Investment in sustainable diary sector
Investment in sustainable diary sector
Business Model Description
Investment in fields for breeding of dairy cows and financing of heifers for dairy farms. These funds buy calves from productive units and specialize in raising them until they become heifers that will be sold with financing to the same dairy farms. The fields are owned by cooperative units of the dairy producers themselves and the financing of the sale will be made against withholding of payment.
Expected Impact
Financial solutions in the rearing phases with a financed repurchase option linked to social and environmental goals will have an impact on levels of profitability and general sustainability of the business and the sector.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- Uruguay: Countrywide
Sector Classification
Food and Beverage
Development Need
Uruguay's primary production must be developed in a sustainable manner. Uruguay currently produces food for 30 million people and has the capacity to do so for 20 million more. Meat chain is an example of integration between the agricultural, industrial and service phases in which producers interrelate with the supply of agricultural machinery and technological inputs.
Policy priority
The food sector, and especially agricultural production, plays a relevant role in the design of public policies through the MGAP and the MA (Ministry of the Environment). Especially regarding sustainable production, the Climate Change Office, the Agricultural Plan Office and the Livestock and Climate and Climate-Smart Livestock programs stand out.
Gender inequalities and marginalization issues
The gender gap in employment in rural areas reaches 27.4%, employment rate of rural women is lower than the national female average. For their part, the unemployment levels of women in rural areas are significantly higher than those of their male peers. The participation of women in jobs reaches 20.4% in the primary phase and 30.4% in agribusiness.
Investment opportunities introduction
Markets for CO2-neutral or certified sustainable foods are in increasing demand as consumer preferences change globally. Remaining isolated from this change in the market implies being associated with unsustainable producers and practices in food production.
Key bottlenecks introduction
sustainable food production is an important driver of development in the sector, however, there are still important conservative features at the level of companies and unions in the sector that offer strong resistance to incorporating innovations or changes in business models and production techniques experimental.
Food and Agriculture
Development need
The dairy sector in Uruguay requires an adequate articulation in its productive chain that contributes to stability in small family productive units, employers of female labor. Incorporate improvements in the treatment of effluents that compromise the watersheds of important water sources for cities.
Policy priority
The dairy sector is developed by 3,300 producers, 5% of the national territory, employing 20,000 people. It is strongly promoted by the Ministries of Livestock, Agriculture and Fisheries as well as state agencies such as INALE (National Institute of Milk) and research institutes such as INIA (National Institute of Agricultural Research).
Gender inequalities and marginalization issues
The dairy sector employs 20,000 people, of whom 36% are women. Per establishment there are 1.2 women on average (1.3 men) with an average age of 46 years. Policies to promote dairy activity constitute an important tool for promoting the economic independence of women in rural areas.
Investment opportunities introduction
In 2020, the international price of milk improves its prospects, but finds a weak sector to rebuild cow stocks quickly, improve production and overall cost performance. It is estimated that the growth of the milk market (referral to the industry) will grow between 2.1% and 5.5% annually, which is equivalent to a potential market of USD 520 M.
Meat, Poultry and Dairy
Pipeline Opportunity
Investment in sustainable diary sector
Investment in fields for breeding of dairy cows and financing of heifers for dairy farms. These funds buy calves from productive units and specialize in raising them until they become heifers that will be sold with financing to the same dairy farms. The fields are owned by cooperative units of the dairy producers themselves and the financing of the sale will be made against withholding of payment.
Business Case
Market Size and Environment
USD 50 million - USD 100 million
< 5%
An average annual investment need of USD 520 million is estimated to increase milk production in different price scenarios and the evolution of international markets. The growth of the milk market (referral to the industry) is estimated between 2.1% and 5.5% per year. It is possible to assume an initial potential market of 15% (USD 78 million) as a market subject to credit.
Indicative Return
5% - 10%
For the year 2020, the margin at the producer level (sale price / average costs + opportunity costs of land and capital) was 7.14% measured in USD.
Investment Timeframe
Medium Term (5–10 years)
The rearing cycle is 12 to 18 months, the financing to the producer for the sale should be 24 months (duration depend on the retentions made in the industrial phase). It is possible to include cycles depending on the results. Being a fund, exit strategies for investors will be incorporated. The average term with at least one breeding and sale cycle resulting in an average of 3 ½ years.
Ticket Size
> USD 10 million
Market Risks & Scale Obstacles
Market - Volatile
Impact Case
Sustainable Development Need
Uruguayan dairy sector has significant levels of fragility. Survival was threatened during the crisis years of low international milk prices. The current increase in milk prices enables improvements in the levels of production and income of the sector, in particular, of small units (SMEs). This growth requires increases in dairy cattle stocks as a starting condition to increase sales.
In turn, it is necessary to ensure the economic survival of the cooperatively owned industry, which determines the development of rural territories, associated with dairy basins. There are 3,300 establishments. The average property is 240 hectares. 44% are members of producing families.
The Uruguayan dairy sector needs to articulate itself on arguments that highlight the excellent quality of the local product. By incorporating quality attributes based on natural production conditions, it will increase the value of the brand and the price of the products.
Dairy production establishments are mostly family-owned. It is necessary and possible to encourage changes in governance structures, incorporating women at the level of cooperative groups, such as business associations and local governments.
Gender & Marginalisation
The dairy sector is responsible for employing the largest proportion of women in rural areas. The development of this sector has a direct impact on income independence and the reduction of income gaps in rural areas.
36% of the women in the family nucleus work in the establishment. There are 1.2 average women per establishment (1.3 men) with an average age of 46 years.
Expected Development Outcome
Improve the production capacity and profitability of small and family farms due to the effect of decoupling and specialization of activities (breeding vs. milk production) in competition for pastures.
Increase in the level of milk production and increase in the level of employment in the sector. Increases in ROI and ROE, by generating efficiencies and improvements in the productivity of establishments, especially SMEs.
Incorporation of seals that materialize good practices and compliance with production guidelines. Improvements in product price levels based on differential quality.
Development and strengthening of cooperative structures associated with the dairy sector, both in production and in industry and marketing.
Gender & Marginalisation
The improvement in family establishments is linked to the presence of women in the production and ownership of the establishments, providing greater financial autonomy and bargaining power at the family nucleus level.
Increased presence of women in sectoral governance structures, such as producer cooperatives and producer unions.
Primary SDGs addressed
8.2.1 Annual growth rate of real GDP per employed person
Level of profitability of establishments and especially the smaller ones (less than 50 cows). These establishments are currently in loss areas. Annual variation (2019/2018) in the number of establishments (65 establishments of less than 50 hectares closed), in the number of animals (-11%, -2% and -1%) and in the production volumes of the total number of senders (-0.23%) of the first 3 strata.
Objective goal: reduce the number of closures of establishments of less than 50 hectares per year; increase the number of animals per establishment and improve the volumes of annual milk production.
9.3.1 Proportion of small-scale industries in total industry value added
GDP increase in regions and Departments where the dairy basins are located.
Increase in local GDP higher than that of the country.
2.4.1 Proportion of agricultural area under productive and sustainable agriculture
Creation of seal and/or good practice guides.
At least develop a protocol to grant a seal to products in coordination with MGAP, MA, INALE and INACOOP.
5.5.2 Proportion of women in managerial positions
Increase or at least no decrease in the number of women working in dairy establishments. (3). (Survey Results 2019 – 2020, INALE)
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Planet
Corporates
Public sector
Indirectly impacted stakeholders
People
Planet
Public sector
Outcome Risks
Risks associated with international milk price shocks, depending on the general volatilities faced by commodities worldwide. Exchange rate risks linked to international and regional shocks and the weakness of local currencies.
Climatic risks due to extreme drought events that harm the feeding and survival of animals and therefore the quantities of milk produced.
Poor management of breeding establishments, which are cooperatives.
In all risk events there will always be a greater effect on the smaller productive units, which are in turn the family ones.
Gender inequality and/or marginalization risk: there is a need to work additionally on cultural changes in the rural sector.
Impact Risks
There may be risks associated with poor management of residues in dairy farms (manure).
Concentration of ownership due to the purchase of smaller units by larger companies. Closure of smaller production units without the possibility of having reserves.
Climate risks associated with drought events affect animal mortality and have a direct effect on the survival of small production units.
Milk price and/or exchange rate shocks cause a decrease in sales or an increase in debts, both effects combined cause the closure of establishments and unemployment.
Impact Classification
What
Profitability of dairy production units, especially family units.
Risk
Weather, prices, problems in the industry or big players buying from the small ones
Impact Thesis
Financial solutions in the rearing phases with a financed repurchase option linked to social and environmental goals will have an impact on levels of profitability and general sustainability of the business and the sector.
Enabling Environment
Policy Environment
Tax exemptions for activities in decentralized territories and with benefits in investments that introduce cleaner energy.
National Gender Plan for agricultural policies.
Transformation in fuel pricing based on import price parity.
Financial Environment
There are several ways of financing livestock production. Livestock funds stand out, with variable income that transfer the ownership of animals to guarantee trusts. This type of investment has average returns of 12% and has been in existence for more than 10 years.
Tax incentives: There is an exemption scheme for cleaner investment activities that can be applied to dairy farms (biodigesters). Income tax exemption for cooperatives (possible unit ownership of rearing fields).
Other incentives: INALE; INIA, Fucrea and business groups and public research institutions support the sector with research and experimentation
Regulatory Environment
The dairy sector in Uruguay has a robust regulatory framework, in addition to consultancies and research institutes. In particular, the tax promotion on investments in the sector stands out.
National Environmental Plan (2019).
Resolution 534/021 National Gender Plan in Agricultural Policies.
Creation of the Milk Fund Law 19,596.
Marketplace Participants
Private Sector
Financial funds that manage portfolios, stockbrokers, pension funds: AFAPs, financial trusts and co-financing with banks and development fund for cooperative activities.
Government
MGAP, MA, INALE, INIA.
Multilaterals
IDB, WB, CAF.
Non-Profit
Universities, INALE.
Target Locations
Uruguay: Countrywide
References
- (1) https://www.inale.org/uruguay-lechero/.
- (2) Development Strategy 2050.
- (3) Estimates of qualified informants from INALE (National Milk Institute), based on the sector's perspectives in response to the increase in the international price of milk and current stocks.
- (4) https://otu.opp.gub.uy/
- (5) FOGALE: https://www.siga.com.uy/garantias/fogale.
- (6) https://www.conaprole.uy/or https://www.claldy.com.uy/es/
- (7) https://proleco.com.uy/
- (8) http://proleco.com.uy/wp-content/uploads/2022/03/FFIEL.pdf
- (9) According to INALE sources and Inale Report 2021https://www.inale.org/wp-content/uploads/2022/05/Situacionyperspectivasversionfinal.pdf
- (10) https://www.inale.org/wp-content/uploads/2022/05/Situacionyperspectivasversionfinal.pdf