Market Information
Latin America and Caribbean

Exploring Manitoba’s Dairy Cattle Opportunities in Mexico

September 2004

Table of Contents

Summary

1. Background

2. Globalisation (process of consolidation & centralization of milk production)

3. Mexico / Canada Situation

4. Overview of the Mexican Dairy Sector

5. Domestic Consumption

6. Imports

7. Manitoba Dairy Sector and Market Opportunities in Mexico

REFERENCES

Executive Summary

Objective of the Study

To undertake some preliminary analysis to determine the extensiveness of market opportunities in the dairy sector in Mexico and the potential of the Manitoba dairy sector to service this market.

Summary of Study

1. Mexican Milk Production

• 73 % of the total milk production comes from 9 federal states of which the most dominant are Jalisco (17.4%), Coahuila (10.7%), Durango (9.7%), and Chihuahua (8.1%).
• For the year 2003, production increased to 9.8 billion litres (10,103,821 tonnes). According to USDA Foreign Agricultural Service GAIN 2003 Report, consumption of milk and dairy products in Mexico is growing and is estimated at 13.6 billion litres in 2002 (14.0 million tonnes).
• 51 % of milk production in Mexico comes from specialized farms, 21 % of milk production comes from semi-specialized farms and 28 % from dual-purpose farms.
• Average Mexican productivity per cow at 2,983 lbs is only 16 % of the US average in year 2000. This reflects the lower yields realized by dual-purpose farms.
• Economic and technical factors are limiting the dairy expansion including availability of water and forages, lack of infrastructure and financing, inferior sanitation, low domestic prices and thin margins, limited storage facilities and refrigeration, high storage costs, high interest rates, lack of transportation, and poor genetics.
• All the above mentioned factors severely restrict Mexico’s ability to expand domestic production and achieve self-sufficiency.

2. Mexican Demand

• Consumption of fluid dairy milk has been steadily on the rise as the purchasing power of the typical Mexican citizens has increased. The resulting rebound in the Mexican economy starting in 1996 and a growing population has seen consumers increased their consumption levels of dairy products.
• Mexican government agricultural policies during the 1990’s and beginning of 2000 have resulted in growth in production, and reduce demand for import dairy products.
• The result of increased demand for locally produced milk is an expansion of opportunities for dairy genetics to improve the productivity of the Mexican sector.

3. Mexican Imports of Dairy Cattle and Genetics

• In 2003, cattle imports were sourced from Canada, the United States, Australia and New Zealand. Over the last 5 years (1999-2003) Australia and New Zealand have become major competitors to traditional dairy heifer and cow suppliers such as Canada and US in the Mexican market. Supply availability and price seem to be key factors that are affecting Mexican purchase decisions.
• Bovine Spongiform Encephalopathy (BSE) was first detected on May 20, 2003, in Canada, resulting in an immediate halting of all Canadian exports of cattle and beef products into Mexico. Dairy genetics (embryos) and semen are still exportable.

4. Market Opportunities

• Canada supplies more than 20 % of dairy genetics to the world in the form of high-quality dairy cattle, embryos and semen.
• Dairy cattle forecasts suggest levels of imports comparable to past years once Mexico opens the border. Increased use of semen to improve genetics is also expected in the future. Other opportunities exist in equipment and machinery, forage seed, embryos, medicines, water management, and irrigation.
• In 2004, a Manitoba survey was conducted to determine the ability of Manitoba dairy producers to export to the Mexican market. From this survey, it was concluded that Manitoba will have 14,885 and 14,448 dairy animals for sale in 2004 and 2005 respectively, with 55% of the animals available year round.
• The survey of the Manitoba dairy producers revealed that 42% desired between US$1,400 and US$1,600 for their replacement dairy heifers.
• Currently, Mexico is an untapped market with only 1% of the Manitoban producers selling to this market, according to the survey results.

5. Recommendations from the Survey

• There is a need to develop an export dairy strategy before Mexico opens the border of live Canadian dairy cattle again. The strategy as suggested by Manitoba producers should offer some form of government funding as this was stressed as the most crucial element for success in this new market.
• Government support is thought to be vital to progress towards exporting to the Mexican market. To achieve success, respondents suggested:
  (a) intergovernmental cooperation was important to gaining this market, and
  (b) government/producer cooperation needs to be enhanced.

1. Background

For the last twenty years the Mexican dairy sector has endured difficult times. There have been few years when the Government was not intricately involved, and even fewer without extreme financial strain.

Commencing with the Market Regulator Subsistence (MRS) in 1938, the Mexican government has been intermingled with the dairy sector. MRS’s main purpose was to study market trends and purchasing habits. MRS eventually evolved into the CONASUPO milk dehydrate company in 1963 (Skim Milk Powder Imports and the Role of CONASUPO, page 3). By 1972, the primary concern of CONASUPO, now known as LICONSA, was milk dehydration (Skim Milk Powder Imports and the Role of CONASUPO, p.3). During the 1980’s, LICONSA would import and process skim milk powder (SMP) at one of their 17 milk production plants. This imported SMP was subsequently distributed to the financially needy at subsidized prices (consumer subsidy), which were inherently lower than those of the domestic market. Throughout the 1980’s LICONSA exerted a stronghold over SMP imports (Mexico’s Dairy Sector in the 1990s, page1, page 2).

Control was assumed by the Mexican government in 1982 through LICONSA over all levels of milk pricing, producer, processor, and retail (An Overview of the Mexican Dairy Sector, page 3). These price controls, often used as a tool to combat inflation (Mexico’s Dairy Sector in the 1990s, page 2), forced consolidation upon the industry. As the price of milk was fixed, and other costs were rising, producers were forced to incur very low margins; hence the reduction of the national dairy herd and the considerably lower milk production of 1984 (An Overview of the Mexican Dairy Sector, p.3). As a result of the decreased level of domestic production, CONASUPO sought foreign powdered milk that could be bought and sold inexpensively relative to domestic prices via subsidies to consumers (An Overview of the Mexican Dairy Sector, p.3). These consumer subsidies essentially forced local producers to sell their milk below market prices. So, they acted more like a tax on producers. It is well known that at the time, Producer Subsidy Equivalents (PSE) were negative, and Consumer Subsidy Equivalents (CSE) were positive (How Mexico’s Dairy Industry had Evolved Under the NAFTA, p.6). This type of policy, one that favours consumers at the expense of producers, was typical of the central government during this era.

Until 1986, all imports of dairy products into Mexico incurred high tariffs. After that year, average tariffs on dairy products were reduced from a maximum of 40% to 20% (Mexico’s Dairy Sector in the 1990s, p.11). Milk production spurred on by the lower tariff rates was able to increase as a result of the augmented imports of dairy cattle, from only 1,400 cows in 1984, to 25,000 in 1986 (An Overview of the Mexican Dairy Sector, p.3). This served as the beginning of a change in government policy.

In 1988, the government began to reform its policies to promote domestic production and the supply of milk within Mexico. A new decentralized system was set up such that each region or province retained jurisdiction over its own pricing. The increased flexibility of the new arrangement permitted the consideration of input costs sustained by dairy producers (An Overview of the Mexican Dairy Sector, p.3). Subsidies to producers were effectively terminated, along with the gradual relinquishment of consumer price controls, with the exception of 1-litre packages of pasteurized milk.

Years later, in 1994, the North American Free Trade Agreement (NAFTA) was signed. NAFTA was designed to dismantle trade barriers between Mexico, Canada, and the United States. At the time of the agreement, Mexico reformed its policies regarding US and Canadian dairy imports. The former import license system was transformed into a tariff rate quota (TRQ) system (How Mexico’s Dairy System has Evolved Under the NAFTA, p.7). The TRQ essentially functioned as a transition tool that would allow the gradual relaxation of tariffs, and thus permit the Mexican producers time to adjust for the increased influx of foreign product. Most dairy tariffs were set to be reduced to zero over the next 10 years; so, in 2003 the tariffs for fluid milk and cheese, among other dairy products, were eliminated. For SMP, a fifteen year period was set to phase out the tariff rates, through gradual reduction, and eventually to zero in 2008 (How Mexico’s Dairy System has Evolved Under the NAFTA, p.7).

Mexico has a large comparative advantage in labour when weighed against more developed countries such as Canada. Although the labour cost per hour is low and labour is plentiful, labour cost per litre of milk in Mexico may be higher because of the lower output per cow and the lack of mechanization. Unfortunately, the profitability of Mexican dairy operations is not well known (An Overview of the Mexican Dairy Sector, page 3).

It was hoped that subsequent to the NAFTA that Mexico would adopt improved genetics and more modern technologies to increase domestic production and reduce average cost per litre (An Overview of the Mexican Dairy Sector, page 3).

2. Globalisation and the process of consolidation and centralization of milk production

Economic globalisation associated with technological, social and economic facets is affecting all the countries and their productive sectors at its different levels. However, these global and domestic factors have varying impacts between countries. An example is the decline of the number of milk productive establishments. This tendency is apparent in most countries except in New Zealand and Australia where the opposite is occurring.

Currently, there is a world-wide trend with respect to a decline in the number of dairy farms. In each country, different reasons explain this diminution such as: problems in the land distribution, policies promoting and benefiting the large producer and unstable economic situations, among others.

In addition, there seems increased emphasis on milk quality. The levels of milk quality with a minimum of fat content seems to be an indicative element for the marginalization of the small producers who do not have access to a very competitive market, since the industrial sector needs the highest raw milk quality relative to the lowest cost possible.

This phenomenon of diminution can be observed in two dimensions, consolidation and centralization of production. The first one refers to fewer farms with more dairy cattle per farm to yield the same total production. The second one, centralization, refers to a phenomenon of space location, where farms are clustered to realize economies of scale.

Clustering also permits the concentration of industrial processing and other related service providers to this sector.

In order to exemplify this phenomenon, we will describe some cases. Let us start with Canada; in 1970, 122,914 commercial milk farms existed, diminishing in the next 5 years to 79,833 farms, a fall of 35 %. By 2003, Canada had 17,890 farms, a 73 % decrease from 1975.

In the USA, a similar experience has occurred. The most significant changes happen between 1992 and 1998 with a one-third decline in the number of dairy farms, and an increase in herd size from 73 cows to 104 cows. In July of 1999, the number of dairy farms was 87,669 nationally, 3,839 less (or 4.2 percent) than the previous year.

For the producers that remained in the business, they observed an increase in the herd size and, a motivation to produce grade "A" milk. The reductions in dairy farms were not consistent across the US as the Southeast of the US lost more dairy farms than other areas.

New Zealand also recorded a decline in the number of dairy farms, but restoration of subsidies in the mid-1980’s stabilized farm numbers. Currently, there has been a moderate increase. Herd size has also increased. In 1990, the average of dairy farm had 159 head. By 1995, this had increased to 193 and, by 2000, it was 240.

In the case of Australia, it is observed that the number of dairy farms diminished by 1,010 from 1995 to 1999, but milk production increased from 8,206 million litres to 10,178 million litres. This is partly explained by the increase in the dairy inventory from 1,882,000 head to 2,122,000 head. Currently, farmers received a good price for their milk. In next 2 years, Australia will have deregulation of the dairy market.

3. Mexico / Canada Situation

Bovine Spongiform Encephalopathy (BSE) was first detected on May 20, 2003 resulting in an immediate halting of all Canadian exports of cattle and beef products into Mexico. BSE, more commonly known as mad cow disease, is a progressive, fatal disease that attacks the brain and nervous system of cattle. The Mexican border re-opened in October of 2003 for Canadian boneless beef for animals younger than 30 months (Overview of the Mexican Cattle and Beef Sector, p.10). However, the border has yet to be fully re-opened. Mexico will likely wait until U.S. Department of Agriculture (USDA) approval is obtained in order to prevent damage to their trade with the United States (Overview of the Mexican Cattle and Beef Sector, p.11). Canadian producers remain hopeful as the Canadian government works hard to re-establish Canada’s market access. Canada, Mexico and the US had, at the technical level, developed a sanitary protocol that would have permitted the importation of Canadian dairy cattle into Mexico. However, on the advice of the U.S. Department of Agriculture’s (USDA) legal counsel, the USDA has warned Mexico that its BSE status in the US will be lowered to the same as Canada if it were to permit the importation of Canadian live cattle (Canadian Embassy in Mexico). The US position has complicated the resumption of Canadian exports of dairy cattle to Mexico. However, the Canadian Food Inspection Agency (CFIA) continues to work with the USDA to find a North American solution. Canadian exports of dairy products such as skim milk powder and cheese are not subject to BSE or any other sanitary restrictions in the Mexican market. Canada supplies more than 20% of dairy genetics to the world in the form of high-quality dairy cattle, embryos and semen. Canadian dairy cattle, recognised for their disease-free status and their ability to produce high quantities of milk over many lactations, are exported to over 50 countries. Exports of Canadian dairy genetic material were valued at more than $168 million in 2002.

With regard to tariffs, under the provisions of NAFTA, Canadian exports of dairy cattle have duty free access to the Mexican market. However, Canadian dairy products were excluded from any tariff preferences.

In light of the above, Canadian exports of dairy products are subject to the Most Favoured Nation (MFN) duties that Mexico has in place for World Trade Organization (WTO) countries:

Product Import duty

• Fluid milk (not concentrated and without added sugar) 10%
• Evaporated milk 45%
• Condensed milk 15%+ US$ 0.39586/kg
• Yoghurt 20%
• Whey 10%
• Skim milk powder (Tariff Rate Quota of 80,000 tonnes with a 0% in-quota duty and a 125.1% over-quota duty)
• Butter 20%
• Powdered cheese 20%
• Blue-veined cheese 20%
• Reggiano and Sardo cheese 20%
• Egmont cheese 45% (When the domestic demand for this product is high, Mexico issues a unilateral TRQ of 1,600 tonnes with a 20% in-quota duty and a 45% over-quota duty)
• Other cheeses (Tariff Rate Quota of 2,405 tonnes with a 50% in-quota duty and a 125% over-quota duty)

Source: Canadian Embassy in Mexico

4. Overview of the Mexican Dairy Sector

Milk production is an important sector not only because of its value but because of the fundamental role it plays within the primary and industrial economies and the desire of the government to expand domestic production to reduce the demand for imports. In the specific case of Mexico, the importance of this product has been reflected in government policies which have resulted in the growth in production being above the growth in the population. The evolution of the milk production in Mexico has faced the phenomena of a demand greater than the supply.

Prior to the 1990’s, the milk supply was sustained by a consumption subsidy with control on prices and milk imports. The results were disincentive to investment in the sector and to expand national production.

4.1 Farm Categorization

The Mexican producers can be classified into three distinct farming systems specialized (confined), semi-specialized (semi-confined) or dual-purpose (milk and beef). See Table 1 for the distribution of the dairy industry by farm type and percentage of milk production.

Source: Sistema de Informacion y Estadistica Agroalimentaria y Pesquera, SAGARPA

4.1.1 Specialized (Confined) Farms

Specialized farms typically consist of large technically advanced facilities that utilize modern technologies such as cooling tanks, mechanized milking, and artificial insemination. Many are comparable to the modern dairy farms of Canada or the United States. These farms border New Mexico, Texas, and California in the Comarca Lagunera and the altiplano. The main producing states are Durango, Coahuila, Guanajuato, Jalisco, Aguascalientes, Chihuahua, México, San Luis Potosí, Hidalgo, Querétaro y Baja California.

For specialized farms, Holsteins are the preferred breed due to their high milk production and ability to withstand the heat. Other breeds include Brown Swiss and Jersey (Mexico’s Dairy Sector in the 1990s, p.5). The specialized system relies on imported production inputs such as replacement heifers, equipment and machinery, semen, forage seed, and medicines. Replacement heifers often are imported from the US, Canada, New Zealand and Australia, although a small number of operations in Mexico produce quality breeding stock.

4.1.2 Semi-specialized (Semi-confined) Farms

Semi-specialized (semi-confined) is another sub-division of Mexican dairy farms. These farms are typically situated in the central states and northern regions (An Overview of the Mexican Dairy Sector, page 2). Semi-confined farms are often characterized by smaller herds, lesser technology, and poorer cow productivity when compared to the confined farms (Mexico’s Dairy Sector in the 1990s, page 7). Frequently family run, these semi-specialized farms typically have smaller herds consisting of cross-breeds such as Holstein-Zebu or Brown Swiss-Zebu (An Overview of the Mexican Dairy Sector, p.2). These family run operations often lack adequate financing and thus rely on trenchant determination to remain competitive (Mexico’s dairy sector in the 1990’s, page 7). They also have lower productivity due to lesser technology such as the sparse availability of even evanescent technology, lack of cooling systems and storage facilities and hand milking (USDA GAIN Report, Mexico Dairy and Products 2003, see table 1). Baja California, Baja California Sur, Colima, Chihuahua, Distrito Federal, Hidalgo, Jalisco, México, Michoacán, Morelos, Puebla, Sinaloa, Sonora, Tlaxcala y Zacatecas are the main states related to this type of milk production.

4.1.3 Dual Purpose Farms

Dual purpose farms have poor milk productivity as milking is a secondary income to beef. The Mexican tropics, along the Gulf of Mexico and the border of Guatemala, are the regions in which these farms are most often found (An Overview of the Mexican Dairy Sector, p.2). Some Mexican states that encompass these regions are Chiapas, Veracruz, Jalisco, Guerrero, Guanajuato, Tabasco, Zacatecas, Nayarit, San Luis Potosi, and Tamaulipas. Zebu cows, Holstein-Zebu, Brown Swiss-Zebu and other zebu cross breeds represent the type of breeds that can be used for either beef or milk production, depending on the local demand (An Overview of the Mexican Dairy Sector, p.2). Most dual-purpose farms retain calves until weaning, and then either raise them to marketable weights or sell them to cattle feeders.

4.2 Production by State

Table 2 shows the dairy cattle population by state. The 73 % of the total milk production comes from 9 federal states of which the most dominant are Jalisco (17.4%), Coahuila (10.7%), Durango (9.7%), and Chihuahua (8.1%).

Source: Servicio de Informacion y Estadistica Agroalimentaria y Pesquera, SIAP, SAGARPA.

Mexico currently maintains a cattle stock of approximately 30 million head, of which 2.2 million are dairy cattle inventories (Overview of the Mexican Cattle and Beef Sector, page1). Large state herds are located along the Gulf coast, which in 1999 represented 30% of the national cattle stock (Step by Step Guide to Exporting Forage to Mexico, section 5.1). Herds may also be found along the Pacific coast, and the northern border (Step by Step Guide to Exporting Forage to Mexico, section 5.1). The central states represent a smaller portion of the national cattle herd.

4.3 Milk Production in Mexico

For the year 2003, production increased to 9.8 billion litres, a growth of 2.2% from the previous year compared to the average annual rate of growth for the last 10 years of 2.9%. This rate of growth has been declining over the last three years.

During 2003, Mexico produced 9.8 billion litres (10,103,821 tonnes)of fluid milk (see Table 3) and domestic demand for consumption of fluid milk reached 10,030,000 tonnes (USDA, Mexico Dairy and Products, p.4).

Similar to the location of dairy cattle, milk production is concentrated along the Gulf and the Pacific coasts, as well as the northern border (Step by Step Guide to Exporting Forage to Mexico). With a dominant yield of 1.7 billion litres (1,752,703 tonnes), Jalisco earned first place, followed at a distant second by Coahuila with 1.05 billion litres (1,082,552 tonnes); Durango and Chihuahua followed with production slightly under 1.0 billion litres (1,031,002 tonnes) each (see Table 3).

*preliminary figures for 2003 (10,103,821 tonnes).
Source: Boletin de Leche

4.4 Trends of the Past

Over the past decade, the Mexican dairy sector has experienced many similar trends to those witnessed in Canada. Firstly, tremendous consolidation and integration of the industry have occurred as result of the extremely thin margins incurred by producers. In Mexico, a company called Grupo Lala controls 26% of the market share, and is composed of 23 integrated companies (Lala Epands, Adds Shop, Upgrades Fleet, page1). Besides amalgamation, another trend encountered has been the improved milk productivity of the cows. Between 1994 and 2000, milk production improved by 23% while the herd size only increased by 5%. However, average Mexican productivity per cow at 2,983 lbs is only 16 % of the US average in year 2000. This reflects the lower yields realized by dual-purpose farms (Babcock 2002-1, How Mexico’s Dairy Industry has Evolved Under the NAFTA, page 2).

Availability of water will impact future dairy expansion and the ability to grow forage crops. Constant prices to the producers from 1996 to 2003 have also a negatively impacted expansion.

Producers have sought out ways to increase productivity levels and thereby reduce production costs. Improved milk quality and use in specialty products have also translated into price premiums.

4.5 Seasonal Milk Production

Milk production peaks during the rainy season, causing the over supply of the market and lower prices paid to the producers. This annual phenomenon has resulted in limited milk availability during other times of the year due to the lack of infrastructure for the drying of milk, and high storage costs. Seasonality of production is more common on dual-purpose production and to a lesser extent in semi-confined farms and is associated with pastures feeding of cattle.

4.6 Mexican Producers

Grupo Lala is a significant milk processing company of Mexico. Lala is short for La Laguna, which means lake or lagoon. La Laguna represents a region in the vicinity of Torreon, where many of the 220 suppliers of Lala are located (Source: Lala Expands, Adds Shop, Upgrades Fleet). It is one of Mexico’s 50 largest companies, and ranks 258 as Latin America’s most important companies (Lala Expands, Adds Shop, Upgrades Fleet). Its main facilities are located in the cities of Torreon, Coahuila, Gomez Palacio, and Durango. Currently, Lala is the second largest processor in the Mexican dairy sector, with 8 plants, 128 distributions centers and more than 3,500 delivery trucks. A large fleet of refrigerated trucks along with its other infrastructure provides Lala with one of the largest chilled distribution networks in Latin America. Their 10,500 employees combined with intricate capital, provides Lala with the ability to distribute high quality milk products such as milk, yogurt, dairy cream, desserts, cheese throughout Mexico. Other Mexican dairy companies include Nestle, Unifoods, Grupo Chen, and Natalim.

4.7 Production Problems

Although milk production has been increasing over the last 4 years, many past struggles of the typical Mexican producer are being carried forward. A lack of infrastructure and inferior sanitation are ever present (USDA Gain report 2004, page12). Extreme lack of infrastructure on dual purpose farms is a persistent problem, as is the lack of available financing for semi-confined operations. Expansion continues to be restricted due to low domestic prices and thin margins. Insufficient capital and financing have resulted in a lack of refrigeration facilities for the both dual purpose and semi-confined operations and their transportation trucks. As their margins are slim, many dual purpose and semi-specialized producers will "fill" their milk by substituting other products such as water or vegetable fat into the milk (An overview of Mexican dairy sector, Nicholson, page 2). These problems severely restrict Mexico’s ability to expand domestic production and achieve self-sufficiency.

A relatively small number of companies’ process dairy products in Mexico and a few large companies dominate the markets for many products. Currently, the major fluid milk producers are Grupo Lala, Alpura, Gilsa, Grupo Saragoza, Lechera Guadalajara, Jersey and Evamex. These firms account for about 80 percent of all domestic production of fluid milk. Most of these firms also produce other dairy products, but they are not market dominant.

4.8 Economic Restrictions

Economic factors are the final influence that contributes to the amount of milk produced domestically. High interest rates make it difficult to expand production, especially for the smaller producers (USDA Gain Report 2003, page 11). When interest rates are high and profits are low, producers can’t expand production, or purchase new equipment. As suggested, it becomes only more difficult as margins are further hampered by low milk prices resulting from LICONSA’s milk distribution. As many of the fore-mentioned factors are dependent upon the economy, these factors influence milk production through a synergistic combination.

5. Domestic Consumption

It is difficult to precisely calculate milk consumption because of the varied products and foods that use it. Growth in the demand for milk and milk products has spurred development, increasing the formal industry at the national level, and small and medium industries at the regional level. An artisan industry has also developed with attention focussed on micro-regional markets and value-added products.

In 1994 and 1995, Mexico had relatively static levels of domestic fluid milk consumption at 11.4 - 11.5 million tonnes (see Table 4). However, consumption declined 30 % in 1996 as a result of a significant price increase for pasteurized one-litre milk from 2.75 pesos to 3.6 pesos and a continued economic recession with high inflation rates (USDA, Milk Retail Price Hikes). Inflation was 52% in 1995, and continued to soar a farther 40% in 1996 (USDA Gain Report 1996). Since then, the consumption of fluid milk has been steadily on the rise as (see Table 4) the purchasing power of the typical Mexican citizen has continued to increase due to improving economic conditions. The resulting rebound in the Mexican economy starting in 1996 has seen Mexican consumers increased their levels of dairy products. According to USDA Foreign Agricultural Service GAIN Report 2003, consumption of milk and dairy products in Mexico is growing and was estimated at 13.6 billion litres in 2002 (14.0 million tonnes or MMT). All milk for direct consumption (fluid, powder, condensed and evaporated) represents 69 % of total consumption, while other dairy products (cheese, yogurt, cream, butter, ice cream, etc) account for the remaining 31 %. This proportion of milk versus dairy products consumption in Mexico is different from that of developed countries like the US, Canada and European Union where most milk consumption is made up of processed products such as cheese, yogurt and butter.

According to SAGARPA, in 2003 the total consumption increased to 12.27 MMT of milk, (imports fluid milk equivalent plus domestic consumption) an increase of 2.2%. Imports accounted for 18.3 % of total consumption.

*not available
** Domestic Consumption includes Fluid use domestic and factory use consumption
Sources: USDA Mexico Dairy and Products 1994 through 2003 and Coordinacion General de Ganaderia, SE and SIAP/SAGARPA

Note: the total milk consumption estimates varies according to source-USDA versus SAGARPA.

6. Imports

6.1 Trends

During the last decade, Mexico has experienced economic issues that have impacted the levels of dairy imports. The Peso Crisis of 1994 was the result of numerous factors such as: failed privatization of banks, poor financial regulation, short term debt composition, and a fixed exchange rate (Case Study: Banking Crisis in Mexico, page 1). Devaluation of the peso, extreme inflation, and soaring interest occurred during the Peso Crisis. Within a week after the crisis struck on December 20, 1994, the value of the peso had diminished by 50% and inflation increased drastically. In March of 1994, interests rate spiked by more than 50% with a further 25% in December. The extreme devaluation of the Mexican currency meant foreign goods became more expensive. This forced reduced levels of imports. Subsequently, in 1995 Mexican Gross Domestic Product decreased by 7% (Case Study: Banking Crisis in Mexico). However, between 1996 and 1999, the Mexican economy recovered due to a strong export sector (World IQ, Economy of Mexico). Despite this economic recovery, producers are reluctant to borrow money to expand. This can be attributed to the elevated domestic interest rates that small producers faced. Over the last 5 years, there appears to be a downward trend in Mexican imports of dairy cows (see Table 5).

6.2 Current Imports

In 2003, Mexico imported 7,092 dairy cows valued US$9 million (see Table 5). According to the telephone interviews conducted by AAFC Manitoba Regional Office to Manitoba dairy producers (Manitoba Dairy Survey¹, June-July 2004), smaller Mexican farms import lower quality and smaller animals. Small dairy farms are finding it unprofitable to import heifers due to high domestic interest rates and the risks of accruing dollar debt. Supplier availability and price seem to be key factors that are affecting Mexican purchase decisions. Imports of high quality semen and embryos are by large specialized farms (USDA, Mexico Dairy and Products 2003, page11).

Source: Mexican Secretariat of Economy.

6.3 Sources of Imports

As Mexico continues to struggle with self-sufficiency, imports of the dairy sector continue to flow into the country although at reduced volumes compared to 1999 and 2000. Cattle imports are sourced from Canada, the United States, Australia and New Zealand (see Table 6). Canada and the US have lost market to these other countries.

Source: Mexican Secretariat of Economy

Although imports volumes are highly variable from year-to-year, it appears that offshore imports are on the rise. As an example of the variability in import volumes, New Zealand has supplied as little as 4.3% of the cows imported in 2001 to as high as 34.2 % in 2002.

Overall, in the last half decade, New Zealand’s and Australia’s market share (by head) has increased from only 30.4% (in 1999) to 59.5% (in 2003), while Canada’s and the United State’s shares have dwindled from 69.6% to 40.4%. The BSE problems that arose in 2003 have contributed to reduced North American exports to Mexico.

Source: Mexican Secretariat of Economy

Looking at market prices as shown in Tables 6 and 7, one can compare the cattle prices from these four countries. According to these calculations, there is a large gap between the price of the offshore cattle and the North American cattle. The main competitive advantage for the offshore exporters such as New Zealand and Australia is price. By USDA Gain Reports, Mexican producers value price. These countries seem to be able to provide very low prices to the Mexican producers. Table 8 compares the average price per head for the various supplying countries. On the average aggregate level, North American countries typically tend to have more expensive dairy cattle. Based on the aggregate price per head, United States is the most expensive, and Australia is the least expensive (see Table 8). Canada is in the upper range at $1,559.63 per head.

According to Manitoba telephone surveys conducted with Manitoba dairy producers, the discrepancy can be explained by the difference in quality of the animal genetics and a vast incongruity in size. Canadian dairy cows are often a full foot taller than their offshore counterparts. Offshore cattle have trouble adjusting to the new environment. As the climate and forage are often different, it is preferable that the animals come from similar settings. (Source: Telephone conversation with Manitoba Dairy Producers). For this reason, North American cows attract a premium price.

*These prices were calculated as aggregate averages based on Tables 6 and 7.

6.4 Forecast of Milk Production

Mexico’s fluid milk production continues to grow modestly and is expected to increase to almost 10.2 MMT in 2005. Leche Industrializada CONASUPO (LICONSA), the parastatal company charged with distributing milk to the poor, continues to increase its usage of domestically produced fluid milk, thus dampening demand for additional imports of non-fat dry milk powder (NFDM). Nevertheless, as the economy improves and population grows, domestic consumption of fluid milk will continue to rise (USDA, Mexico Dairy and Products 2003, pages 10-11).

According to the USDA, in large specialized dairies, modernization and improved dairy herd management will increase overall milk production in 2004 and the near future (USDA, Mexico Dairy and Products 2003, p.10). However, as confined producers make progress, it appears that the differences between the confined and dual-purpose and semi-confined farms will continue to widen as the later two groups struggle to increase output (USDA, Mexico Dairy and Products 2003, page 10).

Mexico’s dairy industry is currently unable to supply all the country’s needs. Poor sanitation and genetics, inefficient cold storage and refrigeration, and outdated transportation and marketing facilities hamper expansion. Confined production systems in northern Mexico are similar to those in Canada. Some large dairies continue to focus on increasing productivity through the use of improved genetics, feed formulas and seasonal comfort systems, such as water mist sprayers during the summer months. Semi-confined systems in central Mexico and dual-purpose cattle operations, mostly in southern Mexico, have lowered productivity.

Higher prices for domestic raw milk and LICONSA policy to use more domestic milk are encouraging small and medium-sized dairy farms in central Mexico to expand milk production by improving their stock.

Increased use of semen to improve genetics is expected in the future. Under the OIE (Organization International des Epizooties) guidelines, semen and embryos are not considered to be products that have a risk of carrying BSE, so trade in these products ought not to be restricted. As a result, Mexico has not banned their importation from Canada or the US.

Dairy cattle forecasts also suggest levels of imports comparable to past years once Mexico re-opens the border. The suppliers will continue to be the same as in the past. However, as the Mexican border remains closed at this time Canadian exporters are likely to face increased competition from suppliers such as the European Union, Australia and New Zealand.

7. Manitoba Dairy Sector and Market Opportunities in Mexico

Milk production throughout Canada is controlled through a supply management system of production quotas. Each province is responsible for the production of its own fluid milk and sets its own pricing formulas, quota policies and other regulations. The federal government has jurisdiction over the industrial milk market, which is administered through a federal-provincial agreement known as the National Milk Marketing Plan. Canada adopted a system of supply management for industrial milk in the early seventies. Although the methodology in how these quotas are administered may vary among provinces, the end result is the same in that all producers must possess quota to produce and market milk and that they must stay within their allotted quotas. The primary disincentive to producing over-quota milk is that it is priced significantly lower than within-quota milk.

Under supply management, farmers attempt to strike the most accurate balance between supply and demand. They manage their production for a certain period so that it coincides with forecasts of demand for their products in the same period.

By controlling production, they avoid costly surpluses. Surpluses occurred when total market production exceeds total market demand. Any excess production generates storage and disposal costs.

Managing supply is more complex in agriculture than in many other industries, primarily because of the large number of production units, weather, diseases and other uncontrollable factors.

There are 619 dairy farmers in Manitoba and their combined production generates significant spin-off dollars for the provincial economy. At year-end 2002, Manitoba had Canada's fifth largest dairy herd with approximately 3.8% of the country's dairy cows. The actual number of dairy cows producing milk in Manitoba within the supply management (quota) system totalled 34,500 as of December 31, 2002. An additional 21,600 replacement heifers, ranging in age from one to 30 months also existed.

The structure of Manitoba dairy farms mirror what has happened in processing plants. Farms have sought economies of scale by growing bigger. Bigger farms have meant fewer farms. The average age of milk producers is 42, almost a decade younger than the average Canadian farmer.

The Manitoba Milk Producers is the organization representing all milk producers in Manitoba. It is responsible for selling milk from producers to local processors. More than $700 million and 4,500 jobs depend on the whole provincial dairy industry. Dairy products produced in the province in 2002 were valued over $300 million and included: fluid milk (94.7 ML); cream (3.8 ML); butter, ice cream, cheddar cheese (5.9 kt), variety cheeses (8.1 kt) and frozen yogurt. In recent years, dairy farmers, operating largely as family farms, have spent an average of $30 to $40 million per year re-investing in their operations.

On average, Manitoba dairy farmers put in more than 3,700 hours of work per year compare that to 2,200 hours per year for full-time employees outside agriculture. An average dairy farm has annual sales around $250,000 but the margins are thin. On average, Manitoba farmers milked 50 cows in 1999. Manitoba Milk Producers takes care of farmers’ price risk, leaving them in control of the margins. On average, farmers have $1.2 million invested in their farms. In this capital-intensive, slim-margin business, farmers count on their supply managed marketing system to keep cash flows predictable.

In 2004, a Manitoba survey was conducted to determine the ability of Manitoba dairy producers to export to the Mexican market. The results provide valuable information when assessing the possibilities of this export market. The survey of the Manitoba dairy producers revealed that 42% desired between US$1,400 and US$1,600 for their replacement dairy heifers, while 40% were willing to accept a lesser price between US$1,200 and US$1,400. These price expectations are consistent with the Canadian average of US$1,559.63. Although the numbers revealed by the Manitoban producers seem to trend to the lower end of the price range, one must consider that the data used to calculate the Canadian export price averages was prior to the BSE. Manitoba farmers could have adjusted their expectations subsequent to the BSE incident.

The survey also provided valuable information on the availability of Manitoban animals for the Mexican export market. Of the respondents, 29% of the producers are currently expanding their operations. This suggests that they will need new buyers for their elevated levels of production. This is further supported by the fact that 61% of those surveyed are interested in new markets. However, it should be noted that Mexico is not a large export market for the Manitoban producers. Currently, only 1% of the Manitoban producers sell to this market, according to the survey results. So, Mexico could be an untapped market for the Manitoban producers. There is an abundance of animals available, as Manitoba will have 14,885 and 14,448 dairy animals for sale in 2004 and 2005 respectively, with 55% of the animals for export available year round. Given this abundance, Manitoba certainly has the ability to potentially supply this export market.

Price will continue to determine actual sales. Canada and the United States have difficulty competing against Australia and New Zealand based on price (see Table 8). However, it is the view of many Manitoban producers interviewed who have been in contact with Mexican importers, that Canadian quality and superior productivity will more than make up for the elevated price. Canada and Manitoba should use these advantages as a means of branding their product.

7.1 Next Step

It has been suggested, during the Manitoba telephone surveys, that cooperation is an imperative facet to taking the next step to approach this market. Firstly, the need for intergovernmental cooperation was emphasized. Producers look to national, provincial, and municipal governments to assist through financial contributions. Secondly, government/producer cooperation needs to be enhanced. Government support is vital to realizing progress towards exporting to the Mexican market. Many of the producers surveyed emphasized the belief that without government collaboration and support, this market is unattainable. Various types of assistance were suggested by the individuals surveyed including government assistance with the costs of and organization of trade shows. Producers felt that costs such as travel expenses, accommodation, along with other expenses were beyond their means. Besides expenses, the respondents felt that government could help establish industry contacts within Mexico. Some felt that government should encourage key Mexican connections to attend the shows.

In an overall consensus, government funding was stressed as the most crucial element for success in this new market. Although trade missions are the most mainstream proposal, many alternatives such as subsidized transportation costs were suggested as a further incentive to help more producers export to this market.

As discussed earlier, financing is not readily available in Mexico for dairy producers. Manitoba producers recognized the need for financing of Mexican purchases. This could enable the Canadian exporters to gain favour and market share in this market.

Co-operation amongst the Canadian and Manitoban producers is essential. By encouraging participation from several producers, it could improve access to the government support and make it easier to service the market on a year-round basis. For 2004, only 25% of the Manitoban producers’ surveyed (MISB producer survey) were interested in participating in trade missions. Although trade missions are supported by many, producers recognized that this requires an ongoing presence in the market. Producers stated extra time, money, and visits are required to establish and continue relationships. It takes time to get to know the Mexican buyers, and gain their trust.

The current sentiment of the Manitoban producers poses a dilemma with respect to further developing the Mexican market. Some negative opinions reflect the recent BSE incident. Some producers don’t feel that the export market is a secure, sustainable business. It has been suggested that in order to pursue this market some producers would like guarantees about the border and prices. Producers want consistent, predictable government policies on market access. Producers also are concerned about variable prices and the impact of currency fluctuations. They are looking for contracts that secure stable prices. These opinions reveal important issues that must be addressed as Canadian producers investigate the Mexican sector.

REFERENCES

1. For complete survey results, please contact Hector Urbina, Agriculture and Agri-Food Canada

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