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Required Report - public distribution **Date:** 5/9/2003

**GAIN Report Number:** MX3064

MX3064

**Mexico**

**Dairy and Products**

**Semi-Annual**

**2003**

**Approved by:**

![](media/image1.wmf)William L. Brant

#### Agriculture Trade Office

**Prepared by:**

Sal Trejo/Gabo Hernandez

**Report Highlights:**

Mexico is one of the most important markets for U.S. dairy products. The
January 1, 2003, elimination of tariffs under the North American Free
Trade Agreement on most dairy products, with the exception of milk
powder, should give U.S. exporters better opportunities to tap into
Mexico's growing consumer demand. Inefficiencies in Mexico's milk
industry and out-dated transportation and marketing facilities are
likely to limit the expansion of milk production over at least the next
few years. As a result, Mexico will likely continue to import
significant amounts of nonfat dry milk (NDM) and whole milk powder (WMP)
to meet growing domestic demand.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Semi-Annual Report

Mexico \[MX1\], \[MX\]

SECTION I. SITUATION AND OUTLOOK Page 2 of 15

Dairy Situation and Outlook Page 3 of 15

SECTION II. STATISTICAL TABLES Page 4 of 15

PS&D Dairy, Milk, Fluid Page 4 of 15

PS&D Dairy, Cheese Page 5 of 15

PS&D Dairy, Butter Page 6 of 15

PS&D Dairy, Milk, Nonfat Dry Page 7 of 15

PS&D Dairy, Dry Whole Milk Powder Page 8 of 15

PRODUCTION OF FLUID MILK BY STATE Page 9 of 15

MEXICO'S MONTHLY FLUID MILK PRODUCTION Page 10 of 15

SECTION III. NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING Page 11
of 15

FLUID MILK Page 11 of 15

Production Page 11 of 15

Consumption Page 11 of 15

Trade Page 11 of 15

Policy Page 11 of 15

Marketing Page 11 of 15

CHEESE Page 11 of 15

Production Page 11 of 15

Consumption Page 11 of 15

Trade Page 12 of 15

Policy Page 12 of 15

Marketing Page 12 of 15

BUTTER Page 12 of 15

Production Page 12 of 15

Consumption Page 12 of 15

Stocks Page 12 of 15

Trade Page 12 of 15

Policy Page 12 of 15

Marketing Page 13 of 15

NON-FAT DRY MILK (NFDM) Page 13 of 15

Production Page 13 of 15

Consumption Page 13 of 15

Stocks Page 13 of 15

Trade Page 13 of 15

Policy Page 13 of 15

Marketing Page 13 of 15

WHOLE MILK POWDER (WMP) Page 13 of 15

Production Page 13 of 15

Consumption Page 14 of 15

Stocks Page 14 of 15

Trade Page 14 of 15

Policy Page 14 of 15

Marketing Page 14 of 15

POLICY Page 14 of 15

MARKETING Page 14 of

15

***SECTION I. SITUATION AND OUTLOOK***

**Dairy Situation and Outlook:**

The fluid milk production forecast for CY 2003 remains unchanged as
adoption of technology and modern production practices are resulting in
modest gains in milk production. The CY 2003 non-fat dry milk (NFDM)
production forecast is unchanged from the previous estimate as limited
processing capacity and rising fluid milk consumption limit the
availability of milk for the production of NFDM. NFDM imports for CY
2003 and 2002 are estimated higher given increased demand for milk and
milk powder from Mexico's food processing sector. The 2003 forecasts for
cheese, butter and butterfat imports for CY 2003 are unchanged.

**SECTION II. STATISTICAL TABLES**

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

(1000 Metric Tons)

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

  Country:              **Mexico**                                       

  **Commodity:**        **Dairy,                                         
                        Milk,                                            
                        Fluid**                                          

                        2001                 2002              2003      

                        Old          New     Old       New     Old       New

  Calendar Year Begin   01/2001              01/2002           01/2003   

  Cows In Milk          6800         6800    6800      6800    6800      6800

  Cows Milk Production  9501         9501    9560      9560    9575      9575

  Other Milk Production 140          140     140       140     140       140

  TOTAL Production      9641         9641    9700      9700    9715      9715

  Intra EC Imports      0            0       0         0       0         0

  Other Imports         41           41      20        20      20        20

  TOTAL Imports         41           41      20        20      20        20

  **TOTAL SUPPLY**      9682         9682    9720      9720    9735      9735

  Intra EC Exports      0            0       0         0       0         0

  Other Exports         0            0       0         0       0         0

  TOTAL Exports         0            0       0         0       0         0

  Fluid Use Dom.        4075         4075    4080      4080    4085      4085
  Consum.                                                                

  Factory Use Consum.   5607         5607    5640      5640    5650      5650

  Feed Use Dom. Consum. 0            0       0         0       0         0

  TOTAL Dom.            9682         9682    9720      9720    9735      9735
  Consumption                                                            

  **TOTAL               9682         9682    9720      9720    9735      9735
  DISTRIBUTION**                                                         
  --------------------- ------------ ------- --------- ------- --------- --------

**PS&D Dairy, Cheese**

(1000 Metric Tons)

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

  **Country:**          **Mexico**                                       

  **Commodity:**        **Dairy,                                         
                        Cheese**                                         

                        2001                 2002              2003      

                        Old          New     Old       New     Old       New

  Calendar Year Begin   01/2001              01/2002           01/2003   

  Beginning Stocks      0            0       0         0       0         0

  Production            140          140     145       145     145       145

  Intra EC Imports      0            0       0         0       0         0

  Other Imports         66           66      65        65      70        70

  TOTAL Imports         66           66      65        65      70        70

  **TOTAL SUPPLY**      206          206     210       210     215       215

  Intra EC Exports      0            0       0         0       0         0

  Other Exports         0            0       0         0       0         0

  TOTAL Exports         0            0       0         0       0         0

  Human Dom.            206          206     210       210     215       215
  Consumption                                                            

  Other Use, Losses     0            0       0         0       0         0

  Total Dom.            206          206     210       210     215       215
  Consumption                                                            

  TOTAL Use             206          206     210       210     215       215

  Ending Stocks         0            0       0         0       0         0

  **TOTAL               206          206     210       210     215       215
  DISTRIBUTION**                                                         
  --------------------- ------------ ------- --------- ------- --------- --------

**PS&D Dairy, Butter**

(1000 Metric Tons)

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

  **Country:**          **Mexico**                                        

  **Commodity:**        **Dairy,                                          
                        Butter**                                          

                        2001                 2002               2003      

                        Old          New     Old       New      Old       New

  Calendar Year Begin   01/2001              01/2002            01/2003   

  Beginning Stocks      0            0       0         0        0         0

  Production            70           70      70        70       70        70

  Intra EC Imports      0            0       0         0        0         0

  Other Imports         35           35      37        37       40        40

  TOTAL Imports         35           35      37        37       40        40

  **TOTAL SUPPLY**      105          105     107       107      110       110

  Intra EC Exports      0            0       0         0        0         0

  Other Exports         0            0       0         0        0         0

  TOTAL Exports         0            0       0         0        0         0

  Domestic Consumption  105          105     107       107      110       110

  TOTAL Use             105          105     107       107      110       110

  Ending Stocks         0            0       0         0        0         0

  **TOTAL               105          105     107       107      110       110
  DISTRIBUTION**                                                          
  --------------------- ------------ ------- --------- -------- --------- --------

Note: Above data includes butter and butterfat.

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

(1000 Metric Tons)

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

  **Country:**          **Mexico**                                       

  **Commodity:**        **Dairy,                                         
                        Milk, Nonfat                                     
                        Dry**                                            

                        2001                 2002              2003      

                        Old          New     Old       New     Old       New

  Calendar Year Begin   01/2001              01/2002           01/2003   

  Beginning Stocks      44           44      42        42      37        37

  Production            143          143     150       150     150       150

  Intra EC Imports      0            0       0         0       0         0

  Other Imports         140          184     140       185     145       185

  TOTAL Imports         140          184     140       185     145       185

  **TOTAL SUPPLY**      327          371     332       377     332       372

  Intra EC Exports      0            0       0         0       0         0

  Other Exports         0            0       0         0       0         0

  TOTAL Exports         0            0       0         0       0         0

  Human Dom.            285          329     295       340     305       345
  Consumption                                                            

  Other Use, Losses     0            0       0         0       0         0

  Total Dom.            285          329     295       340     305       345
  Consumption                                                            

  TOTAL Use             285          329     295       340     305       345

  Ending Stocks         42           42      37        37      27        27

  **TOTAL               327          371     332       377     332       372
  DISTRIBUTION**                                                         
  --------------------- ------------ ------- --------- ------- --------- --------

**PS&D Dairy, Dry Whole Milk Powder**

(1000 Metric Tons)

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

  **Country:**          **Mexico**                                        

  **Commodity:**        **Dairy, Dry                                      
                        Whole Milk                                        
                        Powder**                                          

                        2001                  2002              2003      

                        Old          New      Old       New     Old       New

  Calendar Year Begin   01/2001               01/2002           01/2003   

  Beginning Stocks      0            0        0         0       0         0

  Production            0            0        0         0       0         0

  Intra EC Imports      0            0        0         0       0         0

  Other Imports         55           55       45        45      45        45

  TOTAL Imports         55           55       45        45      45        45

  **TOTAL SUPPLY**      55           55       45        45      45        45

  Intra EC Exports      0            0        0         0       0         0

  Other Exports         0            0        0         0       0         0

  TOTAL Exports         0            0        0         0       0         0

  Human Dom.            55           55       45        45      45        45
  Consumption                                                             

  Other Use, Losses     0            0        0         0       0         0

  Total Dom.            55           55       45        45      45        45
  Consumption                                                             

  TOTAL Use             55           55       45        45      45        45

  Ending Stocks         0            0        0         0       0         0

  **TOTAL               55           55       45        45      45        45
  DISTRIBUTION**                                                          
  --------------------- ------------ -------- --------- ------- --------- --------

PRODUCTION OF FLUID MILK BY STATE

(000 LITERS)

  ------------------------------- ------------- ------------- -------------
  STATES                          2001          2002          \% Change

  AGUASCALIENTES                  415,977       415057        (0.2)

  BAJA CALIFORNIA                 223,061       210,930       (5.7)

  BAJA CALIFORNIA SUR             34,520        35,976        4.2

  CAMPECHE                        22,925        22,055        (3.9)

  COAHUILA                        951,566       959,419       0.8

  COLIMA                          38,219        39,920        4.4

  CHIAPAS                         268,208       264,035       (1.5)

  CHIHUAHUA                       772,361       802,394       3.8

  MEXICO CITY                     15,500        19,599        26.4

  DURANGO                         960,261       913,099       (5.1)

  GUANAJUATO                      643,738       642,854       (0.1)

  GUERRERO                        69,667        71,285        2.3

  HIDALGO                         400,253       419,996       4.9

  JALISCO                         1,691,082     1,709,300     1.0

  MEXICO                          480,200       484,161       0.8

  MICHOACAN                       300,971       297,038       (1.3)

  MORELOS                         16,961        17,120        0.9

  NAYARIT                         68,420        67,401        (1.5)

  NUEVO LEON                      36,388        41,905        15.1

  OAXACA                          142,286       143,439       0.8

  PUEBLA                          358,842       362,933       1.1

  QUERETARO                       197,275       219,637       11.3

  QUINTANA ROO                    5,062         3,888         (30.1)

  SAN LUIS POTOSI                 136,017       140,370       3.2

  SINALOA                         84,828        91,197        7.5

  SONORA                          118,355       127,580       7.7

  TABASCO                         89,309        88,609        (0.7)

  TAMAULIPAS                      22,089        23,562        6.6

  TLAXCALA                        114,981       126,149       9.7

  VERACRUZ                        671,350       698,733       4.0

  YUCATAN                         9,654         8,390         (15.0)

  ZACATECAS                       140,401       129,525       (8.3)

  TOTAL                           9,500,727     9,597,556     1.0
  ------------------------------- ------------- ------------- -------------

SOURCE: Agriculture Secretariat (SAGARPA)

SAGARPA's final figures for January to December, 2002

MEXICO'S MONTHLY FLUID MILK PRODUCTION (000 LITERS)

  ------------------------------- ------------- ------------- -------------
  MONTH                           2001          2002\*        \% Change

  JANUARY                         720,628       714,209       (0.8)

  FEBRUARY                        709,278       721,406       2.6

  MARCH                           728,147       725,124       (0.4)

  APRIL                           722,404       722,527       0.01

  MAY                             734,301       747,567       1.8

  JUNE                            776,998       785,751       1.1

  JULY                            847,719       840,921       (0.8)

  AUGUST                          901,685       881,127       (2.3)

  SEPTEMBER                       928,651       941,440       1.3

  OCTOBER                         877,935       900,186       2.5

  NOVEMBER                        794,844       817,105       2.8

  DECEMBER                        758,137       800,193       5.5

  TOTAL                           9,500,727     9,597,556     1.0
  ------------------------------- ------------- ------------- -------------

SOURCE: Agriculture Secretariat (SAGARPA)

-   SAGARPA's final figures for January to December, 2002

**SECTION III. NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING**

FLUID MILK

Production

The previous forecast for fluid milk production for CY 2003 remains
unchanged. Production is expected to maintain modest annual growth into
the foreseeable future as technology is adopted and larger dairies
increase in number and efficiency.

Consumption

Fluid milk consumption for CY 2003 is forecast to increase slightly from
the previous year's estimate due to general population growth and
increased usage by bakeries, confectionaries, and dairy processors.
Consumption in CY 2002 remains unchanged from our previous estimate
based on information from industry sources.

Average consumer prices in Mexico for CY 2002 were 6.83 pesos per liter
for pasteurized milk (US\$0.63) and 7.68 pesos per liter of UHT milk
(US\$0.71).

Trade

Fluid milk imports for CY 2003 are forecast to remain unchanged from our
previous estimate. As in previous years, most of the imports will go to
the border cities of northern Mexico.

Policy

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

Marketing

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

CHEESE

Production

Cheese production for CY 2003 is forecast to remain unchanged from our
previous estimate due to the level of imports expected from the U.S. at
zero duty. Given steady demand from middle class consumers and current
production costs, CY 2002 cheese output remains unchanged from the
previous estimate.

Consumption

Cheese consumption during CY 2003 is forecast to increase as a result of
more cheese varieties in the market and population growth. Also, the
cheese consumption estimate for CY 2002 has been revised upward from our
previous estimate to reflect more current industry data and stronger
consumer demand. Cheese consumption for CY 2001 has also been revised
upward by 12 percent from the previous estimate to reflect official
government data.

Trade

The cheese import forecast for CY 2003 remains unchanged from our
previous estimate and is 2.3 percent higher than the previous year's
estimate. The cheese import estimate for CY 2002 also remains unchanged
from the previous estimate due to attractive prices for cheeses not
produced in Mexico and the demand for these cheeses among certain
sectors of the population.

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

Butter and butterfat production is forecast to remain unchanged during
CY 2003. This is likely due to steady consumption patterns and industry
demand, particularly by LICONSA. The CY 2002 butter production estimate
also remains unchanged from our previous estimate based on the inclusion
of butterfat production as part of the government's official statistics
for butter production. All future statistics on butter and butterfat
production will be combined.

Consumption

The combined butter and butterfat consumption forecast for CY 2003 is
nearly 3.0 percent higher compared to the previous year's estimate.
Increased use of LICONSA's reconstitution of milk powder program for the
poor is expected to account for the increase. The estimate for CY 2002
also remains unchanged from our previous estimate taking into account
the usage of butterfat in LICONSA's milk program.

Stocks

Consistent with past years, stocks are expected to remain at minimal or
zero levels during CY 2003 due to a lack of refrigerated storage space
among producers and end users.

Trade

Butter imports are forecast to remain unchanged from our previous
estimate during CY 2003 given steady consumption from LICONSA. For CY
2002, the previous estimate remains unchanged based on industry
information and demand from LICONSA for reconstituting milk powder with
animal fat instead of palm oil.

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)

Production

Mexican NFDM producers are not expected to be able to significantly
increase production in the short term due to limited processing
facilities. Therefore, the output forecast for CY 2003 is expected to
remain unchanged from our previous estimate. The CY 2002 estimate also
remains unchanged pending a final official figure. The production figure
for CY 2001 reflects official government data.

Consumption

The consumption forecast for CY 2003 has been increased to reflect
rising demand for NFDM from Mexico's growing processed foods industry.
Similarly, pending official data, the consumption estimate for CY 2002
has been revised upward by 15 percent based on increased demand from
food processors. For CY 2001 the consumption figure reflects final
government data.

Stocks

LICONSA continues to carry modest stocks at the end of the year to
minimize interference with demand for domestic milk following the peak
production months in the fall. Domestic producers have been critical of
LICONSA in the past when stocks were higher than they felt were
necessary.

Trade

Mexico continues to be far from reaching self‑sufficiency in NFDM
production because of insufficient domestic fluid milk production and
processing capacity. The import forecast for NFDM in CY 2003 and the
estimate for 2002 are revised upward to reflect growing demand from
private sector food processors as well as increased demand from
LICONSA's milk program. The NFDM import figure for CY 2001 has been
revised upward based on official government 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.

WHOLE MILK POWDER (WMP)

Production

No changes from our previous report, MX2146, dated 10/16/02.

Consumption

WMP consumption for CY 2003 is forecast to remain unchanged from our
previous estimate due to expected stable demand from LICONSA and other
end users. The consumption estimate for CY 2002 also remains unchanged
from our previous estimate due to steady demand from bakeries, candy
manufacturers, and LICONSA.

Stocks

Since production statistics for WMP are unavailable, and total imports
of WMP are consumed by dairy processors and LICONSA, stocks are not
reflected in the PS&D table for WMP.

Trade

Mexico continues to be far from reaching self‑sufficiency in WMP
production because of limited domestic processing capacity. Imports are
forecast unchanged in CY 2003 compared to our previous estimate due to
modest gains in fluid milk production. Similarly, the CY 2002 import
estimate is unchanged reflecting steady demand from the food processing
sector. The CY 2001 estimate 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.

POLICY

With the exception of powdered milk, all U.S. exports of dairy products
to Mexico are duty-free in 2003. Milk powder exports to Mexico are
subject to a tariff-rate quota (TRQ), which will be phased out in 2008.
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.

MARKETING

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

Matanzas 733-C, Col. Lindavista

07300 Mexico, .D.F

Tel 011-52-55-5119-0475

Fax 011-52-55-1997-5758

http://www.usdec.org