Grain prices and local thirst absorb threat

Grain prices and local thirst absorb Argentinean threat

The tsunami of Latin American milk powder that the global dairy industry has been anticipating will not flood New Zealand’s key export markets in the short to medium term, Rabobank visiting expert, Osvaldo Cappellini told audiences in Hamilton, Hawera and Timaru late last month.

Mr Cappellini, president of the Centro de la Industria Lechera (CIL), the industry body for Argentina's dairy processors and president of the Global Dairy Alliance, discussed the rise of dairying in Latin America, telling audiences that despite rapid growth over the last ten years several factors would limit Argentina’s growth potential over the short to medium term.

“The dairy industry is developing quickly in many parts of Latin America; production growth has been strong and this has seen countries in this region turn from net importers to net exporters over the last decade, with Argentina and Brazil in particular sending increased volumes onto the global market in recent years,” Mr Cappellini said noting that Argentina had gone from exporting 1.1 million litres of milk or milk equivalents in 1996 to 2.7 million litres in 2006.

The drivers of such rapid growth include the availability of arable land, feed grains and low cost labour in addition to the devaluation of several currencies in the region early in the current decade, which improved cost competitiveness according to Mr Cappellini, who is also the Director of Corporate Affairs at Mastellone Hermanos (MH), Argentina's second largest dairy processor.

“Certainly in the long-term potentially we may compete for the same market at the same time. We are not just exporting in our own back yard anymore,” Mr Cappellini told the audiences.

However, fears that the world faces an imminent surge of dairy exports from the region are likely to prove unfounded, at least in the short term Mr Cappellini said.

“Production growth has slowed for the time being as farmers’ reduce feed rates, and some dairy land is shifted to crop production, in response to rising grain prices. Dairy productivity is highly dependent on grain prices,” Mr Cappellini said.

In addition to these factors, Mr Cappellini noted that the continued rise in domestic consumption is likely to soak up much of any increased production in the short term, which will absorb any threat of significant competition in New Zealand’s key export markets.

And while New Zealand is welcoming a higher payout due to the current high commodity prices, an export tax implemented by the Argentinean government attempts to ensure domestic milk prices are not lifted as a result of high export prices causing inflationary pressure.

According to Senior Rabobank analyst Hayley Moynihan, the combination of increasing grain production, domestic consumption, slowing production and government intervention will limit Argentina’s ability to significantly lift its presence in New Zealand’s key export markets in the short to medium term.

However Ms Moynihan said that despite the lack of immediate threat, developments in Latin America will be highly relevant to the New Zealand dairy industry in coming years

“The extent to which growth in Argentina and Brazil in particular sees surplus production spilling onto the global market will impact the demand for New Zealand dairy products and ultimately commodity price levels. That in turn will have an influence on farm gate prices and the growth prospects of our industry.”

“The picture of modest export growth Mr Cappellini has painted is reassuring for New Zealand. However, longer term growth in Latin America is still likely to force our industry to focus on higher value added products to avoid head to head competition with these players where they do export,” Ms Moynihan said.

Mr Cappellini was in New Zealand as part of Rabobank’s Visiting Experts Program, which aims to bring some of the world’s leading food and agribusiness specialists to New Zealand to share their knowledge with communities in rural and regional locations across the country.

Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and is ranked one of the world’s safest banks by Global Finance magazine. Rabobank operates in 38 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank New Zealand is one of the leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

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