BMI Kazakhstan Agribusiness Report Q4 2013

Q4 2013www.businessmonitor.com

KAZAKHSTANAGRIBUSINESS REPORTINCLUDES 5-YEAR FORECASTS TO 2017

ISSN 2044-5717Published by:Business Monitor International

Kazakhstan Agribusiness ReportQ4 2013INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: August 2013

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CONTENTS

BMI Industry View ............................................................................................................... 7

SWOT .................................................................................................................................. 10Agribusiness ........................................................................................................................................... 10

Industry Forecast .............................................................................................................. 12Dairy Outlook ......................................................................................................................................... 12

Table: Kazakhstan Milk Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Table: Kazakhstan Cheese Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Table: Kazakhstan Butter Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Table: Kazakhstan Milk Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Table: Kazakhstan Cheese Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Table: Kazakhstan Butter Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Livestock Outlook .................................................................................................................................... 16Table: Kazakhstan Poultry Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Table: Kazakhstan Pork Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Table: Kazakhstan Beef & Veal Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Table: Kazakhstan Poultry Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Table: Kazakhstan Pork Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Table: Kazakhstan Beef & Veal Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Grains Outlook ....................................................................................................................................... 22Table: Kazakhstan Wheat Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Table: Kazakhstan Corn Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table: Kazakhstan Barley Production & Consumption, 2012-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table: Kazakhstan Wheat Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Table: Kazakhstan Corn Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Table: Kazakstan Barley Production & Consumption, 2007-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Commodities Price Analysis ............................................................................................. 31Monthly Grains Strategy ........................................................................................................................... 31

Table: Select Commodities - Performance & BMI Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Table: BMI Commodities Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Monthly Softs Strategy .............................................................................................................................. 41Table: Select Commodities - Performance & BMI Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table: BMI Commodities Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Upstream Analysis ............................................................................................................ 51Europe GM Outlook ................................................................................................................................. 51

Europe Machinery Outlook ........................................................................................................................ 56

Europe Fertiliser Outlook ......................................................................................................................... 63

Downstream Analysis ....................................................................................................... 69Food ..................................................................................................................................................... 69

Food Consumption ................................................................................................................................. 69

Kazakhstan Agribusiness Report Q4 2013

© Business Monitor International

Table: Food Consumption Indicators Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Canned Food ........................................................................................................................................ 71Table: Canned Food Value/Volume Sales Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Confectionery ........................................................................................................................................ 72Table: Confectionery Volume/Value Sales Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Processed Foods .................................................................................................................................... 75Table: Processed Meat Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Table: Frozen Fruits and Vegetables Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Baked Products ..................................................................................................................................... 77Table: Baked Products Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Pasta ................................................................................................................................................... 78Table: Pasta Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Dairy ................................................................................................................................................... 79Table: Dairy Products Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Drink .................................................................................................................................................... 82

Alcoholic Drinks ................................................................................................................................... 82Table: Alcoholic Drinks Volume/Value Sales Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Soft Drinks .......................................................................................................................................... 85Table: Soft Drinks Value/Volume Sales Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Hot Drinks ............................................................................................................................................ 89Table: Hot Drinks Volume/Value Sales Historical Data And Forecasts 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Mass Grocery Retail ................................................................................................................................ 90

Regional Overview ............................................................................................................ 92Regional Overview - Europe ...................................................................................................................... 92

Table: EU Farm Size Statistics In 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Demographic Forecast ..................................................................................................... 98Table: Kazakhstan's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Table: Kazakhstan's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Table: Kazakhstan's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Table: Kazakhstan's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Methodology .................................................................................................................... 102



BMI Industry View

BMI View: We expect the Kazakh grain sector to outperform, especially as Kazakhstan sees more export

opportunities to Central Asia and China. We expect limited growth for the livestock and dairy sectors, as

export potential for both industries will remain limited. Only domestic demand, which we expect to be

strong, could partially encourage domestic production. That said, cheap imports from Russia could put

local growers at a disadvantage. We have not identified any major public company operating in the sector

that we would highlight.

Grains Taking Their Share

Kazakhstan - BMI Market Value By Commodity (% of total)

Note: The BMI Market Value is an addition of all domestically produced commodities' value (calculated

by multiplying the production with the international benchmark prices, converted in US$/tonne); f = forecast.

Source: BMI.



Key Forecasts

■ Wheat production to 2016/17: -23.7% to 17.4mn tonnes. Efforts to diversify into oilseeds and otherfield crops and little potential for a repeat of the perfect conditions of 2011/12 will see production fallover our five-year forecast period.

■ Cheese consumption growth to 2017: 51.5% to 81,300 tonnes. This will come from increased demandfor value-added dairy products on the back of accelerating urbanisation and improvements ininfrastructure.

■ Beef production growth to 2016/17: 35.7% to 576,700 tonnes. The comprehensive overhaul of the beefherd continues apace as imported breeding stocks improve quality.

■ 2013 real GDP growth: 5.4%, up from 5.0% in 2012.

■ 2013 average consumer price inflation: 6.2% year-on-year (y-o-y), up from 5.1% y-o-y in 2012.

■ BMI universe agribusiness market value: 35.5% y-o-y decrease to US$6.9bn in 2012/13, forecast togrow on average 9.8% annually between 2011/12 and 2016/17.

Key Revisions To Our Forecasts

■ 2013/14 wheat production revised up from 16.0mn tonnes to 17.0mn tonnes on the back of the latestofficial estimates.

■ 2014 wheat consumption revised up from 6.9mn tonnes to 7.2mn tonnes as lower prices boost localdemand.

■ 2012/13 poultry production revised up from 120,000 tonnes to 125,000 tonnes as the impact of highergrain prices seems to be wearing off.

■ 2012/13 pork production revised down from 231,000 tonnes to 215,000 tonnes owing to lowerpreference among the local population and subdued prospects for exports in the short term.

■ 2012/13 poultry consumption revised up from 369,000 tonnes to 379,500 tonnes because of localpreference for the meat and its price competitiveness compared with other meats.

Industry Outlook

We believe Black Sea countries will see increased grain demand from Asia in the coming years after the

region was largely ignored for at least the past three seasons. Disappointing harvests in Asian countries'

traditional suppliers, mainly the US, Australia and India, partially account for this. In addition, rising middle

classes and changing dietary habits are increasingly putting strains on the region's grain production balance;

this will force Asian importers to look for increased volumes and lower prices for grain purchases in the

medium term.



We believe Kazakhstan has the potential to improve the quality and efficiency of its meat output via a

strong increase in cattle imports. This supports our forecast for beef production to grow by 35.7% out to the

end of our forecast period, to 576,720 tonnes in 2017. In 2011, the Ministry of Agriculture announced a

plan for 'the development of beef export potential for Kazakhstan' to be implemented in two phases. The

first phase, covering 2011-2015, targets the rapid expansion of the number of high-yielding breeding cattle

in Kazakhstan. The second phase, from 2016-2020, would push for the development of beef export

potential.

The Board of the Eurasian Economic Commission has increased custom duties on several dairy products in

order to protect domestic dairy producers against cheap competition in a context of high domestic feed and

strong demand. The duties were raised on butter, cottage cheese and dairy spreads from 15% to 20%. For

other types of dairy products, such as grated and powdered cheese, including Schabziger, duties were raised

to 20%. Import duties on feta cheese made from cow milk were taken to 25% of their customs value

(against 15% currently).



SWOT

Agribusiness

SWOT Analysis

Strengths ■ Kazakhstan has fertile soil and a strong agricultural tradition.

■ More than 70% of Kazakhstan's land area is occupied by agricultural crops and

animal husbandry.

■ The recent efforts from the government to develop the industry will very likely help to

boost production over the long term.

Weaknesses ■ Decades of collective and state farming with little incentive to maximise production

have left Kazakhstan's agriculture with poor yields by international standards.

■ Aging Soviet-era infrastructure increases costs and makes expansion into new areas

difficult.

■ Many farmers lack the skills to run a profitable business without government aid.

• Because the country is land-locked and transportation infrastructure is lacking,

shipping costs for grains to the export market make the crop uncompetitive

compared with other Black Sea region producers such as Russia and Ukraine.

Opportunities ■ Poor yields leave much room for increasing production through better farming

practices.

■ The government has invested heavily in the development of large and efficient

corporate farms, creating greater opportunity for further expansion.

■ Rising disposable incomes will enable domestic demand for food products to pick up.

• Because of recently tight grains markets by historical standards, export demand is

likely to be sufficient to encourage production growth in Kazakhstan.

Threats ■ The global recession hit Kazakhstan hard. We estimate GDP growth was only 1.2% in

2009, accompanied by a rapid fall in consumer expenditure. While GDP growth has



SWOT Analysis - Continued

since recovered, the eurozone crisis could continue to constrain the country's growth

and thus consumer demand.

■ The rural population is declining rapidly, with many young people heading for the

cities.

• Much of the country suffered from environmental degradation in Soviet times; if not

dealt with, this could threaten agricultural production in the future.



Industry Forecast

Dairy Outlook

BMI Supply View: We forecast a 1.4% year-on-year (y-o-y) decline in milk production in 2012/13 to

4.9mn tonnes. This fall in production reflects damage to pastures due to the severe drought in summer 2012.

In the medium term, the country's output growth is likely to be limited, as 90% of dairy production comes

from the household sector, with most output for home consumption. Over the longer term, however, we are

positive about the government's recent plan for the development of large-scale modern dairy farms and its

significant investment in machinery for these farms. Therefore, we see plenty of room for growth coming

from the commercialisation of the sector and forecast milk production to rise 23.9% on the 2011/12 level to

6.1mn tonnes by 2016/17.

Less than 40% of milk produced in Kazakhstan is processed in formal dairy plants. This is because of the

uneven availability of fresh milk between summer and winter, the high cost of transportation, as well as the

poor quality of the milk produced in the country. Therefore, we maintain our view for cheese and butter

production to be subdued over our forecast period. We forecast cheese and butter production to come in at

24,090 and 18,060 tonnes respectively in 2012/13, reflecting increases of 9.0% and 14.0% y-o-y. Out to

2016/17, we expect cheese and butter production to remain low, at 30,600 and 23,650 tonnes respectively.

BMI Demand View: In 2013, we expect fluid milk consumption growth of 3.6% y-o-y to 4.9mn tonnes.

Even if demand is lower than domestic production, we see room for some imports because of the low

quality of domestic milk and the potential for spoilage. Out to 2017, we forecast milk consumption to grow

19.6% to 5.7mn tonnes, as a boost in production is likely to continue to increase milk demand.

However, we expect most dairy sector consumption growth to come from increased demand for processed

and higher-value dairy goods. This trend will be especially evident outside of Kazakhstan's major urban

centres, where underdeveloped infrastructure has to date impeded the distribution of perishable dairy items.

In line with this, we forecast cheese and butter consumption to grow 51.5% and 65.6% respectively to 2017.



Table: Kazakhstan Milk Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Milk Production, '000 tonnes 2 4,919.2 4,850.2 5,303.9 5,554.9 5,815.9 6,096.9

Liquid Milk Consumption, '000 tonnes 1,3 4,761.6 4,930.5 5,136.2 5,339.1 5,526.0 5,694.5

Notes: e BMI estimates. f BMI forecasts. 1 Based on food supply data; estimated after 2005. Sources: 2 The Agency ofStatistics of the Republic of Kazakhstan, BMI; 3 FAO.

Table: Kazakhstan Cheese Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Cheese Production, '000 tonnes 1 22.1 24.1 25.8 27.3 29.0 30.6

Cheese Consumption, '000 tonnes 2 53.0 58.4 63.7 69.2 75.1 81.3

Notes: e BMI estimates. f BMI forecasts. Sources: 1 UN Industrial Commodity Statistics Database; 2 UN IndustrialCommodity Statistics Database, UN Comtrade, BMI calculation.

Table: Kazakhstan Butter Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Butter Production, '000 tonnes 1 15.8 18.1 20.2 22.7 24.9 23.7

Butter Consumption, '000 tonnes 2 38.3 43.0 47.9 53.0 58.5 64.3

Notes: e BMI estimates. f BMI forecasts. Sources: 1 UN Industrial Commodity Statistics Database; 2 UN IndustrialCommodity Statistics Database, UN Comtrade, BMI calculation.

More Protectionist Measures To Aid Competitiveness Of Sector

The Board of the Eurasian Economic Commission (EEC) announced recently it would increase custom

duties on several dairy products in order to protect domestic dairy producers against cheap competition in a

context of high domestic feed and strong demand. The duties were raised on butter, cottage cheese and dairy

spreads from 15% to 20%. For other types of dairy products, such as grated and powdered cheese, including

Schabziger, duties were raised to 20%. Import duties on feta cheese made from cow milk were taken to 25%

of their customs value (against 15% currently).



The EEC was established upon the decision of the presidents of Russia, Belarus and Kazakhstan at the end

of 2011. It is a single permanent regulating body of the Customs Union and the Single Economic Space. We

believe the recent restrictions in dairy imports were linked to difficult operating environment for dairy

producers in all three countries and the aim to protect them against foreign competition, especially from

Western Europe. All three markets are not concentrated and particularly vulnerable to shocks, such as

soaring input costs in 2012.

Investment To Boost Production In Spite Of Remaining Challenges

The Kazakh government has announced that it wants to invest US$1.5bn in milk and meat production in the

coming years in order to address major challenges facing both sectors. After the dissolution of the Soviet

Union, Kazakhstan lost its major export markets for dairy products, which resulted in milk production

plummeting by 40.0% in four years. This also drastically cut herds; levels have not yet regained their 1992

levels.

Kazakhstan's dairy sector is inefficient and uncompetitive, which makes it unlikely to find other export

markets of the size of the former Soviet Union. The quality of milk is poor, and agricultural workers'

productivity is very low. This is partly because small farms account for 90% of production, and because

most of the output is directed at household consumption. Historically, there has been little incentive for

production to increase beyond that level, especially as levels of government support to the sector have been

very low.

Foot-And-Mouth A Constant Threat

In 2011, Kazakhstan was hit by a number of foot-and-mouth disease (FMD) outbreaks, showing that the

disease continues to pose a serious risk to the country's dairy and beef industries. The country was affected

by three consecutive disease outbreaks in two villages in Uralsk in north-west Kazakhstan and in the village

of Kurchumskiy in eastern Kazakhstan. That incident resulted in the destruction of 69 animals. While all

three outbreaks were contained, there remains the possibility of a wider epidemic, and we see this as posing

downside risk to our forecasts through our outlook period.

Throughout the summer of 2012, cases were reported in the east of the country. Out of 1,040 susceptible

cattle, 721 cases were reported. All affected animals were destroyed. The source of the outbreak has yet to

be determined.



In June 2013, more cases were reported in the east of the country. According to the World Organisation for

Animal Health, a total of 2111 cattle were found susceptible to the FMD virus (serotype A), out of which 50

cases were reported. A total of 901 animals were destroyed.

Table: Kazakhstan Milk Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Milk Production, '000 tonnes 2 5,073.2 5,198.0 5,303.0 5,381.0 5,235.0 4,919.2

Liquid Milk Consumption, '000 tonnes 1,3 3,978.7 4,165.0 4,233.1 4,491.1 4,612.8 4,761.6

Notes: e BMI estimates. 1 Based on food supply data; estimated after 2005. Sources: 2 The Agency of Statistics of theRepublic of Kazakhstan, BMI; 3 FAO.

Table: Kazakhstan Cheese Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Cheese Production, '000 tonnes 1 19.4 17.7 18.1 18.8 20.0 22.1

Cheese Consumption, '000 tonnes 2 36.4 39.0 40.5 45.5 49.6 53.0

Notes: e BMI estimates. Sources: 1 UN Industrial Commodity Statistics Database; 2 UN Industrial Commodity StatisticsDatabase, UN Comtrade, BMI calculation.

Table: Kazakhstan Butter Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Butter Production, '000 tonnes 1 19.7 16.6 15.3 14.0 14.6 15.8

Butter Consumption, '000 tonnes 2 27.0 23.3 24.8 31.5 35.3 38.3

Notes: e BMI estimates. Sources: 1 UN Industrial Commodity Statistics Database; 2 UN Industrial Commodity StatisticsDatabase, UN Comtrade, BMI calculation.

Risks To Outlook

We see upside risks to our Kazakh fluid milk production forecasts. Our current growth projections assume a

similar level of commercialisation over the next five years as has occurred over our review period.



However, a wider government push towards improved food security, coupled with increased private sector

investment in agriculture, could see this rate of commercialisation accelerate. This would translate into

greater efficiencies and higher output quality and could see our currently reasonably modest milk

production growth forecasts surpassed.

Another outbreak of foot-and-mouth disease hit Kazakh dairy herds again in 2013. It has been contained so

far. We see the possibility of a wider outbreak posing downside risk to our milk production forecasts.

Livestock Outlook

BMI Supply View: We have revised up our 2012/13 forecast for poultry production to 125,000 tonnes

(from 120,000 tonnes previously). Over the forecast period, poultry is expected to be the outperformer of

the livestock sector, with output increasing by 69.2% to reach 203,000 tonnes by 2016/17. The

government's subsidy programme, combined with an import tariff system and financial support for new

enterprises, will underpin this growth. We also highlight renewed private sector interest in the sector, which

is likely to enhance efficiency and quality of the industry over the medium term. The sector nevertheless

faces challenges, notably rising feed prices and a lack of expertise.

We have revised down our forecast for 2012/13 pork production and now expect output to stagnate at

215,000 tonnes. Similarly, beef production is projected to stagnate at 425,000 tonnes in 2012/13. Over our

forecast period, all sectors of Kazakhstan's livestock industry are forecast to experience solid growth.

Government investment, including initiatives to improve livestock farming standards and encourage greater

industry participation, is part of a wider plan to improve the country's food self-sufficiency. With meat

representing a large part of the traditional Kazakh diet, the livestock industry is set to be a major

beneficiary. A government drive to improve the country's bovine genetics by importing stock from the US

is likely to have a fairly powerful effect on beef production, helping it to expand by 35.7% over our forecast

period, reaching 576,700 tonnes in 2016/17.

BMI Demand View: As with production, demand across all Kazakh livestock sectors will be robust,

although poultry is set to be the outperformer. To 2017, poultry demand is forecast to increase by 43.6%,

while consumption of pork and beef will increase by 29.1% and 17.2% respectively. The outperformance of

poultry will be a product of its lower starting point - it is not as widely consumed as pork or beef - but will

also be a result of the increased presence of imported processed poultry goods on the local market. More

generally, livestock consumption will benefit from strong domestic production increases, which will help to

improve product affordability, as well as from Kazakhstan's healthy forecast economic growth outlook,

which will increase demand for processed livestock products.



Table: Kazakhstan Poultry Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Poultry Production, '000 tonnes 1 120.0 125.0 125.0 146.0 171.0 203.0

Poultry Consumption, '000 tonnes 2 345.0 379.5 405.7 433.7 463.6 495.6

Notes: e BMI estimates. f BMI forecasts. Sources: 1 Official Statistics of Kazakhstan, USDA; 2 USDA.

Table: Kazakhstan Pork Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Pork Production, '000 tonnes 1 215.0 215.0 237.9 244.5 251.1 257.7

Pork Consumption, '000 tonnes 2 231.0 243.0 258.4 272.9 286.3 298.2

Notes: e BMI estimates. f BMI forecasts. Sources: 1 Official Statistics of Kazakhstan, USDA; 2 USDA.

Table: Kazakhstan Beef & Veal Production & Consumption, 2012-2017

2012e 2013f 2014f 2015f 2016f 2017f

Beef & Veal Production, '000 tonnes 1 425.0 425.0 450.0 508.6 542.6 576.7

Beef & Veal Consumption, '000 tonnes 454.0 454.0 474.9 495.0 514.1 531.9

Notes: e BMI estimates. f BMI forecasts. Sources: 1 Official Statistics of Kazakhstan, USDA.

Support To Beef Sector To Aid Export Capacity

We believe Kazakhstan has the potential to improve the quality and efficiency of its meat output via a

strong increase in cattle imports. This supports our forecast for beef production to grow by 35.7% out to the

end of our forecast period, to 576,720 tonnes in 2017. In 2011, the Ministry of Agriculture announced a

plan for 'the development of beef export potential for Kazakhstan' to be implemented in two phases. The

first phase, covering 2011-2015, targets the rapid expansion of the number of high-yielding breeding cattle

in Kazakhstan. The second phase, from 2016-2020, would push for the development of beef export

potential.



Recovering Slowly

Kazakhstan - Cattle Numbers ('000 head)

Source: Kazakhstan Statistics Agency

The strategy has been so far a success, as it has encouraged a boom in import demand for better-quality

cattle. Cattle imports into Kazakhstan climbed from just 1,556 head in 2009 (worth US$6mn) to more than

16,713 head in 2012 (worth US$66mn). In 2012, Kazakhstan imported mostly from the United States and

the EU, while Canada and Australia took a smaller share of the country's purchases. Most of the imports

were of beef breeds (primarily Angus).



Booming Imports

Kazakhstan - Cattle Imports (head)

Source: Kazakhstan Customs, USDA

We expect these trends to accelerate further in the coming years, as the Kazakh government announced in

February that large-scale subsidised imports of cattle will continue. The goal is to develop the country's

herds back to the level seen at the start of the 1990s, when the country still had the capacity to export beef.

For 2013, an import target of 21,000 head of cattle has been set. This compares with 16,713 imported in

2012, and 13,892 imported in 2011. In addition to cattle imports, the plan also outlines goals for increased

use of semen for in vitro fertilisation and increased use of transplanted bovine embryos. The subsidy for

breeding cattle was set at KZT235,000 (US$1,555) for cattle from Australia or North and South America,

and KZT154,000 (US$1,020) for cattle from Europe.



Looking For US Heifers

Kazakhstan - Cattle Imports By Country (LHS) & Type (% of total, RHS)

Source: Kazakhstan Ministry of Agriculture, USDA

Government support, combined with renewed private interest in the sector, underpins our forecast for the

country's beef production deficit to narrow over the coming years and turn into a small surplus out to 2017.

That said, we still believe the government is being too optimistic in expecting a return to 1990s production

levels by 2020. We forecast beef production to reach 576,720 tonnes in 2017; the country produced

600,000-700,000 tonnes in the early 1990s, which allowed steady exports every year. We would revise up

our forecasts if we see clear signs that the country's booming cattle imports and improvements in

genetics aid production capacity over the medium term. Also, we would need to see better quality and safety

standards in place if the country wants to be a reliable export source for some markets.

Private Sector Interest Highlights Strong Growth Potential

In the Kazakh poultry sector, we believe the recent US$108mn investment by Israeli technology provider

MAD Corporation to build five large poultry farms in the north of the country will unleash growth

potential in the sector. This is in addition to strong government support for the industry. Even though the

sector has benefited from large feed subsidy programmes, poultry production is still hampered by a lack of

breeding material as well as the vulnerability of animals to disease, as well as the lack of high-quality

vaccines to treat them. We expect the project to improve poultry farming technology and quality. We also



believe these types of projects could attract other private companies to the country, boosting private

investment in the sector in the medium term.

As a result of these developments, we have revised up our forecasts for poultry production in Kazakhstan

out to 2016/17. We now forecast output to reach 203,000 tonnes out to 2016/17, as experts project annual

production of 50,000-70,000 tonnes from the new projects, with full capacity reached in four years.

Table: Kazakhstan Poultry Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Poultry Production, '000 tonnes 1 65.0 75.0 90.0 101.0 100.0 120.0

Poultry Consumption, '000 tonnes 2 209.0 206.0 199.0 225.0 278.0 345.0

Notes: e BMI estimates. Sources: 1 Official Statistics of Kazakhstan, USDA; 2 USDA.

Table: Kazakhstan Pork Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Pork Production, '000 tonnes 1 194.0 206.0 209.0 206.0 214.0 215.0

Pork Consumption, '000 tonnes 2 207.0 215.0 220.0 216.0 225.0 231.0

Notes: e BMI estimates. Sources: 1 Official Statistics of Kazakhstan, USDA; 2 USDA.

Table: Kazakhstan Beef & Veal Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012e

Beef & Veal Production, '000 tonnes 1 370.0 384.0 400.0 407.0 415.0 425.0

Beef & Veal Consumption, '000 tonnes 414.0 419.0 411.0 422.0 433.0 454.0

Notes: e BMI estimates. Sources: 1 Official Statistics of Kazakhstan, USDA.



Risks To Outlook

The key risks to our outlook relate to production and are weighted to the downside. If oil prices remain

subdued, we expect ongoing government investment in economic diversification. Agriculture and livestock

are likely to be key beneficiaries of this diversification owing to the secondary government initiative of

improving food security. However, any sustained uptick in oil prices could undermine this drive. Such an

uptick would mean greater oil revenues to invest, but it would also mean far lower urgency in terms of the

need for diversification.

Another general downside risk relates to possible disease outbreaks, particularly an outbreak of bird flu in

the case of our optimistic poultry production forecast. Kazakhstan's poultry industry has been growing

strongly in recent years. However, it remains under-invested and, consequently, the impact of a disease

outbreak in what remains a relatively immature agricultural sub-sector could be pronounced. The outbreak

of foot-and-mouth disease in eastern Kazakhstan in July 2012 shows the disease remains a threat and poses

downside risk to our pork and beef forecasts.

Grains Outlook

BMI Supply View: We have revised up slightly our 2013/14 wheat production forecast to 17.0mn tonnes

(compared with a previous forecast of 16.0mn tonnes) on the back of the latest official estimates. This still

represents a significant 73.4% year-on-year (y-o-y) rebound, as weather conditions have improved. Even

though in 2013/14 the country is expected to plant the same area for wheat as in 2012/13, area harvested is

likely to be slightly higher, and yields are expected to recover strongly, boosting total wheat production

back to 2010 levels. We expect wheat production to increase gradually by an average of 5.0% annually over

the last three years of our forecast period, reaching 17.4mn tonnes in 2016/17, which is still below the

2011/12 level.

The barley crop is also forecast to recover strongly in 2013/14, by 40.0% to 2.1mn tonnes. This will come

from increased area dedicated to the crop at the expense of wheat as the government seeks to decrease its

dependence on wheat production and exports. Also, barley yields will most likely recover from their low in

2012/13, when the crop was affected by droughts to the same extent as the wheat crop was. We forecast

barley production to increase by an average of 2.0% annually over the last three years of our forecast

period, reaching 2.3mn tonnes in 2016/17.



The corn crop, which is planted in spring, benefited from much milder weather and soil moisture conditions

in 2012/13, with rainfall starting again around the plantings period. As a result, and because of base effects,

we forecast output to drop slightly in 2013/14 to 480,000 tonnes. Out to 2016/17, we forecast corn

production to grow by 8.0% on the 2011/12 level to reach 510,000 tonnes.

BMI Demand View: Unlike neighbouring Ukraine, Kazakhstan did not impose a wheat export ban despite

suffering a similarly poor harvest as a result of drought. The higher average prices, which we expect to

continue in H113, will have the effect of encouraging exports and raising prices for domestic consumers.

We therefore forecast a moderate decline in wheat consumption in 2013, of 7.9% to 7.0mn tonnes, which is

still considerably higher than the 2011 figure of 6.2mn tonnes. Over our forecast period to 2017, we see

hardly any potential for additional growth in domestic wheat demand and forecast consumption to reach

7.5mn tonnes, a marginal increase on the 2012 figure.

Most of Kazakhstan's barley is used for feed for domestic livestock. Consumption has consequently shown

itself highly volatile to supply dynamics as farmers switch to other feed types when supply tightens and

prices rise. In 2013, we forecast barley consumption to fall 18.6% y-o-y to 1.5mn tonnes, as local barley

output will be severely restricted by the effects of drought. Kazakhstan has traditionally relied on domestic

supplies, only importing 55,000 tonnes of barley in 2010/11, another year that saw poor harvests. The corn

harvest has emerged relatively unscathed from the drought, and we expect most of the supply to be taken up

by domestic consumption as usual, with demand increasing 5.0% y-o-y to 498,100 tonnes in 2013. Out to

2017, we forecast barley and corn demand of 2.0mn tonnes and 822,300 tonnes respectively.

Table: Kazakhstan Wheat Production & Consumption, 2012-2017

2012 2013f 2014f 2015f 2016f 2017f

Wheat Production, '000 tonnes 1 22,732.0 9,841.0 17,000.0 16,200.0 17,010.0 17,350.2

Wheat Consumption, '000 tonnes 1 7,400.0 e 6,815.8 7,156.6 7,163.7 7,171.7 7,180.6

Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA.



Table: Kazakhstan Corn Production & Consumption, 2012-2017

2012 2013f 2014f 2015f 2016f 2017f

Corn Production, '000 tonnes 1 482.0 500.0 480.0 490.0 500.0 510.0

Corn Consumption, '000 tonnes 1 475.0 e 498.8 514.1 601.5 703.7 823.3


Table: Kazakhstan Barley Production & Consumption, 2012-2017

2012 2013f 2014f 2015f 2016f 2017f

Barley Production, '000 tonnes 1 2,593.0 1,500.0 2,096.0 2,148.4 2,202.1 2,257.2

Barley Consumption, '000 tonnes 1 1,825.0 e 1,485.1 1,793.4 1,861.8 1,918.3 1,976.4


Export Potential Shifting East

We believe Black Sea countries will see increased grain demand from Asia in the coming years after the

region was largely ignored for at least the past three seasons. Disappointing harvests in Asian countries'

traditional suppliers, mainly the US, Australia and India, partially account for this. In addition, rising middle

classes and changing dietary habits are increasingly putting strains on the region's grain production balance;

this will force Asian importers to look for increased volumes and lower prices for grain purchases in the

medium term.

Thailand and the Philippines have already bought 200,000 tonnes of wheat from Black Sea countries in

recent months, and traders expect between 2.0mn and 2.5mn tonnes to flow into Asia in 2013/14. Thailand

bought Black Sea wheat for US$280-285/tonne, including cost and freight, while the Philippines purchased

wheat for US$282/tonne. India quoted about US$320-325/tonne for similar quantities. We see potential for

other large wheat importers in the region, such as Indonesia, China and Bangladesh, to turn to the Black Sea

region in the coming months, especially as we expect a bumper harvest in all the producing countries of the

region (we forecast a 41.4% year-on-year rebound in wheat production in Russia, Ukraine and Kazakhstan).



Surging Import Demand

Select Asian Countries - Corn (LHS) & Wheat (RHS) Imports ('000 tonnes)

Source: USDA, BMI

More specifically, we see tremendous potential for China to increase its corn imports from Ukraine in the

coming years. A recent agreement between both governments could result in the delivery of 2mn-4mn

tonnes of corn from Ukraine to China for the 2013/14 season. As part of the agreement, Ukraine's State

Food Grain Corporation (GPZKU) obtained a US$1.5bn loan to finance improvements to the former Soviet

republic's agriculture. GPZKU will then export its grain output via Chinese operator China National

Machinery Complete Industry Engineering Corporation. Most of the grain shipped will be corn given

China's booming import demand for the feed. We believe this will come on the back of China's aim to

diversify away from the US as its major supplier for corn and soybean. As China has so far failed to develop

reliable supply agreements with Brazil and Argentina because of infrastructure and administrative

bottlenecks, Ukraine, which exported 12.9% of global corn in 2011/12, would be an efficient alternative.



Asia Still Small Share Of Black Sea Exports

Ukraine (LHS) & Russia (RHS) - Wheat Exports By Region/Country (% of total)

Note: Ukraine exports are for 2011/12 season; Russian exports are for H113; Source: USDA, Sovecon

As a result of this emerging demand and significant long-term growth potential, we have seen tailored port

capacity coming online in the region. The plan by Russia's United Grain Company to develop a grain

terminal on Russia's Far East coast will serve that purpose. Russia is seeing grain shipments to Asia

expanding very fast (set to increase to about 1mn tonnes in 2012/13, compared with almost nothing in

2011/12) but is lacking the relevant infrastructure to keep up with demand. The development of shipping

capacity in Siberia and the Far East will make Russia even more competitive than it is currently on Asian

markets.



Upside Potential For Far East Russian Ports

Port of Vostochny - Throughput ('000 tonnes) & Growth (% year-on-year)

e/f = BMI estimate/forecast. Source: Port Authority

Ukraine is pouring investment into its grain port terminal capacity in order to be better prepared for the

surge in demand from Asia. Recent financing projects aim to increase Illichivsk port's annual capacity from

30mn tonnes to 76mn tonnes. A new grain terminal was launched at the port of Odessa in April, with 11

reservoirs, a total capacity of 72,400 tonnes, brought online. The grain terminal will have a final annual

capacity of between 2mn and 3mn tonnes and will be one of the most advanced terminals in the Black Sea.

For Kazakhstan, transport subsidies support exports to Russian and Baltic ports, in turn directed to Asia,

mainly China. Approximately 160,000 tonnes of grain was shipped to China in 2011/12, compared with just

31,000 tonnes the year before. Also, Kazakhstan launched its own grain terminal in the Iranian port of

Amirabad (which it supplies from its port of Aktau). BMI believes that this will offer Kazakhstan the ability

to not only cater for Iranian demand, but also to Asia as grains will be shipped to Amirabad, freighted

through Iran and then shipped out to central and eastern Asia, via Iran's ports on the Persian Gulf.



Booming Export Capacity

Black Sea Countries - Wheat Exports ('000 tonnes)

f = BMI forecast. Source: USDA, Sovecon

Only developed markets (and established grain importers) in Asia will resist the renewed attractiveness of

Black Sea grains. In fact, we expect Japan and South Korea to stay with their current traditional suppliers

(mainly the US), as they are far less price sensitive markets and more wary of the quality of imported

products. Also, volatility in export capacity could be an issue for these markets, as they import roughly the

same amount of grains every season and are looking for long-term supply agreements with exporters. This

will be less of a critical point for emerging grain importers in the region, as they are constantly looking for

the best bargain on global markets rather than long-term security of supply. Only India and China could be

exceptions to this rule.

Output Recovery, Diversification On The Cards

We forecast wheat production in Kazakhstan to recover by 73.4% in 2013/14 to 17.0mn tonnes thanks to

higher yields. The strong growth in output follows losses seen in 2012/13 as a result of severe droughts.

Area harvested is set to increase by about 7.2% in 2013/14, while yields are set to recover by more than

40%.



Kazakhstan's objective to diversify away from wheat production is likely to push the country's corn and

barley production higher in 2013/14. The country has faced challenges in terms of getting wheat exports to

distant markets, and the government is pushing to increase domestic livestock and poultry production. The

area dedicated to feed crops and oilseeds is therefore likely to be prioritised at the expense of wheat. In

recent years, wheat planted area has represented 64% of all planted area in Kazakhstan, and 83% of grain

and pulse planted area. We believe the share allocated to wheat will decrease in the near term.

We expect an improvement in the grain production balance will benefit the country's exports in 2013/14.

Kazakh wheat exports remained particularly subdued in 2012/13, even below capacity. The US Department

of Agriculture estimates that the country exported about 6.5mn tonnes in 2012/13, while the production

balance stood at 3.0mn tonnes and stocks at a record of 11.8mn tonnes. Kazakh wheat prices were

supported by high prices in Russia, which saw wheat production almost halved owing to droughts in

2012/13. Kazakhstan also massively increased shipments to the region in order to fill the regional deficit,

which we see as temporary. In fact, we expect the country to boost exports to non-former Soviet Union

countries in 2013/14.

Overall, we see strong potential for growth in grain production and exports for Kazakhstan in the medium

term on the back of increased government support to the sector. In 2012, the Ministry of Agriculture

announced a number of programmes to support spring sowing and the 2013/14 crop production in general.

These included a KZT60bn (US$400mn) budgetary loan to major players in the sector, such as KazAgro

Holding. These funds will give preferential rates to farmers in order to support plantings as well as help

microcredit institutions propping up the sector. The ministry also launched a forward purchasing of wheat

and barley at a rate of KZT6,000/ha (US$40/ha), representing a total budget of KZT13bn (US$86mn). The

government also increasingly makes sure that relevant fuel, machinery, seeds and fertiliser supply are made

available to farmers.

Our outlook for grain prices will be supportive of increased plantings and investment in these crops in

Kazakhstan, as well as export demand, especially from Asia. We forecast wheat prices to remain

particularly elevated in the short term, while all grains are expected to trade at a premium compared with

their historical average in the coming years. Our strong forecasts for consumption growth in Asia, and the

country's development into these markets, will also boost revenues and investment in grain crops out to

2016/17.



Table: Kazakhstan Wheat Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012

Wheat Production, '000 tonnes 1 13,460.5 16,466.9 12,538.2 17,051.0 9,638.0 22,732.0

Wheat Consumption, '000 tonnes 1 7,500.0 7,500.0 7,500.0 7,600.0 6,200.0 7,400.0 e

Notes: e BMI estimates. Sources: 1 USDA.

Table: Kazakhstan Corn Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012

Corn Production, '000 tonnes 1 414.0 421.0 420.0 470.8 462.0 482.0

Corn Consumption, '000 tonnes 1 425.0 425.0 425.0 425.0 450.0 475.0 e


Table: Kazakstan Barley Production & Consumption, 2007-2012

2007 2008 2009 2010 2011 2012

Barley Production, '000 tonnes 1 1,953.0 2,441.0 2,059.0 2,519.0 1,313.0 2,593.0

Barley Consumption, '000 tonnes 1 1,350.0 1,700.0 1,850.0 2,000.0 1,475.0 1,825.0 e


Risks To Outlook

The high prices Kazakh growers received for their wheat crop in 2012 may provide them with the capital to

make further investments, for instance, in improved mechanisation and storage. This represents an upside

risk to our forecasts. Drought, which in 2012 resulted in y-o-y falls in grains production of around 50%,

shows that the weather remains an ever-present risk to our forecasts.



Commodities Price Analysis

Monthly Grains Strategy

■ Having declined steadily since Q412 in line with our view, we believe grain prices will find a base inQ413 as prices approach key support levels and planting prospects in the Southern Hemispheredeteriorate due to the lower prices.

■ Corn prices could stage a temporary recovery following recent weakness, as we believe the bulk of theprice declines are behind us. Corn (and to a lesser extent soybean) are expected to experience a period ofvolatile prices in the coming weeks leading up to the US harvest.

■ Wheat prices will remain supported owing to strong import demand from China and reduced plantingprospects in the Southern Hemisphere.

• Rice prices will face downside pressure in the coming months as the Thai government releases stockson the international market.

Grain Feels The Pain (weekly chart)

S&P GSCI Grains Index

Source: Bloomberg



Corn: Temporary Strength After Free Fall

Our view of corn prices breaking below multi-year support around USc650/bushel has played out, and we

now see prices forming a base around support at USc425/bushel in the coming weeks. Prices have collapsed

in recent weeks: the US harvest remains on track for a significant rebound in 2013/14 owing to better

weather, and key demand drivers such as the livestock sector remain comparatively subdued. We have also

revised our 2013 and 2014 price forecasts lower to USc600/bushel and USc525/bushel respectively. The

view for lower prices is premised on our forecasts for three consecutive large global surpluses starting in

2013/14 - of at least 10mn tonnes - before the market returns to deficit in 2016/17.

Betting The Farm

US Corn - Largest Planted Areas By Season Since 1926 (mn acres)

Note: Corn and soybean began sharing acreage in 1964. Sources: BMI, USDA, NASS

However, we believe the bulk of the price declines is behind us and see potential for corn to form a base

around the USc400-425/bushel level, which corresponds with technical support. The main reason is that we

expect the significant decline in prices to reduce corn plantings in South America, a key export hub that



experienced record plantings in 2012/13 on the back of high prices. Indeed, official forecasts are also for a

decline in the area dedicated to corn in 2013/14.

Mind The Gap

Front-Month CBOT Corn, USc/bushel (weekly chart)

Sources: BMI, Bloomberg

Rice: Signs Of Changes To Thai Policy

Supported by a price premium stemming from Thailand's rice pledging programme and tightness on the US

domestic market (which has a significant influence on CBOT rice prices), we believe front-month rice

prices will trade within their moderate channel uptrend (US$15.00/cwt and US$17.00/cwt) in the coming

months. We have slightly revised up our 2013 price forecast owing to the strength in prices since the

beginning of the year; we now expect rice to average US$15.00/cwt over the year (compared with US

$14.50/cwt previously).



More Weakness Coming

Front-Month CBOT Rough Rice, US$/cwt (weekly chart)


However, we continue to forecast lower average rice prices beyond 2013, as ample global supply is likely to

keep prices in check. The global market will record surpluses of around 5mn tonnes in 2012/13 and

2013/14, which will maintain the stocks-to-use ratio at a relatively elevated level. Prices are expected to

eventually head lower once Thailand releases its unsustainably high stocks on the market at a discounted

price. This will increase the availability of rice on the international market and push prices below multi-year

support, which comes in around US$15.00/cwt. As a result, we forecast prices to average lower in 2014, at

US$13.00/cwt.



A Hundred Months Of Surpluses

Rice - Global Production Balance, mn tonnes (LHS) & Stocks-To-Use Ratio, % (RHS)

Global Production Balance (LHS)Stocks-To-Use (RHS)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

-40-35-30-25-20-15-10-505

101520

10

15

20

25

30

35

40

Source: BMI, USDA

Soybean: Market Tightness To Continue

We anticipate soybean prices holding key support around USc1,300/bushel as US and Latin American

production prospects deteriorate. Unlike the US corn crop, where crop conditions have improved

dramatically compared with the same time a season ago, soybean conditions have deteriorated in recent

weeks following patches of dry weather. Indeed, the percentage of the US soybean soil in good condition

has gradually fallen since estimates were released at the end of the planting season in May. Moreover, we

have revised down our forecasts for South American soybean production for the 2013/14 season (the

plantings for which begins shortly) as prices have declined considerably compared to the 2012/13 planting

season. We also expect Chinese soybean imports to continue reaching new highs and see demand

recovering strongly by Q214.



Weaker Growth In 2013/14

Brazil & Argentina - Combined Annual Growth In Soybean Plantings (%)

Source: BMI, USDA

Overall, we believe the soybean market will remain one of the tightest in the grains complex, as it is

rebounding from a record 17mn tonne deficit during the 2011/12 season. Indeed, the soybean futures curve

is the only curve in the grains complex that is in backwardation. Therefore, soybean is the only grain for

which we forecast higher average prices in 2014 (USc1,450/bushel) than 2013 (USc1,400/bushel).



Weakness Won't Last

Front-Month CBOT Soybean, USc/bushel (weekly chart)

Source: BMI, Bloomberg

Wheat: Prices To Find Support

We have revised down our average annual wheat price forecasts. Wheat prices have fallen by almost 20%

since January, brought on by improving harvest prospects in major producers such as the EU, United States

and Black Sea region. Indeed, we forecast the global wheat market to rebound from a 35mn tonne deficit in

2012/13 to be essentially balanced in 2013/14. Consequently, we have revised our average price forecasts

lower and now see wheat averaging USc690/bushel in 2013 and USc650/bushel in 2014.



Looking For Support

Front-Month CBOT Wheat, USc/bushel (weekly chart)


Over the short term, however, we believe prices will remain supported around the USc600/bushel level as

more wheat is diverted to feed in the US and because Chinese imports are forecast to reach a multi-decade

high of 9mn tonnes in 2013/14. This would make China the world's largest wheat importer during the

season. Prices will also receive support as we are forecasting only a minor increase in Argentine production

for the 2013/14 season, mainly owing to better yields. Indeed, official forecasts see the area dedicated to

wheat in Argentina falling to its second lowest level in 40 seasons in 2013/14.



20-Year Highs

China - Wheat Imports ('000 tonnes)

Note: 2013/14 = USDA forecast; Sources: BMI, USDA

Table: Select Commodities - Performance & BMI Forecasts

Commodity Unit Spot PriceYTD

(% chg)1 Year

(% chg)2012 (ave)

YTD (ave)

2013 (BMI ave)

2014 (BMI ave)

Barley EUR/tonne 201 -19.5 -23.2 250 236 230 225

Class 3 Milk US$/cwt 17.75 -3.1 -10.7 17.59 18.27 18.00 17.25

Cocoa (London) GBP/tonne 1,660 15.7 3.4 1,540 1,496 1,475 1,550

Coffee USc/lb 118 -17.7 -26.6 175 134 125 115

Corn USc/bushel 489 -30.0 -40.0 695 655 600 525

Cotton USc/lb 92.0 22.4 24.0 79.7 84.4 85.0 87.5

Feeder Cattle USc/lb 155 2.3 10.2 149 144 na na

Lean Hogs USc/lb 86.4 0.8 13.8 84.9 90.3 na na

Live Cattle USc/lb 124 -4.8 1.9 123 125 na na

Palm Oil MYR/tonne 2,380 2.6 -17.9 2,901 2,359 2,450 2,650

Rough Rice US$/cwt 15.54 15.4 8.2 14.86 15.43 15.00 13.00

Soy Oil USc/lb 43.2 -12.2 -19.9 52.2 48.5 na na

Soybean USc/bushel 1,310 -7.6 -23.1 1,466 1,453 1,400 1,450



Select Commodities - Performance & BMI Forecasts - Continued


(% chg)1 Year

(% chg)2012 (ave)

YTD (ave)

2013 (BMI ave)

2014 (BMI ave)

Soymeal US$/tonne 417 -1.0 -21.8 430 433 na na

Sugar #11 USc/lb 16.54 -15.2 -19.3 21.57 17.50 17.50 17.00

Wheat USc/bushel 636 -18.3 -27.7 751 702 690 650


Table: BMI Commodities Strategy

EntryDate

EntryLevel

Gain/(Loss) Rationale

AGRICULTURE

- - - - -

ENERGY

- - - - -

METALS

Bullish Platinum (spot) vsGold (spot)

29-May-201

3 1.055 5.89%Supply disruption in South Africa, growing autos use to supportplatinum prices. Bearish gold.

Note: Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg



Monthly Softs Strategy

■ In line with our view, softs have outperformed grains and industrial commodities since the start of theyear.

• We believe the softs index is close to a bottom, especially for sugar and coffee.

• Cotton and cocoa will remain the best supported among softs on the back of China's ongoingstockpiling policy (cotton) and subdued supply prospects in West Africa (cocoa).

• Despite little upside potential in the short term, palm oiI prices are likely to start to recover in 2014.

More Neutral On Softs Now

Select Commodities & Indices - Prices (rebased)

Note: 2 January 2013 = 100. Source: BMI, Bloomberg

Cocoa: Supply Risks Remaining

We expect cocoa prices to continue trading within the GBP1,400-1,700/tonne range in the coming months.

Concerns over delays to the coming West African crop, combined with quality issues, will prevent

significant declines in prices. Indeed, we have revised down our 2012/13 and 2013/14 cocoa supply

forecasts for Ghana, as poor rainfall has affected yields. However, we believe the recent rally in prices will



fade as new supply comes online. Despite strong European grindings in Q213, we believe any demand

recovery in Europe will be uneven in the short term given the high prices.

Range Trading

Front-Month LIFFE Cocoa, GBP/tonne (weekly)

Source: Bloomberg, BMI

We forecast small global cocoa deficits in the coming seasons, which will push cocoa prices higher in the

medium term. We are particularly cautious about supply prospects in West Africa, where ageing trees and

farmers, low efficiency and limited access to credit will restrict production growth. As a result, we forecast

cocoa prices to average GBP1,550/tonne in 2014.



Picking Up

Europe - Year-On-Year Q2 Cocoa Grindings (% of previous year)

Source: BMI, European Cocoa Association

Coffee: Finding A Bottom Soon?

We expect coffee prices to remain weak in the coming months as ample global supply puts pressure on

prices. The supply problems in Central America related to coffee rust disease have had little impact on

prices so far, mainly because Colombia is projected to offset its neighbours' production drop. Although we

still expect a decline in 2013/14 production in Vietnam, concerns over a prolonged dry spell have now

eased.



Little Support Before US$1 Level

Front-Month ICE Coffee (USc/lb, weekly) & RSI (below)


Prices could drift towards USc100/lb, a level we believe presents strong psychological support. Farmers in

major producers, including Brazil, Colombia, Vietnam and Indonesia, will consider hoarding in the face of

sharply declining profitability. Moreover, Brazil's soon-to-be-announced support programme for coffee

farmers is likely to include a subsidies scheme, which will limit the downside for prices. We forecast prices

to stabilise in the coming years, averaging USc115/bushel in 2014 and 2015 compared with USc125/bushel

in 2013.



Downside Pressure For Sugar And Coffee

BRL/US$ Exchange Rate (weekly chart)


Cotton: Stable For Now

We expect cotton prices to respect current resistance at USc90.00/lb in the coming months, as the global

market remains well supplied. Net speculative long positions are still high by historical standards, which is

likely to limit upside risks for prices in the near term. Prices could make a decisive move above the

USc90.00/lb level towards the end of the year, when the market is likely to enter a supply trough after a

disappointing year in terms of output growth. We do not foresee a major change to China's stockpiling

policy before mid-2014 at least; this will maintain domestic prices at elevated levels and incentivise millers

to import significant volumes of cotton.

In the medium term, we expect the global market to record decreasing surpluses as relatively low prices

continue to discourage plantings and demand recovers at a stronger pace. We forecast cotton prices to

average USc85.00/lb in 2013 and USc87.50/lb in 2014.



Resistance To Hold For Now

Front-Month ICE Cotton, USc/lb (daily) & RSI (below)


Palm Oil: Recovery In 2014

Although we continue to believe palm oil prices have bottomed, we see limited upside to prices in the

coming months given the lack of a significant fundamental upward catalyst. We continue to expect prices to

trade along support at MYR2,250/tonne. The demand picture has deteriorated in recent months, as the



depreciating Indian rupee is weighting on India's imports, which usually represent close to 20% of the

world's total trade. Meanwhile, Malaysia and Indonesia are now in the part of the season during which

yields peak, and when production is at its highest.

Weakness For Now

Three-Month Palm Oil (MYR/tonne, weekly)


Prices are expected to start to recover in 2014 as production growth slows and consumption maintains a

healthy growth rate. Palm oil remains competitive compared with other vegetable oils, as the palm oil/soy

oil and palm oil/soybean ratios are still low by historical standards. We see prices averaging MYR2,650/

tonne in 2014, compared with MYR2,450/tonne in 2013.



Weak Rupee Weighting On Imports

India - Palm Oil Imports ('000 tonnes)

Source: BMI, India Solvent Association

Sugar: Bottoming Out

We maintain our view that sugar prices are close to bottoming out and are likely to show resilience over a

three-to-six-month horizon. Prices could face downward pressure in the very short term, as sugar prices

have recently regained competitiveness over ethanol prices in Brazil, which could prompt millers to turn

more cane into sugar. The continued weakness in the Brazilian real also poses downside risk to sugar

prices. However, unfavourable weather in June and July and the upcoming end of the harvest season in

Brazil suggest that supply will only tighten. The Brazilian sugarcane association Unica revised down its

production estimate for Brazil in April and could do so again in its next report in September. We forecast

the global surplus to significantly narrow in 2013/14, to 5mn tonnes, down 37.5% year-on-year. This will

help prices recover slightly in 2014 to average USc18.00/lb, compared with USc17.50/lb in 2013.



Reversal In Sight?

Front-Month ICE Sugar, USc/lb (weekly)


Table: Select Commodities - Performance & BMI Forecasts


(% chg)1 Year

(% chg)2012 (ave)

YTD (ave)

2013 (BMI ave)

2014 (BMI ave)

Barley EUR/tonne 205 -17.7 -21.5 250 236 230 225

Class 3 Milk US$/cwt 17.55 -4.2 -11.7 17.59 18.27 18.00 17.25

Cocoa (London) GBP/tonne 1,654 15.3 3.1 1,540 1,496 1,475 1,550

Coffee USc/lb 115 -20.2 -28.5 175 134 125 115

Corn USc/bushel 483 -30.8 -41.9 695 654 600 525

Cotton USc/lb 86.7 16.3 14.3 79.7 84.4 85.0 87.5

Feeder Cattle USc/lb 155 2.7 11.2 149 144 na na

Lean Hogs USc/lb 86.9 1.3 14.6 84.9 90.3 na na

Live Cattle USc/lb 124 -4.5 3.7 123 125 na na

Palm Oil MYR/tonne 2,385 2.8 -17.7 2,901 2,359 2,450 2,650

Rough Rice US$/cwt 15.75 15.4 8.2 14.86 15.43 15.00 13.00

Soy Oil USc/lb 43.0 -12.6 -22.7 52.2 48.5 na na

Soybean USc/bushel 1,309 -7.7 -25.3 1,466 1,452 1,400 1,450



Select Commodities - Performance & BMI Forecasts - Continued


(% chg)1 Year

(% chg)2012 (ave)

YTD (ave)

2013 (BMI ave)

2014 (BMI ave)

Soymeal US$/tonne 412 -2.0 -24.2 430 432 na na

Sugar #11 USc/lb 16.49 -15.5 -16.6 21.57 17.49 17.50 18.00

Wheat USc/bushel 635 -18.4 -29.5 751 702 690 650


Table: BMI Commodities Strategy

EntryDate

EntryLevel

Gain/(Loss) Rationale

AGRICULTURE

- - - - -

ENERGY

- - - - -

METALS

Bullish Platinum (spot) vsGold (spot)

29-May-201

3 1.055 5.47%Supply disruption in South Africa, growing autos use to supportplatinum prices. Bearish gold.

Note: Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg



Upstream Analysis

Europe GM Outlook

BMI View: Europe is expected to remain the smallest region for genetically modified (GM) plantings in the

world, as there is still strong public opposition to GM products in the region's largest grain producers,

among them France. The EU's reliance on GM feed imports has pushed several retailers in the UK to step

back from their initial commitment to source non GM-fed poultry meat.

Strict regulations on production and the use of genetically modified (GM) food, as well as negative public

opinion, make the EU the smallest region for GM plantings in the world. GM plantings in the EU only

represent 0.6% of global GM plantings, while the US and South America represent 77.8%. Only two crops

are authorised for cultivation in the bloc: Monsanto's MON810 corn and BASF's Amflora potato. Since

2007, GM plantings in the EU have remained stable, between 93,000 and 110,000 hectares. Spain is the

leading producer of GM corn in the EU, accounting for an estimated 85.5% of plantings in 2012. Portugal,

the Czech Republic, Poland, Slovakia and Romania have boosted plantings in recent years, and this has

benefited their local livestock sectors.



Spanish Planting Spree

Select Countries - GM Corn Area Planted (ha)

Source: USDA

Strong public opposition to field trials could discourage any private investment in the sector because of

uncertainty over demand prospects for GM products. In fact, Germany-based BASF announced recently it

would discontinue its pursuit of regulatory approval for its GM potato varieties, as the company has been

widely exposed to field destruction and radical shifts in the regulatory environment. There are still no field

tests allowed in most EU countries; vandalism of fields by activists occurs because, by law, exact locations

of the fields are available on the internet. Field tests have increased in some countries such as the Czech

Republic, Ireland, Poland, Portugal, Romania and the UK. The UK has a history of activist destruction of

field tests, but recent experiments of Cadenza wheat, modified to produce a non-toxic odour to repel aphids

and funded by the government, went ahead despite actions of protestors and amid tight security.



Different Approaches To GM Plantings

EU - Countries By Approach To GM Plantings

Note: GE= genetically engineered. Source: USDA

We still do not expect France to reverse its unilateral ban of Monsanto corn plantings, especially after a

study into the effects of GM corn on health prompted loud reactions from anti-GM activists in the country.

However, the country dropped any further challenge to the company's license to sell GM corn in the EU, as

France's food-safety agency ruled that the experiment, which linked the absorption of GM corn to tumours

in rats, was inconclusive and flawed. Also, the country's highest court recently lifted the back on growing

Monsanto's genetically modified (GMO) maize MON810. The court found that the French ban violated

European Union law because the maize was authorised by the EU in 1998. Still, France is one of the eight

member states which have banned the cultivation of MON810 - France, Germany, Poland, Italy,

Luxemburg, Austria, Hungary and Greece. Monsanto itself recently announced that it will no longer pursue

cultivation approvals for new GMO crops in Europe because of the regulatory resistance.



US Decreasing Importance

EU - Soybean Imports By Country In 2006-2010 Average (LHS) & 2011/12 (RHS), %


We believe imports of GM foods will be subject to much less restrictions than plantings in the medium

term. This is because imports benefit from more centralised ways of approval. The region is still very

dependent on soymeal and corn products imports from the Americas in order to feed its livestock. In the

2011/12 season, the EU shifted sourcing for soybean and corn products from the US to other countries in

South America because of stiffer regulations on sustainability criteria for soybean use in biofuels. Also,

higher quantities of domestically produced dried distillers grains with soluble (DDGS) and delays in the

approval of Syngenta's MIR162 DDGS variety reduced corn imports. In the 2012/13 season, we have seen

corn imports increase significantly and the EU approved imports of Syngenta's MIR162, a genetically

modified corn variety, in October 2012. As a result, we expect GM feed imports to increase in the medium

term as the EU does not have the production capacity to be self-sufficient in soybean and corn production

for feed.



Steady Feed Imports

EU-27 - Corn, Soybean & Soymeal Imports ('000 tonnes)

f = BMI forecast. Source: USDA

The EU's reliance on GM feed imports has pushed several retailers in the UK to step back from their initial

commitment to source non-GM-fed poultry meat. Tesco, followed by Asda and Morrisons, have recently

indicated it is nearly impossible with its objective to sell non-GM fed animal meat only under its own

brands. The retailers pointed that quantities of non-GM soybean were not sufficient to supply its livestock

producers, making sourcing difficult, inefficient and expensive. This turnaround, even in a context where

retailers in other countries such as France and Germany have maintained their commitment to non GM-fed

animal meat, illustrates the limit of retailers' capacity to supply their processing chains outside of traditional

channels. Because the US, Brazil and Argentina, the world's three largest soybean producers, produce

mostly GM soy, we believe retailers' commitment to only sell non-GM animal meat will encounter major

hurdles in the medium term, and we see more European retailers turning around their strategy, in line with

UK retailers' decisions.

Ultimately, the lack of growth potential for GM plantings in the EU underpins our view for grains

production growth in the region to be subdued over our forecast period. Europe has lower yields than the

US, where almost 80% of plantings are GM, and is expected to soon fall behind Argentina and Brazil,



where yields are picking up on the back of increased GM plantings. Out to 2016/17, we forecast corn

production in the EU to fall 18.5%, while we see output growing 8.3% in the US and 14.1% in Brazil, with

this growth partially linked to a greater use of GM seeds.

Europe Machinery Outlook

BMI View: Mainly owing to base effects, we continue to see higher potential for machinery industry growth

in Eastern Europe compared with Western Europe. The two key growth markets in Eastern Europe are

Russia and Kazakhstan. We expect machinery imports in both countries to be strong in the coming years,

and see stronger growth mitigating dire prospects in Western European sales for companies such as

AGCO.

In Western Europe, similar to the US, agricultural machinery sales in both volume and relative terms are

declining. The region's machinery market is already well supplied, and the sector has been affected by a

deteriorating business environment since the 2008 financial crisis, along with poor crop production

prospects, reducing demand for equipment. Indeed, poor credit conditions, the looming prospect of subsidy

reforms and the increased volatility of commodities prices have made it more difficult for the EU's

machinery manufacturers to resume previous production growth trends. For example, in Switzerland, the

number of tractors per 100 square kilometres has fallen from 2,645 in 2001 to 2,597 in 2007, showing a

decline even before the financial crisis. In Germany, consolidation of the farming sector has meant that the

number of tractors in use in the country fell from 1.5mn in 1990 to just over 675,000 by 2008.



Sharp Decline In 2009

EU - Machinery Production & Market (EURbn, LHS) & Agricultural Machinery Employees Per Country(%)

Note: Market = total sales. Source: CEMA, VDMA & Eurostat

In Eastern Europe, we see much better prospects for tractor sales in the coming years and specifically

highlight Romania, Poland, Russia and Kazakhstan. In Romania, tractor use increased by 7.6% between

2001 and 2009 (the most recent year for which data is available). Given that the country is a key corn

exporter in the region and that corn prices are expected to remain elevated by historical standards, prospects

for tractor sales are likely to be relatively strong as the country seeks to improve production efficiency.

Indeed, we forecast corn production in Romania to recover 86.9% between 2012/13 and 2016/17.

Furthermore, the Romanian economy has been relatively resilient despite other troubles in the eurozone,

implying that credit conditions will remain relatively loose (albeit very tight) by regional standards,

particularly for businesses. We expect machinery sales in Poland to be slightly more limited than in

Romania, but still stronger than in Western Europe. The country has also seen strong tractor sales in recent

years, but because of the already high number of tractors present, sales could be relatively weaker compared

with other non-eurozone countries.



More Growth To Come

Russia - Tractor Monthly Cumulative Sales (units)

Source: Bloomberg, Russian Association of Equipment Manufacturers



Russian Imports To Increase On Accession To WTO

The two key growth markets we see in Eastern Europe are Russia and Kazakhstan. Both are coming from a

very low base (in 2010 Russia had fewer than 50 tractors per 100 square kilometres, while Kazakhstan had

only 17 by 2010), and both countries have made a strong commitment to increase grain production in the

coming years, implying a greater need for mechanisation. Between 2009 and 2012, Russian tractor unit

sales multiplied by almost 2.5x to 46,680 units. Sales growth in the first months of 2013 slowed slightly, but

we expect recent government support to the industry to at least keep its 2012 pace by the end of the year.

Russian tractors per 100 square kilometre is just over one-tenth of the US's 30-year average, suggesting

further room for growth over the long term.

Russian producers of agricultural machinery were affected by the country's entry into the WTO in August

2012, as local manufacturers lost competitiveness with foreign companies due to the steep decrease of

import duties. Over 2012, sales of tractors manufactured in Russia decreased by 3.7% year-on-year (y-o-y),

and their market share shrank from 37.1% to 32.0%, even though overall sales grew by 11.5% y-o-y,

according to Soyuzagromash, Russia's association of farm machinery manufacturers. The association

estimates that foreign imports of agricultural machinery in the Russian market share could increase to 84%

(from 48%) between 2011 to 2017, and that many of the imports will be of second-hand machinery.



AGCO More Present In Europe

Select Companies - Revenues By Region, FY2012 (%)

Source: BMI, AGCO, CNH



AGCO And European Manufacturers To Benefit The Most

Local machinery production capacity is unlikely to be sufficient to support increasing demand from farmers,

especially as the region has set impressive grain production targets over the medium term. We expect

machinery imports in Russia and Kazakhstan to be strong in the coming years. We still see US agricultural

equipment manufacturer AGCO benefiting the most from growth in the region compared with other US

competitors Deere & Company and CNH, which mainly sell to the Americas. Moreover, European

manufacturers, especially German and French companies, could also benefit. German companies (including

the CLAAS Group) already control 28% of the import market, followed by Belarusian companies at 16%

and US firms at 11%.

Stronger Growth In Eastern Europe

CLAAS - Revenue By Region (% chg y-o-y)

Source: BMI, CLAAS

In the short term, we are turning more cautious on profitability prospects for machinery companies

operating in Europe, especially for ones with strong exposure to Western Europe. AGCO announced

Q113 results on May 1, seeing a y-o-y improvement in EPS. AGCO beat analyst expectations by 35% for



the quarter, while it was able to lift its guidance for full-year profits (from US$5.20/share to US$5.40/share)

despite a slowdown in sales in Europe's equipment market. As a result, the company highlighted that most

of its growth came from outside of Europe, especially from Latin America, where the company is increasing

exposure. AGCO suggested that tractor sales in Western Europe would fall by almost 5% in FY2013.

Eastern European sales will help mitigate these losses, but only slightly as farmers' income and credit

conditions in Russia are dire at the moment, and only extra government support and higher grain prices will

help to keep machinery sales in the country stable.



Europe Fertiliser Outlook

BMI View: Over the short term, poor production in Europe is expected to weigh on farmer incomes, which

could reduce demand for fertiliser in 2013, especially in the Black Sea region. Consequently, we see

demand for fertilisers for Eastern and Western Europe showing some convergence, which would ultimately

be a short-term bearish development for seed manufacturers. Looking longer-term, we continue to see a

divide between Western and Eastern Europe in terms of fertiliser consumption.

Until 2010, EU-27 fertiliser consumption had been in a declining trend, largely as a result of low grain

prices and a decrease in the area dedicated to grains. Currently, the European fertiliser market consists of

three categories: phosphates, potash and nitrogen-based fertilisers. Within that, nitrogen fertilisers

(including ammonium- and urea-based fertilisers) account for almost 70% of total use, with the rest divided

equally between phosphates and potash-based products. This is a change from previous years; nitrogen

accounted for only 60% of total consumption in 2002. Nitrogen products also account for the majority of

production and trade within the region. In the case of nitrogen, the distribution of production among the

elements has remained largely stable.

Growth Moving East

Europe - Consumption Of Select Fertilisers In Western (LHS) & Eastern Europe (% of global)

Source: BMI, FAO



We continue to see a long-term divide between Western and Eastern Europe in terms of fertiliser

consumption patterns. Mainly because of base effects, Western Europe's fertiliser consumption as a

percentage of the global total declined in the last decade because of moderate plantings growth. This has

also been the case since the start of 2012, as substantial winter crop damage and continued dry conditions

until May reduced farm demand for fertilisers.

All About France And Germany

EU - Fertiliser Consumption By Country In 2009 (% of total EU-27 consumption)

Source: BMI, FAO

Eastern Europe, by contrast, has increased its share of global fertiliser demand over the last decade, as

tremendous production growth for grains in countries such as Russia, Ukraine and Kazakhstan boosted

demand. The slow shift from small- to large-scale farms is also leading to rising demand for fertilisers. In

line with the region's objective to boost grain production in the medium term (Russia aims to double its

grain exports in the coming years), we expect steady growth in the region's fertiliser consumption over our

forecast period. However, we see the trend of divergence in usage growth continuing over the long term,

especially as reforms to farmers' EU subsidies will make them less competitive.

In terms of production, Russia is a large player in the production of all three elements. It accounts for more

than 50% of total European phosphate production and almost 50% of all nitrogen fertiliser production.



Russia is also, along with Canada, one of the world's largest potash producers. Among smaller producers,

Eastern Europe (specifically Ukraine, Poland and Belarus) accounts for the majority of fertiliser production

in Europe. Domestic fertiliser production for these countries ensures a cheap supply of chemicals for their

local agricultural industry. We believe more fertilisers produced in Eastern Europe will be sold locally

instead of for export, reinforcing our view that domestic consumption growth will be strong over the long

term.

Against Support

Uralkali - Share Price (US$, weekly) & RSI (below)




In the short term, we believe prospects for sales growth for companies producing fertilisers in Eastern

Europe will falter, but we maintain a positive medium-term view. Russian Potash producer Uralkali

recently revised down its forecast production for 2013 by 10-11% to 9.5-9.7mn tonnes, only 4.4-6.6%

higher than in 2012. This is because in spite of higher grain prices in 2012 helping farmers' revenues, lower

output limited profitability. Moreover, it is difficult to see which effect overcame the other. In Eastern

Europe, the US Department of Agriculture indicated that farmers' income growth after the 2012/13 season

was only minimal and that the lack of credit and recent reforms to government support after Russia entered

the WTO will restrict their investment capacity in the near term. One of the main points of this reform was

to restrict current price subsidies on fertilisers, which encouraged farmers to stock up on chemicals before

the subsidy was terminated at the end of 2012. This resulted in negative growth for fertiliser sales in Q113

in Russia, while domestic prices are still at a high.



More Room To Run Down

Yara International - Share Price (NOK, weekly) & RSI (below)


We see a more neutral picture in Western Europe in 2013. Yara International, which mainly focuses on

the region, indicated that fertiliser sales were in line with those over the same period in 2012. Sales volumes

were temporarily affected in March by delayed applications on the back of a late spring, but we expect this

to have little impact on results in the coming quarters. Nitrogen fertiliser deliveries to Europe helped to

compensate for lower volume demand in Brazil and North America. In fact, total European sales, among

which nitrate sales are the most important, were up 6.0% since the start of the season (in line with historical



growth averages), while sales outside Europe were down by 6.0% over the same period as phosphate trade,

the other nutrient Yara uses to produce fertilisers, was limited because of a reduction in price subsidies in

India.



Downstream Analysis

Food

Food Consumption

■ Total food consumption value compound annual growth rate (CAGR) to 2017: +11.2%.

■ Per capita food consumption value CAGR to 2017: +10.1%.

Food Consumption

2010-2017

e/f = BMI estimate/forecast. Source: BMI

Through to 2017, BMI forecasts that food consumption in Kazakhstan will grow by a CAGR of 11.2% in

local currency terms, to reach KZT4,734bn (US$32.65bn). We hold to our view that the country's food

industry remains one of the most promising in Eurasia, owing to its relatively large and young population

and the country's favourable macroeconomic outlook, which is expected to result in changing consumption

patterns, particularly in urban areas. The global economic crisis had a negative impact on the country's

economy - and the food and drink sector - but a recovery followed. We highlight, however, that the

worsening external environment could have an impact on the market's performance in the shorter term.

Given the low starting point, expected economic growth will have a large bearing on our food consumption

forecast. The growth of the mass grocery retail (MGR) industry and a shift away from traditional

consumption habits in favour of processed and packaged foods will be a major contributor to this forecast



growth. With the government keen to diversify the economy and develop the banking and financial sectors,

we expect an increase in credit availability for the consumer, particularly credit cards and overdraft

facilities, which will extend to the poorer sectors of the retail market and allow for an expansion in

consumption for Kazakh households.

Although most foreign investors have been slow to enter the Kazakh market, levels of foreign direct

investment in the food and drink production sector are slowly rising, which will help to stimulate greater

domestic consumption. As local production quality improves and more jobs are created in this sector,

demand for processed foods will grow. However, we caution that an uncertain political situation will

hamper faster involvement of foreign investors.

Kazakh consumers are curious to experiment with new food products and varieties, particularly after years

of Soviet rule when there was little variety available. Diets have become more diverse over the past 10

years, a trend that is expected to continue. Foods that would have been considered luxury items in the past,

such as snacks, sauces and seasoning, are all growing in popularity, contributing to the higher value of food

sales. Busier lifestyles are also contributing to the rising demand for convenience foods such as powdered

soups. Both of these trends are mostly evident in major urban centres. Wealthier urban residents are

becoming more aspirational and developing increasingly sophisticated and diverse tastes, fuelling the sale

of non-essential, higher-value food and drink items.

There will continue to be a significant urban-rural divide in consumption levels, owing to higher levels of

rural poverty, more traditional consumption patterns and a narrower availability of products in the

countryside. Consequently, food consumption in rural areas is focused on essential, staple food and drink

items, with subsistence farming still in place in some regions. While this trend is more evident in rural

areas, throughout the country traditional eating habits can reduce demand for pre-packed foods, which may

limit returns for food companies and serve as a deterrent for investors.



Table: Food Consumption Indicators Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Food consumptionKZTbn 2,146 2,523 2,784 3,061 3,408 3,795 4,234 4,734

Food consumption,KZT, % chg y-o-y 20.52 17.57 10.34 9.94 11.35 11.36 11.55 11.81

Food consumption,KZT per capita 133,924.8 155,709.2 169,982.8 184,955.3 203,880.2 224,799.4 248,320.3 275,009.6

Food consumption,US$bn 14.56 17.21 18.69 20.60 23.27 26.00 29.00 32.65

Food consumptionUS$, % change y-o-y 20.76 18.14 8.61 10.23 12.94 11.75 11.55 12.58

Food consumption,US$ per capita 908.80 1,061.70 1,140.80 1,244.60 1,391.60 1,539.70 1,700.82 1,896.62

Source: Kazakhstan National Statistical Office, OECD, BMI e/f= BMI estimate, forecast

Canned Food

■ Canned food value sales CAGR to 2017: +10.5%.

■ Canned food volume sales CAGR to 2017: +3.8%.

Canned Food Sales


Canned foods in Kazakhstan are mostly represented by processed meats. Domestic products - such as those

manufactured by Bonduelle Groupe (a subsidiary of the French group, which holds around a quarter of the



retail market) have a good reputation but can mostly be more expensive than imports from cheaper

manufacturing locations. The development of the canned and preserved food segments in Kazakhstan will,

therefore, remain shaped by the prevailing economic conditions. Changing consumer habits and busier

lifestyles will, in the meantime, be conducive to the development of volume sales of convenience-type food

products, including canned fruits and vegetables.

Table: Canned Food Value/Volume Sales Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Canned foodsales, tonnes 89,515 94,415 99,535 103,583 107,562 111,681 115,941 120,332

Canned foodsales, units, %change y-o-y 5.52 5.47 5.42 4.07 3.84 3.83 3.81 3.79

Canned foodsales, kg percapita 5.59 5.83 6.08 6.26 6.43 6.61 6.80 6.99

Canned foodsales, KZTmn 7,025,641 8,025,269 8,883,529 9,817,990 10,847,606 11,966,971 13,230,960 14,638,345

Canned foodsales, KZT, %change y-o-y 13.01 14.23 10.69 10.52 10.49 10.32 10.56 10.64

Canned foodsales, KZT percapita 438,380 495,181 542,297 593,197 648,834 708,689 775,887 850,254

Canned foodsales, US$mn 47,675 54,722 59,621 66,070 74,045 81,966 90,623 100,954

Canned foodsales, US$, %change y-o-y 13.24 14.78 8.95 10.82 12.07 10.70 10.56 11.40

Canned foodsales, US$ percapita 2,975 3,377 3,640 3,992 4,429 4,854 5,314 5,864

Source: Kazakhstan National Statistical Office, OECD, BMI e/f= BMI estimate, forecast

Confectionery

■ Confectionery volume sales CAGR to 2017: +7.6%.

■ Chocolate confectionery volume sales CAGR to 2017: +7.9%.

■ Sugar confectionery volume sales CAGR to 2017: +7.0%.

■ Gum volume sales CAGR to 2017: +4.0%.

Confectionery is considered a relatively affordable luxury in Kazakhstan. The demand is met by a

combination of domestically produced chocolate and other confectionery and imports. Some of the key



local manufacturers are Rahkat, Karaganda Confectionery and Bayan-Sulu. Future drivers of growth

will be portfolio expansion by major manufacturers and importers, including strong marketing and

promotional campaigns targeting younger and more aspirational consumers.

Table: Confectionery Volume/Value Sales Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Confectionery sales,tonnes 211,491 231,610 247,249 265,694 286,894 309,151 332,633 357,385

Confectionery sales,tonnes, % change y-o-y 8.36 9.51 6.75 7.46 7.98 7.76 7.60 7.44

Confectionery sales, kg percapita 13.20 14.29 15.09 16.05 17.16 18.31 19.51 20.76

Confectionery sales KZTmn 42,351 50,246 56,332 64,298 73,885 84,606 96,962 111,065

Confectionery sales, KZT,% change y-o-y 16.12 18.64 12.11 14.14 14.91 14.51 14.60 14.55

Confectionery sales, KZTper capita 2,643 3,100 3,439 3,885 4,419 5,010 5,686 6,451

Confectionery sales, US$mn 287.39 342.61 378.06 432.69 504.34 579.49 664.12 765.96

Confectionery sales, US$,% change y-o-y 16.35 19.22 10.35 14.45 16.56 14.90 14.60 15.34

Confectionery sales, US$per capita 17.93 21.14 23.08 26.14 30.17 34.32 38.95 44.49

Confectionery sales,EURmn 216.66 246.48 297.69 346.16 420.28 482.91 553.43 638.30

Confectionery sales, EUR,% change y-o-y 22.80 13.77 20.77 16.28 21.41 14.90 14.60 15.34

Confectionery sales, EURper capita 13.52 15.21 18.17 20.91 25.14 28.60 32.45 37.08

Chocolate sales, tonnes 137,853 151,876 162,694 175,414 190,057 205,413 221,600 238,648

Chocolate sales, tonnes, %change y-o-y 9.29 10.17 7.12 7.82 8.35 8.08 7.88 7.69

Chocolate sales, kg percapita 8.60 9.37 9.93 10.60 11.37 12.16 13.00 13.86

Chocolate sales, KZTmn 28,640 34,172 38,437 44,011 50,737 58,263 66,940 76,848

Chocolate sales KZT, %change y-o-y 17.05 19.32 12.48 14.50 15.28 14.83 14.89 14.80

Chocolate sales KZT percapita 1,787 2,109 2,346 2,659 3,035 3,450 3,925 4,464

Chocolate sales US$mn 194.35 233.01 257.96 296.17 346.32 399.06 458.49 529.98

Chocolate sales, US$, %change y-o-y 17.28 19.90 10.71 14.81 16.93 15.23 14.89 15.59



Confectionery Volume/Value Sales Historical Data And Forecasts 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Chocolate sales, US$ percapita 12.13 14.38 15.75 17.89 20.71 23.63 26.89 30.78

Chocolate sales, EURmn 146.51 167.63 203.12 236.94 288.60 332.55 382.08 441.65

Chocolate sales, EUR, %change y-o-y 23.79 14.41 21.17 16.65 21.81 15.23 14.89 15.59

Chocolate sales, EUR percapita 9.14 10.34 12.40 14.32 17.26 19.69 22.41 25.65

Sugar confectionery sales,tonnes 72,827 78,888 83,674 89,363 95,884 102,746 110,001 117,664

Sugar confectionery sales,tonnes, % change y-o-y 6.70 8.32 6.07 6.80 7.30 7.16 7.06 6.97

Sugar confectionery sales,kg per capita 4.54 4.87 5.11 5.40 5.74 6.08 6.45 6.83

Sugar confectionery sales,KZTmn 13,449 15,778 17,572 19,930 22,753 25,905 29,537 33,680

Sugar confectionery sales,KZT, % change y-o-y 14.27 17.31 11.37 13.42 14.16 13.85 14.02 14.03

Sugar confectionery sales,KZT per capita 839.18 973.52 1,072.66 1,204.15 1,360.91 1,534.10 1,732.08 1,956.25

Sugar confectionery salesUS$mn 91.26 107.58 117.93 134.12 155.31 177.43 202.31 232.27

Sugar confectionery sales,US$, % change y-o-y 14.50 17.88 9.62 13.73 15.80 14.24 14.02 14.81

Sugar confectionery sales,US$ per capita 5.69 6.64 7.20 8.10 9.29 10.51 11.86 13.49

Sugar confectionery sales,EURmn 68.80 77.40 92.86 107.29 129.42 147.86 168.59 193.56

Sugar confectionery sales,EUR, % change y-o-y 20.85 12.49 19.97 15.55 20.63 14.24 14.02 14.81

Sugar confectionery sales,EUR per capita 4.29 4.78 5.67 6.48 7.74 8.76 9.89 11.24

Gum sales, tonnes 812.1 845.8 880.6 916.4 953.5 991.9 1,031.7 1,072.9

Gum sales, tonnes, %change y-o-y 4.20 4.16 4.11 4.07 4.04 4.03 4.02 3.99

Gum sales, kg per capita 0.05 0.05 0.05 0.06 0.06 0.06 0.06 0.06

Gum sales KZTmn 262.44 296.05 323.62 357.66 395.94 437.65 484.81 537.43

Gum sales, KZTmn, %change y-o-y 11.60 12.80 9.31 10.52 10.70 10.53 10.78 10.85

Gum sales, KZT per capita 16.38 18.27 19.76 21.61 23.68 25.92 28.43 31.22

Gum sales US$mn 1.78 2.02 2.17 2.41 2.70 3.00 3.32 3.71



Confectionery Volume/Value Sales Historical Data And Forecasts 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Gum sales US$, % changey-o-y 11.83 13.35 7.59 10.82 12.29 10.91 10.78 11.62

Gum sales US$ per capita 0.11 0.12 0.13 0.15 0.16 0.18 0.19 0.22

Gum sales, EURmn 1.34 1.45 1.71 1.93 2.25 2.50 2.77 3.09

Gum sales, EUR, %change y-o-y 18.03 8.17 17.76 12.59 16.97 10.91 10.78 11.62

Gum sales, EUR per capita 0.08 0.09 0.10 0.12 0.13 0.15 0.16 0.18

Source: Kazakhstan National Statistical Office, OECD, BMI e/f= BMI estimate/forecast

Processed Foods

Even though domestic meat processing capacities are improving, Kazakhstan continues to rely on imports to

meet most of the local demand. For example, in recent years around 65% of total sausage meat volumes

consumed in Kazakhstan were sourced from abroad, although this figure is calculated to have fallen to

52.4% in 2011. By 2017, we expect that more than half of local demand will be met by locally

manufactured products, with exports also growing strongly, from the 2012 base of just 8.13 tonnes.

Similarly, in 2009, some 67% of poultry demand in Kazakhstan was met through imports, according to

former agricultural minister, Akylbek Kurishbayev. The government's goal is to improve its local food

production and agricultural sectors, supported by substantial investments in the sector.

In the meantime, the population's food preferences are changing. For example, poultry represented just over

5.3% of total meat production in Kazakhstan in 2000, with this percentage almost doubling by the end of

2010, according to the Union of Poultry Producers of Kazakhstan. Over the same period, per capita

consumption of poultry rose from 3.6kg to 13.6kg, as consumers increasingly choose poultry over beef or

pork, mostly due to the former's lower price, but also due to changes in traditional diets, with younger

generations moving away from meats such as mutton.

The association also noted that the percentage of imported poultry meat as a share of total poultry

consumption has been decreasing in recent years. Poultry exports, in the meantime, have grown, but still

represent less than 5% of total output and minor overall volumes.



Table: Processed Meat Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Bacon/hamproduction, tonnes 1,082.35 1,245.27 1,368.28 1,511.63 1,677.56 1,850.99 2,033.32 2,224.81

Bacon/hamproduction, tonnes,% change y-o-y 15.81 15.05 9.88 10.48 10.98 10.34 9.85 9.42

58.00 54.59 52.58 50.65 48.64 46.85 45.25 43.82

Sausageproduction, tonnes 43,875.67 47,818.42 50,795.34 54,264.67 58,280.20 62,477.40 66,890.07 71,524.15

Sausageproduction, tonnes,% change y-o-y 8.87 8.99 6.23 6.83 7.40 7.20 7.06 6.93

Sausage sales,tonnes 69,321.50 73,916.48 77,500.11 81,740.24 86,615.40 91,736.78 97,142.98 102,845.15

Sausage sales,tonnes, % changey-o-y 5.57 6.63 4.85 5.47 5.96 5.91 5.89 5.87

Sausage sales, kgper capita 4.33 4.56 4.73 4.94 5.18 5.43 5.70 5.97

Source: United Nations, BMI e/f= BMI estimate, forecast

Table: Frozen Fruits and Vegetables Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Frozen vegetablesproduction, tonnes 19.57 22.56 24.82 27.45 30.50 33.69 37.04 40.55

Frozen vegetablesproduction, tonnes, %change y-o-y 16.10 15.29 10.01 10.61 11.10 10.44 9.94 9.50

Frozen vegetables sales,tonnes 1,377.17 1,466.77 1,549.90 1,654.59 1,770.64 1,895.38 2,029.44 2,173.50

Frozen vegetables sales,tonnes, % change y-o-y 0.98 6.51 5.67 6.75 7.01 7.05 7.07 7.10

Frozen vegetables sales,kg per capita 0.09 0.09 0.09 0.10 0.11 0.11 0.12 0.13

Frozen fruit exports, tonnes 25.28 35.09 41.48 55.71 79.02 103.41 129.40 157.08

Frozen fruit exports,tonnes, % change y-o-y 26.07 38.81 18.19 34.32 41.84 30.86 25.13 21.39

Frozen fruit imports, tonnes 186.98 191.94 196.56 202.43 208.99 216.04 223.61 231.76



Frozen Fruits and Vegetables Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Frozen fruit imports,tonnes, % change y-o-y 0.34 2.66 2.41 2.99 3.24 3.37 3.51 3.64

Frozen fruit balance,tonnes -161.69 -156.85 -155.08 -146.72 -129.97 -112.63 -94.22 -74.68

Frozen fruit balance,tonnes, % change y-o-y -2.76 -3.00 -1.13 -5.39 -11.42 -13.34 -16.35 -20.73


Baked Products

Bread forms a traditional part of the Kazakh diet. Per capita consumption of bread, as is the case with most

other foodstuffs, is uneven across the country, dependent on factors such as consumer purchasing power and

transport routes. Moreover, breakfast cereals and sweet pastries, for example, have begun to substitute bread

in some households.

According to UN figures, per capita consumption of bread products in Kazakhstan is in the region of 43kg

per annum, which lags considerably behind Russia, for example. Nevertheless, in line with economic

improvements and changing lifestyles, the consumption of more expensive types of bread (such as low

calorie) has increased at the expense of cheaper, lower-quality loaves made with fewer flour types and

ingredients. Some estimates suggest that per capita consumption of bread in urban areas of Astana and

Almaty is in the region of 70kg per year, although cheaper types of bread continue to account for around

50% of this figure.

Table: Baked Products Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Crispbreads production,tonnes

5,125 5,732 6,190 6,724 7,342 7,989 8,668 9,381

Crispbreads production,tonnes, % change y-o-y

12.03 11.84 8.00 8.63 9.19 8.80 8.50 8.23

Crispbreads sales, tonnes 8,765 9,819 10,696 11,757 12,955 14,226 15,577 17,013

Crispbreads sales, tonnes,% change y-o-y

7.26 12.03 8.93 9.91 10.20 9.81 9.50 9.22

Crispbreads sales, kg percapita

0.55 0.61 0.65 0.71 0.77 0.84 0.91 0.99



Baked Products Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Sweet biscuits production,tonnes

65,565 71,285 75,604 80,638 86,464 92,554 98,956 105,680

Sweet biscuits production,tonnes, % change y-o-y

8.59 8.72 6.06 6.66 7.22 7.04 6.92 6.79

Sweet biscuits sales, tonnes 115,639 124,519 131,798 140,546 150,461 160,951 172,085 183,898

Sweet biscuits sales,tonnes, % change y-o-y

5.06 7.68 5.85 6.64 7.05 6.97 6.92 6.86

Sweet biscuits sales, kg percapita

7.22 7.68 8.05 8.49 9.00 9.53 10.09 10.68

Bread products (other)production, tonnes

666,185 683,029 695,747 710,568 727,723 745,654 764,505 784,302

Bread products (other)production, tonnes, %change y-o-y

2.35 2.53 1.86 2.13 2.41 2.46 2.53 2.59

Bread products (other)sales, tonnes

680,677 698,969 713,074 729,567 748,475 768,300 789,191 811,186

Bread products (other)sales, tonnes, % change y-o-y

2.32 2.69 2.02 2.31 2.59 2.65 2.72 2.79

Bread products (other)sales, kg per capita

42.47 43.13 43.53 44.08 44.77 45.50 46.28 47.12

Jams/jellies production,tonnes

1,338 1,434 1,507 1,591 1,689 1,791 1,898 2,011

Jams/jellies production,tonnes, % change y-o-y

6.95 7.16 5.05 5.60 6.14 6.04 5.99 5.94

Jams/jellies sales, tonnes 10,107 11,533 12,842 14,498 16,350 18,339 20,474 22,766

Jams/jellies sales, tonnes,% change y-o-y

2.62 14.11 11.35 12.90 12.77 12.16 11.64 11.20

Jams/jellies sales, kg percapita

0.63 0.71 0.78 0.88 0.98 1.09 1.20 1.32


Pasta

Most pasta sold in Kazakhstan is available in packaged form. Sales volumes have been increasing over the

past decades, in line with lifestyle changes and the expansion of organised retail, complete with more

targeted marketing campaigns. Future drivers of volume growth will be further urbanisation of the country,

new product launches and a shift towards pasta types that are perceived to have added health benefits.



The market is supplied by a combination of locally made and imported products, the latter of which

represent over two-thirds of prepared pasta volumes consumed in Kazakhstan. Competition in the pasta

market has been strong, which will continue to hamper faster value growth.

One of the key players is Sultan Marketing TOO, which has a strong offering in the shape of its affordable

and wide-ranging Sultan brand. Another local company, KazAgroKhleb, is actively promoting pasta recipes

in order to increase the consumption of pasta in the country. Many of the local pasta producers (such as

Tcesna-Astyk and Zernovaya Industriya, the latter which is now part of the Astana Group) also deal in other

dry commodities, such as rice, confectionery and cereals.

Table: Pasta Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Uncooked pasta production, tonnes 125,926 137,120 145,572 155,422 166,822 178,739 191,267 204,424

Uncooked pasta production, tonnes,% change y-o-y

8.77 8.89 6.16 6.77 7.34 7.14 7.01 6.88

Uncooked pasta sales, tonnes 125,657 136,801 145,227 154,997 166,253 178,018 190,386 203,372

Uncooked pasta sales, tonnes, %change y-o-y

8.76 8.87 6.16 6.73 7.26 7.08 6.95 6.82

Uncooked pasta sales, kg per capita 7.84 8.44 8.87 9.36 9.94 10.54 11.16 11.81

66.62 66.17 66.17 66.96 68.18 69.31 70.38 71.40

Prepared pasta production, tonnes 17,077 19,030 20,505 22,224 24,213 26,292 28,478 30,773

Prepared pasta production, tonnes, %change y-o-y

11.57 11.44 7.75 8.38 8.95 8.59 8.31 8.06

Prepared pasta sales, tonnes 30,075 33,885 37,232 41,005 44,889 49,041 53,467 58,185

Prepared pasta sales, tonnes, %change y-o-y

6.36 12.67 9.88 10.13 9.47 9.25 9.03 8.82

Prepared pasta sales, kg per capita 1.88 2.09 2.27 2.48 2.68 2.90 3.14 3.38


Dairy

Dairy products are very popular in Kazakhstan and make up an important part of the local diet. The dairy

market has grown in recent years as rising disposable incomes mean that locals are buying more products

and experimenting with new product varieties, such as drinks and cheeses. As a result, Ukrainian companies

have also been expanding their exports of cheese to Kazakhstan, which is their second-largest export market

in volume terms, after Russia.



Dairy drinks and low and non-fat products are some of the more dynamic product categories. Future

expansion of organised retail and cold storage facilities are expected to increase volume sales substantially.

Additionally, concentrated and UHT milk products have become more popular, on account of their easier

storage and transportation. According to some estimates, packaged milk presently accounts for around 17%

of total milk consumption in volume terms.

FoodMaster is the leading domestic producer, while Dutch and Russian producers have also entered the

market. In 2002, Swiss conglomerate Nestlé invested US$10mn to construct a dried fat-free milk plant in

Kazakhstan through its local subsidiary Kosmis. Kosmis was then sold to local company RG Brands in

2004, which has since been producing private label dairy products. In June 2010, French and Russian dairy

majors Danone and Unimilk announced they were to combine their operations in Russia and the

Commonwealth of Independent States. The combined annual sales of the new unit make it the largest

regional player, with revenues of around EUR1.5bn. The creation of Danone-Unimilk (in which the former

has a 57.5% share) has generated considerable synergy benefits for the two companies through the

combination of global branding and local expertise. As of 2012, the companies have been operating as a

single entity in Kazakhstan but have no local manufacturing presence there.

Table: Dairy Products Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Processed liquid milk production,tonnes

290,954 313,954 331,319 351,557 374,982 399,466 425,207 452,239

Processed liquid milk production,tonnes, % change y-o-y

7.72 7.90 5.53 6.11 6.66 6.53 6.44 6.36

Processed liquid milk sales, tonnes 338,504 364,942 385,508 409,808 437,758 467,108 498,081 530,737

Processed liquid milk sales, tonnes, %change y-o-y

6.71 7.81 5.64 6.30 6.82 6.70 6.63 6.56

Processed liquid milk sales, kg percapita

21.12 22.52 23.53 24.76 26.18 27.66 29.21 30.83

Cream production, tonnes 1,068 1,112 1,146 1,185 1,230 1,277 1,326 1,378

Cream production, tonnes, % changey-o-y

3.91 4.14 3.00 3.40 3.81 3.83 3.88 3.92

Cream sales, tonnes 1,873 1,944 2,003 2,073 2,150 2,232 2,319 2,411

Cream sales, tonnes, % change y-o-y 2.32 3.78 3.03 3.48 3.73 3.81 3.90 3.98

Cream sales, kg per capita 0.12 0.12 0.12 0.13 0.13 0.13 0.14 0.14



Dairy Products Volume Sales, Production And Trade Historical Data And Forecasts 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Yoghurt production, tonnes 124,937 137,147 146,366 157,110 169,545 182,543 196,208 210,559

Yoghurt production, tonnes, % changey-o-y

9.73 9.77 6.72 7.34 7.92 7.67 7.49 7.31

Yoghurt sales, tonnes 161,378 177,265 189,909 204,992 222,252 240,437 259,680 280,028

Yoghurt sales, tonnes, % change y-o-y

7.70 9.84 7.13 7.94 8.42 8.18 8.00 7.84

Yoghurt sales, kg per capita 10.07 10.94 11.59 12.39 13.29 14.24 15.23 16.27

Butter production, tonnes 23,764 26,572 28,692 31,164 34,024 37,013 40,156 43,457

Butter production, tonnes, % changey-o-y

12.00 11.82 7.98 8.61 9.18 8.79 8.49 8.22

Butter sales, tonnes 33,260 36,117 38,289 40,813 43,715 46,751 49,945 53,300

Butter sales, tonnes, % change y-o-y 8.28 8.59 6.01 6.59 7.11 6.95 6.83 6.72

Butter sales, kg per capita 2.08 2.23 2.34 2.47 2.61 2.77 2.93 3.10

Cheese production, tonnes 20,695 23,146 24,996 27,153 29,649 32,258 35,001 37,882

Cheese production, tonnes, % changey-o-y

12.03 11.84 8.00 8.63 9.19 8.80 8.50 8.23

Cheese sales, tonnes 44,800 47,863 50,302 53,165 56,398 59,804 63,406 67,211

Cheese sales, tonnes, % change y-o-y 5.35 6.84 5.10 5.69 6.08 6.04 6.02 6.00

Cheese sales, kg per capita 2.80 2.95 3.07 3.21 3.37 3.54 3.72 3.90

Ice cream production, tonnes 16,234 17,955 19,255 20,769 22,522 24,354 26,280 28,303

Ice cream production, tonnes, %change y-o-y

10.64 10.60 7.24 7.87 8.44 8.13 7.91 7.70

Ice cream sales, tonnes 16,396 18,112 19,410 20,916 22,652 24,467 26,374 28,378

Ice cream sales, tonnes, % change y-o-y

10.49 10.47 7.16 7.76 8.30 8.01 7.80 7.60

Ice cream sales, kg per capita 1.02 1.12 1.18 1.26 1.35 1.45 1.55 1.65




Drink

Alcoholic Drinks

■ Total alcoholic drinks volume sales CAGR to 2017: +6.3%.

■ Beer volume sales CAGR to 2017: +7.0%.

■ Wine volume sales CAGR to 2017: +4.1%.

■ Spirits volume sales CAGR to 2017: +0.4%.

Alcoholic Drinks Sales


Kazakhstan's alcoholic drinks industry has considerable long-term growth potential. A combination of

foreign investment into the sector and rising disposable incomes has created a degree of dynamism even

during the economic downturn. We expect that an economic recovery will reflect strong growth in the

alcoholic drinks sector, especially given the growing population.

Another major driving factor will be the trend of consumers moving away from illegal home-brewed

alcoholic drinks, which currently account for a significant proportion of alcoholic drinks consumption.

These drinks often have a dangerously high level of alcohol and, as consumers become more educated and

have higher disposable incomes, they will increasingly move away from these drinks. This shift will drive

growth in the economy end of the market.



The beer market is expected to experience the strongest growth within the alcoholic drinks sub-sector as

investments by major operators continue to rise. Estimated at about 47 litres per capita in 2011, beer

consumption is growing off a low base, certainly relative to nearby Russia where about 70 litres are

consumed per capita. Carlsberg and Anadolu Efes' emerging Europe unit EBI is competing for market

share in the country, which will continue to drive investment and marketing strategies.

Young consumers in particular are illustrating a preference for drinks with a lower alcohol content, which is

reflected in beer's rising popularity at the expense of more traditional spirits. This has had a very

pronounced negative effect on the low- and mid-priced segments of the spirits market. However, premium

spirits are expected to experience stronger growth.

Table: Alcoholic Drinks Volume/Value Sales Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Alcoholic drinks sales, litres mn 690 754 806 841 900 961 1,025 1,094

Alcoholic drinks sales, litres, % changey-o-y

7.81 9.25 6.85 4.45 7.00 6.75 6.68 6.70

Alcoholic drinks sales, litres per capita 43.06 46.52 49.18 50.84 53.85 56.92 60.13 63.54

Alcoholic drinks sales, KZTmn 208,279 240,403 266,359 292,212 327,683 365,094 409,301 460,358

Alcoholic drinks sales, KZT, % changey-o-y

12.74 15.42 10.80 9.71 12.14 11.42 12.11 12.47

Alcoholic drinks sales, KZT per capita 12,996 14,834 16,260 17,655 19,600 21,621 24,002 26,739

Alcoholic drinks sales, US$mn 1,413 1,639 1,788 1,966 2,237 2,501 2,803 3,175

Alcoholic drinks sales, US$ % changey-o-y

12.97 15.98 9.05 10.00 13.75 11.80 12.11 13.25

Alcoholic drinks sales, US$ per capita 88.19 101.15 109.13 118.81 133.79 148.09 164.40 184.41

Alcoholic drinks sales, EURmn 1,066 1,179 1,408 1,573 1,864 2,084 2,336 2,646

Alcoholic drinks sales, EUR, % change 19.24 10.68 19.36 11.76 18.49 11.80 12.11 13.25

Alcoholic drinks sales, EUR per capita 66.48 72.77 85.93 95.05 111.49 123.41 137.00 153.68

Beer sales, litres mn 582.34 644.53 693.09 727.70 784.34 845.41 907.58 973.42

Beer sales, litres, % change y-o-y 9.26 10.68 7.53 4.99 7.78 7.79 7.35 7.25

Beer sales, litres per capita 36.34 39.77 42.31 43.97 46.91 50.07 53.22 56.54

Beer sales, KZTmn 118,287 141,784 160,091 178,506 204,713 234,445 268,044 306,463

Beer sales, KZT, % change y-o-y 17.02 19.86 12.91 11.50 14.68 14.52 14.33 14.33

Beer sales, KZT per capita 7,381 8,748 9,773 10,785 12,245 13,884 15,719 17,801

Beer sales US$mn 803 967 1,074 1,201 1,397 1,606 1,836 2,114

Beer sales, US$, % change y-o-y 17.26 20.45 11.13 11.80 16.32 14.92 14.33 15.12



Alcoholic Drinks Volume/Value Sales Historical Data And Forecasts 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Beer sales, US$ per capita 50.08 59.65 65.59 72.58 83.58 95.10 107.66 122.76

Beer sales, EURmn 605 696 846 961 1,164 1,338 1,530 1,761

Beer sales, EUR, % change y-o-y 23.76 14.94 21.63 13.59 21.17 14.92 14.33 15.12

Beer sales, EUR per capita 37.76 42.92 51.64 58.06 69.65 79.25 89.72 102.30

Wine sales, litres mn 24.00 25.85 27.45 29.42 31.63 30.18 31.92 33.69

Wine sales, litres, % change y-o-y 3.34 7.69 6.19 7.17 7.51 -4.57 5.75 5.55

Wine sales, litres per capita 1.50 1.60 1.68 1.78 1.89 1.79 1.87 1.96

Wine sales, KZTmn 16,253 18,957 21,136 24,056 27,517 27,900 31,423 35,357

Wine sales, KZT, % change y-o-y 10.68 16.63 11.50 13.81 14.39 1.39 12.63 12.52

Wine sales, KZT per capita 1,014 1,170 1,290 1,453 1,646 1,652 1,843 2,054

Wine sales, US$mn 110.29 129.26 141.85 161.88 187.83 191.10 215.22 243.84

Wine sales, US$, % change y-o-y 10.90 17.20 9.74 14.12 16.03 1.74 12.63 13.30

Wine sales, US$ per capita 6.88 7.98 8.66 9.78 11.23 11.32 12.62 14.16

Wine sales, EURmn 83.15 92.99 111.70 129.50 156.52 159.25 179.35 203.20

Wine sales, EUR, % change y-o-y 17.05 11.84 20.11 15.94 20.86 1.74 12.63 13.30

Wine sales, EUR per capita 5.19 5.74 6.82 7.82 9.36 9.43 10.52 11.80

Spirits sales, litres mn 83.78 83.57 85.05 84.34 84.40 85.50 85.82 86.89

Spirits sales, litres, % change y-o-y -0.17 -0.25 1.78 -0.84 0.07 1.31 0.37 1.24

Spirits sales, litres per capita 5.23 5.16 5.19 5.10 5.05 5.06 5.03 5.05

Spirits sales, KZTmn 73,739 79,662 85,132 89,650 95,454 102,749 109,835 118,539

Spirits sales, KZT, % change y-o-y 6.92 8.03 6.87 5.31 6.47 7.64 6.90 7.92

Spirits sales, KZT per capita 4,601 4,915 5,197 5,417 5,709 6,085 6,441 6,885

Spirits sales, US$mn 500.39 543.20 571.36 603.30 651.56 703.76 752.29 817.51

Spirits sales, US$, % change y-o-y 7.13 8.56 5.18 5.59 8.00 8.01 6.90 8.67

Spirits sales, US$ per capita 31.22 33.52 34.88 36.45 38.97 41.68 44.12 47.48

Spirits sales, EURmn 377.23 390.79 449.89 482.64 542.97 586.47 626.91 681.26

Spirits sales, EUR, % change y-o-y 13.07 3.59 15.12 7.28 12.50 8.01 6.90 8.67

Spirits sales, EUR per capita 23.54 24.11 27.46 29.16 32.48 34.73 36.76 39.57




Soft Drinks

■ Soft drinks volume sales CAGR to 2017: +8.0%.

■ Carbonated drinks volume sales CAGR to 2017:+7.2%.

■ Juice volume sales CAGR to 2017: +10.6%.

■ Bottled water volume sales CAGR to 2017:+7.9%.

■ Functional soft drinks volume sales CAGR to2017: +7.6%.

■ RTD volume sales CAGR to 2017: +7.3%.

Similar to the alcoholic drinks industry, significant

scope for growth remains in the soft drinks industry.

We expect both value and volume sales to continue

growing steadily, albeit from a relatively low base,

with the former negatively impacted by economic

downturn and the currency devaluation. In the shorter term at least, consumers will remain price sensitive.

Economic recovery, however, will very likely stimulate the sales of healthier soft drinks at the expense of

concentrates and carbonates.

New product launches and aggressive marketing and promotional activities focused on urban areas will

drive this growth. Sales of fruit juices will grow along with rising health consciousness, as will sales of

functional drinks such as energy and sports drinks, although to a more limited extent, particularly as the

health effects of energy drinks have begun to be called into question. Nevertheless, novel products, such as

ready-to-drink tea, have performed well over the past few years.

Bottled water sales have experienced very strong growth in recent years as health consciousness increases.

However, this is not a particularly dynamic product category, with hygiene concerns being the main driving

factor behind sales growth, rather than product innovation.

Soft Drinks Sales

f = BMI forecast. Source: BMI



Table: Soft Drinks Value/Volume Sales Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Soft drink sales,litres mn 1,372.28 1,480.86 1,562.15 1,691.98 1,828.05 1,973.55 2,131.77 2,298.34

Soft drink sales,litres, % changey-o-y 6.39 7.91 5.49 8.31 8.04 7.96 8.02 7.81

Soft drink sales,litres per capita 85.63 91.37 95.36 102.23 109.34 116.87 125.01 133.50

Soft drink salesKZTmn 114,219.34 133,704.64 148,483.13 171,050.25 196,936.30 226,220.08 260,558.65 299,819.52

Soft drink sales,KZT, % change y-o-y 14.01 17.06 11.05 15.20 15.13 14.87 15.18 15.07

Soft drink sales,KZT per capita 7,126.96 8,249.94 9,064.19 10,334.75 11,779.47 13,396.85 15,279.62 17,414.73

Soft drinks sales,US$mn 775.08 911.70 996.53 1,151.08 1,344.28 1,549.45 1,784.65 2,067.72

Soft drink sales,US$, % changey-o-y 14.24 17.63 9.30 15.51 16.78 15.26 15.18 15.86

Soft drink sales,US$ per capita 48.36 56.25 60.83 69.55 80.41 91.76 104.65 120.10

Soft drink sales,EURmn 584.32 655.90 784.67 920.86 1,120.23 1,291.21 1,487.21 1,723.10

Soft drink sales,EUR, % changey-o-y 20.57 12.25 19.63 17.36 21.65 15.26 15.18 15.86

Soft drink sales,EUR per capita 36.46 40.47 47.90 55.64 67.00 76.47 87.21 100.08

Carbonated softdrink sales, litresmn 636.49 660.87 677.00 730.34 778.63 832.03 893.14 957.42

Carbonated softdrink sales , %change y-o-y 2.04 3.83 2.44 7.88 6.61 6.86 7.34 7.20

Carbonated softdrink sales, litresper capita 39.72 40.78 41.33 44.13 46.57 49.27 52.38 55.61

Carbonated softdrink sales,KZTmn 49,955.57 56,174.09 60,422.25 69,223.94 78,524.15 89,154.23 101,923.10 116,469.38

Carbonated softdrink sales, KZT,% change y-o-y 9.29 12.45 7.56 14.57 13.43 13.54 14.32 14.27



Soft Drinks Value/Volume Sales Historical Data And Forecasts 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Carbonated softdrink sales, KZTper capita 3,117.09 3,466.09 3,688.49 4,182.47 4,696.81 5,279.75 5,976.95 6,765.01

Carbonated softdrink sales, US$mn 338.99 383.04 405.52 465.84 536.00 610.65 698.10 803.24

Carbonated softdrink sales, US$,% change y-o-y 9.51 12.99 5.87 14.88 15.06 13.93 14.32 15.06

Carbonated softdrink sales, US$per capita 21.15 23.63 24.75 28.15 32.06 36.16 40.94 46.66

Carbonated softdrink salesEURmn 255.56 275.57 319.31 372.67 446.67 508.87 581.75 669.36

Carbonated softdrink sales, EUR,% change y-o-y 15.58 7.83 15.87 16.71 19.86 13.93 14.32 15.06

Carbonated softdrink sales, EURper capita 15.95 17.00 19.49 22.52 26.72 30.14 34.12 38.88

Fruit/vegetablejuice sales, litresmn 184.63 211.37 232.96 258.60 287.62 318.25 350.70 385.06

Fruit/vegetablejuice sales, litres,% change y-o-y 11.04 14.48 10.21 11.01 11.22 10.65 10.20 9.80

Fruit/vegetablejuice sales, litresper capita 11.52 13.04 14.22 15.62 17.20 18.85 20.57 22.37

Fruit/vegetablejuice sales,KZTmn 21,310.03 26,421.01 30,575.56 36,045.52 42,655.78 50,148.90 58,854.74 68,885.82

Fruit/vegetablejuice sales, KZT,% y-o-y 18.93 23.98 15.72 17.89 18.34 17.57 17.36 17.04

Fruit/vegetablejuice sales, KZTper capita 1,329.69 1,630.25 1,866.49 2,177.85 2,551.40 2,969.84 3,451.35 4,001.17

Fruit/vegetablejuice sales, US$mn 144.61 180.16 205.21 242.57 291.17 343.49 403.11 475.07

Fruit/vegetablejuice sales, US$,% change y-o-y 19.17 24.58 13.90 18.21 20.03 17.97 17.36 17.85

Fruit/vegetablejuice sales, US$per capita 9.02 11.12 12.53 14.66 17.42 20.34 23.64 27.59



Soft Drinks Value/Volume Sales Historical Data And Forecasts 2010-2017 - Continued

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Fruit/vegetablejuice sales,EURmn 109.02 129.61 161.58 194.05 242.64 286.24 335.93 395.90

Fruit/vegetablejuice sales, EUR,% change y-o-y 25.77 18.89 24.67 20.10 25.04 17.97 17.36 17.85

Fruit/vegetablejuice sales, EURper capita 6.80 8.00 9.86 11.72 14.51 16.95 19.70 23.00

Bottled watersales, litres mn 551.16 608.62 652.20 703.05 761.81 823.27 887.92 955.86

Bottled watersales, litres, %change y-o-y 10.26 10.43 7.16 7.80 8.36 8.07 7.85 7.65

Bottled watersales, litres percapita 34.39 37.55 39.81 42.48 45.57 48.75 52.07 55.52

Bottled watersales, KZTmn 37,317.58 44,628.24 50,214.91 57,486.17 66,277.61 76,101.43 87,412.78 100,311.32

Bottled watersales, KZT, %change y-o-y 18.09 19.59 12.52 14.48 15.29 14.82 14.86 14.76

Bottled watersales, KZT percapita 2,328.51 2,753.68 3,065.38 3,473.28 3,964.30 4,506.76 5,126.04 5,826.49

Bottled watersales, US$mn 253.23 304.31 337.01 386.85 452.41 521.24 598.72 691.80

Bottled watersales, US$, %change y-o-y 18.33 20.17 10.75 14.79 16.95 15.22 14.86 15.55

Bottled watersales, US$ percapita 15.80 18.78 20.57 23.37 27.06 30.87 35.11 40.18

Bottled watersales, EURmn 190.91 218.93 265.36 309.48 377.01 434.37 498.93 576.50

Bottled watersales, EUR, %change y-o-y 24.89 14.68 21.21 16.63 21.82 15.22 14.86 15.55

Bottled watersales, EUR percapita 11.91 13.51 16.20 18.70 22.55 25.72 29.26 33.49




Hot Drinks

■ Coffee volume sales CAGR to 2016: +8.7%.

• Tea volume sales CAGR to 2016: +7.3%.

As with other countries within the former Soviet

bloc, Kazakhstan is a large consumer of tea,

especially the black variety. Leading brands include

Lipton (produced by multinational food and drink

conglomerate Unilever) and Greenfield (produced

by the Russian Greenfield Tea Ltd, which was

itself created by Orimi Trade), most of which fall

outside the 'cheap' price bracket. Consumers are

highly loyal to their chosen brands, and this will

continue to boost retail values of tea in the forecast

period. New product launches, especially in the

specialty categories, will also stimulate growth in

this market.

Coffee has made headway in line with the development of urban environments. Instant coffee is popular,

with Nescafé (produced by Nestlé) being a popular choice, although there is evidence of a preference shift

towards fresh ground coffee. Over the coming years, the unsaturated coffee market is expected to make

great strides forward, boosted by innovation, the entrance of new players and changing consumption

patterns, including the rising popularity of café culture.

Other hot drinks, including powdered hot chocolate and similar beverages, remain a relatively minor

industry, especially given the largely limited investment in new products. Children are large consumers of

cocoa-powder drinks, with some of the major brands in the category being Nesquik, also manufactured by

Nestlé. The demand for these types of drinks is expected to grow in the coming year, in line with the

development of mass grocery retail and food and drink industries, increased advertising and the more

prominent presence of foreign players.

Tea Sales

2010-2017




Table: Hot Drinks Volume/Value Sales Historical Data And Forecasts 2010-2017

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Coffee sales, tonnes 4,630.12 5,080.22 5,584.24 6,065.24 6,635.18 7,204.27 7,821.01 8,488.31

Coffee sales, tonnes, %change y-o-y

8.76 9.72 9.92 8.61 9.40 8.58 8.56 8.53

Coffee sales, kg per capita 0.29 0.31 0.34 0.37 0.40 0.43 0.46 0.49

Coffee sales, KZTmn 1,567.47 1,862.59 2,149.75 2,479.69 2,886.31 3,329.73 3,849.74 4,453.97

Coffee sales,KZT, %change y-o-y

16.48 18.83 15.42 15.35 16.40 15.36 15.62 15.70

Coffee sales,KZT per capita 97.81 114.93 131.23 149.82 172.64 197.19 225.76 258.70

Coffee sales, US$mn 10.64 12.70 14.43 16.69 19.70 22.81 26.37 30.72

Coffee sales, US$, %change y-o-y

16.72 19.40 13.60 15.66 18.07 15.76 15.62 16.49

Coffee sales, US$ percapita

0.66 0.78 0.88 1.01 1.18 1.35 1.55 1.78

Tea sales, tonnes 30,357.16 33,204.42 35,370.61 37,889.05 40,785.82 43,816.79 47,005.38 50,356.25

Tea sales, tonnes, %change y-o-y

9.08 9.38 6.52 7.12 7.65 7.43 7.28 7.13

Tea sales, kg per capita 1.89 2.05 2.16 2.29 2.44 2.59 2.76 2.92

Tea sales, KZTmn 7,988.73 9,463.26 10,584.65 12,041.27 13,791.44 15,742.36 17,985.66 20,539.48

Tea sales, KZT, % changey-o-y

16.82 18.46 11.85 13.76 14.53 14.15 14.25 14.20

Tea sales, KZT per capita 498.47 583.91 646.14 727.53 824.92 932.27 1,054.71 1,193.02

Tea sales, US$mn 54.21 64.53 71.04 81.03 94.14 107.82 123.19 141.65

Tea sales US$ % change y-o-y

17.06 19.03 10.09 14.07 16.18 14.54 14.25 14.99

Tea sales US$ per capita 3.38 3.98 4.34 4.90 5.63 6.39 7.22 8.23


Mass Grocery Retail

The retail sector and consumer demand are growing significantly in Kazakhstan, which is fuelling the

growth of the mass grocery retail sector. External investments, such as those made by Russian and Turkish

retailers, and most recently Germany's Metro, will be crucial in driving growth in the consumer sector.

Indeed, the vast opportunities available for retailers to exploit will likely attract foreign retailers from

Russia, and potentially China, who will start to build up a market presence in Kazakhstan. Additionally,



expected steady economic growth will continue to attract foreign direct investment from a range of foreign

players, with investment trickling down to underserved areas over the longer term.

As more consumers convert from shopping at independent shops and in bazaars to modern retail formats,

this will drive growth - as will the increasing demand for convenience and longer opening hours, as most

bazaars are closed one day a week. This convenience factor particularly appeals to working women.

Discount stores have started to appear in larger cities, helping to draw more low-income consumers, and

some local stores have started to introduce private-label products, although the scale of this still remains

small. In rural areas, local independent groceries continue to account for the bulk of retail volumes.

With the population forecast to top 17mn by 2020 and given rising GDP per capita, we believe that the

consumer will become instrumental in driving growth dynamics over the long term. With the government

keen to develop its banking and financial sectors, we expect to see an increase in credit availability for the

consumer, particularly credit cards and overdraft facilities, which will extend to the poorer sectors of the

retail market and thus allow for an expansion in consumption possibilities for Kazakh households. As a

result of these dynamics, we expect consumer spending to contribute to about a third of economic growth.

In much the same way that increased credit availability will spur consumer spending, we expect a broader

and more sophisticated array of financial products coming onto the market, which will facilitate investment

and business transactions. Internet retailing is, therefore, likely to become more than just a possibility. With

disposable incomes and demand rising, we forecast steady industry growth.



Regional Overview

Regional Overview - Europe

BMI View: We believe the recent proposal by the EU to cap the amount of subsidies received by large

farms will support production growth in the union, as farms are on average smaller in size than other major

agricultural producers. Delays to the removal of production quotas for sugar will keep the regional sugar

market tighter for longer. We see pork supply in the EU tightening on the back of high feed prices and

reforms to health and safety standards. The recent horsemeat scandal unveiled a complicated and

intertwined supply chain in the EU, which will continue to impact food labelling and safety standards,

preventing proper testing.

1. CAP Reforms To Exacerbate Existing Trends

We believe the recent proposal by the EU to cap the amount of subsidies received by large farms will

support production growth in the bloc, as farms here are on average smaller-sized than other major

agricultural producers. In terms of individual products, we identify some agricultural products that will be

affected more than others by the reforms. First, grain markets are likely to be generally spared as current

intervention schemes will be maintained, helping to mitigate the effect of prices on farmers' profits.

Second, we believe delays to the removal of production quotas for sugar will keep the regional sugar

market tighter for longer. Initial reform drafts set 2015 as a target for sugar production quotas to be phased

out, but recent negotiations have indicated that they could be maintained until 2017 and 2020. Third, we

believe the EU livestock and dairy industries will be the worst-hit by the reforms, especially in a context of

tighter mandatory environmental and quality standards.



Table: EU Farm Size Statistics In 2007

Average UAA

of all farms (ha)

Average UAA of the larger farms

(ha)Number of

larger farmsLarge farms (as %

of all farms)

Thresholdvalue

(ha)

Luxembourg 57 212 123 5.3 159

Finland 34 146 3,141 4.6 100

France 53 274 20,032 3.8 196

Netherlands 25 135 2,826 3.7 88

Sweden 43 388 1,605 2.2 234

Germany 46 1,391 2,434 0.7 705

Poland 6 250 12,392 0.5 74

Czech Republic 89 3,531 199 0.5 2,500

Italy 8 337 7,560 0.5 138

UK 54 2,416 1,335 0.5 891

Spain 24 1,087 4,580 0.4 517

Slovakia 28 3,934 98 0.1 2,782

Note: UAA stands for utilised agricultural area; 20% of the total UAA is covered by holdings larger than size the thresholdvalue determined in the last column. Source: Eurostat

2. Sugar Reforms: Turning More Cautious On Production Prospects

We have revised down our forecast for sugar production in the EU in 2013/14 from 17.2mn tonnes to

15.9mn tonnes, as planting growth in the bloc has been subdued, especially in Germany. We believe the

lower plantings were a result of farmers favouring more competitive crops, especially corn and wheat, for

which tight markets encouraged extensive growth in planting.



Remaining In Deficit

EU-27 - Sugar Production Balance ('000 tonnes)

f = BMI forecast. Source: Bloomberg, BMI

Recent measures to allow additional imports to the region have not been sufficient to significantly loosen

the regional market, with prices in the EU surging in a context of moderating global prices. This has left

sugar prices in the EU at a high of EUR731/tonne as of June, while global sugar prices have dropped below

the EU reference price. Our forecast for a production deficit in the region over the years to 2016/17 is in line

with our view that the disconnect between price trends in the global market and in the European market is

here to stay.

3. EU Pork Supply To Tighten Significantly In Medium Term

We expect pork supply in Europe to tighten significantly in the coming years and have revised our outlook

for production in the EU on the back of recent data from Eurostat showing the pig population declining in

2011. We now estimate pork production in the EU-27 fell by 2.0% in 2012 and project it to fall by 1.0% in

2013. The recent surge in grain prices, especially for wheat, corn and barley, which are used in the EU for

feed, is putting significant pressure on farmers' margins. This is especially the case as retail pork prices have



not increased by much in recent months, while global lean hog prices declined sharply over the summer of

2012 on the back of oversupply and disease concerns in the US.

Losing Pigs

EU-27 - Pig Herd ('000 head)

Source: Eurostat

4. Biofuels Incentive Shift To Decrease Farm Industry Competitiveness

The EU's recent shift in favour of second-generation biofuel produced from waste instead of food crops will

not have a significant impact on the actual volume of crops the biofuels industry uses. Ultimately, the EU's

move will effectively phase out incentives to boost grain, sugar and vegetable oil production for the biofuels

industry, which in the long term will remove positive spillover effects for the livestock, sugar and vegetable

oil industries. Consistent and potentially growing demand from the biofuels sector has encouraged

investment in farming land and increased productivity, as there are synergies between feed produced for the

livestock sector and ethanol production. For example, a by-product of the wheat-into-ethanol production

process can be used as a high protein content feed for livestock. Similar trends are visible in the sugar and

vegetable oil sectors: food demand for these products in a very mature regional market is insufficient to



make the crops profitable for mass production; however, the prospects for the biofuels industry were

enough to encourage production.

Small In Ethanol, Big In Biodiesel

Select Countries - Production Of Bioethanol (LHS) & Biodiesel (% of global)

Source: US Energy Information Administration

5. Horsemeat Scandal Exposes Inefficient System; Little Change In Sight

Meat supply chains in the EU have become very intertwined and complicated in recent years, which we

believe has impacted food safety standards by preventing proper testing. The recent horsemeat scandal

unveiled a network of dozens to hundreds of intermediaries between farmers and supermarket shelves.

Pressure on abattoir costs in Western Europe in particular encouraged most of the region's slaughter houses

to move to more competitive markets, especially in Eastern Europe. From there, orders are made for the

cheapest lots, with horsemeat often bought in bulk at a much lower price than beef. Romanian

slaughterhouses sell horsemeat for just under EUR0.50/kg, while beef goes for EUR3/kg. The practice of

adulteration (mixing some lower quality mince meat with the meat quality indicated on the label) has

become common in recent years, and the multiplication of sources from which food producers purchase

meat has made controls unlikely. In fact, tests are difficult to perform at each step of the value chain and are

normally left to the industry rather than government bodies.



6 Steps To Go

Findus' Case - Steps Between The Abattoir & The Retailer's Shelf

Source: Financial Times, France 24

Even though Poland was not originally targeted as responsible for beef adulteration detected in Western

European ground beef, recent DNA traces have revealed that the country could have been one origin of the

horsemeat exported to the rest of Europe. As a result of increasing distrust over beef products from Poland,

the country's beef exports fell by 30% since the start of 2013 compared with the same period last. We

believe beef exports for the entire year will be down in year-on-year terms. This is a significant drawback

for the industry, as the Polish beef sector is particularly export dependent, with trade accounting for more

than 80% of output on the back of subdued domestic demand for beef because of a local preference for pork

and poultry.



Demographic Forecast

Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is

the total population of a country a key variable in consumer demand, but an understanding of the

demographic profile is key to understanding issues ranging from future population trends to productivity

growth and government spending requirements.

The accompanying charts detail Kazakhstan's population pyramid for 2011, the change in the structure of

the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life

expectancy. The tables show key datapoints from all of these charts, in addition to important metrics

including the dependency ratio and the urban/rural split.

Source: World Bank, UN, BMI



Table: Kazakhstan's Population By Age Group, 1990-2020 ('000)

1990 1995 2000 2005 2010 2012f 2015f 2020f

Total 16,530 15,926 14,957 15,172 16,026 16,381 16,886 17,680

0-4 years 1,876 1,462 1,117 1,198 1,641 1,752 1,660 1,608

5-9 years 1,729 1,719 1,411 1,099 1,184 1,338 1,640 1,651

10-14 years 1,597 1,556 1,606 1,388 1,099 1,079 1,183 1,632

15-19 years 1,443 1,427 1,417 1,577 1,397 1,261 1,096 1,175

20-24 years 1,323 1,312 1,273 1,384 1,597 1,560 1,390 1,085

25-29 years 1,467 1,187 1,195 1,238 1,366 1,471 1,582 1,373

30-34 years 1,412 1,299 1,079 1,156 1,206 1,246 1,345 1,556

35-39 years 1,170 1,242 1,145 1,034 1,120 1,142 1,180 1,317

40-44 years 874 1,054 1,066 1,093 1,019 1,028 1,089 1,150

45-49 years 582 766 920 1,008 1,091 1,048 981 1,053

50-54 years 918 501 641 855 954 997 1,035 936

55-59 years 550 805 415 581 761 810 884 968

60-64 years 621 451 651 360 505 575 681 803

65-69 years 360 509 332 542 299 318 430 593

70-74 years 218 277 359 254 423 343 237 351

75+ years 389 358 328 405 365 415 473 428

f = BMI forecast. Source: World Bank, UN, BMI



Table: Kazakhstan's Population By Age Group, 1990-2020 (% of total)

1990 1995 2000 2005 2010 2012f 2015f 2020f

0-4 years 11.35 9.18 7.47 7.89 10.24 10.69 9.83 9.10

5-9 years 10.46 10.79 9.44 7.24 7.39 8.17 9.71 9.34

10-14 years 9.66 9.77 10.74 9.15 6.86 6.59 7.01 9.23

15-19 years 8.73 8.96 9.48 10.39 8.72 7.69 6.49 6.64

20-24 years 8.00 8.24 8.51 9.12 9.96 9.52 8.23 6.14

25-29 years 8.88 7.46 7.99 8.16 8.52 8.98 9.37 7.76

30-34 years 8.54 8.16 7.21 7.62 7.52 7.61 7.97 8.80

35-39 years 7.08 7.80 7.65 6.82 6.99 6.97 6.99 7.45

40-44 years 5.29 6.62 7.13 7.20 6.36 6.28 6.45 6.50

45-49 years 3.52 4.81 6.15 6.65 6.81 6.40 5.81 5.96

50-54 years 5.55 3.15 4.29 5.64 5.95 6.08 6.13 5.30

55-59 years 3.33 5.05 2.77 3.83 4.75 4.95 5.23 5.48

60-64 years 3.76 2.83 4.35 2.37 3.15 3.51 4.03 4.54

65-69 years 2.18 3.19 2.22 3.57 1.87 1.94 2.55 3.35

70-74 years 1.32 1.74 2.40 1.67 2.64 2.09 1.41 1.98

75+ years 2.36 2.25 2.19 2.67 2.27 2.53 2.80 2.42

f = BMI forecast. Source: World Bank, UN, BMI



Table: Kazakhstan's Key Population Ratios, 1990-2020

1990 1995 2000 2005 2010 2012f 2015f 2020f

Dependent ratio, % of total working age 1 59.5 58.5 52.6 47.5 45.5 47.1 49.9 54.9

Dependent population, total, '000 2 6,169 5,880 5,155 4,885 5,011 5,243 5,623 6,263

Active population, % of total 3 62.7 63.1 65.5 67.8 68.7 68.0 66.7 64.6

Active population, total, '000 4 10,361 10,045 9,802 10,287 11,015 11,138 11,263 11,417

Youth population, % of total working age 5 50.2 47.2 42.2 35.8 35.6 37.4 39.8 42.8

Youth population, total, '000 6 5,202 4,737 4,135 3,685 3,925 4,168 4,483 4,891

Pensionable population, % of total workingage 7 9.3 11.4 10.4 11.7 9.9 9.7 10.1 12.0

Pensionable population, '000 8 967 1,144 1,020 1,200 1,087 1,075 1,140 1,372

f = BMI forecast; 1 0>15 plus 65+, as % of total working age population; 2 0>15 plus 65+; 3 15-64, as % of totalpopulation; 4 15-64; 5 0>15, % of total working age population; 6 0>15; 7 65+, % of total working age population; 8 65+.Source: World Bank, UN, BMI

Table: Kazakhstan's Rural And Urban Population, 1990-2020

1990 1995 2000 2005 2010 2012 2015 2020

Urban population, % of total 56.3 55.9 56.3 57.1 58.1 58.6 59.3 60.7

Rural population, % of total 43.7 44.1 43.7 42.9 41.9 41.4 40.7 39.3

Urban population, '000 9,203.9 8,840.9 8,379.5 8,648.9 9,311.3 9,596.2 10,013.4 10,731.8

Rural population, '000 7,144.1 6,974.7 6,504.1 6,498.1 6,715.0 6,785.1 6,872.6 6,948.2

Source: World Bank, UN, BMI



Methodology

BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and

causal/econometric modelling. The precise form of model we use varies from industry to industry, in each

case being determined, as per standard practice, by the prevailing features of the industry data being

examined. BMI mainly uses OLS estimators, and in order to avoid relying on subjective views and

encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear

model, but simple non-linear models, such as the log-linear model, are used when necessary. During periods

of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are

used to determine the level of impact.

Effective forecasting depends on appropriately selected regression models. BMI selects the best model

according to various different criteria and tests, including but not exclusive to:

■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account

■ Testing the directional movement and magnitude of coefficients

■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value)

■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity

BMI uses the selected best model to perform forecasting.

It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry

forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot

structural breaks, anomalous data, turning points and seasonal features where a purely mechanical

forecasting process would not.

Within the Agribusiness industry, this intervention might include but is not exclusive to technology

development that might influence future output levels (for example greater use of biotechnology); dramatic

changes in local production levels due to public or private sector investment; the regulatory environment

and specific areas of legislation, such as import and export tariffs and farm subsidies; changes in lifestyles

and general societal trends; the formation of bilateral and multilateral trading agreements; and political

factors.

The following two examples show the demand (consumption) and the supply (production) of rice. Note that

the explanatory variables for both of them are quite similar, but the underlying economic theory is different.



Example of rice consumption model:

(Rice Consumption)t = β0 + β1*(Real Private Consumption per capita)t + β2*(Inflation)t + β3*(Real

Lending Rate)t + β4*(Population)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt

Where:

■ β are parameters for this function.

■ Real private consumption per capita has a positive relationship with rice consumption, if rice is a normalgood in a particular country. If rice is an inferior good in a country, the relationship is negative. So thesign of β1 is determined by a specific product within a specific country.

■ When inflation is high, people with rational expectations will consume 'today' rather than wait for'tomorrow's high price to come. Higher rice demand in year t due to higher inflation in that year leads toan assumed positive sign of β2.

■ The relationship between real lending rate and rice consumption is expected to be negative. When reallending rates increase, disposable incomes, especially for those with mortgage burdens etc, will decrease.So the sign of β3 is expected to be negative.

■ Of course, other things being equal, growth in rice consumption can also be caused by growth inpopulation. Consequently, positive sign of β4 is expected.

■ Government expenditure typically causes total disposable incomes to rise. So the sign of β5 is expected tobe positive.

■ Human behaviour has a trend: A high level of food consumption in previous years means there is verylikely to be a high level of food consumption the next year. So the positive sign of β6 is expected.

■ ε is the error/residual term.

Example of rice production model:

(Rice Production)t = β0 + β1*(Real GDP per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t +

β4*(Rural Population)t + β5*(Government Expenditure)t + β6*(Food Production)t-1 + εt

Where:

■ The same as above, the relationship between real GDP per capita and rice production depends on whetherrice is normal or inferior good in that country.

■ If high inflation is caused by food prices increasing, farmers will be more profitable. Then they willsupply more agricultural product (eg, rice) to increase their marginal (extra) profit, although this istempered by the rising cost of other inputs in line with inflation.

■ There is a global move towards corporate farming, away from small holdings, in order to achieve greateragricultural productivity. Corporate farming means more investment in the modes of production i.e.agricultural machinery. Higher real lending rates discourage investment, which in turn reduce production.



■ BMI assumes only the rural population has a positive effect on agricultural product supply.

■ With supportive government policy, other things being equal, rice production is expected to goup. Government expenditure is likely to play some role in supporting agribusiness.

■ Again, previous food production positively affects this year's prediction.



BMI Kazakhstan Agribusiness Report Q4 2013

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