Rising Milk Prices Start to Choke Demand in South America
May 25, 2022
A worldwide milk production contraction has begun to hit South America, despite the region’s eagerness to fill dairy needs left unmet by other nations. As processors scramble to obtain much needed milk supplies, the resulting rapid run-up in milk prices has started to threaten dairy demand in an area of the world where overall inflation and food inflation are particularly severe.
Monica Ganley, analyst for the Daily Dairy Report and principal of Quarterra, an agricultural consulting firm in Buenos Aires, said that as the Southern Hemisphere moves toward winter, milk availability has fallen off seasonally, but margin challenges on the farm and intermittent weather issues have also further limited milk output.
“High prices for feed, fuel, and fertilizer are also amplifying the downward pressure on producer profitability, forcing processors to increase milk prices to maintain milk volumes,” she added.
Argentina’s dairy processors remain well positioned to fill some of the supply gaps that have developed in export markets. However, to generate enough milk to meet this export demand, Ganley said processors have had to raise farm milk prices in April to an equivalent of $16.86/cwt., the highest farm milk price in Argentina since mid-2014.
“Fortunately for Argentina’s dairy sector, seasonal temperatures and sufficient precipitation have supported milk production growth in recent months,” Ganley noted. Thus, despite a year-over-year dip in milk production in January, when sweltering summer temperatures reigned, Argentine output for first-quarter 2022 grew 1.6%, compared to the first quarter last year.
“Uruguay processors have raised milk prices even higher,” she said. “With a population of just 3 million people, Uruguay sends most of its milk to the export market. Over the past year, Uruguay increased its exports to China as production in New Zealand faltered. While Uruguayan processors and exporters have been keen to continue this trend, the country’s milk production has fallen in recent months.”
For the first three months of this year, Uruguay’s milk volumes dropped 1% compared to first-quarter 2021, due primarily to structural changes within the industry, including the exit of a large international dairy farming company. To overcome this loss, processors increased March milk prices to the U.S. equivalent of about $18.55/cwt., also the highest price since 2014.
South America’s dairy importing countries have also seen prices rise. In Brazil, where the year-over-year milk production drop was 1.9% in 2021 and inflation has been ongoing since the start of the pandemic, industry contraction has accelerated. For the first quarter of 2022, year-over-year milk production volumes fell by 10.5% as producers strapped with sky-high operating costs have elected to exit the business, she said.
“The weather in Brazil has also been very inconsistent, with pockets of exceptionally dry and/or wet weather interrupting the normal trajectory of milk production,” Ganley noted. “Thus, processors in Brazil have been forced to compete for remaining milk volumes.” That pushed prices to a shocking high of $22.54/cwt. in April. In Chile, meanwhile, farm milk prices in March climbed to $20.08, and in Colombia, they soared to $21.57/cwt. to encourage more output in these already milk deficit countries.
“While South American producers—like those elsewhere—welcome higher prices and consider them necessary to overcome the current increase in operating costs, concerns are mounting about the impact these prices will have on consumer demand,” Ganley said. “Elevated milk prices are translating into higher retail milk and dairy product prices for consumers in South America—where food prices have risen dramatically—and evidence is mounting that these prices are already beginning to choke demand.”