Required Report - public distribution

**Date:** 10/26/2006

**GAIN Report Number:** AR6038

AR6038

**Argentina**

**Dairy and Products**

**Annual Report**

**2006**

**Approved by:**

![](media/image1.wmf)Kari Rojas

U.S. Embassy

**Prepared by:**

Ken Joseph

**Report Highlights:**

Argentine dairy exports for 2007 are forecast to continue to grow as a
result of a larger milk output and better expected returns than selling
domestically. Most growth will be in dry whole milk powder, which is
already shipped to more than 70 markets. Milk production is projected to
grow, but at a slower pace, mainly because of tighter returns. Domestic
consumption is also expected to grow as retail prices of dairy products
are expected to continue to be controlled and due to increased
purchasing power.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Buenos Aires \[AR1\]

\[AR\]

SECTION I. SITUATION AND OUTLOOK

**Trade:** Argentine dairy exports for 2007 are forecast to continue to
grow, reaching a new record level. This is as a result of expected
larger milk production, a continued strong world market, and positive
returns in most cases. Approximately 22 percent of total milk output is
projected to be exported, primarily in the form of dry whole milk powder
(DWM) and cheese. Total dairy exports for 2006 are estimated at \$650
million, reaching almost 100 markets.

Exports of DWM for 2007 are forecast at 205,000 tons, the highest ever.
Most of Argentina's milk that is not marketed domestically is dried.
During 2006 exports of DWM will have gone to more than 70 markets
throughout the world. Most sources indicate that exporting dry milk is a
better alternative than selling dairy products in the domestic market,
which has controlled prices. At current prices, and even with 10 percent
export taxes (last August they were reduced from 15 percent), returns
are still profitable. Most exports are focused primarily on South
American and Northern African countries. The most important countries
are expected to continue to be Algeria, Venezuela, Brazil, and Mexico.
About half of the exports are made in 25-kilo bags and the other half in
500-gram packages. Large companies can provide 24-month shelf life on
dry whole milk powder. A few local companies are supplying private label
dry milk products for supermarkets in South Africa, Chile, and Brazil.

Cheese is the second most important dairy product exported and is also
expected to total a record at 58,000 tons in 2007. Until 2004, Argentine
cheese exports were about half of current volumes. Lowered production
costs after the 2002 devaluation, improved FOB prices, and important
investment in local medium and large processors stimulated cheese
exports. The United States is expected to continue to be the largest
market in 2007. Argentina receives a 6,800-ton tariff rate quota for
cheeses shipped to the United States, of which 94 percent is for
Italian-type cheese. Some exports are also done outside the quota. Other
markets which are expected to expand are the Russian Federation,
currently the second largest market, Japan, Korea and Taiwan. These
countries are continuously increasing their purchases, primarily of
semi-hard cheese and mozzarella. China is also a market that local
cheese exporters hope will expand in the future. Industry contacts
indicate that exporting cheese is currently not very profitable, but it
has improved since last August, when the GOA brought down the export
taxes on cheese from 10 percent to 5 percent.

Nonfat dry milk exports for 2007 are projected to increase to 20,000
tons, very small compared to WDM. Brazil, Chile, and Mexico are expected
to continue to be the largest market. Exports of whey and modified whey
products are expected to continue to grow quite rapidly as a result of
several investments, which are now in operation.

Chile, the second largest market of Argentine dairy products through
August 2006, has recently announced a 23 percent provisional
countervailing duty on Argentine fluid milk, milk powder and semi-soft
cheese. Chileans state that this safeguard will protect their dairy
industry from price distortions caused by increased imports from
Argentina. The safeguard will expire on April 2007. Through August 2006,
Chile imported 26,000 tons of products, valued at US\$41 million. The
main products were UHT fluid milk, DWM, semi-soft cheese and non-fat dry
milk.

Dairy imports are negligible, expected at about \$12 million for 2006.
Most imports are cheeses, which come from a wide variety of countries
(primarily from Brazil, Uruguay, France). Imports from the United States
are primarily whey products and other ingredients used in the food
industry.

**Production:** Milk production for 2007 is forecast to grow at a record
10.8 million tons. Most sources indicate that the strong recovery
initiated in 2004, after the economic crisis that negatively affected
the sector, will slow down in 2007 due to, among other factors: 1) lower
returns at the farm level due, primarily, to higher production costs and
flat farmgate milk prices, 2) poorer conversion ratio between corn/milk,
3) low or negative returns at the processing level focusing on the
domestic market, due to a maximum price agreement and growing costs, 4)
a severe drought suffered during winter and early spring 2006 which will
affect somewhat the availability of feed reserves, 5) strong production
growth in 4 straight years with a very small herd expansion, and 6) a
deceleration in investment after the increase in 2005 of export taxes
(and the elimination of export rebates), and retail price agreements.

Most contacts foresee for 2007 a growing milk output, a stronger
domestic demand, and also larger exports of dairy products. On one hand,
exports are expected to be more profitable than selling in the domestic
market, but on the other, most people forecast steady domestic demand.
At the end of next year there will be Presidential elections and the
government wants to have controlled inflation, mainly through price
agreements, and stronger purchasing power. The industry will have to
fine-tune the balance between the domestic supply and exports, in order
not to put pressure on retail prices. If this were the case, most
contacts predict that export taxes could be increased again to augment
supply in the domestic market and keep retail prices under control.

Argentina's milk production costs are one of the lowest in the world.
With a growing world demand, many foreign companies have been investing
in this sector in the past few years. However, contacts indicate that
after the changes of rules in 2005, investments have slowed down. There
are no significant projects announced for 2007, except for the
probability of selling part of the largest dairy cooperative which drags
financial problems, and a strong expansion in milk production by one of
the largest local farm companies. The current processing capacity is
expected to be able to absorb the expected milk output growth of 2007.
However, some industry people indicate that production capacity,
especially drying facilities, will have to expand further if milk output
continues to increase in 2008.

Argentina produces approximately 30 million liters of milk per day.
Although there is no accurate data, most private sources estimate the
total number of dairy operations at 12-12,500. Roughly 10 processing
companies account for 25 percent of the total milk output, 100 companies
process another 25 percent and 800-1,000 companies process the other
half. The group of small producers is formed mainly by small fresh
cheese manufacturers which do not export nor dry milk.

There are roughly 35 milk drying facilities in the hands of 20
companies. The daily processing capacity is approximately 14 million
liters. Spring (August/December) is the peak period for drying milk,
while the rest of the year, processing diminishes somewhat. Private
sources indicate that there is unused capacity in cheese and some fresh
products. The production and consumption of yogurt and dairy desserts
has grown drastically in the past couple of years and it is expected to
continue into the near future. All companies are at full capacity. The
number one local company of fresh dairy products, which accounts for
more than 60 percent of this market, is investing in expanding its
processing capacity significantly.

Most local traders foresee relatively high FOB prices for 2007. Domestic
retail prices of dairy products are expected to remain quite stable. In
early 2005, the Government of Argentina (GOA) signed price agreements
with the dairy sector to attempt to control growing inflation. Prices of
most products were frozen for several months. In mid 2005, the dairy
sector advised the GOA that it could no longer honor this agreement,
since production costs - especially farmgate milk prices -- supported by
strong export demand, had increased and they needed to raise the price
of products in the domestic market. Due to lack of agreement within the
industry, the GOA, in late July, decided to increase export taxes on dry
milk from 5 to 15 percent and cheese from 5 to 10 percent. In early
2006, the two largest local dairy processors signed an agreement by
which prices of the most popular dairy products would remain unchanged
for one year. Just some minor adjustments would be possible if
production costs increased significantly. On average, the price of the
"dairy product basket" has not changed. Industry contacts hope to be
able to increase prices marginally by the end of 2006 and in 2007 to
partially offset higher production costs (labor, energy, packaging,
etc.).

If retail prices increase slightly over the next 12 months, most people
believe that some benefit will be passed on to milk producers. Since
September 2005, after export taxes were increased, producers have
received 0.50 pesos (US\$0.16-0.17) per liter of milk, practically
unchanged in 12 months. During this same period, production costs
increased about 10 percent, making returns shrink significantly.
However, higher yields per cow partially offset higher costs. Large and
very efficient producers are still enjoying reasonable profits, but if
farmgate milk prices do not increase in 2007, many producers will lose
money.

**Policy:** Since the 2002 crisis, the GOA has being trying to maintain
local currency to be competitive and encourage exports, and also replace
products which were imported in the 1990s. However, inflation has been
running ahead of the local currency devaluation, eroding some
competitiveness of the export sector. Most local economists project for
2007 an exchange rate of 3.20 pesos for each dollar (an increase of 3.2
percent) and an inflation of 10 percent.

The government does not have a specific policy to promote the dairy
sector. In fact, many contacts believe that export taxes, the
elimination of export rebates and price controls on dairy products are
slowing down investment and thus the growth in milk output. The GOA is
working on setting a system by which the price of milk will be
generalized, based on quality and composition. It is also working on
pricing information, through a dairy index, referential prices, and
market prices.

As mentioned above, in 2005 the GOA, in order to control growing retail
prices and thus inflation, increased dairy export taxes from 5 to 10
percent in the case of cheeses and from 5 to 15 percent for dry milk. It
also suspended export rebates, which, depending on the products and
sizes ranged between 3.4 percent and 6.0 percent. These measures had the
objective of discouraging exports to enlarge the supply in the domestic
market. In August 2006 the government brought down export taxes for
cheeses to 5 percent and to 10 percent for dry milk as retail prices had
not increased and the industry needed to improve its returns. There are
several people who believe that export taxes on dry milk will come down
further and even a few believe that rebates will be put back. However,
several other contacts disagree, as they think that retail prices in
2007 could start to increase. A strong demand (both internal and
external) and moderate milk output growth could put pressure on prices
during some periods.

There is no specific entity which promotes and markets Argentine dairy
products abroad. However, the government has a few programs which
support the participation of local exporters at international food
shows. Some provinces also have similar programs.

SECTION II. STATISTICAL TABLES

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