Peru Agribusiness Report Q4 2012

BMI View: The outlook for Peru’s agricultural sector remains positive. During the first five months of2012, agricultural production grew 3.4% year-on-year (y-o-y), according to data from the Office ofEconomic and Statistical Studies of the Ministry of Agriculture. The increase was primarily owing to a4.6% y-o-y increase in the livestock sector. Coffee, cocoa and sugar crops are also forecast to post stronggrowth in 2012. However, falling prices for key cash crops such as coffee and cocoa pose downside risks.

The signing of a free trade agreement with the EU in June will open new opportunities for Peruvianexporters. However, it means that modernising production techniques and improving efficiency in areassuch as dairy production will be more important than ever if producers are to remain competitive. Theagreement is set to enter into force by the end of 2012.

Key Forecasts

BMI believes that Peruvian growth will be among the strongest in Latin America over the medium termon the back of a growing consumer base and robust mining and infrastructure projects in the pipeline.Domestic demand will be a further driver of growth. Following the release of strong economic data, wehave revised up our growth forecasts and now see GDP coming in at 5.6% in 2012 and 5.2% in 2013.

We estimate that coffee consumption increased by 6.3% year-on-year (y-o-y) in 2010/11 to reach 170,000bags amid strong economic growth. We see demand stabilising in 2011/12 and have pencilled in a y-o-yincrease of 1.0% to take consumption to 171,700 tonnes. We forecast a similar scenario in 2012/13 totake demand to 173,400 tonnes. Out to 2016, we forecast demand to grow by 8.6% on the 2011 level to184,600 bags.

We have revised down our 2011/12 forecast for corn production, as yields have been lower than expected.We now expect output to increase by 9.0% y-o-y to 1.58mn tonnes. We see output growing by 3.2% y-oyto 1.63mn tonnes in 2012/13. To 2016, we forecast production to rise by 30.3% on the 2011 level to1.89mn tonnes.

We now believe that demand for wheat grew by an estimated 1.4% y-o-y to 1.80mn tonnes in 2011. Weforecast continued slow growth of 1.0% in 2012 to take consumption to 1.81mn tonnes. Out to 2016, weforecast wheat consumption to grow 9.0% on the 2011 level to 1.96mn tonnes as growth in the Peruvianeconomy fuels demand for bread and bakery goods.

Domestic beef production is forecast to grow by 2.1% y-o-y in 2011/12 to reach 170,500 tonnes. In2012/13, we see continued moderate growth of 1.5% y-o-y to take output to 173,000 tonnes. Out to 2016,we see production growing by 9.0% on the 2011 level to 182,000 tonnes.

Key Trends And Developments

Ethanol production in Peru began in 2009 and has expanded rapidly, with a second ethanol plant comingonline in 2012. Both ethanol plans are in Piura, in northern Peru. The Caña Brava plant, owned by theRomero Group, began production in 2009 and has a capacity of 350,000 litres per day. Maple Energy,through its subsidiaries Maple Ethanol and Maple Biocombustibles, invested US$254mn in establishingan ethanol plant and 7,800 hectares to be used for sugar cane production. After a series of delays, theplant opened in May 2012. Once it reaches full capacity, it is expected to produce 105mn litres per year.

Peru’s ethanol consumption is forecast to reach 85mn litres in 2013, boosted by legislation mandating7.8% ethanol content in gasoline. In addition to increased domestic use, ethanol exports are also set togrow. In 2013, exports are forecast to rise to 129mn litres, up from 88mn litres in 2012 and 51mn litres in2011. The spike in exports is due to the second ethanol plant coming online in 2012. The Netherlandsaccounted for 53% of Peru’s ethanol exports in 2011.

The fall in coffee prices has continued into 2012, with the cost of mild arabica on the New York exchangesinking to USc176/lb in August, down from a peak of USc304 in April 2011. As a result, the value ofPeru’s exports is set to drop, despite exports for the 2011/12 harvest forecast to increase by 31.4% y-o-yin volume terms to 5.10mn bags. Between January and June 2012, exports stood at US$251.3mn, downby 13.1% on the same period in 2011, despite a 10.6% increase in volume terms. Germany (24.0%), theUS (21.5%), Colombia (18.2%) and Belgium (12.6%) remain the most significant export destinations.

Agricultural exports for January-July 2012 stood at US$2.14mn, according to new data from the Ministryof Agriculture’s Office of Economic and Statistical Studies. This was marginally up from US$2.13mn forthe same period in 2011. The increase was due to an increase in export volumes of a number of products:

Valery bananas (up 24.1%), grapes (23.7%), animal feed (22.8%), avocados (21.5%), evaporated milk(20.2%) and paprika (14.2%). There was also an increase in export price for mangoes (up 37.8%),asparagus (19.4%) and tangerines (12.5%). However, export prices for coffee fell by 26% over the period,while the price of cocoa dropped by 25% as concerns over global supply restrictions eased. There were139 destinations for agricultural exports. The most significant market was the US (24.7%), followed bythe Netherlands (10.9%), Germany (6.7%), Spain (6.5%), Ecuador (6.4%) and Colombia (5.9%), whichtogether made up 61.1% of total exports.