November 06, 2003
Argentina 2004 Dairy Exports To Drop Slightly
SITUATION AND OUTLOOK
Argentine dairy exports for 2004 are projected to drop marginally from 2003 level. An expected recovery in domestic demand will more than offset slightly higher milk production, leaving somewhat shorter supplies for export.
Most traders believe that in 2004, whole dry milk will be practically the only product to suffer a reduction in exports. Shipments will be somewhat lower than those of 2003 and about half the volume of 2002. Most milk surplus from the domestic market is processed into whole dry milk, the most important export product, which is easily marketed throughout the world.
In 2002 over 70 countries purchased Argentine dry whole milk powder (DWMP). Traders indicate that foreign markets, such as Mexico, are demanding more instant dry milk, which sells at $30-40 per ton more than the regular product. Nonfat dry milk (NFDM) exports for 2004 are projected to remain unchanged at 12,000 tons, due to the shortage of milk.
Brazil is expected to continue to be the largest market in 2004, taking in roughly 20 percent of Argentine total dairy exports. During the 1990, the neighboring country accounted for 65-70 percent of exports. However, in 2001, Brazil filed an antidumping case on dry milk imports against several countries and set a minimum import price for Argentine product of $1,900 per metric ton. This together with the strong devaluation of the Brazilian "real" in 1999 and its economic problems reduced significantly the importance of the Brazilian market. Algeria is also expected to be an important market for dry whole milk, especially with added vitamins and packages of half a kilo. Mexico and Chile are forecast to continue to be good markets for dry milk and cheese.
Most local traders predict good world dairy prices for 2004. Droughts in several major producing countries, the reduction of subsidies in the EU and a strong Euro (against the dollar) are all factors which are influencing trade in 2003 and are expected to do so for next year as well. Current local FOB price for dry whole milk powder is about $1,800, a very good price compared to the average of the past several months. With current farmgate milk price at about $0.16 per liter, exporters of dry milk are near to break even. Generally speaking, selling to the domestic market is better business than exporting, but the economy is recovering slowly and demand is expected to react at a similar pace.
Dairy imports for 2004 are projected to be insignificant, except for fluid milk. With the strong devaluation, retail prices of imported products have increased drastically. The combination of higher prices and a significant economic downturn have reduced Argentines' purchasing power.
The drop in milk output in Argentina forced a few local processors to find new sources of milk supply. Uruguay, very close to Argentina's main dairy area, became a good alternative for a few processors who needed to increase milk purchases. Imports for 2004 are projected at 30 million liters, similar to those of 2003. Uruguayan milk has to be exported pasteurized, and the price currently paid is slightly higher than local milk.
Milk production for 2004 is forecast at 8.1 million metric tons, a slight recovery from 2003. There is much talk about the production level for next year as there are some who expect output to be somewhat lower due to the persistent pressure of very profitable soybean production. Nevertheless, total output is projected to be quite similar to 2003.
The Argentine dairy sector expanded significantly in the 1990's, reaching its output record of 10.3 million tons in 1999. Since then, and through 2003, a number of economic crises in the country and region affected the sector severely. Milk output for 2003 is estimated at 7.9 million tons, down 23 percent since the record. The main factors for the drop in 2003 were the numerous dairies which either shut down or reduced their operations to shift to soybean production; the unfavorable condition of the dairy herd due to slim returns in 2001-02; and flooding in Santa Fe province in early 2003 and a very dry and cold winter in most of the milk producing areas.
Although there are no reliable data, sources indicate that during 1999-2003 some 25-30 percent of dairy operations were closed and the dairy cowherd dropped by 15-20 percent. The total number of dairy farms is currently estimated at 12-13,000 and the number of dairy cows is about 2 million. This process of shrinking is believed to have finished, as returns in the sector are now attractive.
During the 1990's, dairy production was almost the best cattle and crop alternative. Dairy returns in 1999 were four times higher than soybeans. From that year onwards, due to the large devaluation in Brazil, a severe economic recession and a strong, overvalued peso which discouraged exports, demand for milk dropped considerably. Farm gate prices weakened to an extent that many dairymen lost money (last semester of 2001). The strong devaluation in 2002 and economic crisis affected the dairy sector as feed prices and many inputs, tied to the dollar, increased almost in the same proportion as the devaluation. Farm gate milk prices caught up, but at a much slower pace. These months were dramatic for the dairy sector as the economy suffered sharp changes and there was a lot of uncertainty.
Returns began to improve in mid-2002 as result of good exports and a recovery of the domestic market. With the strong devaluation of 2002, returns of crops more than doubled in dollar terms. As Argentina is a strong exporter of grains and oilseeds, these are valued in dollars. Therefore, farmers' income almost tripled, while their costs increased but in a much smaller proportion. Many inputs are tied to the dollar, but overhead costs are in pesos and increased in a much smaller proportion.
The period 2001-2003, when soybean returns have been significantly higher than dairy, was when most dairy farms closed or reduced their operations significantly. In both cases, producers shifted to the much more profitable soybean production. The technology used in soybean production has improved significantly in the past few years. The use of roundup ready seed and no till seeding makes this a very low cost crop. Other factors that helped this significant shift were the lesser capital involved in cropping and the less amount of work demanded. Farm owners are currently being paid between 1.0-1.5 tons of soybeans to rent their land for production. This amount is somewhat less than what they would get if put into dairy production, but with no risk and little work.
As of June 2002, farm-gate milk prices have increased significantly, making dairy a very profitable business. With very good export returns and the adjustment of wholesale and retail prices, local processors to take advantage of their large capacity, began to buy more milk from producers, many of whom had shifted to supplying smaller companies. Since the devaluation, farm-gate milk prices have tripled in peso terms, while inflation in that same period was slightly over 40 percent.
Returns for both activities are now comparable. Therefore, the closing of dairies seems to be near its end and dairymen who survived the crisis will slowly increase their production. We can already see improved investment in genetics, nutrition and pastures. The key is to increase yield per cow and try to free up the maximum land for cropping. Dairy operations, which have made it through the crisis, are the most efficient ones and the cows left in production are the best as dairymen got rid of the less productive ones.
Farm-gate milk prices for 2004 are forecast to be similar to 2003. The first semester could be close to $0.17 per liter and in the second semester, when the supply grows, prices will drop a few cents. Dairy production is once again a good business which has good potential growth. Milk production in the next few years should continue to recover moderately.
Domestic consumption of dairy products for 2004 is forecast to expand about 3-4 percent, similar to what most economists predict for Argentina's gross domestic product. Approximately 40 percent of total dairy sales are through super and hypermarkets. Almost all large processors manufacture private labels for the large retailers. These products generally sell for 20-30 percent less than name brands.
The current retail price of a liter of milk is $0.48 and nonfat dry milk is $2.71 per kilo.
Since the new administration took office last May, the government has indicated that it will encourage domestic production and exports. The exchange rate, which nowadays is at 2.85 pesos to a dollar, is projected to remain about this level in 2004.
There is no specific official support to the domestic dairy sector. Production, marketing and trade are free. There are export rebates, but they are nullified by even higher export taxes.
The Argentine dairy sector in the past WTO Cancun meeting had a firm position of not reaching an agreement unless substantial advances were achieved The sector was critical of the joint proposal U.S./EU, which they see as a drastic change from the previous position of the U.S.
Argentina's position is to work hard on the elimination of subsidies, the limitation of domestic support, and the improvement of market access. However, the dairy sector's main focus is market access. While the sector waits for improvement in market access under the WTO, they continue to advance on regional agreements. The two most important are the FTAA and one with the EU. Sources indicate that an agreement with the EU is closer to being achieved. This agreement would include tariff rate quotas, and reduction of import duties in the long term. Under the FTAA, there are several countries which want the dairy sector to be excluded from the agreement or intend to include it on a list of extremely sensitive commodities.
Source: USDA
