‘Til the Cows Come Home’: South America’s Dairy Industry in 2021
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2020 was certainly one for the history books. Extreme uncertainty collided with a generally chaotic year and in many moments, the dairy market’s movements seemed to defy fundamentals. But while 2020 may have left most market analysts, myself included, humbled, the time has come to swallow what’s left of our tattered pride and shift our focus to 2021.
All things considered, South America’s dairy industry weathered the tumultuous past year with remarkable success. The region had the advantage of the virus’ late arrival, or at least late detection, relative to other parts of the world. As such, authorities got a head start coordinating responses and were quick to implement key strategies that limited disruption in the dairy industry. For example, the immediate designation of food and agricultural workers as essential, allowed their work to continue relatively uninterrupted.
Furthermore, by sheer luck, when the WHO officially declared COVID-19 a pandemic, setting off a cascade of stay at home orders across the globe, most countries in the region were experiencing seasonal troughs in milk production. This timing surely helped avoid the dumping of milk which was prevalent for a time in the Northern Hemisphere.
The structure of the dairy manufacturing sector in South America also likely played a role in limiting disruptions in the sector. The region’s large, relatively consolidated processors were able to retool production away from foodservice products toward retail without too much ado. Of course, the region’s artisanal processors did not enjoy the same luxury, with many of these absorbing the worst impacts of the pandemic.
While these factors combined to make the pandemic ‘not as bad as it could have been’, the world looks very different today. Milk production across most of South America grew considerably during 2020 and new challenges have come to light for participants at every step of the dairy value chain.
As we begin anticipating what 2021 will look like for South America’s dairy industry, a few key factors can be expected to play a disproportionate role in the sector’s development over the course of the year:
- Grain Prices
- Coronavirus Restrictions
- Government Assistance
- Dairy Commodity Availability
Baby, It’s Dry Outside!
Weather, and more specifically dry weather, has been a key topic of conversation for those interested in South American agriculture for months now. Even before the National Oceanic and Atmospheric Association (NOAA) officially declared a La Niña Advisory in September, agricultural producers were fretting about a lack of precipitation and the potential impacts on their crops and pasture.
The impacts of a La Niña, or an El Niño for that matter, are surprisingly nuanced as we explored in our October blog. But put in oversimplified terms, a La Niña tends to bring dry weather to Argentina, Uruguay, and Southern Brazil. This dryness pulls down on milk production since pasture quality and grain yields suffer. It is important to recognize that the impacts are not uniform across the continent. Producers on the continent’s west coast, may benefit from the weather ushered in by the La Niña.
While it has certainly been dry across the main dairy basins of Argentina, Uruguay, and Southern Brazil, occasional rainstorms moving through the region have so far been sufficient to stave off the most severe drought conditions and keep soil moisture at minimally acceptable levels for many dairy producers. However, the summer is long and if dry weather persists, it is certain to weigh heavily on production in these countries in the coming months.
In its most recent prediction, NOAA forecast that the La Niña will persist through at least the first quarter of the year, before gradually transitioning to a neutral weather pattern around the middle of 2021. Thus, there is still plenty of time for the La Niña to wreak havoc on milk output in South America by pushing down on production, especially among the continent’s largest exporters. Even significant production gains in countries such as Chile and Colombia would not likely be sufficient to offset losses on the other side of the Andes.
Against the Grains
Of course, dry weather does not only have potentially negative impacts on pasture for dairy cows. Dry weather undermines grain production as well. And this year in particular, dry weather has delayed crop planting and interfered with development across South America.
Climatic impacts and concerns about the availability of corn and soybeans in South America have been a key factor driving the rally in these markets over the last several months. The most recent World Agricultural Supply and Demand Estimates from the USDA reduced expectations for the size of this year’s corn crops in Argentina and Brazil by 3.1% and 0.9%, respectively. The forecast for Argentina’s soybean production was also reduced by 4.0%.
As economics would dictate, lower supply has increased prices and global grain markets have risen on concern about grain availability. While higher prices may be a boon for grain farmers, they raise operating costs for dairy farmers and other livestock producers that purchase grain to feed their animals.
For months dairy producers across South America have been warning that increased feed prices are squeezing their profitability, and the effect is being borne out by the data as well. According to data provided by OCLA, the Argentine Dairy Chain Observatory, in November the profitability of the average Argentine dairy producer slipped to -1.7%, the lowest value since the data became available in December 2016. Producer organizations in other countries echo this trend.
Saddled with negative profitability, many of the region’s producers may grasp this moment to exit the business, or at least pull back on production, negatively affecting regional output. Furthermore, with beef fetching high prices, these producers may choose to liquidate their herds. Ultimately, these moves could challenge the ability of regional production to recover in the future, once farmer economics improve.
The Virus Among Us
As much as I wish we could, it would be imprudent to discuss what the year might hold without acknowledging that the virus continues to have a major impact on how we live our lives. As cold weather drove folks in the Northern Hemisphere inside and caused a spike in cases late in 2020, the experience in the Southern Hemisphere has been somewhat different.
Even as the number of cases is rising in many parts of the continent, likely accelerated by travel and gatherings over the holiday season, authorities have struggled to successfully implement restrictions. People, fatigued by extended quarantine requirements, seem determined to enjoy summer vacations. Meanwhile, businesses, including restaurants, have successfully lobbied against government officials and have remained open during the summer season.
This experience is likely to be short-lived, however. As happened in other parts of the world, when temperatures drop and options for outdoor entertainment decline, the South American population is likely to be more malleable and accepting of restrictions. The form, and severity, of these restrictions will ultimately determine the impact on the dairy sector.
South America’s dairy industry demonstrated its adeptness in 2020, transitioning from foodservice demand to retail demand. Presumably, it will be at least equally successful the second time around. However, there are broader economic concerns looming in the background that could weigh on consumption overall in the region this year.
Many of South America’s economies were deeply damaged during 2020, particularly those that depend heavily on tourism revenues. Though regional GDP is expected to at least move into positive territory this year, the overarching economic environment is expected to remain difficult. Economic performance, and its commensurate impact on dairy consumption, will undoubtedly be a key influence on regional demand for dairy products this year.
I’m From the Government and I’m Here to Help
Across the globe, 2020 provided a case study on how government assistance programs can influence consumer demand and impact dairy markets. South America was no different. Although they varied in size and scope from country to country, government assistance programs kept dairy products moving across most of the continent during the year.
In several countries, especially Brazil, government cash transfer programs are credited, or blamed depending on your point of view, with dissociating dairy price movements from market fundamentals. Either way, they surely kept dairy purchases at a higher level than would have otherwise been the case.
Looking forward, it is unclear how these government assistance programs will be carried into 2021. While the need is still significant, many regional governments are in a fundamentally different financial position today than they were last year. Most South American governments either ran through their own resources and/or borrowed heavily to finance many of these programs. As such, they are now facing pressure to demonstrate greater austerity and restraint with respect to these aid regimes
Rather than extend the emergency support programs launched last year, most governments are indicating a preference for expanding on longer standing welfare programs. But the situation is likely to be fluid, and authorities may change course based on need or politicking. In any case, the past year has proven that the existence of government assistance programs can levy an important influence on dairy consumption, an effect which will certainly carry into this year.
Taking Stock(s) of the Situation
Perhaps one of the biggest surprises of 2020 was that dairy commodity markets in South America remained relatively tight. Last year, I anticipated that robust milk production growth in Argentina and Uruguay, combined with demand depressed by the pandemic, would lead to warehouses overflowing with dairy products, especially milk powders, which would ultimately push prices downward.
However, a dramatic resurgence in demand from Brazil, as well as other international destinations, has kept significant tension on the markets, despite readily available milk supplies in South America’s key exporters. In Argentina, despite a 7.2% increase in cumulative milk production during the first eleven months of 2020, milk powder inventories at the end of November were 18.6% lower than during the same month prior year. In Uruguay, major manufacturers have indicated that they will not have product available until at least the second quarter of 2021.
The situation is not likely to shift materially in the coming months. Available raw milk supplies will contract seasonally and demand, especially from Brazil, is expected to stay strong amid their own seasonal fluctuations and high domestic spot milk prices.
Tighter than anticipated supplies in Mercosur, buoyed further by surprising strength in the first Global Dairy Trade events of the year, have precipitated stronger than anticipated dairy commodity prices in the region. Presumably, this boost will ultimately feed back into higher producer milk prices, which could help to counteract some of the economic stress caused by increasing producer prices.
For those of us who attempt to analyze markets and make predictions, 2020 was a sobering year. But with the turn of the calendar page, the slate is wiped clean and we can begin focusing on the factors that will influence South America’s dairy industry in 2021.
It is sure to be a challenging year, with producers in the region facing climate and profitability obstacles while broader economic challenges loom in the background. But South America’s dairy industry has proven its resilience, and while it may be a difficult journey, there are certain to be bright spots along the way.
Source: Quarterra News & Views MONICA GANLEY
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