whey powder
April 26, 2017

Can Mexico Count on Argentina for Milk Powder?

 |  By: Fran Howard

U.S. President Donald Trump could be backtracking on his promise to pull out of the North American Free Trade Agreement (NAFTA) or to even substantially change it, but that hasn’t stopped Mexico from courting other trading partners.

Pulling out of NAFTA entirely, while possible, would be costly to U.S. agricultural producers, particularly dairy and corn farmers. While South America could probably fill Mexico’s corn needs, it remains uncertain which countries or regions would be able to cost-effectively meet Mexico’s dairy needs.

“Mexico is rapidly expanding domestic milk production, but it would take additional international relationships to displace the 250,000 metric tons of nonfat dry milk that the country typically imports each year from the United States,” says Monica Ganley, analyst with Quarterra, a consulting and advisory firm located in Argentina and a contributor to the Daily Dairy Report.

Last year, Argentina’s milk production plunged 12.5% below 2015 levels to 22.1 billion pounds due to both economic challenges and adverse weather, Ganley says. Argentina’s dairy industry, which is still developing, has about 1.8 million milk cows spread across 11,500 dairy farms, and farms vary dramatically in size. “Most production comes from larger farms, but small farms producing less than 1,000 liters (2,271 lbs.) of milk per day still provide about a third of the country’s production,” Ganley notes.

More than half of Argentina’s milk supply is used to produce cheese, almost 20% is absorbed by bottling plants, and 17% is used to make milk powder. “Yogurt, butter, dulce de leche, and other dairy products make up the balance,” Ganley says. “While a few large, important processors exist, there is also a broad network of local dairy manufacturers, especially those that produce cheese. Most industry experts believe that processing capacity far exceeds current throughput, with some estimating that Argentina has the ability to process up to 45.4 billion pounds of milk a year—more than twice what it processes now.”

In a typical year, approximately 20% of Argentina’s milk supply is available for export. Last year, however, only about 16% of the country’s total milk supply was available for export due to the production shortfall, Ganley says. In value terms, whole milk powder (WMP) accounted for more than a third of the country’s dairy exports last year, while skim milk powder (SMP) accounted for only 7%

“While it isn’t impossible that Argentina could offset U.S. export volumes of skim milk powder to Mexico, a few important things would have to happen first,” she says. “Domestic milk production would need to grow dramatically, and processing capacity would likely need to be updated or retrofitted to produce SMP, which hasn’t traditionally been a product of focus for Argentina.”

In addition, she says that logistics and dynamics of shipping product to Mexico need to be considered. “Argentina and Mexico are not particularly close geographically, and even though Argentina has repealed many of its distortionary trade policies, the country has no agreements ensuring preferential tariff treatment with Mexico,” she says.

But the biggest challenge meeting Mexico’s needs for skim solids will be the sheer volume of product. Last year, the United States shipped 279,973 metric tons of SMP to Mexico, while Argentina exported only 135,247 metric tons of SMP and WMP combined.

“To displace U.S. powder in Mexico, Argentina would need to transition entirely to SMP production, double output, and supply Mexico exclusively,” says Ganley. “Argentina might be able to supply some additional powder to Mexico, but it’s unlikely the South American country would be able to offset U.S. exports in any material way anytime soon.”