Argentine dairy under duress

The financial situation of Argentine dairies has deteriorated in recent months, according to the US Department of Agriculture’s (USDA) Foreign Agricultural Serivce six-month report. Prices controls intended to constrain food price inflation for consumers have generally not been updated in months, and these consumer prices have translated to stagnant (in dollar terms) farmgate milk prices.

For 2021, the production projection continues to be 11,575,000 metric tons of fluid milk, an increase of 130,000 tons or 1.1% above the revised 2020 production, which is now estimated at 11,445,000 tons, or 95,000 tons above USDA official.

These flat prices have driven Argentine dairy margins into negative territory since September 2020 as feed prices have risen. Relatively mild weather and flat prices have incentivised farmers to produce more milk in an effort to generate revenue. Fluid milk production in the first few months of 2021 is surpassing 2020, which had the highest level since 2015. However, a reduction in the herd size since that time means that Argentina is unlikely to reach those all-time highs until the herd can be further rebuilt.

The current negative margins, especially for smaller producers, have led to continued protest by local dairy organisations that demand that current price controls be updated or abandoned. Price controls were recently extended until mid-June, but several dairy products were removed from the price control list, including: infant formula, grated cheese, cream cheese, dulce de leche, butter and margarine, yogurt, desserts and puddings.

According to industry contacts, leading dairy processors are in negotiations with the government to establish minimum production levels for a variety of dairy products. The government’s goal is to guarantee sufficient domestic supply to help contain food price inflation. An agreement could shield the dairy industry from export controls which the government has threatened or implemented in other agricultural sectors

The government is also implementing a new law intended to increase the diversity of food products on supermarket shelves by requiring a certain percentage of shelf space be devoted to products produced by small and mid-size businesses, and limiting how much space can be assigned to products from a single company.

The effects of this law, which is beginning to be implemented in May 2021, are uncertain, but it could lead some small dairy processors to devote more production to the formal market. In the short run, supermarket chains are scrambling to diversify their suppliers to comply with the new law.

With mostly fixed domestic prices, trade continues to be important to the financial health of the dairy industry. According to a study by OCLA, a dairy industry organisation, 25.3% of Argentine dairy production went into export channels. The top five destinations for Argentine dairy products are Brazil, Algeria, Russia, Chile, and China.

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