Why monitor milk and dairy prices?

The importance of the dairy agro-industrial system in Brazil is undeniable. Our country is the fifth largest milk producer in the world, accounting for almost 5% of global production, according to FAO data. National statistics show that there are more than 1.17 million producers in the field and about 130 thousand people employed in the dairy industry (IBGE, 2017; RAIS, 2022). Most recent estimates from the Center for Advanced Studies in Applied Economics of University of São Paulo (Cepea/Esalq/USP) indicate that the dairy sector generated R$ 77.1 billion in 2020, a figure that represented 4% of the agribusiness GDP that year.

Despite the significant importance of the sector in the Brazilian agribusiness, there are still substantial bottlenecks for its development, such as increasing productivity in the field, improving the quality of raw milk, enhancing the efficiency of dairy companies, and ultimately, boosting Brazilian competitiveness. This is evident when we observe that Brazil, although having great potential in animal protein production, is not self-sufficient in dairy production, making the country dependent on imports. In 2023, imports tripled, putting pressure on domestic prices. Between 2003 and 2022, imports averaged 4% of the national milk industrialization, but in 2023 they rose to 9%.

The lower competitiveness of Brazilian dairy products compared to foreign ones is not the cause of the sector’s fragility but rather the most acute symptom of a productive structure that still lacks specific investments and engenders and is engendered by business strategies based on poorly coordinated governance structures focused mainly on short-term returns.

Cepea’s research indicates that the governance structures organizing raw milk acquisition are strongly affected by uncertainties. The main sources of uncertainty are the difficulty of agents in assessing their performance and the unpredictability of supply and demand fluctuations, reflected in the high volatility of raw milk prices.

In practical terms, this uncertainty makes market context assessment, decision-making, and agents’ actions more prone to divergence. This means that market interpretation can differ among sector agents, as if producers had access to a market scenario and dairy companies, to another. This divergence can even occur among agents within the same segment, explaining different behaviors for business organization and investments, for example.

In any case, this uncertainty context increases the alignment difficulties among production chain segments, leading to low coordination intensity among them. Poorly coordinated relationships, in turn, hinder the generation and distribution of value within the production chain, increasing transaction costs. As a result, it becomes increasingly difficult to achieve strategic objectives common to the development of the agro-industrial system.

Reducing uncertainty comes from reducing information asymmetries. When factors related to uncertainty are monitored and measured, information is created. The distribution and access to this information among agents have the potential to transform uncertainty into risk. And risk, unlike uncertainty, can be managed.

This is where the question in the title of this text is answered: monitoring and measuring market aspects are essential to reduce uncertainty, generate information and reduce transaction costs. This aligns with Cepea’s mission to provide data that can guide market agents’ strategies and contribute to a more accurate understanding of the short and long terms.

In an interview with 33 dairy industries, which produce almost 24% of all Brazilian milk, nearly 88% agreed that Cepea’s information is important for performance evaluation, and 72.8% agreed that it is relevant information for pricing reference.

The dairy chain is thus monitored by Cepea’s team to understand value generation among segments. The monthly summary of these results is published at “Boletim do Leite”, but Cepea’s network of collaborators also receives other information.

Price goes beyond a number; it is also information that helps agents measure their performance, supply, demand, and the impacts of different strategies they may adopt to manage their businesses. By arming themselves with information, dairy chain agents can not only better understand the current scenario but also prepare for future scenarios. This constant adaptation, in the short and long term, enables business resilience even in the face of market adversities.

This text reminds us of the role of information in the agribusiness development. Economic growth does derive from structural investments such as technical assistance, improvements in animal nutrition, health, and reproduction, workforce training, and the adoption of managerial tools on farms and dairy companies. It also depends on infrastructure and logistics. However, all of this depends on an institutional environment that favors reducing information asymmetries and transaction costs. Therefore, society must support, collaborate, finance, and value initiatives that generate information about production chains.