Uruguay - Second Livestock Project

SRETRICTED dY* lJ 1IJ g N lRoport No. TO=448a 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 The report may not be published nor may it be quoted as representing their views. INTERNATIC)NAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOC[ATMON SECOND LIVESTOCK PROJECT URUGUAY December 24, 1964 Department of Technical Operationo  C C () C II r 'I 3 (-i; I C -l  & 0  URUGUAY SECOND LIVESTOCK PROJECT S U M M A R Y i. The Government of Uruguay has requested a Bank loan of US$1207 million to help finance a second stage of its livestock development plan. Livestock contribute most of the export earnings of Uruguay. ii. The first stage, financed by Loan UR-245 is to be completed by December 31, 1964. It promises to be a great success. To date, all targets have been attained or exceeded. By closing date over 220,000 ha of highly productive improved pastures will have been established on about 2,000 farms widely scattered throughout the country. The demonstrational achievements of the project have been such that there is a widespread, large and increasing demand from farmers for continuation of the plan and for credit assistance to permit their participation. iii. The new project aims at meeting this demand and at a much wider impact on the national production of meat and wool for export. It is proposed to improve about 400,000 ha of grassland through direct loan assistance to some 2,600 farmers and indirectly through importation of the necessary materials for a further 15,000 farmers to participate on a cash basis. Methods would be used which have proven feasible and economic under the first loan. iv. The loan which would be to the Government would be administered by the Banco de la Republica. Its technical aspects would be controlled by the Honorary Commission of the Plan Agropecuario on the recommendation of which the Banco would make development loans to participants. Both organizations are fully competent to carry out their respective functions. Both have been similarly involved in the execution of the first stage. v. The project is estimated to cost a total of about US$35 million. The Bank loan, amounting to about 36 per cent of this would cover the foreign exchange costs only. The balance would be provided by the Government, the Banco and participating farmers. vi. The project is sound and economically justified. Estimated benefits to both participants and the economy are substantial. The project is suitable for a Bank loan of US$12.7 million with a term of 15 years including a grace period of 5 years.  URUGUAY SECOND LIVESTOCK PROJECT Table of Contents Page No. SUINARY i I. INTRODUCTION l II. BACKGROUND . III. THE PROJECT 3 A. General Description 3 B. Detailed Features 3 C. Cost Estimates 5 D. Proposed Financing 6 E. Operating Results 8 IV. ORGANIZATION AND MANAGEMENT 8 A. The Honorary Commission 9 B. The Bank of the Republic 10 C. Import Procedure 10 V. BENEFITS AND JUSTIFICATION 11 VI. CONCLUSIONS AND RECCMIENDATIONS 12 ANNEXES 1 Achievements of the first livestock project. 2. Methods of pasture improvement. 3. Physical objectives and material requirements of loans. 4. Import requirement;s and list of goods. 5. Production and cost estimates of typical farm. 6. Receipts and payments under the livestock fund. 7. Cash flow of incremental costs and benefits. 8. Technical staff. MAPS 1. Plans,approved and requested. Following Page 2  URUGUAY S 5CN L\^SOO PFECL I. INTRODUCTION 1. The Government of Uruguay has applied for a Bank loan of $12.7 million to help finance a project for the continuation of the program of livestock development being financed by Loan 245-UR.l/ This appraisal report is based on findings of a field mission which visited Uruguay in July 196h. II. BACKGROUND 2. Uruguay is essentially a pastoral country. Its major natural resource is its usable land of 16.7 million hectares of which 90 per cent is used for animal production based on grassland. Wool, meat, milk and by-products represent about three quarters of the total value of agricultural output and provide most of the export earnings. 3. Agricultural production remained static from 1955 to 1961, the total physical output being relatively constant with only a small shift from crop to livestock production. Over this period the output per hectare, both in crop and livestock production, was low compared with countries which have similar soil and climatic conditions. This stagnation has been due mainly to unfavorable price relationships for agriculture and the failure to adopt modern production techniques. Price relationships have changed during recent years as a result of government policy to subsidize fertilizer and seed for pasture improvement and through an increase of prices for beef in relation to other agricultural products. These changes now provide strong incentives for the intensification of pasture production by modern tech- niques which could lead to considerable increase of livestock production. 4. The need for a livestock development program was highlighted by the conclusions of the joint IBRD/FAO agricultural mission to Uruguay in 1950 which eventually resulted in the establishment of the Plan Agropecuario in 1959. This Plan was based on a program of pasture improvement and involved investments in fencing, water supplies, farm machinery and technical services. It was estimated to cost a total of US$11.7 million of which US$7 million were provided by a Bank loan (245-UR). The Plan was essentially a pilot one designed to initiate improved pastures on a large sample of farms (initially 600) widely distributed throughout the country. It provided for the estab- lishment of a team of qualified technical advisors under the direction of a foreign specialist. This team was to assist participating farmers so that the properties concerned would become demonstrational points from which knowledge and experience in modern pasture production could spread throughout the farming community. 1/ Closing date December 31, 1967  5. The Plan was to be administered by an Honorary Commission established by the Government under a special law. This Commission was to be responsib]e for the selection of participating farmers, the provision of technical assis- tance, the recommendation of approved farm development plans to the Banco de la Republica (Banco) for the necessary loan assistance, and for supervision and execution of each farm program. Subject to consideration of credit- worthiness and its regulations, the Banco was to be responsible for providing the necessary loans to farmers recommended by the Commission. Development finance for this purpose would come from the proceeds of the Bank loan and the resources of a special livestock fund, set up by government. The Banco was responsible for disbursement and collections. 6. The major achievements of the first project up to June 30, 1964, and its estimated achievements up to an extended disbursement date of June 30, 1965, are summarized in Annex 1. The total number of supervised farms on which plans will have been executed or initiated will be about 1,455 as compared with the 600 anticipated when the project was designed. The original target number has already been exceeded by 255 and a further 600 farm plans should be approved before December 30, 1964. The farm size has averaged about 600 ha as compared with the 1,000 ha originally planned. The reduction came about because the law creating the Plan Agropecuario set an upper limit to the capital resources of participating farmers and the Banco has interpreted this provision more strictly than expected. In addition, the average size has been influenced by the large proportion -- approximately 20 per cent -- of small dairy farms included in the project. The small farm size reduced the average amount of loans to farmers so that the available funds have been spread over a larger number of properties. This in turn has required a longer disbursement period, but has had the advantage of giving wider distri- bution of demonstration farms over the country (see map). 7. The average area of improved pasture per farm will be more than 100 ha so that a total of approximately 150.000 ha of artificial or improved grassland will have been created by the project. In addition, extensive development has occurred on "non-supervised farms"../ It is estimated from the quantity of pasture seed imported by the Commission for cash sale and the seed imported outside the project for farmers stimulated by its success that an additional 70,000 ha of improved pastures have been established. Thus the project can be credited with a total of 220,000 ha of artificial or improved grasslands5especially since much of the sowing on non-supervised farms has occurred with the direct technical advice of the staff of the Commission with seeds and machinery imported under the project. 8. Detailed records of costs and benefits are being maintained con- tinuously on a representative sample of 50 farms to provide a guide as to the economic gains obtainable from improved pasture. Although the three-year period over which the data have been collected is too short for a complete U,/ "Supervised" farms refers to farms for which specific development plans are approved and supervised by the Commission and financed by Banco. "Non-supervised" farms refers to those for which development plans are made with technical aid of Commission but for which finance is arranged independently by owners.  U R UG U A Y DOSTROBUTOON OF PLANS APPROVED AND O EW LOAN APPLOCATDON N.\ * * ..S- 0 r..: ., \.0 _.~ @~~~~ PLAN APROE 855Q A 2EPTEMBE R 144 .6 14... IBD416 13 2~ ~~~3. 0it.. ~ 5~~c 0 PLANS APPROVED 855 ___ 161 SEPTEMBER 1964 IBRD-141261  - 3 - economic evaluation, a preliminary analysis indicates that increased produc- tion over the yields of natural pasture ranges from two to four times, depending upon the system of pasture improvement used and the type of soil. The financial and economic results of farms in the sample show that the benefits to the individual farmers as well as to the economy as a whole are substantial. 9. The project has shown that artificial pastures of high productivity can be established in Uruguay. This demonstration has had a profound effect upon livestock producers all over the country with the result that there is now a larger and increasing demand for technical and financial assistance of the same type (see map). 10. It is not yet possible to measure the precise impact of the project on the export of meat and wool. The program has not been going long enough, it has covered only a relatively small portion of the total grassland, while seasonal factors have been responsible for large variations in overall produc- tion of recent years. However, it is estimated that the 220,000 ha of improved pasture laid down should add 10,000 tons of meat and 2,500 tons of wool to production annually over the next five years. If all this is exported, it would represent an increase of about 8 per cent annually over present volume of exports. III. TiF SECOND PROJECT A. General Description 11. The project aims at a much wider impact than achieved during the first project on the production of sheep and cattle through improved pastures. Individually supervised livestock development loans would provide 270,000 ha of improved pastures on 2,600 medium sized farms. In addition about 1,000 larger non-supervised farms are expected to participate on a cash basis to improve about 130,000 ha, lifting the total under the project to 400,000 ha, or along with the achievements during the first stage, to 620,000 ha of improved grassland. These improved portions iwould be located on farms with a total area of 4 - 6 million ha. B. Detailed Features 12. The project would follow closely the lines of the first project, modified in the light of experience gained. It is proposed that the new project confine assistance to producers of meat and wool. Considerable aid has been given the local dairy industry during the first stage and other sources of finance are now available to dairy farmers. 1/ All the farms 1/ A recent UrS - AID loan to the rural cooperatives of Uruguay is designed to assist the local dairy industry.  entering the program would not be new properties. It is highly desirable that development continues on farms already participating. The only limit for further participation would be that set through the policy of the Banco in not approving loans when total indebtedness would exceed 25 per cent of the net value of farm assets. i/ 13. Three methods of improving permanent grasslands, which have been fully tested in the first stage will be used. These are (a) conventional sow- ing, (b) sod-seeding and (c) over-sowing (for details see Annex 2). It is estimated that 50 per cent of the new pastures will be conventional, 30 per cent sod-seeded and 20 per cent oversown. The latter category, however, could be revised upward since recent large scale trials with aerial oversowing with phosphates and innoculated legume seeds have been successful. The establish- ment of annual pastures would be negligible under the new project. l1. Complementary to pasture improvement, the project would also provide for subdivisional fencing, the installation of water points and the construc- tion of livestock handling facilities (corrals and dips). These investments are essential for a balanced pasture and livestock program. In addition agri- cultural machinery 2/ would be provided for pasture establishment and, on a smaller scale, for forage conservation as hay or silage. These items would be included in the loans to -supervised farmers or made available for cash sales to non-supervised farmers. 15. An essential feature of the project is an increase of 8tocking rates on the improved pasture. This requires the purchase of cattle and sheep both for breeding and fattening. The first project did not include loans for live- stock because the Banco had separate credit facilities for such purposes. This has raised serious difficulties. Lending procedures for pasture improve- ment and for livestock have been different. Adequate co-ordination has been lacking so that funds have not been available when needed. It is proposed that finance for livestock should be a part of the development loans to farmers under the new project. This provision would assist materially in making better use of the improved pastures. 16. Cooperating farmers, both supervised and non-supervised, would receive technical assistance in preparing development plans and in executing them. 3/ The capacity of the Commission to provide this would be greater than during the first project since: l/ This figure is not inflexible and may be varied in accordance with individual creditworthiness appraisals. 2/ This would also include some machinery for harvesting and pro- cessing pasture seeds to reduce reliance on imports. 3/ As in the first project, each farm plan would cover a 2 year disbursement period.  - 5 - a) The method of programming has been simplified so that loan appli- cations can be processed more quickly and efficiently. b) Farmers already participating in the program will not need as much technical help. Furthermore, these can assist new appli- cants prepare development plans and their farms would act as local demonstration points. c) Technicians have become more experienced and efficient. 17. Assuming this increasing capacity to process farm plans the project has been scheduled on a progressive scale. Beginning with 500 farms in the first year, the number would increase in the following years to 600, 700 and 800 respectively to total 2,600. Annex 4 shows the targets of pasture estab- lishment in various categories and the material requirements of these plans in relation to the time schedule. In addition, it is anticipated that about 1,000 non-supervised farmers would invest in improvements approximately 50 per cent of the amounts shown in Annex 3. It is worth emphasizing that the project is an integrated one, combining all key production elements, including technical ser- vices and credit, for achieving increased beef, mutton and wool production from grassland. C. Cost Estimates 18. The estimated total investment cost of the project, not including interest during construction, is USi135 million. The estimates are based on experience in the first project and are summarized as follows: Foreign Supervised Non-Supervised Exchange Farms Farms Total Component - - - - - - - - - US$.000- Pasture Seeds a d Fertilizers Y 6,810 3,350 10,160 8,390 Machinery 2,350 1,150 3,500 1,980 Fences 1,290 630 1,920 670 Water Facilities 1,550 760 2,310 960 Livestock (purchases) 3,180 1,560 4,740 - Freight 820 400 1,220 - Subtotal 16,000 7,850 2,850 12,000 Labor, Fuel and Other Costs j 2,500 1,230 3,730 - Services 3/ 1,800 400 2,200 700 Special Government Contributions 4 3,500 1,720 5,220 - TOTAL 23,800 11,200 35,000 12,700 1/ Not including subsidies and local freight; 2/ Provided by the farmer. 3/ Costs of the Commission and ancillary services. 4/ Subsidies paid by the Government in respect to phosphate fertilizer manufacture and seed imports.  - 6 - 19. All expenditures for the establishment of pastures incurred during the first two years have been regarded as investment cost (Annex 5, P. 1). These include the fertilization of pastures in the first year and the refertilization during the second year. Values are based on farm prices and do not include government subsidies on seeds and fertilizers_1/ 20. The cost estimates for machinery, fences, water points and other constructions are based on an analysis of the 300 farm plans approved during the last 6 months (to July 1, 1964). The cost of livestock (para. 18) refers to the value of cattle and sheep which, on the average, have to be purchased by the individual farmer to make the best use of the improved pastures. The figures assume that only 60 per cent of needs will be bought, the remainder being derived from stock retained rather than sold. The farmers' contribu- tion to the investment cost includes the cash cost of farm labor, fuel and other materials needed for the establishment of improved pastures. 21. The cost of services provided by the Commission have been included in the investment cost over a period of 4 years ($2.2 million). They cover the local currency cost ($1.5 million) and foreign exchange requirement ($0.7 million) of which $0.4 million would be needed for foreign exchange expenses of the Commission (salary of foreign experts, staff training and costs of vehicles and other equipment) and $0.3 million for the purchases of goods for ancillary services (research and disease and pest control). The Commission would continue its assistance to the Alberto Boerger Research Institute, the pasture investigations of which would be closely allied to the needs of the project and would assist in organizing disease and pest control measures essential for increased efficiency of pasture use. D. Proposed Financing 22. On the assumption that on-farm expenditures would be in accordance with estimates in Para. 18, the $35 million (total) investment cost of the project would be financed as follows: Source On-Farm Investments Services Total Cost Per Cent