Got Leche? The Global Relevance of Latin America's Dairy Industry

For those who study the global dairy markets, it is critical to understand the supply and demand dynamics of the major players. We watch closely as weather impacts in Oceania, shifting political winds in Europe, and pricing trends in the USA influence the amount of milk headed to global markets. In many cases, the dairy situation in Latin America forms merely a footnote to other, more established regions. But as the world shifts, Latin America’s dairy producers and exporters will have an increasingly important role to play - and those who understand their unique characteristics will find themselves with a powerful first mover advantage.


Setting the Stage

First, let’s consider the scope of the Latin America region from a dairy supply perspective. According to data collected and published by the FAO, Latin America produced 85 million metric tons (189 billion pounds for the metrically challenged) of milk in 2013, accounting for 13% of global supply. Most are probably not surprised to find that this puts the region in fourth place behind Europe, Asia, and a revised North America that includes the USA and Canada. But what is interesting is the rate at which production in the region is expanding. When we consider the compound annual growth rate of each region between 2004 and 2013, we see that milk production in Latin America has been growing at an average of 3.2% per year. This is faster than any other region with the exception of Asia. (Note that for the purposes of this article, Latin America includes Mexico, Central America, the Caribbean, and South America.)

Breaking the data down further we can see that several countries in Latin America are important milk producers on their own. With 34 million metric tons of milk production in 2013, Brazil is the 4th largest global producer, falling in just behind China. Argentina’s production in the same year rivaled that of the Netherlands. And Mexico’s production in 2013 put it just ahead of Italy.


If we move one step down the supply chain and examine dairy commodity production, we can see that the region has a strong presence in certain products. Most obvious is whole milk powder. If we again look at FAO data, we see that Latin American production of dried whole milk reached 1.3 million metric tons in 2013. Not only does this volume represent just over 38% of global production, but it also makes Latin America the leading global producer – even greater than Australia and New Zealand whose combined production was just over one million metric tons. Furthermore, Brazil and Argentina are the second and third largest individual producers, respectively, with Mexico and Chile also securing places in the top 10.  


But as experienced market analysts know, there is more to the story than just milk and dairy commodity production. What really influences a country or region’s role on the global dairy stage is the extent to which it participates in global trade. The astute reader may now point out that if we revisit the case of WMP from an export perspective we will see that despite producing over a third of global dried whole milk in 2013, Latin America only accounted for 12% of exports, lagging behind both Oceania and Europe. What is driving this gap between production and exports?


While Latin America’s dairy industry has been rapidly growing, so has the population and relative wealth of the region. Over the same period that we considered for milk production, Latin America’s population grew at an average rate of 1.1% per year. At the same time the region enjoyed GDP growth above global levels. These factors support the theory that dairy consumption grew alongside milk production and explains that even if dairy commodity production is significant, it doesn’t always translate into large export volumes. Or put another way, not only is Latin America an important region for dairy production, it is also an important region for dairy consumption.


Looking to the Future

Up to this point, we have only considered the role of Latin America in the global dairy industry of today. While this is important groundwork to set, the real key will be the sector’s future. Despite current hardships, most agree that the global dairy industry is well positioned to grow over the long term. What will really set Latin America apart will be its unique ability to expand and meet future demand, ultimately elevating its importance among the global dairy powers. Below we will explore the region’s idiosyncrasies that will enable this growth.


  • Unparalleled Natural Resource Wealth – As the dairy industry aims to expand, it will require sufficient natural resources to support this growth. Latin America enjoys a wealth of natural resources above and beyond what can be found in other major producing regions. Perhaps most important is access to fresh water. Latin America benefits from lower levels of water stress than many other agricultural producers. Though this resource must be managed judiciously, it gives the region an important advantage. Similarly, land is generally more available in Latin America than in other regions where farmers compete against residential and commercial developers for marginal acres.


  • Hybrid Production Systems – In addition to having the resources to physically expand, many farmers in Latin America also employ combined production systems that position them well for future growth. By using a mix of pasture and grains, dairymen are naturally insulated from the feast and famine cycles of purely intensive or extensive production. With these systems, farmers can make decisions based on the relative economics of feeding additional concentrates which should preserve margins and encourage more sustainable growth into the future. Although today’s management may not reflect such dynamism, access is improving daily to systems and technologies that will make this a reality.


  • Low Hanging Fruit – Many parts of Latin America have been slow to adopt new systems and technologies for a variety of reasons. In some cases, political interference barred the import of hardware and software. In other cases, a lack of financing prevented investment in the dairy supply chain. But as the region modernizes and becomes increasingly interconnected, these barriers are fading, leaving a lot of low hanging fruit to be plucked in the coming years.


The case for growth is evidenced in various forecast models. For example, OECD’s Agricultural Outlook predicts average annual growth for Argentina and Brazil of 1.8% and 1.3%, respectively, larger than the 1.1% annual growth predicted for the USA and the 0.7% annual growth forecast for the European Union. Oceania’s growth is predicted at an average annual rate of 1.8% over the same period.


But what about consumption? Will increasing consumption simply eat away at the expanded production? While the population of Latin America is expected to continue to rise in the future, it will likely do so at a slower rate than in the past. The United Nations estimates that over the coming decade the regional population will grow by an estimated 0.9% per year, less than the 1.1% we saw in the previous decade. Furthermore, as these economies continue to mature, increasing wealth will likely lead to a shift in dairy consumption patterns as people trade out lower value products, like powders, for higher value goods. This move may lead to an accommodation of trading patterns where excess lower value dairy products find their way to the global market while producers of higher value products discover new consumers in Latin America.



To be sure, the road to Latin America’s increased prominence in global dairy markets will be long and varied. The region still struggles from a variety of socioeconomic and political factors that give it a distinct risk profile. Nevertheless, ignoring the region would be a mistake. Latin America has been one of the fastest growing dairy supply regions over the last decade and possesses a combination of characteristics that uniquely position it to continue this growth into the future. Furthermore, the region’s evolving consumer base will influence global trade trends with a growing population in search of higher value dairy products. While the full scope of Latin America’s potential will come into focus over time, one thing is clear - those who understand the region will enjoy a distinct competitive advantage in the future.