Expensive milk: high costs lead farmers to give up the branch

As the pandemic progressed, the rise in feed costs and the loss of purchasing power of Brazilians hit milk producers and dairy manufacturers alike.

As a result, milk production fell by 2.2% in 2021, and in the second half the fall reached 5%, compared to the same period of the previous year.

“It was a historically high drop, with supply reacting to the tightening of profitability. The consequence of this is that we are seeing the departure of producers, although we cannot quantify this”, says researcher Glauco Carvalho, from Embrapa Gado de Leite.

Between March 2020 and March 2022, the cost of milk production rose by no less than 64%, according to Carvalho’s estimate, mainly because of the high prices of soy and corn, widely used in animal feed.

“This increase ended up tightening the margins [de lucro] within the production chain. It started by squeezing the producer, then the industry [de laticínios]. And with weaker demand, the industry was unable to pass it on to retailers”, says the researcher.

The change in the economic climate did not happen overnight. 2020 was still a positive year for the sector because demand was heated and costs were relatively under control.

“Milk is a commodity very dependent on the domestic economic situation. When the Brazilian economy, income and consumption grow, the dairy chain also grows”, says the researcher.

“In 2020 we saw a lot of injection of resources in social programs, which helped a lot because it brought consumers from classes C, D and E, which ended up providing the growth of the sector”, says Carvalho.

In 2021, unemployment remained high and there was a reduction in emergency aid, which began to negatively affect demand.

Market analyst Andrés Padilla, from Rabobank bank, highlights the average increase of almost 40% in food in the basic basket, between the beginning of 2020 and 2022, a movement that explains the drop in consumption.

“Consumers are going through a very difficult situation, they are feeling a lot of pressure. That’s why the consumption of UHT milk, yogurt and some cheeses also dropped”, he says.

The scenario has also changed for the worse within farms, where animal feed can represent more than half the cost. “There was an escalation in the cost of production that began in mid-2020 with corn and soybeans, including the failure of the Brazilian crop,” he says.

The upward trend continued, according to the researcher, also because the main developed countries began to inject a lot of resources into their respective economies.

“This ended up leading to a stronger process of price increases, which ended up culminating in higher inflation worldwide”, says Carvalho, from Embrapa, who also mentions the supply problems caused by the lockdown.

According to the researcher, as the grain market has high prices, many of these producers have chosen to change their activity. They can also lease their areas or sell them, taking advantage of the heated demand for land in the interior of the country.

In addition to the price of the feed, a relevant fixed cost has to do with the European origin of the Brazilian dairy herd. As they are temperate animals, they need lower temperatures, otherwise they produce less. The way out used by producers with better economic conditions is to acclimatize the environment, through sprinklers installed in the sheds.

Production focuses on large companies

The concentration of milk production on larger farms is not just a Brazilian phenomenon, says Padilla, from Rabobank.

“Milk is an activity that demands a lot of effort from the workforce and needs to be carried out all year round. And it’s difficult to achieve good profitability if the scale is very small. We see this in New Zealand, in the USA, in Europe, with the consolidation of the number of producers. It is a worldwide phenomenon. Larger farms represent an increasing share of total production”, says Padilla.

Larger producers are more profitable because they are able to invest in new technology and equipment, as well as in the genetic improvement of the herd. They also plant corn and soybeans, reducing the cost of production.

They raise pigs to use the dung as fertilizer on their crops, in addition to selling younger animals to other producers.

According to Glauco Carvalho, from Embrapa, the dairy sector is undergoing a restructuring process that has accelerated in recent years.

“From a regional point of view, production has been increasingly concentrated in the southern states, Minas, part of Goiás, with a little milk in Pernambuco, Alagoas and Rondônia, [com essas regiões] concentrating half of the national production”, says the researcher.

The other point has to do with the scale of production. “Producers who deliver more milk receive a higher price. This price differential can sometimes reach 30%, which gives an idea of ​​the difference in profitability for the small producer”, he says.

In Rio Grande do Sul, the local Emater (Company of Technical Assistance and Rural Extension) estimates that around 5,000 producers leave the activity annually, a relatively small number compared to the national total.

Present in practically all municipalities in the country, the number of producers has been falling for decades, according to the IBGE (Brazilian Institute of Geography and Statistics).

In 2017, the last available survey, there were 1.2 million establishments producing milk – up from 1.4 million in 2006 and 1.8 million in 1996.

In the country’s leading dairy town, cooperative cushioned crisis

In the city of Castro (PR), ranked first in the municipal milk production ranking, the Rural Union, which brings together producers, calculates that about 10% of associated producers chose to leave the activity since 2021.

According to producer Roelof Hermannes Rabbers, director of the union and in activity since 1993, the crisis just doesn’t come with force majeure in the city because the sector is organized in a cooperative.

“Here, everyone works together. With a pricing system that doesn’t go up or down at once. We have a cushion to cushion falls and price rises as well. And this is important because milk costs money every month, it’s not like soy and corn”, says Rabbers.

In the case of Laniel Pereira, 29, son and grandson of dairy farmers in Indianópolis (MG), in the Triângulo Mineiro, the decision to change activities took place in 2014. Today he produces coffee, corn, soybeans and sorghum.

He entered dairy production early, at the age of 12, due to the need to take on the tasks that his father stopped performing due to a health problem that was overcome a few years later. After two years sharing the milk business with his father, in 2009 he left for his own herd, which he ran for five years.

He chose to go out with a profit in managing the herd of 70 heads, of which on average 20 were lactating and produced 300 liters of milk a day, with a productivity of 15 liters per cow.

“There was no loss with milk, but the opportunity cost of cereals was better”, says Pereira, for whom the daily work routine of milk, even at Christmas and Carnival, was never an issue. “The problem is to do this knowing that the profitability is low”, says the producer, who does not consider returning to the activity.

Ahead of Abraleite (Brazilian Association of Milk Producers), Geraldo Borges says that the negative scenario has not spared anyone in the sector.

“The crisis is affecting the small, medium and large, although obviously the small ones suffer more for having a smaller scale of production, with less negotiation power. From north to south of the country, and all forms of production, with the generalized increase production inputs, starting with animal feed and diesel”, says Borges.

The sector, he says, has been making demands on the federal government for more than three years to face the difficult period, in particular to improve the conditions for financing investments in new equipment and digital technologies.

These demands would have been welcomed by the Ministry of Agriculture, but that would not have been enough.

“The Economy Minister and his team have no eyes for the dairy sector. [ex] Minister Tereza Cristina and Minister Marcos Montes, who succeeded her, are our partners, they accepted a lot that we took. But a lot of things die in the Ministry of Economy”, says the president of Abraleite.

Researcher Natália Grigol, from Cepea (Center for Research in Applied Economics) at Esalq (Luiz de Queiroz Higher School of Agronomy), draws attention to other effects of the bad conjuncture.

“The big problem was the very large sequence of compromised margins. We see the short-term result, with production adjusting to account for the weakened demand, as well as the medium and long-term disinvestment”, she says.

The lack of financial breath led to a kind of anticipation of the off-season, evaluates the researcher, which normally occurs from the months of June or July, when the pastures are not able to adequately nourish the herd. “As a result, prices [pagos ao produtor] rise again in the field, now driven by the decreasing supply”, says Natália.

In the case of dairy products, Padilla, from Rabobank, assesses that the products have faced high raw material costs, especially energy and packaging.

The structure of the industry, however, remains quite fragmented, despite the growth of some foreign groups in the Brazilian market.

“It is true that the [mexicana] Lala bought Vigor, and [francesa] Lactalis grew up in Brazil. But Nestlé has shrunk a lot in size [no segmento lácteo]. Overall, production is quite pulverized, especially in the case of UHT milk, with little product differentiation”, says the analyst.

App helps producer get organized

To help small producers, Epamig (Empresa de Pesquisa Agropecuária de Minas Gerais) recently launched a simplified application for monitoring production costs.

“This project is aimed at the producer who is more familiar, who is the smallest, the poorest. And this sector crisis has made the most sense in recent years”, says researcher Djalma Pellegrini, from Epamig.

One of the complicating factors is following the variation in production cost, which varies greatly throughout the year. “From June, the situation complicates because only in the pasture it is not possible to maintain milk production, it needs to be supplemented with feed”, he says.

The idea for the application came after a series of interviews with producers from Minas Gerais, in which it became clear that basic management notions were lacking.

“We realized that the vast majority of producers did not know what their production cost was. And they played anyway”, says Pellegrini.

Epamig sends the Android version of the application free of charge via Whatsapp (34) 99911-8602.