South America starts to stir

By John Droppert

SOUTH AMERICA, with its abundant natural resources, is an oft-cited land of opportunity for agricultural production, including dairy.

However, volatile climatic and political conditions, together with widespread infrastructure challenges and competing land uses have historically kept the level of dairy production and exports well below expectations.

In addition, rapid growth in the Brazilian economy through the 2000’s boosted dairy consumption in that country to the point where Brazil became more of a dairy importer than exporter.

Within the protection of the Mercosur trading bloc, Argentina and Uruguay became major suppliers to their former competitor.

Apart from the market opportunities closer to home, both of these countries had less dairy product to sell for most of 2016 and 2017, as repeated floods inundated key dairy regions.

More recently, things have changed. From late 2017, weather conditions moderated and — with the exception of Brazil — farmgate milk prices rose.

The better weather also boosted crop yields, which saw grain prices ease. More stable economic conditions and lower inflation helped improve the general business environment, and reduced financial pressure.

Whilst the renewed economic slowdown in Brazil (and more recently Argentina) is likely to impact dairy demand, other opportunities are emerging.

Russia’s ongoing embargo on most of its other dairy suppliers has generated some openings, whilst the US trade disputes with China and Mexico could also benefit South American exporters.

Milk is increasingly available to take advantage. Argentina’s milk production grew just over 7 per cent for the first half of 2018, as did that of Chile, whilst Uruguay is up 6.5 per cent for the year to July.

Brazil had been following a slower trajectory (up 2 per cent for Q1) but has since slowed. Overall volumes are roughly steady for the first half of 2018, compared to the same period in 2017.

Production may be up, but the payoff in trade volumes is yet to materialise. For the first two quarters of 2018, total export volumes from South American suppliers fell 10 per cent compared to the same period in 2017.

All countries have seen falls with Brazil the most severe (down 36 per cent), followed by Chile (-12 per cent) and Uruguay (-9 per cent).

Argentina has seen a more modest 2 per cent decrease, having had a particularly severe drop in 2017 and thus a weaker comparable.

At a product level, the biggest volume dairy commodities traded within and out of the region tend to be wholemilk powder (WMP), condensed milk, and (to a lesser extent) whey powder and cheese.

Of these, only WMP has seen gains, with 12 per cent more exported for the first half of 2018. Far from Russia or China, this growth has been driven by Algeria, with South American suppliers delivering over 44 000 tonnes of product as part of the Algerian government’s regular tenders — a threefold gain from the same time a year prior.

Algeria’s tenders are highly price-competitive and widely discussed in dairy trading circles.

Anecdotal reports suggest that over the last few months, South American sellers have become increasingly noticeable in other pricing negotiations globally.

As the chart shows, there is a lot of ground to make up.

Whether the current nascent turnaround is the beginning of a sustained re-emergence, or another false dawn, remains to be seen.

• John Droppert is Senior Industry Analyst with Dairy Australia.