Brazil: After successive increases, prices of milk and dairy products begin to fall

After successive increases, exceeding 60% accumulated in one year and becoming the villain of food inflation, the price index for milk is starting to fall.

The analyses of Embrapa’s Milk Intelligence Center (CILeite) point to falls in all dairy products, including the amount producers received.

“According to data released by the Conselho Paritario Produtores/Industrias de Leite (Joint Council of Milk Producers and Industries) from the states (Conseleites) regarding payments to producers in September, we can affirm that the upward movement has come to an end,” says Samuel Oliveira, a researcher at Embrapa Gado de Leite (Minas Gerais).

THE REASONS FOR THE RECENT STRONG INCREASE

The strong pressure on the price of milk and its derivatives was motivated by several factors, among them the fall in the supply of the product.

The off-season period, which occurs in the fall/winter months, when there is less pasture for the herd, causes production to decline. The sector already expects that.

However, other factors contributed to the decline of production, such as the high cost of production and the deteriorating profitability of the farms.

The war in Eastern Europe and the increased price of fertilizers, fuel, and agricultural commodities put pressure on costs.

The disorganization of the production chains, which occurred worldwide due to the Covid-19 pandemic, is also pointed out as one of the variables, by analyst José Luiz Bellini, from Embrapa.

With the arrival of spring in the Southern Hemisphere and the rainy season, production in the field begins to increase, first in the country’s southern states, then in other regions.

According to researcher Glauco Carvalho from Embrapa, the increase in production can already be seen in the spot market (buying and selling milk between industries).

“The spot market registered a drop of 37.6% in the price charged in August, closing the second half at R$2.83 a liter,” says Carvalho.

“This signals a rapid change in trend compared to recent months, showing that there began to be a greater quantity of raw material available in the industry,” reinforces the researcher.

For Lorildo Stock, an analyst at Embrapa, the better price paid to the producer due to the decrease in supply stimulated the primary sector to invest more in feeding the herd, and the cows responded with a greater volume of milk.

Another front that motivated the expansion of supply was the imports, which reached 172 million liters in August, 63.3% more than July and 129.9% compared to August 2021.

Another factor not very positive that pulls prices down is the drop in consumer demand for the product.

“Inflation has compromised the purchasing power of wages and imposed difficulties for the market to assimilate the increase in prices, which caused a significant demand reduction,” says Carvalho.

The consequences of this set of factors reached the wholesale market first, where the price of UHT milk (Ultra High Temperature), also known as Long Life or “boxed milk”, fell by 23.5% in August and cheese by 15.7%.

The first half of September shows some price stability, but the tendency is that the reduction is amplified in October when production in the Southeast and Midwest regions increases.

But the consumer notices the deceleration and even the drop in retail dairy prices.

After the big jump verified in July (14%), the increase in milk prices in August was 0.4%, with the highlight being the 1.8% drop in the UHT milk price.

GLOBAL SCENARIO FOR MILK

In the internal environment, the indices of the Brazilian economy are being revised upwards.

The latest forecast from the Central Bank points to growth in 2022 close to 2.5%.

Unemployment is falling, reaching 9.1%, the lowest level since 2016.

This positive scenario is due to the recovery of the services sector and also an improvement in investments.

However, the global scenario is still worrying. The effects of the war in Ukraine have caused inflation and energy crisis in several regions of the world.

“Europe, especially, but also the United States may go into recession at the end of this year,” predicts Oliveira.

In China, there is the prospect of a real estate crisis that limits that country’s growth.

Some analysts are already predicting a Chinese growth below 4% this year.

As for the global milk market, Stock says the supply remains restricted, impacted by climate issues and increased production costs.

“The price of dairy products in the international market is still above the average levels observed in recent years, but has fallen in recent months, which may be a reflection of lower demand from China,” points out the analyst.

Oliveira highlights that the close monitoring of the international market will be fundamental for the sector to strategically position itself in the production and management processes of the national milk agribusiness.

“Milk prices tend to decrease, but one must pay attention to the fact that production costs are high,” emphasizes Oliveira.

The price of inputs has been a major concern for the production chain, although the exchange ratio is still favorable to producers.

According to ICPLeite/Embrapa, which measures the cost of production, there was a positive variation of 10.4% in the last 12 months (data from August).

But the exchange ratio liter of milk/concentrated mixture, which serves as food for the cow, continues to improve precisely because the milk price is higher.

In August, 29.7 liters of milk were needed to purchase 60 kg of mixture, against 38.6 liters observed in August 2021.

However, the milk producer needs to be alert to this downward trend in milk and dairy product prices.

“Sharp price drops can compromise profitability in production systems and cause a new supply imbalance,” highlights Oliveira.

However, some factors can contain a steep drop that affects primary production, such as the heating of the economy, which has shown strength in the second half.

With information from Canal Rural