FINAL Ingredient Database 2019 Explanatory Notes

2019 INGREDIENT DATABASE
Explanatory Notes
Katie Phelan
COPYRIGHT ©2019. USDEC. ALL RIGHTS RESERVED
Contents
1 Asia .......................................................................................................................................... 1
1.1 Bangladesh ..................................................................................................................... 1
1.2 China .............................................................................................................................. 3
1.3 Hong Kong ...................................................................................................................... 6
1.4 India ................................................................................................................................ 7
1.5 Indonesia ......................................................................................................................10
1.6 Japan ............................................................................................................................12
1.7 Malaysia........................................................................................................................15
1.8 Pakistan ........................................................................................................................16
1.9 Philippines ....................................................................................................................17
1.10 Singapore ...................................................................................................................19
1.11 South Korea ................................................................................................................20
1.12 Taiwan ........................................................................................................................22
1.13 Thailand ......................................................................................................................23
1.14 Vietnam.......................................................................................................................25
2 Middle East & Africa ..............................................................................................................27
2.1 Algeria...........................................................................................................................27
2.2 Egypt.............................................................................................................................29
2.3 Morocco ........................................................................................................................32
2.4 Nigeria ..........................................................................................................................36
2.5 Saudi Arabia .................................................................................................................38
2.6 Turkey ...........................................................................................................................42
2.7 UAE ..............................................................................................................................44
3 Australasia .............................................................................................................................48
3.1 Australia ........................................................................................................................48
3.2 New Zealand ................................................................................................................53
4 Europe ...................................................................................................................................58
4.1 EU-28............................................................................................................................58
5 North America ........................................................................................................................64
5.1 Canada ........................................................................................................................64
5.2 USA .............................................................................................................................66
6 Latin America .........................................................................................................................69
6.1 Argentina ......................................................................................................................69
6.2 Brazil .............................................................................................................................72
6.3 Chile..............................................................................................................................75
6.4 Colombia.......................................................................................................................79
6.5 Guatemala ....................................................................................................................82
6.6 Mexico ..........................................................................................................................85
6.7 Peru ..............................................................................................................................88
6.8 Uruguay ........................................................................................................................91
6.9 Venezuela .....................................................................................................................93
7 Former Soviet Union (FSU) ...................................................................................................95
7.1 Belarus..........................................................................................................................95
7.2 Russia ...........................................................................................................................97
7.3 Ukraine .........................................................................................................................99
1.
Asia
1.1
Bangladesh
Data Sources
 Production data: Trade sources
 Trade data: Estimates based on Bangladesh Customs Department
Context/Rationale for Forecast
 The population of 168.1 mn is rising at 1.02% annually; it remains mainly rural and marked by low
spending power, but the economy is growing rapidly despite this, aided in particular by government
policies supporting labor-intensive export-oriented industries and a low birth rate which has allowed per
capita incomes to rise. Arguably, the economy is now its best shape since independence in 1971, with
a stable political environment (one party in power for last ten years), remittances from the 10 mn plus
overseas Bangladeshis increasing and the key garment industry doing well
Bangladesh GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
7.7
7.3
7.0
7.0
7.0
7.0
Source: IMF
Key Trends
 As a result of the economy’s growth, dairy consumption is on the rise, especially for liquid milk (milk and
eggs have always been seen as a rich person's food locally) – although, unlike the vegetarians of India,
Bangladeshis do not have high cheese (panir) consumption
 Bangladesh remains in evident dairy deficit, at around 62% self-sufficiency, so import demand is
expected to grow for the foreseeable future
 WMP production has been growing – here the estimates have been revised and corrected to 11,800 mt
last year, although utilization levels are low due to the high cost and scarcity of milk:
– Key producers are the state-owned Milk Vitae (~4,400 mt), PRAN (1,800 mt) and BRAC (1,500 MT),
although their aggregate production capacity is close to 26,000 mt/yr
– Other emerging dairy companies also produce in limited quantities, including Abdul Monem Ltd.'s
Igloo dairy, Partex group's Danish milk (which imports milk powder but has recently started a small
production facility), ACI (likewise) Abul Khair Group (Brand Starship) and a few others
 FFMP imports also appear to have grown, suggesting lower future growth in WMP import demand
 New Zealand has been developing its volumes in the market strongly, with WMP up from 31,000 mt in
2014 to 67,000 mt in 2018; last year Fonterra signed sole distribution agreement with ACI Agrolink for
Anchor “NutriShakti” fortified milk powder
1
Regulatory Changes
 The government is putting in a lot of measures to support the development of the local dairying and
dairy processing sector:
– Import duties on milk powder were raised from the existing 5% to 10% in the budget for FY 2019-20
(this took effect from July 1, 2019)
– To encourage local dairy producing companies, concessionary benefits have been provided by
Statutory Regulatory Order for insulated road milk tankers, animal feed, raw milk preservatives and
for AI equipment
– The local supplementary duty on skimmed milk manufacturing has also been withdrawn. It was
originally charged at 20%, as it was considered a luxury product, and then later reduced to 15%. A
supplementary duty for butter and other fats and oils derived from milk and dairy spreads has also
been reduced
– With the support from World Bank, the Department of Livestock Services (DLS) started the Livestock
Development based Dairy Revolution and Meat Production Project in July, 2018. The World Bank
commitment to this is US$500 mn, with the Bangladesh government due to add around US$100 mn
more. The project will be completed by June, 2021. Key expected results are improved agricultural
technology, increased productivity by species, increased market access and so sales for producers
and processors, more risk resilient operating practices backed up by livestock insurance products
– The Bangladesh Dairy Development Board Act-2017 has been drafted and sent to Cabinet. On its
approval a Dairy Development Board will be created to regulate the dairy market, set standards and
facilitate research and regulations and activities to improve local dairy production
– Bangladesh Bank has launched a 2 bn BDT (Bangladeshi Taka) refinancing scheme to dairy farming,
facilitating credit for dairy farmers for rearing dairy cows and AI
– There are regular extension program of DLS for breed improvement, husbandry practice
improvement and feed improvement for dairy cattle
New Plant / Capacity Expansions
 Two existing key players (BRAC and PRAN) have also increased their production of butter and cheese,
competing vs. Milk Vitae, whose production levels are steady. Some of the country’s large food
processors have entered the market with butter and cheese products, including Ejab Group, Golden
Harvest and Igloo Dairy (Abdul Monem Ltd.)
 Nestlé is setting up an infant milk plant in Bangladesh this year
2
1.2
China
Data Sources
 Production data: Trade sources
 Trade data: Estimates based on GTIS, ITC and local customs data breakdowns (0404 only)
Context/Rationale for Forecast
 The 1.42 bn population (18.4% of the world total) is slowing its growth but becoming increasingly
urbanized, while the local economy continues to grow rapidly, though more slowly
China GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
6.6
6.3
6.1
6.0
5.8
5.6
Source: IMF
Key Trends
 Economic growth is expected to continue at a good pace, albeit with some impact from the trade
confrontation with the US; August 2019’s Yuan devaluation could slow imports but boost exports and
support income growth. Demographic growth has shifted into reverse, impacting the infant formula
category in particular, but overall domestic demand is being supported by strong expansion in aggregate
spending power and E-commerce reach
 In 2018, China produced 30.75 mn mt of raw milk, up 1.2% YoY; the output in Q1 2019 only rose by 2%
YoY to 6.25 mn mt:
– The government has relaxed its drive for larger farms to some extent, rather placing greater focus
on working with smaller farms to encourage their growth − with a new policy issued in July 2019 to
this end − and on plans at a provincial level around the country aimed at supporting growth in milk
production and in the scale and sophistication of the main processors
– Local milk supply has been tight, with 2019 prices in USD/mt terms notably higher than in the
preceding two years, and rising earlier during the year, with rising feed prices a contributory factor
too
 WMP production levels are unclear as they are not reported openly, and WMP production is not
competitive vs. imports of course, and its level is dictated to a great extent by the raw milk supply
situation; however trade sources report that local stocks as of mid-June 2019 are ~100,000 mt; YTD
milk powder imports are notably high, whilst the opposite is true for butter/AMF
 Demand for US whey permeate in the pig industry has been hit
– Overall demand is being constrained by the impact of the African swine fever crisis, the first confirmed
case of which occurred locally in August 2018; ~700 mn hogs were slaughtered in China in 2018,
but Rabobank has predicted that this total will fall by 150 – 200 mn in 2019 because of deaths from
infection or culling
3
 Whey import volumes:
– For the main Chapter 4 whey products, these have been revised using Chinese customs data
breaking down imports for 2017 and 2018, with extrapolations back over 2014-2016 (where no such
data is available) based on the HS040410 import trends; for whey permeate it has been estimated
that some limited additional volumes enter under HS codes outside Chapter 4; as far as possible
small exports of milk permeate have been removed from these volumes
– WPC80/WPI volumes are based on an estimated 90/10 split of HS350220 imports plus “stray”
volumes identified under HS040410 (extrapolated for 2014-2016 as above)
– Permeate volumes have been badly hit with some SWP substitution and reduced demand due to
culls; investment is already going in to replace and expand the larger operators, but demand will take
some to time to recover
 MPC:
– Import volumes have been revised using Chinese customs data breaking down imports for 2017 and
2018, with extrapolations back over 2014-2016
 Milk permeate:
– This is exported from the US under HS040490 but in China the shipments are declared by the
importers under HS040410
Regulatory Changes
 The main thrust of regulatory changes in the industry since last year has been on enforcement of tighter
control around formulations on infant nutritionals, establishing a stricter inspection regime for their
manufacturers and on labeling/claims of dairy products in general; the infant nutritional area has been
the subject of a national work plan issued in June and focusing on aspirations such as domestic formula
taking 60% of the market and local processors improving their sophistication and quality levels
 During 2019 there has been a marked focus on establishing regulations and registering acceptable
products in the Food for Special Medical Purpose category, most of which are in the specialized infant
nutritionals segment (Nestlé is the main local FSMP manufacturer, whilst some pharma companies have
entered this segment); this category’s growth should be aided as a result
 2019 has seen Guangzhou begin to pioneer regulations supporting breastfeeding at a local level. This
could well be the first part of a wider drive for change around the country, acting as a constraint on future
demand for infant formula (and related ingredients)
Trade Agreements
 A notable impact of the Sino-US trade war has been that tariffs imposed on US whey permeate have
assisted substitution by SWP from suppliers such as Belarus, which started to increase its exports to
China notably from June 2018 onwards
 Higher tariffs on US alfalfa have also helped local feed and therefore milk prices appreciate, in principle
enhancing the price competitiveness of imported ingredients
4
New Plant / Capacity Expansions
 Growth in processing capacity is far outstripping that in milk supply:
– For example, in H1 2019, numerous domestic dairy processors invested in capacity expansion:
 Mengniu invested USD152.4mn (RMB1.05bn) and USD72.6mn (RMB500mn) to enlarge its plants
in Jiaozuo (Henan) and Qiqihar (Heilongjiang)
 Yili expanded its Daqing (Heilongjiang) and Quzhou (Zhejiang) factories with investments of
USD290.3mn (RMB2bn) and USD182.9mn (RMB1.26bn) respectively
 Shanxi-based Jinzhogn Yili Dairy Co., Ltd. planned an investment of US$12.7mn (RMB87.15mn)
into the technical rectification of its existing fermented dairy production lines and the building of 2
UHT dairy production lines. If this commissions at the end of this year as scheduled, the
company’s capacity will expand to 310,000 mt/yr from 210,000 mt/yr
 Saishang Nestle Hulun Buir Ltd. spent US$17.4mn (RMB120mn) on a UHT whipping cream &
milk plant to start up in late 2019, as well as a cheese plant to enter pilot production in 2020
 Guangzhou Fengxing Milk Co., Ltd. started construction of a 300,000 mt/yr dairy factory at the
cost of USD145.1mn (RMB1bn)
 Wissun International Nutrition Group Co., Ltd. announced a US$59.5mn (RMB410mn) investment
in its liquid dairy project with 2 phases adding 5 and 15 production lines and new milk processing
capacity of 300 mt/d and 5,000 mt/d in the 2 phases respectively
 Such growth is being supported by province-level subsidies designed to expand and upgrade
processors’ capabilities in producing dairy products and nutritional formula
5
1.3
Hong Kong
Data Sources
 Production data: N/A
 Trade data: Estimates based on GTIS/ITC
Context/Rationale for Forecast
 The 7.4mn population is wealthy on an overall per capita basis; however, in 2018, Hong Kong’s economy
was weak (+3%, vs average 5.2% over 1974 – 2018), and market uncertainties around the US-China
trade disputes persist alongside weak stock markets
Hong Kong GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
3.0
2.7
3.0
3.0
3.0
3.0
Source: IMF
Key Trends
 Retail and foodservice are quite flat: low-end and high-end are doing OK, with the mid-market segment
is reported as suffering most
 There is a plus in the recent announcement that the market is now merging into the Guangdong-Hong
Kong-Macao Bay Area (the Greater Bay Area, or GBA). The GBA combines Mainland China's
wealthiest and economically most advanced cities along the Pearl River Delta into a metropolitan cluster
which covers Hong Kong and Macao. It has a population of nearly 70 mn and generates GDP of about
US$1.5 trn – this may boost GDP and stimulate imports to some extent, however most manufacturing
activities will remain in the mainland and in the GBA rather than Hong Kong itself
 Trade remains tariff free, so encouraging transparency and price-competitiveness but essentially
unaffected by free trade agreements
 There is no meaningful swine and livestock business in Hong Kong, although ASF has been identified
in May 2019, at a slaughterhouse close to the border with China, leading the Hong Kong government to
announce a cull of 6,000 pigs
6
1.4
India
Data Sources
 Production data: estimates based on trade sources and sporadic official data when released
 Trade data: Estimates based on GTIS/ITC, Import Genius (customs data / bill of lading analysis on whey
category)
Context/Rationale for Forecast
 The still mainly rural 1.37 bn population (17.7% of the world total) is growing rapidly; the local economy
continues to grow very rapidly
India GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
7.1
7.3
7.5
7.7
7.7
7.7
Source: IMF
Key Trends
 Milk supply (~55% buffalo vs. 45% cow) has continues to grow, estimated by some local analysts as
follows:
– 2017 – 169 mn mt
– 2018 – 174 mn mt
– 2019 – 181 mn mt
– 2020 – 188 mn mt
 However, as of early June, 2019 has seen fodder availability down, feed prices up and milk production
reduced due to a delayed monsoon and droughts, with consequent reduced feeding also limiting
productivity
 However, from a longer-term perspective, this level of growth is likely to be encouraged or at least
facilitated by the state: at least 60% of the processed milk is processed by co-ops who are effectively
under government control. Procurement by the co-ops will not be permitted to drop, as it would be
disastrous politically. Hence their SMP and bulk butter volumes (i.e. as opposed to butter in consumer
packs) will be dictated by supply considerations than demand
 In effect, the key theme is: high production > high procurement > inadequate growth in value added
products > compulsion to convert to SMP
 The country is broadly self-sufficient in dairy:
– Demand is assured as 31% of the population is vegetarian
– Growth in demand is being driven by a rising middle class population & income levels, growing
urbanization and increasing demand for packaged dairy, especially pasteurized packaged milk
(aided by increasing quality / safety concerns)
7
 However per capita consumption of milk is still only 97 L/yr, and product mix is a challenge:
– 64% of the industry = liquid milk, milk powders, beverage whiteners (estimated annual growth for
category – 15%)
– 33% = Traditional Value Added Products (curd (like plain yogurt), paneer, ghee, butter, ice cream,
butter milk (estimated annual growth for category – 16%)
– 1% = New Value Added Products (cheese, UHT Milk, flavored milk, yogurt, whey powders)
(estimated annual growth for category – 25%)
 SMP / butter / ghee (AMF):
– Production of these products has been growing rapidly due to sheer milk availability and the lack of
other options, causing last year’s strong export growth
– In 2018 SMP stocks reached ~200,000 mt, leading the central government to introduce a subsidy of
10% on export prices, and exports grew substantially in Q4 2018, especially to Bangladesh and
Malaysia; this continued in Q1 2019
– However, this level of SMP exports will not continue
 The domestic market’s demand has been supported by the lower prices caused by the surplus
last year and by moves by several States to use SMP for their mid-day meal (MDM) schemes
 SMP now sells for US$4,000 at home vs US$2,500 internationally (subsidies for exports ended
about March/April)
 Even price aside, India should not be competitive internationally as many exporters are not
plugged into the MNC supply chains. There is always inconsistency in the availability and quality
of milk and therefore the end product: Local SMP sometimes has higher thermophilic plate count,
making it unsuitable for making UHT milk (and only viable in processes where high heat is not
involved)
– Exports of white butter are expected to stay relative strong by contrast, reflecting domestic prices of
US$4,000 vs US$5,000 internationally; likewise exports of ghee (=AMF) in consumer packs
 Whey imports – whey powder has been substituted by SMP in some local formulations, however whey
imports are likely to continue for the long term, despite some local production which will show an altered
profile as part of the industry gravitate gradually towards higher added value variants:
– Both the sports and health nutrition markets are growing rapidly, with sales of imported brands
(notably Glanbia’s ON, BSN and Isopure) increasing exponentially: the main local brandowner is
MuscleBlaze, producing locally from mainly imported suppliers
– Mainly WPC80 is being imported under 350220 and (in limited quantities) 350290
– Although production of cheese and paneer are growing, local production of whey and whey
derivatives is constrained
 Liquid milk growth remains high (~20%/yr) and fresh milk is quite profitable when compared to
many products, reducing incentive to develop market for new products, especially in light of the
high investment required for whey processing and the negligible market for western type cheeses
 Paneer is a big market but 97% in unorganized sector, whilst even the 3% organized sector
volumes are shared across many players = whey availability issues, plus questions on suitability
of whey from paneer for further processing into derivatives
8
– Parag Milk Foods is main local manufacturer seeking to take advantage of these categories’
expansion; its sales are ~22% based on cheese/whey (no-other major player exceeds 2%), no. 2 in
cheese after Amul; brand focused, low ROCE due to high capex − has set out to dominate the local
whey market via the most integrated & largest whey processing facility in the country at Manchar,
Maharashtra state
 It is focusing on increasing added value products’ share of its portfolio, and has made a series of
launches based on whey:
(1) 2014 – whey ingredients for local B2B sale
(2) 2017 – Avvatar Advanced Mass Gainer (a sports nutrition product “truly made in India”
containing WPC and WPI)
(3) 2018 – supplement Go Protein Power (a health nutrition product aimed at the adult mass
market)
 Parag’s whey business is expected to grow strongly from a low base due to its partnerships with
Amazon India (35‐40% of whey supplement sales are via e‐commerce) and gym chains
 Lactose volumes reflect a major change in the approach of Lactose India, which has set up a plant
dedicated for Kerry with annual volume of 10,000 mt of lactose using crude lactose (imported) as raw
material: this has removed the constraint caused by limited whey availability and is likely a factor behind
the rising lactose imports in 2017 and 2018; demand for lactose for standardization remains key of
course as SMP production grows
 Casein exports – these are practically all rennet casein made from buffalo milk to the US; exports
volumes are not expected to grow as their pricing would be uncompetitive given the SMP price level
 A notable development is Fonterra’s moves towards producing consumer dairy products
9
1.5
Indonesia
Data Sources
 Production data: Trade sources
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 269.5 mn population is growing by 1.03% annually, whilst the local economy continues to grow
strongly
Indonesia GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
5.2
5.2
5.2
5.2
5.3
5.3
Source: IMF
Key Trends
 Future dairy import demand looks assured due to a significant dairy deficit, a growing urban middleclass and increases in household food expenditure and consumption of dairy products
 The government plans to reduce the national dairy deficit, indicating that domestic industry requires
around 4.5 mn mt milk/yr:
– It has set a target of 40% domestic supply by 2021 vs. 20% currently
– Local milk production is close to 1 mn m, last year up just 1% from 2017
– Dairy processors Ultrajaya, Greenfields, Cimory have invested in dairying cattle farming as well as
foreign groups at a lower level (Mengniu, Yili, Kogen/Mitsui)
– Such initiatives are not likely to change the overall demand for imported dairy too much
 Notably, Indonesia is a target market for the Fonterra / Coca-Cola alliance to launch ready-to-drink
beverages the region using NZ milk powder; Nestlé has recently announced the expansion of its three
local factories to increase its production capacity by 25% in liquid drinks
 There are signs that several dairy manufacturers are considering substituting SMP by SWP for pricing
reasons; Cimory, for instance, has started trial production using SWP instead of SMP as basic ingredient
to reduce production cost for its drinking yogurt, since competition in the liquid yogurt market is becoming
tougher with newcomers entering the Indonesian market. This may result in higher demand for SWP
going forward
 SWP is the key whey ingredient used across various sectors of the F&B industry, estimated at 50% of
whey imports; followed by DWP at an estimated 35%, also important due to wide application in the infant
formula/growing up milk powder, biscuits and candy industry; WPC34-50 is the third largest at ~11%,
with wide use across the F&B industry as well; whey permeate is mainly used in sweetened condensed
milk manufacture, where the main user is PT Indolakto, import volume in 2018 = 2,800 mt); WPI use in
sports/adults nutrition is much higher than for WPC80 (for premium (Greek) cup yogurt), a reversal of
the position in most markets
10
 MPC34-50 and milk permeate, are used mainly in milk powder, notably by Kalbe for its senior/adult
nutrition range. One of Cimory’s subsidiaries is also adding MPC34-50 in its soymilk. MPC85 is used
by premium cup yogurt producers (Yummy Food Utama, Nutrifood)
 Small volumes of micellar casein have been used in trial production of non-dairy creamer, exploring the
potential to substitute caseinate used by the manufacturers. For example, Santos has been testing out
MC as a potential replacer of DuPont’s sodium caseinate, used as an emulsifier in its creamer – although
the test result proved negative, changing the taste of the final product. However the other main local
creamer manufacturer, Lautan Natural Krimerindo, has no plans to substitute casein
Trade Agreements
 The duty-free access provided from 2019 under the terms of AANZFTA (ASEAN Australia New Zealand
Free Trade Area) – this is especially relevant for SMP/NFDM (the March 2019 Indonesia-Australia
Comprehensive Economic Partnership Agreement (IA-CEPA) is less relevant in terms of the ingredients
covered in this database)
 Indonesia’s trade minister has recently threatened to impose higher tariffs on EU dairy imports in
response to the EU’s proposed move to hit biodiesel made from palm oil with anti-subsidy duties
11
1.6
Japan
Data Sources
 Production data: Ministry of Agriculture, Forestry and Fisheries (MAFF), Japan Dairy Council
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 126.9 mn population is shrinking; it has high spending power
 The local economy remains stagnating but has been supported a little by increasing tourism
Japan GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
0.8
1.0
0.5
0.5
0.5
0.5
Source: IMF
Key Trends
 National milk production:
– Has fallen by ~15% between 1998 and 2018
– Picked up a little in 2019 to about 7.29 mn mt, despite very erratic weather conditions
– Is forecast to continue to decline, due largely to the retirement of dairy farmers who are over 65 years
old and lack successors
 Local availability of whey will decline as local production of natural cheese (especially for processed
cheese, and thus overall), is expected to decline; due to the limited and declining local milk supply, which
the industry is expected to increasingly allocate towards drinking milk.
 Milk permeate does not appear to be used locally
 Micellar casein volume is estimated:
– One manufacturer is using in a sport nutrition protein powder
 Butter imports have been rising strongly in 2019, whilst SMP is down:
– On January 30, MAFF announced it would import 20,000 mt of butter (+7,000 mt) and 20,000 mt (7,000 mt) of SMP in FY April 1, 2019 to March 31, 2020, due to
 Increased butter demand from food processors
 Diversion of domestic butter production (recovering as southern Hokkaido recovers from the
September 2018 earthquake) to table use
– YTD trends reflect this announcement
12
Regulatory Changes
 Plans to increase the consumption tax on goods and services to 10% in October 2019 from the current
levels of 8% will dampen demand at least in the short term
Trade Agreements
 CPTPP and JEEPA:
– Will mean lower cost dairy ingredient imports from the US’s key dairy competitors
– This should support demand to some extent by significantly reducing tariffs on a number of products
over various periods of time
– This excludes the US unless a bilateral agreement is reached
 SMP:
– Local production predominates but has been declining
– Import demand is not expected to be affected by CPTPP and JEEPA, as most imports will remain
under the control of the state trading system. Demand has been weak, moreover, meaning higher
stocks at the end of 2018 and so constraining what had initially been expected to be higher state
imports in 2018
– Demand may be affected by some substitution by increased imports of WPC35 due to lower tariffs
under the CPTPP and JEEPA
 Imports of Chapter 4 whey are expected to increase under CPTPP and JEEPA:
– Make the out-of-quota imports feasible by lowering the tariff (critical, as in-quota supply has been erratic),
enabling use in the food industry which has remained relatively limited
 These agreements provide additional TRQs for whey mineral concentrate, whey for infant formula
and permeate, and phase out the high tariffs over coming years (these have stood at 29.8% + a
specific tariff of JPY 99 to 687 per kg)
– There will be new demand for WPC60 and WPC70 instead of WPC80 as the import duty for whey
with protein content ≥45% but <80% will be reduced to zero in the 6th year
– Note: there is no change in respect of feed whey and ALIC tender whey quantities, and some of the
minor whey import classifications; imports of whey for infant formula are expected to decline
– Whey permeate is essentially not used apart from a few trials by bakery/snack manufacturers;
demineralized whey powder is barely present in the market either
 In terms of Chapter 35 whey
– WPC80 will benefit only marginally if at all from elimination of the 2.9% tariff from signatory countries
(CPTPP and JEEPA): however, the demand for WPI may benefit more, given the price differential;
moreover, demand for both ingredients in end products has been increasing strongly due to rising
purchases of high protein foods/beverages (aided by the ageing population) and should be boosted
by growing interest in healthy foods and low-carb meals, with take-up of sports nutritionals and other
healthy foods also set to be encouraged by the Tokyo Olympic Games in 2020
 For lactose, demand in the key end applications looks flat
13
– Due to the recent trend of low carb products, consumption of sweetened dairy drinks is declining.
The soup broth market is expanding, but dextrin is a cheaper ingredient in terms of sweeteners
– CPTPP and JEEPA eliminate the 8.5% tariff; whilst this seems unlikely to create growth in imports it
may sustain demand
New Plant / Capacity Expansions
 Declining population and milk supply effectively rule this out for dairy ingredients themselves
 However whilst infant formula production by the major local manufacturers is under pressure with the
declining population, making exports more important where viable (the new Asahi-NutiFood JV to target
the Vietnamese infant nutrition market is interesting in this context)
14
1.7
Malaysia
Data Sources
 Production data: Trade sources
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 32.5 mn population is growing more slowly, however the local economy continues to grow strongly
Malaysia GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
4.7
4.7
4.8
4.8
4.8
4.8
Source: IMF
Key Trends
 Whey usage locally is dominated by SWP (recombined, sweetened condensed milk and fermented milk,
biscuits, bakery and milk powder manufacturers) and permeate (sweetened condensed/evaporated
milk, bakery and chocolate)
 WPC 34-50 is used by the formula manufacturers, ice cream and the snack industry, DWP primarily in
infant formula production (which is expected to see marginal growth in the years to come due to a
decreasing population growth rate and strict government regulations on sales/marketing/labeling)
 Use of high-end whey proteins is very limited, with only one Malaysian manufacturer of adults and sports
nutrition, UNO Nutrition (using WPC80 along with MPC40-50 and milk permeate)
Regulatory Changes
 Health issues are becoming ever more important influencers of ingredient choice and could pave the
way for more use of proteins:
– F&N has indicated plans to reformulate about 70% of its product portfolio to offset the new sugar tax
set which took effect July 1
– Nestlé is targeting adults on-the-go with Milo Protein Up in the market, now alongside the existing
Milo Nutri Up for adults looking to increase their calcium intake
Trade Agreements
 CPTPP may enable the import of lower cost dairy ingredients into Malaysia, but the country’s sign-up to
the deal is by no means certain as of summer 2019 (Malaysia has had bilaterals with New Zealand since
2010 and Australia since 2013)
15
1.8
Pakistan
Data Sources
 Production data: Pakistan Dairy Association and trade sources
 Trade data: Estimates based on ITC, Pakistan Federal Board of Revenue, trade sources
Context/Rationale for Forecast
 The 204.6 mn population (annual +1.88%) is still mainly rural, but the local economy continues to grow
relatively strongly
Pakistan GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
5.2
2.9
2.8
2.8
2.7
2.6
Source: IMF
Key Trends
 Pakistan is producing ~6.5% of total world milk, and production has been recorded as increasing by
3.22% in 2018, suggesting national production is ~46.4 bn L, with ~ 26 bn L tradeable and ~4 bn L
processed ie <10% of total milk production
 The local food market is growing well with categories like biscuits up 20% YOY of late, all supporting
demand for dairy ingredients, especially milk powders and whey ingredients
 Butter production volume picked up further in 2018 after declining production in 2016 and showing some
recovery in 2017, reflecting that one of the leading producers has become functional again (Fauji Food,
operating as NurPur; recently the subject of acquisition interest from China’s Yili, however this deal fell
through in late April 2019)
Regulatory Changes
 The policy of Government is to discourage dry milk import and the surge in the Dollar value has also
discouraged imports. These forces are expected to continue to dissuade imports, although the Pakistan
Dairy Association seeks a balanced approach and has been lobbying the Government not to increase
import duties:
– Pakistan increased its effective import tariff on imports of milk powder and whey powder from 20% to
45% by imposing a 25% “regulatory duty” in 2016, but in January 2018 this was reduced by 20% on
bulk packaging.
– There has been demand to increase all duties by 80 – 100% in the June 2019 budget
New Plant / Capacity Expansions
 Dairy processing activities have not changed much from last year, although Engro started producing
WMP in 2018. There are some new processing units, but few of the major processors’ plants operate
near full capacity and many stop /start
16
1.9
Philippines
Data Sources
 Production data: n/a
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 108 mn population is growing rapidly (+1.5%/yr) but is still mainly rural (56%); GDP per capita is
low, but the local economy continues to grow very strongly and is supported by overseas workers’
remittances which came to US$31.3 bn in 2017
Philippines GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
6.2
6.5
6.6
6.7
6.7
6.8
Source: IMF
Key Trends
 Demand for imported dairy has been solid, supported by CWT making US dairy more competitive in the
market
 Local production is growing well in most end-use categories, and dairy ingredient demand is expected
to continue to grow as a result – one reason why dairy trader Lacto Japan has been working to establish
a local sales office this year:
– Infant nutrition (stages 1-3) is an exception, with tighter marketing regulations over recent years and
a trend towards using standard UHT liquid milk for breast milk replacement rather than infant formula;
this has made formula for 3+ the volume driver category for most manufacturers
 SWP:
– Usage has benefited from the fact that in several important applications such as concentrated milks
the dairy ingredient mix over the years has transitioned to higher usage of SWP to improve
profitability in a very price point driven market; use of vegetable fat is evident in local food
formulations wherever possible
 Whey permeate:
– Demand for pork continues to rise in the country, with imports significant and growing, curtailing
growth in local production despite the 40% tariff imposed by the government to protect the local
industry. The growth of foodservice is driving the growing pork imports as this sector requires certain
specifications which local farmers and processors struggle to meet consistently, although some
animal feed companies have forward-integrated into hog farming, processing and retailing are
picking up foodservice business as a result
– The government plans to expand the pig sector to address this, which should support demand for
whey permeate. The total pig inventory started 2018 1.5% up from 2017 levels. Additionally, there
17
was a swing towards commercial enterprises, in which the pig number increased by nearly 5%.
Increased domestic production is expected this year, with USDA forecasting growth of ~2%
– By end of July, no ASF had been detected in the local pig industry
– Lactose usage in the sector is higher than for permeate. However there are positive prospects of
use in edible applications; for instance in sliced white bread the market leader, Gardenia Bakery, has
a price fighter positioned loaf bread (Neu Bake Gardenia) that uses whey permeate which has gained
increasing market share driven by the good pricing and very wide distribution. Whey permeate is
expected to be used by more and more loaf bread manufacturers
 WPC80/WPI:
– Previous import data under HS350220 is believed to have been different product(s) misclassified;
however, WPC80 is seeing rapid growth from a very low base as sports nutrition emerges as a
segment, although WPI use appears negligible/zero
– Relevant manufacturers driving this new segment are Ethical Pharma, Wheyl Nutrition, Athlene
Nutrition and Greenplus Corporation (more of a toll manufacturer but also makes its own
weight/muscle building drinks)
Regulatory Changes
 The government has recently sacked the head of the Philippine Bureau of Food and Drug – this may
have some impact on the import inspection regime going forward but it is too early to determine what
this could be
18
1.10
Singapore
Data Sources
 Production data: N/A
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 5.6 mn population has high spending power but the local economy continues to grow relatively
slowly
Singapore GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
3.2
2.3
2.4
2.5
2.6
2.6
Source: IMF
Key Trends
 There is some significant local production of products using dairy ingredients, the full range of food and
beverage alongside infant nutritionals (by the multinationals and the local business SMC Nutrition) and
fat-filled blends (notably Asian Blending) –
 However this remains a tariff-free market more significant for trade than domestic consumption, demand
for dairy ingredients driven by export-oriented food and drink producers
 Usage volumes in-market identifiable do not correlate well with traded volumes, suggesting that for some
products (e.g. MPC<80%) much of the volumes entering are then re-exported
19
1.11
South Korea
Data Sources
 Production data: Korea statistics office
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 51 mn population is growing only at 0.34%/yr; GDP growth remains modest
South Korea GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.7
2.6
2.8
2.9
2.8
2.9
Source: IMF
Key Trends
 On the one hand, future demand in general, and in respect of ingredients for production of infant
nutritionals, will reflects the fact that the population is ageing and therefore growing only very slowly:
– The total fertility rate (birth rate per fertile woman) was 0.98% in 2018, the lowest level since 1970
– This is reflected in the falling volume for DWP
 However, demand for ingredients in adult nutrition is positive:
– In 2018, Korea entered became an ‘aged society’ for the first time, with >14% of the population aged
≥65, according to the National Statistical Office. It is predicted to become a “super-aged” society by
2025
– e.g. Maeil Dairy
 Founded a ‘Sarcopenia Research institute’ for R&D into products addressing this age-related
disease
 Launched “Cellex” in October 2018, an adult nutritional powder for those in their 40s and 50s; it
contains with MPI, WPC (and soy protein)
 Demand for imported whey proteins is also supported by:
– The growing category of “care food” for the elderly, which comprises both powdered milk/whey
formula and various easy-to-chew foods – this category has expanded from 501.4bn KRW in 2011
to 1.1 trn KRW in 2018, and is expected to reach 2 trn KRW in 2020
– The growth in demand for ready meals with whey protein, as professional couples and single
households seek a combination of speed and convenience and nutrition
 e.g. in January 2019 Dongsuh Food launched “Post Rice and Protein” a cereal with heart shape
crunch which is made with whey protein
 The Korean swine sector is expanding, leading to potential increased demand for dairy carbohydrates
20
New Plant / Capacity Expansions
 Local production of SMP/butter and WMP is expected to remain flat/decreasing:
– It is carried out mainly to store local raw milk (still 70% of raw milk production is marketed as fluid
milk, and fluid milk consumption has been decreasing – whereas demand for other dairy products
(such as cheese) has been increasing)
– By end 2018 SMP stocks were about 11,000 mt, the lowest monthly inventory in the last 5 years
– Import demand should remain robust, despite Seoul Milk’s current construction of a new 1.69 mn
L/day plant in Yangju, Gyeonggi Province: this is due to commission in April 2021 and its output will
include some SMP+WMP+butter
21
1.12 Taiwan
Data Sources
 Production data: n/a
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 24 mn population is growing by just 0.27% and is quite urbanized, but has moderate spending
power and GDP growth remains modest
Taiwan GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.6
2.5
2.5
2.4
2.3
2.2
Source: IMF
Key Trends
 Taiwan is a very stable market with no local ingredient production and flat local milk supply, which rose
7% from 374,000 MT in 2013 to 400,400 in 2017 but has been flat since then
 The local pig industry uses SWP and whey permeate: it has been on high alert since ASF broke out in
China in 2018; some infected carcasses have been reported on the island, with debate over whether
they are local or have floated there from the mainland
Regulatory Changes
 Local dairy demand should be supported by a change on March 13, 2018, when the Health Promotion
Administration (HPA) – part of the Ministry of Health and Welfare (MOHW) – revised its dietary guidance
to two glasses of milk a day in order to increase calcium intake
22
1.13
Thailand
Data Sources
 Production data: trade sources
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 69.3 mn population, growing at just 0.8%, has low spending power; GDP growth reached 4.8% in
H1 2018, but the rest of the year saw a deceleration as:
– The economy suffered a dramatic drop in tourist arrivals from China which had been critical to the
economy. The number of Chinese visitors slid 12% in August, the biggest drop in more than a year,
after a tour boat accident off Phuket in July that killed dozens of Chinese holidaymakers, sparking
safety concerns. Thailand’s image in China was also hit by a dengue outbreak, the strength of the
baht and later in the year by a viral video of an airport guard apparently punching a Chinese tourist
– Exports were challenged by an increasing strong baht from H2 2018, after a period when it had
remained stable despite sluggish economic growth since the junta seized power in 2014 and amid
global uncertainties, thanks to Thailand's high current account surplus and foreign exchange
reserves
– 2019 has continued to see political uncertainty undermining domestic demand, despite low
unemployment, muted inflationary pressures and stimulus from the government’s infrastructure push.
There are high household debt levels and the country’s prospects are affected by the risk of the SinoUS trade disputes
Thailand GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
4.1
3.5
3.5
3.5
3.5
3.6
Source: IMF
Key Trends
 There have been a number of launches taking advantage of increasing demand for higher concentrated
dairy proteins in beverages and shakes, as consumers are becoming more of health-conscious – this
trend is supported by the country being an increasingly aging society − 11% of the population are 65
years or older, and by 2040 this is expected to rise to 25% (17 mn Thais)
 Notably, Thailand is a growing market for value add RTD beverages:
– It is a target market for the Fonterra / Coca-Cola alliance to launch ready-to-drink beverages the
region using NZ milk powder
– Myen (a Danone subsidiary in Singapore) is forming a JV with Thai functional drink marketer Sappe
to market healthy beverages
23
 SMP:
– Quota administration for SMP is complicated and has long led some manufacturers to avoid SMP in
their formulations. In addition to the standard ‘Quota’, Australia and New Zealand have additional
quotas of 10,000+ mt of SMP each, that do not appear in the ‘Quota’ as part of the Thai-Australia
FTA and Thai-New Zealand CEP Agreement
 Whey:
– WPI – Dutch Mill has begun using alongside MPC60 and MPI, all EU sourced (the three are used in
combination in its green tea Matcha milk which has reportedly been very successful); the other
identified user is Tacha Interfood producing the Maximus WPI protein shake
– WPC80 – CP Meiji is notable in using from the US, alongside MPC and WPC34; there are also a
number of local manufacturers of sports nutritionals using this ingredient
– Thailand produces over 2mn hogs each year, and has so far held back African Swine Fever from
entering the country. However, whey permeate use is very low, and has been constrained by the
regulations of the local Ministry of Agriculture and Cooperatives (MOA) which require minimum 3%
protein, restricting imports of US permeate
24
1.14
Vietnam
Data Sources
 Production data: trade sources
 Trade data: Estimates based on GTIS/ITC direct and mirror data, plus some customs data / bill of lading
analysis (whey category)
Context/Rationale for Forecast
 The mainly rural 97.4 mn population, growing by 0.97%, has low spending power, but GDP growth
remains very strong
Vietnam GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
7.1
6.5
6.5
6.5
6.5
6.5
Source: IMF
Key Trends
 Local milk production has been growing at 15% annually since 2011, reaching 936,000 mt in 2018; 1 bn
L is expected to be produced in 2020, 1.4 bn L by 2025, as big domestic producers like Vinamilk, TH
Group and Nutifood look to expand their dairy farms and production levels
 However, self-sufficiency is currently only 30%: whilst dairy per capita consumption has risen to 27 kg,
this is roughly half of Asia’s average, suggesting considerable upside for consumption growth
 Import demand in general will benefit from:
– 2% average population growth combined with economic growth
– Rising health improvement initiatives and health-awareness (driving yogurt, drinking milk and
powdered milk segments)
 Notably, Vietnam has been the starter market for the Fonterra / Coca-Cola alliance across the region,
with the introduction of the Nutriboost milk/fruit juice made using NZ milk powder
 Whey/lactose:
– It should be noted that product distinctions are not clear locally: whey permeate, milk permeate and
SWP are all represented by the same word in local language. Moreover products are often declared
as feed grade to avoid the 5% VAT applicable when they are for edible use
– Whey permeate demand is very dependent on use in the pig industry, which is being severely hit by
the impact of ASF
 Its incidence locally has meant that about 4 mn pigs from the country’s 10 mn total have been
culled by early August; local prices of live hog have risen and traders are beginning to source pigs
from household farms to supply to China
25
 Future exports will also need declarations as ASF-free, as the contamination of water and soil
can last for up to 20 years
 Consumers will buy imported pork but are also moving to other meats instead of pork
– WPI: Nutifood started using small volumes of instant WPI in late 2018, but the volumes are limited,
less than 10 mt per month
– Lactose is used in feed and in edible applications, however price is a challenge, and whey and
sometimes permeate are generally preferred in both
Regulatory Changes
 Demand for imported SMP, AMF and WMP will also be helped considerably when the local school milk
program goes national in scope from September this year:
– This is funded 50% by government, 35% by parents’ payments and 15% by packaging suppliers
– So far it has not covered HCMC and Hanoi
– It comprises mainly recombined or reconstituted milk, with fresh milk preferred for premium sales in
the local fluid milk market
Trade Agreements
 Lower cost dairy imports via zero import tariff with FTAs will support increased dairy ingredient use:
– From January 14, 2019, Vietnam has been part of the CPTPP, leading to tariff reductions and likely
increased dairy imports from New Zealand in particular, and also Canada
– On June 30 the EU-Vietnam trade agreement (EVFTA) was signed, providing a 2nd threat to US dairy
exports; EU dairy exports to Vietnam face tariffs of up to 20% currently, but under the new agreement,
these will be removed over a 5-year period. In 2018 EU-28 exports to Vietnam included 36,700 mt
of SMP, 1,000 mt of WMP and 9,150 mt of whey products under HS040410
26
2.
Middle East & Africa
2.1
Algeria
Data Sources
 Production data: Estimates based on Algeria Ministry of Agriculture, Office National Interprofressionel
du Lait ONIL and trade sources
 Trade data: 2018 Algerian trade data did not become available, so for 2018 only, UN ITC TradeMap
mirror data was used (ie exports from the rest of the world to Algeria)
– For 2017, direct import data and mirror data was fairly similar (max diversion +/- 10%) – on this basis
it seems more reliable to use mirror data for just 2018 rather than revise all the back data to mirror
data too, especially given that hopefully Algeria will start to supply direct import data again going
forward
Context/Rationale for Forecast
 The mainly urban 42 mn population has low spending power, while GDP growth remains uncertain
 With lower oil prices since 2014, Algeria’s foreign exchange reserves have declined by more than half
and its oil stabilization fund has decreased from about US$20 bn at the end of 2013 to about US$7
billion in 2017, which is the statutory minimum.
 Declining oil prices have also reduced the government’s ability to use state-driven growth to distribute
rents and fund generous public subsidies, and the government has been under pressure to reduce
spending
– Over the past three years, the government has enacted incremental increases in some taxes,
resulting in modest increases in prices for gasoline, cigarettes, alcohol, and certain imported goods,
but it has refrained from reducing subsidies, particularly for education, healthcare, and housing
programs
Algeria GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.1
2.3
1.8
1.4
1.1
0.4
Source: IMF
Micro
 Raw milk production in the country declined from 3.35 bn mt in 2017 to 3.19 bn mt in 2018, mainly due
to unfavorable weather conditions (a mid-2018 extreme heatwave and limited levels of rainfall)
 A very limited share of raw milk – about 20% – is collected through official channels for industrial
processing
 There is no dairy production of an y note – the only product manufactured in small volumes is butter –
the traditional local product is butter combined with smen (a salted fermented butter made from goats
or sheep milk)
27
 Algeria’s expanding population continues to drive the demand for cheap imported dairy ingredients,
most notably milk powders, for the production of subsidized recombined drinking milk
– Higher value products have seen a decline in imports, especially butter as this product has
experienced a strong increase in international prices in 2017-18, therefore import volumes have
reduced
 This expanding market for drinking milk and consequently demand for imported milk powders is set to
continue
– Algerian trade sources do not see the recent / current social unrest driven by a desire for political
change impacting negatively on milk powder demand
– Subsidized cheap drinking milk has become an integral part of the Algerian diet and population
expansion will continue to drive volumes
 Processed cheese is an important product and continues to grow
 Industry sources do not cite any investment in capacity expansion or new processing units
28
2.2
Egypt
 Production data: interviews with trade sources
 Trade data: GTIS and UN ITC TradeMap
Context/Rationale for Forecast
 The 101 mn population, growing by 1.8% annually, has low spending power, although GDP growth rates
are forecast to remain strong
 In late 2016, persistent dollar shortages and waning aid from its Gulf allies led Cairo to turn to the IMF
for a 3-year, US$12 bn loan program. To secure the deal, Cairo floated its currency, introduced new
taxes, and cut energy subsidies – all of which pushed inflation above 30% for most of 2017, a high that
had not been seen in a generation
– Given high inflation and a generally struggling economy, prices in restaurants have increased by
around 14% compared to last year, affecting purchasing activities for raw materials and ingredients
– A weaker currency has made Egyptian resource more attractive and capital inflows have
strengthened, enabling the Central Bank of Egypt to re-build its FOREX reserves
– The weaker Egyptian Pound is also boosting external competitiveness, supporting a rebound in
manufacturing activity in both food and non-food sectors – however at the same time, it makes it
harder for Egypt to pay for imported goods
 The economy is expected to continue to improve with strong investment and improvements to the
regulatory environment – major infrastructure projects include the expansion of the Suez Canal,
construction of a new administrative capital to the east of Cairo and building the world’s largest coalfired power plant
 Ramping up the tourism sector, a major pillar in Egypt’s economy, is witnessing major developments
such as the new airport at Giza and the new Grand Egyptian Museum
Egypt GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
5.3
5.5
5.9
6.0
6.0
6.0
Source: IMF
Milk production and processing
 The Ministry of Agriculture and Land Reclamation has initiated a national plan to boost dairy productivity,
with the goal to double raw milk production through genetic improvement of cow and buffalo herds,
establishing farms that specialize in foreign, high-yielding dairy breeds, reduction of milk waste and
expansion of milk collection
 Growth in the Egyptian dairy market has encouraged dairy farms to expand rapidly – this is driven by
high demand and consumer preferences shifting towards packaged dairy products following increased
health and food safety awareness
29
– The EBRD has provided a US$7 mn loan to support the expansion plan of Obour Land, a leading
Egyptian milk and dairy producer – this includes the establishment of a dairy farm with an estimated
production of 60 mt of milk / day
– Qalaa Holding, owner of Dina Farms, has announced a further US$24 mn in Egypt’s largest privatesector agricultural facility – the expectation is that Dina Farms will be milking more than 8,500 cows
at the end of 2019
Stock levels
 Most companies import products that can be used as stock for up to 6 months, with many companies
importing every 1-3 months, therefore stock levels are not huge
Consumer / market trends
 White cheese remains the most popular product in natural cheeses, with Feta and Domiati leading
consumer preference – the growth in this segment will further increase demand for SMP, whey products
and MPC
 Egypt is currently witnessing an increase in health awareness among consumers, driving demand for
yoghurt, fruit-flavored yoghurt and labneh (strained yoghurt) – this will grow demand for ingredients such
as SMP and MPC70
– There has been talk about the production of high protein yoghurt, but this has not happened yet
– There is currently also some product development of nutritional bars containing WPI for the growing
body building trend
 The food sector in general and the dairy sector in particular are continuing to provide growing
opportunities for dairy ingredient sales – demand for packaged and convenience foods will continue to
increase due to higher levels of disposable incomes among some consumer groups and ongoing food
safety scares
 Egypt is considered a manufacturing hub for the Middle East and wider African markets
 The confectionery / bakery sector in Egypt continues to thrive, introducing new production lines and
working on product development and geographical expansion into new markets
– Morocco is a major market for Egyptian manufacturing companies’ expansion plans
 Public concerns about the safety and quality of fresh milk highlights the importance of imported dairy
powders from reputable sources
 In terms of dairy ingredients:
– There is only one SMP producer in Egypt – Dina Farms – with an estimated volume of no more than
100 mt p.a. when it has excess volumes of raw milk
– Butter is produced in small volumes by very small, traditional manufacturers in the suburbs of Cairo
for local consumption – there are no volume statistics for this production
 Butter and AMF are forecast to grow strongly to recover to previous volumes – the strong dip in
2017/18 imports was likely caused by high international butter prices during that period
– Whey powders are mainly sourced from the EU and New Zealand, with German quality considered
the best
30
– Whey permeate is imported mainly by flavor manufacturing companies and is also used by local
confectionery / bakery producers, but on a smaller scale
– SWP and some permeate is used to develop confectionery fillings (chocolate and caramel) and
spreads
– Chocolate-flavored spreadable products using SWP are manufactured for local consumption and
export to Palestine, Jordan and Oman – these are considered healthier alternative to chocolate dips
which are not dairy-based (many of these are lower-cost Nutella imitations or for use in layer cakes)
– The majority of the whey volume in Egypt is SWP as manufacturers are used to it and hesitate to
switch it – if whey permeate is lower in price than SWP, they would be tempted to switch however
 In April / May 2019, SWP was cheaper than whey permeate in the Egyptian market with SWP
selling at around US$800 / mt whereas permeate commanded US$1,200 / mt
– MPC is in demand for spreadable processed cheese and white cheese production, eps for Feta,
Akkawi, Halloumi and double cream cheese but also other varieties
 The vast majority of this is MPC70
Regulatory changes
 The government is making continuous efforts to modernize and reduce barriers for international
companies investing and operating in Egypt to make Egypt a gateway to other international markets
ASF / other diseases
 FMD outbreaks recur frequently, causing huge economic losses and setting back the dairy sector
Plant / capacity expansion
 For Q1, 2019, Egypt’s food production capacity has increased significantly – the Chairman of the Export
Council for Food Industries is aiming to increase the sector’s exports by 6% to reach US$3 bn in 2019
compared to US$2.8 bn last year
– Food exports grew by 9% during April / May 2019 reaching US$520 mn, compared to US$476 mn
during the same period in 2018
– The UAE has expressed interest to strengthen a food and agricultural production partnership with
Egypt
 A french dairy processor has acquired Greenland Group for Food Industries, an Egyptian cheese maker
and subsidiary of Middle East food company Americana Group, to strengthen their position as the major
dairy processor in Egypt and will reinforce the production of white cheese, processed cheese, yoghurt
and UHT milk
– Greenland has well developed structures and organization and is looking to upgrade its production
facility – it is expected that this will lead to increased demand for ingredients such as MPC
 Arabian Food Industries will continue to pursue its domestic and international expansion with plans to
enter the baked goods sector – it is seeking to start production of new products such as flavored milk
as well as baked goods, and is planning to set up a new branch and distribution center in the Rwandan
capital of Kigali
 Riyada Egypt (Soudanco), a major cheese manufacturer, plans to open new markets for its products in
South Africa and East Asia as part of its export growth plan – the company exports more than 35-40%
of its production to more than 22 countries. It has recently acquired the rights to package cooked
31
Mozzarella for Kraft Food Inc for distribution in Egypt and other African countries – this will further drive
demand for ingredients such as MPC
32
2.3
Morocco
Data Sources
 Production data: Interviews with Trade sources
 Trade data: GTIS and ITC
Context/Rationale for Forecast
 The 35 mn population, growing at just 0.95%, has low spending power, although there are reasonable
rates of GDP growth
 Morocco has capitalized on its proximity to Europe and relatively low labor costs to work towards building
a diverse, open, market-oriented economy – key sectors of the economy include agriculture, tourism,
aerospace, automotive, phosphates, textiles, apparel, and subcomponents
 Morocco has increased investment in its port, transportation, and industrial infrastructure to position
itself as a center and broker for business throughout Africa – industrial development strategies and
infrastructure improvements, most visibly illustrated by a new port and free trade zone near Tangier, are
improving Morocco's competitiveness
 Despite Morocco's economic progress, the country suffers from high unemployment, poverty, and
illiteracy, particularly in rural areas. Key economic challenges for Morocco include reforming the
education system and the judiciary
Morocco GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
3.1
3.2
3.8
4.1
4.3
4.4
Source: IMF
Milk Production and Processing
 2018 was a very good year for agriculture due to above-average rainfall – milk volumes increased by
more than 8% from 2.4 bn liters to 2.6 bn liters
 However, at the processing level, 2018 was a year of turmoil due to the massive boycott of dairy
products, especially those produced by market leader Centrale Danone, which accounts for 60% of
processed milk volume:
– In April 2018, Moroccans launched a boycott targeting Danone, Oulmes Mineral Water and Afriquia
Glass, stating that these three companies had raised prices because of their dominant positions in
their respective markets
– Consequently significant losses impacted negatively on the dairy processing industry, and
processors had to adapt by reducing formal milk collection through milk collection centers – this has
led to larger volumes of raw milk being sold directly to consumers
– Market leader Centrale Danone will see severely impacted financials results for H1, 2019 and the
boycott has had a drastic impact on all of its activities
33
– Processors also increased their stocks of milk powder and butter as they had to process excess raw
milk into long-life products – more butter was produced both in formal and informal channels
 International high prices impacted on imports of butter, additionally to increased local production
 Conversely, SMP seeing lower prices has led to a surge in imports
 Morocco does not produce any whey / lactose / casein-based ingredients
 Importers / traders contacted in the market referred to general ingredients such as “whey powders” and
“milk powders” without distinguishing protein content or whether products were, for example, WPCs or
MPCs:
– Whey ingredients and MPCs are used mainly for cheese spreads / processed cheese
– Casein is used in commercial cheese production
Market / Consumer Trends
 The local market is forecast to continue to expand – as the effects of the boycott are receding, there is
an expectation that local milk processing will ramp up again
 Processors and importers interviewed see the volatility of international prices as the main threat to their
operations and profitability, given the price sensitivity of local consumers especially when it comes to
common products such as cheese spreads or yogurt
 Social media has an increasing impact on the market and consumer opinion – the dairy product boycott,
especially of Laitiere Danone products, was instigated by Facebook, Instagram and WhatsApp
campaigns going viral
 Retail and foodservice (esp fast food) are both growing strongly, with rising purchasing power, an
expanding Middle class and growing westernization of Moroccan culture, driven by the younger
population:
– McDonald’s is leading the way in the emerging QSR segment, with Pizza Hut, Domino’s and KFC
also popular chains
– The café segment is very popular and the largest foodservice segment – Alshaya Maroc (Moroccan
brand owner of Starbucks) is the leader in this segment
 Consumer behavior is gradually changing – as in other parts of the region – with Moroccan consumers
increasingly looking for healthier and convenient food options – packaged foods and healthy choices
are the fastest growing segment sin the F&B industry
 Whilst Morocco is renowned for having a large informal market, and although the market is still extremely
fragmented, the development of retail, foodservice and food processing sectors is evident
 Growing tourism, a trend for dining out among the affluent segment and increasing sophistication of
consumers is expected to be reflected in higher expenditure on food
 The bakery and confectionery / snack sector in Morocco is expected to continue to thrive – for example,
Egypt’s Edita Food Industries (EFID) signed a contract with the local DISLOG Group to establish a snack
food factory in Morocco – in time, this will likely lead to increased demand for dairy ingredients
 Morocco has traditionally looked towards the EU, but is now increasingly positioning itself towards Africa,
joining the African Union after more than 30 years – it is expected that this trend will continue
34
Regulatory Changes
 A decrease of import duties due to FTAs with the EU and USA, which will particularly impact SMP,
cheeses and UHT milk, is expected to lead to further increases in SMP imports:
– Fort US SMP/NFDM, the tariff rate is 8%, to be reduced to zero in 2020
– Whey products were immediately reduced to zero in 2008
 Following the recall of millions of infant formula products around the world in December 2017, the
Moroccan Ministry of Health reacted in December 2018 by announcing the discontinuation of nine types
of IF and three cereals manufactured by the company producing the recalled infant formula.
 The issue has also led to more rigorous controls of sanitary certificates and audits of companies dealing
with baby food
Plant / Capacity Expansion
 No processor has mentioned the intention to invest in new / expanded processing units as capacity is
sufficient to cover the needs of the domestic market and a lack of export orientation / opportunity
35
2.4
Nigeria
Data Sources
 Production data: no local production of dairy ingredients
 Trade data: Import data is based on ITC Trademap mirror data
Context/Rationale for Forecasts
 The 186 mn population has low spending power, and now has the largest number of people living in
extreme poverty of any country, according to a recent study; GDP growth is modest only
 Nigeria is Sub Saharan Africa’s largest economy and relies heavily on oil as its main source of foreign
exchange earnings and government revenues
 Following the 2008-09 global financial crises, the banking sector was effectively recapitalized and
regulation enhanced. Since then, Nigeria’s economic growth has been driven by growth in agriculture,
telecommunications, and services
 However, economic diversification and strong growth have not translated into a significant decline in
poverty levels; over 62% of Nigeria's population still live in extreme poverty
 Despite its strong fundamentals, oil-rich Nigeria has been hobbled by inadequate power supply, lack of
infrastructure, delays in the passage of legislative reforms, an inefficient property registration system,
restrictive trade policies, an inconsistent regulatory environment, a slow and ineffective judicial system,
unreliable dispute resolution mechanisms, insecurity, and pervasive corruption:
– Regulatory constraints and security risks have limited new investment in oil and natural gas, and
Nigeria's oil production had been contracting every year since 2012 until a slight rebound in 2017
Nigeria GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
1.9
2.1
2.5
2.4
2.7
2.6
Source: IMF
Key Trends
 The market is most notable for its milk powder imports; FFMP has been eroding imports of WMP
 The country is grossly underprovided with essential nutrients such as protein
 Nigeria’s yearly estimated raw milk production capacity is put at 560,000 to 570,000 mt – with estimated
annual milk consumption of 1.7 mn mt, this represents only 34% of demand
 Domestic milk production is dominated by nomadic herdsmen without capacity to meet the huge demand
gap due to low milk yield, poor feed and heavily burdened cows, in addition to primitive milking
processes, storage and transportation technology:
– There are an estimated 12 mn Fulani pastoralists involved in cattle rearing and milk production, who
account for over 90% of domestic milk production
36
– Affordable, quality fodder available throughout the year is a major challenge – this has led to conflict
between farmers and herdsmen, with drastic consequences (regional fighting, esp in the north of the
country) now reaching the national level
– In spite of some projects – with some success – by NGOs and several international commercial
players to build a network of high-quality milk suppliers, there seems little scope at national level of
Nigeria’s milk production increasing or the sector modernizing in the short- to medium-term
– This July, the Central Bank of Nigeria (CBN) has declared its preparedness to provide loans to
investors who are interested in tapping into its milk production initiative. This announcement followed
the restriction placed on access to foreign exchange by the apex bank in order to reduce milk
importation in the country
37
2.5
Saudi Arabia
Data Sources
 Production data: USDEC regional office based on trade sources
 Trade data: ITC
Context/Rationale for Forecast
 The 34.1 mn population is mainly urban and growing by 1.75%, but has relatively low spending power,
and GDP growth is modest only
 Saudi Arabia has an oil-based economy with strong government controls over major economic activities
– the petroleum sector accounts for roughly 87% of budget revenues, 42% of GDP, and 90% of export
earnings
 Saudi Arabia is encouraging the growth of the private sector in order to diversify its economy and to
employ more Saudi nationals. Approximately 6mn foreign workers play an important role in the Saudi
economy, particularly in the oil and service sectors; at the same time, however, Riyadh is struggling to
reduce unemployment among its own nationals. Saudi officials are particularly focused on employing
its large youth population
 Prince Mohammed bin Salman is on an unprecedented mission to fundamentally transform the economy
and modernize Saudi society – some of the main endeavors are fighting corruption and diversifying the
economy whilst maintaining national and regional political stability:
– Previous attempts to reduce dependency on oil and linking the economy to global production and
trade have proved largely ineffective
– The country still has a long way to go in terms of competitiveness – developing the skill sets of the
indigenous population, softening the influence of cultural traditional practices etc
 However with Saudi’s population growth, its domestic food processors are receiving a confidence boost
from the government, esp in the sectors of dairy, snacks, ice cream, mineral water, tea and coffee:
– The tourism sector has been earmarked by the Saudi Government as the key driver for growth in the
Kingdom’s Vision 2030 economic diversification strategy, with major initiatives to stimulate the travel
and tourism industry
– In addition to large-scale hotel construction, major transport infrastructure projects include the new
airport in Jeddah and the Haramain Speed Rail Project which is launching this year
– The government is also investing heavily in large-scale leisure, culture and entertainment projects
Saudi Arabia GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.2
1.8
2.1
2.2
2.2
2.3
Source: IMF
38
Milk Production
 Raw milk production continues to increase – during Ramadan and Hajj, some major dairy processors
are processing raw milk into cream for applications such as desserts and oriental sweets
 2018 output was estimated at 2.72 mn liters, down slightly (-0.7%) from 2017’s 2.74 mn liters
 SMP: Almarai has started to produce SMP – from 2020 onwards, this will only be used internally:
– Production capacity is 18,000 mt p.a., but at present only 4,000-5,000 mt are produced, so 20-25%
of capacity
 Butter: NADEC produces around 1,000 mt p.a., with Almarai also producing some from fresh milk:
– Saudi culture is not accustomed to consume butter however it is used in the production of homemade
and industrial bakery and confectionery goods
 WPC – nutritional bars are currently being developed in Saudi Arabia which include WPC
 Whey powders – mainly SWP – are used in various confectionery and bakery items as well as in dairy
products
 Demand for MPC is mainly for MPC70 for the production of Turkish labneh and cheese fillings for
croissants
 Saudi importers prefer not to take on large stock levels due to fluctuations in oil and commodity prices
Market / Consumer Trends
 Saudi Arabia’s fast food market continues to expand and is projected to reach US$9 bn in 2023 – this
will affect the import of various dairy products including dairy powders for applications in desserts,
confectionery and baked goods served in these outlets
 Demographic changes and increasing health challenges are providing new opportunities for food and
beverage growth – consumers are increasingly seeking better value and healthier products:
– Saudi consumers, esp the young population, are paying more attention to product labels
 Whilst global brands maintain their traditional dominance in the preserved food categories, Saudis are
increasingly preferring locally-produced dairy and fresh food products
 Saudi Arabia is witnessing a rising demand for organic products, with over half of Saudi consumers
purchasing organic foods more than once a month:
– This trend is bolstered by the growing interest in health and wellness, with consumers increasingly
looking for natural food as well as becoming more aware of issues such as animal welfare and
environmental concerns
– Demand for gluten-free, vegan and high protein products is also rising, but consumers are remaining
very cost-conscious
 Saudi eating habits are changing rapidly, including the removal of “family sections” previously enforced
in restaurants – this is resulting in people going out more and is changing the social / dining dynamic:
– This creates new foodservice opportunities that were previously off limits for investors to explore
39
 The rise of ready-to-eat (RTE) and grab-and-go meals is shaping the future of Saudi food packaging
trends, with more focus on shelf appearance and manufacturers moving into individual packs, with more
focus on packaging quality
Regulatory Changes
 The 5% VAT launched on January 1, 2018 took a few months of adjustment
 Saudization is being enforced at 30% of the company workforce with Saudis in some cases being paid
1/3 more than their expatriate counterparts
 Saudi started to issue tourist visas for the first time in 2018, the driving ban for women was lifted and
cinemas returned to the country for the first time in 35 years
 The Saudi Food and Drug Administration (SFDA) has given restaurants and café instructions to display
ingredients and calorie counts of their food and beverage offer in an effort to raise health standards in
response to the country’s diabetes epidemic
 There are discussions about SFDA suggesting upper limits of sugar and fat in foods – these are proving
to be of concern due to their negative impact on the smooth flow of trade in packaged US food and
beverage products
 SFDA is considering maximum salt levels in food products
 In September 2018, SFDA announced a voluntary Front of Pack Nutritional Labelling (FoPNL) traffic
light system which is expected to be made mandatory in 2021
 SFDA has also issued a new technical regulation that requires calorie counts on menus starting
New Plant / Capacity Expansions
 Saudi Arabia’s National Agricultural Development Co acquired Danone’s venture in the country, creating
one of the Kingdom’s largest dairy producers
 Saudia Dairy & Foodstuff Co. (SADAFCO) acquired a 76% stake in Poland’s Mlekoma and its
subsidiaries Foodexo and Mlekoma Dairy at a value of US$32 mn
 Saudi Arabia’s Almarai, the largest dairy company in the Gulf, signed a sale purchase agreement with
Alamar Foods to acquire a 100% stake in Premier Foods, a leading producer of value-added halal
products
 GEA has worked with Alamarai to build the nation’s largest and most modern dairy processing facility:
– The new plant at Al Kharj includes multiple production lines for a wide range of milk and yogurt
products
– It has the capacity to process 2 mn liters of milk / day
– The project has already been successfully completed and the plant is in operation
– It processes mainly Almarai’s own raw milk but utilizes imported dairy ingredients to make up
shortfalls
 FrieslandCampina targets expansion in the Kingdom, aiming to break into the foodservice sector with
its new cream range and to increase its distribution network
 UAE’s Al Rawabi Dairy is currently assessing the feasibility of an operation base in Saudi Arabia
40
 As Morocco’s Centrale Danone, a subsidiary of French dairy giant Danone, is counting its losses given
the ongoing boycott against it, Alamarai is emerging as a potential future investor in Morocco, planning
to open a dairy factory there in 2019
 NZMP, Fonterra’s ingredient arm, has launched a full cream milk powder with 25% more protein per
serving than average as well as a new product catering for the health and wellness trend – this is a dairy
blend made with WPI
41
2.6
Turkey
Data Sources
 Production data:
– TURKSTAT Department of Industrial Production
– TURKSTAT Department of Agriculture
– Whey complex data for 2018 to be published on 24 December 2019 – estimated based on imports,
exports and previous consumption trends
– Lactose data not published as only 3 producers – estimated based on imports, exports and previous
consumption trends
 Trade data: GTIS and ITC
Context/Rationale for Forecast
 The 80 mn population is mainly urban but has only modest spending power, although GDP growth is
relatively good
 However the current economic crisis and 2018 crash of the Turkish Lira is having a negative impact on
Turkey’s economy and the population’s spending power
Turkey GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.6
-2.5
2.5
3.0
3.0
3.5
Source: IMF
Milk Production
 Turkey’s dairy industry has been growing year-on-year both in terms of milk production and processing
capacity, caused by both herd increases and yield growth
 Milk collection by integrated processors is mainly located in the wester, southern and south central
regions of Turkey
 Official production data places cow’s milk production in 2018 at 20 mn mt, up by 6.8% over 2017
 Sheep’s, goat and buffalo milk add another 2.1 mn mt and have also grown
 Around 50% of cow’s milk is collected for industrial processing – this volume has risen by 10.1% over
2017 volumes
 However, in 2019, milk production is down – for the period Jan-May 2019, produced volumes were down
by -5.7% over the same period in 2018:
– Since the Turkish currency and debt crisis, leading to high inflation and lowered purchasing power,
demand for dairy products has been decreasing and farmers are facing higher feed costs
42
 Key processed products are:
– Drinking milk – 1.6 mn mt
– Cream – 33,000 mt
– Butter and AMF – 66,000 mt
– WMP – 46,000 mt
– SMP – 63,000 mt
– Cheese made from cow’s milk – 723,000 mt
– Cheese made from goat’s / sheep / buffalo milk – 33,000 mt
– Yogurt – 1.2 mn mt
– Fermented / cultured beverages – 731,000 mt
 Cheese production has risen strongly in 2018 (up by 9% for cow’s milk cheese and 17.9% for goats /
sheep / buffalo milk cheese) leading to higher availability of whey, but the cheese volume has dropped
by -5.7% for cow’s milk cheese and -16.6% for goats / sheep / buffalo cheese during the first five months
of 2019, indicating that less why may be available going forward
 Two Turkish companies manufacture MPC – all of this is MPC70, and market demand is largely for
MPC70
Consumer / Market Trends
 Turkish consumers are more health conscious than ever, with organic, functional and health foods very
popular at the moment – this may well drive growing demand for WPCs and MPCs
 The large Turkish bakery sector, traditionally dominated by artisanal breads and continues to grow – an
important user sector for dairy ingredients
 Going forward, a key element determining growth in demand and dairy ingredient imports will be if the
Turkish Lira recovers value in the international currency exchange markets
Regulatory Changes
 After years of negotiation to re-open the market to US dairy products, agreement on a new certificate
was reached in July 2018 and the market is now open for dairy products for human consumption sourced
from the US:
– Before the previous certificate expired, the US exported around US$24.2 mn to Turkey, the bulk of it
butter
43
2.7
UAE
Data Sources
 Production data: no dairy ingredient production
 Trade data: ITC Trademap
– 2018 data currently available as mirror data only
– 2014-17 data has been revised by ITC – we have corrected the numbers in the database for those
years accordingly
Context/Rationale for Forecast
 The 9.7 mn population is mainly urban and is growing by 1.47% – it has relatively high spending power
on a per capita basis, and reasonable GDP growth
 The UAE has an open economy with a high per capita income and a sizable annual trade surplus;
successful efforts at economic diversification have reduced the portion of GDP from the oil and gas
sector to 30%
 The government has increased spending on job creation and infrastructure expansion and is opening
up utilities to greater private sector involvement. The country's free trade zones, offering 100% foreign
ownership and zero taxes, are helping to attract foreign investors
 A 5% value-added tax was introduced in January 2018
 The UAE's strategic plan for the next few years focuses on economic diversification, promoting the UAE
as a global trade and tourism hub, developing industry, and creating more job opportunities for nationals
through improved education and increased private sector employment
 There is continued growth in the economy of Dubai and the UAE in general due to ongoing spending on
infrastructure development and construction in preparation for the Dubai Expo 2020, as well as intensive
investment in technology and the digital economy
 Dubai Plan 2021 aims to re-inforce Dubai’s position as a global center and destination for a number of
industries and sectors
 A growing population, increasing tourist numbers and rising incomes will all contribute to pushing UAE
food consumption to an estimated 59.2 mn mt annually by 2025 – the UAE has the highest number of
F&B outlets per capita in the world
UAE GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
1.7
2.8
3.3
3.0
2.9
2.8
Source: IMF
Milk Production
 Al Ain Dairy remains the leading player in drinking milk products due to its strength in fresh milk, with
Almarai (Saudi Arabia) and Al Rawabi Dairy in 2nd and 3rd place
44
 Milk production has increased significantly from 2014’s 170,929 mt to 242,729 mt in 2017 – a 42%
increase, with 2016-17 growth at 34%
 There is basically no production of the target ingredients in the UAE
 Most importers and traders do not bring in huge amounts of stock, purchasing to cover a 3-6 month
period
 In terms of imported dairy ingredients:
– WPC is imported for functionality as well as nutrition
 It is used for developing confectionery fillings (chocolate and caramel) and spreads
 It is used in applications such as sports nutrition, infant nutrition and high protein beverages
– WPI is mainly imported for products intended for distribution to gyms and the athletic sector, often
incorporated in nutritional bars
– Whey permeate and DWP are used mainly in the production of confectionery, esp cookies, biscuits
and chocolate bars
 Whey permeate is also seen as a cost effective dairy ingredient
– SWP is used in dairy products, confectionery and in the snack industry – it is considered a relatively
affordable ingredients
 However, supply competition is fierce and it is mainly imported from Lithuania, Ukraine, Poland
and Latvia
– MPC is mainly used in salty white cheese production for further distribution to bakeries and
restaurants which use large quantities of white cheese in baked goods, croissants, cheese pies and
other menu applications
Market / Consumption Trends
 The UAE continues to position itself as a food production and distribution hub, with its food processing
sector forecast to grow in parallel with a growing population and increasing export activity:
– The continuous development of the food manufacturing and processing sector is an important part
of working towards food security
 Dubai has recently made a huge investment in the Dubai Food Park – this is a US$1.5 bn mega project
in Dubai Wholesale City, established to enhance the Emirate’s competitiveness as a leading regional
hub in the food sector and food re-export:
– Food processing takes center stage in the new plants’ operation with 75% of the total area allocated
to factories, 17% to warehouses and 8% divided between offices and other facilities
 There is a growing trend towards fit and healthy lifestyles, with the younger generation especially driving
this trend – this is expected to increase the demand for whey protein in the coming years:
– The number of people going to gyms is rising which is driving demand for whey protein products
– This trend is also leading to rising popularity of healthy snacks – local consumers are switching to
low fat dairy products such as yogurts which are perceived as healthier, and dairy beverages instead
of traditional sweet treats
45
– Consumers are increasingly looking for products that are free from preservatives, artificial colorings
and flavorings
– Organic food at present remains a niche but growth in this space is being driven by new products
and strong marketing campaigns from large manufacturers
 Online retailing is starting to gain share as a result of growing interest from different dairy companies –
however, dairy products are still typically purchased in hyper / supermarkets and traditional groceries
 Social media provides brands with a free platform to interact with their consumer base – F&B
manufacturers are tailoring their existing products and introducing new ones to meet the ever-changing
tastes and behaviors of their target audience
 Convenience is important, with UAE consumers increasingly looking to buy “food on the go” – esp in
terms of snacks and breakfast items
 It is increasingly important for UAE food suppliers to match consumer values – as UAE consumers are
more educated and aware of global issues such as sustainability, transparency etc
 White cheeses and Mediterranean types of dairy products are in high demand and are considered
nutritious fresh food with a low fat content – more attention is being paid to labels, esp by the younger
population
Regulatory Changes
 5% VAT was introduced on January 1, 2018 and is levied on most goods and services
 A new food registration portal is currently being released (called ZAD) and is still in the testing phase
– It is related to product registration – once a food product is registered in one Emirate, it will be visible
on the system and the registration will be effective in all the other Emirates as well
– When lab testing has been done for a product, the new system will show the result sin all seven
Emirates
– This new system and law applies to all food products including dairy
Plant / Capacity Expansions
 Leading UAE regional supplier Chef Middle East has signed a major deal with a French dairy producer–
Chef Middle East’s broad client portfolio within the hotel / foodservice sector and its experience will
strengthen the French dairy producer’s exposure and sales growth in the region
 FrieslandCampina is looking to expand regionally and has started to sell a foodservice range via its
distributor MH Enterprise, selling directly to hotels, restaurants and catering companies
 Unikai, a UAE ice cream manufacturer, recently launched a fresh line of products including the Royal
Treat Premium Ice Cream which is made from 100% butter fat and will be offered in 6 flavors – this will
be distributed in the UAE and Oman
Halal Requirements
 Halal mark:
– For dairy, the Halal Mark is optional – all imported products are Halal by default so no declaration is
required
46
– However is a supplier wishes to have a Halal mark, it has to use the ESMA Halal mark – this means
companies need to go through an audit process
 Emirates Quality Mark (EQM):
– Obtaining an EQM is mandatory for certain products incl yogurt, flavored milk, Laban, fermented
Laban, flavored yogurt, pasteurized camel milk and goat milk
47
3.
Australasia
3.1
Australia
Data Sources
 Production data: Dairy Australia, ABARE and trade sources
 Trade data: Estimates based on Australian Bureau of Statistics
Context/Rationale for Forecast
 The 25.1 mn population is mainly urban and growing with an influx from Asia in particular; there is high
spending power on a per capita basis, and reasonable GDP growth
 The domestic fresh category’s demand for raw milk represents 29% of total raw milk production, with
demand forecast to grow further. Additionally, a reasonable volume of milkfats, cheese and other dried
or concentrated product is consumed domestically
 This means that the Australian industry might now have, and possibly for the first time, the opportunity
to arbitrage between domestic and export market demand depending on returns
Australia GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.8
2.1
2.8
2.8
2.6
2.7
Source: IMF
Key Trends
 In 2018 Australia’s raw milk production fell by 1.8%, driven by an accelerating H2 decline of 5.0% YoY.
Despite this, and the significant domestic demand (much more so than in NZ), manufactured product
exports grew 1.2% – and if Fresh and Liquid are added, exports grew 1.8%
 Local milk supply continues to fall, with more dramatic decline (-11.2%) in Q1 2019. Hence the 2019
forecast production of raw milk is -8%, reflecting the continuing effects of the 2018/19 heat waves and
drought conditions in Northern Victoria (not to the exclusion of overall declines in VIC, NSW and QLD)
and the eastern effects of low rainfall on grain, hay and water prices
 There are forecast declines in SMP, WMP and milkfat production – the latter two drawing milk which
could be allocated to cheese; for WMP raised imports in 2017-2018 reflect weak production, and
Australia cannot compete with NZ in this product; these declined are balanced 1% growth in cheese and
some growth in value added whey product streams
48
 Several key factors are affecting Australia’s constrained supply situation going forward:
– Water supply is a huge problem: today, Australia is using 350% more water than the available
renewable supply, according to the Global Resource Management Index
 Q4 2018 saw average rainfalls, but the Australian Bureau of Meteorology still considers there is
a 50% chance of developing El Niño conditions in 2019.
 A critical metric is the falling stored water level in key rural water storage systems
Australia’s Falling Stored Water Levels, 22 May 2019
Source: Bureau of Meteorology
 Rural water storage is at 56%, down 26% on this time in 2018. The last full replenishment occurred
in early 2017
 Important milk catchments of Northern Victoria and Southern New South Wales are adversely
affected by drought and by low availability of irrigated water allocations. In Northern Victoria water
prices were up 190% and in Southern NSW up 71%
49
– Farm Input Costs.
 In key dairying regions input costs have put acute pressure on farm cashflows and profitability.
Fertilizer: Urea up 29%, phosphates 9%. Feed has been hit by global commodity trading and
winter crops being down 23% YOY
Australia’s Rising Farm input Costs in 2019
Source: ARA, Profarmer, Latchstock Consulting
– So it is clear that improved milk prices and better weather conditions are crucial if unfavorable water
availability and input cost increases are to be mitigated
– Currency has been a positive meanwhile
 The mid-decade AUD to USD exchange rate decline, repeated in 2018 has protected the AUD
farmgate milk price from falling commodity prices
50
Trends in Australian Dollar: Cents per US Dollar, 2010-2019
Source: www.xe.com
 Whey and lactose are sourced locally from production of cheese only (unlike in NZ, where there is a
huge volume of powders versus cheese); yields are assumed as being the same as in NZ (a fuller mass
balance assessment, beyond our scope here, would need to take into account that Australian milk has
lower solids content than NZ milk):
– Imports (040410):
 Sweet / acid whey powders − estimated at 20% of import volume
 WPC34 mix retained − estimated at 50% of import volume
 D40 / D90 mix varied − estimated at 30% of import volume
– Exports (040410):
 Sweet / acid whey powders − estimated at 35% of export volume
 WPC34 mix retained − estimated at 40% of export volume
 D40 / D90 mix varied − estimated at 25% of export volume
Trade Agreements
 CPTPP is leading to tariff reductions in some of New Zealand’s growing key markets such as Malaysia,
Peru and Vietnam
New Plant / Capacity Expansions
 There is some change in local ingredient production mix observable in Freedom Foods’ expansion of its
nutritionals capability at Shepparton (northern Victoria), which is expanding from a through 300 mn L
site to what is expected to be a 400 mn L facility by 2020:
51
– Micellar casein is now being produced from February 2019, but sold only in liquid format at this point
– Native WPI is due to come on stream in H2 2019, with forward contracts in place for H2 2019 and
2020; however, volumes look like remaining niche over the next five year period
52
3.2
New Zealand
Data Sources
 Production data: trade sources
 Trade data: Estimates based on Statistics New Zealand
Context/Rationale for Forecast
 The 4.8 mn population is mainly urban and also growing with an influx from Asia in particular; there is
relatively high spending power on a per capita basis, and reasonable GDP growth
 However it’s evident that, unlike in Australia, in NZ the domestic fresh category’s demand for raw milk
represents only 5% of total raw milk production, so exports are the absolute driver
New Zealand GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
3.0
2.5
2.9
2.8
2.5
2.5
Source: IMF
 2018 NZ raw milk production grew 2.1% based on H2 production running 5.1% ahead YoY on the back
of favorable farming conditions. However, the forecast by calendar year is cautious given the stress
from the 2018/19 summer drought and unusually hot and dry 2019 autumn. Zero growth is expected in
H1 2019 as a consequence, with key North Island catchments worst affected. Whilst H2 2018 NZ raw
milk production was 40% higher than H1 and 5.1% ahead YoY, the impacts in H1 2019 will have
unfavorable effects in H2
 The 2019 data forecasts use a 1% raw milk production growth factor at a product stream level.
Forecasting recognizes the volume of raw milk consumed for export purposes is typically viewed as
being 95% of total raw milk produced
 In terms of trade:
– NZ manufactured dairy exports (excluding liquid dairy) fell 0.6% in 2018 − only growth in Fresh and
Liquid offset this decline, allowing exports to grow 0.4%
– Product mix exports in 2018 marginally favored growth in SMP / Butter / AMF and WMP streams
over Cheese / Butter / AMF / Whey and Casein and the 2019 forecast assumes this is to continue
 Several key factors are affecting New Zealand’s supply situation going forward:
– Currency has been a positive
 Since the H2 2015 exchange rate correction the NZD has trade at an average NZD 0.13 less to
the USD than was the case in from 2012 to FH 2015
53
Trends in New Zealand Dollar: Cents per US Dollar, 2010-2019
Source: www.xe.com

A NZD 0.01 swing in the NZD / USD rate across 2018’s estimate milk volume of 1.878 mn kg
milk solids approaches NZ$ 0.25 per kg MS at farmgate: the average local dairy farm produces
160,000 kgs MS, so a NZD 0.01 swing = NZD40,000, a large percentage of the average farm’s
free cash
 The NZD reset from H2 2015 has bolstered the NZD revenue realizations in the Fonterra Model
and accordingly the milk price. This is signaled by the relatively flat curve over the last 40 months
in the GDT Price Index
Trends in GDT Price Index, 2015-2019
Source: GDT
– Rainfall looks set to be a constraint
 With NZ’s pasture-based dairy system, raw milk production for any given season is materially
influenced by summer rainfall and soil moisture carry, especially in the January to March period.
Drought conditions impact summer fodder crops and cause the seasonal tail to fall away steeply,
54
placing pressure on farmers to use traditional winter fodder stores (hay and silage) harvested in
early season much earlier, potentially causing extraordinary herd culling
 A key forward rainfall indicator to whether NZ will experience a strong El Niño (dry) or a strong La
Niña (wet) summer is the Southern Oscillation Index, recording a “see–saw” effect where surface
air pressure (and so air mass) reduces at one location but sees a corresponding increase at
another site. This represents a mass of air that is oscillating back and forth across the
International Date Line in the tropics and subtropics
Figure 2.3.2d
Southern Oscillation Index Indicator for NZ Milk Production
Source: National Institute of Water and Atmospheric Research
 In H1 2019 we saw and are seeing the YoY effects of the latest El Niño − negative in H1 will retard
the full year despite a likely positive H2 (e.g. could be 2% +/-)
 The earliest timing of the next El Niño / La Niña signal will be H2 2019 but the effects on raw milk
production will be H1 2020
– Fonterra’s move to limit use of palm kernel expeller (PKE) – it also has concerns over the effect of
PKE on the profile of milk which is already more volatile late in the season – will make production
levels more vulnerable to climate in the future
 In fact PKE imports revived notably in January and March 2019. Farms supplying more Off Peak
versus Peak gain vs. the milk price by the Capacity Adjustment payment (applicable 8 months of
the year outside the September-December peak months). At a national level, the recent drought
has meant farmers’ Off Peak performance has fallen short of Peak volumes. These farms dried
off early and had cows in suboptimal condition pre winter and therefore pre early spring calving.
Rather than open up winter’s food rations (hay, silage and maize etc) these farmers can use PKE
to bridge through to when winter rations are opened. Many did, following a theme previously seen
in 2013/14 with the previous significantly dry summer
 Whey production/imports:
– Sourced locally from production of cheese, acid casein, rennet casein and caseinate
– Mostly SWP, little WPC34, no DWP produced
55
– WPC80 is production balance vs WPI and alpha-lactalbumin / hydrolysates mix
– WPC 50-89.9 includes mainly WPC80 but also WPC70 highfat
– The estimated strong growth in DWP imports is believed to reflect the expansion in local infant
formula blending operations
 Lactose imports:
– Driven by demand for standardization of SMP (mainly) and WMP
 MPC/milk permeate:
– Production trend estimates assume
 Increased Fonterra focus on MPC80/85, with some minimal MPI output
 Fairly constant levels of MPC56 and MPC70 high fat, with standard MPC70 as a balancing item
 No drying of milk permeate
– Imports of milk permeate are often for standardization so need considering vs overall lactose imports
and mass balance; there has been significant use of imports in domestic liquid milk products,
although Goodman, Fonterra and Lewis Road Creamery all now do permeate-free milk
Regulatory Changes
 Other possible constraints to growing milk production are:
– Certain – the Resource Management Act: New Zealand is maturing in its approach to the
management of the environment, with consequences to dairy farms covering land and water. Dairy
farms which fail to meet riparian planting standards and cannot achieve reduction targets for runoff
and leaching will struggle to renew resource consents associated with water usage and enterprise
activity under the Act. Dairy companies are increasingly active with defensive strategies across both
aspects. Government’s introduction of the Climate Change Response (Zero Carbon) Amendment
Bill will add to the compliance pressure dairy farms increasingly face and which will see farmed land
area decrease and farm land utilization change
– Possible – the current review of the Dairy Industry Restructuring Act (DIRA), which Fonterra wants
renegotiated, is presently underway with public consultation just finished: giving Fonterra the right to
turn down milk from new operators may put a brake on dairy conversions
Trade Agreements
 CPTPP gives New Zealand access to a number of new markets, with Japan, Mexico and Canada being
the largest. It is leading to tariff reductions in some of New Zealand’s growing key dairy markets, In Asia
notably Vietnam; Chile, Malaysia and Peru have yet to ratify
New Plant / Capacity Expansions
 Given the slow milk growth and limitations of commodity business, most new capacity has been in liquid
dairy or nutritional formula rather than commodities / ingredients which draw more milk, but with the
caveats that
– Fonterra has been investing in Mozzarella
– The investment in other new capacity has been in value add and new industry entrants have been
significant contributors
56
 Very limited growth is likely in availability of whey for drying: there is a risk that NZ production of hard
cheese (Cheddar, Gouda etc) could decline driven by (a) the competition in commoditized markets of
North Asia, North Africa and Middle East and/or (b) Fonterra’s belief in its WMP strategy and that stream
returns for powders and milk fat are better than protein and cheese
57
Europe
4.1
EU-28
Data Sources
 Production data: Mainly trade sources, EC on butter, SMP and WMP
 Trade data: Estimates based on GTIS
Context/Rationale for Forecast
 The 513 mn population enjoys high spending power on a per capita basis, but is seeing GDP growth
slow down
EU-28 GDP Forecast
Real GDP growth (%)
2018
2019f
2020f
2.0
1.4
1.6
Source: European Commission
 Brexit remains undetermined at this point – still; here we are forecasting as the EU-28 with the Brexit
impact taken into account and with a view to potentially separating out the UK and EU-27 in the next
update
 Projections 2019-2023 for milk are based on 1% CAGR:
– This reflects the fact that, in view of environmental issues, reductions in cow herds are to be expected
over the next years in some countries, impacting milk production
– Whilst Irish milk growth especially keeps on growing rapidly, this may not be possible for too long
 Environmental realities have constrained the Netherlands a lot already, and are certainly
becoming influential in France and Germany, even towards to rightist side of the political spectrum
 In June the individual member states submitted draft National Energy and Climate Plans outlining
proposed national strategies on energy and climate issues for the next decade, which are to be
finalized by the end of 2019 – the Irish plan has received some criticism and even Ireland seems
likely to need to rein back its expansion in milk
 2018’s SMP production in the EU declined a little, being much lower than forecast due to:
– Limited milk growth
 After 2017’s higher than expected milk production of +2% (with strong farmgate prices
incentivized by strong butterfat values), 2018 saw lower than expected milk production growth of
just +0.9%; this was caused by adverse weather circumstances during March-April (= almost flat
milk production) and during September-December (production down -0.45% YOY); despite this,
the average farmgate price was -3% YOY
– The release of intervention SMP, with 292,000 mt sold back to the market over the year (during AprilOctober, SMP production was down -7.5% YOY as a result), and a further 103,000 mt this year
58
 WMP powder production was 5% lower, mainly due to an inability to compete on the world market which
resulted in a 16.5% lower export volume in 2018 (-65,000 mt)
 Butter and AMF production increased a little
 SMP forecasts do NOT use a CAGR as here the market has been distorted by the intervention volumes:
– Consumption comes out low in 2019 due to intervention powder that was sold back to the market in
2018 and early 2019
 Part of that has replaced fresh powder in domestic consumption and exports but is not accounted
for in the production
 Based on higher consumption in the CMR industry, overall consumption in 2018 and 2019 has
been higher than in 2017 (estimates: 890,000 mt for 2018, 865,000 mt for 2019)
– The exports are extraordinarily high for this reason: these sales allowed EU operators to export
additional volumes because of the price advantage it offered vs global competition
 In 2018, intervention stocks were sold by the EU commission at €1,252/mt on average, vs. the
market price of €1,540/mt
 In Q1 2019 the average EU sales price has been €1,562/mt vs. average market price of €1,900/mt
– All intervention SMP has been sold by June. However, only a relatively small % of the intervention
powder part was exported in 2018 and most will happen in 2019, with an estimated 330,000 mt to
sell at an average price of is €1,347/mt vs. European market prices averaging €1,900/mt (note − the
intervention price is lowered by volumes from lower cost origins such as the Baltic states and Poland,
making it lower than would be the case from the main Western EU dairy exporters)
 This may suggest higher opportunistic imports this year by the more price-sensitive dairy
purchasing countries such as Egypt, Bangladesh etc
– This simple but significant price advantage drives the strong rise in exports forecast in 2019: by the
year end, intervention stocks will remain to some extent, as SMP production shows no signs of
decreasing. Therefore, 2020 is expected to reduce vs. 2019 but remain notably above the years
before 2018
 Whey products:
– WPC34 – 49.9%: WPC35 is based on UF product and does not include dry blends of various whey
proteins designed to copy a UF WPC35 as that would cause a double count
– WPC50 – 85%: This category consists predominantly of WPC80; there is some production of/
demand for WPC70 or WPC60, but most EU producers accommodate this by using a WPC80 and
blending that back with lactose to the desired protein level
– Whey permeate: Of EU production ~60% is used in the animal feed industry. Most liquid permeate
streams are used for lactose production
– Whey powder: Of EU production ~ 900,000 mt are used by the animal feed industries, mainly for
CMRs; acid whey is only a small part of the production and is becoming smaller each year, as WPC
producers often prefer to produce from acid whey
– Whey availability follows a similar track to milk supply overall: EU cheese production (cows’ milk) has
grown at a CAGR of 1% over the last five years to 9,275,280 mt
59
 MPC:
– Predominantly this category consists of MPC80 and higher
– Imports are fairly significant at the ≥80% level due to low EU tariffs which have allowed bigger
producers (from Oceania and North America) to build a significant customer base
Trade Agreements
 The EU Japan deal signed in 2018 is the most important EU trade agreement in terms of dairy. With
regard to ingredients, key elements are:
– Whey
 There is a TRQ growing from 6,200 mt in year 1 to 9,400 mt in year 11 for whey powder, whey
permeates and whey products used for infant formula
 The tariff lines concerned are 040410.129, 040410.139, 040410.149, 040410.169, 040410.189,
040490.118, 040490.128 and 040490.138
 The in-quota customs duty is reduced as follows:
EU-Japan Agreement, Whey in Quota Duty Rates
Year
Containing added sugar
Not containing added sugar
1
31.80%
22.70%
2
28.60%
20.50%
3
25.50%
18.20%
4
22.30%
15.90%
5
19.10%
13.60%
6
0.00%
0.00%
Source: Orrani Consulting based on European Commission
 Out of quota duties will be:
(1) Reduced to 35% (if containing added sugar) and 25% (if no added sugar) respectively and 40
yen per kg upon entry into force
(2) Reduced by 70% over 10 years
(3) There will be no full liberalization:
(a) For tariff lines 040490.118, 040490.128 and 040490.138, the out of quota tariffs will not be
reduced at all
(b) WPCs with a protein content above 45% will be fully liberalized over 5 years
(c) For both WPCs and whey powder, an agricultural safeguard measure may be applied by
Japan. The trigger level increases every year while the duty is reduced each year
60
(d) Whey for use in mixed feeds containing added coloring matter will be duty free upon entry
into force
– TRQ for Butter, SMP, WMP, BMP and Condensed Milk
 This is a pooled TRQ with an aggregate quantity expressed in LME
 It applies to the following tariff lines: 040510.129, 040510.229, 040520.090, 040590.190,
040590.229, 040210.129, 040210.212, 040210.229, 040221.212, 040221.229, 040229.291,
040221.119, 040221.129, 040229.119, 040229.129, 040390.113, 040390.123, 040390.133,
040299.129 and 040299.290
 The quota volume will grow as follows:
EU-Japan Agreement, Aggregate TRQ
Year
mt LME
1
12,857
2
13,286
3
13,714
4
14,143
5
14,571
6
15,000
Source: Orrani Consulting based on European Commission
 After year 6, it will remain at 15,000 mt
 The in-quota duty will not be fully liberalized, only the component by weight will gradually be
reduced to zero over 10 years
 However, the duty will be maintained (35% for butter and SMP, 30% for WMP and BMP)
 Therefore, the market access will be the same as under the pooled WTO quota with the difference
that this one is reserved for the EU and will be managed on a first come, first served basis
 The in-quota duty for condensed milk (040299.129 and 040299.290) will be zero
61
– WMP for chocolate manufacturing
 The volume of the TRQ which covers the tariff lines 040221.119 and 040221.129 is expressed in
LME and evolves as follows:
EU-Japan Agreement, TRQ for WMP for Chocolate Manufacturing
Year
mt LME
1
5,242
2
6,312
3
7,382
4
8,451
5
9,521
6
10,591
7
11,661
8
12,731
9
13,800
10
14,870
11
15,940
Source: Orrani Consulting based on European Commission
– There is no in-quota duty but a requirement for the importer to prove it uses 3 times more
domestically-produced WMP for the same purpose. Like the other TRQs, this one will also be
managed on a first come, first served basis
– SMP for feed

The duty will be reduced to 5% of the base rate (i.e. by 95%) over 6 years as follows:
EU-Japan Agreement, Duty Reductions, SMP for Feed
Year
Custom duties pre-levy
Levy (yen/kg)
1
77.43%
¥255.87
2
62.87%
¥207.73
3
48.30%
¥159.60
4
33.73%
¥111.47
5
19.17%
¥63.33
6
4.60%
¥15.20
Source: Orrani Consulting based on European Commission
62
 A similar reduction scheme is applied to milk powder with a fat content above 1.5% used for feed
 The summer 2019 EU/Mercosur trade deal includes a 10,000 mt quota for SMP with gradual tariff
elimination over 9 yrs. Duties will be cut for EU butter by 30% from the outset. To some extent Mercosur
and EU milk production are complementary, since northern and southern hemisphere countries produce
at different times of the year. However tariffs on dairy are generally too high to allow EU exporters to
compete vs other Mercosur origins that are duty free, and most products required are now produced
within the bloc
New Plant / Capacity Expansions
 Due to the limited milk growth expected, it is notable that there have been very little investment in new
dairy ingredient capacity, with the leading processors making investments in 3 main areas − out-ofregion acquisitions, purchases of cheese distribution/cutting businesses, or moves into plant/vegetable
milk/yogurt processing; exceptions have been:
– Ireland: a number of investments (Carbery, Lakeland etc) tending to shift away from FFMP to cheese,
whey and potentially more added value ingredients
– UK:
 In 2018 Dairy Crest raised ~£70 mn to increase cheese / whey production capacity at Davidstow,
Cornwall; any impact on this due to the 2019 acquisition of Dairy Crest by Saputo remains unclear
– France:
 Lacto Sérum has added a new whey drying tower, but this is replacing old kit rather than adding
truly new capacity
63
North America
5.1
Canada
Data Sources
 Production data: Statistics Canada, trade sources
 Trade data: GTIS/ITC average, trade sources
Context/Rationale for Forecast
 The 37.36 mn population is growing by 0.88%; it is mainly urban and enjoys relatively high spending
power on a per capita basis; however GDP growth is sluggish
Canada GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
1.8
1.5
1.9
1.8
1.6
1.6
Source: IMF
Key Trends
 Milk supply looks like it is slowing in Canada this year – similar to other regions. YTD May 2019 the
volume delivered for industrial processing (non-fluid) was -3%
 Slowing quota growth in Canada is consistent with increased penetration of cheese imports under CETA
and the beginning of dairy imports under CPTPP
Trade Agreements
 Canada’s supply management system is under pressure from the concessions on market access made
in CETA, CPTPP and prospectively from USMCA (= CUSMA); the deal opens up some market access
for US dairy, eggs and poultry into Canada but made no major concessions on the import and export of
beef, pork and grain, whilst allowing Canada to avoid punishing auto tariffs; it seems likely that all access
granted to the US under USMCA will be filled – this is less likely under CPTPP
 Strong demand for butter over the years up to 2017 encouraged increased Canadian milk production
and a skim surplus which led to the creation of milk Class 7 in March 2017, meaning much lower prices
on some Canadian MPC, skim milk and WMP used to make cheese and yogurt, making the US
equivalents (high protein UF milk) uncompetitive and enabling Canada to export much higher volumes
of SMP; Canada has since been able to increase butter output to meet current levels of demand
 Canada’s deal with the US in fall 2018 has paved the way for the elimination of the controversial Class
7 once the USMCA is ratified and implemented:
– The most likely scenario seems to be that ratification will be delayed but will take place at the end of
the year (six-month implementation period, effectively no impact in the election year); assuming
ratification
64
– Canada will:
 Eliminate Class 7 pricing six months after USMCA enters into force (although the “make
allowance” adjustor could be just as effective as the Class 6/7 for Canadian processors)
 Monitor its exports of MPC, SMP, and infant formula, with a surcharge being applied to exports
above certain levels (Canada agreed to export volume thresholds for SMP and MPC (55,000 mt
in YR1, 35,000 tonnes in YR2 and then increasing by 1% per year)
 Reduce certain barriers for US dairy exports, SMP included (although this will likely not drive
higher imports into Canada ex US, as US targets in five years are less than what it send in today).
– The US will provide expanded access for Canadian dairy (although this will be hard to exploit given
higher milk costs, the industry’s status under WTO as subsidized and the PMO’s role as a non-tariff
trade barrier)
Whey Ingredients
 Canadian whey imports are forecasted to be higher from 2021 onward in the forecast period
as USMCA is ratified and the Canadian market becomes more open.
New Plant / Capacity Expansions
 Vitalus Nutrition:
– In fall 2017 near Winnipeg opened its MDI Holdings Corp. (“Manitoba Dairy Ingredients Holdings
Corporation”) JV Gay Lea Foods Co-operative to produce MPC 85, MPI 90, GOS, BMP and butter
– In spring 2018 completed the expansion of its plant in Abbotsford, British Columbia, meaning that
more milk was headed to MPC/MPI
 China’s Feihe International is due to commission its greenfield plant in September 2019, trading as
Feihe Canada Royal Milk (CRM):
­
Plans to manufacture up to 60,000 mt of Infant & Child Nutritionals annually, exporting 80-85% back
to China
­
It will be Canada’s only infant formula facility, with two separate production lines, one for cow dairy,
the other for goat dairy
•
This could increase internal consumption of whey/lactose at the start of next year – reducing
commodity exports
 Gay Lea Foods had government funding of $16.9mn confirmed in July 2019 to help expand
its Teeswater, Ontario plant
 Pea protein supplier Roquette has opened a $300mn pea protein plant − reportedly the world’s largest
− in Manitoba this year
65
5.2
USA
Data Sources
 Production data: USDA and trade sources
 Trade data: Estimates based on GTIS/ITC and trade sources – in the context of this study, it was not
possible to do a fuller analysis of customs bills of lading
Context/Rationale for Forecast
 The 329.1 mn population has high spending power on a per capita basis but GDP growth is weak and
the economy will increasingly be impacted by trade policies which are reducing US market access and
giving competitive advantage to its competitors
USA GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.9
2.3
1.9
1.8
1.6
1.6
Source: IMF
 Milk production growth in 2019 is forecast by the USDA at just 0.3%, to 218.2 bn lb (just under 99 mn
mt), due to declining cow numbers and slowing growth in milk yields
 Production of SMP/NFDM will likely show only very limited growth over the period, reflecting the slow
milk growth, its role as a balancing product, the attractions of cheese manufacture and the lack of a
decisive shift towards SMP vs NFDM; butter is expected to broadly follow suit, although AMF
production/export remain less predictable – whilst output is estimated to have fallen last year, easier
new format plants have been added which suggest a little growth here
 WMP production is expected to remain broadly stable, remaining essentially an opportunistic play where
dependency on China is being offset by growth in other parts of Asia and the Americas. The trade
dispute with China and the growth of competitors’ preferential advantages in some (mainly Asian
markets) suggests the YTD reduction in WMP and SMP exports will “re-set” export volumes at levels
closer to 2017 than 2018, and that export growth will face constraints going forward
 Whey availability will rise as cheese production continues to rise (+3% in 2018 exc cottage cheese, to
5.9 mn mt); the same rate of growth is foreseen as opportunities arise in Asia, Middle East and even
Australia
 Whey ingredient production growth is expected to continue to center on WPC80 and to a lesser extent
WPI, with whey powder and WPC34 quite flat, but the former benefiting from the whey permeate
situation:
– New WPC80/WPI capacity (2018 onwards and future) is evident providing a growth spurt in WPI
from 2021
– Plant and synthetic proteins are threats, but seem likely to have limited impact over this timeframe
 DWP remains marginal and the limited US production is increasingly being sold in value add formats on
the domestic market: international competition is difficult with US disposal costs higher than in Europe
(reflecting the high Biochemical Oxygen Demand (BOD) required to break down this material), and
WPC/lactose is becoming a more attractive options for some infant nutrition manufacturers
66
 Whey permeate:
– Exports take place across multiple HS codes which vary amongst countries, their broad level being
estimated based on trade sources
– Consumption in the US is estimated to have grown with some pig industry expansion; however edible
take-up remains limited and it remains a feed- and export-led product which has therefore been badly
affected by the combination of the ASF outbreak in China and other Asian markets, together with the
Sino-US trade war, making 2019 about damage limitation: plant shutdowns and flexing to other
ingredients where plants have this capability suggest marked drops in both drying and export; this
means that new plants which should impact mainly from 2021 will not have the impact to sector
volumes that would otherwise have been expected; there are clear technical education opportunities
which can drive future growth in buyers’ usage levels in Asia, but these will take time and will face a
major headwind in terms of reduced demand
 WPC80/WPI trade:
– For the purposes of this study, HS350220 volumes in and out of the US are estimated at 85% WPC80
vs 15% WPI; additional estimates are made for the volume of WPC80 known to be exported under
Chapter 4 (exc. MF retentate)
 Lactose production will continue as whey proteins grow; it should benefit to some extent from the whey
permeate situation but growth prospects in some of the key export markets
 MPC/MPI:
– Imports <80% protein (HS040490) contain the higher fat content, which takes the protein level of the
initial nonfat solids (70%) down to around 42-45% – this derives from Fonterra; it was developed in
collaboration with Kraft for use in cream cheese in particular; these have been declining due to high
international fat prices
– Imports ≥80% protein are estimates based on
 The rising volume of MPC85 being traded (hidden) in 040490, driven by use in protein beverages
 Trade under HS3501101000 (but excluding volumes from Belarus (not known as a producer);
– Exports take place across several codes such as 3504.00 and 0404.90, and vary amongst
countries; trade sources indicate that they are much for significant for ≥80% protein formats
(estimated at 12% of output) than for <80% MPCs (estimated at 5% of output)
 Unlike for other markets, casein imports are HS3501105000 only to exclude MPCs#:
– Casein and caseinates volumes have been in decline due to
 Casein selling into applications which are relatively flat
 Over the last 2 years, movement by some end users to replace caseinates by micellar casein
where viable in functionality terms
 Limited production capacity in high protein beverages, where there is real demand
– In the past caseinate import volumes were inflated by push into cheese milk extension applications
coming from NZ and EU exporters who had excess milk to dispose of – that supply push has gone,
making the lower level of imports more reflective of true demand in sports nutrition, medical nutrition,
creamers, beverages
67
– The next 5 years could see some stabilization and perhaps even modest growth, as there is more
capacity for high protein beverages due to come onstream in 2019/2020
 Micellar casein is expected to continue from a low base, most selling into liquid coffee creamers
 Even though Casein isn’t produced in the US, the US does export some via Fonterra that brings it into
the Philadelphia and the re-shipping elsewhere were needed.
68
6.
Latin America
6.1
Argentina
Data Sources
 Production data:
– USDEC regional office based on official statistics
– For WPC34-50, WPI, whey permeate and DWP, we had to estimate production data based on the
growth in whey powder output as no detailed figures were available
 Trade data:
– ITC data only / Argentinian Statistics Office INDEC
 GTIS is thought to be less accurate as it excludes significant volumes exported to “Area nes”
 It is thought that these are exports to countries that have asked to remain confidential, as per
INDEC numbers – an example of this could be Venezuela due to its critical political and economic
situation
 Argentina and Venezuela has an agreement going back to 2005 allowing for tariff benefits for
Argentinian exports to Venezuela
– For 2018 exports of WPCs 50-89.9 and WPIs, we had to use ITC mirror data as no direct data was
yet available for 2018
Context/Rationale for Forecast
 The 44 mn population, growing by 0.92%, has weak spending power on a per capita basis; GDP growth
is moderate but recovering after a difficult 2016
 The economy has faced a difficult 2018 and is forecast to contract further this year – sky-high interest
rates, runaway inflation and nose-diving public investment are suppressing domestic demand
 However, external accounts should improve due to a weaker peso and higher agricultural output
 The uncertain outcome of October elections and possible financial turbulence could the outlook
Argentina GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
-2.5
-1.2
2.2
3.2
3.4
3.6
Source: IMF
Milk Production
 Milk production continues to lag behind 2018 but the gap is narrowing – May output ran just 1.7% behind
the same month last year
 Cumulatively, output for the first five months of 2019 is down 6.3% over the same period last year
69
 Higher milk prices are leading to improved profitability for farmers and the expected strong grain harvest
puts downward pressure on concentrate prices
 However lack of raw milk means that processors were only utilizing 38.8% of installed capacity in April
2019:
– The production mix has shifted to favor milk powders over cheese and fluid milk – this means that,
going forward, less whey is likely to be available
– This change has helped stabilize powder stocks which are at historically low levels
Consumer / Market Trends
 Local consumers are looking for healthier products and this is driving investment in sectors such as
organic – Nestlé is the first company to invest in organic milk production in the market
 There has been investment in infant formulae and special nutritional formulae for consumers with
specific dietary restrictions – again, Nestlé is leading this development
 The sales of leading brands have declined due to the current economic situation, leading to a
proliferation of alternative, “secondary” brands (ie low-priced products) in the market – these are growing
fast
 The current health trend and a new forthcoming regulation on labelling has led companies to invest in
new products with reduced sugar, sodium and fat levels and the inclusion of probiotics
 La Serenísima has launched a new line of milk products with varying fat contents from 0-3% with colorcoded packaging to tap into the trend for healthier products and easier communication with consumers
Regulatory Changes
 “Tasa estadística”: The government has this year implemented an import tariff for products which has
increased from 0.5% to 2.5% – this increase will be valid until; December 2019 and will be used to
balance public accounts
 The “Precios Cuidados” program has come into force under which prices of 64 products which are part
of the grocery basked have been foxed until October – including milk and yogurt:
– This measure also ensures that the prices of these products must be highlighted for consumers in
retail outlets
– This measure is aimed at helping consumers during these times of extremely high inflation
 The government is currently discussing a model of warning labels to be implemented on processed
foods
 A Mercosur FTA with the EU has been concluded but it is thought that this will not impact majorly on
dairy ingredient trade
 Argentina and Vietnam have signed new commercial agreements and treatment for some product has
already been agreed – the Argentinean President has indicated his intention for the agreement to be
expanded to include Argentinian milk powder
New Plant / Capacity Expansion
 Adecoagro finalized the purchase of the two Sancor processing plants, located in Chivicoy and Morteros,
as well as the brands "Las Tres Niñas" and "Angelita", enabling Adecoagro to afford to pay their debts
to their suppliers. The amount payed was US$50.4 mn
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 Nestle launched a new production line for liquid milk, and plans new investments in infant formulae,
organic milk and A2 milk. This year, it also launched a new production line at its Villa Nueva plant which
would be responsible for making chocolate milk for the production of the famous Nesquik in its liquid
version, which until then was produced in Tregar
 Arcor and Bagley increased their participation in Mastellone. In a letter sent to the National Securities
Commission, they announced the purchase of 2.3 mn shares of the dairy company for US$996,600.
With this operation, the companies together accumulate 43% of the social capital of the owner of La
Serenísima. According to an agreement signed in 2015, Arcor will have the right to purchase 100% of
Mastellone shares between 2020 and 2025
 The equity fund manager Aqua Capital is running the brands Lac Léo and Cruzília in Brazil. The group’s
focus is the growth of the businesses already acquired, but it considers entering the Parmesan cheese
market, as well as the acquisition of new companies in Argentina and Uruguay, places that already have
authorization to operate
 A new player entered in the dairy market this year, the dairy company Cerlac: a public-private company
whose products can already be found on the market. The first products launched were a pasteurized
milk, cream and dulce de leche, with the company planning to enter the cheese market soon
 The Agribusiness Secretariat of Argentina provided US$100,000 to milk producers to modernize and
increase production. Six producers benefited from this program, and with these investments they expect
to increase milk production by 48% over the next seven years in the region
 The Manfrey cooperative plans to build a large farm to house animals from several producers. The main
idea is to share the production costs and gain bargaining power due to the high production volumes.
The difference of this model is that the animals would be relocated to a single space and the producers'
farms would be converted into crops that would supply the animal feed demand, with the surplus to be
sold, making the operations more profitable
71
6.2
Brazil
Data Sources
 Production data: collated by USDEC Brazil office, based on official statistics and primary research /
trade sources
 Trade data: GTIS and ITC
Context/Rationale for Forecast
 Brazil’s population of 212 mn is growing by only 0.7%
 In 2018, Brazil faced uncertain economic periods due to the general elections and other factors such as
the trucker strike; at the same time, the Brazilian Real hit an record low of almost 4.2 to the US$ – as a
consequence, both GDP and dairy consumption decreased during this period
 Following a severe recession in 2015-16, GDP again contracted for the first time in Q1, 2019. This is
caused by a broad-based weakness in the economy, with uncertainty at home and abroad impeding
investment. Available data for Q2, 2019 points towards a lingering weakness, with industrial production
barely growing in April 2019 and both consumer and business confidence falling in May 2019. Economic
recovery is languishing in 2019, picking up only modestly from 2018. Uncertainty about reforms will
weigh on the business environment and dampen investments, while fiscal tightening and a tough
external backdrop (rising protectionism and slowing global growth) will also take their toll. In June 2019,
Brazil’s prospects were slashed for the fourth consecutive month. Focus Economics project a growth
of 1.4% this year, down by 0.4 percentage points from last month’s forecast, and 2.3% in 2020
Brazil GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2024f
1.1
2.1
2.5
2.2
Source: IMF
Key Trends
 Milk supply fell by 4% in 2018 due to the trucker strike but the conditions for milk production have been
good in Q1 2019, and annual growth of 2% is forecast by the USDA. Imports are still entering the
country in a steady stream, but there are most likely the result of previous negotiations / contracts
 High protein products have grown significantly in Brazil with local companies announcing many product
launches this year:
– Tirolez, a local dairy processor, is launching a new line of products called Nutri+ which includes
requeijão with fiber, cottage cheese with added protein and yogurt with whey
– Verde Campo is planning to produce a Greek yogurt with no preservatives or artificial colors / flavors
– Protein products are heavily promoted in the market, leading to local processors Italac, Piracanjuba,
Frutap, Vigor and Danone to all launch dairy drinks and yogurts with high protein levels this year
– Blissiomo and Yorgus are two other well-known brands competing in this market
72
– There is an assumption that this will lead to greater demand for MPC, WPC and other ingredients,
however at the same time, plant-based proteins are also seeing growing demand
 Other products showing strong growth are:
– Sports nutrition
– Bars and dairy drinks with high protein levels
– Organic products
– Plant-based products
 There is growing demand for MPC for the production of requeijão and cream cheese – this is mainly
MPC70:
– There appears to be only one company in Brazil that manufactures MPC60 and MPC70 (Quatrelati)
– products are only made to order and the minimum order quantity is 12 mt
– As MPC70 demand is increasing, Sooro mentioned that it was trying to produce this last year
however it has not been able to agree on its final formulation
 Sooro and Alibra manufacture WPC34 and Quatrelati produces WPC35 – Sooro has also been
manufacturing WPI since 2016; WPC output is expected to increase following its concluded partnership
agreement with Renner earlier this year
 Sooro and Alibra also produce whey permeate
 Brazil produces partially demineralized whey powder – key producers are Sooro, Alibra, Italac, Laticinios
Porto Alegre (Emmi) and Quatrelati
 Alibra has been producing sodium and calcium caseinate since 2016
 AMF is manufactured locally by Nestlé in its plant located in Goia – this is all for internal consumption
and output numbers were estimated based on its milk production output
Regulatory Changes
 The new MAPA IN 76/2018 and IN 77/2018 entered into effect and has generated discussions about
the dairy market and industry. These new regulations establish new requirements for the dairy chain
including production, storage, transportation and processing. New physio-chemical, microbiological and
somatic cell count (SCC) limits are the topics of most concern for dairy processors as the majority of
Brazilian producers are unable to meet these strict new requirements
Trade Agreements
 A Mercosur-EU FTA has been concluded:
– Commentators remarked that the trade deal is likely to fall short of EU dairy expectations
 This year, Brazil has officially removed anti-dumping (AD) duties on imports of milk powder from the EU
and New Zealand:
– Brazil’s Ministry of Agriculture has stated that it will monitor imports from these countries in order to
chart the effects of this new measure
 Brazil agreed an FTA with Chile in November 2018, but this covers mainly the technology, telecoms and
phytosanitary sectors and is not likely to be a key driver in the development of dairy trade
73
 The Brazilian dairy industry expects to increase its dairy exports to China and Asia in the wake of the
US-China trade war
New Plant / Capacity Expansions
 Local processor Tirol announced an increase in investments in its new processing plant in Ipiranga in
the state of Paraná. The initial investment of BRL 70 mn (US$18.1 mn) was increased to BRL 150 mn
(US$38.8 mn). The unit is expected to start operating in 2021 and to process 600 mn liters of milk / day,
mainly into UHT milk but easily expandable to other dairy products
 The court in charge of validating the sale of the Itambé brand by the Central Cooperative of Rural
Producers of Minas Gerais (CCPR) to Lactalis found in favor of the French company which is in dispute
with the company Vigor (part of Mexico’s Group Lala) which between 2013-17 owned 50% of the brand.
The injunction in favor of Lactalis is not a final decision – this is due in H2, 2019. However this signals
towards a positive outcome for Lactalis
 The Sooro and Renner Hermanos groups joined forces to set up a new company, Sooro Renner
Participaçôes S.A. this company will focus on whey proteins (WPC and WPI), likely to become a
significant player in the market with a processing capacity of 3.5 mn liters of whey / day:
– Sooro currently produces WPC35, WPC80, WPI90, whey permeate and partially demineralized whey
powder – it is planning to increase its production capacity especially for WPCs, WPI and lactose with
this partnership
 Equity fund manager Aqua Capital, which runs the Lac Lélo and Cruzilia brands (both cheese producers)
in Brazil, is investing US$13 mn in these two companies with the intention of growing the market and
tripling their revenues. The group believes in the growth of the market and intends to be well positioned
for a consolidation process. It is also considering the acquisition of companies in Uruguay and
Argentina. After this acquisition, Lac Lelo has changed its internal structure and is having a stronger
presence in the local market – as it produces many products such as cheese and requeijao for retail
and foodservice, it is likely that this will increase the company’s demand for dairy ingredients such as
MPC
 Nestlé will make investments of around US$100 mn in Brazil
 Swiss dairy company Emmi has increased its shareholding in Lacticinios Porto Alegre Indústria e
Comércio S.A. from 40% to 70%
 Local sports nutrition producers indicate that micellar casein is imported from the EU, so estimated
volumes are included from 2016 onwards – specifically, this is Glanbia’s sports nutrition business in
Brazil
74
6.3
Chile
Data Sources
 Production data:
– USDEC regional office in Brazil based on ODEPA
– La Federación Gremial Nacional de Productores de Leche FEDELECHE
– Oficinas de Estudios Políticas Agrarias ODEPA, Ministerio de Agricultura
– Local primary research / discussions with trade sources
 Trade data:
– GTIS and ITC
– Subsecretaría de Relaciones Económicas Internacionales SUBREI, Ministerio de Relaciones
Exteriores
Context/Rationale for Forecast
 The 18 mn population has weak spending power on a per capita basis; GDP growth is relatively strong
for Mercosur
 Economic growth is projected to decelerate this year as re-ignited trade tensions and a slowing global
economy weigh on exports. Moreover, sluggish gains in employment suggest that private consumption
could struggle to sustain momentum
 Nevertheless, solid fixed investment, buoyed by upbeat credit growth and an upcoming tax reform,
should buffer any slowdown
Chile GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
4.0
3.4
3.2
3.0
3.0
3.0
Source: IMF
Milk Production / Processing
 Due to increased import levels, local prices have been affected and raw milk output is not growing as
forecast by the government: in 2018, it only grew by 1.8% or 1.9% whereas at least 4% increases had
been forecast
– However a strong US$ is making imports more difficult
 Additionally, 2018-19 were very dry years with little rain during the winter season:
– According to large processors such as Surlat and Nestlé, local milk volumes are insufficient to supply
demand
75
– At the same time, producers claim that cost increases are stopping milk producers from making
further investments
– In February 2019, Prolesur and Watt’s, two of the major raw milk buyers in the country, announced
lower milk prices – this news was not welcome by the different producer associations
 Current milk prices remain relatively high
 Chile’s Oficina de Estudios y Políticas Agrarias (ODEPA), part of the Ministry of Agriculture, collects
production statistics directly from the milk processors to check what type of products raw milk is used
for:
– It publishes much reduced SMP production for 2018, whereas more raw milk was diverted into WMP,
partially skimmed milk powder and pasteurized milk
– Chile is not traditionally a big SMP producer and industry sources see this drop in local production
as a revision to more usual levels
– Generally, Chile has a deficit in SMP and butter
– Milk reception in 2019 so far has been flat or shown a slightly downward trend, which means there
will be less WMP – milk prices are currently too high to make WMP viable / profitable
 Whey products:
– Prolesur (Soprole) is currently producing WPC34, whey permeate and DWP locally
– Schwager (Lácteos y Energía) is currently producing WPC34 locally – but need to buy this in from
other sources so only produce if they can buy in whey
– Most WPC34 is used in blends for Chile’s National Health Service programs as long as it is
competitive
– Surlat is currently producing WPC50-89.9 locally – actual volumes could not be confirmed so we
estimate this to be around 100 mt annually
– Prolesur (Fonterra) used to send some whey permeate to South Korea under a trade deal, with small
volumes going to South East Asia
 However the quality of this product was poor and it was useful for stockfeed only – this trade was
basically simply disposal of a by-product and has since stopped
 Production capacity was a round 100 mt / month, however Prolesur now has the option to produce
WPC instead, or to sell liquid whey to the Government’s health programs
 Nestlé is producing AMF locally – estimates are in the region of 5,000 mt, only in the summer when
there is surplus fat:
– Some of this is exported to Peru
 Loncoleche is apparently producing some batches of lactose as a trial, but there has been no
commercial use / sale of these products yet:
– Lactose is generally used as a cheap filler to standardize milk powder
 HS code 0404.90 includes MPCs as well as dairy preparations (incl dairy blends) – it is estimated that
these may make up around 40% of the total import volume and have therefore been excluded from the
database numbers
76
Regulations
 Since 2015, dairy imports have broken records year after year – in December 2018, local producers
through the association FEDELECHE (the largest raw milk producers’ association) asked the Chilean
Government to implement tariffs for a 2-year period; whilst this request was accepted for review, until
now there has been no decision on this and analysts feel that this is unlikely to happen given that Chile
is one of the countries with the most liberal trading regime in the region and that such a decision would
hurt the interests of many other sectors
 The Ministry of Agriculture has invited all producers to create joint ventures with other local companies
to reduce costs and increase competitiveness in international markets:
– Some small to medium-sized companies have already formed these partnerships and there are
several examples of successful joint ventures
 New labelling regulations with warnings on high content of sodium, sugar, saturated fat and calories
from 2016 are leading to dairy products receiving more attention
 There is a draft law running through Senate which requires the mandatory presence on the label of the
origin of milk used in the production of dairy products – this is a purely political move against imports
Trade Agreements
 Chile deepened its longstanding commitment to trade liberalization with the signing of a free trade
agreement with the US, effective 1 January 2004. Chile has 26 trade agreements covering 60 countries
including agreements with the EU (currently a modernization of the FTA is under negotiation), Mercosur,
China, India, South Korea, and Mexico. In May 2010, Chile signed the OECD Convention, becoming
the first South American country to join the OECD. In October 2015, Chile signed the Trans-Pacific
Partnership trade agreement, which was finalized as the Comprehensive and Progressive Trans-Pacific
Partnership (CPTPP) and signed at a ceremony in Chile in March 2018. CTTPP negotiations with New
Zealand are ongoing
Consumption / Market Trends
 Overall, the Chilean dairy market is sluggish – the economy is growing only slowly, retail sales are down
and a large part of the population is still poor and extremely price conscious
 The Chilean Government is implementing programs to increase dairy consumption among children with
the goal to increase per capita consumption from 161 L to 175 L. There are also plans to introduce
other dairy products / ingredients as components of daily school meals in public schools
 Increasing numbers of Chilean consumers are focusing on healthier food and the nutritional content of
purchased food products:
– However a lot of people still don’t have a lot of disposable income and price is key
 There is strong growth in products with higher protein levels, including yogurt, milk and dairy beverages
– this is increasing the demand for MPC and WPC:
– Key producers / brands in this segment are Soprole, LoncoLeche (Watt’s), Nestlé, Colun and Surlat
Plant / Capacity Expansions
 Saputo has been investigating potential investment in Chile since February 2019 but no official decision
has been announced yet
77
 Colun – the only cooperative in the country and therefore not paying tax – purchased 32,000 sq m of
land in Chile in January 2019 in order to build a new distribution center
 Generally, Chile lacks volume so will never be a huge player in the international market – the only
products for consistent exports are WMP and cheese
 Future volumes will depend to a large extent on what Fonterra’s plans are with their Chilean investments
of Prolesur and Soprole – as the company aims to reduce its debt, it depends on its strategy for Brazil
and its farming operations in China – it is uncertain whether the Chilean investment is also on the list to
be axed
 There is talk of some local investments in plants, but in the past these have not been very successful
as they have lacked critical mass – however, some wealthy local businessmen are interested
78
6.4 Colombia
Data Sources
 Production data:
– Asoleche
– Analac
– Ministry of Agriculture
– Interviews with key processors / trade sources
 We have revised SWP data upwards for previous years due to a difference in sources:
– Production data in previous years was mainly based on Asoleche, which excludes whey products for
feed applications
– This year we have used figures from the Ministry of Agriculture, which include whey products for feed
applications – we have therefore revised the production numbers up for the period 2014-18
 Trade data:
– GTIS and ITC
– Dirección de Impuestos y Aduanas Nacionales DIAN
– Legiscomex shipping data for 2018 – as this does not go into sufficient detail, the whey codes /
numbers have been cross-checked with a personal contact at a large freight forwarder who knows
dairy imports extremely well and can interpret the Legiscomex / DIAN numbers
– Based on these results, we have revised the 2014-17 data too to reflect the 2018 splits more closely
Context/Rationale for Forecast
 The 49 mn population, growing by around 0.8%, has weak spending power on a per capita basis; GDP
growth is relatively strong for the region however
 Colombia’s economic development is hampered by inadequate infrastructure, poverty, narco-trafficking
and an uncertain security situation, in addition to heavy reliance on primary commodities with little valueadding
Colombia GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.7
3.5
3.6
3.7
3.7
3.7
Source: IMF
Milk Production
 Fresh milk production grew by 11% last year – cooperation programs between the large processors
such as Alpina, Alqueria and Colanta with local farmers have improved the milk’s solid contents and
overall quality
79
 42% of drinking milk is sold through informal channels and under regulated milk prices, with lower quality
milk used to further process it into consumer products other than drinking milk
 Colombian production levels are among the highest in the region and a healthy industry supports local
producers:
– Colombia’s food industry is also growing fast which is making dairy more important as a food
ingredient rather than just drinking milk
 Improvements in the country’s social and security situation has opened wider regions to the national
dairy industry and market, where previously production was either too expensive or impossible due to
security reasons:
– Cost reductions in transport, labor, commerce etc in these regions is helping milk producers and
processors to improver technology and invest in expansion
 Stock levels are normal as the industry is balanced – production growth and imports push prices down
but growing exports balance the market out to avoid overstocking
 There has been a big push on whey production – in less than four years, production of SWP has doubled
due to official programs and efforts from academia to educate producers on the correct utilization and
commercialization of whey:
– Support from the industrial sector by the main companies has also been a factor in this growth
 Most of the locally-produced milk powder (esp WMP) is for local consumption – previously Venezuela
was the main buyer of Colombian WMP but payment issues given the current situation within Venezuela
have led to Colombian producers to avoid that market:
– Other natural export markets such as Ecuador, Panama and Costa Rica have phytosanitary
restrictions or high tariffs for Colombian dairy products
– However the loss of export markets is being balanced by strong growth in the domestic food
processing market and a decline in imports
 The last two years have seen an intense battle between margarine and butter producers with consumers
now increasingly aware of the benefits and healthy attributes of butter – this is leading to a growth in
butter output
Trade Agreements
 Colombia has signed or is negotiating FTAs with more than a dozen countries – the Colombia – USA
FTA went into effect in May 2012, however milk producers have requested that he Colombian
Government keep dairy out of future FTAs
 New Zealand will join the USA and Europe for which tariffs on dairy products will go to zero in 2026 and
2028 respectively
Consumption / Market Trends
 A growing demand for healthy products is increasing industrial demand for WPC and MPC in any form
or concentration – this is a fast-growing segment
Plant / Capacity Expansions
 There are no reports of any significant investments in plant or capacity
80
 Danone and Alquería are dissolving their JV, and Alquería is now starting to produce a wide assortment
of dairy products both for B2B and B2C
 Alpina has made some investment in its plants (around US$35 mn) but this has been on beverage lines,
not dairy lines
81
6.5 Guatemala
Data Sources
 Production data: There are no or few official production statistics for dairy production in Guatemala:
– One source consulted is the Ministerio de Economía
– Our production numbers are estimates made by the Guatemala Producers’ Association
– The biggest local production is butter, most of which is produced by small artisanal producers who
do not keep records in order to avoid taxation – this is sold though informal channels, hence there is
only a poor record in dairy products manufacture and sales in Guatemala
 Trade data: GTIS and ITC, Ministerio de Economía, Legiscomex:
– Note: ITC data not yet available for 20108 so for this year, the source is GTIS only. However,
generally, GTIS and ITC data are in close agreement
– In Guatemala, as is the case in other countries in the region, it is hard to differentiate products by HS
code only as these are often interchanged freely:
 WPC34 enters under HS Code 0404.10and 3502.20- which should be reserved for the higher
concentration WPCs (80 plus) and WPI
 Conversely, imports of WPC80 / WPI can also be found under 0404.10, not just 3502.20
 SWP and DWP is imported under 0404.10 and 0404.90 (which is strange given that 0404.90
attracts 6% duty compared to zero duty for 0404.10)
 MPC, which should enter under 0404.90, also comes in under 3502.20 which should be reserved
for WPCs
– Our estimates of trade volumes is therefore based on a mixture of trade data analysis, analysis of
shipment data for 2018 and best estimates made on the basis of discussions with industry / trade
Context/Rationale for Forecast
 With a population of 16.6 mn growing annually at 1.93%, Guatemala is the most populous country in
Central America, with a GDP per capita roughly half the average for Latin America and the Caribbean:
– The agricultural sector accounts for 13.5% of GDP and 31% of the labor force
 Guatemala is the top remittance recipient in Central America as a result of Guatemala's large expatriate
community in the US – these inflows are a primary source of foreign income, equivalent to two-thirds of
the country's exports and about a tenth of its GDP
 The 1996 peace accords, which ended 36 years of civil war, removed a major obstacle to foreign
investment, and Guatemala has since pursued important reforms and macroeconomic stabilization. The
Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) entered into force in July
2006, spurring increased investment and diversification of exports, with the largest increases in ethanol
and non-traditional agricultural exports. While CAFTA-DR has helped improve the investment climate,
concerns over security, the lack of skilled workers, and poor infrastructure continue to hamper foreign
direct investment
 Over the last few years, Guatemala has had one of the best economic performances in Latin America
with a growth rate above 3% since 2012, reaching 4.1% in 2015. However, it ranks amongst the
countries with the highest income inequality in Latin America:
82
– The distribution of income remains highly unequal with the richest 20% of the population accounting
for more than 51% of Guatemala's overall consumption:
 More than half of the population is below the national poverty line, and 23% of the population lives
in extreme poverty
 Poverty among indigenous groups, which make up more than 40% of the population, averages
79%, with 40% of the indigenous population living in extreme poverty
 Nearly one-half of Guatemala's children under age five are chronically malnourished, one of the
highest malnutrition rates in the world
 That said, analysts believe that, given Guatemala’s further capacity for economic growth, there is an
opportunity to reduce poverty, with accelerating economic growth crucial to achieve social objectives in
the medium and longer term
Guatemala GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
3.1
3.4
3.6
3.8
3.6
3.5
Source: IMF
Milk Production
 Only around 60% of Guatemala’s installed milk processing capacity is being utilized as there is a lack
of quality local milk – additionally, it is hard for local processors to compete in a highly competitive market
full of imported products
 In terms of milk production, mediocre profitability, high costs, lack of logistics capacity and lack of
investment (both from the public and private sector) hamper development of local milk production:
– There is no government involvement in the dairy sector, with dairy farming in private hand through
the Chamber of Dairymen – there is generally weak management and most of milk production takes
place with dual purpose herds
– Raw milk is generally sold at collection centers or to informal buyers for artisanal processing into
cheese, cream and butter – it is estimated that only 20% of local raw milk is processed industrially
 As an open market for imported products, especially fluid milk but also dairy ingredients for recombining,
locally made products based on raw Guatemala milk find it hard to compete
 This is leading to Guatemala becoming a significant net importer in the region
 Guatemala is a producer and exporter of cheese, but only produces a small amount of whey – very
small volumes have been exported lately:
– There are some efforts to utilize local whey which at present it is treated as waste:
 The Universidad San Carlos has been working with cheese producer associations and small
producers to encourage whey processing
 Costa Rica’s Dos Pinos has also been working with local cheese producers to develop whey
utilization (Guatemalan cheese is mainly exported to Costa Rica) but no commercial whey
processing exists in the country as of yet
83
Regulatory Changes
 At present, certain fractions of the dairy sector are arguing that there is unfair competition in the country
due to a proliferation of lower-cost dairy imports and imported products being sold at lower prices than
in their countries of origin (“dumping”) – the Chamber of Milk Producers announced that it will file a
complaint to the Ministry of the Economy through the Directorate of Foreign Trade. However, the
government at the same time is aiming to increase the usage of whey in dairy production, so there is
doubt which products / ingredients this complaint will cover
 Since the emergence of highly pathogenic avian influenza (H5N1) in the Dominican Republic (a member
of the CAFTA-DR trade bloc), products of animal origin have been subject to intense examination since
January 2019. The livestock sector is highly sensitive in Guatemala because most producers are smallscale with low levels of technology which cannot protect themselves from diseases, therefore all
imported animal-origin products are currently under extra scrutiny before being allowed to enter the
country
Trade Agreements
 Guatemala is part of the CAFTA-DR-USA FTA, under which 95% of US agricultural exports can enter
the country duty free, with the remaining 5% on 5- or 10-year tariff phase-outs (0404.90, currently at 6%
duty, will become duty free in 2020)
 In addition to CAFTA-DR-USA, Guatemala has signed bilateral or regional FTAs with Chile, Mexico,
Colombia, Taiwan, Panama, the EU, Peru and the European Free Trade Area (EFTA) and is currently
negotiating an FTA with South Korea – it has also signed partial scope agreements with Belize, Ecuador,
Cuba, Trinidad & Tobago and Venezuela which cover a reduced number of products
 Central America established a common external tariff schedule in 1998 and the so-called “Northern
Triangle” countries (Guatemala, El Salvador and Honduras) are moving towards fuller integration in
shape of a customs union. Honduras and Guatemala implemented the first stage of a customs union in
2017 with El Salvador starting negotiations to join this in October 2017
Plant / Capacity Expansion
 Given that only an estimated 60% of industrial processing capacity in the country is utilized, there are
no current efforts to increase capacity:
– It is not envisaged that there will be any capacity expansion investments in the near future – at the
contrary, there is actually some divestment for some mid-size milk producers of fresh milk and
cheese
– Costa Rican company Dos Pinos has had a plant in Guatemala since 2007 and has been updating
this, but this has not included an expansion of capacity
– Investments by current players are very small and there are no reports of new entrants into the
market / industry
84
6.6 Mexico
Data Sources
 Production data: USDEC Mexico office based on official statistics and trade sources
 Trade data: GTIS and ITC
Context/Rationale for Forecast
 The 128 mn population is mainly urban but has weak spending power on a per capita basis; GDP growth
is being hampered by uncertainty over the country’s trade relationship with the US, policy ambiguity on
the outset of the new President’s term and deteriorating investor and consumer confidence:
– Indeed, Q1 2019 saw the Mexican economy shrink by 0.2% for the first time since Q1 2018 – dealing
a blow to the new government’s drive to convince investors it can boost growth in Latin America’s
second-largest economy
– Analysts believe that the weak Q1 GDP figure means the economy won’t, barring a major surprise,
grow by the 2.5% that had been projected, and that the next few years will be underwhelming for
Mexico’s economy
– US tariffs, if imposed, would devastate the economy and the unfolding diplomatic crisis has already
shaken USMCA-related certainty and frightened investors
– Policy uncertainty in light of Andres Manuel Lopez Obrador’s (AMLO) nascent presidency and
flagging oil and gas output are also expected to weigh on growth in 2019
Mexico GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.0
1.6
1.9
2.4
2.6
2.7
Source: IMF
Milk Proteins
 MPI – one company, Lopez Negrete (LONEG), produced 85 mt for just one customer (Nestlé); future
production depends entirely on what Nestlé wants
 The same is true for Micellar Casein which is also produced by Lopez Negrete for Nestlé only – actual
volumes could not be confirmed with LONEG but are estimated to be around 60 mt in 2018, down from
80 mt in 2017
 Indústrias Lácteas Chihuahuaense (Reny Picot) is the main producer of SWP, DWP and whey permeate
and has provided updated production numbers for 2018, indicating a shift away from DWP production
towards SWP and whey permeate in 2018
– Demand for these ingredients and US pricing could well be bringing a shift in domestic production
for the different types of whey products
– There are a few other local companies drying whey, but most of this is for internal use only and no
volume data is available
85
 A more in-depth ingredient segmentation study in 2017/18 revealed that whey permeate imports stopped
in 2017 in favor of SWP – this was a one-off situation with permeate imports resuming in 2018
 AMF production has increased in 2018 – again, Indústrias Lácteas Chihuahuaense is the main supplier
and has been increasing its output for export markets, mainly the US
 Most of the MPC used in Mexico is MPC70
 DWP is produced and exported by Indústrias Lácteas Chihuahuaense
 Small volumes of WPC34, MPC70 and WPC80 are exported – it is uncertain if this is local product or
re-export of US product
 Growth rates for MPC are higher than WPC over the forecast period due to stronger demand by
applications using MPC.
Whey Ingredients
 Whey imports are projected to remain flat over the forecast period as the Mexican economy growth
slows, local spending power weakens, trade remains uncertain with key trade partners like the USA and
lower cost ingredients will likely win over dairy in the feed section.
Milk Supply
 Mexico’s fresh milk production has been growing at a moderate rate of about 1.5% p.a. while domestic
food and dairy processing sector growth has been at 3-5% annually – the milk deficit is forecast to
remain at 25-30%:
– In 2018, Mexican raw milk production reached a record volume of 12 bn liters, with annual demand
(LME) at around 15.5 bn liters
 Domestic production of dairy ingredients is still very low and most of the ingredients needed to
supplement local milk production in filling domestic demand will continue to be imported – it is thought
that Mexico’s dairy ingredient supply will consist of around 75-80% of imported ingredients
 The new Mexican Government is implementing policies to increase local milk output but the market
demand is not for more raw milk, but for dairy ingredients:
– It is thought that most of the additional output will go into social feeding programs and some regional
/ artisanal fresh cheese production
 The US will continue to be the leading supplier of imported ingredients, especially NFDM/SMP, all whey
products and MPCs
Consumption / Market Trends
 Dairy demand depends on the general economic situation as dairy is considered an expensive protein
in comparison to other protein sources eg chicken or egg
 Cheese and yogurt consumption have been increasing – driven by middle class consumers and a new
generation of customers looking for natural and healthy products
 In trade, Mexico has exported significant volumes of SMP and small volumes of WMP to Venezuela –
SMP exports rocketed from just under 29,000 mt in 2017 to 104,000 mt in 2018, however WMP exports
dropped from more than 56,000 mt to 6,800 mt during the same period:
– Whilst 2019 data is not yet available, indications are that these large volumes of SMP to Venezuela
were a one-off in 2018, with exports at the end of July amounting to maybe 5,000 mt or less
86
 US exports to Mexico saw the following trends:
– WPC34-49.9 – imports from the US grow by 10-15% p.a.
– WPC50-85 – all of this category is WPC80, with imports from the US growing by 30% in 2018 –
growth in US product depends on the price competition from Europe and Argentina
– SWP and whey permeate mainly come in from the US, with this trade growing by about 15-20% p.a.
– MPC<80% consists mainly of MPC70 and comes in from the US, a trade which is growing by 1015% p.a.
Regulatory Changes
 There are new standards for milk powder as an ingredient, cheese and yogurt – Mexico is becoming a
very strict and highly regulated country for dairy products, with these new standards unfortunately mainly
aimed at imported products
Diseases / ASF
 Mexican demand for whey permeate as well as lactose in feed is mostly for the swine sector, which is
growing – however competition in this very price-driven application from other, lower cost ingredients is
strong and prices / competitiveness determine the inclusion levels of whey permeate in feed
 The local feed industry is seeing ASF in China and other Asian countries as an opportunity for the
increasing production and export of Mexican pork products, which should lead to growth in the local
swine industry
Trade Agreements
 The last two years have seen lots of uncertainty due to parallel negotiations for FTAs with key global
dairy exporters and the uncertain trade relationship with the US; US trade into Mexico is likely to be
impacted by other FTAs:
– Mexico FTA with Europe which will grant new market access for milk powder, cheese and other dairy
products
– CPTPP will grant new market access for milk powder and cheese, which means that Australia and
New Zealand will compete more aggressively with the US
– USMCA – this is awaiting final approval by members of Congress, with the US maintaining tariff free
access for dairy ingredients, however there are a number of uncertainties including:
 Retaliatory tariffs on cheese in the steel and aluminum dispute
 New trade tensions (May / June 2019) over immigration issues
– Our forecasts are based on the assumption that continuity of trade is assured through the signing of
USMCA and avoidance of a trade war with the US
New Plants / Capacity Expansions
 2018 saw some addition to milk powder production capacity, but no detailed data is available – however
it is unlikely that this will impact on the general market / trade picture
87
6.7
Peru
Data Sources
 Production data: estimates based on discussions with trade sources / primary research
 Trade data: ITC and GTIS, Legiscomex:
– Only for the whey / protein complex, actual Peruvian statistics based on shipping manifests vary
significantly from ITC / GTIDS data – HS codes 0404.10, 0404.90 and 3502.20
– As these customs numbers are extremely detailed in their descriptions, including suppliers, lot
numbers, production dates etc, we have utilized these numbers for the whey / milk protein complex
and revised the numbers for 2014-17 accordingly
Context/Rationale for Forecast
 The 32.9 mn population is growing by 1.17%; it is mainly urban but has weak spending power on a per
capita basis; GDP growth is quite good by the standards of the region however
 Peru's urban and coastal communities have benefited much more from recent economic growth than
rural, Afro-Peruvian, indigenous, and poor populations of the Amazon and mountain regions. The
poverty rate has dropped substantially during the last decade but remains stubbornly high at about 30%
(more than 55% in rural areas):
– After remaining almost static for about a decade, Peru's malnutrition rate began falling in 2005, when
the government introduced a coordinated strategy focusing on hygiene, sanitation, and clean water
Peru GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
4.0
3.9
4.0
4.0
3.9
3.8
Source: IMF
Milk Production / Processing
 With 1 mn cows and 2 mn mt of raw milk produced annually, Peru’s milk production has been steady
over the last 4 years – the Peruvian Milk Producers’ Association AGALEP expects no more than 2% of
growth in 2019
 This is far from the level required for the sector to be competitive, with industry sources estimating that
at least a 6% annual growth is needed, however over the last 11 years, milk output has been impacted
by regulations and imports:
– Trade liberalization in 2007 played a major role in this, with import tariffs for milk powder dropping
from 25% to zero and the regulation limiting use of milk and whey powders as ingredients for
consumer dairy products (Decreto Ley No 653 de Promoción de las Inversiones del Sector
Agropecuario) was abolished – this boosted imports
88
 There are rumors that Grupo Gloria will start producing milk powder in the near future (maybe in a couple
of years) but with its actual production levels and market demand still very much focused on evaporated
milk, there is no need for the company to make this a priority item
 There is no culture of local whey production / processing / utilization – in spite of industry demand, whey
powders (SWP, DWP, whey permeate and WPC) are imported
 Peru does produce butter; whilst this production has been growing steadily, prices have pushed small
producers to sell their output mainly in the informal market – this created an artificial product scarcity in
the second half of 2018 until prices balanced out again
 WPC34-49.9 is imported in small volumes and is not growing fast – in contrast, WPC50-85 is also small
but growing faster; WPI demand is negligible with just 2 mt imported in 2018
 Whey permeate is imported in reasonable volumes (1,723 mt in 2018) – multinational companies are
the main users of this ingredient, much of which is used in the food industry, esp for biscuit / cookie
production
 DWP imports, at around 277 mt in 2018, are growing fast
 MPC imports are significant – virtually all of the volume of 1,343 mt is MPC80 – but are said to be
growing only slowly
 Whilst MCC is not showing up in official trade data, some small and medium-sized distributors (Indústrias
Ragar, Peruana de Nutrición, Akaesperu, Nutriforma, Lab Nutrition, Sky Nutrición Superior) market it,
either as branded product or a raw material – import volumes are estimated at around 10 mt annually
89
Regulatory Changes / Consumption And Market Trends
 Production plants are increasingly relying on imported milk powder for recombining:
– Peruvian law is flexible with what the industry can call “milk”, so powdered ingredients are used in
significant volumes to make final consumer dairy products
– Grupo Gloria, Peru’s largest dairy processor, is engaged in strong lobbying to congress to keep it
this way as it is more profitable to recombine from imported ingredients than purchasing from local
producers
– Even though local farmers / producers are pressuring the government to re-instate the 25% import
tariff on milk / dairy powders, Peru is lacking the land needed to bring up local milk production
sufficiently to cover demand, therefore this is not a realistic possibility
 Following a 2017 scandal on whether Gloria’s / other local brands products are really milk, consumers
were demanding more “proper” milk products based on local raw milk or milk powder rather than wheybased ingredients:
– As a consequence, fresh, pasteurized and UHT milk grew by 15%
– Milk powder imports grew as well whereas whey powder imports stayed constant
– Local processors were forced to reduce whey usage in final consumer products in order for their
products to be accepted in the market
 Peru is the only country in APEC not belonging to the OECD – one of the reasons for this are
discrepancies in nutritional standards / legislation, mainly based on the dairy chapter:
– However the Peruvian Government does not see changes in nutritional regulations as a priority as it
is more concerned about larger issues such as corruption levels and taxation laws
– It is therefore likely that whey powder will remain an important ingredient with a high import volume
 As in many other countries, the demand for plant-based products is growing
 Alejandro Daly, President of the Dairy Committee of the National Society of Industries (SNI), stated that
the transporters’ strike in February 2019 affected more than 6,000 local farmers in the north of the
country and that these lost more than 300 mt of raw milk per day
90
6.8 Uruguay
Data Sources
 Production data:
– Instituto Nacional de la Leche INALE
– Trade and industry sources
 Trade data:
– GTIS and ITC
– Legiscomex shipment data
Context/Rationale for Forecast
 The 3 mn population is mainly urban but has relatively good spending power on a per capita basis and
GDP growth by the standards of the region
Uruguay GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.1
1.9
3.0
3.0
3.0
3.0
Source: IMF
Milk Production
 2018 was a good year for milk producers and dairy processors, with 2019 following this trend so far
 International prices have helped producers and many farms managed to save themselves from imminent
bankruptcy:
– International prices make the Uruguayan market that interesting that even Peru’s Grupo Gloria has
decided to re-open its Uruguayan operation Ecolat in June 2019, processing 50,000 liters / day
 Ecolat was closed some 4 years ago
– During the first 5 months of 2019, exports increased by 19% over the same period in 2018 due to
increases in raw milk production
– Prices are expected to rise due to increasing demand from China, a slowdown in the global raw milk
output and Ecolat’s re-opening
 In the last 6 years, the number of dairy farms has decreased by 18% but the volume of milk sent for
industrial processing has increased by 30% – this illustrates the ongoing industrialization and investment
of Uruguay’s remaining dairy farming sector:
– The main reason for the closure of 650 dairy farming operations was internal cost / lack of profitability
 2015 was the last year that Uruguay exported milk powder to Venezuela, and processors have been
looking for new, non-traditional export markets – this is how, in 2018, Algeria for the first time has
91
become a customer for Uruguayan milk powder, purchasing 44% of the exported milk powder at a value
of US$185 mn
 Since 2017, WMP has been one of the key products with the highest growth in exports in terms of US$
values, with this trend continuing in 2018 – however, this increase was less marked in volume terms
Industry trends
 Clearly, exports are key for the Uruguayan dairy industry
 Small and medium-sized farmers connected with Conaprole have gone through a hard time – commodity
prices have not helped them and Conaprole has political internal difficulties that have negatively
impacted on confidence, efficiency and profitability:
– It is owed US$30 for exports to Venezuela
– It had to close a plant and its CEO has been dismissed
 However, in other parts of the dairy sector, there is new confidence, with a feeling that the last few
difficult years have given the sector the push it needed to modernize and look for new markets – several
processors are planning to move away from commodities and invest in differentiated / value-added dairy
products:
– A healthy industry is expecting accelerated growth and is looking to attract international investors
over the next few years
– There is international investment coming into the industry and new markets are being opened,
especially for non-traditional, value-added products
– Large companies and innovative processors are confident, supported by government plans to
support the production of value-added, high-margin products
Regulatory Changes
 The valorization of whey powder is being financially incentivized by the government and capabilities
should increase – official programs financially support small producers of non-commodity and valueadded whey products such as WPC
 SWP producers receive loans and technical support to help them utilize whey
Plant / Capacity Expansion
 Peru’s Grupo Gloria is re-opening its Ecolat operation in Uruguay to initially process 50,000 liters / day:
– It has started operations at its Nueva Helvecia plant, focusing on cheese exports
 Ex-employees of bankrupt processor Pili are in the process of opening a company to dry whey:
– It is part of the company’s plan to pay its former employees and that they will be able to utilize the
company’s premises and machinery
– During Q3, 2019, the central bank will evaluate financial projects in order to determine whether to
grant a loan for this venture
– Production is thought to be in the region of 50,000 liters of cheese whey / day to be dried
92
6.9 Venezuela
Data Sources
 Production data: Trade sources based on Cavilac, Pidel, Invelecar and the Government’s Nutrition
Program (CLAP)
– Official Government data is not considered reliable
– To conduct industry interviews is not possible under the current situation as providing information
that contradicts official government numbers is potentially dangerous
 Trade data:
– ITC mirror data only as GTIS import data is deemed unreliable for Venezuela
– For example, GTIS import data for Venezuela indicates 96 mt of SMP imports, whereas Mexican
export data shows 103,368 mt of SMP exported to Venezuela in 2018
– We have revised import data backwards to 2014 where ITC has revised its numbers in the mirror
data
Context/Rationale for Forecast
 The 32 mn population is mainly urban but has shrunk with departures as people feel the desperate
economic situation and violence, given the continuing stand-off between Nicolás Maduro and Juan
Gerardo Guaidó, both claiming the country’s presidency
– More than 2.3 mn people (according to conservative estimates) have fled Venezuela in the last five
years, with political instability, hyperinflation and the economic crisis forcing them to seek refuge in
neighboring countries
– The economic situation is looking increasingly complicated, with recent data from the IMF, World
Bank and ECLAC indicating that the country is in its sixth year of recession and that by the end of
2019 GDP will have suffered an accumulated contraction of more than 70% since 2013
– The economic outlook remains very poor, with the collapse of economic activity, an inflation rate of
around 10 mn %, the rationing of a multitude of products and unemployment exceeding 30% of the
active population
– Added to this is the high homicide rate and strong repression by the Maduro Government
Venezuela GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
-18
-25
-10
-5
-2
-1.5
Source: IMF
 The dairy output situation continues to deteriorate, and government has attempted to cover the situation
with false data eg for WMP, industry reports a local production level of no more than 4,200 mt in 2017
and probably not even reaching 2,500 mt in 2018, whereas official data indicates 9,000 mt in 2017 and
6,700 mt in 2018:
93
– These volumes are hard to believe especially since the main dairy states of Lara, Monagas, Trujillo
and Anzoategui have been devastated by the continuing political and economic crisis, with farmers
slaughtering much of their dairy cattle as meat achieves better returns than milk
 Most of Venezuela’s milk production takes place on dual purpose (milk and meat) farms, with average
yields at around 4.37 liters per cow per day:
– More than 90% of producers are small (less than 200 liters / day)
 More than 85% of Venezuela’s milk is made into cheese – it is estimated that around of locally-produced
milk and cheese is manufactured and sold through informal channels
 The Venezuelan milk producing and processing sector is facing a very complex situation not seen in
more than 30 years, where prices of milk and llanero cheese have not increased during the months of
February – April (the dry season when products are usually in short supply), as they usually do:
– This indicates that consumption of dairy products has fallen significantly as consumers clearly don’t
have the financial resource to purchase them
– Milk deliveries and processing have also been affected by interruptions in power supply – power
outages are severely hampering the cold chain and distribution of chilled products
 Venezuelan dairy processors don’t have access to raw milk or dairy ingredients as they cannot pay
above regulated prices – a situation that has been aggravated by nine years of government price
controls:
– This means that raw milk is increasingly diverted into the informal sector which is not regulated ,
especially artisanal cheesemakers
– Consequently, the organized dairy processing sector has reported a decrease of 40-45% in milk
deliveries
– Given the lack of profitability, farmers even in the high production areas of south of Lake Maracaibo
and the high areas of Mérida are culling their dairy herds
 Production of milk powder has been dropping over the last couple of years
94
7.
Former Soviet Union (FSU)
7.1
Belarus
Data Sources
 Production data: National Statistical Committee of Belarus and trade sources
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 9.4 mn population is also mainly urban but contracting; it has very low spending power on a per
capita basis, and only moderate GDP growth is expected
 The Belarussian government is supportive of a more concentrated and export-driven dairy industry:
– In the past decade, the country’s 100+ dairy processors have reduced to 42, expected to reduce
further to 32 by 2021
Belarus GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
3.0
1.8
2.2
2.1
2.0
2.0
Source: IMF
Key Trends
 Milk deliveries for processing have grown over recent years but have been flat (+0.3%) YTD May 2019
at 2.8 mn mt
 Cheese production for that period has been growing: hard cheese +25%, processed and analogues 30%
 Whey commodity production is on the rise, and whereas 8% of local whey was processed in 2004, the
figure in Q1 201 was 94.7%, with at least 25 local companies processing whey in some form
 Whey powder production and exports are estimated at 50/50 between sweet and demineralized whey;
export data has been revised downwards to include only 0404 10 020 0 >> 0404 10 380 0, therefore
excluding exports of non-powdered whey
 In 2018 and early 2019, SWP exports from Belarus to China have stepped up significantly, taking
advantage of the opportunities to replace American whey permeate in the local pig industry:
– 2017: 1,082 mt >> 2018: 30,370 mt
– Q1 2018: 758 mt >> Q1 2019: 13,741 mt
– This trade is expected to slow over the year, however, given the impact of ASF in reducing demand
in China’s pig industry
95
 Key whey processors:
– Primemilk opened a new plant in September 2016 in Shchuchin: it produces SWP and FFWP and is
now installing an electrodialysis system to produce DWP; it also declares a WPC80, but local trade
sources indicate that this product is in reality WPC60-70
– Shchuchin Butter-Cheese Factory (same location, different company; from April 30, 2019, part of
Molochny Mir OJSC): it produces WPC80 which its supplies to local manufacturer Bellakt OJSC for
the production of infant nutritional formula
– Berioza (from May 14, 2019, part of Savushkin Product OJSC) makes WPC55 which it sells as a
commodity and as a branded sport nutrition product
– Biofon produces WPC for its branded sports nutrition powders and buys in some higher % WPC from
other manufacturers
– Goretskiy Food Production Facility produces liquid WPC only, for internal use only
Trade Agreements
 It also wants to improve access to Russia, but to reduce its traditional extreme over-dependence on the
Russian market
– Supply into Russia remains problematic, and the Russian body Rosselkhoznadzor has repeatedly
introduced and then removed restrictions on supply of Belarusian dairy products from various
enterprises to Russia
New Plant / Capacity Expansions
 In 2019, there have been two notable M&A transactions in the dairy industry
– April 30, when the Shchuchin butter-cheese factory OJSC and Dyatlovo cheese-making plant OJSC
merged with Molochny Mir OJSC. As a result of the deal the total milk processing volume of Molochny
Mir OJSC will be 458,000 mt/yr, doubling its current capacity
– May 14, joining Berioza cheese-producing plant OJSC and Savushkin Product JSC. The process of
acquisition began last year when Savushkin acquired 61% of Berioza for US$41 mn, committing to
investing ~US$10 mn within 3 years in Berioza by acquiring additional shares, which it did in May
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7.2 Russia
Data Sources
 Production data: Federal State Statistics Service and trade sources
 Trade data: Estimates based on GTIS/ITC and trade sources; some limited access to local customs/bill
of lading data (for MPC imports)
Context/Rationale for Forecast
 The 143.9 mn population is mainly urban but contracting; it has low spending power on a per capita
basis and GDP growth remains weak
Russia GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
2.3
1.6
1.7
1.7
1.6
1.6
Source: IMF
Key Trends
 Milk deliveries for processing have been growing:
– +3% in 2018 TO 30.6 mn mt
– +3.6% YTD May 2019 at 6.7 mn mt
 Cheese production has also been growing:
– Q1 2019: +10% (natural and processed cheese combined); analogues/processed -10%
 Liquid and concentrated whey is traded around the FSU states: all production and trade estimates are
based on powdered products only
 WPC34: there is one company which indicates production − Komos Group
 WPC80: In 2017 Ichalki declared the start of production at Russia’s first WPC80 plant, indicating a 650
mt/year capacity – however recent information indicates that this production is no longer taking place
 Imported MPC>80% is being used in limited quantities for yogurt, cheese/curd and sports nutritionals
(mainly from France, Australia, Switzerland, Lithuania, New Zealand)
Trade Agreements
 In August 2018 the Agreement on Exporting Chinese Cows and Importing Russian Milk was signed by
the Entry-Exit Inspection and Quarantine Bureau of General Administration of Custom of China and the
Federal Service for Veterinary and Phytosanitary Surveillance of Russia. China’s Zhongding Dairy
Farming plans to develop milk production and dairy processing businesses in Russia, and sell the
products back to China in the future:
– This agreement followed the cooperation agreement earlier that year between the Eurasian
Economic Union (EEU) and China (The EEU was formed to provide an economic counterweight to
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the European Union and to Beijing’s intensified regional projects in Southeast Asia; it currently has
five members – Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan)
New Plant / Capacity Expansions
 Not all cheese projects have commissioned, but many new plants have already started production or
will start in 2019. New plants’ capacity for 2019 is about 25,000-30,000 mt cheese per year, so this
would represent ~+8% of production), so the actual production increase is expect to be ~+3-5% for
cheese
 There are about 32 cheese plant investment projects identified as underway currently
 Some are selling the whey as a liquid product or using it to produce condensed milk; some producers
plan to produce WPC, WPI, DWP etc in the future (although it remains the case that most
produce condensed whey, or dispose of the whey, or plan to produce bioethanol)
 Many are independent plants, but 8 large investment projects are being carried out by large agricultural
holding companies:
– 4 by TH True Milk, one of the leading dairy companies in Vietnam
– 2 by EkoNiva group, the largest raw milk producer in Russia (484,000 mt in 2018)
– 1 by N.I. Tkachev Agrocomplex, the no. 2 in raw milk production after EkoNiva
– 1 by Komos Group
– 1 by Germany’s DMK
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7.3
Ukraine
Data Sources
 Production data: State Statistics Service of Ukraine + trade sources
 Trade data: Estimates based on GTIS/ITC and trade sources
Context/Rationale for Forecast
 The 43.8 mn population is mainly urban but contracting; it has very low spending power on a per capita
basis, although there is reasonable GDP growth expected as the country recovers
Ukraine GDP Forecast
GDP growth, constant prices (%)
2018e
2019f
2020f
2021f
2022f
2023f
3.3
2.7
3.0
3.0
3.2
3.3
Source: IMF
Key Trends
 Milk deliveries contracted -7.7% YTD May 2019 at 1.4 mn mt
 Whey:
– Whey exports expanded to, and then flattened at ~30,000 mt in 2017 and 2018, with China emerging
to make up half the volume, likely replacing some US whey permeate
– However Ukraine’s whey availability has reduced over recent years. Cheese production was 205,100
mt in 2014 but fell during 2014-2016 due to the Russian embargo for Ukrainian dairy products (80%
of Ukrainian cheese production was exported to Russia in 2013); starting from 2017 there are signs
of stabilization and growth in 2018 (3.5% to 196,400 mt). However natural cheese production fell 10% in Q1 2019, -30% for processed and analogs, as the industry has focused more on powders
since Russia and so Belarus resisted supply of analogs
– Local whey ingredient production is mainly of D40, and DWP and a little SWP are produced mainly
by Terra Food, Molochnyi Alians, Danone Ukraine, Almira Group, Komo, Milky Land, Bel Shostka
Ukraine, Zakhidna Molochna Gruppa, and several other smaller producers
– There is no production now of WPC34, WPC80 or WPI (and the only Ukrainian producer of sports
nutrition is BIOS Protein, also known as Gadyach Protein)
– The only current WPC producer is Almira Group’s subsidiary Techmolprom LLC, which processes
the whey from its sister company on the same site, the cheese producer GadyachsyrL in 2018 it
produced 1,250 mt of WPC55-60, exporting 950 mt from this. For the last five years Almira Group
has reported considerable debts, which have worsened in 2019, so if no buyer is identified Almira
Group may be declared bankrupt this year
– Formerly Buchachsky Syrzavod produced WPC70-80, but has stopped producing WPC since
October 2017 due to lack of stable demand, putting the plant up for sale. It remains idle, with no
production in 2018 and in 2019 (as of May)
 MPC: Techmolprom (Almira Group) is also manufacturing MPC80
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 Butter exports to the EU have been enabled by strong prices to expand beyond the 2018 quota of 2,100
mt, approaching close to 4,000 mt
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