Dairy consumption in Latin America significantly lags other regions of the world with consumer spend half of that in Western Europe and North America. On the surface this presents an interesting growth opportunity for the industry and the convenience and shelf-life of packaged dairy products is incentivising consumers to switch from artisanal formats but barriers remain.
Brazil is Latin America’s largest dairy market, with total retail sales of USD 25 billion but it is a net importer of dairy products. Also, when normalised for consumption per capita Mexico, Uruguay, and Argentina are the largest consumers in the region. Dairy product consumption varies substantially across Latin America: Brazil’s largest segment is drinking milk but in Mexico, Argentina, Chile, and Colombia cheese is the most widespread dairy product.
It follows that the dairy market landscape is complicated, and levels of fragmentation vary by both product and country. For example, industrial cheese production in Mexico is just 25% of the market but in the case of Mexican butter production just one major player commands a 70% market share.
“Argentina and Uruguay both rank in the world’s top 15 countries by net exports of milk.”
Former executive, CONAPROLE, Uruguay
In terms of exports, Argentina and Uruguay are the region’s powerhouses, a former executive of CONAPROLE, Uruguay’s largest milk producer, explained, “Argentina and Uruguay both rank in the world’s top 15 countries by net exports of milk behind New Zealand, US, Australia, and several European countries. Despite this, market conditions are difficult: the macroeconomic environment is bad, costs have increased, and Argentina has implemented price controls which are squeezing thin margins even further. In Uruguay, we’re working hard to increase production efficiency, but New Zealand are way ahead of everyone else.”
An Argentine dairy industry executive shared this view, “Argentina has historically been a leading country in terms of agricultural and livestock production but in recent times the dairy sector has been experiencing severe difficulties. Argentina has severe macroeconomic problems, currency weakness and fragile institutions. For example, the price of fertiliser increased 60% in dollar terms in Q2 2022 alone, as a result of the war in Ukraine, and although it has subsequently declined it remains 2.5x higher than the 3-year average at the end of 2020. When the price of a key imported input increases so much it is easy to understand why the sector is struggling.”
“Argentina has severe macroeconomic problems, currency weakness and fragile institutions.”
Dairy industry executive, Argentina
Climate is another major headwind facing the industry as severe droughts over several years have contributed to higher costs. The Argentine executive explained, “It is not just the recent droughts that are a problem, there have been severe droughts for the past three years due to the effects of La Niña. A lack of rain means we have to look for alternative fodder products, many of which are imported and dollarised, leading to another major problem in Argentina – a shortage of foreign currency.”
Taking a closer look at the market, Argentina and Uruguay’s leading dairy export is powdered milk, which accounts for 50% of Argentina’s dairy exports and 74% of Uruguay’s. The former CONAPROLE executive felt that powdered milk also offered the best growth potential, “Among all dairy products milk powder has the largest growth potential. It is being increasingly used as an input in the food industry, in sport nutrition products, food for animals, etc.. There are some marginal exports of UHT milk, even to far away markets, but milk powder has many advantages from a hygiene and transport perspective. Uruguay’s powdered milk exports grew 23% in 2022, particularly in skimmed milk powder which registered 70% growth.”
This growth isn’t limited to Latin America, the global powdered milk market reached USD 30 billion in 2021 and is forecast to grow to USD 65.3 billion by 2030, driven largely by Chinese consumption. Despite this growing demand, prices are falling after reaching record highs in early 2022: global milk powder prices decreased in the second quarter of the year by 4.4%, registering the third straight decline in what is perceived to be a stabilisation of the market. In Latin America, prices remain well below more developed markets, the 2022 average price for powdered milk in Latin America stood at USD 3,790 per tonne; the US and the EU registered significant higher prices, respectively set at USD 4,891 and USD 4,911.
Despite some apparent opportunities for growth, Latin America’s dairy industry is set for a difficult year as a combination of macroeconomic, climate and inflationary challenges are unlikely to be solved on the short-term.