Argentina’s Burgeoning Milk Production Worries U.S. Dairy Exporters

There’s a deep pool of milk sitting at the other end of the Western Hemisphere, and it’s getting deeper all the time.

It’s starting to make the U.S. dairy industry a little nervous. Three UW–Madison agricultural economists went to the southern end of South America recently to see for themselves.

Edward Jesse, Brad Barham and Tom Cox spent a couple of weeks visiting dairy farms and processing plants.

Their conclusion: Anyone with plans to export U.S. dairy products better keep one eye on Argentina.

How can Argentina produce milk so cheaply? Argentinean cows graze on the pampas, a rich, deep prairie that covers roughly a quarter of the country. These lands yield about 5 tons/acre of alfalfa without any fertilizer. The mild climate allows year-round grazing, and keeps down the cost of housing. Pasturing animals also eliminates most of the cost of manure handling. Cows receive some supplemental grain and silage during the dry season, but the deep soils make raising those crops quite economical. The Wisconsin visitors learned that the average producer's investment in Argentina ranges from $1,000 to $1,500 per cow. A typical Wisconsin farmer's investment ranges from $7,200 to $7,800 per cow. Another factor: There are essentially no environmental regulations - which Jesse says probably reduces costs by about 50 cents per hundredweight.

“The visit was sobering,” says Jesse. “We saw a country with considerable potential for expansion in dairy exports and a cost of production that’s roughly half that of the United States. If international markets improve, milk is more likely to flow from there than here.”

Using its vast grasslands – the pampas – as a cheap feed source, Argentina has been adding 100,000 cows annually since 1990.

The economists were told that by the year 2000, Argentina will likely be producing 22 billion pounds of milk annually – twice what it was producing in 1990 and 150 percent of what it will likely need for domestic use.

The big worry, Jesse explains, is the possibility that Argentinean exporters will target Mexico. If so, they’ll be going head to head with U.S. dairy exporters, who see Mexico as their number-one growth market.

“Mexico is already the world’s leading importer of nonfat dry milk, and most knowledgeable sources anticipate substantial increases in purchases of other products – especially cheese, and in northern Mexico, fluid milk,” Jesse explains.

Mexico’s economy is expected to strengthen, but it is unlikely to ever become self-sufficient in dairying. In short, it’s an ideal market for the United States.

“The North American Free Trade Agreement was sold to Wisconsin dairy farmers partly on the grounds that we’d have a strong Mexican market,” Jesse says. Back then, he notes, Argentina was not a dairy export threat.

But if Argentina wants to target Mexico, they’d be very tough competitors. An Argentinean government research economist told the visitors that farmers in his country can produce 100 pounds of milk for $6.80, including land costs. The comparable cost is $11- $12 in Wisconsin and about $10 in the southwestern United States.

Will the United States and Argentina actually end up going head-to-head in Mexico? That depends on several factors, Jesse explains.

• How much milk will be soaked up by Brazil? With a population of 165 million, Brazil can drink a lot of milk. “Brazil is 89 percent self-sufficient in dairying, but with such a large population, that other 11 percent represents a huge market,” Jesse points out. “If the Brazilian economy strengthens, Brazil will be able to absorb most of Argentina’s exports. Brazil is the most logical place to expand, because there are no tariffs between nations that are signatories to MERCOSUR, a South American trade pact.”
• To what extent will dairy displace beef in Argentina? The big push in dairying has been driven to a large extent by the collapse of beef markets. Dairy cows are grazing on the pampas where beef cattle used to roam. *What will happen with world oilseed markets? The rich pampas land that works great for dairy pastures is also great for grain. The better the market for soybeans and other oilseed crops, the slower Argentina’s dairy capacity will expand.
• What will happen to world dairy prices? “If current market prices hold, Argentina can produce and compete very profitably,” Jesse days. Because of the GATT – the General Agreement on Tariffs and Trade – European export subsidies will decrease somewhat, which should bring some price improvement. How much European exports will decline is uncertain.

Money for the trip to Argentina came from the UW–Madison’s Babcock Institute for International Dairy Trade and Development.

William Dobson, the Institute’s director, says the upward production trends in the southern part of South America have been watched by major U.S. dairy exporters and U.S. Department of Agriculture officials for some time.

“It’s known that Argentina is likely to be a strong competitor,” Dobson says. “We thought it would be a good idea to do some field research to better assess their strength.”

CONTACT:
Ed Jesse, 608-262-4591, edward.jesse@ccmail.adp.wisc.edu