Venezuela’s dairy sector can be characterised as high risk. The limited number of dairy multinationals operating in the country are living under the cloud of Venezuela’s nationalisation policies and price controls threaten margins. However, rising demand means that opportunities exist for firms that can negotiate the tricky political situation

As discussed in BMI’s newly published Q408 Venezuela Food & Drink Report the President of Venezuela, Hugo Chávez, has made it clear that he would like to see large parts of the country’s food industry under state control. However, the food market is still dominated by private firms, and most are managing to turn a profit despite the anti-business policies being pursued by the Venezuelan government

Italy-based dairy giant Parmalat is one such firm. In 2007 Parmalat’s revenues from its Venezuelan operations increased by 5.2% to reach VEF602,401mn (US$281mn). However, the firms earnings before interest, taxes, depreciation and amortisation decreased by 6.8% to come in at VEF61,773mn (US$29mn)

This represented a decline of four percentage points in Parmalat’s profit margin over the year

Over the year Parmalat sold 22% less pasteurised milk and 52.6% less condensed milk. However, this reduction in sales was not driven by a lack of demand. Demand for dairy products is very highly correlated with consumer affluence and the large amounts of money circulating in the Venezuelan economy, thanks to loose fiscal spending and bumper oil receipts, has sent demand soaring

Instead, this decline in sales was almost entirely due to the actions of the Venezuelan government. In January 2007 the government introduced price controls to regulate the retail price of pasteurised milk, powdered milk and UHT milk. As Parmalat could not make a profit selling at these prices, the firm’s production levels were drawn down and sales dropped. With other dairy firms also reducing production there have been serious supply shortages. The Venezuelan government has since responded by nationalising large parts of the domestic dairy industry

With the government becoming an increasingly dominant player in the production of basic dairy products many dairy firms are now looking to focus on value-added products. These have the added advantage of being less subject to price controls, and offering high growth potential. For example, in 2008 Parmalat recorded revenue growth of 11.3% in the yoghurt sector and 11.7% in the juice sectors. These growth rates reveal that there are still a number of opportunities in the tricky Venezuelan food and drink sector.