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Will halting importations increase milk prices paid to producers?

The recent decision of the Brazilian Ministry of Agriculture, Livestock and Supply (Mapa) to suspend importations of dairy products from Uruguay temporarily has raised expectations of improvements for the market, mainly regarding the milk price recovery in the field. However, will this halt buck the downward trend observed since June this year and push up milk quotes paid to producers? The answer to this question implies causes and effects that are not direct, leading a more complex question than “yes” or “no”. Therefore, it is necessary to bring some data to the discussion.

 

Brazil is the world’s fifth largest milk producer, according to the USDA; still, it is traditionally an importer of dairy products, mainly milk powder. From September 2013 to September 2017, the trade balance was 1.26 billion USD negative. While importation shares of milk powder from Argentina are limited to 3.6 thousand tons per month, the same is not observed for Uruguay. Since 2015, milk powder purchases from Uruguay have been increasing and the country became the major supplier to Brazil, surpassing the former leader, Argentina. From January to September 2017, roughly 86.5 thousand tons of milk powder were imported, approximately 54.7% from Uruguay and 36.9%, from Argentina. However, this volume is 30.5% smaller compared to what had been registered in the same period of 2016, as consumption decreased in the domestic market. Therefore, the share of importations of dairy products on the total that Brazil offers in 2017 may be smaller than the 5% in 2016.

 

The weak demand for dairy products is the main factor that has been affecting prices of milk and dairy products. Due to the decrease of purchasing power because of economic downturn, the Brazilian consumer has purchased less essential items to their diet, mostly dairy products (considered higher goods with elastic demand). In addition, production has increased this year, also dropping prices. According to the ICAP-L/Cepea, the monthly production in Goiás, Bahia, Minas Gerais, São Paulo, Paraná, Santa Catarina and Rio Grande do Sul States rose 5.6% from January to August. On average, ICAP-L is 7.1% higher than in the same period last year. Greater milk purchases this year are attributed to more favorable weather conditions and higher access of milk producers to the animal feed, because of grains price decreases.

 

Milk price volatility reinforces an aspect of the dairy production chain: domestic market – differently from other proteins, such as meat and eggs, which use the international market as a “sponge” to drain supply excess and balance values in the domestic market.

 

A Cepea study, still undergoing, uses econometrical models to show that price formation in the domestic market is not directly influenced by external purchases. Therefore, suspending importations from Uruguay might not push up milk prices in the short-term. However, the action taken by the Ministry continues important, as it shows that pressure of the sector was efficient to bring into discussion issues of milk prices and milk chain. Brazilian importations of dairy products might not affect directly prices; however, they affect the chain dynamics, which needs to be discussed.

 

Milk powder importations highlight a bigger problem: Brazilian dairy products are not as competitive as the imported ones in terms of quality and price. High production costs, low productivity, technical assistance difficulties, access credit limitations, lack of investments, inefficient management of farms and dairy companies, logistic difficulties, low valorization of high-quality milk, low encouragement for dairy consumption and lack of public policies for the sector are issues that need discussing. Suspending importations of dairy products does not resolve these questions. Besides, it has critical results involving politics and diplomacy. The sector needs planning for actions in private and public sectors to converge to strengthen the relationships between players of the sector. Only then will the “milk crisis” be solved, turning Brazil from an importer to an exporter of dairy products.

 

 

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