Q3 2015 www.bmiresearch.com VENEZUELA AGRIBUSINESS REPORT INCLUDES 5-YEAR FORECASTS TO 2019 ISSN 2040-0497 Published by:BMI Research Venezuela Agribusiness Report Q3 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: June 2015 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International Ltd, 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 Ltd 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 Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Venezuela Agribusiness Report Q3 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: June 2015 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International Ltd, 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 Ltd 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 Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Venezuela Agribusiness Report Q3 2015 CONTENTS BMI Industry View SWOT 10 Agribusiness 10 Operational Risk 12 Industry Forecast 14 Grains Outlook 14 Table: Corn Production & Consumption (Venezuela 2014-2019) 16 Table: Wheat Production & Consumption (Venezuela 2014-2019) 16 Table: Corn Production & Consumption (Venezuela 2009-2014) 21 Table: Wheat Production & Consumption (Venezuela 2009-2014) 21 Livestock Outlook 22 Table: Beef Production & Consumption (Venezuela 2014-2019) 23 Table: Pork Production & Consumption (Venezuela 2014-2019) 23 Table: Poultry Production & Consumption (Venezuela 2014-2019) 24 Table: Beef Production & Consumption (Venezuela 2009-2014) 27 Table: Pork Production & Consumption (Venezuela 2009-2014) 27 Table: Poultry Production & Consumption (Venezuela 2009-2014) 27 Coffee Outlook 29 Table: Coffee Production & Consumption (Venezuela 2014-2019) 30 Table: Coffee Production & Consumption (Venezuela 2009-2014) 34 Commodity Strategy 35 Upstream Analysis 41 Americas GM Outlook 41 Americas Fertiliser Outlook 47 Downstream Analysis 53 Food 53 Food Consumption 53 Table: Food Consumption Indicators - Historical Data & Forecasts (Venezuela 2012-2019) 54 Confectionery 54 Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019) 55 Drink 56 Alcoholic Drinks 56 Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019) 57 Soft Drinks 58 Table: Soft Drinks Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019) 59 Hot Drinks 59 Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Venezuela 2012-2019) 60 Mass Grocery Retail 60 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2015 Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Venezuela 2012-2019) 61 Table: Sales Breakdown By Retail Format Type 61 Regional Overview 62 Competitive Landscape 67 Table: Venezuela Agribusiness Competitive Landscape 67 Demographic Forecast 68 Demographic Outlook 2015 68 Table: Population Headline Indicators (Venezuela 1990-2025) 69 Table: Key Population Ratios (Venezuela 1990-2025) 69 Table: Urban/Rural Population & Life Expectancy (Venezuela 1990-2025) 70 Table: Population By Age Group (Venezuela 1990-2025) 70 Table: Population By Age Group % (Venezuela 1990-2025) 71 Methodology 73 Industry Forecast Methodology 73 Sector-Specific Methodology 74 © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2015 BMI Industry View BMI View: The operating environment for the agribusiness sector has deteriorated significantly over recent years due to a poor macroeconomic climate, shortage of foreign currency and government mismanagement, resulting in a dearth of agricultural inputs Venezuela's economy will be under extreme downward pressure in 2015 amidst a drop in international prices The growing headwinds to the economy will weigh on agriculture production and consumption in the coming year, and we will see most commodities see modest if not declining growth out to 2019 Producers of agricultural goods will struggle as rising production costs and controlled prices at farm level reduce margins Agribusiness Market Value BMI Market Value By Commodity (2005-2019) 75 50 25 2005 2007 2006 2009 2008 2011 2010 2013e 2015f 2017f 2019f 2012 2014e 2016f 2018f Grains market value, % of total Livestock market value, % of total Sugar market value, % of total e/f = BMI estimate/forecast Source: FAO, BMI © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2015 Key Forecasts ■ Poultry consumption growth to 2019: 9.3% to 1.1mn tonnes Demand for poultry is slowing down, amidst the growing headwinds to the Venezuelan economy and consumer purchasing power ■ Coffee production to 2018/19: decline of 1.9% to 686,800 60kg bags The outlook for coffee production in Venezuela remains dire, as hurdles to output expansion will remain in place over the coming years ■ Beef production growth to 2018/19: 0.1% to 280,400 tonnes High input costs, cheaper Mercosur competitors and reduced domestic demand will stymie growth ■ 2015 BMI universe agribusiness market value: USD19.6bn (up 1.8% from 2014; forecast to grow annually by 2.5% on average from 2015 to 2019) ■ 2015 real GDP: contraction of 3.6% (contracted by 2.5% in 2014; forecast to grow by an annual average of 0.2% between 2015 and 2019) ■ 2015 consumer price index: 77.0% year-on-year (y-o-y) (up from 61.7% in 2014; forecast to grow annually by 42.5% on average between 2015 and 2019) Industry Developments Venezuela's agricultural sector has been held back over the past decade by poorly executed control policies and limited agricultural inputs The country's socialist government has pegged its procurement price for corn below the cost of production for some time, which has resulted in declining output for several years Control over the bolivar by the Venezuelan government and limited loan availability in the country have also meant there is limited use of imported agricultural inputs This has drastic implications for Venezuelans, as the country's dependence on imports has been growing over the past ten years due to these poor policies; imports now account for about 70% of its food supply The operating environment for the agribusiness sector has deteriorated significantly over recent years due to the poor macroeconomic climate and a shortage of foreign currency Venezuela's economy will be under extreme downward pressure over the coming quarters, due to a confluence of factors including a poor business environment, high inflation and lower oil prices Some types of politically important public spending will be bolstered by the government's attempts to consolidate its appeal ahead of the legislative elections scheduled for the end of 2015, but the dearth of public revenue, as well as high inflation, will mute spending growth in real terms We forecast a real GDP contraction of 3.6% in 2015, compared to an estimated 2.5% contraction in 2014 We expect the recession to stretch into its third year in 2016 The already strained grains and livestock sectors in Venezuela will see their operating environment deteriorate further in 2015 as the growing headwinds to the Venezuelan economy will weigh on meat © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2015 production and consumption Regarding livestock, beef and poultry output will record weak growth in the coming years, as domestic production will be pressured by fixed output prices and high feed costs Although the government lifted meat prices in early 2015, local producers associations argue they are still below production costs The country's modern poultry industry will fare better than the beef sector, for which the outlook is especially bleak Meanwhile, the growing headwinds to the Venezuelan economy will drag meat consumption growth lower in 2015 Venezuela's grain farmers and milling sector will continue to operate in a challenging environment in the coming years Hurdles will include rising production costs and government control over access to foreign exchange and therefore inputs The recent drop in international oil prices poses further risks to the country's foreign exchange reserves and its ability to import much-needed agricultural inputs Corn production, a key staple in the country, will decline Meanwhile, the grain downstream segments, including feed manufacturing and food production, will face mounting challenges © Business Monitor International Ltd Page Venezuela Agribusiness Report Q3 2015 operate on a profit-and-loss basis, and has almost unlimited (for now) access to expansion capital, its existence creates quite a challenge for the country's other retailers Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Venezuela 2012-2019) 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 13.1 14.5 16.4 18.1 20.1 22.5 25.1 28.0 437.5 477.1 533.2 577.0 635.0 699.0 769.7 847.9 Total mass grocery retail sales, USDbn 3.1 2.4 2.6 1.2 0.8 0.9 1.0 1.1 Supermarket sales, VEFbn 9.2 10.2 11.5 12.6 14.1 15.7 17.6 19.6 Supermarket sales, USDbn 2.1 1.7 1.8 0.8 0.6 0.6 0.7 0.8 Hypermarket sales, VEFbn 3.3 3.6 4.1 4.5 5.0 5.6 6.3 7.0 Hypermarket sales, USDbn 0.8 0.6 0.7 0.3 0.2 0.2 0.3 0.3 Convenience store sales, VEFbn 0.7 0.7 0.8 0.9 1.0 1.1 1.3 1.4 Convenience store sales, USDbn 0.2 0.1 0.1 0.1 0.0 0.0 0.1 0.1 Total mass grocery retail sales, VEFbn Total mass grocery retail sales, VEF per capita f = BMI forecast Source: National Sources/BMI Table: Sales Breakdown By Retail Format Type 2011 2021f Organised/MGR 25% 35% Non-organised/Independent 75% 65% f = forecast Source: BMI © Business Monitor International Ltd Page 61 Venezuela Agribusiness Report Q3 2015 Regional Overview In this quarter's regional overview for the Americas region, we highlight that the Americas agriculture industry is facing a weaker growth outlook in the past Lower crop prices, reduced government support and higher farmland rental prices will curb farm incomes and ultimately production growth We believe a bright spot will be the palm oil sector in Latin America Looking further ahead, technology and consumer awareness will be key issues facing the industry US Meatpackers: Striking A Balance On Animal Welfare Growing US consumer awareness will help to drive domestic meat processers to continue examining and amending their production methods in the coming years A reduction in the use of animal steroids and antibiotics may increase brand equity for these companies, but it may also increase operating costs in an industry that already has low margins and is likely to see slowing sales growth over the coming quarters Livestock At The Bottom Select Sub-Sectors - Trailing 12M Operating Margins (%) Note: Sub-sector company list is derived from the Bloomberg Food Index; a full list of companies included is available upon request Sources: BMI, Bloomberg © Business Monitor International Ltd Page 62 Venezuela Agribusiness Report Q3 2015 Americas Long-Term Grain Production Growth To Slow We expect grain production growth in the Americas to slow over the coming years, mainly due to high base effects for yields and limited available land for additional plantings This will lead to tightening grain markets in the coming years and higher average prices by the end of our forecast period to 2019, for which we hold an above-consensus view Grain production in the Americas (including corn, wheat, soybean and rice) has grown tremendously in the last decade, a function of the greater use of genetically modified seeds and a larger area dedicated to grains, driven by high prices Argentina & Brazil Underperformance Select Grains - Production Growth (%) Note: 2014-2019 is BMI forecast Growth is the 2014 level compared with the 2009 level, and the 2019 level compared with the 2014 level Sources: USDA, IBGE, Conab, BMI Farm Incomes: Lower For Several Years US crop farm incomes will be significantly lower in 2015 compared to recent years, primarily due to lower grain prices, comparatively high farmland rental costs and reduced government subsidies We believe that machinery sales growth in the US will suffer over the next few years, based on our view of lower farm incomes and the strong potential of a rise in US interest rates in H215 Crop farmers will particularly suffer, © Business Monitor International Ltd Page 63 Venezuela Agribusiness Report Q3 2015 as livestock farmers will benefit from elevated meat and animal prices compared to previous years However, overall we believe input usage will be reduced as farmers attempt to reduce costs World of Hurt In 2015 United States - Annual Farm Net Income Growth (%) Sources: BMI, Bloomberg, USDA Big Potential For Big Data, But Questions Remain As part of a trend known as 'precision agriculture', mountains of data can now be collected and processed from agriculture fields and companies are working on technology so data can be analysed to maximise yields Precision agriculture, which includes 'smart' tractors, highly localised weather forecasts and advanced insurance policies, looks set to expand as a key feature for agricultural input companies Firms are looking to tap into so-called 'big data' as a means to improve revenues via the sale of higher value-added (and thus more expensive) goods and services, while shielding themselves from the effects of lower grain prices However, we expect challenges along the way, as some ventures will take a while to show progress Falling farm incomes and tightening credit conditions in several markets may threaten to reduce farmer incentives to purchase more expensive products, especially machinery © Business Monitor International Ltd Page 64 Venezuela Agribusiness Report Q3 2015 No Imminent Return To Previous Highs Select CBOT Grain Prices With Forecast (USc/bushel) Note: Horizontal lines are BMI forecasts; Sources: BMI, Bloomberg Latin America: Increasing Its Palm Oil Presence Though low by global standards, the Latin America palm oil sector will experience high growth over the coming years In particular, Colombia will gain more importance on the global scene over the next decade, while we also expect Guatemala and Honduras to post strong growth We believe that the region's largest producer, Colombia, has the very real ability to overtake Thai palm oil production in the next decade We also hold the view that Honduras will become an increasingly important player for processed palm oil, with increases in both domestic demand and oil for export © Business Monitor International Ltd Page 65 Venezuela Agribusiness Report Q3 2015 Colombia Will Increase In Global Importance Select Countries - Palm Production Growth (% chg y-o-y) 30 25 20 15 10 2012 2013 Colombia 2014 2015f Ecuador 2016f Guatemala 2017f 2018f Honduras Sources: BMI, USDA © Business Monitor International Ltd Page 66 Venezuela Agribusiness Report Q3 2015 Competitive Landscape Table: Venezuela Agribusiness Competitive Landscape Company Sub-Sector Revenue (USDmn) Fiscal Year End Market Capitalisation (USDmn) Proagro Feed & Livestock 672.2 08/2011 407.4 Productos Dairy 120.4 09/2011 28.9 Empresas La Polar Dairy 688.9 12/2014 36.9 Sources: Bloomberg, BMI © Business Monitor International Ltd Page 67 Venezuela Agribusiness Report Q3 2015 Demographic Forecast Demographic Outlook 2015 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 essential to understanding issues ranging from future population trends to productivity growth and government spending requirements The accompanying charts detail the population pyramid for 2015, the change in the structure of the population between 2015 and 2050 and the total population between 1990 and 2050 The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy Population (1990-2050) 60 40 20 2050f 2045f 2040f 2035f 2030f 2025f 2020f 2015f 2010 2005 2000 1990 Venezuela - Population, mn f = BMI forecast Source: World Bank, UN, BMI © Business Monitor International Ltd Page 68 Venezuela Agribusiness Report Q3 2015 Venezuela Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS) Source: World Bank, UN, BMI Table: Population Headline Indicators (Venezuela 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 19,740 24,407 26,725 29,043 31,292 33,416 35,383 na 1.9 1.8 1.6 1.4 1.3 1.1 Population, total, male, '000 9,958 12,283 13,432 14,575 15,680 16,718 17,676 Population, total, female, '000 9,782 12,123 13,293 14,467 15,612 16,697 17,706 Population ratio, male/female 1.02 1.01 1.01 1.01 1.00 1.00 1.00 Population, total, '000 Population, % y-o-y na = not available; f = BMI forecast Source: World Bank, UN, BMI Table: Key Population Ratios (Venezuela 1990-2025) Active population, total, '000 Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age © Business Monitor International Ltd 1990 2000 2005 2010 2015f 2020f 2025f 11,499 15,060 17,024 18,849 20,490 22,009 23,424 58.3 61.7 63.7 64.9 65.5 65.9 66.2 8,240 9,346 9,701 10,193 10,802 11,407 11,958 71.7 62.1 57.0 54.1 52.7 51.8 51.1 Page 69 Venezuela Agribusiness Report Q3 2015 Key Population Ratios (Venezuela 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f 7,505 8,231 8,371 8,560 8,736 8,807 8,761 Youth population, % of total working age 65.3 54.7 49.2 45.4 42.6 40.0 37.4 Pensionable population, '000 735 1,115 1,330 1,633 2,065 2,599 3,196 Pensionable population, % of total working age 6.4 7.4 7.8 8.7 10.1 11.8 13.6 Youth population, total, '000 f = BMI forecast Source: World Bank, UN, BMI Table: Urban/Rural Population & Life Expectancy (Venezuela 1990-2025) 1990 Urban population, '000 Urban population, % of total 2000 2005 2010 2015f 2020f 2025f 16,638.3 21,939.7 24,564.0 27,101.4 29,499.0 31,711.0 33,711.3 84.3 89.9 91.9 93.3 94.3 94.9 95.3 3,102.5 2,467.8 2,161.9 1,941.8 1,793.7 1,705.6 1,671.9 Rural population, % of total 15.7 10.1 8.1 6.7 5.7 5.1 4.7 Life expectancy at birth, male, years 68.3 69.6 70.4 71.3 72.1 72.9 73.8 Life expectancy at birth, female, years 74.1 75.5 76.3 77.2 78.0 78.7 79.4 Life expectancy at birth, average, years 71.1 72.4 73.2 74.2 74.9 75.7 76.5 Rural population, '000 f = BMI forecast Source: World Bank, UN, BMI Table: Population By Age Group (Venezuela 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, total, '000 2,726 2,781 2,863 2,934 2,956 2,931 2,885 Population, 5-9 yrs, total, '000 2,497 2,737 2,773 2,855 2,926 2,950 2,926 Population, 10-14 yrs, total, '000 2,281 2,712 2,734 2,770 2,853 2,925 2,949 Population, 15-19 yrs, total, '000 1,972 2,486 2,704 2,727 2,765 2,848 2,921 Population, 20-24 yrs, total, '000 1,875 2,263 2,472 2,690 2,713 2,753 2,837 Population, 25-29 yrs, total, '000 1,728 1,953 2,248 2,457 2,674 2,699 2,740 Population, 30-34 yrs, total, '000 1,428 1,854 1,939 2,234 2,442 2,658 2,685 Population, 35-39 yrs, total, '000 1,233 1,703 1,838 1,924 2,216 2,424 2,640 Population, 40-44 yrs, total, '000 1,006 1,399 1,683 1,818 1,904 2,194 2,401 Population, 45-49 yrs, total, '000 764 1,197 1,376 1,657 1,790 1,877 2,165 © Business Monitor International Ltd Page 70 Venezuela Agribusiness Report Q3 2015 Population By Age Group (Venezuela 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 50-54 yrs, total, '000 588 961 1,166 1,343 1,619 1,752 1,839 Population, 55-59 yrs, total, '000 493 711 923 1,123 1,296 1,566 1,698 Population, 60-64 yrs, total, '000 408 528 670 872 1,065 1,233 1,494 Population, 65-69 yrs, total, '000 292 417 482 614 804 986 1,146 Population, 70-74 yrs, total, '000 204 318 363 422 542 714 881 Population, 75-79 yrs, total, '000 131 200 257 297 350 453 601 Population, 80-84 yrs, total, '000 72 111 140 184 215 256 336 Population, 85-89 yrs, total, '000 27 48 61 80 107 127 154 Population, 90-94 yrs, total, '000 15 19 26 35 48 58 Population, 95-99 yrs, total, '000 11 15 Population, 100+ yrs, total, '000 0 1 2 f = BMI forecast Source: World Bank, UN, BMI Table: Population By Age Group % (Venezuela 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, % total 13.81 11.40 10.71 10.10 9.45 8.77 8.15 Population, 5-9 yrs, % total 12.65 11.22 10.38 9.83 9.35 8.83 8.27 Population, 10-14 yrs, % total 11.56 11.11 10.23 9.54 9.12 8.75 8.34 Population, 15-19 yrs, % total 9.99 10.19 10.12 9.39 8.84 8.52 8.26 Population, 20-24 yrs, % total 9.50 9.27 9.25 9.26 8.67 8.24 8.02 Population, 25-29 yrs, % total 8.76 8.00 8.41 8.46 8.55 8.08 7.74 Population, 30-34 yrs, % total 7.24 7.60 7.26 7.69 7.81 7.96 7.59 Population, 35-39 yrs, % total 6.25 6.98 6.88 6.63 7.08 7.25 7.46 Population, 40-44 yrs, % total 5.10 5.74 6.30 6.26 6.08 6.57 6.79 Population, 45-49 yrs, % total 3.87 4.90 5.15 5.71 5.72 5.62 6.12 Population, 50-54 yrs, % total 2.98 3.94 4.36 4.63 5.18 5.25 5.20 Population, 55-59 yrs, % total 2.50 2.92 3.46 3.87 4.14 4.69 4.80 Population, 60-64 yrs, % total 2.07 2.17 2.51 3.01 3.41 3.69 4.22 Population, 65-69 yrs, % total 1.48 1.71 1.80 2.12 2.57 2.95 3.24 Population, 70-74 yrs, % total 1.03 1.30 1.36 1.46 1.73 2.14 2.49 Population, 75-79 yrs, % total 0.66 0.82 0.96 1.03 1.12 1.36 1.70 Population, 80-84 yrs, % total 0.37 0.46 0.53 0.64 0.69 0.77 0.95 © Business Monitor International Ltd Page 71 Venezuela Agribusiness Report Q3 2015 Population By Age Group % (Venezuela 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 85-89 yrs, % total 0.14 0.20 0.23 0.28 0.34 0.38 0.44 Population, 90-94 yrs, % total 0.03 0.06 0.07 0.09 0.11 0.14 0.17 Population, 95-99 yrs, % total 0.01 0.01 0.02 0.02 0.03 0.03 0.04 Population, 100+ yrs, % total 0.00 0.00 0.00 0.00 0.00 0.01 0.01 f = BMI forecast Source: World Bank, UN, BMI © Business Monitor International Ltd Page 72 Venezuela Agribusiness Report Q3 2015 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, we use 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 We select 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 Ltd Page 73 Venezuela Agribusiness Report Q3 2015 Human intervention plays a necessary and desirable role in all or our industry forecasting Experience, expertise and knowledge of industry data and trends ensure 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 ■ 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 © Business Monitor International Ltd Page 74 Venezuela Agribusiness Report Q3 2015 ■ ■ ■ 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 that 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 Ltd Page 75 [...].. .Venezuela Agribusiness Report Q3 2015 SWOT Agribusiness Venezuela Agribusiness SWOT Strengths ■ Venezuela' s tropical climate enables production of a diverse range of agricultural products ■ Venezuelan cocoa are known for their high quality Cocoa especially is sought after by producers of premium... increasing agricultural production to reduce the cost of food imports © Business Monitor International Ltd Page 10 Venezuela Agribusiness Report Q3 2015 Venezuela Agribusiness SWOT - Continued Threats ■ The threat of land seizures and nationalisation inhibits investment in agriculture in Venezuela ■ Falls in oil prices will severely limit the amount of money the government will be able to spend ■ Uncertainty... 2.0% to 1.7mn tonnes in 2015; out to 2019, we believe consumption will grow by 14.6% on in 2014 level to 1.9mn tonnes © Business Monitor International Ltd Page 15 Venezuela Agribusiness Report Q3 2015 Table: Corn Production & Consumption (Venezuela 2014-2019) Corn production, '000 tonnes Corn production, % y-o-y Corn consumption, '000 tonnes Corn consumption, % y-o-y 2014e 2015f 2016f 2017f 2018f 2019f... International Ltd Page 19 Venezuela Agribusiness Report Q3 2015 America Benefiting From Growing Imports Venezuela - Corn (LHC) & Wheat (RHC) Imports By Suppliers, 2013 (% of total volume imported) Source: ITC, BMI Gran Misión Agro Venezuela Fails To Deliver Following its intention to boost grains production and reach self-sufficiency in corn, the government launched in 2011 Gran Misión Agro Venezuela, a new... beef meat over the past 10 years © Business Monitor International Ltd Page 25 Venezuela Agribusiness Report Q3 2015 However, the growing headwinds to the Venezuelan economy will drag meat consumption growth lower in 2015 Although the government is likely to expand significantly public spending and subsidies over the course of 2015 in the lead-up to the legislative elections at the end of the year, government... has been making large © Business Monitor International Ltd Page 26 Venezuela Agribusiness Report Q3 2015 inroads into the Venezuelan market as it enjoys large and cheap supply of meat However, Venezuela is now looking at diversifying its exports suppliers, especially towards Uruguay and Paraguay Table: Beef Production & Consumption (Venezuela 2009-2014) 2009 2010 2011 2012 2013 2014 290.0 348.0 345.0... Monitor International Ltd Page 30 Venezuela Agribusiness Report Q3 2015 Sector On The Decline Venezuela - Coffee Production ('000 60kg bags) & Area Harvested ('000 ha) Source: USDA, FAO, BMI From Net Exporter To Net Importer Venezuela was once among the world's largest producers of coffee At the beginning of the 20th century, coffee production was the mainstay of the Venezuelan economy, accounting for... supply chain delays © Business Monitor International Ltd Page 13 Venezuela Agribusiness Report Q3 2015 Industry Forecast Grains Outlook BMI Supply View: Venezuela is a major net importer of grain Though production rose rapidly through the first decade of the 21st century, consumption has also risen, fuelled by oil-driven economic growth Corn is Venezuela' s major grain crop, with the vast majority grown in... International Ltd Page 21 Venezuela Agribusiness Report Q3 2015 Livestock Outlook BMI Supply View: After strong growth in the 1990s and the first few years of the 21st century, Venezuela' s livestock sector has been going through challenging times since 2005 Production has been broadly stagnating in the country (while it grew strongly in the rest of Latin America), including in Colombia and Brazil Venezuela was... consumption, '000 tonnes Pork consumption, % y-o-y 2014 2015f 2016f 2017f 2018f 2019f 127.0 127.6 128.3 128.9 129.6 130.2 0.4 0.5 0.5 0.5 0.5 0.5 143.0 143.3 144.4 145.6 146.8 147.9 0.0 0.2 0.8 0.8 0.8 0.8 f = BMI forecast Source: USDA, BMI © Business Monitor International Ltd Page 23 Venezuela Agribusiness Report Q3 2015 Table: Poultry Production & Consumption (Venezuela 2014-2019) Poultry production, '000 ... Venezuela Agribusiness Report Q3 2015 SWOT Agribusiness Venezuela Agribusiness SWOT Strengths ■ Venezuela' s tropical climate enables production of a diverse range of agricultural products ■ Venezuelan... Page 10 Venezuela Agribusiness Report Q3 2015 Venezuela Agribusiness SWOT - Continued Threats ■ The threat of land seizures and nationalisation inhibits investment in agriculture in Venezuela. .. International Ltd Page 20 Venezuela Agribusiness Report Q3 2015 Table: Corn Production & Consumption (Venezuela 200 9-2 014) Corn production, '000 tonnes Corn production, % y-o-y Corn consumption, '000