July 7, 2016

Adverse Weather Reduces South American Milk Supply

 |  By: Fran Howard

Milk production in South America is running below-year ago levels, a situation that could help to stem some of the persistent global surplus in milk and dairy products.

“The first half of 2016 has proven difficult for stakeholders throughout the dairy value chain in South America,” notes Monica Ganley, with Quarterra Consulting and Advisory, Buenos Aires, Argentina, and a guest columnist for the Daily Dairy Report. “In this export-oriented region, low global dairy commodity prices have been reflected in dismal farm-gate payments, which have undermined producer margins and profitability. As a result, milk production is registering below prior-year levels in most countries. While painful for farmers, the declines may help to resolve some of the oversupply issues that are keeping international prices low.”

Heavy April rains in Argentina and Uruguay, particularly in key dairy provinces in central Argentina, have worsened the effect of low prices. Wet conditions reduced milk production, as poor infrastructure prevented milk tankers from reaching farms to collect what milk was produced. Compounding the problem, Ganley notes that uncharacteristically low temperatures followed the April rains, delaying grass growth.

“Even though the extreme weather has now given way to more normal climatic conditions, a lack of forage availability will prevent a rapid recovery in milk production in the region,” she says.

Brazil’s dairy industry has also suffered from adverse weather this year. Hot, dry conditions in early 2016 cut into Brazil’s milk production. “This weather also negatively affected prospects for the grain harvest, and as a result, forecasts for corn and soybean production have been gradually reduced over the past several months,” Ganley notes. “A smaller projected harvest combined with a weak real, which has helped to accelerate exports, has led local grain prices to climb considerably. Higher corn and soybean prices are now eating into Brazilian farmers’ bottom lines—despite the fact that they are enjoying one of the strongest milk prices in the region.”

Milk production in Argentina for the January through May period is down 11.9%, compared with the same period in 2015, according to Ganley. Brazil output, January through March, is down 4.5% year-over year, and Uruguay production is off 12.5% for the January through May period, compared to the previous year.

Whole milk powder exports have been increasingly important to the South American dairy industry. Year to date, whole milk powder exports account for 38% of Argentina’s dairy trade on a value basis and 57% of Uruguay’s. However, like processors elsewhere, dairy processors in Argentina and Uruguay are receiving less revenue for their exported products. Moreover, due to economic instability in Brazil and Venezuela—two of Argentina and Uruguay’s most important trading partners—processors in Argentina and Uruguay are also not being paid for some shipments.

“This year has been challenging for the South American dairy industry, but there are a number of clues that indicate market improvements lie ahead,” Ganley says. “On the production side, milk prices are now rising across the region, largely in reaction to declining milk volumes. Milk production will begin to expand seasonally in the coming months, which will indicate how much of the decrease seen so far this year has been due to structural changes in the production environment.”

While dairy farmers in South America are anxious to increase revenues by bringing additional volume back online as quickly as possible, Ganley points out that several persisting factors will limit expansion, including low-quality pasture and expensive grains.