milk
June 1, 2018

Volatile Milk Prices In South America

 |  By: Fran Howard

As the Southern Hemisphere’s winter approaches, milk production trends in South America are mixed with output recovering in some of the continent’s milk-production regions and declining in others. The current milk production trends, which are expected to persist over the short term, face various risks longer term, says Monica Ganley, principal of Quarterra, a Buenos Aires-based consultancy firm, and a columnist for the Daily Dairy Report.

 

"Shifting milk production in South America could have important implications for U.S. dairy producers,” Ganley says. “In some cases, such as with Argentina and Uruguay, it could mean additional competition in export markets, while in other markets, such as Chile, it could create additional opportunities for exports within those markets."

 

Argentina posted an impressive milk production recovery in early 2018. Recent data from the Argentine government shows that milk production grew consistently over the first four months of 2018, climbing a notable 9.1% in April.

 

“Dairy farmers in Argentina have been benefitting from an improved relationship between milk and input prices, but it appears this could be changing—particularly in the case of operating costs,” Ganley notes. “Adverse weather caused severe damage to Argentina’s corn and soybean crops, which will result in higher feed prices this winter.”

 

In Uruguay, milk production grew a robust 4% in the first four months of the year, compared to the same period in 2017, due to improved farm profitability. “Milk prices in Uruguay have been marching steadily higher for five consecutive months,” Ganley notes. “And at least for now, the increase in milk prices has outpaced that of operating costs, leaving dairy producers with a comfortable margin.” She warns, however, that in Uruguay an expected increase in expenses, particularly concentrate costs, could threaten profitability in coming months.

 

On the other side of the ledger are Brazil and Chile, where milk production is declining. “Reports from industry stakeholders in Brazil indicate some farmers chose to exit the dairy industry at the beginning of the year due to low milk prices,” Ganley says. Milk prices in Brazil declined in the second half of 2017, falling to a low of $14.74/cwt. (U.S.) in December. “Brazilian dairy farmers, however, enjoy a moderate cost structure and even those who were losing money should have been able to endure several months of low prices,” she states. Last year’s low prices followed two years of average milk prices above $17/cwt. (U.S.) in Brazil. “Thus, Brazil’s decline in milk production is more likely due to normal attrition than a dramatic structural change within the industry,” she adds.

 

Year-over-year milk production in Chile has been declining since June 2017 and Chilean dairy imports have climbed over the same period. “Rather than looking to the local market to fill their needs, processors in Chile are likely leveraging competitively priced product from North America, Europe, and Oceania,” Ganley says. “This trend has caused much distress among Chilean dairy farmers who have successfully persuaded the government to open an investigation into the source of imports and their effect on the local industry.”

 

Looking ahead, analysts will be watching weather forecasts for the milk-producing regions of South America, including the National Oceanic and Atmospheric Administration’s prediction that an El Niño phenomenon will materialize later this year. “If an El Niño develops, the associated rains could create one more risk factor that will work against the recovery of South America’s dairy industry,” says Ganley.

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