Tuesday, December 5, 2023

Drought takes toll on Argentina’s crop, milk production

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The ongoing dry is Argentina’s worst in 60 years, with water levels at their lowest in 35 years. 
As expected with a reduction in supplementary feed and stress on both animals and workers, Argentina’s milk production continues to take a dive.
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By Alexandria Winning-Browne, NZX dairy analyst

Agricultural production continues to struggle through record drought in Argentina

Argentina has continued to suffer the consequences of drought, impacting the nation’s crops and milk production, flowing into export figures and seeing the nation’s economy push further down. 

The country is experiencing drought for the third consecutive year, the country’s worst in 60 years, and receiving less than half the nation’s average rainfall, with water levels at their lowest in 35 years. 

The USDA continues to revise down their expectations of Argentina’s grain production amid the drought. Wheat production is inching closer to being halved compared to the year prior, with production estimates in February at only 12.50 million mt compared to last year’s 22.15m mt. Corn, which was anticipated to outperform last year at the start of the season with more hectares sown, has been revised down to 47m mt, down 2.5m mt from the previous year’s production and 5m mt from the initial forecasts. Like corn, soybeans were initially expected to outperform the previous season, however, drought has brought estimates down 4.5 million mt to 41m mt, 2.90m mt down from last season’s production.

The crop loss alone is expected to have a $15 billion impact on the nation’s economy, with JP Morgan revising their forecast of Argentina’s 2023 GDP down to a decline of 1.7% year on year (YoY) from a forecast decline of 0.5% late last year. 

As expected with a reduction in supplementary feed and stress on both animals and workers, Argentina’s milk production continues to take a dive. January milk production declined 7.3% from December, with December processing easing 2.3% YoY. The domestic milk price continues to increase in an attempt to incentivise farmers, up AR$51.57kg MS; however with inflation and the downward trend in the Argentinian peso, when converted to USD, the milk price remains stagnant to the previous month at US$5.17/kg MS.

Also to be expected is milk production declines flowing through into exports. Argentina’s total dairy export volumes declined 21% in January with a decline of 17% for total dairy export values. 

Whole milk powder (WMP), skim milk powder (SMP), butter, and whey reported declines, down 34%, 9%, 39%, and 5% YoY respectively. 

On the other side, anhydrous milkfats and cheese reported increases; albeit off of low volumes, up 47% and 8% YoY. Both commodities were driven by increased purchases from Brazil. 

Looking forward, there is little confidence in a break in drought. As we move into autumn and winter the nation is expecting dry conditions to continue, with less rain through the cold months than the warm months historically. While production of dairy and grains struggle, it is likely that more product will remain onshore as food suppliers attempt to mitigate food shortage risks across the nation. In addition, neighbouring Chile and Uruguay who also produce dairy and grain products, are also suffering a drought and would historically turn to their neighbours for product. What this means for the wider market is that we can expect less of these commodities available for purchase, and as the other hemisphere heads towards its winter months, this is not the news the market will be seeking.

Meanwhile in North America, US milk production is slightly up.

The US Dairy Association (USDA) January milk production figures highlight a 1% increase in December’s milk production across the nation to 18.9 billion pounds. This number was driven both by production per cow and by the number of cows on-farm. Production per cow increased nine pounds year on year (YoY) to 2014 pounds in December, while the number of milk cows on-farm increased 27,000 YoY to 9.4 million head, albeit 8000 less than in November. 

Despite drought and subsequent floods through California, the largest milk producing state managed to increase milk production by 0.3%, with an increase of milk cows by 5000 across the region. Other notable increases came from Georgia, Iowa and Texas, up 6%, 8.9% and 3.3% respectively. These increases were also attributed to milk cow numbers increasing, with Texas even experiencing a reduction in milk per cow. 

The USDA has, however, announced forecast milk prices in 2023 to slide nearly 15% over the year, with profits expected to slide circa 18% over the same period. There is a risk that this may impact 2023 production, with US dairy cow slaughter figures already showing that factors are changing.

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