Required Report - public distribution

**Date:** 01/11/2006

**GAIN Report Number:** MX6092

MX6092

**Mexico**

Dairy and Products

**Dairy Annual**

2006

**Approved by:**

![](media/image1.wmf)Suzanne E. Heinen

#### U.S. Embassy Mexico City

**Prepared by:**

Sal Trejo/Richard Battaglia

**Report Highlights:**

Fluid milk production is expected to continue rising in 2007, along with
other dairy products such as cheese and butter. Mexico's parastatal
LICONSA is expected to expand its utilization of domestic fluid milk in
2007 to augment its feeding programs, which could displace milk powder
use. Imports of U.S. dairy cattle are expected to resume in October
2006, ending the ban Mexico imposed in 2003 due to BSE.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Mexico \[MX1\]

\[MX\]

# Table of Contents

# 

# SECTION I. SITUATION AND OUTLOOK \...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.... 3

# 

# SECTION II. STATISTICAL TABLES \...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\..... 4

# 

# PS&D Dairy Milk, Fluid \...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.... 4

PS&D Dairy, Cheese
\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
5

# PS&D Dairy, Butter \...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\..... 6

# PS&D Dairy, Milk Nonfat Dry \...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.... 7

PRODUCTION OF FLUID MILK BY STATE
\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
8

MEXICO'S MONTHLY FLUID MILK PRODUCTION
\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\... 9

AVERAGE MILK PRICES PAID TO PRODUCERS BY STATE
\...\...\...\...\...\...\...\...\...\...\...\...\... 10

SECTION III. NARRATIVE ON SUPPLY, DEMAND, POLICY & MARKETING\...\.... 11

Fluid Milk

Production\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...
11

Consumption\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....
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Trade\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
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Policy\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
\...\...\...\...\... 12

Marketing\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....
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Cheese

Production\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
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Consumption\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...
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Trade\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....
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Policy\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
\...\...\...\...\... 12

Marketing\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....
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Butter

Production\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...
13

Consumption\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....
13

Trade\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
13

Policy\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
\...\...\...\...\... 13

Marketing\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....
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Non-Fat Dry Milk (NFDM) and Whole Milk Powder (WMP)

Production\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
13

Consumption\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...
14

Stocks\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...
14

Trade\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
14

Policy\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
\...\...\...\...\... 14

Marketing\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....
15

Dried Whey

Production\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
15

Consumption and
Trade\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
15

**POLICY\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....
\...\...\...\...\...\...\...\...\...\...\...\...\...\... 15**

**MARKETING
\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
15**

**Related FAS/Mexico Reports
\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
17**

**SECTION I. SITUATION AND OUTLOOK**

**Dairy Situation and Outlook:** Mexico's fluid milk production
continues to grow modestly and is expected to increase to 10.26 MMT in
2007. The production estimate for 2006 has been revised higher
reflecting the use of improved feeds. However, if feed grain prices
continue to rise, milk quality will suffer as producers reformulate
their feeding supplies with lower priced forages, grasses and lower
quality grains, possibly resulting in lower prices received for their
milk. Leche Industrializada CONASUPO (LICONSA), Mexico's parastatal
company charged with distributing milk to the poor, continues to
increase its utilization of domestically produced fluid milk buying at a
government mandated price of 3.84 pesos per liter (\$0.35 U.S.). Imports
of non-fat dry milk powder (NFDM) are forecast at 170,000 MT in 2007,
slightly lower from the unchanged figure in 2006. Cheese production is
forecast to increase slightly in 2007, and industry's emphasis on
producing more fluid milk domestically is expected to lead to higher
domestic cheese production in 2006. Cheese production for 2005 reflects
official data. Imports of cheese are forecast modestly higher in 2007.
Cheese imports for 2005 are revised upward reflecting official data.

In continuation of Mexico\'s retaliatory actions in response to the WTO
ruling on the Byrd amendment, Mexico announced it will temporarily apply
a duty rate of 110 percent on imports of preparations made from milk
products with a milk solids content in excess of 50 percent by weight,
outlined in tariff code 1901.90.05. This ruling is in effect from
September 14, 2006 to October 31, 2006. (See MX6078).

Dairy cattle imports to Mexico from the United States are expected to
resume in 2006 following conclusion of an agreement that ends the ban
Mexico imposed in 2003, following the detection of a single case of BSE
in Washington State. Mexico has not imported dairy cattle from the
United States since December 24, 2003.

Note: Currently, the Mexican peso is valued at US\$11.09.

**SECTION II. STATISTICAL TABLES**

**PS&D Dairy, Milk, Fluid**

  --------------------- ------------ ------- --------- ------- --------- --------
  **PSD Table**                                                          

  **Country:**          **Mexico**                                       

  **Commodity:**        **Dairy,                                         
                        Milk,                                            
                        Fluid**                                          
                        (1000 Metric                                     
                        Tons)                                            

                        2005                 2006              2007      

                        Old          New     Old       New     Old       New

  Calendar Year Begin   01/2005              01/2006           01/2007   

  Cows In Milk          6850         6850    6875      6875              6885

  Cows Milk Production  9855         9855    9976      9998              10100

  Other Milk Production 161          161     161       163               165

  TOTAL Production      10016        10016   10137     10161             10265

  Intra EC Imports      0            0       0         0                 0

  Other Imports         70           77      70        70                70

  TOTAL Imports         70           77      70        70                70

  **TOTAL SUPPLY**      10086        10093   10207     10231             10335

  Intra EC Exports      0            0       0         0                 0

  Other Exports         0            0       0         0                 0

  TOTAL Exports         0            0       0         0                 0

  Fluid Use Dom.        4266         4266    4295      4305              4344
  Consum.                                                                

  Factory Use Consum.   5820         5827    5912      5926              5991

  Feed Use Dom. Consum. 0            0       0         0                 0

  TOTAL Dom.            10086        10093   10207     10231             10335
  Consumption                                                            

  **TOTAL               10086        10093   10207     10231             10335
  DISTRIBUTION**                                                         
  --------------------- ------------ ------- --------- ------- --------- --------

PS&D Dairy, Cheese

  --------------------- ------------ ------- --------- ------- --------- --------
  **PSD Table**                                                          

  **Country:**          **Mexico**                                       

  **Commodity:**        **Dairy,                                         
                        Cheese**                                         
                        (1000 Metric                                     
                        Tons)                                            

                        2005                 2006              2007      

                        Old          New     Old       New     Old       New

  Calendar Year Begin   01/2005              01/2006           01/2007   

  Beginning Stocks      0            0       0         0                 0

  Production            136          143     138       145               147

  Intra EC Imports      0            0       0         0                 0

  Other Imports         85           89      86        86                88

  TOTAL Imports         85           89      86        86                88

  **TOTAL SUPPLY**      221          232     224       231               235

  Intra EC Exports      0            0       0         0                 0

  Other Exports         2            2       2         2                 2

  TOTAL Exports         2            2       2         2                 2

  Human Dom.            219          230     222       229               233
  Consumption                                                            

  Other Use, Losses     0            0       0         0                 0

  Total Dom.            219          230     222       229               233
  Consumption                                                            

  TOTAL Use             221          232     224       231               235

  Ending Stocks         0            0       0         0                 0

  **TOTAL               221          232     224       231               235
  DISTRIBUTION**                                                         
  --------------------- ------------ ------- --------- ------- --------- --------

PS&D Dairy, Butter

  --------------------- ------------ ------- --------- ------- --------- --------
  **PSD Table**                                                          

  **Country:**          **Mexico**                                       

  **Commodity:**        **Dairy,                                         
                        Butter**                                         
                        (1000 Metric                                     
                        Tons)                                            

                        2005                 2006              2007      

                        Old          New     Old       New     Old       New

  Calendar Year Begin   01/2005              01/2006           01/2007   

  Beginning Stocks      0            0       0         0                 0

  Production            89           93      92        92                93

  Intra EC Imports      0            0       0         0                 0

  Other Imports         55           51      55        55                55

  TOTAL Imports         55           51      55        55                55

  **TOTAL SUPPLY**      144          144     147       147               148

  Intra EC Exports      0            0       0         0                 0

  Other Exports         0            0       0         0                 0

  TOTAL Exports         0            0       0         0                 0

  Domestic Consumption  144          144     147       147               148

  TOTAL Use             144          144     147       147               148

  Ending Stocks         0            0       0         0                 0

  **TOTAL               144          144     147       147               148
  DISTRIBUTION**                                                         
  --------------------- ------------ ------- --------- ------- --------- --------

**PS&D Dairy, Milk, Nonfat Dry**

  --------------------- ------------ -------- --------- ------- --------- --------
  **PSD Table**                                                           

  **Country:**          **Mexico**                                        

  **Commodity:**        **Dairy,                                          
                        Milk, Nonfat                                      
                        Dry** (1000                                       
                        Metric Tons)                                      

                        2005                  2006              2007      

                        Old          New      Old       New     Old       New

  Calendar Year Begin   01/2005               01/2006           01/2007   

  Beginning Stocks      25           25       25        25                25

  Production            172          166      175       170               170

  Intra EC Imports      0            0        0         0                 0

  Other Imports         170          183      172       172               170

  TOTAL Imports         170          183      172       172               170

  **TOTAL SUPPLY**      367          374      372       367               365

  Intra EC Exports      0            0        0         0                 0

  Other Exports         0            0        0         0                 0

  TOTAL Exports         0            0        0         0                 0

  Human Dom.            342          349      347       342               340
  Consumption                                                             

  Other Use, Losses     0            0        0         0                 0

  Total Dom.            342          349      347       342               340
  Consumption                                                             

  TOTAL Use             342          349      347       342               340

  Ending Stocks         25           25       25        25                25

  **TOTAL               367          374      372       367               365
  DISTRIBUTION**                                                          
  --------------------- ------------ -------- --------- ------- --------- --------

NOTE: Mexico does not separate official statistics on production and
consumption of powdered milk (NFDM and WMP). Post estimates for milk
powder production NFDM and WMP are based on interviews with industry
associations, government and LICONSA. The above production, import and
consumption figures include both WMP and NFDM as production and
consumption figures for WMP and NFDM are not regularly separated or
registered separately.

# PRODUCTION OF FLUID MILK BY STATE

(000 LITERS)

  -------------------- ------------ ----------- ----------- --------------
  STATES               2004         2005        2006        \% Change
                                                            05/06

  AGUASCALIENTES       402,541      367,967     390,119     6.0

  BAJA CALIFORNIA      208,752      180,153     183,215     2.0

  BAJA CALIFORNIA SUR  42,982       42,551      43,494      2.0

  CAMPECHE             33,270       33,726      35,672      6.0

  COAHUILA             1,087,526    1,178,897   1,228,394   4.0

  COLIMA               34,384       34,559      34,420      0.0

  CHIAPAS              300,050      299,830     324,826     8.0

  CHIHUAHUA            784,031      802,116     785,316     (2.0)

  MEXICO CITY          13,039       12,955      13,722      6.0

  DURANGO              958,776      950,576     992,834     4.0

  GUANAJUATO           664,786      649,432     648,027     0.0

  GUERRERO             78,036       79,692      75,498      (6.0)

  HIDALGO              411,105      413,567     419,065     1.0

  JALISCO              1,701,291    1,711,221   1,712,462   0.0

  MEXICO               490,145      481,779     464,835     (4.0)

  MICHOACAN            312,874      323,231     321,121     (1.0)

  MORELOS              17,798       18,126      18,218      1.0

  NAYARIT              67,438       65,423      65,088      (1.0)

  NUEVO LEON           41,441       38,280      38,586      1.0

  OAXACA               143,180      140,149     144,325     3.0

  PUEBLA               364,452      369,398     365,669     (1.0)

  QUERETARO            209,328      210,942     215,813     2.0

  QUINTANA ROO         4,590        5,250       5,331       2.0

  SAN LUIS POTOSI      144,523      142,686     144,312     1.0

  SINALOA              77,243       83,388      85,183      2.0

  SONORA               136,375      149,853     143,441     (4.0)

  TABASCO              99,432       106,936     116,784     9.0

  TAMAULIPAS           30,015       29,985      33,942      13.0

  TLAXCALA             141,560      96,434      102,318     6.0

  VERACRUZ             719,360      677,888     682,753     1.0

  YUCATAN              7,749        6,788       6,753       (1.0)

  ZACATECAS            145,684      151,028     156,601     4.0

  TOTAL                9,873,755    9,854,805   9,998,138   1.0
  -------------------- ------------ ----------- ----------- --------------

SOURCE: Agriculture Secretariat (SAGARPA)

## MEXICO'S MONTHLY FLUID MILK PRODUCTION

(000 LITERS)

+------------------------+----------+----------+----------+----------+
| MONTH                  | 2004     | 2005     | 2006     | \%       |
|                        |          |          |          | Change   |
|                        |          |          |          |          |
|                        |          |          |          | 05/06    |
+------------------------+----------+----------+----------+----------+
| JANUARY                | 746,674  | 757,432  | 773,554  | 2.0      |
+------------------------+----------+----------+----------+----------+
| FEBRUARY               | 747,800  | 744,403  | 763,769  | 3.0      |
+------------------------+----------+----------+----------+----------+
| MARCH                  | 765,109  | 764,056  | 772,372  | 1.0      |
+------------------------+----------+----------+----------+----------+
| APRIL                  | 763,177  | 773,643  | 788,637  | 2.0      |
+------------------------+----------+----------+----------+----------+
| MAY                    | 800,716  | 793,726  | 802,565  | 1.0      |
+------------------------+----------+----------+----------+----------+
| JUNE                   | 807,373  | 822,665  | 820,644  | 0.0      |
+------------------------+----------+----------+----------+----------+
| JULY                   | 858,744  | 877,445  | 891,210  | 2.0      |
+------------------------+----------+----------+----------+----------+
| AUGUST                 | 919,976  | 896,477  | N/A      | N/A      |
+------------------------+----------+----------+----------+----------+
| SEPTEMBER              | 932,720  | 903,357  | N/A      | N/A      |
+------------------------+----------+----------+----------+----------+
| OCTOBER                | 864,940  | 879,657  | N/A      | N/A      |
+------------------------+----------+----------+----------+----------+
| NOVEMBER               | 839,771  | 841,014  | N/A      | N/A      |
+------------------------+----------+----------+----------+----------+
| DECEMBER               | 826,755  | 800,928  | N/A      | N/A      |
+------------------------+----------+----------+----------+----------+
| TOTAL                  | 9        | 9        | N/A      | N/A      |
|                        | ,873,755 | ,854,805 |          |          |
+------------------------+----------+----------+----------+----------+

SOURCE: Agriculture Secretariat (SAGARPA)

## AVERAGE MILK PRICES PAID TO PRODUCERS IN MEXICO BY STATE

(PESOS PER LT.)

+---------------------+-------------+-------------+------------------+
| STATE               | 2004        | 2005        | VAR. %           |
|                     |             |             |                  |
|                     |             |             | 04/05            |
+---------------------+-------------+-------------+------------------+
| AGUASCALIENTES      | 3.11        | 3.67        | 18.0             |
+---------------------+-------------+-------------+------------------+
| BAJA CALIFORNIA     | 4.28        | 4.73        | 11.0             |
+---------------------+-------------+-------------+------------------+
| BAJA CALIFORNIA SUR | 4.17        | 6.15        | 47.0             |
+---------------------+-------------+-------------+------------------+
| CAMPECHE            | 4.00        | 4.50        | 13.0             |
+---------------------+-------------+-------------+------------------+
| COAHUILA            | 3.15        | 3.67        | 17.0             |
+---------------------+-------------+-------------+------------------+
| COLIMA              | 3.61        | 5.35        | 48.0             |
+---------------------+-------------+-------------+------------------+
| CHIAPAS             | 3.51        | 3.15        | (11.0)           |
+---------------------+-------------+-------------+------------------+
| CHIHUAHUA           | 4.85        | 4.11        | (18.0)           |
+---------------------+-------------+-------------+------------------+
| MEXICO CITY         | 5.37        | 6.05        | 13.0             |
+---------------------+-------------+-------------+------------------+
| DURANGO             | 3.71        | 3.80        | 2.0              |
+---------------------+-------------+-------------+------------------+
| GUANAJUATO          | 3.18        | 4.03        | 27.0             |
+---------------------+-------------+-------------+------------------+
| GUERRERO            | 5.26        | 5.83        | 11.0             |
+---------------------+-------------+-------------+------------------+
| HIDALGO             | 3.31        | 3.57        | 8.0              |
+---------------------+-------------+-------------+------------------+
| JALISCO             | 3.21        | 3.38        | 5.0              |
+---------------------+-------------+-------------+------------------+
| MEXICO              | 3.48        | 3.57        | 3.0              |
+---------------------+-------------+-------------+------------------+
| MICHOACAN           | 3.82        | 3.97        | 4.0              |
+---------------------+-------------+-------------+------------------+
| MORELOS             | 4.67        | 4.65        | 0                |
+---------------------+-------------+-------------+------------------+
| NAYARIT             | 3.49        | 3.49        | 0                |
+---------------------+-------------+-------------+------------------+
| NUEVO LEON          | 3.55        | 3.65        | 3.0              |
+---------------------+-------------+-------------+------------------+
| OAXACA              | 5.57        | 5.83        | 5.0              |
+---------------------+-------------+-------------+------------------+
| PUEBLA              | 3.47        | 3.57        | 3.0              |
+---------------------+-------------+-------------+------------------+
| QUERETARO           | 3.53        | 3.69        | 5.0              |
+---------------------+-------------+-------------+------------------+
| QUINTANA ROO        | 3.69        | 3.68        | 0                |
+---------------------+-------------+-------------+------------------+
| SAN LUIS POTOSI     | 3.35        | 3.63        | 8.0              |
+---------------------+-------------+-------------+------------------+
| SINALOA             | 3.42        | 3.42        | 0                |
+---------------------+-------------+-------------+------------------+
| SONORA              | 3.95        | 3.98        | 1.0              |
+---------------------+-------------+-------------+------------------+
| TABASCO             | 3.40        | 3.44        | 1.0              |
+---------------------+-------------+-------------+------------------+
| TAMAULIPAS          | 4.19        | 4.52        | 8.0              |
+---------------------+-------------+-------------+------------------+
| TLAXCALA            | 3.54        | 3.75        | 6.0              |
+---------------------+-------------+-------------+------------------+
| VERACRUZ            | 3.32        | 3.51        | 6.0              |
+---------------------+-------------+-------------+------------------+
| YUCATAN             | 4.40        | 4.64        | 5.0              |
+---------------------+-------------+-------------+------------------+
| ZACATECAS           | 3.62        | 3.75        | 4.0              |
+---------------------+-------------+-------------+------------------+
| AVERAGE PRICE       | 3.50        | 3.76        | 7.0              |
+---------------------+-------------+-------------+------------------+

SOURCE: Agriculture Secretariat (SAGARPA)

#### SECTION III. NARRATIVE ON SUPPLY, DEMAND, POLICY & MARKETING

**Fluid Milk**

**Production**

Fluid milk production in Mexico continues to grow steadily and is
forecast at 10.26 MMT in 2007. Continued improvements in herd management
techniques among Mexico's larger dairies, increased demand from
processors and from LICONSA to meet the needs of the government's social
programs, along with improved prices paid to domestic producers, will
likely support higher production in 2007. Despite increasing
modernization among larger dairies, a number of factors continue to
plague small and medium producers such as poor sanitation and genetics,
inadequate cold storage and refrigeration facilities, lack of affordable
financing, and poor infrastructure in more remote areas. Higher
production estimates for 2006 and 2007 reflect changes in feeding
patterns as farmers are being paid more for their milk thus allowing
them to shift to better quality feeds. The fluid milk production
estimate for 2005 reflects official data.

#### Consumption

Mexico's total fluid milk consumption for 2007 is forecast at 10.26 MMT,
as dairy processors increase usage and LICONSA expands its use of
domestic fluid milk to augment its use of reconstituted milk powder in
its social programs. It is estimated that LICONSA distributes almost
3.15 million liters of subsidized milk per day at the current price of
3.50 pesos per liter (US\$0.32) to Mexico's poor who depend on the
government social program for low-priced milk. For 2006 and 2007,
LICONSA expects to increase utilization of domestic fluid milk, which
could impact milk powder imports. In 2005, LICONSA is estimated to have
purchased 278 million liters of domestically produced raw fluid milk
from small and medium producers. For 2006 LICONSA expects to purchase
420 million liters of domestically produced raw fluid milk.

Due to higher production of fluid milk in the first half of 2006,
LICONSA is increasing purchases and expanding distribution of fluid
milk, contributing to the expected overall increase in fluid milk
consumption for 2006. Consumer prices in Mexico are currently 8.36 pesos
per liter for pasteurized milk (US\$0.75) and 9.19 per liter of UHT milk
(US\$0.83). More widespread consumption of fluid milk continues to be
hampered by problems with sanitation, transportation, and processing
capacity, although supplies and quality are improving. Total consumption
in 2005 reflects official data.

## 

LICONSA serves as an important alternate buyer for many smaller and more
remote producers who are not members of cooperatives or are located far
from milk processors. While LICONSA currently pays producers a
government mandated price similar to, or above the market price,
discounts are applied for lower quality milk and for excessive distances
from the farmers location to LICONSA's collection centers that the
vehicles have to travel to pick-up the milk. Producers are under weekly
or monthly supply contracts. (see Policy section below)

**Trade**

Fluid milk imports for 2007 are expected to remain relatively unchanged
given that utilization of domestically produced fluid milk will likely
continue to grow at the expense of imports. However, retailers in many
of Mexico's border states continue to source fluid milk from the United
States for logistical reasons and to compensate for domestic supplies
that are being bid away by LICONSA and processors in the interior of
Mexico.

Following the detection of BSE in the United States in 2003, Mexico
banned imports of U.S. dairy cattle. As a result, Mexico diversified its
sources of dairy cattle, looking to suppliers in New Zealand and
Australia. Mexico ended the ban on U.S. dairy cattle in October 2006,
and trade is expected to quickly resume, with the first shipments
expected by late October or early November. In 2005, Mexico imported
23,895 head of dairy cattle from New Zealand and 12,823 head from
Australia. Through June 2006, Mexico has imported 25,084 head from New
Zealand and 8,115 head from Australia.

**Policy**

The main objective of the Mexican government's dairy policies is to
encourage milk producers to improve efficiency and productivity levels.
The expected unchanged level of imports of fluid milk from the previous
year, particularly into northern Mexico, is much the result of increased
domestic fluid milk production. Shipments to Mexican border-states have
also been affected by local governments' response to pressure from
Mexico's domestic producers to discourage imports of U.S. retail-pack
milk.

In 2005, LICONSA purchased approximately 278 million liters of fluid
milk as part of Mexico's program to purchase and distribute domestic
milk. For 2006, LICONSA is expected to purchase approximately 420
million liters. Mexico's Federal Income Law (Ley de Ingresos de la
Federacion para el Ejercicio) authorizes Congress to mandate the price
LICONSA pays domestic producers for fluid milk in a given fiscal year.
As a result of increased pressure from Mexico's small and medium
producers, who complained of oversupplies and limited market outlets for
their milk, the Chamber of Deputies (Camara de Diputados) mandated that
LICONSA pay a maximum of 3.84 pesos (\$0.35 U.S.) per liter in 2006.
This price represents a maximum, and LICONSA may pay less depending on
the quality of the milk and distance from the collection center. In
2005, prices paid by LICONSA ranged from 3.20 to 3.60 pesos per liter
(\$0.29 to \$0.32).

**Marketing**

See dairy products marketing section at the end of this report.

#### CHEESE

#### Production

Cheese production for CY 2007 is forecast to increase slightly from the
previous year's revised estimate due to continued growth in fluid milk
production and strong demand. Cheese output for 2005 reflects official
data.

#### Consumption

The 2007 cheese consumption forecast shows a slight increase from the
previous year's revised estimate as a result of the improved purchasing
power of the general population and increasing demand from the fast-food
industry, institutional users, and specialty cheese consumers. The
cheese consumption estimate for 2006 is revised upward reflecting more
recent data from the National Dairy Association and government sources.
For 2005, the estimate is revised upward reflecting official data.

**Trade**

The cheese import forecast for 2007 is forecast slightly higher
reflecting continued demand for cheeses not manufactured in Mexico,
which are utilized by fast food restaurants, institutional users and
specialty cheese consumers. The 2006 import estimate remains unchanged
from the previous figure reflecting current data from the National Dairy
Association and government sources. For 2005, imports reflect official
data.

#### Policy

See dairy products policy section at the end of this report.

#### Marketing

See dairy products marketing section at the end of this report.

#### BUTTER

**Production**

All Mexican statistics on butter and butterfat production are combined.
Butter and butterfat production for CY 2007 is forecast slightly upward
from the previous year's estimate owing to steady demand from Mexico's
bakery and confectionary industry. The 2005, butter production estimate
reflects official data.

#### Consumption

Butter consumption for 2007 is forecast slightly upward from the
previous year's figure due to the expected increase in usage from the
bakery and confectionary industry and from the population in general.
Consumption figures for butter and butter fat for 2006 and 2005 remain
unchanged from the previous estimate reflecting current information from
the National Dairy Association and industry sources.

#### Stocks

In line with past years, no stocks are estimated due to the lack of
refrigerated storage space among producers and end users. Users such as
bakeries, confectioners and food processors, according to industry
sources, do not keep large stocks of butter.

#### Trade

The butter import forecast for 2007 is expected to remain unchanged from
the previous year's estimate due to an expected increase in domestic
production. Imports for 2006, are forecast to remain unchanged as demand
for imported butter is expected to remain largely unchanged in light of
trends toward lower fat dairy products and other foods by certain
sectors of the population. The estimate for 2005 reflects official data.

#### Policy

See dairy products policy section at the end of this report.

**Marketing**

See dairy products marketing section at the end of this report.

NON-FAT DRY MILK (NFDM) and WHOLE MILK POWDER (WMP)

Production

The Government of Mexico combines NFDM and whole milk powder in its
production and consumption estimates. Consequently, the NFDM PS&D
contains estimates that reflect both NFDM and WMP production and
consumption. Mexican NFDM producers are not expected to significantly
increase production in the short term due to production limitations.
Output for 2007 is forecast to remain unchanged from the previous year's
revised estimate. The production estimate for 2006 is revised downward
reflecting expectations that dairy processors and LICONSA will continue
to utilize domestically produced fluid milk. The 2005 estimate reflects
official data.

Consumption

Consumption of NFDM by the private industry and LICONSA is forecast to
slightly decrease in 2007 due to the increased usage of fluid milk at
the expense of imported and domestically produced milk powder. The NFDM
consumption estimate for 2006 is revised downward much for the same
reason as above. The 2005 estimate reflects official data.

Stocks

Ending stocks are expected to remain unchanged from previous years as
LICONSA continues its policy of minimizing storage costs. In previous
years, LICONSA had tried to maintain larger stock levels to avoid
imports during the early part of the calendar year when domestic milk
prices are typically highest. Stocks held by the private sector are
minimal.

Trade

Mexico continues to be far from reaching self‑sufficiency in WMP and
NFDM production because of insufficient domestic processing capacity.
LICONSA is expected to maintain its current distribution levels for milk
in response to demand for social programs targeted at lower-income
consumers. For 2007, the NFDM import forecast has been decreased from
the previous year's figure due in part to increased domestic production
of fluid milk and to the pressure exerted on the government authorities
by the domestic milk producers to reduce imports of NFDM. It is a known
fact that Mexico still needs to supplement domestic production with
external supplies as domestic production of powdered milk is limited,
therefore, imports, although possibly at a lower rate, are expected to
continue in the short and possibly in the medium term. For CY 2005, the
NFDM import estimate reflects official data.

LICONSA imports about 100,000 MT of milk powder per year. For 2006,
LICONSA is expected to import 55,462 MT under the WTO tariff rate quota
(TRQ), 39,538 MT under the NAFTA TRQ, and 5000 MT of dairy blends.
(Most, or about 55 percent, of LICONSA's milk powder imports are NFDM)
However, LICONSA's pace could slow during the second half of 2006 if it
continues to purchase excess production of fluid milk under the
Government's purchasing program. Through July 2006, LICONSA has imported
22,572 MT of NFDM from the United States, 26,226 MT of WMP from New
Zealand, and 5,500 MT of WMP from Argentina.

Policy

See dairy products policy section at the end of this report.

Marketing

See dairy products marketing section at the end of this report.

**DRIED WHEY**

**Production**

No production figures are available from any of the current sources of
information used for the writing of this report.

**Consumption and Trade**

Imports of whey from the United States are higher in 2006 reflecting in
part, the growing market for milk substitutes made from whey. Sales of
milk substitutes are high among Mexico's lower-income population since
these products are more affordable than higher-priced fluid milk
products. According to industry sources, the government tolerates the
sale of milk substitutes since they complement social milk programs for
the poor and needy in areas outside of LICONSA's reach. The most recent
WTA data shows that 2006 (Jan-Jul) imports of whey (0404) from the
United States were 57,359 MT, compared to a 63,995 MT for all of 2005.
The U.S. import figure for 2006 (Jan-May) represents about 98 percent of
total imports.

POLICY

With the exception of powdered milk (and dairy blends -- see below),
U.S. exports of dairy products to Mexico are duty-free. Milk powder
exports (NFDM and WMP) to Mexico are subject to a tariff-rate quota
(TRQ), which will be phased out in 2008. At the beginning of NAFTA there
was a duty-free quota of 40,000 MT for NFDM with an over-quota tariff
rate of 133.4 percent or \$1,113.6/MT, whichever was greater. For 2007,
the tariff-rate quota is 58,741 MT and the tariff is down to the greater
of 11.8 percent or \$98.0/MT. By January 1, 2008, the tariffs on U.S.
milk powder exports to Mexico will be eliminated. Private companies bid
for import permits (cupos) that allow them to import a specific quantity
under the TRQ at zero duty. LICONSA is not subject to the TRQ and may
import any quantity of milk powder at zero duty to meet its program
needs.

In September 2006, Mexico announced that it would temporarily impose a
110 percent tariff on dairy blends as a response to a WTO authorized
retaliation for the U.S. implementation of the Byrd Amendment. The
tariff will be applied to imports of preparations made from milk
products with a milk solids content in excess of 50 percent by weight
entered under tariff code 1901.90.05. The tariff will be enforced until
October 31, 2006. (see MX6078 and MX5074)

Mexico recently ended its ban on imports of U.S. dairy cattle, which was
imposed in 2003 following the detection of BSE in the United States.
Exports of U.S. dairy cattle were authorized to resume on October 4,
2006. Export requirements can be found on the USDA Animal and Plant
Health Inspection Service (APHIS) website:
http://www.aphis.usda.gov/vs/ncie/iregs/animals/mx.html

MARKETING

Mexico is the largest and most rapidly growing market for U.S. dairy
exports, and is the top market for U.S. non-fat dehydrated milk, fluid
milk, cheese, yogurt, and ice cream. World exports of dairy products to
Mexico were valued at almost US \$1.4 billion in 2005. Distributors and
importers are key to exporting dairy products to Mexico since few of the
major food service chains import directly. Retail buyers cite inadequate
distribution \-- the inability to provide supply continuity and on time
delivery \-- as the major reason why new-to-the-market US products fail
in their stores.

It is important for U.S. firms to have someone \-- an agent or reliable
distributor \-- who can maintain regular contact with buyers, interface
with the government, handle the required paperwork, and ensure that
customer service is maintained. There are only a few national
distributors with the capability to handle food items, so it is not
uncommon for a U.S. exporter to have multiple distributors to supply the
major regional markets.

The most up-scale supermarkets in Mexico are as modern as any stores in
the United States and cater primarily to upper-income consumers.
Virtually all imported food items are currently purchased through
Mexican-based distributors. These distributors must deliver almost
daily, or at least weekly, to each of the retailer\'s outlets to be
competitive. This enables the chains to keep inventories at a minimum,
avoid investment in large centralized storage, and bypass importing.

The cooperator group that represents the US dairy industry in foreign
markets is the U.S. Dairy Export Council (USDEC). The council's staff in
the city of Queretaro provides information on all aspects of the U.S.
dairy product trade and use, including market intelligence on trade
policy issues, organizing informational seminars for the Mexican trade,
and developing promotion and sales opportunities for U.S. dairy products
in the Mexican market. USDEC also organizes buying missions for
potential Mexican importers/distributors to visit U.S. dairy processing
plants so they can meet and see, firsthand, various U.S. suppliers and
the services they offer.

Mexico is expected to continue as a significant importer of dairy
products to augment domestic production. While imports are likely to
consist primarily of bulk products such as NFDM, higher value products
such as specialty cheeses and ice creams are also likely to find a home
in Mexico's growing consumer class as tastes, preferences, and shopping
habits increasingly mirror those of the United States and Europe.

US Dairy Export Council (USDEC)

Calle Regules No. 2, Int. 3, Esquina Madero

Col. Centro

Queretaro, Queretaro

Phone: (442) 215-9613 and 215-9552

[http://www.usdec.org](http://www.usdec.org/)

**Related FAS/Mexico Reports**

  ----------------- ---------------------------------------- -------------
  **Report Number** **Title of Report**                      **Date**

  MX5012            Mexico Announces TRQ for Milk Powder     02/01/05
                    Imports from WTO Member Countries        

  MX5032            Mexico Amends the Allocation of the 2005 04/11/05
                    Tariff-Rate Quota for Milk Powder        

  MX5040            Mexico Announces Worldwide Tariff-Rate   05/06/05
                    Quota for Egmont Cheese                  

  MX5044            Dairy Semi-Annual Report                 05/16/05

  MX5070            Mexico Establishes 2005 Additional       08/17/05
                    Volume on Out-of-Quota Milk Powder       
                    Imports                                  

  MX5074            Mexico Announces Retaliatory Tariffs in  08/22/05
                    Response to Byrd Amendment               

  MX5075            Mexican Customs Establishes Grace Period 08/29/05
                    for Correcting Errors in Import and      
                    Export Documentation                     

  MX5077            Livestock Annual                         09/01/05

  MX5081            Mexico Establishes 2005 Additional       09/12/05
                    Out-of-Quota Milk Powder Imports         

  MX5082            Mexico Announces the TRQ for Feeder      09/19/05
                    Cattle Imports from Countries with       
                    Animal Health Agreements Celebrated with 
                    Mexico                                   

  MX5096            Dairy Annual                             05/15/05

  MX6001            TRQ Dairy Preparations                   01/09/06

  MX6002            TRQ Milk Powder WTO                      01/09/06

  MX6003            TRQ Milk Powder USA                      01/09/06

  MX6010            Livestock Semi-Annual                    02/01/06

  MX6024            Mexico Announces TRQ Issuance Date for   03/22/06
                    Milk Powder Imports                      

  MX6039            Dairy Semi-Annual                        O5/15/06

  MX6068            Livestock Annual - Revised               08/01/06

  MX6078            Retaliatory Tariff in Response to Byrd   09/13/06
                    Amendment                                
  ----------------- ---------------------------------------- -------------