Uncertainty remains whether falling output in Mexico benefit the U.S. dairy industry.
The current milk production situation across Latin America is starkly different than what it was at the beginning of this year. In some countries, healthy margins are boosting output, whereas adverse weather has limited output in others, according to Monica Ganley, analyst with the Daily Dairy Report and principal of Quarterra, an agricultural consulting firm in Buenos Aries.
Of the Latin American milk-producing countries, Mexico is the most crucial to the U.S. dairy industry, and like elsewhere across the region, a shift in output has also started to occur in the United States’ largest dairy market.
“Official government data indicates that Mexico’s milk production continues to move steadily higher, including a 3.1% year-over-year increase in October, but that is in sharp contrast to information being shared by market participants,” Ganley said. “Stakeholders indicate that milk volumes in Mexico have tightened considerably compared to earlier in the year.”
In fact, weakening production in Mexico has pushed milk prices higher, which helps to explain why Mexico’s dairy imports have remained so strong in recent months even as the value of the peso has declined, she said. While a decline in milk and dairy product supplies in Mexico should be good for the U.S. dairy industry, the election of former President Donald Trump as the 47th president of the United States has raised concerns for the U.S. dairy industry.
Trump has threatened to pressure Mexico into curbing illegal immigration into the United States, a crucial issue during the campaign, by levying 25% tariffs on Mexican imports into the United States. And if the border issue persists, he has further threatened to increase those tariffs to 100%.
If Trump follows through on his threat of tariffs, Mexico has already indicated it would retaliate with tariffs of its own. A recent New York Times article noted that about 80% of Mexico’s exports are sent to the United States, while 16% of all U.S. exports go to Mexico. However, Ganley noted that Mexico is a particularly critical market for the U.S. dairy industry, with nearly 30% of all U.S. dairy exports in value terms sent to Mexico last year.
Another large importer of dairy products, Brazil, started the year with strong milk production, but that has since stumbled due to major weather challenges. Ganley noted that lingering effects of flooding in the south of the country compounded by drought and wildfires in the center of Brazil have had a negative impact on milk production. By the third quarter of this year, she said, year-over-year milk production had slipped 0.6%.
“Weaker domestic production in Brazil has kept demand for dairy product imports strong,” Ganley noted. “But most of that demand will be filled by fellow Mercosur members, Argentina and Uruguay.”
At the same time, milk production in Latin America’s who largest dairy-exporting countries has shifted from double-digit losses early in the year to being down only slightly in recent months. “At the start of 2024, a difficult macroeconomic environment in Argentina, punctuated by soaring inflation, caused dairy producers to slash production as they attempted to insulate themselves from rising costs. The resulting scarcity of milk combined with moderate operating costs, have driven profits higher, and the resulting strong margins have encouraged dairy producers to expand.”
In Uruguay, the region’s other major exporter, heavy rains took a toll on second-quarter output, but just like in Argentina, strengthening milk prices in the face of lower output have improved producer profitability, Ganley reported, and that has led to a near recovery in output. Most industry analysts expect production in Uruguay to continue to improve.
“However, even if milk production continues to improve among the region’s exporters, milk and dairy products would largely stay confined to the region if demand among Latin America’s importers continues to increase,” Ganley said.
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