Coffee Supply Chain IN VIETNAM

LEARN. www.vietnamsupplychain.com SHARE. NETWORK LEARN. SHARE. NETWORK Coffee Supply Chain IN VIETNAM 1

RESEARCH INDEX I. Overview II. Production III. Consumption IV. Trade V. Price VI. Stock VII.Government policies VIII. Industry activities References p.5 p.6 p.9 p. 11 1. Export p. 14 2. Import p. 16 1. Export price p. 18 2. Domestic price p.20 p.21 p.22 p.22 2 www.vietnamsupplychain.com 3

I. OVERVIEW Coffee registered current off-trade value growth of 14% and off-trade volume growth of 10% in 2013. This growth was supported by higher demand for coffee from the younger generations. Furthermore, the increase in unit prices and efforts of manufacturers /distributors in stimulating the demand were other factors supporting the growth of this category. In particular, they introduced new product developments and ran promotional activities such as discounts. For example, in April 2013, Trung Nguyen introduced a new product called G7 Gu Manh X2. This product was developed from its popular product line G7, targeting men and was advertised as it could enhance alertness and concentration as well as increase creativity and productivity. Nestlé remained the leader in coffee in 2013, with 33% of value sales, largely due to the dominance of its brand Nescafé. A diversified product portfolio, acceptable product quality, reasonable prices and a nation-wide distribution network were the main reasons for its success in the country. Furthermore, new products were launched on the market in 2013 and active marketing activities, including advertising and product promotions supported sales further. In the first quarter of 2013, the company introduced a new product under the brand Nescafé Café Viet. This new product was a coffee in concentrated liquid form that only required ice to produce an iced coffee. In 2013, the company also opened a new coffee manufacturing facility in Vietnam. This new plant is located in the Amata Industrial Zone of Bien Hoa Dong Nai province and cost the company US$248 million. As a result, thanks to these heavy investments, the company continued to strengthen its dominant position in coffee and was the company that enjoyed the fastest value growth of 16% in 2013. Coffee is projected to see a constant value CAGR of 6% over the forecast period, nearly one percentage point higher than the historic constant CAGR. The increasing awareness of health and wellness trends, higher disposable incomes, higher living standards and better education are the main factors fostering this trend. Furthermore, manufacturers, especially leading ones such as Nestlé and Trung Nguyen are expected to invest more heavily in new product developments and marketing activities in order to continue to stimulate the demand. II. PRODUCTION According to local exporters, coffee cultivated area continues to expand in the major coffee growing areas in Vietnam. Based on estimates from MARD, Provincial Departments of Agriculture and Rural Development, and local coffee industry, Vietnam s coffee area is estimated at 633,295 hectare (ha) in 2013, about a 3 percent rise from 616,407 ha in 2012, and about an 11 percent increase over 2011 (571,000 ha). Dak Lak, Lam Dong, and Dak Nong Provinces continue to expand coffee area (mainly Robusta coffee), and account for 76 percent of total growing area in Vietnam. Arabica cultivation was estimated at about 42,000 ha, accounting for about 6.6 percent of total coffee area. Unit: Thousand 60 kg bags 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Arabica 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014(F) Robusta Sources: USDA, Local exporters, Vietnam coffee semi-annual report 2013 estimates VIETNAM S COFFEE PRODUCTION 4 www.vietnamsupplychain.com 5

In general, weather has been quite favorable for the development of coffee trees for the 2013 coffee crop. According to local traders, favorable weather more than offset the reported productivity drop with lower yielding, aging coffee trees (making up a large portion of total area) and the small areas that remained drought affected. According to MARD, there are about 140,000-160,000 ha of ageing trees needing to be replanted over the next 5-10 years, and about 200,000 ha by 2020. Production (green bean, 000 tons) Average coffee yield (tons/ha) MY MY 2012/13 MY 2013/14 2011/12 Old New Old New 1560 1497 1590 1374 1740 2.44 2.32 2.47 2.1 2.63 Source: Vietnam coffee semi-annual report 2013 estimates Coffee Production by Marketing Year (Oct.-Sept.) In Vietnam coffee semi-annual report 2013, post revises its initial forecast of coffee production in MY 2013/14 up to 29 million bags or 1.74 MMT, about 9 percent increase over the previous crop year. Post also revises its forecast for Arabica coffee production in MY2013/14 to about 70 TMT of green coffee, or 1,167 60-kg bags as Arabica area continues to expand significantly in Lam Dong, and as additional output became available from newly productive, and replanted coffee areas. Post also revises its production estimate for MY 2012/13 upwards to 26.5 million bags or 1.59 MMT of green coffee beans. This is attributed to strong exports during the MY and reported large MY ending stocks being held by farmers, dealers, and exporters. Province Coffee area in 2012 Coffee Area in 2013 Target by 2020 Daklak 202,022 207,152 170,000 Lam Dong 145,735 151,565 135,000 Dak Nong 116,350 122,278 69,000 Gia Lai 77,627 77,627 73,000 Dong Nai 20,000 20,000 13,000 Binh Phuoc 14,938 14,938 8,000 Kontum 12,158 12,158 12,500 Quang Tri 5,050 5,050 5,000 Son La 6,371 6,371 5,000 Ba Ria Vung Tau 7,071 7,071 5,000 Dien Bien 3,385 3,385 4,500 Other 5,700 5,700 n/a Total 616,407 633,295 500,000 Sources: MARD, Provincial DARD, Local exporters Vietnam s Coffee Areas by Province 6 www.vietnamsupplychain.com 7

III. CONSUMPTION 2000 1800 1600 1400 1200 1000 800 600 400 Lam Dong 25% Dak Nong 20% Daklak 34%% Gia Lai 13% Dong Nai 3% Binh Phuong 2% Kontum 2% Quang Tri 1% MARD, Provincial Departments of Agriculture and Rural Development (DARD), Local exporters Coffee Plantation Area in Vietnam in 2013 Thousand metric tons 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Coffee Production (thousand metric tons) Coffee plantation area (thounsand ha) Sources: General Statistics Office (GSO), MARD, Post Estimates Vietnam s Coffee Growing Area and Production (Calendar Year) 700 650 600 550 500 450 Thousand ha Africa 3,282 Ethiopia 1,833 Asia & the Pacific 8,351 India 1,573 Indonesia 3,333 Vietnam 1,583 Latin America 26,646 Brazil 18,390 Mexico 2,200 Venezuela 1,650 Source: ICO and The coffee guide estimates Domestic consumption in coffee producing countries in 2010 Vietnamese domestic consumption continues to grow. Café culture and retail coffee shops continue to spread in Vietnam with presence of many giant players such as Starbucks, Trung Nguyen, Highlands, Vinacafe, Gloria Jeans, and The Coffee Bean. Vicofa and its members recently organized a coffee tasting event for two months in Hanoi from August through October 2013 in Vicofa s Headquarters, in order to promote a variety of coffee brands from different local coffee manufacturers and to increase local coffee consumption. Participating in this coffee tasting event, were seven local coffee producers. The domestic consumption is estimated to be at 1.83 million bags the MY 2012/13, about 7 percent of total annual coffee domestic production, and 2 million bags, in MY 2013/14, up 10 percent from the previous MY. The expanding coffee retail sector will contribute to stronger coffee consumption growth next MY, and into the foreseeable future. 8 www.vietnamsupplychain.com 9

CONSUMING COUNTRY PRODUCING COUNTRY Bar Retail Factory Import agents Exporter Factory Farm Dry process Dry Cherry Unwashed green bean Processing company Instant coffee Shop retail for home market THE COFFEE VALUE CHAIN Fresh Cherry Beans for export Freight and insurance Beans cleared for market Dealer Export Duty Import duty Roasted ground coffee Commercial and catering Wet process Washed parchment Unwashed green bean Coffee house Coffee bar IV. TRADE 1. Export: According to data from MARD and Global Trade Atlas (GTA), Vietnam exported 23.6 million bags, or 1.4 MMT of green coffee in MY 2012/13, a drop of about 1.6 percent from the previous MY. Month 2010/2011 2011/2012 2012/2013 % Change 2012/12 over 2011/12 Volume Thousand Metric Tons % October 67 58 118 103 November 77 79 112 42 December 93 124 125 1 January 129 121 163 35 February 84 168 131-22 March 137 161 141-12 April 145 132 132 0 May 104 160 118-26 June 81 121 101-17 July 78 115 110-4 August 81 106 92-13 September 53 91 71-23 Total 1,129 1,436 1,414-1.6 Sources: MARD, GTA Vietnam s Green Coffee Bean Exports, MY 2010/11 MY 2012/13 10 www.vietnamsupplychain.com 11

Thousand metric tons The export pace through the first 4 months of MY 2012/13, highlighted in the table above, was very strong. However, beginning in February, Vietnam s coffee bean exports dropped significantly, relative to the previous MY, due to falling export prices in global markets. Additionally, local exporters continue to struggle with the GOV s value added tax (VAT) refund policy which is creating a delay in transferring VAT refunds to local coffee exporters and has also reportedly affected exports during MY 2012/13. At the end of the MY, dealers and exporters reported withholding exports from the market in anticipation of higher prices. Accordingly, ending stocks for MY2012/13 increased considerably. In 2012/2013, Vietnam exported coffee beans to 70 countries worldwide. The top eighteen markets accounted for about 92 percent of total green coffee bean exports. The United States is the largest importer of Vietnamese green coffee beans, and Germany is second. 305 255 205 155 105 5 USA Germany 12 www.vietnamsupplychain.com Spain Italy Belgium Japan Algeria Russia Ecuador France Mexico UK China my 2012/2013 MY 2011/2012 MY 2010/2011 Sources: MARD, GTA Vietnam s Key Markets for Green Coffee Exports MY2010/11-MY2012/13 South Korea India Philippines Malaysia Netherlands According to official data from Vietnam s General Customs Office (GCO), in MY 2012/13, Vietnam exported about 1.43 MMT (all types of coffee products, including green bean coffee, roast and ground coffee, and instant coffee) valued at $3 billion. This is a drop of 11 percent in both volume and value from the previous marketing year 2011/12. Month 2010/2011 2011/2012 2012/2013 % Change Volume Value Volume Value Volume Value Volume 2012/12 over 2011/12 Value Oct. 58 98 32 73 103 230 222% 215% Nov. 77 134 71 149 128 262 80% 76% Dec. 164 292 157 325 163 330 3.8% 1.5% Jan. 215 414 118 241 219 455 86% 89% Feb. 144 303 206 428 100 219-51% -49% Mar. 215 487 210 440 158 354-25% -20% April 129 308 169 356 111 243-34% -32% May 98 238 205 435 117 253-43% -42% June 69 162 141 304 88 186-18% -39% July 58 135 117 256 91 194-22% -24% Aug. 42 95 103 230 84 179-22% -24% Sep. 28 64 71 160 64 136-10% -25% Total 1297 2370 1600 3397 1426 3041-11% -11% Sources: General Customs Office (GCO), General Statistics Office (GSO) Vietnam s Coffee Product Exports (all coffee), MY 2010/11-MY 2012/13 (in volume of TMT and value of million $) 13

2. Import: Vietnam continues to import small, but growing, quantities of green coffee, as well as roasted and instant coffee, from neighboring countries. 2011/2012 2012/2013 Country Volume (MT) Country Volume (MT) U.S 190 U.S 279 Laos 3734 Laos 4651 Cote d Ivoire 2076 Indonesia 3261 Thailand 1742 China 3075 Indonesia 1422 Cote d Ivoire 1681 China 961 Uganda 530 Uganda 669 Brazil 295 Brazil 422 Thailand 200 Kenya 260 Others 414 Others 262 Total 11890 Total 14216 Sources: Vicofa; General Customs Office; GTA Green Coffee Import Trade Matrix for MY2011/12-MY2012/13 14 www.vietnamsupplychain.com 15

V. PRICE 1. Export price: The average export price of Vietnam s robusta coffee in MY 2012/13 was $1,919/MT (FOB HCMC), a drop of 3 percent from the previous MY ($1,984/MT), and a 10 percent decline from MY 2010/2011. Month 2010/2011 2011/2012 2012/2013 % Change 2012/12 over 2011/12 FOB HCMC price for common ungraded coffee beans (US$/MT) % October 1625 1993 2022 1.5 November 1806 1818 1849 2 December 1821 1853 1827 1.4 January 1910 1790 1887 5 February 2093 1923 2003 4 March 2281 1992 2088 5 April 2328 1988 1985 0.2 May 2492 2111 1994 0.6 June 2350 2073 1853-11 July 2351 2103 1921-9 August 2357 2016 1870-11 September 2197 2053 1731-16 Average 2134 1984 1919-3 Sources: Dak Lak Trade, Investment & Tourism Promotion Center (Daktip); Vicofa, Buon Ma Thuot Coffee Exchange Center (BCEC), and Local Exporters Average Export Prices for Green Coffee, MY 2010/11-MY 2012/13 Unit price : US$/ MT FOB basic $2,700 $2,500 $2,300 $2,100 $1,900 $1,700 $1,500 $1,300 Oct. Nov. Dec. Jan. Feb. Mar. April May June July Aug. Sept MY 2010/11 MY 2011/12 MY 2012/13 Sources: Daktip, Vicofa, BCEC, and Local Exporters Average Export Prices for Green Coffee, MY2010/11 MY 2012/13 Although Vietnam has faced difficult economic times over the past two and half years, coffee growers and local exporters have done fairly well and have been relatively profitable over the past three years (export prices above $1,900/ MT). However, the large estimated production in MY 2013/14 has already put downward pressure on prices, both domestically and internationally. As a result, Vietnam s export prices have declined significantly since October 2013, and as of October 31, 2013 were $1,529/MT (FOB HCMC). It is reported that the price fell approximately $100/MT in a one week period from October 23 31, 2013, due to the drop in global market prices. This rapid drop in export and domestic prices has prompted Vicofa to seek MARD to allow a stockpiling program to stabilize prices. The Minister of MARD recently petitioned the National Assembly to permit such a program. As of the publication of this report GOV had not decided to implement a stockpiling program. 16 www.vietnamsupplychain.com 17

55,000 Unit price : US$/ MT FOB basic 3000 2000 2000 1500 1000 500 0 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/12 Sources: Daktip, Vicofa, BCEC, and Local Exporters Average Export Prices for Green Coffee for 20 Marketing Years 2. Domestic price: Vietnam s average domestic coffee price for Robusta common ungraded coffee beans in MY2012/13 was VND 40,159/kg ($1.91) in Dak Lak province, and VND 39,917/kg ($1.90) in Lam Dong province, the largest coffee growing areas in Vietnam (See Table 7, Graph 7). This is a decrease of about 1 percent from the previous MY, and about a 7 percent drop from MY2010/11. 45,000 35,000 25,000 55,000 45,000 Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. JuL Aug. Sept. In Dak Lak In March 2013, prices spiked in all four major growing provinces as the specter of the drought in the Central Highlands took hold. Prices reached VND 44,000- VND 45,000/kg before falling off in late March and April as rainfall increased and crop prospects improved. Local prices kept falling from May to October in line with the decline of export prices and international prices. Average local farm gate prices in Dak Lak and Lam Dong provinces in October 2013 were quoted at VND 34,636/kg ($1.65) and VND 34,220/kg, respectively, about a 5-6 percent drop from the previous month. It is reported that prices have continued to fall in growing regions, and as of October 31, 2013, local farm gate prices were quoted at VND 30,900/kg in Dak Lak Province. 35,000 25,000 Oct. Nov. Dec. Jan. Feb. Mar. Apr. In Lam Dong May Jun. JuL Aug. Sept. 2010/11 2011/12 2012/13 Source: Daktip, Vicofa, BCEC, and Local Exporters Average Prices for Common Robusta Beans in Dak Lak & Lam Dong 18 www.vietnamsupplychain.com 19

VII. GOVERNMENT POLICIES 1. Establish coffee coordinating board: On July 30, 2013, in response to requests from MARD s Department of Crop Production (DCP), the Institute of Policy and Strategy for Agriculture and Rural Development (IPSARD) and the Department of Personnel, the MARD Minister issued Decision 1729/QD-BNN-TCCB establishing Vietnam s Coffee Coordinating Board (Coffee Board). The Coffee Board s members include representatives from MARD s Planning Department, International Cooperation Department, Department of Processing and Trade in Agriculture, Forestry, Fisheries and Salt, VICOFA, officials from two main coffee growing provinces (Dak Lak and Lam Dong), domestic and foreign enterprises, and producers. 2.Approve extending export credit terms for coffee exporters: In response to MARD s proposal to the Prime Minister, the GOV recently issued Decree 133/2013/NDCP, dated October 17, 2013, approving the extension of export credit terms for coffee enterprises from the current maximum of 12 months to the new maximum of 36 months to help ease the pressure of bad debts. VI. STOCK Although there is no official data for coffee stocks available, MY 2012/13 ending stocks were estimated by local growers and exporters at about 7-8 percent of the MY 2012/13 crop. Traders, processors, farmers, and collectors are holding the stocks. Industry reports that farmers are holding higher stocks than in previous years due to favorable, low interest rates limiting the pressure they feel from financial institutions to repay loans with the proceeds of selling their old-year crop. 20 www.vietnamsupplychain.com 3.Issues value added tax refund for agricultural exports directive: In June 2013, the Ministry of Finance (MOF) issued Directive 7527/ BTC-TCT, which informs exporters that all value added tax (VAT) refund claims for agricultural export products need to be withheld for verification. According to foreign exporters with operations in Vietnam, Directive 7527 has led to them limiting their purchases in order to avoid purchasing from dealers and middleman who are involved in VAT scams. Recently, local coffee exporters proposed that the GOV to remove the VAT for coffee entirely, as almost all coffee (95 percent) is exported. 4.Coffee stockpiling program to stabilize prices: On November 12, 2013, Vicofa received approval from MARD to submit a proposal to GOV to implement a stockpiling program of 300,000 MT or 5 million 60-kg bags of coffee beans during MY2013/14 to stabilize coffee prices, which are currently at a three year low. Government must now decide whether to implement the program. 21

VIII. Industry activities 1. Starbucks opened its first café in Vietnam: In February 2013, Starbucks, the U.S. Seattle-based coffee company, opened its first café in Ho Chi Minh City, as a part of its strategy to expand across Asia, and plans to add more cafés throughout the country. 2. Ngon Coffee Ltd launched instant coffee processing plant in Dak Lak Province: On April 28, 2013, Ngon Coffee Ltd. Co., 100 percent Indian-invested company, launched the operation of instant coffee processing plant in Cu Kuin District, Dak Lak. The plant has a total annual capacity of 10 TMT of coffee products, which are mainly for export 3. Vinacafe continues its replanting program: Vinacafe has replanted about 1,400 ha old age and low yield coffee trees, of which 500ha in Dak Lak province; 500 ha in Gia Lai province; 100 ha in Kontum province; 300 ha in Dak Nong province. 4. Sustainable coffee production attracts more farmers and trading companies: Certified/verified coffee production standards for quality and sustainability, including UTZ certified, the Common Code for the Coffee Community (4C) Association, and Rainforest Alliance, continue to gain favor with farmers and traders in Vietnam. Recently, Nedcoffee, the Amsterdam-based trading group, has been strongly committed to developing a sustainable coffee sector. Additionally, Mondelēz International will join the agricultural sustainability drive in Vietnam and implement Coffee Made Happy the sustainability initiative of the company. 5. Trung Nguyen introduces G7 Gu Manh X2 into the local market: On April 24, 2013, Trung Nguyen Coffee Corporation launched its new instant coffee product into market, G7 Gu Manh X2. G7 is the best-selling brand name of Trung Nguyen Coffee Company in local market and has been exported to about 60 countries over the world, including the United States, ASEAN, Germany and Japan markets. 6. Vicofa and Dak Lak governments continue to support sustainable coffee production: Dak Lak s provincial government s sustainable target is to maintain only 150,000 ha producing about 400 TMT of coffee beans, annually, by 2015. In 2013, Vicofa and the Dak Lak Province will provide about 1,650kg of coffee seeds to farmers for the replanting program. 7. Coffee Production in Lam Dong province: As of March 2013, about 20,000 ha of over 50,000 ha of aging and low yielding coffee area have been replanted. There is demand for about 15 million seedlings and 43 million coffee shoots in Lam Dong in the period of 2012-2015. 8. Nestle Vietnam launches new Instant Coffee Plant in Dong Nai: On July 9, 2013, the new Nescafé Tri An factory was inaugurated in the Amata Industrial Zone, Bien Hoa, Dong Nai. Nestle set up its representative office in Vietnam in 1995 and has since grown to include five plants in the country with more than 2,000 staff nationwide at total investment of over US$450 million. Sources: 1. Euromonitor 2. United States Department of Agriculture (USDA) 3. Vietnam coffee semi-annual report 2013, 2014 4. Vietnam Coffee Annual report on 2012, 2013, 2014 5. Ministry of Agriculture and Rural Development (MARD) 6. Provincial Departments of Agriculture and Rural Development (DARD), 7. General Statistics Office (GSO) 8. Dak Lak Trade, Investment & Tourism Promotion Center (Daktip); 9. Vietnam coffee and Cocoa Association (Vicofa) 10. Buon Ma Thuot Coffee Exchange Center (BCEC) 11. Passport Coffee in Vietnam by Euromonitor International 12. Report of Agriculture and Rural Development Department in 2013 22 www.vietnamsupplychain.com 23

COFFEE SUPPLY CHAIN IN VIETNAM learn. SHARE. NETWORK Unit 201, Floor 2, 49 Bui DinhTuy Street,Ward 24, Binh Thanh District, HCMC T: +84 8 2242 7762 - E:info@vietnamsupplychain.com F: www.facebook.com/vietnamsuppl ychaincommunity - L:Vietnam Supply Chain Forum www.vietnamsupplychain.com 24 www.vietnamsupplychain.com