October 22, 2003
Outlook of Mexico's Dairy and Products in 2003
SITUATION AND OUTLOOK
Fluid milk production for CY 2004 (Jan.-Dec.) is forecast to increase nearly three percent to 10.3 MMT. Continued modernization and improved herd management by large dairies will continue to boost overall production. 2004 non-fat dry milk (NFDM) imports are forecast unchanged at 165,000 MT as domestic production of milk increases. Additionally, Leche Industrializada CONASUPO (LICONSA) the parastatal charged with distributing milk to the poor has increased its usage of domestically produced milk, which is expected to dampen import demand for NFDM. Modest growth in cheese imports is expected as Mexico's middle class consumers develop preferences for more U.S. style foods.
NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING
FLUID MILK
Production
Fluid milk production for CY 2004 (Jan-Dec) is forecast to increase, as larger modern dairies continue to improve their productivity. Production is expected to increase at a moderate rate into the foreseeable future. Mexico's fluid milk production estimate for CY 2003 was revised upward due to technological improvements and better herd management practices during the hot summer months. Despite the forecast increase in production, poor sanitation and genetics, inefficient cold storage, refrigeration, transportation, and marketing facilities, particularly in smaller and dual-purpose cattle operations, remain major obstacles to large increases in production. Small and medium sized dairies are continuously facing financial problems as a result of high production costs and low productivity. Relatively low domestic raw milk prices and the lack of affordable financing for capital improvements discourage small and medium-sized dairy farms from expanding, particularly in central Mexico.
Producer milk prices were 2.26 percent higher in the first five months of CY 2003 than the same period in CY 2002. Raw milk producer prices thus far in CY 2003 ranged between 3.04-3.08 pesos (US$0.27 - 0.28 per liter).
Consumption
Fluid milk consumption for CY 2004 is forecast to increase given current population growth rates and expanded usage by LICONSA and dairy products processors, along with expected improvement in economic growth. Consumption in CY 2003 was revised upward by 3.0 percent from our previous estimate based on more recent information from industry sources.
Consumer prices in Mexico are currently 7.19 pesos per liter for pasteurized milk (US$0.65) and 8.00 per liter of UHT milk (US$0.73). According to private sources, LICONSA is distributing approximately 3.3 million liters of subsidized milk per day at the current price of 3.00 pesos per liter. Although LICONSA has increased utilization of domestic fluid milk significantly, its social program continues to rely mainly on NFDM imports. In CY 2003, LICONSA is expected to use 180 million liters of domestically produced raw fluid milk, 80 percent more than in CY 2002. This, however, will represent only 16 percent of LICONSA's total milk usage. Consumption of fresh fluid milk continues to be hampered by problems with sanitation, transportation, and processing capacity, but supplies and quality are improving.
According to government estimates, about 28 percent of milk is consumed raw in Mexico and 24 percent is consumed via the government's social program. The first case represents a severe health problem, and the second case a heavy monetary burden that discourages domestic milk producers. The consumption of pasteurized milk and dairy products is 48 percent of total consumption, however, due to urban expansion, this percentage could increase as incomes rise.
Trade
Fluid milk imports for CY 2004 are forecast to remain unchanged due to the expected increase in domestic production. As in previous years, most of the imports will go to the border cities of northern Mexico and opportunities for sales beyond the border are limited by the cost and distance of transporting to other areas in Mexico.
Small dairy farms are finding it unprofitable to import heifers due to high domestic interest rates and the risks of accruing dollar debt. However, larger dairy farms continue to import live cattle to complement an expected modest increase in domestic cow numbers. According to World Trade Atlas data, of the total of 11,598 head of dairy cattle imported by Mexico in CY 2002, only 1,454 came from the United States. Supplier availability and price seem to be key factors that are affecting Mexican purchase decisions. Total imports of dairy cattle for the first half of CY 2003 reached 2,581 head, with the United States supplying only 387 head. Increased use of semen to improve dairy genetics is expected to continue in the future. The United States should continue to be the primary supplier, but U.S. exporters are likely to face increased competition from suppliers such as the European Union (EU) and New Zealand.
Policy
The government's main objective is to encourage producers to improve efficiency and productivity. The reduction in imports of fluid milk and dairy products from previous years, particularly into northern Mexico, is much the result of increased domestic milk production. Shipments to Mexican border areas have also been affected by local governments' response to pressure from Mexico's domestic producers to discourage imports of U.S. retail-pack milk. These efforts have been aided by stricter enforcement by Mexican authorities of the labeling regulations, together with quality standards and food safety regulations, which have discouraged some U.S. exporters concerned about potential delays in clearing shipments.
Marketing
See dairy products marketing section at the end of this report.
NON-FAT DRY MILK (NFDM)
Production
Mexican NFDM producers are not expected to significantly increase production in the short term due to limited processing facilities. The output forecast for CY 2004 is slightly greater than the CY 2003 estimate given expectations that LICONSA will seek to maintain a minimal level of stocks to avoid making emergency purchases of milk powder on the international market. The NFDM production estimate for CY 2003 remains unchanged based on expectations that LICONSA will import additional amounts of NFDM. The production figure for CY 2002 reflects official data.
Consumption
The consumption forecast for CY 2004 is unchanged from the previous year's revised estimate as fluid milk consumption is expected to increase. The consumption estimate of NFDM for CY 2003 is revised upward as demand from cheese and other food processors increases. For CY 2002 the consumption figure reflects official data. LICONSA is projected to continue as the main NFDM user.
Stocks
The majority of product imported and produced domestically is used for further processing.
LICONSA is the main holder of NFDM stocks. In recent years, LICONSA had tried to maintain larger stock levels to avoid imports during the early part of the calendar year when domestic milk production is highest. However, stock levels are expected to drop somewhat as LICONSA seeks to reduce storage costs while maintaining enough stocks to minimize imports during the first part of the calendar year.
Trade
Mexico continues to be far from reaching self-sufficiency in NFDM production because of limited domestic processing capacity. FAS/Mexico expects that increases in the quantity of subsidized milk that LICONSA distributes to the poor will generally be limited to increases in population. The import forecast for NFDM in CY 2004 reflects the expectation that LICONSA will continue to have access to greater volumes of domestic milk. For CY 2003, the NFDM import estimate is revised upward due to more current information from industry sources pointing to increased demand for NFDM from cheese and other dairy product processors. The NFDM import figure for CY 2002 is also revised upward reflecting official data.
Policy
See dairy products policy section at the end of this report.
Marketing
See dairy products marketing section at the end of this report.
WHOLE MILK POWDER (WMP)
Production
No changes from our previous report, MX3064, dated 5/09/03. Production for CY 2004 is forecast to remain unchanged from the previous year's figures.
Consumption
WMP consumption for CY 2004 is forecast to remain unchanged from the previous year's estimate due to expected stable demand caused by increased fluid milk output. The consumption estimate for CY 2003 also remains unchanged from our previous estimate due to steady demand. According to LICONSA, over 60 percent of the WMP and NFDM is consumed by the poor. LICONSA expects to continue opening new milk stores in proportion to population growth, as long as the government budget permits. LICONSA is currently distributing close to 3.3 million liters of reconstituted milk per day. LICONSA's subsidized milk prices are currently 3.00 pesos per liter (US$0.27/lt).
Stocks
Since production statistics for WMP are unavailable, and total imports of WMP are consumed by dairy-processors and LICONSA, stocks are not reflected in the PS&D table for WMP.
Trade
Mexico continues to be far from reaching self-sufficiency in WMP production because of limited domestic processing capacity. Imports are forecast unchanged in CY 2004 compared to our previous estimate due to modest gains in fluid milk production. Similarly, the CY 2003 import estimate is unchanged reflecting steady demand from the food-processing sector. The CY 2002 estimate reflects official data.
Policy
See dairy products policy section at the end of this report.
Marketing
See dairy products marketing section at the end of this report.
POLICY
With the exception of powdered milk, all U.S. exports of dairy products to Mexico are duty-free in 2003. Milk powder exports (NFDM and WMP) to Mexico are subject to a tariff-rate quota (TRQ), which will be phased out in 2008. Private companies bid for import permits (cupos) that allow them to import a specific quantity under the TRQ at zero duty. LICONSA is not subject to the TRQ and may import any quantity of milk powder at zero duty to meet its program needs.
MARKETING
The cooperator group that represents the US dairy industry in foreign markets is the US Dairy Export Council (USDEC). The council's staff in Mexico City provides information on all aspects of US dairy product trade and use, including market intelligence on trade policy issues, organizing informational seminars for the Mexican trade, and developing promotion and sales opportunities for US dairy products in the Mexican market. USDEC also organizes buying missions for potential Mexican importers/distributors to visit US dairy processing plants so they can meet and see, firsthand, various US suppliers and the services they offer.
Mexico is expected to continue as a significant importer of dairy products to augment domestic production. While imports are likely to consist primarily of bulk products such as NFDM, higher value products such as specialty cheeses and ice creams are also likely to find a home in Mexico's growing consumer class as tastes, preferences, and shopping habits increasingly mirror those of the United States and Europe.
Source: USDA
