Argentina expected to see recovery in 2021
Argentinian dairy cows
Following favourable weather, a steady increase in peso-denominated milk prices, and strong domestic and international demand, Argentine dairy producers have steadily increased production of fluid milk over 2019 levels, reports the US Department of Agriculture Foreign Agricultural Service. This increase has led to a rise in the production, consumption, and export of all products except certain cheeses (notably mozzarella), which have fallen since the closure of food service outlets in response to Covid-19 outbreaks in Argentina in March 2020.
That being said, 2021 fluid milk production is projected to move up 2% to 11.57 million tons. An anticipated recovery in the Argentine economy in 2021 will encourage processors to refocus on the domestic economy and trim exports of powdered milk, which amounted to 180,000 tons due to competitive prices and low domestic margins.
Political and economic uncertainty continue to affect the local dairy industry. Argentina has primarily been financing its Covid-19 recovery and stabilisation efforts through printing more pesos. While inflation has run at more than 40% in recent years, the industry fears that the inflation rate will rise even higher once post pandemic economic growth resumes.
While generally not making large expansions due to industry overcapacity, sector participants are accelerating repairs and necessary upgrades by investing in assets such as milk processing equipment, tractors, and trucks. Dairy farmers with grazing land are converting some of that land to crop production as another means of guarding current earnings. They reason that newly planted soybeans and corn will retain more value after harvest than pesos saved at banks even with high interest.
Domestic dairy consumption has held up better than expected at the beginning of the outbreak, thanks in part to continued government price freezes on many key consumer staples, including dairy products. However with inflation rising 3-4% per month, the profit margins for retail dairy products are eroding rapidly and farmers warn that rising costs for labour and other inputs could quickly overtake slowly rising milk prices paid to farmers. In October, the government allowed the prices of most dairy products to rise 2%. Some major dairy processors are seeking to maintain profitability by introducing new product lines unaffected by the price freezes and limited at-home delivery of milk.
Argentina has had strong export performance so far in 2020, exceeding earlier expectations. It could become more competitive if its currency is allowed to depreciate further. Post contacts report that the government is considering reducing the current 9% export tax on powdered milk to 5%. The government is eager to replenish foreign currency reserves and recently lowered export taxes on soybeans and mining products in an effort to increase exports. Argentine regulations require that exporters convert their sales from dollars to pesos and farmers are paid in pesos.