In July, the cost of concentrated feed for dairy herds had shown a strong international rise. The concentrated mixture (corn plus soybean meal in the ratio of 70% and 30%) reached US$ 0.34 per kg in May, an increase of 51.4% compared to the 2018-2020 average.
Considering that corn and soybeans are commodities quoted in dollars, the current exchange rate for the US currency in Brazil does not alleviate the problem. The dollar came to be below R$5.00 in June, opening an interesting window for purchases, but it returned to its previous level, making inputs again more expensive. Data from the ICPLeite (Embrapa’s Milk Production Cost Index) show that in June the purchase and production of roughage presented a variation of 7% and concentrated feeding, 3.85%. Feeding the herd is more expensive this off season.
During the monthly meeting of the situation of the Milk Intelligence Center, Embrapa researchers and analysts at the institution were faced with the question: “When will the prices that integrate production costs start to fall?” The combination of rising agricultural commodities with the devaluation of the Real does not make this answer easy. ICPLeite posted a 39% increase in the last 12 months ending in June. The concentrate rose 68%.
“To aggravate the situation, the lack of rain in the Center-South region of the country compromised the production of off-season corn”, says the researcher at Embrapa, Glauco Carvalho. He expresses concern about the significant increase and says he does not see prospects for production costs to start falling.
In addition to the delay in planting the grain crop and the little rain, more recently, the rise in costs, in addition to putting pressure on the producer’s profit margins, harming milk production, increases the prices of dairy products, which naturally have higher prices in the off-season. On the wholesale market, UHT milk (from a box) was being sold in the first half of June at R$ 3.55. Mozzarella cheese was quoted at R$27.81.
“After prices registered an increase in wholesale, the market lost strength in recent days, but there is still support due to the off-season, which ends in August/September”, says the researcher.
In any case, the scenario is one of caution, due to uncertainties about demand and the tightening of producer and industry margins.
As for the producer, analyst Denis Rocha says that profit margins remain tight, but there was an improvement in the last month. In June, the producer received R$ 2.20 per liter of milk, with record of consecutive highs since April.
“This upward trend is explained by the lower availability of the product in the wholesale market, due to the off season, the high cost of production and the lower entry of milk via imports”, explains Rocha.
Regarding 2020, the analyst recalls, however, that in this period last year, the government paid a higher amount of emergency aid, due to the pandemic, which ended up increasing consumption and increasing the price of products, ensuring a better margin profit for the productive sector at that time. The current moment, according to Rocha, is more complex due to the high unemployment rates,
Carvalho is optimistic about the country’s macroeconomic scenario: “Investments in GDP in the first quarter came in good and household consumption is recovering.”
The researcher also claims that despite the poor performance in the labor market, performance indicators tend to be better in this second semester, causing a positive impact on the sector.
Researcher Kennya Siqueira finds that trade, in general, has improved, with household consumption returning to pre-pandemic levels.
There is still a very large repressed consumption, which commerce has been absorbing little by little. She still believes that the return of the movement in restaurants could contribute to the increase in dairy consumption.
Interview – Glauco Carvalho
After a year and a half of the pandemic, researcher Glauco Carvalho granted an interview to the Anuário Leite, from Embrapa Gado de Leite, in which he talks about the behavior of the sector in this period:
How do you evaluate the behavior of the dairy sector during this time of pandemic?
The industry as a whole did an excellent job during the pandemic, especially at the beginning, when everything was very new and unknown. There was no disruption in production or distribution. And the sector was quick to reallocate milk from dairy products with greater difficulty in sales to others with less logistical and distribution problems. In this way, the production chain managed to maintain the supply of milk and dairy products throughout the country, meeting the consumption needs of Brazilians.
Was there more impact on the milk production or consumption segment?
There was a growth in the sector as a whole. We grew in milk production and we grew in consumption. But as our trade balance was negative, that is, we imported more than we exported, I would say that the impact on consumption was greater. But in this case it was a positive impact. If we look at the production of formal milk, that is, with inspection, there was an increase of 2.1% last year. Availability, which is the volume absorbed internally in direct or indirect consumption, registered a growth of 2.8%. For this reason, I say that the impact on consumption was greater and greatly driven by the income effect that occurred in the population via Emergency Aid. But we also had new consumption habits that helped sales.
In the first year of the pandemic, there was growth in the sector, due to emergency aid. This year, the aid is less. Could the year 2021 close with an established crisis in the production chain, which will extend to 2022?
The milk chain is very resilient to crises and generally adjusts quickly. But the short-term scenario is not the best, for a number of factors. On the macroeconomic side, we have a high unemployment rate, a drop in income and rising inflation and interest rates. Furthermore, economic growth is forecast to be low, falling far short of global expansion. Specifically in relation to the sector, we are under enormous cost pressure and with difficulties in passing on prices to the final consumer due to the macroeconomic weakness itself. It is a very challenging environment and, yes, it can drag on beyond 2021, especially in terms of costs. Therefore, it is a year that suggests more conservative decisions. But we cannot forget that the economy is recovering, with positive effects on income and consumption over the next few months.
How do you explain the rise in milk production costs, which has dragged on since the beginning of the pandemic?
This increase is related to a set of factors, internal and external. Externally, we can highlight: the devaluation of the dollar against other currencies, which raised the prices of commodities in dollars; the strong growth in global consumption; Chinese corn imports, which used to be between 3 and 5 million tons/year, are now expected to exceed 25 million tons; the decline in global corn and soybean stocks, with a sharp drop in US stocks. Another factor, not much talked about, was the migration of hedge funds to the commodity markets. The funds have a historically high long position, which ends up putting more pressure on prices. But we had internal factors too. In addition to weather problems that affected planting and harvesting, there was a devaluation of the real, which has a strong impact on milk production costs. Anyway, the fact is that we have a firm demand for corn and soybeans and with highly capitalized producers, slowing sales.
In addition to commodity prices, what else has increased milk production costs?
The main increases were in the cost of concentrate, as mentioned above. But we are also seeing an increase in the cost of bulky food, with more expensive fuel, fertilizers and pesticides. These are inputs affected by the exchange rate, the price of oil, international maritime freight, and all these factors suggest an increase.
The exchange rate rise makes Brazilian milk cheaper compared to international prices. However, imports are on the rise. What is the role of the exchange rate in the current crisis?
In agribusiness, exchange devaluation is generally positive. But this when we think of agro-export chains such as soy, coffee, orange, etc. In the case of milk, despite the exchange rate holding imports, there is a direct effect on costs. In the second half of 2020, the exchange rate was not enough to hold imports. Higher domestic prices and the competitiveness of dairy products from Argentina and Uruguay greatly increased our imports. And this also occurred in early 2021, but with decreasing volumes. At the beginning of the year, we are seeing imports losing strength and exports growing. The rise of dairy products on the international market contributed to this movement.
With regard to the industry, what has been worried about dairy products?
The big concern is the difficulty in increasing margins and adding value. As we have a very fragmented industry and no bargaining power with retailers, the sector ends up being pressured at certain times. The existence of low barriers to entry in the sector ends up generating this result of little market power. When the economy grows more sharply, this effect is mitigated, as there is an expansion of income and consumption. But when economic growth is low, problems get worse. Milk consumption has a strong relationship with income and Brazil stopped growing in 2014. As a result, we are practically stagnant in milk as well. And when you have sequential seizures the result is very dangerous. Brazil shrank in 2015 and 2016, then we had very low growth in the 2017-2019 period. In 2020 came the pandemic and more economic crisis. This undermines the investment capacity of companies in different sectors, affects employment, income, consumption and so on. In the first year of the pandemic, we had a strong fiscal contribution, which generated an important consumption of dairy products. But it is something that does not support itself and ends up increasing public indebtedness, which has other negative economic consequences, such as higher interest rates, for example.
There was an increase in milk consumption in the first year of the pandemic, how is the consumer behaving at the moment?
The situation in early 2021 is more complicated. Last year we had a large consumption of classes D/E with the release of Emergency Assistance. But we lost a good part of that portion of the population for lack of income. We started 2021 with timid growth in consumption, which is limiting more robust price increases and negatively putting pressure on profitability margins in the sector.
Would you consider that the dairy sector was the least affected by the pandemic within the agro?
I don’t see it. In the first year, the sector benefited from increased consumption and improved margins. But this did not hold up and by the end of 2020 the scenario had worsened. The fact is that the world is growing fast and the agro-export chains are taking advantage of the moment, with greater shipments of products and at higher prices. In other words, a perfect match. This is not the case with milk, which depends almost exclusively on domestic income to grow. We should have a bid adjustment to improve the current price condition.
What lessons can the dairy sector, inside and outside the farm, take from this very atypical period and what is the trend going forward?
I see that there are several lessons, such as the adaptation required by the pandemic, how to deal with uncertainties and how to deal with the expectation of bad news, the latter is very present in the daily life of the pandemic. In this sense, the greatest lessons learned are related to action and cooperation. Complaining doesn’t help at all, but acting does. And I see that the industry followed this line in the first year of the pandemic. We all face countless challenges and the important thing is to look for solutions to move forward and successfully. In the case of cooperation, looking for good partnerships in the business is essential to deal with the complexity of today’s world. And the pandemic showed that cooperation between individuals, companies and nations was the most powerful weapon in the search for solutions, like the Covid-19 vaccine. For the future, this cooperation will be essential in business to produce more efficiently, to make better purchases of inputs, to improve marketing and to add value. There are also trends related to food safety, health, the environment, social responsibility, all topics that need to be on the sector’s agenda.
With fewer people going to bars and restaurants, in your opinion, was the pandemic able to change dairy consumption habits?
Definitely yes. There was a substitution of food away from home for food at home, which boosted the demand for dairy products used in cooking. But the changes in habits didn’t just happen because of the lesser presence in bars and restaurants, but because of a series of changes that we experienced. With the pandemic, families favored spending on food. In addition, while a portion of the population gained income and spent more on food, others had increased savings due to savings in other expenses, such as travel and even bars and restaurants. These families ended up favoring a more elaborate and more pleasurable diet. Anyway, it has been a period with different consumption experiences. And I also see that the pandemic has accelerated some trends like online shopping. It is a form of commercialization that the dairy sector needs to explore more. There are other issues related to food safety and origin that are likely to gain traction in the coming years.
It is very likely that a new order will be established in Brazilian and world agriculture when our life returns to normal. What should we expect?
There is a growing demand for ESG (Environmental, Social, Governance) practices in the field. Society and investors are looking for a sustainable development model that considers these issues, that is, environmental protection, social responsibility and greater transparency. These are issues that gain weight in investor analysis, in global trade, and Brazil has enormous potential in this direction, with low-carbon agriculture and food production to supply a large part of the world’s population, without subsidy. This is the sign that we are seeing for the future. The agrifood chains move towards productivity gains for market segmentation and customization of consumption, and here we are talking about adding value to products. In the case of milk, how it is produced, and by whom, will gain more and more importance. As a result, there are demands for traceability, animal welfare, carbon footprint, waste and recycling, sustainability, local products, natural products, among other trends. Consumers seek this information and the industry can use it as an important source of value.
Source: thedairysite.com
