Argentina Dairy and Products Annual 2008

Argentine dairy exports in 2009 are forecast to increase, as expected larger milk production, stable domestic consumption and high stocks, will force the industry to ship larger volumes of dry whole milk and cheese, says USDA, Foreign Agricultural Service. A link to the full report is also provided. The full report includes all the tabular data which we have omitted from this article.

25 October 2008

5 minute read

Situation and Outlook

Argentine exports of dairy products for 2009 are projected to increase significantly. In response to an expected increase in milk production and relatively flat domestic consumption, companies will try to reduce their very large stocks built during the last semester of 2008. Most contacts expect that the current world financial crisis will put a halt in 2009 to the rapid expansion of the domestic consumption, forcing surplus milk to be exported in order to keep a balanced local market.

EXPORTS: Exports in 2009 are forecast to account for approximately 20-22 percent of the total milk output. This share is significantly higher than the past two years. The main dairy product exported by Argentina will continue to be dry whole milk powder. The markets are expected to be Venezuela, which also buys large volumes of modified milk for the retail market, Brazil, and several countries in northwestern Africa (Algeria, Senegal, Nigeria, Niger, Congo). Dry modified milk is also expected to continue to be exported to Venezuela and the Caribbean Basin.

Non-fat dry milk exports are also expected to grow in 2009, but volumes are much smaller. Brazil and Peru are usual buyers.

Exports of cheese in 2009 are also forecast to grow due to an excess in production and high stocks. During part of 2008, the government slowed down the approval of cheese export permits fearing that the domestic market was going to be under-supplied and thus put pressure on retail prices. Argentina exports soft, semisoft and hard cheeses. Semisoft, which is the most exported, normally goes to the Russian Federation, Chile, and Japan. Soft cheese is primarily shipped to the Russian Federation, Chile and South East Asia. Exports of hard cheese go primarily to the U.S. under a cheese quota. Other secondary markets are Brazil and the Russian Federation.

Most local exporters believe that 2009 FOB prices will be weaker than those in 2007-08, but still at reasonable levels as demand for dairy products will continue. Recent sales of dry whole milk were done at a price of $2,700 per ton. Some industry contacts believe that Argentina will have to move to a price scheme where spring surplus milk will be paid according to world prices, while the base price remains at a higher level.

PRODUCTION: Milk production for 2009 is forecast to increase to 10.4 million tons, practically the same as the record of 1999. Despite a very dry season in 2008, the cowherd is in good condition and most farmers’ returns are still positive. Although production costs increased significantly in the first nine months of 2008, they are expected to be lower in 2009 as feed costs should reflect lower world grain prices. Production of milk in Argentina is being concentrated in the hands of medium to large producers who are efficient, use more technology, and are intensifying their production schemes. The smaller and less efficient producers continue to go out of business. The significant drop in world soybean prices has decreased incentives for dairy producers to shift into crop production. Of the volume increase expected in 2009, most processors believe that a vast majority of the milk will be turned into whole dry milk, and a sma ller portion into cheese.

There are no significant new investments in processing capacity projected for the next year. Production and processing capacity are in good shape and there is room to handle further milk output increases.

CONSUMPTION: Domestic consumption of dairy products is forecast to grow marginally in 2009. Although there is concern about the effects of the global financial crisis will have on Argentina, contacts expect that the government will try to keep demand steady. Dry milk traders expect somewhat larger domestic sales through official food programs.

POLICY: The government continues to fight inflation in order to maintain the increased purchasing power of consumers gained in the past few years. In order to keep prices down, it established Resolution 61 of February 2007, creating the “Dairy Products Domestic Price Stabilization Program”. Through it, there are 16 popular dairy products with “directed prices”. Contacts report that in 2008, these products were authorized price increases of 8 percent, significantly lower than private sector estimates of inflation. This resolution also established a maximum export price for dairy products, to finance price supports for local dairy processors and milk producers. In the first semester of 2008, the FOB price for dry whole milk averaged $4,300 per ton, while the government’s maximum export price was $3,116 per ton. The government received the difference between the export price and maximum price ($1,184 per ton), representing an export tax of 27.5 percent.

Exporters also report that the government slows down the certification of export permits when it feels that the local market is not sufficiently supplied. This affects primarily exports of cheese and dry milk. Large dairy processors report that the price controls on many products, combined with increasing production costs, are creating significant problem. Moreover, most processors have nowadays large stocks of products, which they could not export when prices were higher and result in high financial costs.

The government has negotiated with three large processors and a limited number of producers a price of 1 peso per liter for milk sold by producers to the major processors, with processors receiving 0.15 pesos per liter to compensate for selling popular dairy products at a lower price. The agreement was signed on October 20, 2008. This follows a previous agreement during June-September of 2008 under which small and medium farmers received pesos 0.945 per liter from the processors and pesos 0.102 per liter from the government. Dairy processors that complied with the government’s price scheme received pesos 0.15 per liter, to offset partially the low prices they had to sell their products in the domestic market. The reduction of government payments under the new agreement appears to be due in part to the drop in international prices. With export prices now below the maximum export price, the government is receiving much lower revenue from dairy product exports (the 5 percent basic export tax remains in place).

Argentina, as the rest of the world, is going through strong economic turbulences. The peso has lost some value, but not in the same proportion as Argentina’s neighbors Brazil, Chile, and Uruguay. The government continues it policy of maintaining a stable exchange rate (currently maintaining the value of the peso between $3.20 and $3.30. Local industry and the farm sector are pressing for a devaluation of the peso in order to be more competitive.