BMI View: After a poor output in 2009/10 due to heavy rains and frost which damaged the coffee crop, we forecast a rebound in 2010/11 due to improved weather as well as increased government support. This will help alleviate some the current tightness in the global coffee market. Although there are risks of poor weather and future low global prices, we expect Vietnamese coffee production to improve by 23% out to 2013/14. Despite this, Vietnam will continue to lag behind global leader Brazil in terms of overall production and exports.

Vietnam is the world's biggest producer of robusta coffee with more than 95% of its coffee output consisting to the cheaper bean and only around 2-3% of production devoted to the premium Arabica variety. In 2009/10, we estimate output fell for the second consecutive year, as unseasonal rains caused early flowering of coffee trees in many areas in Vietnam. This was then followed by a dry period, which damaged resulting fruits. Given that Vietnam is the world's largest exporter of Robusta, the production declines have contributed to global market tightness, which set the scene for a significant rally in prices in recent months.

In response to the domestic production problems, The Vietnamese government is aiming to increase replanting of coffee trees, although in mid-2009, farmers were still investing in expanding the area under production rather than replanting existing trees. In September 2009, the Vietnam National Coffee Corporation said it would be investing VND2.5trn (US$140mn) in replanting ageing tree stock. Work on replacing trees, many of which are more than 20 years old, will improve disease resistance and thus yields in the long term. As a result of these developments, we forecast a 6% y-o-y improvement in domestic coffee production in 2010/11 to 19.1mn tonnes, and forecast 23% production growth to 22.7mn tonnes to 2013/14 as the re-planted trees start to reach full maturity.

Risks To Outlook

With Vietnam's coffee industry almost exclusively dependent on exports (domestic consumption accounts for only 4% of production), our forecasts for production will be heavily dependent on world demand and prices for robusta coffee. Our own price forecasts moderately bullish. However, in the event that prices weaken, production could undershoot our growth forecast. Another downside production risk is that Vietnam's coffee crop is vulnerable to poor weather conditions and the country is frequently in the path of typhoons. The damage caused by adverse weather conditions, as seen in 2007/08 is exacerbated by the often low-quality plant stock. Should more typhoons hit, production could be limited.

Global Implications

As the world's largest exporter of robusta coffee, and the second largest exporter of all green coffee, significant changes in Vietnamese supply could have a noticeable effect on the global market balance. However, Vietnam's importance is currently limited by the fact that Brazil is still by far the world's largest coffee producer and exporter. Going forward, although Vietnam will continue to gain a greater percentage of global coffee exports, it will continue to lag well behind Brazil, which will also gain greater market share over the medium term.