Japan Agribusiness Report Q1 2013

BMI View: While the economy continues on its path of marginal growth, the agribusiness industry willalso expand slowly. In 2013, higher domestic prices for foods such as beef, pork and even rice could keepimports strong. However, this also could curb profit margins of food producers and ultimately hurtconsumers. Indeed, the Agriculture, Forestry and Fisheries Ministry reported in August 2012 that selfsufficiencyon the basis of intake of calories has fallen to a 17-year low of 39%, highlighting fundamentalweaknesses in the sector that may be further exposed if Japan returns to the Trans-Pacific Partnershiptable. To battle this decline in food self-sufficiency, the government will continue its search for overseasfarmland as well as invest in foreign trading companies.

Key Forecasts

Rice production to 2016/17: -9.8% to 7.1mn tonnes. This will bring the rice self-sufficiencyratio down from 0.96 to 0.95 despite an overall decline in rice consumption per capita.

Beef production growth to 2016/17: 0.8% to reach 508,100 tonnes. Production will growmarginally as consumers on tight budgets prefer cheaper poultry meat and pork to beef.

Soybean consumption growth to 2017: -13.7% to 2.6mn tonnes. With soybean pricesremaining high and Japan heavily dependent on imports, and given a weakening beef sector (themain demand driver for feed soybean), we forecast soybean consumption to continue its decline.

2013 real GDP growth: 0.5% (up from -0.6% in 2012, forecast to average 1.0% out to 2017).

2013 consumer price inflation: 0.2% average (up from 0.0% average in 2012, forecast toaverage 1.0% to 2017).

Industry Outlook

Despite a reasonably good rice harvest in 2011/12, the price of the national staple rose to a six-year highin October 2012, leading to increased demand for imported rice. In September, for example, the averagetrading price was JPY16,650 per 60kg (US$202) for brown rice, and JPY308/kg of polished rice - about10% higher year-on-year (y-o-y). This has been attributed to the higher prices farmer groups have beenpaying farmers. Another possible reason is the increase in rice brands and varieties, especially for higherqualityrice such as the Hokkaido-produced Yumepirika rice brand, which has received the top 'special A'ranking for particularly sticky rice, which Japanese consumers tend to prefer.

The higher price of rice in Q411 led to a surge in imported rice from China and the US, pushing the totalimport tender for November 2012 to 88,840 tonnes, more than three times the limit for rice imports.Domestic food companies such as Yoshinoya and Matsuya have also started to see profit margins erodeas food-rice prices in Japan jumped 17% y-o-y for the year ended August 2012.

Imports of US beef are expected to rise marginally, by 2% to 760,000 tonnes in 2013, as the productiondeficit widens, according to the US Department of Agriculture. The expected small growth is owing tohigher prices for American beef cuts due to historically small US beef cattle inventories in 2012. Thisassumption is also on the basis that Japan continues its import restrictions (only allowing animals 20months and younger to enter).

In July 2012, Mitsui, the country's largest trading house, announced that it had acquired a 10% stake inLuxembourg-based Sodrugestvo Group SA. Sodrugestvo Group SA is Russia's largest soybean mealmanufacturer. The alliance will expose the Japanese company to the livestock feed business, while theRussian company will benefit from Mitsui's marketing and distribution resources.