Executive Summary

An increase in milk prices paid to farmers due to an increase in international prices for dairy products is the main reason for the expansion of output for this and next year. Chile’s milk production is expected to increase significantly in 2008 (Jan-Dec). A considerable increase in the prices paid to producers together with an increasing number of cows and productivity of the milk-producing herd and good weather in most producing areas, are the main factors for the larger output. Domestic milk prices are an important factor that affects total milk output. Additionally weather is an important factor for pasture production, Chile’s basic feed input. The outlook for the next three-to-five year’s milk production also will depend on international dairy prices, government policies, and continued improvements in technology and animal genetics.

Production General

Chile’s total milk output rose a modest 2 percent from 2.40 billion in 2006 to 2.45 billion liters in 2007, mainly due to an increase of, number of cows, productivity of the herd and an increase of the use of milk substitutes for raising calves increasing by this delivery to the processing plants. Additionally, climatic conditions in the primary dairy producing regions of the country were another factor which affected total production positively. For 2008 a production expansion of over 8 percent is expected, this is mainly due to a further expansion of the milk production herd. Additionally, the increase of milk prices paid to farmers also had a positive effect on production as farmers could increase supplemental feeding of their herds due to an significant increase of income.

Chile currently has an estimated 16,000 dairy farmers with approximately 650,000 cows in production, of which 80 percent are considered small producers and the whole dairy industry employs directly and indirectly an estimated 35,000 persons.

Trade

Starting 2004 the dairy industry’s exports exceeded imports in volume and value. In CY2007 the trade balance increased when compared to the previous year, in volume and value mainly as a result of high international prices of dairy products. The trade balance exceeded US$110 million, up from US$43 million in 2006. Latin American countries are the main destination for Chile’s dairy exports, headed by Mexico with a 42 percent and Venezuela with a 35 percent of total dairy exports. Close to 40 percents of these exports correspond to whole and non fat dry milk.

Argentina was the main supplier of dairy products in spite of a 23 percent surcharge on imports during the first semester of 2007. Due to an influx of dairy imports mainly from Argentina, the GOC imposed safeguard measure against Argentinean dairy product imports. The share of imports from Argentina increased from 35 percent in 2005 to over 75 percent in 2006. The imposed safeguard rate, which came into effect October 13, 2006, was 23 percent. But as a result of significant increases of dairy product prices the GOC decided to suspend the safeguard measures temporarily in July of 2007 and left an option to re-impose the measure if it becomes necessary. The US has become Chile’s second supplier of dairy products.

Policy

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 imported dairy products. Additionally, a value-added tax of 19 percent is charged at the consumer level on all goods, domestic or imported. Chile has reduced import duties only for Colombia and the United States for whole and non-fat dry milk as a result of the Free Trade Agreements with these countries. Non-fat dry milk enters duty free in 2007 and whole dry milk will be tariff free in 2011. Colombia will have duty fee access for both, whole and nonfat dry milk by 2012. For all other countries that have signed agreements with Chile, dairy products are excluded from the tariff reduction schedule.

As a result of Chile’s trade agreements, the dairy industry expects to keep increasing its export market share. The US – Chile FTA provides for a 3,500 metric ton duty free quota for Chilean dairy products. This volume increases 10 percent each year until Chile gains duty free access in 2016. 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 Ton duty free quota for whey powder, but there is an agreed upon reduction in the high duties for dairy products like yogurt and cheese in 10 years. Duties applied to these products are 40 and 38 percent respectively. No preferences were agreed for dairy products in the Chile-Japan trade agreement.

In an effort to increase domestic consumption of milk and milk products the GOC, the industry and producers continues with a promotional campaign, which is evenly financed by all. These three players have agreed to form and finance an association (Promolac) that manages the contributed funds in promotional campaigns, mainly through TV and printed media. In 2008 contributions were only 550 million Chilean pesos because the GOC did not contribute their share.

Whole Dry Milk

Production

Close to 75 percent of Chile’s production of dry milk is whole milk powder. Production of whole dry milk increased again in CY2007 when compared to both the previous year and our last years estimates. As a result of excellent prices and a strong export demand together with a recent increase of production capacity, the industry expects production of whole dry milk to increase close to 50 percent in 2008. The industry has been expanding their production capacity with investments in a new drying facility. For 2009 production of whole dry milk is expected to fall slightly as a result of lower dry milk prices due to the economic crisis that is affecting most countries.

 

Consumption

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. Ultra high heat treated milk (UHT milk) is very common in Chile because you can store the containers for long time without refrigeration, but once opened the containers have to be kept in refrigerators. 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.

Trade

Due to higher international prices together with a increase in domestic dry milk production, imports of whole dry milk fell significantly in 2007. Only small amounts, less than five hundred tons are expected to be imported in 2008 and the coming years.

Chile's dry milk export markets are expected to expand in the coming years as the industry becomes more competitive and the price incentive increases. In the long-term, Chile's success in the dairy export market will depend upon its ability to compete with other countries. Chile’s main export markets are in Latin America, particularly Venezuela, Cuba, Peru and Bolivia.

Non Fat Dry Milk

Production

Chile’s NFDM production increased again in 2007, as milk output increased. Production in the coming years will depend on expected prices in international markets and changes in food industry consumption or specific strategies from individual industries.

Consumption

Chile’s food industry determines to a great degree the consumption level of NFDM in Chile. Leading products made from NFDM are chocolate, ice cream and yogurt. The consumption rate of these products is in line with Chile’s economic growth. For 2005 and beyond, utilization is expected to continue to increase, but at a slower rate.

Trade

The US has become again an important supplier of NFDM (non fat dry milk) for Chile. Competitive US prices for NFDM is the main reason for US milk imports, according to industry sources.

Further Reading

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November 2008