Chile is a long, slim country located at the far southern tip of South America that has a population of a little over 18 million.
Despite its far-flung location, it is becoming increasingly well known for its tourist attractions, having been selected three times as the world’s leading travel destination for adventure tourism. It is also characterised by its mining industry in the north of the country – state-owned company Codelco is the world’s largest producer of copper. The main types of production in the central-southern region are forestry and agriculture, while in the south, salmon farming is the main enterprise.
In the 30+ years that I have been involved in the production sector, with two farms producing grass-fed milk and almost 800 hectares of traditional crops, as well as being a leading figure in the dairy industry, I have personally experienced the changes in agriculture and livestock farming over the last decade.
Less than 10% of the world’s milk is produced from grass-fed cows farmed in the southern hemisphere, but Chile is one country doing just that. Nevertheless, Chile has not been successful in developing a competitive export position.
The dairy industry in Chile achieves 2.4 billion litres, which mainly originate from dairies processing grass-fed milk in the Los Rios and Los Lagos regions in southern Chile.
The market indicates a deficit of around 15% and typically prioritises the satisfaction of domestic demand. For this reason, the Chilean industry strives to achieve the most stable supply possible all year round, in order to stimulate production during the winter months.
This encourages the development of “non-seasonal” production systems, which meet the needs of the industry, yet are associated with higher production costs.
To a certain degree, this competitive situation explains why supply has stagnated over the past 10 years despite the enormous potential for milk production in southern Chile. During this time period, foreign investors and domestic producers have successfully rebuilt seasonal milk production systems on the basis of the grass-fed milk production curve (based on the New Zealand model), yet the milk has continued to be destined for the domestic market.
Prolesur, a subsidiary of Fonterra in New Zealand, took a gamble on developing a milk export model based on a seasonal grazing system, but sadly it was unsuccessful. The company reverted back to the domestic market.
In short, Chilean producers and processors are not yet ready to compete successfully on the global dairy market (commodities: milk powder and cheese).
In terms of the price paid to the milk producers, this has risen significantly in the last two years as a response to the milk deficit and to pressure from the industry to secure an increased supply of domestically-produced milk.
The average price paid to producers in the month of June was EUR 0.34 per litre, which is 18% higher than in the same month last year. Suppliers have responded to price signals from the past two years with a cumulative increase in volume of 6.2% in the first half of 2020. This trend is set to continue in the short term.
On the other hand, retail prices are showing an increase of 5% in the first half of 2020. However, physical sales have fallen by around 2%.
It is hard to imagine that in the context of COVID-19, the prices for dairy products and therefore the prices paid to producers can be sustained when demand has fallen. The uncertainty associated with COVID-19 has meant that lower milk prices for producers are forecast for 2021.
The dilemma facing the Chilean dairy sector for the last 20 years still boils down to the fact that the industry is not in a position to develop a model that would enable it to bring its domestic supply in line with a successful placement of its surplus product on the international market.
From what I have seen, arable crops (oilseed rape, cereals, maize, potatoes, beets) in the south of Chile have undergone a thorough process of transformation over the last decade. We have transitioned from extensive agriculture with low production quantities to intensive agriculture with high to very high production quantities.
Extensive agriculture has no chance of success in Chile when you take into account the advantages of countries such as Argentina and Brazil with their large expanses of land that are well-suited to agricultural activities. Nevertheless, the climate conditions in the south along with its primarily volcanic soils indicate strong potential for the production of virtually any crop.
We are now observing the technological advancements that are being implemented in southern Chile with great enthusiasm. The technological transformation is clear to see. For example, a very significant proportion of stubble is now incorporated into the soil. German brands (of all colours) are dominating the tillage implement market. Pneumatic seed drills with Suffolk coulters and disc coulters have flooded the market. Service providers are stocking up on increasingly large, sophisticated machinery in order to satisfy their discerning customers.
Alongside a group of other farmers, I took part in a technological transformation process, which enabled us to make significant strides in the results of our traditional crops through investments in mechanisation and participation in an advisory council led by the German company Hanse Agro, which was founded in 2012 along with its subsidiary PBB Chile (Pflanzen-Bau-Beratung, “Arable Farming Advice”). In addition, we now have access to business management consulting for arable farmers (PbbU), which in my case also covers my two dairy farms.
One additional factor that had a positive influence on our results was having access to plant genetics with a higher yield potential and quality than the varieties we were able to get hold of in Chile at the time.
Access to seed of a superior genetic quality within a traditionally informal market was only made possible through the introduction of a framework sales agreement, which protected the licence fee and prevented propagation of the seed. As a result, we now see varieties from Europe (RAGT, Saaten-Union, NPZ, DSV, KWS, etc.) on the market in Chile, which achieve highly productive and profitable returns. For the past two years, we have had access to legumes such as beans and peas, which produce good yields and have the added benefits associated with crop rotation and soil health. Meanwhile, we have observed how catch crops can be incorporated in interesting ways, especially in spring crop rotations in combination with potatoes, beets, maize and vegetables, for example.
In summary, I believe that the changes described above have improved the competitive position of producers in the cereal growing region as well as in the south. For example: Over the past two years, the producers receiving advice from PBB Chile achieved additional yields of 25 quintals (2.5 tonnes) on average from their winter wheat compared to those who did not receive advice yet used the same variety. Nevertheless, Chile is still a net importer of cereals (wheat approx. 50%). Only oat and lupin crops are exported from Chile.
From a market standpoint, both producers and processors are seeing a growing interest from the salmon industry in wheat, triticale and legumes for the production of concentrated feed for salmon. Since Chile is the second largest producer globally after Norway, this gap in the market presents us with a critical challenge and opens up new avenues.
However, considering that 80% of milk production is concentrated in the south, the dairy sector will always be an important player in the market for cereals and legumes.
From my point of view, the greatest challenge for the production sectors in southern Chile is not to lose sight of their competitive advantages, and to continue with the process of transformation so that they are able to compete successfully on both the domestic and export markets.
Francisco Deck Roman, Chile
Agricultural producer and prominent leader in the Chilean dairy industry