Domestic market

Vietnam Agribusiness Report Q2 2011
BMI View: Vietnam's agriculture industry will continue to produce surpluses in coffee and rice - but few other commodities. Indeed, with a rising population and incomes, the country will remain a net importer of all livestock and dairy goods over the forecast period. Although the Vietnamese government is investing in several sectors to increase production, most of the industry, barring rice, will remain importdependent and vulnerable to changes in global agricultural prices.

We note that since joining the WTO in 2007, Vietnam has striven hard to meet an array of agriculture production standards especially in the area of food health safety issues, also known as Sanitary and Phytosanitary (SPS) rules. To date it has already submitted 22 notifications to the WTO. Vietnam has also engaged other countries such as the Netherlands in private-public partnerships (PPPs) to improve on production standards for sectors such as fisheries and livestock.

Key Trends:

Coffee production growth to 2014/15: 27.8% to 23.2mn 60kg bags. Given that Vietnam is the world's largest exporter of robusta coffee, greater export opportunities will be the main driver of production.

Rice production growth to 2014/15: 12.3% to 28.1mn tonnes. We do not foresee expansion through increase in area harvested but through yield improvements that are already the highest in the South East Asia region.

Fluid milk consumption growth to 2014/15: 43.6% to 247,900 tonnes. As incomes rise and dietary preferences change, we are confident of strong consumption growth emerging from Vietnam, especially from its low base.

2011 Real GDP Growth: 6.3% (down from 6.8% in 2010; predicted to average 7.0% from 2010 until 2015).

Consumer Price Inflation: 12% y-o-y in February 2011 (forecast to average 11.5% in 2011). Industry Developments

Vietnam's growing coffee consumption - which we forecast to grow 27.8% by 2014/15 - might make the sector seem like fertile ground for foreign entrants, especially in the higher-end coffee business. However, BMI believes that the current strong hold that local players have on the industry, as well as heavy regulation, dampens the attractiveness of the sector to foreign entrants. Indeed, our current Risk/Reward ratings for the Vietnamese drinks industry stand at a lowly 54 out of 100, suggesting that the landscape for foreign coffee retailers might not be as promising as expected. The main factors contributing to this outlook are the large rural-urban divide, as well as poor physical and labour infrastructure - both of which are important aspects to ensure returns to investment in high-end coffee franchises.

Despite virtually flat production growth in recent years and even a slight decrease in 2009/10, we believe Vietnam's rice sector will experience considerable growth over our forecast period, buoyed by improvements in infrastructure, higher yields and increased domestic demand. Compared with many of its agricultural sub-sectors, Vietnamese rice is actually very competitive relative to many of its regional peers and is well positioned to ensure the country remains a net exporter. Indeed, it will continue to be one of the world's few rice exporters, the second largest in 2009/10.

As Vietnam is highly dependent on imports of dairy products to meet its domestic needs, local dairy prices are very vulnerable to higher international milk prices. Indeed, milk prices have risen some 20% year-on-year in February 2011. Vietnamese dairy consumers will be confronted with higher diary product prices, especially milk powder prices in the medium term. Anecdotal reports in late March 2011 claimed that prices of imported milk products such as milk powder had risen by 18% on the back of an 8.5% Vietnamese Dong devaluation. Given the low incomes earned by the average worker, we think these milk price hikes will only place these products further out of reach of the masses and might lead to substitution effects in the short-to-medium term.

Source: Business Monitor International
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