October 27, 2003
Chile Dairy and Products Annual 2003
Chile's milk production is expected to fall slightly in 2003 (Jan-Dec), as adverse weather conditions affected forage supplies. Low domestic milk prices are another factor that affected total milk output in 2002. Although weather is an important factor for pasture production, Chile's basic feed input, the outlook for the next three-to-five years will also depend on international dairy prices, government policies, and continued improvements in technology and animal genetics.
After reaching a record milk production level in CY2001, Chile's total output in CY2002 fell slightly from 2.19 billion to 2.17 billion liters, mainly due to a loss of productivity of the milk-producing herd. Adverse climatic conditions in the primary dairy producing regions in the southern part of the country, together with low prices paid by the dairy industry, are the main factors affecting total production. Excessive rain and cold weather affected the quality and quantity of forage during the spring of CY2002. Additionally a significant drop in the domestic milk prices paid to producers prevented most producers from using supplemental feeding with concentrates to make up for deficiencies in their pastures to increase or maintain the production level of their herds. Production is expected to fall again in MY2004, as the low prices paid during the last two years have put some producers out of business and others have reduced their milk-producing herds. Chile currently has an estimated 49,000 dairy farmers with approximately 614,000 cows in production.
Real prices paid to producers for milk in Chile have been falling slowly but steadily since 1992. These declines are mainly due to deteriorating international prices during the same period. Chile's domestic milk market is relatively open to dairy product imports and is only protected by an import duty of 6 percent. Chile's dairy producers blame the fall in prices on the international oversupply of dairy products, and on countries that support their dairy industries with large subsidies and protect their domestic markets. At the same time, prices paid to Chilean milk producers also have been affected by increased competition among dairy products and increased processing costs. To stay competitive the industry continuously invests in technology. In order to maintain their profit margins, the processing industry has lowered the price they pay to milk producers.
For CY2002, prices paid to milk producers fell 13 percent in real terms, when compared to last year (CY2001). Statistics show another significant fall during the first 8 months of this marketing year.
Chile's dairy industry almost reached during CY2002 an all-dairy product export-import trade balance in volume, expressed in liters of milk. Imports of 91.9 billion, against exports of 87.2 billion liters. But in value the export-import trade balance turned out positive for Chile again for the second year in a row, going from US $9 million in 2001 to US $21 million in 2002.
Although Chile bound its dairy product import duties (HS 04.02, 04.05, 04.06) at 31.5 percent in the Uruguay Round, a flat import tariff of 6 percent is applied on nearly all dairy products imported. Additionally, a value-added tax of 18 percent is charged at the consumer level on all goods, domestic or imported.
As a result of the Free Trade Agreements Chile has signed, the dairy industry expects to increase their export market share. Once implemented the agreement with the United States will provide a 3,500 metric tons duty free quota for dairy products. This volume will increase 10 percent each year until Chile gains free access after 12 years. The agreement with the EU offers a duty free quota of 1,500 Tons, with a yearly increment of 5 percent. The agreement reached with South Korea gives only a 1,000 Metric Tons duty free quota of whey powder, but there is an agreed reduction of the high duties for dairy products like yogurt and cheese in 10 years. Duties applied to these products are 40 and 38 percent respectively.
In an effort to increase domestic consumption, milk producers and the processing industry have agreed to form and finance an association (Promolac During CY2003, approx 650 million Chilean pesos will be spent on a publicity campaign. Promotion of fresh milk consumption will be mainly through TV and printed media. The increase in consumption as a result of the campaign, is not expected until 2004 or 2005.
Whole Dry Milk
Close to 90 percent of Chile's production of dry milk is whole milk powder. Production of whole dry milk fell significantly in MY2003, when compared to the previous year, due to a smaller output of milk and deterioration in the demand. An increase in other fresh dairy products, like yogurt and fresh fluid milk, had a negative effect on domestic whole dry milk demand. For 2003, the industry expects a further reduction in whole dry milk production, as total milk output is expected to fall and the strong demand for fresh dairy products is expected to continue. Industry sources have indicated that in the long term, production increases in whole dry milk are expected to level off, as demand moves to high value dairy products as the country develops economically.
Dry milk is produced primarily in the summer months of November, December and January when domestic fluid milk production is at its peak. Chile produces dry milk from surplus milk that would not otherwise be consumed as fluid milk or used to produce other dairy products, such as cheese.
Dry milk is available for sale in practically all Chilean supermarkets and smaller grocery stores. Families that do not consume large quantities of milk or lack refrigerators to keep UHT fresh after opening prefer dry rather than fluid milk. Government food programs also account for a significant proportion of dry milk consumption. Government tenders for dry milk may be filled by either domestic or imported product. During the winter months, the industry reconstitutes fluid milk from dry milk produced during the summer, in order to produce dairy products that have a constant demand throughout the year.
Statistics show that there has been a reduction in whole dry milk consumption. Industry sources indicate that due to the promotional campaign, dry milk consumption has been replaced by fluid milk and yogurt. During MY2002 production of fluid milk expanded over 300 percent and yogurt production expanded 33 percent. Additionally industry sources indicate that total per-capita consumption of dairy products expressed in liter dropped from 126 liters in 2001 to 124 liters in 2002.
A significant fall in domestic demand for whole dry milk resulted in fewer imports in 2002. Industry sources indicate that a further decline in imports is expected in 2003, compared to last year, as domestic production returns to normal levels but consumption remains stable.
Chile's dry milk export markets are expected to expand in the coming years as the industry becomes more competitive. In the long-term, Chile's success in the dairy export market will depend upon its ability to compete with other countries that benefit from subsidy programs. Chile's main export markets are in Latin America, particularly Cuba, Brazil and Bolivia.