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, more specifically 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 products 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.
|Highest Yields In South East Asia|
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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 the 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 regulatory framework.
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.
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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 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 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 on 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.
|Coffee - Vietnam (LHC) & Brazil (RHC) Exports ('000 60 kg bags)|
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. Indeed, 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 maintain its status as an export spearhead.
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. So far, the size of the average farm in Vietnam is stagnating at a low 0.6 hectares, which clearly 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 volumes boats. Thailand's strong competitiveness in the region is partly based on the efficiency of its infrastructure.
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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 agricultural products 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.
|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|
|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|
|Coffee Production, '000 60kg bags||24,800.0||23,450.0||24,500.0||23,520.0||24,225.6||24,952.4|
|Coffee Consumption, '000 60kg bags||1,665.0||1,824.8||1,987.3||2,211.8||2,450.7||2,715.4|
|Notes: f= BMI forecasts; Sources: USDA; General Statistics Office of Vietnam, BMI, FAPRI, Vietnam Coffee and Cocoa Association.|