Uruguay - Third Livestock Development Project

*J 6qJL Z 5 Sq- ZL FILE COPY RESTRICTED Report No. PA-38a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THIRD LIVESTOCK DEVELOPMENT PROJECT URUGUAY June 11, 1970 Agriculture Projects Department  CURRENCY EQUIVALENTS US$1 - Uruguay Peso 250 Uruguay Peso 1 - US$ 0.004 Uruguay Peso 1,000,000 = US$ 4, 000 WEIGHTS AND MEASURES Metric System 1 kilogram (kg) = 2.20 pounds 1,000 kg = 1 metric ton - 0.98 long ton 1 meter (m) = 1.09 yards 1 kilometer (km) = 0.62 mile 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 square kilometer (km2) = 100 ha = 0.39 square mile 1 liter (1) = 0.26 gallon ABBREVIATIONIS BR - Bank of the Republic SFSCA - Workers Packing Plant Cooperative FUND - Livestock Fund in Central Bank INAC - National Meat Institute PLAN - Comision Honoraria del Plan Agropecuario, an agency of the Ministry of Agriculture and Livestock  URUGUAY THIRD DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY ANDCONCLU SIONS . .........** I**I*. ..II. I . ..... . I. INTRODUCTION . . .o. ... . . . . . . . . . ... . . . . .1 II. BACKGROUND I . I I I . . . . ... .I . . . . . . . . . . . .1 A. Livestock in Relation to the Economy . ........ 1 Production Patterns . ... .. .. ... .. . 1 Economic Importance . . I I . . . . . . . . 2 B. Agricultural Services. . . . . . . . . . . . . . . . . 2 C. Policies and Programs for Livestock Development. . .. III. REVIEW OF THE FIRST TWO LIVESTOCK PROJECTS . . . . . . . . 7 IV. THE THIRD LIVESTOCK DEVELOPMENT PROJECT. . . . . . . . . . 9 A. Description. . . . . . . . . . . . . . . . . . . . . . 9 B. Detailed Features. .. . .I. .. .. . .I . . . . . .0 9 New Borrowers. . . . . . . . . . . . . . . . . .0 . 10 Current Borrowers. . . . . . . .0. . . .a. .. . 11 Technical Services . . . . . . . . . 0 . . . 0 0 1I C. Cost Estimates .. .. . . . . . . . . . . . . . . . . 12 D. Financing. . . . . . . . . . . . . . . . . . . . . . . 13 E. Procurement. . . . . . . . . . . . . . . . . . . . . . 14 F. Disbursement . . . . . . . . . . . . . . . . . . . . . 15 G. Auditing ...a.................oo oa oo oo 15 H. Organization and Management. . . . . . . . . . . . . . 15 I. Lending Operations . . . . . . . . . . . . . . .I. . . 17 V. PRICES, MARKETS AND RANCHER BENEFITSI . .. . .. .. . 19 A. Prices . .*. . o. ooo0. . 0 *I 19 B. Markets . . . . . . . . . . . . . . . . . . . . . . . 19 C. Rancher Benefits and Revenue Generation. . . . . . . . 21 VI. ECONOMIC BENEFITS AND JUSTIFICATION. . . . . . . . . . . . 22 VII. RECOMMENDATIONS. . . . . . . . . . . . I . . . . . . . . . 23 This Report, based on the findings of missions that visited Uruguay in May and October 1969, was pr-epared mainly by Messrs. D.B. Argyle and A. Schumacher. IBRD consultants C. Percival, R. Phillips, H. van der Heijden and A. Zeini also contributed substantially to the Report, especially in the preparation of Annex 1 on policies and programs.  2 ANNEXES 1. Development of the Livestock Industry: Policies and Programs Table 1 - Size of Ranch Holdings Table 2 - Gross Domestic Product - Current Factor Cost Table 3 - Production, Consumption and Exports of Beef Table 4 - Development of Livestock Exports Table 5 - Sectoral Incidence of Taxation Table 6 - Breakdown of Export Price of Beef Table 7 - Breakdown of Export Prices of Greasy Wool (1968 and 1969) Table 8 - Phosphate, Consumption and Government Subsidy Payments Table 9 - Key Indices Table 10 - Ownership and Slaughter Patterns of the Meat Plants Table 11 - Needs for Upgrading and Expanding Facilities Table 12 - Meat Inspectors Appendix 1 - Production from Improved Pastures, 1961-1975 Appendix 2 - Selected Agricultural Statistics, 1966 Appendix 3 - Production, Consumption and Exports of Beef, 1951-1968 Appendix h - Value of Exports, 1956-1968 Appendix 5 - Incdcence and Composition of Taxation, Livestock Seckor, 1968 Appendix 6 Comparative Breakdown of Agricultural Machinery Prices May 1969; Four Different Importing Regimes Appendix 7 - Comparative Breakdown of Prices of Agricultural Machinery Parts, May 1969; Imported Under Three Different Surcharge Systems Appendix 8 - Fertilizer, Consumption and Subsidies 1961-1969 Appendix 9 - Breakdown of Hyperphosphate Price, 1969 Appendix 10 - Relative Composition of Consumer Expenditures, 1962 Appendix 11 - Evolution of Costs of Selected Inputs, 1962-1969 Appendix 12 - Evolution of Farm Output Value and Farm Prices, 1962-1969 Appendix 13 - General Farmn Input/Output Price Relationships, 1962-1969 Appendix 14 - Lncdex Consumer Beef Prices, Prices of Farm Outputs and Cross Indexes Appendix 15 - Prices and Price Indexes of Beef, Poultry and Fish, 1962-1969 Appendix 16 - Frigorificos: Size of Operation, Plant Condition and Purchases Appendix 17 - Frigoriricos: Products Marketed, Inspection Personnel and EXport Data Appendix 18 - Frigorificos: Needs for Training Market Information, Credit Transport and Future Operations Appendix 19 - Volume and Value of Beef Export. 2. Plan Agropecuario, Progress Under Loans 245-UR and 4074UR and Duties, Responsibilities and Authorities of the Technical Director. Table 1 - Loans Approved and Paid Out and Withdrawals from IBRD Accounts Table 2 - Plan Agropecuario, Sources and Application of Funds - 1961-1968 - 245-UR  Table 3 - Plan Agropecuario, Sources and Application of Funds - 1966-1968 - 407-UR Table 4 - Plan Agropecuario, Details of Account - Sundry Debtors: December 31, 1968 Figure 1 - Plan Agropecuario Proposed Organization Chart 3. The Banking System Table 1 - The Bank of the Republic (BR) Assets, Loan Portfolio, Profits and Salaries, 1964-1968 Figure 1 - Bank of the Republic Organization Chart 4. Indexing of Project Subloans Schedule I - Loan Agreement signed by Plan Borrowers from January 1, 1969 5. Development Projections: 1,000-ha Ranch - New Borrowers Table 1 - On-Ranch Investment Cost Projections Table 2 - Beef Cattle Herd Development Projections Table 3 - Sheep Flock Development Projections - Stable Flock Table 4 - Projection of Sales and. Operating Expenses Table 5 - Financial Projection 5004ha Ranch - Current Borrowxers Table 6 - On-Ranch Investment Cost Projections Table 7 - Beef Cattle Herd Development Projections Table 8 - Sheep Flock Development Projections - Stable Flock Table 9 - Projection of Sales anid Operating Expenses Table 10- Financial Projection 6.1 Project Investments 7. Projected Sources and Application of Funds Taole 1 - Central Bank Table 2 - Participating Banks 8. Financial Rate of Return Calculations 9. Econor-ic Rate of Return  - 4 - MAPS 1. General Location of Main Farm Types 2. Frigorifico Location  URUGUAY THIRD LIVESTOCK DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. The Project, for which a loan of US$6.3 million is proposed, would be the Third Livestock Development Project financed by the IBRD in Uruguay and would continue technical and financial support to Uruguay's national program of livestock development. The First Loan of US$7 million (245-UR) was made in 1959, the Second of US$12.7 million (407-UR) in 1965. ii. Despite the technical success achieved under the first two loans, beef and wool production and export targets were not realized until 1968. Inflation, discriminatory policies and subsequent credit squeezes reduced the profitability of livestock production and levels of investment incen- tives to ranchers. This situation was further aggravated when Uruguay failed to meet tightening international meat inspection and hygiene control standards required by the major meat importing countries. The result was a total embargo in mid-1969 on imports of Uruguayan meat by the United Kingdom and the United States, pending improvements in Uruguay's meat in- spection service and hygienic conditions in meat processing plants. Despite these bans Uruguay exported more than 100,000 tons of beef in 1968 and 1969, mainly to countries in the Mediterranean basin. This was the first time since World War II that Uruguay exported more than 100,000 tons for 2 successive years. iiI. In mid-1969, the Government, with considerable political courage, began to take steps to restore producer incentives and to encourage meat packers to export further quantities of beef. As a result, ranch-gate protucer prices for cattle have now risen 30%, the long-existing monopoly uf the Government-owned meat packing plants in the Montevideo market has been eliminated and the damaging export taxes on beef have been reduced by 5C%. The export taxes on wool have also been reduced from 28% to 22%. Internal consumer prices of beef have been raised an average of 15% and action has been taken to reduce the artificially high slaughter charges by 20%. There has also been substantial progress in efforts to restructure the meat inspection service: inspectors are being trained and the director's tnd inspectors' salaries are being paid by the Government instead of by the packing aouses. Additionally, a small inter-ministerial group, with the help of internationally recruited meat processing specialists, has prepared Plan of Action to modernize meat packing plants. Finally, Government action has been completed to remove all import taxes on agricultural machinery and meat processing equipment. Together, these measures should provide adequate incentives for increasing primary production and simul- taneously help Uruguay to increase its exports of beef and wool. iv. In light of these substantive improvements, additional IBRD fi- nancial and technical assistance to the livestock sector is warranted. With  - ii - the support of the proposed Project, the Government would intensify its efforts to restructure the vital livestock industry. The Project would contribute to these efforts by providing credit to ranchers and technical services to both ranchers and meat processors. Project funds would be channeled through a Livestock Fund to be administered by the Central Bank. v. All development loans to Project ranchers would be based on technically sound and financially viable ranch development plans. Competent technicians, trained under the auspices of the Plan Agropecuario, would assist ranchers in preparing these plans. Overall Project administration would continue to be handled by the Plan Agropecuario. vi. The economic rate of return on the investment in this Project is estimated at 21%. The financial rate of return to participating ranchers varies from 22% to 23%, depending on the type of ranch. These financial rates of return are now sufficient to provide ranchers with an adequate in- centive to borrow development funds under the Project and repay the loans, which are indexed to cover future inflation. At full development, after 7 years, the investments made under this Project are likely to result in an incremental beef production of 7,000 m tons, valued at US$3.5 million annual- ly on the export market. vii. Total Project cost is estimated at US$13.1 million. The Proposed Loan of US$6.3 million would finance the estimated foreign exchange component. The Project is technically sound and financially and economically viable and suitable for a loan of US$6.3 million. The Borrower would be the Govern- ment of Uruguay, which would bear the foreign exchange risk. The loan term would be 12 years, including a 4-year grace period.  URUGUAY THIRD LIVESTOCK DEVELOPMENT PROJECT I. INTRODUCTION 1.01 The Government of Uruguay has applied for a Third Loan from the IBRD to support its national program of livestock development. The First Loan of US$7 million (245-UR) was made in 1959, the second of US$12.7 million (407-UR) in 1965. The history of IBRD livestock activities in Uruguay, however, goes back to 1950, when a joint FAO/IBRD mission, led by Sir Maurice Hutton, advised the Government to start a pilot plan to test the application of new pasture improvement techniques and evaluate the yields of these trials. This experiment, carried out over 120,000 ha on a number of conmercial ranches, was successful and laid the foundation for subsequent IBRD livestock lending. 1.02 An IBRD mission visited Uruguay in May/June 1969 to evaluate the impact of the earlier two Loans and to appraise the Third Loan application on the basis of a comprehensive review of the livestock sector. It gave special attention to Government policies and to the processing and marketing of beef and wool. (Annex 1 discusses these policies and programs in detail.) A follow-up mission in October 1969 found that Government had taken a series of politically difficult policy steps to improve investment incentives to producers and to encourage additional exports of meat and wool. Further discussions regarding additional Government action were held in Washington in November 1969 with officials of the Ministry of Finance and again in Uruguay in late January and early February 1970. 1.03 On the basis of recent policy improvements, a Third Livestock Loan of US$6.3 million is proposed. This Loan would be an interim measure and would give the Government time to resolve remaining livestock sector policy issues. It would also provide the necessary continuity while the preparation of a fourth project to improve another 500,000 ha of native pasture land is completed. 1.04 This report is based on the findings of the May/June 1969 mission, comprising Messrs. Schumacher and Argyle (IBRD) and Messrs. Percival, Phillips, van der fAeijden and Zeini (consultants). Mr. Schumacher participated in all follow-up livestock sector policy discussions, and, assisted by Mr. Argyle, carried the principal responsibility for the preparation of the report. II. BACKGROUND A. Livestock in Relation to the Economy Production Patterns 2.01 Uruguay, with an area of 17 million ha, has a generally undulating topography with virtually no wasteland. Rainfall variations significantly  - 2 - affect livestock production, since there is extensive grazing on unimproved pastures. Uruguay's pastures support 7.5 million beef cattle, mainly Hereford; 500,000 dairy cattle, predominantly Friesian; and a sheep flock of 23 million, principally Corriedale. Overall carrying capacity averages one cow and three sheep per 2 ha. As the country can no longer bring large areas of new land into production, increased livestock output must come from in- creasing stocking rates and production per animal. Economic Importance 2.02 The livestock industry is the mainstay of the economy. It, with its ancillary industries, generates about 30% of the national income and provides employment for about 10% of the working population. Exports of beef and wool and their by-products account for about 85% of Uruguay's export earnings. 2.03 It is difficult to draw definite conclusions on trends in pro- duction, consumption and exports from available data because of rainfall variations and unofficial trade with Brazil. Beef and wool production has remained generally steady since the early 1950's although consumption of beef has declined slightly in recent years, mainly because of the im- position of beefless days in 1966, 1967 and beefless months in 1969. How- ever, at roughly 67 kg per person per year, Uruguay has one of the highest levels of beef consumption in the world. 2.04 Despite the lack of any noticeable increase in beef exports until 1968, Uruguay remained an important international supplier of beef and wool. Beef exports amounted to about 105,000 tons in 1968 and 122,000 tons in 1969, valued at about US$56 million and US$70 million, respectively. This was the first time since World War II that Uruguay exported more than 100,000 tons for two successive years. These beef export levels were achieved despite the United Kingdom and United States embargoes on Uruguay meat, which bans are still in effect. Government is now taking the necessary actions to get them removed. Wool exports averaged about 65,000 tons annually in 1968 and 1969, worth about US$78 million, while exports of hides and skins averaged US$15 million for these 2 years. B. ricultural Services 2.05 The Ministry of Agriculture and Livestock is responsible for the technical development of the livestock sub-sector. Under its general auspices, the Honorary Commission for the Plan Agropecuario (Plan), or- ganized in 1959, is specifically charged with providing technical services directly to cattle and sheep ranchers (Annex 2 gives further details). 2.06 Agricultural research is performed at the National Agricultural Research Center (La Estanzuela) where more than 30 young research workers are now employed. It is equipped to conduct applied research on cereals  and pastures, fertilizer usage and livestock. Between 1964 and 1969, considerable financial and staffing assistance were provided to La Estanzuela by international and regional organizations. For several years a number of UNDP/FAO specialists were in residence, laying the basis and direction of research. Plan staff have assisted the Research Center in programs of certification and production of legume, grass and forage seeds. 2.07 Veterinary research is carried on in the Rubino laboratories near Montevideo and more laboratories have been planned within the concept of a well-coordinated Agricultural Service Center. Four laboratories, to be located in rural areas, are also proposed. Because of the importance of livestock to the Uruguayan economy, such facilities are essential in the development of a veterinary diagnostic service. Foot and mouth disease (FMD) has been endemic in Uruguay for many years. To help control this disease, the Inter-American Development Bank has lent US$1.5 million to the Government to assist in its program. It is difficult to assess actual losses, mostly concerned with market restrictions on beef. However, since 1955, when commercial FMD vaccine was first produced locally, the number and severity of outbreaks have declined. Obligatory vaccination of cattle started in August 1968 in the area adjoining Brazil and has since been extended over the entire country. This program is aimed not only at keep- ing losses from FMD to a minimum but also at retaining markets in many European countries. 2.08 Inadequate management and nutrition rather than disease, however, are the major obstacles to attaining higher levels of livestock production. In spring and autumn, feed supplies are plentiful but in summer and winter the quantity and quality of such supplies are often low. Because most ranchers do little to overcome these seasonal shortages, calving and lamb- ing Dercentages are low and mortality rates high. Considering the high gerietic quality of stock (para 2.01), animal output performance is still below potentials. 2.09 During the 1965-68 period of intensive inflation in Uruguay, it was difficult to maintain, much less develop, a sound agricultural credit system., Private commercial banks severely restricted medium- and long- tvrm credit for all purposes, especially development lending. To protect the -value of their deposits and capital, they increased interest rates on short-term loans during one period to 50% per year. The Government-owned Bani oi- the Republic (BR), the largest supplier of short-term and medium- .erm development loans to the livestock sector, acted much more slowly and, as a consequence, suffered an erosion of lending resources and capital. 2.1u In 1967 a Central Bank was formed, independent of BR, which had previously performed central banking functions in addition to its regular commercial and development lending activities (Annex 3). The dissociation of the Central Bank from BR, plus a severe credit squeeze imposed by the Government to control inflation, led to a significant drop in the overall level of credit expansion. This action, together with other fiscal and monetary measures, has helped to achieve a period of relative price stability (10% to 15% inflation on an annual basis) since mid-1968. The stabilization  - 4 - program, however, created significant problems for the livestock industry. The principal difficulty was that the BR, within the credit expansion ceiling imposed by the Central Bank, cut off all short-term credit to the livestock sector from January 1968 to mid-1969. Working capital from the private commercial banks (42 now exist in Uruguay, foreign and local) was prohibitively expensive at 2% to 3% per month for both producers and meat processors, especially in view of the deteriorating cost-price relation- ships that handicapped the livestock sector between 1965 and mid-1969. C. Policies and Programs for Livestock Development 2.11 The rapid inflationary developments of the 1960's, when the consumer price index rose 23-fold in the 1962-1968 period, produced many distortions in Uruguay's price structure and seriously affected the live- stock sector. First, general consumer prices rose 29% faster than ranch- gate output prices, thus eroding the purchasing power of livestock output. At the same time, the index of livestock costs increased 37% faster than did the index of livestock prices. This reduced the financial rate of return to ranchers on new improvement investments to less than 8% in real terms as of May 1969 1/, a level substantially below the cost of money (11%) and yields on alternative investments. The result was an undermining of the ranchers' willingness to invest, except in those cases where they could obtain development loans that were not indexed to the prices of beef and wool. With inflation over 100% in 1967, these non-indexed loans be- came more nearly "hard grants." 2.12 Political developments in Uruguay have also adversely affected the livestock sector. A taxation system was introduced that effectively redistributed income from the livestock producer to the urban consumer. With non-agricultural production taxed at 12%, the tax burden on the live- stock sector was nearly triple that in 1968 (34%). Moreover, the tax system discouraged increased production and exports of beef and wool by taxing production and exports rather than income. Export taxes on wool absorbed roughly 28% of the export price in May 1969 and those on beef averaged some 15% of the export price. The result was that more beef was put on the domestic market, which depressed internal prices and encouraged beef consumption. The export taxes, combined with numerous others, drove the final ranch-gate producers' cattle price to a level that was one of the lowest in the world (US$130 per ton liveweight, as compared to US$160 in Argentina, US$230 in Australia and US$680 in the European Common Market). 2.13 Other policies also discouraged development of primary production and exports of beef and wool. High tariffs on agricultural machinery and 1/ Internal rate of return (financial) on new investment in a 1,000-ha ranch calculated on May 1969 inputs cost and output values.  poorly timed fertilizer subsidies discouraged ranchers from undertaking pasture improvement and needed forage conservation. Finally, the inefficient operation of the processing industries, including the maintenance of the monopoly of the publicly-owned and grossly inefficient Frigorifico Nacional (Frigonal), raised processing costs to over US$100 per ton of beef carcass weight compared to, for example, US$30 in Argentina. 2.14 Thus, the positive technical achievements in pasture improvements and increased carrying capacity under Loans 245-UR and 407-UR (para 3.03) were offset by adverse Government policies. Without their modification, further financial support for investments in primary production would have been largely meaningless. Moreover, livestock development objectives needed to move beyond the production phases and include the processing and marketing industry. Remedial Government action was required in two categories before the IBRD could continue financial support of the live- stock development program: a. investment incentives to livestock producers had to be restored; and b. the marketing and meat packing industry had to be modernized to improve operations and the meat inspection service had to be restored to inter- national standards. 2.15 In the last 5 months of 1969, the Government took strong action to meet the above requirements. The following steps were aimed mainly at improving producers' investment incentives: a. internal consumer prices for beef were raised 15% on the average, helping to reduce domestic consumption and make additional beef available for export (para 2.04); b. beef export taxes were changed from an ad valorem tax of 15% to a flat rate of US$40 per ton of beef exported, an average equivalent to 8% ad valorem, to induce meat packers to export higher quality, more processed cuts of beef; c. wool export taxes were reduced from 28% to 22% to encourage wool exports; d. import duties and surcharges on farm machinery were removed; and e. ranch-gate price controls on beef cattle were abolished. 2.16 To stimulate the meat packing industry, the following measures were taken:  - 6 - a. the 40-year-old Frigonal monopoly over the Montevideo market was removed. All meat packing plants can now supply this domestic market (this monopoly had been primarily responsible for the excessive slaughtering charges in the meat packing industry and had fostered inefficient operations in the Frigonal itself); b. funds were designated by Government to cover the transfer or retirement of 450 of Frigonal's more than 1,000 administrative personnel and to permit a substantial reduction in the blue collar work force there and at the workers' packing plant cooperative (EFSCA); the Board of Directors of EFSCA was also taken over by Government; and the most inefficient of its three plants, Artigas, closed; d. a full-time director for the meat inspection service is being recruited (para 2.20); funds were also allocated in the 1970 budget to cover the meat inspectors' salaries, rather than continue to have them paid by the meat packers directly; e. training programs for meat inspectors, with United Kingdom assistance, were started; f. import duties and surcharges on packing house equipment were removed; and g. a national Plan of Action to modernize the meat packing industry was prepared with the assistance of internationally recruited consultants. 2.17 As a result, ranch-gate producer prices for beef cattle have risen 30%. If maintained, these new price levels would ensure a reasonably attractive rate of return on new ranch investments. 2.18 The actions listed indicate the Government's desire to encourage increased livestock production for export as a key element of restoring the real growth of Uruguay's economy. Uruguay could double beef exports by 1985. To achieve this target, however, a number of further actions are required to consolidate recent livestock producer gains and to lay a sound marketing structure for future exports. These are discussed in the follow- ing paragraphs. 2.19 To ensure continued investment for expansion of livestock pro- duction, Government must maintain producer prices at levels that provide satisfactory financial rates of return on new ranch investments. Rancher cost-price relationships should also be restored to a normal commercial basis as soon as it can be done with the minimum use of artificial price  - 7 - supports or controls and input subsidies. To this end, subsidies on phosphate fertilizer, currently at 33% of the ranch-gate price, would need to be gradually reduced. In the meantime, annual announcement of the levels of such subsidies and their prompt payment by Government would be necessary. In support of these measures, the Central Bank must ensure that adequate short-term credit is available to livestock producers and processors. 2.20 Modernization of the meat packing industry is one of the most urgent matters facing the Government. Uruguay has engaged international meat processing and hygiene control specialists to advise the Ministers of Industry and Agriculture and Livestock in formulating a Plan of Action, which has now been completed. A high-priority effort recommended in this Plan of Action is bringing the meat inspection service up to international standards (para 2.16). An important step toward this goal would be the appointment of a highly qualified full-time director of the service (Annex 1, para 3.22). The Plan of Action also includes substantive recommendations to Government on the conversion of Uruguay's Meat Institute (INAC) into a regularly financed meat marketing advisory authority with full-time staff (Annex 1, pars 3.28). III. REVIEW OF THE FIRST TWO LIVESTOCK PROJECTS 3.01 By the early 1950's, Uruguay's national livestock industry, dependent on native grasslands, had already reached a relatively high level under the "range management" type of production. While sub-division of land, water supplies, grazing and stock management were to high standard, production was static because full exploitation of unimproved grasslands had been reached. The overall ecological conditions in Uruguay, however, indicated that modern-type improved pastures could be grown. 3.02 The first two projects were designed to introduce modern-type legumes (clovers) and grasses as well as the cultural practices that had proved successful in countries of similar soil and climate. The legumes and grasses selected were those adapted to the three main livestock regions of Uruguay (Map 1). The Australian sod-seeder technique and the New Zealand method of aerial over-sowing were used to get these started in native swards without :ultivation and, therefore, at low cost. Better lands were cultiv- ated and resown. 3.03 Native grasslands had almost no legumes and suffered from nitrogen shortages. The introduction of legumes was therefore necessary to build up the soJi to support the growth of the improved grass species to be introduced. Phosphate to stimulate legume growth was used concurrently with inoculation of seeds with suitable strains of rhizobia (the nitrogen-fixing organisms). In most cases, the effects were impressive. Farms with improved pastures showed a three-fold increase in animal production over those farms with un- improved pastures. Such improvements are likely to be permanent, given continual maintenance with phosphates and good pasture management.  3.04 A considerable amount of IBRD-supported experimentation helped to solve technical problems encountered in establishing improved legume- based pastures. For example, phosphate rather than lime was shown to be the key factor. Also, initial attempts to establish clover failed because there were no suitable strains of rhizobia (para 3.03). The feasibility of aerial over-sowing of land that could not be cultivated was easily established after investigation. In spite of these successful experiments, the start of commercial grassland improvement was slow because farmers had to be convinced first that the new methods would be profitable. 3.05 The First Loan (245-UR), in 1959, was essentially used to demon- strate methods of pasture improvement on a large sample of farms. The Second Loan (407-UR), in 1965, built upon the experience gained under 245-UR and covered a larger number of ranches (para 3.08). 3.06 Under the Plan Agropecuario, ranchers are assisted in preparing ranch plans and supervised in their execution. Recommendations for individual loans are also made by Plan technicians to the lender (BR), which provides the necessary financing to ranchers, subject to consideration of their creditworthiness and its own regulations. The BR is also responsible for loan disbursement and collection. In 1969, subloans under the Plan were indexed for the first time (Annex 4). Necessary veterinary services are made available to Plan borrowers by the Ministry of Agriculture and Livestock. 3.07 IBRD funds were used mainly for direct imports of fertilizers, seed and machinery. This was done because private importers could not fi- nance the quantity of materials required, and a large reduction on import taxes was allowed on goods purchased through the Plan. Upon payment by the IBRD to foreign supplier of eligible goods, the equivalent in pesos was credited to the Livestock Fund in the BR and was used for ranch loans. To encourage more pasture improvement, provision was made to import seed and fertilizer for ranchers outside the Project who could pay cash. Equivalent peso funds from these imports were also added to the Fund. 3.08 The Plan has now successfully established its pasture improvement program. Achievements under the first two projects are detailed in Annex 2. Plans have been executed on about 6,100 supervised farms, 1,400 under the First Loan and 45700 under the Second, distributed throughout the country. By the end of 1968, an estimated 430,000 ha of pasture had been improved. An additional 140,000 ha have been established from funds disbursed in 1969. Ranchers outside the Project iho were supplied seed and fertilizer on a cash basis developed another 200,000 ha (pars 3.07). Under the First Project, farm size averaged 600-ha, compared to the 1,000-ha units envisaged. During the Second Project, ranch size dropped to about 500 ha, due to the strict interpretation by BR of ceiling regulations on capital resources of eligible Project ranchers. The average area of Improved pasture per ranch is now about 100 ha.  - 9 - 3.09 Many of the ranchers who bought seed and fertilizer for cash have consulted Plan technicians in preparing and carrying out their ranch improve- ment programs. Thus, the demonstration impact of the Project has been significant. However, the interest of such ranchers in participating on a cash basis declined considerably in recent years as investment incentives deteriorated (para 2.11). Overall, the total acreage of pasture improvement has exceeded original targets set in 1959 by about 35,000 ha. The two Pro- jects have been in progress long enough to provide a fair record of the actual investment and operating costs. A sample survey of 50 representative properties indicates that average per hectare productivity has increased by about 75% by sowing 30% of the area to improved pasture. Given sound manage- ment, production on most ranches can be tripled with full pasture improvement and fodder conservation (para 3.03). Expenditures on fencing, water supplies and machinery have been approximately in proportion with the amounts fore- cast. IV. THE THIRD LIVESTOCK DEVELOPMENT PROJECT A. Description 4.01 The Project would provide technical and financial support for 1 year to continue the national livestock development program of Uruguay, begun under Loans 245-UR and 407-UR. Support for such a short-term program is proposed to allow time for Government to resolve remaining sector policy issues especially in the meat packing industry and to restore the ranchers' e:nfidence sufficiently to encourage them to undertake substantial additional investments. The Project would finance investments for ranch improvements to increase the carrying capacity of the land and the production of beef and wool. Increased beef production would be sought by directed credit and Project-related technical services. Ranch development plans would be drawn up for each participating ranch and ranchers would be encouraged to continue the proven pasture Improvement program. 4.02 The Project would also finance equipment and machinery to grow, harvest, clean and certify quality legume and grass seed. Technical and corwultant services would be provided (paras 4.11 and 4.12). B. Detailed Features 4.03 The Third Project would embrace all livestock areas of Uruguay. However, in view of the country's already high levels of milk consumption and its mounting butter inventory, as well as the world wide surplus of dairy products, support of the dairy sub-sector is not proposed. No direct assistance to the poultry and pork industries is suggested at the present time, although it may be considered in a subsequent project after further study by the Plan staff.  - 10 - 4.04 An additional 200,000 ha of pasture would be improved under the Third Project. Various techniques of pasture establishment and improvement tested under previous loans would be used in the different regions, depend- ing upon soils and topography (paras 3.02 and 3.03). Provision would also be made for further fencing, dips, yards and watering facilities, which are essential to a balanced pasture and livestock program. 4.05 Initially, the additional feed provided by the improved pastures would be used mainly for raising the nutritional level of existing stock, which have generally a high genetic potential (para 2.01). Given the low re- productive and fattening efficiencies of current livestock on natural pasture, it would be more profitable to the economy to increase the calving rates from the rancher's existing breeding herd and to shorten the fatten- ing period than to feed newly purchased breeding heifers. Therefore, there is no allowance for financing heifers or breeding cows under the participat- ing banks development loans to ranchers, and assurances have been obtained during negotiations to this effect. However, as pasture development in- creases ranch carrying capacities, ranchers in the eastern and western livestock regions are likely to purchase and fatten more feeder steers, and short-term financing for this purpose would be provided (para. 4.17). New Borrowers 4.06 Funds from this Project would finance the first stage (US$4,060) of a new borrower's ranch development plan in which 10% of the ranch's pasture area would be improved. Pasture improvement, consisting mainly of fertili- zer and seed (Annex 5, Table 1), represents about 80% of total ranch improve- ment expenditures, with the balance in fencing, water supplies and livestock. 4.07 With higher ranch-gate cattle prices (para 2.17), about 1,000 ranchers who did not previously borrow under Plan auspices for ranch devel- opment would now find such investment profitable. Most of these new bor- rowers would be somewhat larger (estimated to average 1,000 ha) than those involved under the first two Projects (para 3.08). The size of individual ranches eligible to borrow under the Plan has been Increased to 2,500 ha. In addition to providing financial support to ranchers in this category, the Proposed Loan would also provide funds to enable ranchers owning or renting holdings in excess of 2,500 ha to receive development loans for supervised ranch improvements. This new policy, to be implemented under the Third Project, would ensure that these larger commercial ranchers would have access to medium- and long-term ranch development finance. 4.08 Improvements in future years would need to be financed separately. This is appropriate in view of the need to retain the ranchers' confidence in the revised policies of Government toward the livestock sector. While ranch plans would be prepared to cover the full program, ranchers would commit themselves for a loan only for the first year. Provided adequate incentives are maintained, ranchers are then likely to continue pasture development.  - 11 - 4.09 Ranch plans would be assessed by Plan technicians, who would recommend loans to participating banks on the basis of their being eco- nomically and technically justifiable. Annex 5, Tables 1-5, gives further details on herd development projections, investment costs and cash flow estimates for these ranchers. Current Borrowers 4.10 The proposed Project would also provide funds for additional pasture improvement on approximately 2,000 of the 6,100 ranches that were developed under the first two loans. Average cost of further development would be Ur$628,000 per ranch (US$2,500 equivalent). The investment would be disbursed in the same proportions as those for new borrowers (para 4.07). Annex 5, Tables 6-10, gives further detail on the herd development projection, investment costs and cash flow estimates. Technical Services 4.11 The Project would also provide for a qualified Technical Director and short-term consultants for the Plan (para 4.21) as well as for inter- national meat processing and hygiene control consultants. Training of local Plan technicians, especially in ranch budgeting and record keeping, would also be provided for under the Project. Provision has been made in the project for the employment of such consultant services to assist the Govern- ment in (a) improving its meat inspection service to the point where it can meet the hygiene requirements of important international markets; (b) defining the future role and scope of the Government-owned or controlled meat processing plants, including the future ownership (wholly Government owned, mixed participation or cooperative) and management of those plants; (c) reviewing and giving advice on the technical, financial and economic soundness of the privately-owned meat processing plants' modernization, expansion and improvement programs; and (d) reorganizing the Meat Institute and the Commission for Local Meat Supply into a single entity. Finally, four-wheel-drive vehicles for Plan technical staff and for the supervisors and senior veterinarians of the important meat inspection service (Annex 1, para 3.24) are included in the Project. 4.12 The Project would also provide financial and technical support for continuation of local pasture seed production, involving such work as pasture seed certification and production and processing of pedigree seed. Preliminary plans for the organization of a producer-owned seed processing cooperative, Calprose, have been prepared by the Plan. These are satis- f-ct "ry. Assurances have been obtained during negotiations that final decailed plans for the development program of the cooperative would be sent to the IBRD for approval no later than 4 months from the signing of the Proposed Loan.  - 12 - C. Cost Estimates 4.13 The total investment proposed tnder the Project, equivalent to US$13.1 million, is detailed in Annex 6 and summarized below by major investment categories. Cost estimates are based on prices prevailing in Uruguay. A contingency provision is included to cover possible unfore- seen costs. The Proposed Loan of US$6.3 million would be 48% of the total cost of the Project, which is estimated at US$13.1 million. The Proposed Loan would cover the estimated foreign exchange component of the Project. - - -Ur$ Million- - - - - US$ Million - - Local Foreign Total Local Foreign Total Ranch Development Pasture Development 1/ 770 1,100 1,870 3.1 4.4 7.5 Fencing 225 150 375 0.9 0.6 1.5 Water Supplies 50 50 100 0.2 0.2 0.4 Livestock 125 - 125 0.5 - 0.5 Contingencies 50 50 100 0.2 0.2 0.4 Sub-total 1,220 1,350 2,570 4.9 5.4 10.3 Incremental Working Capital 2/ 366 - 366 1.5 - 1.5 Technical Services Plan Agropecuario 3/ 90 50 140 0.4 0.2 0.6 Pasture Seed Production and Processing - 75 75 - 0.3 0.3 Consultant Services for Meat Processing and Hygiene Control Studies 4/ - 100 100 - 0.4 0.4 Sub-total 90 225 315 0.4 0.9 1.3 TOTAL 1,676 1,575 3,251 6.8 6.3 13.1 1/ Includes fertilizer, pasture seeds, agricultural machinery and equipment. 2/ For purchase of additional feeder steers (para 4.16). 3/ Includes vehicles, technical and consultant services and training for Plan technicians. 4j/ Includes vehicles for meat inspection service.  - 13 - D. Financing 4.14 The Project cost would be financed by participating banks, Govern- ment, ranchers and the IBRD as follows: Participating Banks Government Ranchers IBRD Total Amount % Amount % Amount % Amount % Amount % --------------------------USA Million