Diving into Mexico’s milk industry

The Milk Check

This is the first podcast episode in our quarterly Understanding Export series. Today’s special guest is Fernando Anaya, Director General at DILAC. DILAC offers powdered dairy products and has a 27-year track record within the Mexican dairy industry. Our Jacoby team includes Ted Jacoby, President; Yara Morales, Director of Sales for Mexico and Latin America; and Diego Carvallo, Director of Dry Dairy Ingredient Trading at T.C. Jacoby and Company, Inc.

Today’s episode discusses the Mexican consumer market for dairy products. Fernando shares his take on how drought, exchange rates, and political waves will affect Mexico’s milk importers in 2024. How has the extreme drought in Mexico impacted domestic milk and cheese production and consumer demand?

1. Inflation has increased dairy prices, but could a strong peso offset this challenge for Mexican importers?
2. The Mexican government, one of the largest Mexican milk powder importers, announced that it will not import any milk powder this year. How will this big player impact the Mexican milk import market?
3. Mexican presidential elections take place this summer. Is this likely to affect milk imports?

This plus what importers should know about changes in milk import procedures and Fernando’s opinion on the most important factor for milk imports in Mexico—dive in with us on today’s Milk Check.

T3: Welcome to this month’s episode of The Milk Check. I’m Ted Jacoby, president of T.C. Jacoby & Company. Today, we are joined by Yara Morales, sales director for Mexico and Latin America; Diego Carvallo, dairy ingredient trading director; and special guest Fernando Anaya, director general for DLAC. DLAC is a very good customer of ours in Mexico, and we’re excited to have him. Fernando, welcome, and thank you for joining us today.

Fernando Anaya: Ted, thanks for the invitation. I’m really glad to be with you and your team.

T3: This episode will be released in Spanish and English, the first in our Understanding Export series, which we will publish quarterly. Today, my first question, Fernando, to you, is when we think about the Mexican dairy market and how much dairy Mexico imports, what is the number one thing exporters to Mexico must understand about the Mexican consumer? Obviously, one of them is price, but beyond price, what’s important to the consumer in Mexico?

Fernando: Okay. Well, Ted, I think that’s a really good question. Well, just to have a rough number of the imports into Mexico, I will say that 15% of our needs have to be imported every year, and that really is not changing a lot. I think that’s the same number from maybe ten years into now.

So, what do the exporters have to be aware of to be in the Mexican market? The number one for sure will be price, the second will be price, and the third will be price. So that’s something that I guess you can agree on that. Of course, Mexican customers will always look to have a better price, but again, it’s not the only thing they are looking for. There are some things that the exporter has to be aware of, and one of them will be regulations. For the past two or three years, Mexico has been entering into new regulations.

For example, for non-fat, there’s this new regulation, the NOM-222, and I know there have been a lot of challenges for the exporters because they must be sure they will be ready to fulfill this regulation. It’s not that hard, but again, that’s something that the exporters, mainly in the US, had to make some changes in their COAs, registering some labs to fulfill these regulations. So again, that’s something that the exporters into Mexico must be aware of.

The other thing is logistics. The way that Mexican customers purchase mainly non-fat food is changing. Right now, the Mexicans are looking for the product to be available in the customs agent warehouses. Why? Because it’s very quick to get the product into Mexico. Let’s think maybe ten years ago, to get the product into our warehouses. We will need maybe three to four weeks because of the time they will take to make the contract and transit it to the warehousing and the water, and then the entire import process will take three or four weeks.

Right now, many customs agents are looking for the protocol and the documents in advance to obtain the health permit. So everything is just ready to import, isn’t it? Right now, for example, the unit product and the exporters have the product in our customs agent’s warehouse.

With the documents, we can have the import process the next day, and in two or three days, it will be in Mexico City, so we need less than a week to have the product available in the Mexican warehouses. So that’s something that is changing. And, of course, one of the reasons for that is that Mexicans are not having really high inventory levels. Most companies are just looking for the product they will need in the short term. So that’s something that’s affecting the way the exporters are seeing the Mexican market.

T3: Makes sense. Question, what would you say, with all of the skim milk powder that Mexico imports, where is most of it used? I know cheese manufacturers, fluid milk. What is the breakdown of the different places where skim milk powder gets delivered these days?

Fernando: Well, I think cheese is the number one application. I think that will be, and one of the reasons that we are bringing in more and more volume is that it is non-fat, low-heat, in bags. That’s the number one product, and most of that product will be going into cheese. But if I separate the different applications, I will say that’s one of the most important ones. The other will be to pasteurizers. And for that, you will see the import of skim or non-fat [inaudible 00:05:13]. So that will be another of the most important applications.

The other will be ice cream manufacturers. I think much volume is going into ice cream manufacturers, and the other, that is a big amount for sure, is going into [inaudible 00:05:27] onsite. We saw them as a separate entity. I will see the Mexican government is getting a lot of non-fat products that are going to be mainly going into social programs or even fluid, but I think that will be the most important application in Mexico right now.

T3: Okay, okay. Going back to the cheese manufacturers, one interesting thing to note is that because non-fat dried milk from the US tends to have higher protein levels than skim milk powder from other parts of the world, that tends to be the desired product for cheese manufacturers in Mexico. Is that a fair thing to say?

Fernando: Yeah, for sure. Yeah, non-fat will be the first need for cheese manufacturers.

T3: Awesome. Yara, anything to add?

Yara Morales: Yes, it’s interesting that the United States is Mexico’s market for non-fat dried milk. They can get the products very quickly. In a week or a week and a half, they can have the products there. So, they use a lot for Mexico’s exports and make a large [inaudible 00:06:22] for infant formulas. Infant formulas are the number one export from Mexico to other countries and the United States.

T3: Interesting.

Yara: Yep, that’s number one.

T3: Diego, what are your thoughts?

Diego Carvallo: I was going to ask Fernando a little bit more about the recent developments in Mexico, and one of the questions that most US manufacturers are trying to figure out is imports or US exports to Mexico for January. We saw a significant decline in the products that moved across the border, especially the non-fat. I believe it’s a 15% decrease. So, I wanted to ask Fernando what he believes are the main causes of that decline and his expectations for what’s left of 2024.

Fernando: Thanks for the question, Diego. I agree with you. The import numbers for January 2024 were less than January 2023, and I think 15% will be correct. But I believe we need to start reviewing the numbers for imports, maybe in the third quarter of 2023. If you see and compare the numbers from 2023 with 2022, you will start seeing the decrease in August and September of last year.

So, I think what we are seeing right now in January is the same decline that we have been seeing since August and September of last year. The reasons for that, I think, are several. One of them that I am pretty sure of is the impact of inflation on the finished product in Mexico. The inflation numbers are pretty high, and the impact of those inflation numbers on the end user’s product is pretty simple. So that will be one.

The other thing that I expect to affect the import number for the rest of the year is the participation in [inaudible 00:08:23] last year’s import of a lot of schemes into different sectors, especially social programs. And as far as we know, the Mexican government will not import any powder this year. At least, that’s the announcement they are sending right now. So, that will be one of the big players who will not be participating. And the other one I see with less interest in importing these ingredients is Lala, a large importer in Mexico. So, I feel the import numbers will be less this year compared with 2023.

Diego Carvallo: Do you think something that’s affecting also the non-fat imports is the recent increase that we have seen in cheese imports? A lot more cheese is crossing the border, do you think that’s somehow going into the end user as a replacement for some of the proteins and the solids on the non-fat?

Fernando: Well, I agree entirely, Diego. We have seen the import numbers of cheese getting a very significant increase in the last couple of months. And I agree, if you are getting more cheese into the Mexican market, and we do not see the rise in demand as the same proportion of the increase on the import of cheese, of course, what we are doing is producing less cheese because of that. So yeah, I agree that we will need less protein from non-fat because we have already imported a finished cheese product. So yeah, I agree with you. We will see less interest just because we are importing more cheese from the States.

Diego Carvallo: Makes sense. I have another question, Fernando. There’s a lot of noise and many headlines currently talking about the weather situation in Mexico. There’s a severe drought in Mexico and high temperatures for this time of the year. Has that impacted the local fluid milk production somehow, and do you expect it to have an impact in the next few months?

Fernando: Well, yeah, that’s true, Diego. We have been hearing that the drought and the high temperatures that Mexico will be dealing right now and in the future… So yes, to answer your question, we think that we will be producing less fluid milk, just because of the impact on the weather, even though we have seen in the past weeks a lot of fluid milk available in Mexico, mainly in the central and northern part of Mexico.

And of course, it’s partly because of [inaudible 00:10:50] for sure, but one thing that we have been hearing is that the demand for cream is decreasing just because of these high temperatures, that the consumers are not willing to take a lot of cream, and that the same time is decreasing the price of fluid milk, that it’s making for some producers to get more fluid milk, just because the cream is cheap. But in the end, I agree that because of the weather, we expect that the fluid milk should decrease their produce in 2024.

T3: If you are a dairy producer or cooperative looking for a better market for your milk or a food manufacturer hoping to strengthen your dairy procurement or risk management strategy, please contact T.C. Jacoby & Company. We’ve been building worldwide relationships with all sides of the dairy supply chain for over 75 years. Tap into our expertise for unlimited, free consultative support, and we’ll develop a sales or procurement strategy that hits all your targets. Please visit us online at www.jacoby.com to get started. Thanks for listening to The Milk Check. I’m back to the show.

Diego Carvallo: What are you expecting in terms of the political situation? We have a presidential election in the summer this year. What are you anticipating regarding the impact on the currency and the general economic outlook? Do you expect any significant change? Is there anything that we should closely monitor?

Fernando: Okay. Well, I think that the change of government this year will be a soft one. We have three candidates right now, but the numbers are pretty clear about which one is at the top. I don’t think that we will be seeing a lot of changes from now until the election date, which will be in July. So that’s the reason I think it’ll be like a soft one, but I am pretty sure that there will be some indexes that will be affected. One of them will be the exchange rate. I think the exchange rate will be going up because we are getting very close to the election day.

But after that, I think that the exchange rate will decrease, and we will maybe get around the numbers that we are seeing right now. And if we speak especially into the impact of dairy, the first one that was a little surprise for most of us, we thought that just because of the election year, [inaudible 00:13:22] will be trying to get some powder to inject that into social programs, and that didn’t happen. On the contrary, they say that they won’t import any powder this year. So that’s something that I’m sure, if you see the political side, will affect dairy. But I think right now, the exchange rate will be the one that for sure will affect us because of the reference between the exchange rate from now into the election days.

T3: Fernando, I have to ask the question. It sounds like Mexico’s going to have a female president starting after the July election. What do you think about Mexico ending up with a female president before the US?

Fernando: Well, that’s interesting for sure. Yeah, I’m pretty sure that will happen this year, Ted, because of the three candidates we have, two are female, and they’re the number one and two if you look at the polls right now. So I agree entirely, there’s no way the third one will win. So, I am pretty sure that we will have our first female president. And yeah, I’m surprised that we are doing that before the States.

I see that Hillary was close on doing that. That didn’t happen, and I don’t think this year will happen for the States. So yeah, it’s incredible. I thought that the US would be getting their first female president before Mexico, but I think that’s the one thing we will be the first, Ted, [inaudible 00:14:43].

Yara: Yeah, Mexico gives surprises.

Fernando: Yeah, this year we give a big surprise with that. I agree.

T3: Well, that’s wonderful. Diego, anything else?

Diego Carvallo: I was also going to ask Fernando to talk a little bit about the exchange rate. With the current strength of the Mexican peso and the competitiveness or the low price of the non-fat, but I would expect that the end demand get some support, but I wanted to hear your opinion. What do you think on the exchange rate and do you think the current low prices are going to create and incentivize some additional demand?

Fernando: Okay, it’s an interesting question, for sure, Diego. If we compare the price for non-fat in the Mexican market last year, the highest price that the companies were willing to pay was 90 pesos. Last year, I think maybe mid-September, if I recall correctly, the cheapest price we had was 45 pesos, so it’s almost half. The reason for that is the combination of the price of non-fat and otherwise the exchange rate that, as you were saying, is very, very low.

But what is interesting to understand is the impact on the consumers. So the thing is that because the way that the products are distributed in Mexico is very hard for the end users, for the consumers to see the benefit of decreasing cost. So if you go to the supermarket, the prices will not go down. So what happened last year, and it’s happening right now, because if you compare these prices with the prices two or three years ago, the price is cheap. It’s historically below the average, for sure.

So that, of course, we’ll be interested. But this benefit is just getting into these distributors and manufacturers; it’s not really getting into the consumers. So, it may take time to impact the consumers. So right now, it’s not getting into them, but again, if you see the numbers and compare the price of fluid milk with powder with the exchange rate, the powder will be cheaper. So, I think that the demand for powder will be good because of the prices we are seeing right now, combined with the exchange rate.

T3: Fernando, I have a question about the exchange rate. So, from our perspective in the US, we’ve been very surprised by the strength and stability of the exchange rate between the dollar and the peso over the last four or five or six years. What is that stability and the lack of what we used to see, which was a regular decrease in weakness in the peso relative to the dollar, but the fact that it’s been stable and strong, how has that manifested in terms of inside Mexico, in the economy?

Fernando: Well, the impact is huge, Ted. Of course, Mexico is a larger importer of a lot of things, a lot of commodities. So, having a low exchange rate will help most Mexicans, for sure. And it’s really strange. If you see maybe in the last 30 years, it’s very hard to see the exchange rate going down. And We have seen that since 2021 and 2022, after the huge impact of Covid, the exchange rate has been going down, It went up to 25 pesos. Right now, it’s just below 17. That’s a lot. So, of course, volatility is impacting for sure. But again, seeing the exchange rate as you see right now, it’s like numbers; I think maybe in 2017 or 2018, we will have the same exchange rate.

So we are six years old and have the same exchange rate. It’s really strange. But for sure, it’s having a good impact because of the imports in Mexico. Of course, it will affect the other way around to the exporters. The exports are not very happy, but we know that Mexico depends on imports, and of course, just seeing the stable exchange rate is good for the manufacturers. That depends on the imports because they can easily see the cost in pesos, and the exchange rate is not moving much. So, having a stable exchange rate benefits the Mexican companies a lot.

T3: Have the Mexican dairy farmers been complaining because they haven’t been able to raise their milk prices?

Fernando: Well, they will always complain, Ted.

T3: That’s true everywhere in the world, Fernando.

Fernando: Yeah, they will do that, for sure. But the truth is that, yeah, of course, the farmers are not happy. Their fluid milk is not getting the price they were looking for, competing with powder; with this exchange rate, it’s really, really difficult. So they have a lot of challenges, for sure. So they will continue not being happy, that’s what I think. I don’t think the powder price and exchange rate will change to compete with fluid milk. I don’t think that we are really close to doing that. So yeah, we are having a lot of farmers complain.

T3: Got it. I will say one thing: If we think of it just in terms of dollars, six years ago, the price of powder was what, Yara, in the US, about 75 cents? Now it’s $1.20. So, the price of powder has gone up quite a bit in the meantime, even if the exchange rate has stayed stable.

Yara: And something interesting is that when AMLO, the President, was doing his campaign, he said that he was going to protect the farmers and not buy non-fat milk and not import products from the United States. In the beginning, it was kind of hard because Liconsa didn’t buy products because they were waiting for them. But in the end, obviously, they need the non-fat dairy from the United States. So, I think they don’t want it this year because it’s an election year. That’s why. Yeah, they want to show the farmers what they are not doing.

T3: That makes sense.

Fernando: I agree.

T3: Yara, do you have any more questions for Fernando?

Yara: Fernando was… No, I think we cover all the questions that we have scheduled. Thank you very much, Fernando.

T3: Diego, how about you?

Diego Carvallo: No, no. Thank you so much, Fernando. It’s great listening to all of the information you have and your experience, so thank you so much. It’s been great.

Fernando: Thanks for the invitation. It’s great having these discussions. Of course, I think it’s very important for US exporters, especially Jacoby, to understand the Mexican market, and it’s hard, for sure. It’s not learning to speak in Spanish; it’s more difficult than that. Now, of course, I appreciate the invitation, the time, and the interest in better understanding the Mexican market.

T3: Thank you, Fernando. We really appreciate you spending the time with us today, and thank you for the long relationship we’ve had over the years. We really appreciate it.

Fernando: No, I feel very, very, very good working with a company like you, Ted. For sure.

T3: Thank you, thank you very much.

Yara: Thank you, Fernando. That is very productive. Thank you always for your help.

Fernando: Thanks. You’re welcome, Yara.