Uruguay bails out dairy firms, blaming Venezuela

Feb 24, 2016, 11:55 AM EST
(Source: Daniel Rowe/flickr)
Source: Daniel Rowe/flickr

Uruguay's dairy sector is in such severe crisis that the government announced an emergency bailout on Tuesday. The blame lies largely with deadbeat Venezuela. The two countries signed a deal in September for Venezuela to import 235,000 tons of Uruguayan milk, cheese, rice, soy, and poultry. But rather than a lump-sum payment of $267 million as Uruguayan agribusiness firms were expecting, Caracas only paid $50 million in November. And since then, Venezuela has taken delivery of $93 million more in food on good faith from Uruguayan producers but hasn’t paid anything more. Further shipments were halted, but there are no replacement buyers anywhere in the depressed industry.

The government finally intervened after dairy farmers protested and called for it to step in. Under the bailout, the four dairy firms that exported most of the powdered milk to Venezuela will receive $66 million in a loan with a three-year grace period on repayment and no subsequent interest charged. That might avert catastrophe, but there are other structural problems hamstringing the industry, namely a slump in global prices and falling demand.

In the last 14 months, the international price of milk has fallen 60%. Compared to January 2015, last month Uruguay shipped out 39% more whole powdered milk (its top dairy export) but earned 11% less. During the same period, the country’s exports of powdered skim milk (at its lowest price in many years) fell 41% in volume and 67% in value. Likewise, the price of Uruguayan exported cheese fell 44%, and with Venezuela out of the picture (until 2014 it had bought more than half of Uruguay’s cheese exports) volume is dropping too.

Many Uruguayan dairy firms now have major surpluses, and are unsure of how to proceed since domestic demand is largely saturated and international prices are hardly appealing. Production costs are not cheap in Uruguay, and if these dairy prices continue at rock bottom, many smaller firms and even some larger ones may be driven to bankruptcy or forced to do a fire-sale of many assets. Indeed, two large international dairy firms, U.S.-based Schreiber Foods and Peru-based Ecolat, left Uruguay last year.

Furthermore, Venezuela has big debts to other Uruguayan industries, and Montevideo can't afford to bail out everyone indefinitely. (The September agreement didn’t address the $27 million that Venezuela already owed Uruguay.) Another group of companies, including paint factories, pneumatic machinery plants, and laboratories, has yet to hear word on the $74 million it’s owed by the Venezuela government.

Montevideo’s decision to bail out the dairy industry is the right call, since it’s an important one for the country’s employment and exports. Dairy firms just need to muddle through this downturn in prices as best they can. And the lesson learned for the future is that if Venezuela wants to buy any more products from Uruguay, it will have to pay in advance.