Colombia Agribusiness Report Q3 2012

BMI View: In May, the long-stalled free trade agreement (FTA) between Colombia and the US finally was put into action. The FTA was first signed in 2006 but had not been ratified owing to continuing concerns in the US over Colombia's human rights record. The pact eliminates tariffs on 77% of agricultural products immediately, with the remainder to be phased out over the coming 3-19 years.

Poultry and rice will receive the longest phase-out time frames, followed by corn and feed grains. The US trade commission estimates that the value of US exports to Colombia could increase by US$1.1bn, while Colombian exports could grow by US$487mn. Despite opportunities for Colombian coffee, cocoa and sugar, there are widespread concerns about the effects of the FTA on the dairy, poultry and livestock sectors due to the arrival of inexpensive imports. Dairy producers are particularly concerned that cheap imports of whey from the US could damage the profitability of Colombia's dairy producers. In response, in March the Colombian government announced that it would invest more than US$500mn in the dairy industry to improve productivity and enable domestic producers to better compete with imports from the US.

Key Forecasts

BMI believes that Colombia will be a regional outperformer in 2012, with GDP forecast to grow by 4.7%. Private consumption, while moderating, will drive the majority of growth, although gross fixed capital formation will play an increasingly important role over the coming quarters. Business-friendly policies and a steadily improving security situation will help Colombia to achieve sustainable levels of strong real GDP growth, which we forecast will average 4.6% y-oy over 2012-2021.

We expect 2012/13 to be a more promising harvest year for coffee following four years of disappointing harvests. Newly renovated plantations will return to production, and weather conditions look set to be more favourable. La Niña weather cycle, which brought devastating rains, is now coming to an end. We forecast 2012/13 production to increase by 6.2% year-onyear (y-o-y) to 9.05mn tonnes. Out to 2015/16, we forecast growth of 21.4% on the low 2011 level to reach 10.35mn bags.

We now expect corn output to increase by 15.2% y-o-y to reach 1.67mn tonnes in 2011/12 on the back of an increase in area harvested, boosted by the government's País Maíz plan. However, we have revised down our forecast for corn consumption to 5.23mn tonnes in 2012, an increase of just 0.5% y-o-y, as high prices drive down demand from the livestock sector.

Sugar production is forecast to increase by 0.9% y-o-y to 2.31mn tonnes in 2012/13. Production has been aided by improved weather conditions that led to higher yields. Exports are forecast to increase by 3.6% y-o-y to 860,000 tonnes on the back of high prices. Chile remains the top export destination, accounting for 32% of Colombia's sugar exports in 2010/11.

We see demand for beef dropping by 8.0% y-o-y in 2012 to reach 828,000 tonnes due to high prices and the sharp increase in exports of beef. Over our forecast period to 2016, we see growth recovering by 6.4% on the 2011 level to 957,900 tonnes. Exports are forecast to increase to 100,000 tonnes in 2012, up from just 7,000 tonnes in 2011. Improvements in trade relationships with Venezuela are likely to see demand for exports grow. Furthermore, Colombia is beginning to explore new markets, including China.

Key Trends And Developments

In May, Nestlé announced that its premium portioned coffee brand, Nespresso, had committed to five further years of investment in its sustainability programme in Colombia. The company pledged to invest US$10mn each year for the coming five years in the 'Nespresso AAA Sustainable Quality Programme', in addition to the US$30mn it has already invested. The agreement has been made in partnership with the Colombian Coffee Growers Federation.

Around 75% of the investment will be used to encourage producers to adopt the AAA sustainable practices. The remainder will be focused on providing technical assistance to enable farmers to improve the quality, volume and sustainability of their crops. The AAA programme was launched by Nespresso in 2003 in partnership with the non-governmental organisation the Rainforest Alliance. Nespresso has been collaborating with Colombia's Coffee Growers Federation to establish AAA in Colombia since 2004. The programme is designed to promote environmentally sustainable practices, guarantee better prices for local coffee growers and produce high quality produce for the global market. Nespresso aims to source 80% of its coffee through the programme by 2013.

Preliminary forecasts see coffee exports rising to 8.85mn bags in 2012/13, up by 4.7% y-o-y, on the back of improved production. However, with strong production in Brazil, we believe that greater supply in the market will see coffee prices fall to an average of US$2.00 per pound in 2012 and US$1.85 per pound in 2013. Coffee exporters have also been hit hard by the appreciation of the Colombian peso against the US dollar. In March, the Colombian coffee growers' federation urged the central bank to halt interest rate hikes following two months of consecutive increases of 25 basis points to 5.25%. However, with concerns now easing over inflationary pressure, we believe that the central bank is unlikely to raise interest rates again for the remainder of 2012.

In April, Venezuelan Foreign Minister Nicolás Maduro and his Colombian counterpart María Holguín signed a partial bilateral trade agreement at the Sixth Summit of the Americas held in Cartagena, Colombia. The agreement establishes a new model for trade relations between the two nations, covering preferential trade agreements, sanitary norms, technical norms, rules of origin, trade protection and the mechanism for the settlement of disputes. The agreement also includes plans to increase joint infrastructure and agricultural production. The pact signals the steady improvement in relationship between the two countries following the long-standing trade dispute of 2009-2010, when Venezuelan President Hugo Chávez froze diplomatic relations with Colombia. After the US, Venezuela has historically been the second most important destination for Colombian exports.

Colombia's dominant cattle ranching association, the Federación Colombiana de Ganaderos (Fedegan), is being challenged by a new organisation, the Confederación de Ganaderos de Colombia (Confegan). Confegan is a newly established organisation representing 10,000 smallscale cattle producers from central and southern Colombia. The confederation is disputing the administration by Fedegan of the National Cattle Fund, which was created in 1993 and collects a fee for the slaughter of each animal. Confegan claims that the administration of the fund is neither transparent nor democratic and that Fedegan is failing to appropriately represent the interests of cattle producers. The new confederation is urging the Colombian government to remove the cattle fund from the administration of Fedegan. Confegan representatives also claim that Fedegan has failed to prepare the sector for the impact of the free trade agreement with the US, which came into force in May. The dispute signals the continued threat of strained labour relations in Colombia's agribusiness sector.

There has been opposition from Colombian union members with regards to the EU's endorsement of the free trade agreement with Colombia. The agreement, which was signed in March, contains a clause relating to the protection of human rights. However, representatives of the National Union of Agrifood Workers of Colombia have argued that Colombia has failed to reach these standards - particularly with regards to the treatment of union leaders - and that the EU should not go ahead with the agreement. Despite opposition, the treaty looks set to come into effect in September and will eliminate many trade tariffs and widen market access.