Venezuela agribusiness report q3 2010

Q3 2010

www.businessmonitor.com

VeneZueLa

agribusiness Report
INCLUDES 5-YEAR FORECASTS TO 2014

ISSN 2040-0489
Published by Business Monitor International Ltd.


VENEZUELA AGRIBUSINESS
REPORT Q3 2010
INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI's Industry Report & Forecasts Series
Published by: Business Monitor International
Publication Date: July 2010

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Venezuela Agribusiness Report Q3 2010

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Venezuela Agribusiness Report Q3 2010

CONTENTS

Executive Summary ......................................................................................................................................... 5
SWOT Analysis ................................................................................................................................................. 7
Venezuela Agriculture SWOT ................................................................................................................................................................................ 7
Venezuela Political SWOT .................................................................................................................................................................................... 8
Venezuela Economic SWOT .................................................................................................................................................................................. 9
Venezuela Business Environment SWOT............................................................................................................................................................... 9

Industry Forecast Scenario ........................................................................................................................... 10
Venezuela Coffee Outlook ......................................................................................................................................................................................... 10
Table: Venezuela –Coffee Production & Consumption ........................................................................................................................................ 11
Table: Venezuela –Coffee Production, Consumption & Trade ............................................................................................................................ 14
Venezuela Dairy Outlook .......................................................................................................................................................................................... 15
Table: Venezuela –Milk Production & Consumption ........................................................................................................................................... 16
Table: Venezuela –Butter Production, Consumption & Trade ............................................................................................................................. 16
Table: Venezuela –Cheese Production, Consumption & Trade ........................................................................................................................... 16
Table: Venezuela –Whole Milk Powder Production, Consumption & Trade ....................................................................................................... 17
Table: Venezuela –Milk Production & Consumption ........................................................................................................................................... 18
Table: Venezuela –Butter Production, Consumption & Trade ............................................................................................................................. 19
Table: Venezuela –Cheese Production, Consumption & Trade ........................................................................................................................... 19
Table: Venezuela –Whole Milk Powder Production, Consumption & Trade ....................................................................................................... 19
Venezuela Sugar Outlook .......................................................................................................................................................................................... 21
Table: Venezuela –Sugar Production, Consumption & Trade ............................................................................................................................. 22
Table: Venezuela –Sugar Production, Consumption & Trade ............................................................................................................................. 24
Venezuela Cocoa Outlook ......................................................................................................................................................................................... 26
Table: Venezuela – Cocoa Production, Consumption & Trade ........................................................................................................................... 26
Table: Venezuela – Cocoa Production, Consumption & Trade ........................................................................................................................... 27
Venezuela Grains Outlook ................................................................................................................................................................................... 29
Table: Venezuela – Wheat Production, Consumption & Trade............................................................................................................................ 30
Table: Venezuela – Corn Production, Consumption & Trade.............................................................................................................................. 30
Table: Venezuela – Wheat Production & Consumption ....................................................................................................................................... 31

Table: Venezuela – Corn Production, Consumption & Trade.............................................................................................................................. 32
Venezuela Livestock Outlook ............................................................................................................................................................................... 33
Table: Venezuela – Poultry Production, Consumption & Trade .......................................................................................................................... 34
Table: Venezuela – Pork Production, Consumption & Trade .............................................................................................................................. 34
Table: Venezuela – Beef & Veal Production, Consumption & Trade .................................................................................................................. 35
Table: Venezuela – Poultry Production, Consumption & Trade .......................................................................................................................... 37
Table: Venezuela – Pork Production, Consumption & Trade ............................................................................................................................. 37
Table: Venezuela – Beef & Veal Production, Consumption & Trade ................................................................................................................. 37

Competitive Landscape ................................................................................................................................. 39
Table: Agricultural Commodity Producers & Traders ........................................................................................................................................ 39
Table: Agribusiness Suppliers ............................................................................................................................................................................. 40
Table: Integrated Agricultural Producers............................................................................................................................................................ 41

Commodity Price Analysis ............................................................................................................................ 42
Grains Update .......................................................................................................................................................................................................... 42
Corn ..................................................................................................................................................................................................................... 42

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Venezuela Agribusiness Report Q3 2010

Table: Corn ......................................................................................................................................................................................................... 42
Rough Rice........................................................................................................................................................................................................... 43
Table: Rice........................................................................................................................................................................................................... 43
Soybean ............................................................................................................................................................................................................... 44
Table: Soybean .................................................................................................................................................................................................... 44

Wheat ................................................................................................................................................................................................................... 45
Table: Wheat........................................................................................................................................................................................................ 45
Softs Update.............................................................................................................................................................................................................. 46
Cocoa................................................................................................................................................................................................................... 46
Table: Cocoa ....................................................................................................................................................................................................... 46
Coffee................................................................................................................................................................................................................... 47
Table: Coffee ....................................................................................................................................................................................................... 47
Milk...................................................................................................................................................................................................................... 48
Table: Milk .......................................................................................................................................................................................................... 48
Sugar ................................................................................................................................................................................................................... 49
Table: Sugar ........................................................................................................................................................................................................ 49

Downstream Supply Chain Analysis ............................................................................................................ 50
Industry Forecast Scenario .................................................................................................................................................................................. 50
Consumer Outlook ............................................................................................................................................................................................... 50
Food .................................................................................................................................................................................................................... 53
Total Food Consumption ..................................................................................................................................................................................... 53
Table: Colombia Food Consumption Indicators – Historical Data & Forecasts................................................................................................. 53
Canned Food ....................................................................................................................................................................................................... 54
Table: Canned Food Value/Volume Sales – Historical Data & Forecasts .......................................................................................................... 54
Confectionery....................................................................................................................................................................................................... 55
Table: Confectionery Value/Volume Sales – Historical Data And Forecasts ...................................................................................................... 55
Mass Grocery Retail ............................................................................................................................................................................................ 57
Table: Venezuela Mass Grocery Retail Value Sales By Format – Historical Data And Forecasts ...................................................................... 58
Table: Sales Breakdown by Retail Format Type .................................................................................................................................................. 58
Trade ................................................................................................................................................................................................................... 59
Table: Food And Drink Trade Balance – Historical Data And Forecasts ........................................................................................................... 60
Macroeconomic Forecast .................................................................................................................................................................................... 61
Table: Venezuela - Economic Activity, 2007-2014............................................................................................................................................... 62

BMI Forecast Modelling ................................................................................................................................. 63
How We Generate Our Industry Forecasts ............................................................................................................................................................... 63

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Venezuela Agribusiness Report Q3 2010

Executive Summary
BMI View: The Venezuelan agriculture industry's woes continue to mount under the constraints of
President Hugo Chávez's 'socialist revolution.' The government continued to tighten its grip on production
in Q210 as it decreed the takeover of the assets of Venezuela-based assets of Mexican food-processor
Gruma. Chávez has also renewed his threat to expropriate Polar, the largest local private food processor,
brewer and miller. Although the government's centralised, state-controlled policies were designed to
boost local production, they have in practice had the opposite effect. Venezuela is set to fall further into
recession in 2010, with BMI forecasting the economy to shrink by 3.6%, following an estimated 3.3%
contraction in 2009. Rising inflation is pushing up production costs, but strict government controls on
food prices have meant shrinking profit margins for domestic producers and retailers. The resulting food
shortages have been exacerbated by the continued disputes with Colombia that have seen imports to
Venezuela grind to a halt. The government has responded to the growing food supply crisis with a series
of raids through June 2010 designed to clamp down on retailers accused of hoarding food and selling it at
above the authorised price. At least 40 butchers were arrested in early May on charges of selling beef for
higher than the regulated price. Eight butchers have been found guilty and fined US$3,000. A further 32
butchers are yet to be tried; if convicted, they too face heavy fines or between two and six years in prison.
!

Production of beef and poultry in 2010 are forecast to rise by 10.3% year-on-year (y-o-y) to
reach 317,800 tonnes. The trade spat with Colombia has halted exports of beef, giving a boost to

local producers. Poultry output is also forecast to increase by 2.5% y-o-y to 696,700 tonnes. The
increase in March 2010 to the state-regulated price for poultry to VEF13.83 per kilogram should
also provide a boost for producers.

!

Corn production is forecast to increase by 14.9% to 1.55mn tonnes in 2009/10, after three years
of successive declines. Production was hit by extreme droughts in 2008/09 and has also been
negatively affected by regulated farmgate prices and retail prices, which farmers complain have
not been adequately adjusted in line with rising costs, which have been driven upwards by high
inflation.

!

In April 2010, the Venezuelan government raised the state-controlled price caps for milk and
dairy products by as much as 30%. The increase was in response to spiralling costs following the
50% devaluation of the bolívar in early January 2010. The price of fluid milk was raised by 30%
to VEF4.15 (US$0.97) per 900ml container, while the costs of white cheeses and powdered milk
were also increased. In recent years, demand for fluid milk in particular has regularly outstripped
supply. The government hopes that the increase in authorised prices will provide an incentive to
producers and head off the danger of future food shortages.

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Venezuela Agribusiness Report Q3 2010

!

We now see coffee production falling for a second successive year in 2009/10 due to dry
weather related to the El Niño-Southern Oscillation in the Pacific. Low prices have also meant
that farmers continue to turn to more profitable crops. As a result, we forecast production to sink
to 813,400 tonnes, down by 3.8% y-o-y.

!

Venezuela's sugar sector continues to struggle from a lack of investment and strictly controlled
prices. Despite two increases in the official cost of sugar on the domestic market in October
2009 and March 2010, producers are still reluctant to devote acreage to sugar or to invest further
in the sector. Of the market price of VEF3.73 per kilogram, cane producers were receiving just
VEF1.20 per kilogram when delivered to the processor; far short of the production cost of
VEF2.60 per kilogram. We forecast production to decline by 9.9% y-o-y to 599,100 tonnes,
following a 14.7% y-o-y decline in 2008/09.

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Venezuela Agribusiness Report Q3 2010

SWOT Analysis
Venezuela Agriculture SWOT

Strengths

Weaknesses

Opportunities

Threats

!

Venezuela's tropical climate allows for production of a diversified range of
agricultural products.

!

Venezuelan cocoa and coffee are known for their high-quality and cocoa especially
is sought after by producers of premium chocolate.

!

Despite having large areas of fertile arable land, lack of investment in agriculture
has left Venezuela a major food importer.

!

High food price inflation and frequent supply shortages have dampened growth in
food consumption.

!

Price controls in place since 2003 squeeze the profits of producers and are a
disincentive to invest in increasing production.

!

The government has shown interest in revitalising coffee and cocoa production
after years of decline.

!

The government has introduced a number of programmes to help small holders
increase production including finance and subsidies.

!

Falling oil revenues are bringing more attention to increasing agricultural
production to reduce the cost of food imports.

!

The threat of land seizures and nationalisation inhibits investment in agriculture in
Venezuela.

!

Falls in the oil price will severely limit the amount of money the government will be
able to spend on agriculture.

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Venezuela Agribusiness Report Q3 2010

Venezuela Political SWOT

!

Setting Venezuela apart from its neighbours, the country has enjoyed a long
tradition of democracy, with elections held regularly since 1959.

!

A consistently high electoral turnout points to a strong level of public
participation in politics.

!

The military has traditionally played a dominant role in politics and possible
future intervention by disgruntled officers - especially following the attempted
coup in 2002 - is not beyond the realms of possibility.

!

The meltdown of the traditional party structure has left something of a political
vacuum where the opposition should be.

!

Relations between President Hugo Chávez and the US remain strained, as
Chávez has accused Washington of interfering in its domestic affairs and has
threatened to cut off oil supplies to the US.

Opportunities

!

If invested prudently in areas such as infrastructure and education, the fiscal
windfalls brought by the devaluation of the bolivar and elevated oil prices could
help bring longer-term stability to the economy in turn diminishing the risks of
civil turbulence.

Threats

!

President Chávez's ability to rule by decree continues to undermine the
country's democratic institutions.

!

The national assembly has pushed through a number of laws that were
previously overturned in the constitutional referendum in 2007. The weakening
of democracy in the country threatens to seriously raise political risk and poses
a threat to private business activity.

!

Tensions between Venezuela and Colombia remain heightened, due to the
former's belligerent rhetoric and recent destruction of bridges straddling the
border. Although we continue to view the possibility of outright military conflict
as improbably, given underlying economic interdependencies, we caution that
risks of a confrontation have risen.

Strengths

Weaknesses

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Venezuela Agribusiness Report Q3 2010

Venezuela Economic SWOT

!

Venezuela is rich in natural resources. In particular, it has huge oil and gas
reserves (it is the world's fifth largest crude producer) and is one of the main
suppliers to the US.

!

The oil boom has allowed the government to accumulate international reserves.

!

Although oil is one of the country's strengths, a high level of dependence on the
energy sector makes the economy increasingly vulnerable to economic shocks
in the long term.

!

The lack of transparency in the government's fiscal accounts is a source of
concern.

Opportunities

!

Following the devaluation of the bolivar in January 2010, the non-oil sector has
an opportunity to benefit from increased competitiveness.

Threats

!

Inflation remains dangerously high, despite the extensive price control system
and successive interest rate hikes. A devaluation of the bolivar, which could
result from a decline in oil prices, would significantly raise inflationary pressures
in the economy, possibly bringing on hyperinflation.

!

The sustainability of economic growth will depend on boosting private
investment, rather than relying on oil and public investment (both of which are
dependent on high oil prices).

Strengths

Weaknesses

Venezuela Business Environment SWOT

!

Venezuela is an important supplier of oil to the US and is a member of OPEC.

!

Home to some of the largest oil reserves in the world, the Orinoco region will
provide opportunities for large-scale investment.

!

A lack of domestic and international investment, largely as a result of the
uncertain political environment, could undermine the long-term growth outlook.

!

Privatisation has ground to a halt since Chávez took office, with the
administration instead preferring production-sharing agreements to encourage
foreign direct investment.

Opportunities

!

Government support for businesses, through a range of low interest rate loans,
is available. The government fund for industrial credit targets large sums of
money at small and medium-sized businesses.

Threats

!

The implementation of stringent foreign currency controls has hit the business
community hard. This has restricted import growth, as businesses lack the
currency to purchase raw materials.

!

State expropriation of 'idle' plants and proposals for land reform will act as a
disincentive for prospective investment (domestic and foreign).

Strengths

Weaknesses

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Venezuela Agribusiness Report Q3 2010

Industry Forecast Scenario
Venezuela Coffee Outlook
BMI Supply View: Favourable growing conditions led to a comparatively good coffee harvest in
Venezuela in 2007/08, with production rising by 4.4% year-on-year (y-o-y) to 900,000 60 kilogramme
(kg) bags. However, in the 2008/09 coffee year, production fell off again, as low government-mandated

prices hurt the profitability of coffee production in Venezuela, particularly given the large increase in the
price of inputs such as fertiliser in 2008. Heavy rain through the latter months of 2008 and first quarter of
2009 also saw yields decline. Production is estimated to have fallen 6.1% y-o-y to 845,000 bags.

We now see coffee production falling for a second successive year in 2009/10 due to dry weather related
to El Niño-Southern Oscillation in the Pacific. Low prices have also meant that farmers continue to turn
to more profitable crops. As a result, we forecast production to sink to 813,000 tonnes, down by 3.8% yo-y.

Government support for small-holder coffee growers, who make up the majority of farms, could see
production rise back up from the low of 2009/10 over our forecast period to 2013/14 and we expect
growth of 9.3% from the 2008/09 level to 924,000mn bags. This, however, will be dependent on
government policy, particularly price controls. If the government responds to the current demands from
millers and producers to relax price controls, interest in investing in production of Venezuela's highquality coffee would likely increase, leading to greater production than we are currently expecting.
Conversely, if price controls continue to squeeze profits, farmers may switch to other less tightly
controlled crops.

BMI Demand View: While Venezuelans consume a fair amount of coffee, per capita consumption at
1.9kg per year is some way below other Latin American countries, such as Brazil and Argentina, where
per capita consumption is 4.6kg and 4.0kg, respectively. Consumption in 2007/08 grew 5.6% y-o-y to
834,000 bags and expanded again in 2008/09 growing 4.9% y-o-y. The vast majority of coffee consumed
is roasted ground coffee, with soluble instant coffee accounting for only around 1% of total consumption.
While controls on the retail price on ground coffee have allowed more of Venezuela's poor to afford it,
they have also led to severe supply shortages and a booming black market.

In November 2008, coffee was once again in short supply on shop shelves, even as other staples such as
milk and beef had returned to the stores. Wealthier consumers were able to buy their coffee at cafes or
street stalls, but poorer consumers are often unable to afford the high prices. The government has, as
usual, blamed the shortages on unscrupulous suppliers hoarding their stock, rather than selling it at the
mandated prices. The Venezuelan Coffee Industry Association, however, has blamed the shortages on the

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strict control of how much coffee that roasters must pay for beans and for how much they are allowed to
sell the finished product. Until this situation is resolved, growth in coffee consumption will be hindered
by the supply shortages and the disincentives to invest in the sector that come from price controlling. In
2009/10, we expect a small fall in consumption as Venezuela's economy faces a second consecutive
severe contraction.

Table: Venezuela –Coffee Production & Consumption

2009e

2010f

2011f

2012f

2013f

2014f

Coffee Production, '000
1
60kg bags

845.00

813.40

842.80

868.40

895.00

924.00

Coffee Consumption,
1
'000 60kg bags

875.00

869.70

870.20

870.40

871.00

871.00

1

Notes: e/f=BMI estimate/forecast. Source: USDA, BMI

Coffee Crisis
Venezuela was once among the world's largest producers of coffee. At the beginning of last century,
coffee production was the mainstay of the Venezuelan economy accounting for more than 80% of the
country's exports. Since then, however, its significance has fallen, particularly after the discovery of oil
led to other industries being crowded out. Government mismanagement of the sector in recent years has
seen production dwindle to the point where the country is now reliant on imports from Brazil, El Salvador
and Nicaragua. In 2008/09, Venezuela imported around 310,500 bags in order to meet domestic demand.

Although the Venezuelan government continues to blame the private sector for the failures of the
economy, coffee producers hold the government's intervention in the sector responsible for the collapse of
the coffee industry. Since 2003, coffee has come under price controls with the retail price for ground
coffee and the farmgate price for green coffee set by the government. In December 2005, the government
almost doubled the price roasters must pay farmers for their beans. Many roasters then refused to sell
their product, claiming they would lose money if they did. This led to an increase in tension with Chávez'
government, as the army seized coffee stocks from roasters and Chávez threatened to nationalise the
industry (see below for further analysis). In November 2008, the problem had still not been solved and
coffee was once again disappearing from shop shelves. In that month the government raised the retail
price of coffee to VEF18.85/kg from VEF11.45 to try and spur production.

In 2004, the government announced plans to invest US$156mn in the sector, so production could more
than double to 3mn quintals (2.3mn bags) by 2007. The area planted with coffee was to increase, the
government would plant new trees and build new roads in coffee growing areas. Despite considerable
investment, the plan has been a failure and the area planted to coffee has actually decreased to around

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200,000 hectares. Growers were dissuaded from investing in production increases by unappealing
government-fixed farmgate prices which have failed to increase in line with rises in production costs,
decreasing the profitability of coffee. As a result, farmers have increasingly turned towards more
profitable crops, complaining that the price they received for coffee did not cover production costs.

The difficulties faced by the sector have led to falls in consumption and the quality of production. Low
investment in coffee farms has left most with old trees well past their peak production and vulnerable to
attack by pests. This means that average yields from coffee farms in Venezuela are less than half those
seen in Brazil and less than a third of those seen in Colombia. Consumption is also only a fraction of its
former level, falling from 3kg per capita in 1990 to just over 1kg at the beginning of the 21st century,
before creeping back up to its current 1.9kg per year as incomes rose and the government controlled the
retail price.

Unless the Chávez government alters its restrictive policies and relaxes control over the sector, we see
little potential for the coffee industry to reach the 3mn quintal target that the government envisaged. If
price controls are not loosened, farmers will continue to abandon coffee growing and the degradation of
plantations will continue, continuing the country's import dependence.

Coffee Plants Latest Victim Of Nationalisation
At the beginning of August 2009, the Venezuelan government seized control of two coffee processing
companies: Fama de América and Cafe Madrid . Together, the two companies controlled around 80%
of the coffee market in Venezuela. The move seems to have been sparked by an announcement by the
companies that they were running out of coffee supplies and had enough left to meet only a few days of
demand. The government claimed the companies had been involved in illegally exporting coffee to
Colombia to take advantage of the higher prices. The government initially claimed the seizures would be
temporary. But a few days after the occupation of the plants, Chávez spoke of permanently expropriating

them. This move seemed increasingly likely in September after Commerce Minister Eduardo Samán said
in a speech that he would recommended for the companies' assets to be expropriated following the
expiration of the initial intervention order used to take control of the plants. In mid-November, the
government finally announced the official expropriation of Fama de America as well as Cafea, a smaller
roaster based in Táchira State. In May 2010, Venezuelan officials seized control of a Fama de América
processing plant in the state of Carabobo after talks to agree a price for the plant broke down, as reported
by Associated Press. It was unclear whether Fama de América would receive compensation. At the time
of writing, the government was still in discussions with Cafe Madrid over the formation of a joint venture.

Regardless of whether the allegations of illegal export of coffee are true - they are strenuously denied by
both companies - the seizures and the looming shortages that motivated them highlight all that is wrong
with the Venezuelan coffee industry. The farmgate prices for coffee fixed by the government are well
below the level in neighbouring Colombia. With Colombia suffering its own shortage of coffee in 2009

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Venezuela Agribusiness Report Q3 2010

owing to a poor crop, demand for coffee from neighbouring countries is high. It is inevitable that
Venezuelan coffee will find its way over the border given the difference in prices on offer. The low prices
offered are also causing yields to fall as growers complain that they are unable to hire enough labourers or
invest in improving tree stock. The added instability in the sector following the seizures will only make
matters worse as investors. In August, just after the seizures, Venezuela imported 25,000 bags of coffee
from Brazil, the first imports from that country since 2004. We see Venezuela becoming increasingly
reliant on imports in the future as domestic production is unable to meet demand.

Now, including the plants of Cafe Madrid, the government is in control of 75% of the country's coffee

roasting capacity. The government is hoping to use its new power in the coffee sector to guarantee a
constant flow of supplies to all areas of the country, with half of the nation's capacity provided by the
government-operated plants and the remaining half in the hands of smaller private players. We do not
expect the going to be easy, however, particularly for the remaining private roasters. According to data
from the Superintendent of Silos, Warehouse and Agricultural Storage (SADA) reported in El Univerasl,
only 99 of the 145 coffee roasters active in 2008 were still working in 2009. We expect the tough
operating environment to continue into 2010 as price controls continue.

Premium Coffee Controls Hit Imports
In January 2009 speciality coffee was brought under government price control along with regular coffee.
Previously, premium brands had been exempt from the controls. This saw the official price for many
brands fall by up to 50%. This obviously made official imports of many brands of high-quality coffee
unprofitable. Colombian coffeemaker Cafe Oma told Reuters that its total exports fell by almost 80% yo-y in the first 11 months of 2009, primarily due to the collapse in demand from Venezuela, its major
export market. In total, the value of Colombian coffee and tea exports to Venezuela plummeted from
US$1.77mn in the first 10 months of 2008 to US$54,450 in the same period of 2009. The fall was caused
by both the price controls imposed on specialist coffee, as well as the general fall in trade between
Venezuela and Colombia owing to the ongoing spat between the countries' leaders. Some low-grade
Colombian coffee is reportedly still being imported by Venezuela to make instant coffee. To make up for
the fall in Colombian coffee, importers have turned to other markets such as Brazil. In the longer term, we
expect Colombian coffee to re-establish itself in the Venezuelan market. Following the decision of the
Constitutional Court to bar President Álvaro Uribe from seeking a third term, Colombia will have a new
president in 2010. This will present a good opportunity to reset relations between the two countries and
normalise trade relations.

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Venezuela Agribusiness Report Q3 2010

Table: Venezuela –Coffee Production, Consumption & Trade

2005

2006

2007

2008

2009e

2010f

Coffee Production, '000
1
60kg bags

800.00

820.00

862.00

900.00

845.00

813.40

Coffee Consumption,
1
'000 60kg bags

700.00

740.00

790.00

834.00

875.00

869.70

1

Notes: e/f=BMI estimate/forecast. Source: USDA, BMI

Risks To Outlook
With state involvement in the economy at such a high level, government policy will continue to be the
major factor influencing the success of coffee production in Venezuela. If the government and coffee
producers cannot come to an agreement on prices acceptable to both sides, investment in production will
not be forthcoming. The threat of nationalisation still worries potential investors in the sector. Coffee
growing has also been hit in other ways by the encroachment of the state. Agricultural labourers are
reportedly becoming harder to find and more expensive, as workers choose employment with government
projects instead of the private sector.

On the upside, the dramatic fall in oil prices over the second half of 2008 could lead to more interest in
developing agriculture as a major export earner, once again. At the end of July 2008, Venezuela-owned
petrol station chain Citgo Petroleum Corporation announced that it would begin selling Venezuelan
coffee at its forecourts in the US. While production is not yet large enough to meet both domestic demand
and support an export industry, if Venezuelan coffee could find popularity on world markets as
neighbouring Colombian coffee has done, then investment in the sector could increase.

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Venezuela Agribusiness Report Q3 2010

Venezuela Dairy Outlook
BMI Supply View: The past few years have been eventful for the dairy sector in Venezuela, as the
government has begun to exert itself by taking over farms and one of the country's leading milk
processing companies. The moves have been part of President Hugo Chávez's attempts to bring food
prices down and provide enough milk to meet rising demand from Venezuelan consumers. Despite the
turbulence, from 2004 to 2009, milk production recovered from a number of years of contraction to grow
by an estimated 17.6%, according to newly available data from the Food and Agricultural Policy
Research Institute. Chávez's interest in milk production may yet turn out to be a mixed blessing as the
private sector is dissuaded from investing in the sector. With this in mind, we do not see the kind of leaps
in production the government is hoping for and are forecasting growth of 7.4% from to 2009 to 2014 to
1.61mn tonnes. Production should be aided by the government's increase of the price caps on milk and
dairy products in April 2010 (see below for further comment). Whole milk powder production saw even
stronger growth from 2004-2009 than fluid milk, expanding by an estimated 28.4% to reach 29,500
tonnes. To 2014, we forecast production to grow by 6.1% to 31,320 tonnes.

In contrast to his enthusiasm for fluid milk production, Chávez has taken a rather dim view of processed

dairy products. He has partly blamed the shortage of milk on companies profiting by diverting milk to
produce high-value-added cheese and yoghurt, which are not subject to the same price controls as milk.
Nonetheless, cheese production grew strongly from 2004-2009, increasing by 23.8% to 74,250. Out to
2014, we forecast cheese production to grow 9.5% on the 2009 level to reach 81,290 tonnes. We now
believe that butter production contracted by 10.3% between 2004 and 2009. We see production returning
to growth over our forecast period and have pencilled in an increase of 3.1% to take output to 1,340
tonnes in 2014.

BMI Demand View: With stocks often in short supply and long queues at stores selling subsidised milk,
demand for fluid milk is higher than consumption figures suggest. In 2008, consumption fell by 4.7% to
185,600 tonnes. The fall can be partly attributed to producers attempting to circumvent price controls on
milk by switching output to products such as flavoured milk, the prices of which are not controlled. This
practice was reduced in 2009, however, as at the beginning of March the government signed into law new
regulations stipulating that 70% to 95% of output from companies producing basic food products, such as
milk, must be products that come under the price control system. We forecast only slow growth in
demand over our forecast period and see consumption rising by 3.9% on the 2009 level to reach 193,000
tonnes.

Transport infrastructure is poor and local production of fluid milk is unable to meet demand. Most of
Venezuela's milk consumption therefore comes in the form of reconstituted powdered milk. From 20042009, consumption increased by 7.4% to reach 123,500 tonnes. We expect consumption growth to

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Venezuela Agribusiness Report Q3 2010

continue to outstrip that of fluid milk and are forecasting expansion of 5.8% to 2014 to reach 130,600
tonnes, driven by population growth and rising incomes.

With the lack of support from the government and slower economic growth, we expect growth in
consumption of processed dairy products to be weak over our forecast period. We forecast cheese
consumption to grow 2.7% to reach 81.06 tonnes in 2014 and butter consumption to grow by 4.3% to
4,040 tonnes in 2014.

Table: Venezuela –Milk Production & Consumption

Milk Production, '000
1
tonnes
Liquid Milk Consumption,
1
'000 tonnes

2009e

2010f

2011f

2012f

2013f

2014f

1,499.5

1,549.5

1,567.0

1,581.2

1,594.1

1,609.7

185.7

187.0

188.4

189.9

191.5

193.0

1

Notes: e/f=BMI estimate/forecast. Source: FAPRI, BMI

Table: Venezuela –Butter Production, Consumption & Trade

2009e

2010f

2011f

2012f

2013f

2014f

Butter Production, '000
1
tonnes

1.3

1.3

1.3

1.3

1.3

1.3

Butter Consumption, '000
1
tonnes

3.9

4.0

4.0

4.0

4.0

4.0

-2.3

-2.7

-2.7

-2.7

-2.7

-2.7

Butter Net Trade
1
Balance, '000 tonnes

1

Notes: e/f=BMI estimate/forecast. Source: FAPRI, BMI

Table: Venezuela –Cheese Production, Consumption & Trade

2009e

2010f

2011f

2012f

2013f

2014f

Cheese Production, '000
1
tonnes

74.3

75.4

76.6

78.1

79.5

81.3

Cheese Consumption,
1
'000 tonnes

79.0

79.7

80.2

80.5

80.7

81.1

Cheese Net Trade
1
Balance, '000 tonnes

-14.1

-4.3

-3.6

-2.3

-1.2

0.2

1

Notes: e/f=BMI estimate/forecast. Source: FAPRI, BMI

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Venezuela Agribusiness Report Q3 2010

Table: Venezuela –Whole Milk Powder Production, Consumption & Trade

2009e

2010f

2011f

2012f

2013f

2014f

29.5

30.6

30.7

30.9

31.1

31.3

Whole Milk Powder
Consumption, '000
1
tonnes

123.5

125.2

126.3

127.7

129.1

130.6

Whole Milk Powder Net
Trade Balance, '000
1

tonnes

-96.4

-94.6

-95.6

-96.8

-98.0

-99.3

Whole Milk Powder
1
Production, '000 tonnes

1

Notes: e/f=BMI estimate/forecast. Source: FAPRI, BMI

Dairy Prices Raised By 30% Following Bolívar Devaluation
In April 2010, the Venezuelan government raised the state-controlled price caps for milk and dairy
products by as much as 30%. The increase was in response to spiralling costs following the 50%
devaluation of the bolívar in early January 2010. The price of fluid milk was raised by 30% to VEF4.15
(US$0.97) per 900ml container, will the costs of white cheeses and powdered milk were also increased. In
recent years, demand for fluid milk in particular has regularly outstripped supply. The government hopes
that the increase in authorised prices will provide an incentive to producers and head off the danger of
future food shortages.

Trade Spat Good News For Domestic Producers
The recent spat between Venezuelan President Hugo Chávez and Colombian President Álvaro Uribe is
likely to see imports of dairy products from Colombia fall. At the end of July 2009, Chávez froze
diplomatic relations with Colombia in response to the country allowing US troops to operate out of their
bases in the fight against drug production. From January to October 2009, the value of Venezuela's
imports of milk, dairy products, eggs and honey from Colombia plummeted 72.4% y-o-y, according to
Colombia's statistics agency, DANE. With no sign of relations between the two countries improving Venezuelan troops reportedly blew up cross-border foot bridges in mid-November - it looks like it will be
some time before dairy exports to Venezuela, at least legal ones, return to their former level.

A number of deals have been struck for imports of dairy products from countries friendly with Chávez'
government including Belarus and Argentina. Any fall in imports caused by the dispute with Colombia
will be welcomed by Venezuela's dairy farmers who have been complaining to the government amount an
excess of cheap, imported milk powder on the market. While producers may be happy, the dispute will be
less welcome for consumers. Dairy products can already be hard to come by in some parts of the country,
at least at the legally controlled price - on the black market supplies are reportedly still plentiful.

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Venezuela Agribusiness Report Q3 2010

Government Enters Dairy Business
In February 2008, the Venezuelan government announced that it would buy Lácteos Los Andes , one of
the largest domestic dairy processing companies. While the government did not announce how much it
paid for the firm, press reports estimated it at around US$180mn. With the company now in state hands,
managers were moved over from state oil company Petróleos de Venezuela to oversee a large increase in
milk production. Orders were given to abandon production of other dairy products such as yoghurt. While

Los Andes was put up for sale by its owners, rather than expropriated by the government as Chávez had
previously threatened to do, the increasing involvement of the state in the dairy sector will not be
welcome news for other players. The move followed the purchase of a dairy processing plant from
Parmalat in November 2007.

In August 2008, the US Department of Agriculture (USDA) reported that the Venezuelan government had
taken over 87 dairy farms in Zulia state. While the government is hoping that once the farms are in state
hands, milk production will increase, dairy industry bodies have been predicting a dramatic drop in
output. Doubts over whether the often inefficient and corrupt state bureaucracy will be able to effectively
manage the farms remain. Farming expertise is often lacking, with, in some cases, managers being
brought in from the state oil company to run dairy farms. Questions also remain over some of the
government's strategic investment decisions. For example, a new dairy processing plant built with Iranian
assistance in Mantecal in Bolívar State has been unable to source enough milk from the local area to
produce at anywhere near full capacity.

Reports over the success of the government's activities in the dairy business have been mixed. In June
2009, Chávez gave his weekly radio show from a government farm in the Andean state of Tachira. He
said that milk production at the farm was up 38% compared to a year earlier. He also said that the national
cattle herd would rise to 14mn head from its present level of 12mn. News from non-government sources
is more mixed. There are many reports of seized or newly established dairy operations struggling to keep
up production levels. The seizures have also led to fragmentation of production as land is divided up
among settlers.

Table: Venezuela –Milk Production & Consumption

Milk Production, '000
1
tonnes
Liquid Milk Consumption,
1

'000 tonnes

2005

2006

2007

2008

2009e

2010f

1,284.8

1,329.8

1,443.8

1,469.9

1,499.5

1,549.5

200.0

191.8

194.7

185.6

185.7

187.0

1

Notes: e/f=BMI estimate/forecast. Source: FAPRI, BMI

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Venezuela Agribusiness Report Q3 2010

Table: Venezuela –Butter Production, Consumption & Trade

2005

2006

2007

2008

2009e

2010f

Butter Production, '000
1
tonnes

1.5

1.4

1.4

1.4

1.3

1.3

Butter Consumption, '000
1
tonnes

3.3

3.1

4.0

3.7

3.9

4.0

-1.8

-1.6

-2.6

-2.3

-2.3

-2.7

Butter Net Trade
1
Balance, '000 tonnes

1

Notes: e/f=BMI estimate/forecast. Source: FAPRI, BMI

Table: Venezuela –Cheese Production, Consumption & Trade

2005

2006

2007

2008

2009e

2010f

Cheese Production, '000
1
tonnes

59.3

63.4

70.1

70.6

74.3

75.4

Cheese Consumption,
1
'000 tonnes

70.0

71.1

73.4

75.9

79.0

79.7

Cheese Net Trade
1
Balance, '000 tonnes

-10.7

-12.1

-10.4

-11.9

-14.1

-4.3

1

Notes: e/f=BMI estimate/forecast. Source: FAPRI, BMI

Table: Venezuela –Whole Milk Powder Production, Consumption & Trade

2005

2006

2007

2008

2009e

2010f

26.0

26.0

26.0

29.1

29.5

30.6

Whole Milk Powder
Consumption, '000
1

tonnes

118.0

118.0

119.8

121.6

123.5

125.2

Whole Milk Powder Net
Trade Balance, '000
1
tonnes

-95.0

-92.0

-94.9

-93.3

-96.4

-94.6

Whole Milk Powder
1
Production, '000 tonnes

1

Notes: e/f=BMI estimate/forecast. Source: FAPRI, BMI

Risks To Outlook
The major risks to our forecasts for the dairy industry come from the policies of Chávez's government. If
the president's efforts to spur dairy production are successful, then production could overshoot our

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Venezuela Agribusiness Report Q3 2010

forecasts, particularly for fluid milk where most of the government's efforts are focused. On the other
hand, if Chávez's rhetoric succeeds only in putting off private investors in the sector, production could fall
short of our forecasts and growth turn negative, as producers leave the sector due to the strict price
controls squeezing profits and the threat of expropriation. In the past dairy farming in areas of the country
close to the Colombian border has been hit by instability spilling over. While the insurgencies in
Colombia seem to be dying down under President Álvaro Uribe's Democratic Security policy, any
renewed flare-up could once again act as a deterrent to investment in dairy farming near the border. With
BMI forecasting Venezuela's GDP to have contracted 3.3% in 2009 and then again by 3.6% in 2010,
growth in dairy consumption could be hit harder than we currently forecast. Much will depend on the
success of the government's production policies and on the price control regime.

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Venezuela Agribusiness Report Q3 2010

Venezuela Sugar Outlook
BMI Supply View: The Venezuelan sugar sector has declined dramatically in the past 24 months and the
country has been facing severe sugar shortages. Sugar production rose rapidly between 2003/04 and
2007/08, growing by 41.8% to reach 780,000 tonnes. This growth was driven by improving efficiency of
production, as the area under sugar cane cultivation saw no significant increase over the period. In
2008/09, however, heavy rains followed by severe droughts saw yields fall and production dropped by
14.7% year-on-year (y-o-y) to an estimated 665,000 tonnes. The uncertain investment climate and
marginal profitability of the sugar sector has seen the area planted to sugar fall. National Federation of
Associations of Venezuelan Cane Producers (FESOCA) estimates that the area planted could fall by 20%
over the next three years due to land seizures and government price caps deterring producers. As a result,
we see production falling again in 2009/10 and have pencilled in a decline of 9.9% y-o-y to take
production to 599,100 tonnes.

Over our forecast period to 2013/14, we expect sugar production to increase gradually to reach 674,900
tonnes. This will be achieved with new mills coming on line. We warn, however, that this will be
dependent on the policies of President Hugo Chávez' government. In 2008, a number of sugar cane
plantations were seized by the government. If this policy continues and the new co-operatives created to
run the plantations are unable to sustain production, then the managers of the new mills being built may
find that there is not enough cane to supply them.

BMI Demand View: Sugar consumption has seen reasonably strong growth over the last few years,
spurred by the economic recovery from 2004. From 2004 to 2009, consumption increased by 25.0% to

1.05mn tonnes, as rising per capita incomes allowed consumers, particularly from poorer segments of
society, to increase the amount they spent on food. Countering this in the last couple of years, however,
has been high food price inflation and supply shortages. With domestic production covering only around
three-quarters of consumption in 2008, imports have had to be found to supply the remainder. The
Chávez government has been criticised by industry bodies for not acting quicker to ensure that enough
sugar was available to meet demand. Conversely, Chávez has blamed the shortages on producers
hoarding their output and illegally exporting it to neighbouring countries such as Colombia.

In 2009, growth in sugar consumption was held up by strong demand in late 2008. By late 2009, however,
consumption was falling rapidly. In October 2009, consumption fell by 25.8% y-o-y according to a poll
by the Venezuelan Chamber of the Food Industry published in newspaper El Universal. Also in October,
the government raised the official price of sugar slightly. In March 2010, the government raised the price
of sugar again to VEF3.73/kg. We expect this to have only a moderate impact on consumption, with
supply shortages a more likely constraint. BMI is forecasting Venezuela's GDP to fall 3.6% in 2010
following a 3.3% contraction in 2009. With inflation still high, we expect sugar consumption to increase

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Venezuela Agribusiness Report Q3 2010

only marginally in 2010 as consumers' ability to purchase is constrained. To 2014, we expect sugar
consumption to grow by 9.8% on the high 2009 level to reach 1.15mn tonnes.

Table: Venezuela –Sugar Production, Consumption & Trade

2009e

2010f

2011f

2012f

2013f

2014f

665.0

599.1

608.5

630.0

651.0

675.0

Sugar Consumption, '000
1
tonnes

1,050.0

1,071.7

1,073.1

1,084.7

1,118.0

1,153.0

Sugar Net Trade Balance
1
('000 tonnes)

-450.0

-438.5

-413.6

-400.0

-392.0

-391.0

Sugar Production, '000
1
tonnes

1

Notes: e/f=BMI estimate/forecast. Source: USDA, BMI

Price Rise Fails To Revitalise Sugar Sector
Venezuelan sugar production has fallen dramatically since 2008. Large amounts of sugar-producing land
have been expropriated in the states of Aragua and Carabobo under the government's 'Land and Free Men'
programme to 'liberate' land from private control. The expropriations have had a negative impact on
Venezuelan sugar production and the area planted to sugar has fallen. Sugar cane growers have also been
discouraged from planting from the shrinking profit margins in the sector. Despite two increases in the
official cost of sugar on the domestic market in October 2009 and March 2010, producers are still
reluctant to devote acreage to sugar or to invest further in the sector. Of the market price of VEF3.73 per
kilogram, cane producers were receiving just VEF1.20 per kilogram delivered to the processor; far short
of the production cost of VEF2.60 per kilogram. In addition, cane producers are yet to receive
government subsidies granted to them in 2009, further deterring them from planting.

The negative production margins bode ill for Venezuela's sugar sector going forward. BMI sees little
hope of much needed investment in the sector through 2010 and 2011 and anticipates that an increasing
amount of domestic demand will be satisfied through imports. Imports have shot up from just 150,000
tonnes in 2006 to a forecast 700,000 tonnes in 2010, according to data from the US Department of
Agriculture (USDA). Imports would, therefore, outstrip domestic production of a forecast 600,000 tonnes.
The majority of imports are raw sugar from neighbouring Brazil. However, the tight caps placed on
refined sugar prices by the government for the domestic market make sourcing imports difficult and
reduce profitability on the domestic market. The sugar shortages experienced in recent months could,
therefore, continue to hit the Venezuelan market unless the government relaxes its restrictive policies.

Seizures Continue Into 2010
In the first quarter of 2010, the government took control of another two of the country's sugar mills. On

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Venezuela Agribusiness Report Q3 2010

March 9, the government moved in to run Santa Elena mill in Potuguesa and the Santa Clara mill in
Yaracuy for a period of 90 days. The moves were motivated by allegations of irregularities in supply - the
authorities claim that 4,000 tonnes of sugar were being hoarded in a warehouse by the Santa Elena mill.
The owner of the two mills, a Guatemalan businessman, has denied any wrongdoing, according to an
Associated Press report. The government has been encouraging citizens' groups to keep an eye on mills
and sugar processing plants to watch out for any suspicious practices. With the cost of imports high and
Venezuelan mills unable to meet demand, we would not be surprised if the government permanently
seizes the mills owing to expected continued difficulty in keeping the country supplied with sugar.

The March moves came only a few months after the government seized two sugar mills in the western
border states of Táchira and Zulia in October 2009. El Universal reported that the Ministry of Agriculture
and Lands said the seizures were needed as the mills' owners had put the desire for excessive profits
before the needs of their workers and the general public. The owners of the Zulia mill had raised the ire of
the government in September by declaring a temporary shutdown leaving around 1,000 employees out of
work. The seizures mean that six of Venezuela's 15 sugar mills are under government control, according
to El Universal. The agriculture ministry has vowed to raise sugar production at its mills, but we believe
this will be difficult without considerable investment. Years of price controls of sugar have worked as a
disincentive to investment in milling technology. The rise in the price of sugar will do little to solve the
problem - millers wanted the price to be raised to VEF4.40/kg claiming that at before the most recent rise
they received only VEF1.20/kg against costs of VEF2.60/kg, according to the USDA. The government
has offered subsidies to encourage investment, but many millers complain that payment of the subsidies
has been irregular. There is now little excess milling capacity available to increase sugar production. This
will not be easy to turn around. The performance records of food production units seized by the
government has been highly mixed. The government often lacks experienced managers to replace the
outgoing former owners leading to difficult transitions. We therefore do not expect to see a major increase
in production from the seized mills any time soon.

Seizures Alone Cannot Drive Production
In April 2008, Venezuelan soldiers seized 32 sugar plantations in the northwestern state of Lara. The
plantations were expropriated on orders from the National Land Institute which claimed they were
unproductive and could therefore be seized under the Land and Agricultural Development Law. The
president of the institute was quoted in press reports as saying that only 20% of the total 2,460 hectares
seized was productive. The local sugar producers association, however, reportedly claimed that 80% of
the land was under cane cultivation and protests followed which the police dispersed with teargas. The
seized land has been transformed into a state co-operative called a Social Production Unit (SPU). SPUs
have been popping up on expropriated land across the country, but it is still too early to say whether the
hoped for gains in production can be achieved and sustained over the long term.

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Venezuela Agribusiness Report Q3 2010

Despite the dramatic news of land seizures and protests (with more than 80% of sugar cane grown by
independent farmers on plots averaging only 45 hectares according to USDA data) just as much attention
will have to be given to assisting smallholders as to pressuring large plantation owners. Measures
introduced to help cane growers include subsidies for every kilogram of cane produced, zero income tax,
cheap fuel and finance.

These measures will only help relieve future sugar supply shortages if the milling capacity is built up to
match any increase in sugar cane production. The government has begun work on new sugar mills, but
construction has been delayed and the projects have been hit by corruption allegations. The most
infamous problems have been with the Ezequiel Zamora Agro-Industrial Sugar Complex in Chávez's
home state of Barinas. In early 2006, 17 people, including members of the military, were arrested amid

accusations that millions of dollars had gone missing from the project. The delay in bringing new mills
online has led to cane being left in the field, owing to a lack of processing capacity.

Shortages Force Changes In Consumption
Refined sugar is one the basic food staples for which the price is controlled by the government. While this
has insulated consumers from the high food price inflation seen over 2007 and much of 2008, the
government has often been unable to get enough sugar to the market at the official rate, leading to long
queues at its Mercal-branded supermarkets. The black market has been quick to fill the gap left by
shortages for those who can afford to pay a premium, with street stalls selling refined sugar at three or
four times the official price. Other consumers have turned to less favoured types of sugar such as bars of
brown sugar and fruit lactose products, which are not covered by price controls. In March 2009, the
government signed into law new regulations stipulating that 70% to 95% of output from companies
producing basic food products such as sugar must be products that come under the price control system.
This could restrict supply of alternatives to refined sugar.

Table: Venezuela –Sugar Production, Consumption & Trade

2005

2006

2007

2008

2009e

2010f

Sugar Production, '000

1
tonnes

650.0

745.0

750.0

780.0

665.0

599.1

Sugar Consumption, '000
1
tonnes

865.0

950.0

960.0

960.0

1,050.0

1,071.7

Sugar Net Trade Balance
1
('000 tonnes)

-218.0

-144.0

-175.0

-389.0

-450.0

-438.5

1

Notes: e/f=BMI estimate/forecast. Source: USDA, BMI

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