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Monday, December 11, 2017
 Latin America‚Äôs Dairy Industry Looks for Recovery in 2017  

by: Monica Ganley

 2016: A Tough Year for Latin American Dairy Farmers

Latin America’s dairy industry struggled immensely during 2016. Low milk prices and high production costs ate into farmer margins while low global dairy commodity prices and weak macroeconomic performance dimmed consumption opportunities both domestically and abroad. For most of the year the sector battled to find sustainable balance between supply and demand.

When all was said and done, milk production contracted nearly universally across the region with some of the major dairy exporters showing the greatest retrenchment. Milk volumes in Argentina and Uruguay fell by 14.2% and 10.2%, respectively, versus 2015. Production in Brazil is estimated to have contracted by between 3 and 4%, while Chile’s output shrank by 1.9% compared to the prior year. The one astonishing exception is Mexico where milk production grew by 1.9% and continues to accelerate, posting volume growth of 3.7% year over year in January.

According to many dairy farmers, milk prices for most of 2016 sat below their cost of production, even in this highly competitive region. However, over the last few months, milk prices have ticked upwards, finding stability at current levels. Milk prices in Argentina and Uruguay are currently at the equivalent of the high $13 USD per cwt, which industry stakeholders agree should be enough to begin promoting additional production. Stronger milk prices persist in Brazil where they are near $18 USD per cwt, and while this seems high by regional standards, even this is down from the record prices seen earlier this year when they topped an equivalent of $23 USD per cwt. 

But the Trade Must Go On

Even in the face of lower milk production and weak global markets, trade still formed an important component of Latin America’s dairy economy. Argentina exported about 17% of their production on a milk equivalent basis for a value of $816 million USD. Although this figure represents a drop of over 24% compared to 2015, some of the decline can be attributed to lower prices. In volume terms, Argentina’s dairy exports declined by a more modest 9.5%. In Uruguay, dairy exports during 2016 totaled $568 million USD representing a year over year decline of 10.1% in value terms and growth of 2.6% in volume terms.

                 
 

The gain in Uruguay’s volume of exports can largely be attributed to additional sales of whole milk powder made to Brazil during the year. To compensate for reduced milk supply in the face of what proved to be surprisingly resilient domestic demand, Brazil was forced to look outside its borders for additional powder supplies. During 2016 Brazil imported 126 thousand metric tons of whole milk powder, an increase of 115% compared to 2015. Their Mercosur neighbors, especially Argentina and Uruguay were particularly helpful in filling this gap.

Looking to 2017, some new trade dynamics will likely come into play that may disrupt the regional flow of dairy products. Brazil’s dairy needs are likely to decline as domestic milk production recovers. However, the real has been strengthening over the last couple months which will make foreign dairy products relatively cheaper for Brazilian buyers. Of course, the question on everyone’s mind seems to be what will happen with Mexico as they slow the import of skim milk powder from the United States due to both a weaker peso and anti-trade rhetoric from the Trump administration. If Mexico looks South, they will likely find several enthusiastic exporters who could serve as alternative dairy suppliers. In fact, the Mexican government has already been in touch with Argentine and Brazilian officials to discuss locating additional grains supplies and there is no reason to think they won’t replicate this strategy for dairy.

A More Optimistic 2017

Many participants in Latin America’s dairy sector were happy to leave 2016 behind, and many have begun this year with the feeling that the industry is in a much more sustainable place. Economically speaking the region is expected to return to growth in 2017, following a recession last year caused in large part by lethargic commodity prices. Most countries expect to see GDP grow and inflation decline, giving the region an optimism that was absent last year.

In the dairy sector, even though many farmers are digging themselves out of a deep financial hole prices have reached a level that should encourage expansion. As a result, we will begin to see volumes approach year over year parity, and in some cases, achieve growth. Of course, weather remains an important risk factor that has the potential to disrupt these trends. Dairy product trade will continue to be vital for the region, though the impact of any single player will hinge on milk availability, currency strength, not to mention unpredictable politics.

After a truly challenging 2016, there are many opportunities for Latin America’s dairy industry to grow in both size and importance. While we may not be able to predict precisely what 2017 has in store for global dairy markets, we can bet that Latin America’s dairy economy will be a factor.

 

This article was provided to ADPI by Monica Ganley of Quarterra, a boutique strategy consultancy focused exclusively on the agriculture and food industries in Latin America. Quarterra publishes the LatinAmerica Dairy Market Update, a monthly report designed to give industry stakeholders a comprehensive understanding of the Latin American dairy markets by providing data, analysis, and insights about the region’s dairy sector. For more information, please visit www.quarterra.com or reach out to Monica directly monica.ganley@quarterra.com
 


Posted on Friday, February 24, 2017 (Archive on Friday, March 03, 2017)
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