% of its raw milk needs from internally owned farms by 2016.

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 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 do expect closer commercial and financial ties with lower import tariffs across the region in the coming years. Vinamilk is trying to capitalise on loser 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.

© Business Monitor International

Page 133

Vietnam Agribusiness Report Q2 2014

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 5.9%. 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 company's future expansion plans.

We therefore believe Vinamilk will remain an outperformer in the industry over the long term due to its efficiency, cost control and emphasis on high-growth demand markets.

© Business Monitor International

Page 134

Vietnam Agribusiness Report Q2 2014

Improved Performance Ahead Vinamilk, Ho Chi Minh Index (VNI), Nestlé India & Inner Mongolia Yili, Rebased

Note: January 2 2013 = 100. Source: BMI, Bloomberg

Valuation

Vinamilk's 12-month trailing price/earnings ratio (PE) decreased slightly since December 2013 and is now standing at a nine months low of 18.0x. However, this is still elevated historically, as in January 2013 PE was at 14.5x. This is also higher than the VNI PE of 14.0x, but significantly below its competitors' average of 38.7x (the average is pushed higher by Bright Dairy and Nestlé India).

© Business Monitor International

Page 135

Vietnam Agribusiness Report Q2 2014

Heading Up Vinamilk - Share Price, VND (daily chart) & RSI (below)

Source: BMI, Bloomberg

Share Price Analysis

We believe Vinamilk's share price could record some weakness in the near term, as margins will continue to be hampered by elevated milk prices. The share price could break below support coming at VND139,000. However, the share price is likely to recover from H214 with the improvement in performance. It will

© Business Monitor International

Page 136

Vietnam Agribusiness Report Q2 2014

eventually break above resistance coming at VND142,000. An upside break at this level would be bullish for the share price.

Table: Vinamilk's Financial Highlights, 2007-2013

2007

2008

2009

2010

2011

2012

2013

6,538

8,209

10,614

15,753

21,627

26,562

30,949

Revenues Growth

4.7

25.6

29.3

48.4

37.3

22.8

16.5

Operating Income*

633

1,248

2,340

3,347

4,317

6,206

7,295

Operating Margin

9.7

15.2

22.0

21.2

20.0

23.4

23.6

Net Income*

963

1,250

2,376

3,616

4,218

5,819

6,534

Profit Margin

14.7

15.2

22.4

23.0

19.5

21.9

21.1

Net Debt/EBITDA

-1.1

-0.4

-1.1

-0.5

-0.8

-0.8

-0.8

na

1,559

4,632

4,556

5,145

6,981

7,839

Revenues*

EPS

* In VNDbn; margins in %; na = not available. Sources: BMI, Bloomberg

© Business Monitor International

Page 137

Vietnam Agribusiness Report Q2 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 138

Vietnam Agribusiness Report Q2 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 139

Vietnam Agribusiness Report Q2 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

2

4

7

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 140

Vietnam Agribusiness Report Q2 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 141

Vietnam Agribusiness Report Q2 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, 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, 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. 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 multicollinearity

© Business Monitor International

Page 142

Vietnam Agribusiness Report Q2 2014

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.

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.

© Business Monitor International

Page 143

Vietnam Agribusiness Report Q2 2014

■

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, ie 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.

© Business Monitor International

Page 144