Turbulent times for Argentina's dairy exporters?

As February ends, dairy markets are flat and there remains considerable uncertainty – these are major questions: for example, the last New Zealand drought from February 2013 to July 2013 caused a decline in milk production that year compared to the previous year by 400,000 metric tons (mt).

Climatic impact

However, we should spare a thought for dairy exporters in Argentina, perhaps! Firstly, it was the only significant milk producer to experience a contraction in output during 2014. The climate played a definite part here, with periodic droughts and then spasmodic heavy rains during Q4. This situation has now improved, but of course local production now falls until May and stabilises into July before rising towards the year-end.

Russian trade

The Russian import ban has had some positive impact. The country's cheese exports to Russia, which had tracked at less than 8,000 mt/yr in the preceding three years, increased last year to over 19,000 mt. However, the fall in sales into Brazil was of broadly similar proportions, while overall cheese exports were up year-on-year, but less than in 2011.

Whole milk powder (WMP) exports to Russia rose strongly but were still less than 4,000 mt. Trade sources indicate that it has proven hard in practice to develop this trade, with currency devaluations and the general state of the Russian economy meaning lower prices and difficulties in securing credit lines to Russia from Latin America making the opportunity less important than hoped for.

Restrictive government policy

The biggest obstacle facing the Argentine industry has not been falling world demand but government policy, with the effective blocking of exports of WMP to most destinations except Venezuela and Brazil. It’s been at it again in February, refusing export licenses to companies such as Williner, Saputo and Veronica after they had gone ahead with price cuts to producers in January. 

Meanwhile it has resisted devaluation, making it harder to export, and fuelled inflation through its spending (in election year, by complete coincidence). I read recently that Argentina’s 2014 inflation rate is bound to be far higher than the 10.9% INDEC announced for last year, and could be as high as 38.5%.

A concern must be that Venezuela's purchasing power is now under huge pressure given the lower oil prices that are prevailing. For example, in December, Sancor exported 4,000 mt of WMP to Venezuela, not too far down on the 4,536 mt is achieved back in January. But how long can this market continue to pay?