Utrecht, Netherlands, Sept. 17 - A buoyant outlook awaits Brazil's dairy sector thanks largely to existing domestic market growth, export market development, and high potential of milk production increase in Brazil, concludes a new Rabobank report.
Brazil's economic performance is foreseen to remain the main driver of domestic market growth.
Also, the country's international position is reinforced by a tense global supply and demand balance for dairy products, which has not only led to firm international prices but also created a window of opportunity for Brazil to boost its role as an important exporter of dairy products.
The environment of high international dairy prices and high local dairy retail prices outlook is likely to support Brazilian farmgate prices at levels above the average long-term trend over the next couple of years.
With international prices for dairy products reaching record levels in 2006-07 and showing signs to remain above their historical levels, Rabobank believes the current trend should encourage the expansion of production and the entrance of new players in the international dairy trade.
For export-focused processors, the potential emergence of an internationally more dominant Brazilian dairy sector poses threats as well as opportunities said Utrecht-based dairy analyst Mark Voorbergen of Rabobank's Food & Agribusiness Research and Advisory (FAR). The main threat lies in Brazil's export focus, which has in recent years grown in geographies that have for decades been important destinations for traditional exporters, like the Middle East and Africa.
"The main opportunity can be found in the relative immaturity of the local Brazilian market, mostly consumption levels of yoghurts and cheese, which are still very low," said Voorbergen. "This poses interesting opportunities for international processors willing to invest locally, bringing their relatively high quality standards and marketing capabilities to the challenging production environment of Brazil."
While New Zealand, the European Union and Australia have continued to dominate the world's dairy export market, over the past five years, the U.S., Argentina and Brazil have exhibited the largest increase in net dairy exports, followed by Ukraine and Uruguay. But Brazil shows one of the best set of characteristics to be one of the winners in accessing the international dairy demand.
Despite the opportunities created by both the current market environments, challenges remain. The short-term challenges include balancing the increase in milk supply output for both international demand and local consumption.
Furthermore, the increase in levels of milk prices worldwide will encourage not only Brazilian milk output, but other important milk supplying regions around the world, consequently intensifying competition in international market.
"On long-term developments, steps need to be taken to modernise parts of the sector, to raise productivity, to expand output of milk and milk products, to achieve international standards in product quality, and to become a reliable partner in international trade," said FAR's Sao Paulo-based dairy analyst Paulo Carletti, who authored the report.
Also, the sector is still developing for a more effective system of agreements between the processors and farmers to ensure quality and consistency in milk supply, which is key if the sector is to realize its full potential.