30 November 2008

6 minute read

Report Highlights:

Despite of these exports, the financial crisis and peso devaluation will flatten retail and processing disappearance in the next 6-12 months. Higher worldwide milk prices will allow Mexico’s imports of non-fat dry milk, cheese, and butter to increase at marginal rates in the short and the medium terms as opposed to the high growth rates of the past 10 years.

LICONSA, a parastatal dairy enterprise, has increased utilization of domestic fluid milk significantly in order to support the domestic dairy sector. In CY 2008, LICONSA expects to use 600 million liters of domestically produced milk, 62 percent more than in 2007.

Situation and Outlook

After a moderate increases in 2007, U.S. exports of non-fat dry milk to Mexico for CY 2008 are surging past last year’s numbers. In addition to milk powder, Mexico has imported more U.S. dairy blends, lactose, and whey powder. In fact, U.S. lactose exports to Mexico from January to July 2008 are up by nearly 40 percent relative to the same period in 2007.

Following full implementation of NAFTA this year, the Mexican dairy sector is now operating within a fully liberated North American market. With increasing demand for dairy and dairy products, the Mexican Government has opened third country TRQ’s . Although the full NAFTA implementation occurred smoothly and with relatively few complaints from the domestic industry, higher international prices, financial and political pressures have force LICONSA to buy more domestic fluid milk. Consequently, the use of imported NFDM within LICONSA’s programs continues to decline.

Moreover, the worldwide financial crisis and the peso devaluation will flatten retail and processing disappearance in the next 6–8 months. The devaluation of the peso will dampen the importation of U.S dairy products. In comparison, the peso has not fallen as rapidly relative to the euro, and thus, U.S. dairy products will face stiffer competition from European dairy products.

Supply, Demand, Policy & Marketing

The Mexican Dairy Sector

The Mexican dairy industry comprises 310 companies employing over 72 thousand people and generates nearly 363 thousand indirect employment opportunities. Since 2000, the dairy processors have expanded production by 40 percent; however, fresh milk production grew by 10 percent. In 2006, total fluid milk production in Mexico represented 21 percent of total livestock output, higher than pork and egg production.

Seventy percent of domestic producers are fully integrated and are located in Jalisco, the Lagunera region (Coahuila and Durango area), Chihuahua, Queretaro and Aguascalientes states, and are responsive to international market forces.

Growth in milk production is greater than population growth; however, it is not sufficient to supply both the industry and the consumer demand for dairy products. Thus, it is necessary to import approximately 24 percent of dairy products and 76 percent of raw materials (milk).

The major milk importer in Mexico is LICONSA, a government enterprise, which distributes subsidized milk to low income consumers, at the current price of 4.00 pesos per liter. LICONSA sources products both domestically and internationally. The primary imported product of LICONSA is non-fat dry milk (NFDM).

Fluid Milk

Production

The total number of dairy cows will remain essentially unchanged for 2008 and 2009; however, the production of milk will continue to grow steadily. Fluid milk production for 2009 is forecast to increase 2 percent, reaching just over 11 thousand metric tons. This slight increase is more than the 1.5 percent for 2008; which was due to higher input cost of grains and transport costs incurred by producers. Despite these efforts to be more productive, Mexico’s consumption continues to outpace production. Factors such as competitively priced imported milk, financial crisis, peso devaluation, inadequate sanitation, lack of genetics, cold storage and refrigeration infrastructure are limiting and will limit efforts to increase milk production not only with smaller producers, but also the small and medium sized dairies. Even, more sophisticated producers have continued to make modest productivity gains through improved genetics and herd management practices however; they will face financial difficulties for the rest of 2008 and 2009.

The 2007 fluid milk production has been revised higher in this report reflecting higher productivity resulting from technological improvements which begun in 2006 and continued for 2007.

In CY 2009 fluid milk consumption is expected to increase slightly (2%) relative to CY 2008. Direct consumer consumption of fluid milk is expected to remain basically even with CY 2008 (.5% more), while processing use is expected to increase by three percent.

Mexico’s dairy processors continue to supply a variety of quality dairy products to consumers. Growth in demand in the medium term is heavily dependent on consumer income, which may be negatively affected by the global financial crisis.

As previously reported, LICONSA was attempting to decrease its dependence on NFDM imports, in order to support domestic dairy producers. In CY 2008, LICONSA is estimated to have purchased 600 million liters of domestically produced milk (62% more than 2007), of which 500 million liters was purchased at 4.00 pesos, plus a quality incentive, per liter. The remaining amount will be purchased at 4.00 pesos per liter plus a quality incentive, plus an additional 30 cent paid by SAGARPA. This level of market intervention demonstrates the Mexican government’s commitment to purchasing locally prior to importing.

LICONSA announced the 2009 sales price of milk will be maintained at 4 pesos per liter for low-income consumers.

Consumption of fresh fluid milk continues to be hampered by problems with sanitation, transportation, and processing capacity, but supplies and quality are improving.

Three years ago New Zealand and Australia were the leading exporters of dairy cattle to Mexico. In CY 2007, New Zealand exported 18,735 head of replacement heifers (42% of Mexican total cow imports) and Australia exported 17,974 head (41%) to Mexico, The United States only exported 7,645 head (17%). However, this import structure has reversed with the removal of the bovine spongiform encephalopathy (BSE) import ban of live animals. Through July 2008, U.S. exports of live dairy cattle to Mexico have reached 12,961 head (170% more than in 2007), while Australia has exported 13,550 head (75% of its export in 2007) and New Zealand has exported 11,151 (60% of its exports in 2007).

Mexico continues to be an attractive market for U.S. dry milk exports. While Mexican milk production is increasing at an average of 1.5 percent every year, the food processing sector requires an increase of at least 3 percent every year.

Fluid milk imports for CY 2009 are forecast to increase 5 percent with respect to the revised CY 2008 estimate because of a higher imported price as a result of the devaluated peso. In the current year it is expected that fluid milk trade will increase 7.5 percent with respect to 2007. This growth in imports is primarily attributable to increased supply within border cities following full NAFTA implementation. The CY 2007 fluid milk import number was revised and reflects official Secretaria de Agricultura Ganaderia, Desarrollo Rural, Pesca y Alimentacion (SAGARPA) data.

The import of dry milk could be more attractive to the industry because of a reduction in the world dry milk price; because the current local fluid milk price in Mexico is 4.50 pesos per ton compared to the world dry milk price of 3.80 pesos per ton. However, in order to make a meaningful comparison to the local price it is necessary to add transportation costs to the world dry milk price.

Further Reading

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December 2008