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Grain market in Uruguay

03 November 202012 min reading

Gustavo Sosa Mechanical Engineer, MBA www.sosaingenieria.com ing.gustavo.sosa@gmail.com

About 85% of Uruguay’s land is apt for agriculture, but only between 30% and 50% of this potential is actually used. The main grains harvested are wheat, soybeans, rice, and corn; with the double annual production of wheat and soybeans in the same fields being pretty common. The natural export market for Uruguayan wheat is Brazil, but only manages to do that when the grain achieves the specifications of millers.

First of all, I want to beg the reader for forgiveness. The numerical information presented in this article is not as complete and deep as I would like. There isn’t a stock market in Uruguay, as all companies are private, and so are their records. Decades ago, the government operated in the grain market through the Plan Nacional de Silos, but that was gradually abandoned and it finally was transferred entirely to private companies in 2002, as part of an austerity program. The records kept by the MGAP (Secretary of Agriculture) are, to be polite, very basic. I contacted some officials regarding this article, but none of the replied. The USDA, which has a regional office in Buenos Aires, has more complete information, but still lacks a lot. I have done my best to present useful and truthful information, but some errors might have escaped me.

INTRODUCTION The population is 3,5 millions. The total GDP is USD 62,917 billion, which means USD 17.819 per capita. Territory is 176.215 km2. Its continental shelf is 206.000 km2.

Natural disasters are uncommon. Mostly there are floods in areas that shouldn’t be populated. Weather is temperate, but be prepared for a winter that is wet and cold. This is not a country with palm trees, sun and daikiris.

Cost of life is about 63% higher in Montevideo (the capital and largest city of Uruguay) than in Istanbul. Salaries are a little lower.

Uruguayans love to think of themselves as a tiny country, locked between two giants. However, its territory is only 4,3 times smaller than Turkey. And that doesn't take into account its sea, roughly the same size as the land mass. But the historic influence of Argentina and Brazil, with their economic and military powers, has been enough to instill a view of Uruguay as small and locked, as a Switzerland of the south, when (in fact) it is about 4 times the size of Switzerland and has a rich sea.

This complex also comes from the fact that our country was a result of the machinations of the British diplomacy. To achieve peace in South America, and also count on a friendly sea port on the Atlantic Coast of the continent, they made Argentina and Brazil sign a peace treaty that left this area to itself, instead of joining Argentina as another province. The elite of Buenos Aires, who drained the provinces through the tariffs and expenses of the only port in the country, where more than happy to let the other sea port of the area out of the Federation. While, for Brazil, the conquest of Uruguay was just a matter of strategy to hold off (maybe eventually conquer) Argentina.

The XIX century was wasted in civil wars between the Partido Colorado (Red Party) and the Partido Nacional (White Party), two of the oldest political parties in the whole world. At the start of the XX century, the death of Aparicio Saravia, the last caudillo (chieftain) of the Partido Nacional marked the end of the civil wars. At the same time, the president Jose Batlle y Ordoñez, of the Partido Colorado, started a series of legal and economic reforms to modernize the country. Turkish readers may find a strong similarity between him and Mustafa Kemal Ataturk. Under his rule, the country pacified and flourished, becoming a preferred destination for thousands of European migrants. However, under the rule of his son (Luis Batlle, also elected through democratic vote) the country embarked in a series of nationalizations and protectionism of the local industry that proved disastrous in the long term. This caused a slow boiling economic crisis and unrest that exploded in the 60s with attacks from Marxist guerrilla groups. As a result, in the 70s the Armed Forces overthrew the government. This situation lasted until 1985, when democratic rule returned to the country.

In 2000, Jorge Batlle, grandson of Jose Batlle, won the Presidency. His government was complicated by the effects of several external crisis (including the default in Argentina) and an epidemy of “foot and mouth disease” that destroyed the beef market. Still, he managed to end his term peacefully and conducted a series of reforms to free the markets. In 2005, a leftist coalition called Frente Amplio won the power and held it 15 years, through 3 terms. Although these years were plagued by denounces of corruption, the international boom of commodities and the construction of two large wood pulp factories gave the country positive numbers, but the economic situation started to fail around 2017,without showing any signs of recovery.

Finally, in 2020, a President of the Partido Nacional, Luis Lacalle Pou (who also comes from a lineage of presidents), won the elections. On his first month he had to deal with the coronavirus, a crippling public deficit (around 4%) and unemployment on the order of 10%. So far, his government has been successful containing the pandemic without any mandatory quarantine, and passed two large packages of legal reforms, but it is too soon to make predictions on his final results.

ECONOMY By tradition, the focus of the economy has been cattle breeding, since the Spanish "planted" cattle here and allowed it to become wild. When the first settlers arrived, they had abundant beef literally running around so to never care about other forms of production. Even industrial production started tied to cattle, as slaughterhouses and leather tanners of the XIX century exploited the wild cattle to supply the raw materials they later exported. Gradually, over the first century of existence of this country, agriculture and sheep breeding where introduced. By the end of XIX, agriculture occupied an area of 350.000 hectares, and cattle breeding counted 14 million animals. By the end of XX, in comparison, agriculture occupied over 1 million hectares, and cattle counted as 13,5 millions.

About 85% of the country's land is apt for agriculture, but only between 30% and 50% of this potential is actually used. Many factors lead to this, but the cultural preference for extensive production (which has lower costs but also lower returns) and a poor transportation network are the main culprits. Also, the country was a little technologically backwards in this aspect, until a massive migration of Argentinian farmers at the start of 2000’s caused a transference of know how that increased production. Now those same farmers are migrating to Paraguay because the land prices are cheaper, but their knowledge stayed. Another factor leading to an increase in land use is forestry, as lands which could not be economically used for any crop are being exploited by planting eucaliptus for paper production.

The main grains harvested are wheat, soybeans, rice, and corn; with the double annual production of wheat and soybeans in the same fields being pretty common. Barley is also important in quantity, but is mostly grown on contracts with brewing companies, so very little is left to be sold as feed.

The natural export market for Uruguayan wheat is Brazil, but only manages to do that when the grain achieves the specifications of millers. Argentinian and Paraguayan wheat is more competitive in the Brazilian market.

There are two mills (with several facilities) that control wheat flour production in Uruguay. One is Molino Cañuelas, owned by the Navili family, of Argentina; and the other one is Molino San José, that belongs to the Gard family, who also owns COUSA, the only local oil mill.

Because of the dimensions of the market, it is almost impossible to give a precise number on the production of each mill. To further complicate things, many mix imported products with local ones. This is especially true for animal feed mills, which import a lot from Argentina and Brazil.

The feedlot business started just 25 years ago, when Patricia Damiani brought the innovation to Uruguay, and has grown to be both a contender and integrated in the beef production chain. Now, between 10% and 20% (roughly 2 million animals) of all cattle in Uruguay is bred in feedlots, and the subproducts of the milling industry have an important place there. With the crisis in Argentina, it is expected that this industry grows a lot in the following years. A deregulation of the beef market in Uruguay would allow prices to grow up to 25%, attracting even more investors.

Chicken meat production is around 31.630 tonnes, less than a third of the maximum of the decade. Egg production is currently around 49.000 tonnes. This industry was severely affected by unpaid debts of the Venezuelan government and never recovered. There are some rather large companies, which employ modern technology, but they pale in comparison against Brazilian and Argentinian competitors, despite having good conditions for growth.

The swine industry, on the other hand, is almost non-existent. Total pig population was 297.000 heads in 2007, producing 21.000 tonnes of meat. That was completed with 11.000 tonnes of pig meat imported from Brazil. Less than 10.000 sows are in intensive or semi-intensive production. The market also lacks integrators and large production units.

The Uruguayan market is crying for large scale investments, that cover for the deficit in the pig and chicken meat, and also to supply to the ailing Argentina. A good reference is the market in Rio Grande do Sul (the southern most state of Brazil) which has almost the same territory and geographic conditions, but has 151 millions of birds (both meat and egg producing). Uruguay has around 7,5 million birds for meat production. We can estimate the number of laying hens in 3,1 millions.

Talking about equipment production, the country doesn’t have a single local manufacturer of neither silos nor milling equipment, while there are several in both Brazil and Argentina.

CONSUMPTION Uruguay produces around 22.000 tonnes per month of wheat flour. The baking industry processes around 74% of them. There are over 1.500 bakeries in the whole country, with 780 of them in Montevideo. However, illegal baking is widespread and it is impossible to know how many of those are out there. Many products sold in established businesses, like gas stations and small supermarkets, are in fact manufactured at illegal bakeries, without any sanitary or fiscal controls. I, myself, buy pre-baked pizzas and pastries from a couple of ladies that knock the door of my house every week.

Per capita consumption of bread varies according to sources, but should be between 55 kg and 86 kg per year.

Per capita consumption of rice is 12 kg per year, much lower than in other Latin American countries. This is probably because Uruguayans have bread with every meal, instead of using rice as universal garnish, as Brazilians and Venezuelans do. Pet food is a booming business, with 11.000 tonnes per month and growing, with consumers gravitating towards higher end products.

The consumption of breakfast cereals is not very extended. They are consumed mostly as a snack. However, 54% of the teenagers have breakfast of very poor nutritional quality, with 28% (of the total) not having breakfast everyday. So, there is room for growth.

PANDEMIC Uruguay is one of the countries less affected by coronavirus. As Sweden, we never a real lockdown to speak off. Schools, cinemas and discos, as other closed public spaces, were closed for a while, but people were mostly free to choose what to do. Masks are required to enter in places like buses, shopping malls and schools, but you can go out jogging without your mask and nobody will care. Small convenience stores don’t even ask for you to wear one. That helped preserve the economy a little bit, but we are still dealing with a slow boiling crisis that started with the bust of the commodities.

The strategy of the current government to improve the economy is, basically, stealing entrepreneurs from Argentina. The minimum capital to declare fiscal residency has been reduced to a home of USD 380.000 or a company of USD 1.680.000 employing at least 15 people, with a minimum of 60 days per year living in our country.

For small entrepreneurs, the situation may not look so good, as the cost of life is so much higher in Uruguay than in other countries, and specialized labor is hard to find, but for big companies, the prospect is completely different. Income tax for companies investing in Uruguay may be reduced significantly, and any Municipality (Intendencias) out of Montevideo will be happy to provide land or even abandoned buildings owned by the local government. Also, imports of industrial equipment may be exempted from VAT.

One can only speculate, but Gustavo Grobocopatel, the owner of Los Grobo, recently quit his position as President and moved to Uruguay. He still owns a participation in Los Grobo, but no longer works in the Board.

*Gustavo Sosa lives in Uruguay. He is a Mechanical Engineer and MBA, with 20 years of experience in post harvest and milling of grains. He is currently unemployed and looking for opportunities. Take a look at his profile in https://www.linkedin.com/in/inggustavososa or send him an email to cgsosa@outlook.com

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