08 Otoño

April 2010

Dairy Industry

Investment Opportunities

2

WHY INVEST IN THE URUGUAYAN DAIRY INDUSTRY?

Rising world demand

Changes in world demographics (i.e., migration to cities), the rise in average income, lifestyle changes and population increases are some causes of the rise in food consumption and animal proteins in particular. World milk production has been increasing at a slower rate than world demand for dairy products over the past 10 years.

Uruguay is one of the few countries that can supply this rising demand

Milk production in the European Union (EU), India, the US and China is oriented to cover domestic market demands and the possibilities of expansion are limited or would be absorbed by domestic consumption.

The Uruguayan dairy industry has significant competitive advantages and offers investment opportunities both in primary and industrial production phases. Uruguayan milk production accounts for 0.3% of total world production, but Uruguay represents 2% of world exports. Like Australia and New Zealand, Uruguay exports more than 60% of its milk production.

Low costs and great potential for productivity improvements

Uruguayan milk production has risen 3% annually over the past 10 years and 4% over the past five. Dairy cows are fed mainly pastures and a moderate supply of concentrates. Prices received by Uruguayan producers are lower than those received by New Zealand or Australian producers (and lower than Argentine producers as well). Production costs are among the lowest in the world.

The expansion of Uruguayan agriculture increases the domestic availability of grains and sub-products for strategic supplementation.

Manufacturing opportunities also exist in the dairy industry and include company consolidation, process and product innovation, and product and marketing mix.

Practically unexploited world market offers great opportunities

The export mix consists mainly of powdered milk (53%) and cheeses (32%). Exporters focus

primarily on the Latin American market. Due to problems of scale and deficiencies in

marketing and product presentation, there is limited experience in supplying extra-regional

markets. Customized products and/or market niches have not yet been explored (e.g.,

kosher, halal, flavored cheeses and organic products). This also occurs in the production of

ingredients and nutraceuticals.

3

Uruguay, a reliable country with preferential access to regional markets

In Uruguay, foreign investors receive the same treatment as local investors. Funds may be freely transferred and profits may be freely repatriated.

Uruguay belongs to Mercosur, a market of over 260 million inhabitants, and almost 400 million if we include other South American countries with which Mercosur has economic complementation agreements, such as Bolivia, Chile, Colombia, Ecuador, Peru and Venezuela. Uruguay has signed

free trade agreements with Mexico and Israel.

Uruguay has a highly attractive investment and export promotion system

In 2007, Uruguay adopted an investment promotion system that allows companies to use

between 51% and 100% of investments as income tax payments under certain conditions.

Benefits for all exports include:

refund of VAT paid on supply purchases

a tax exemption system (customs and other duties) for imports of supplies used in exported goods

a pre-export financing system

Uruguay has broad experience in the dairy industry

Uruguay has a long history in both milk production as well as the elaboration of dairy products. Over the past 20 years, milk production has doubled while income from exports has increased ten-fold. The recent arrival of major foreign investments, such as New Zealand Farming Systems, Schreiber Foods and Bom Gosto, denotes a promising future for the industry.

Why invest in Uruguay?

Significant comparative advantages based on:

Well-irrigated land and temperate climate with rain averaging 1,200 mm distributed throughout the year.

More than 80% of the surface area is arable and totals approximately 4 hectares per person (world average is 0.21 hectares per person).

No natural catastrophes.

4

Export-oriented primary production:

Agriculture-based exports account for 65% of total exports.

7th largest beef exporter in the world (exports to 85 countries).

3rd in world ovine meat exports.

6th in world rice exports. The grain elaboration process offers a large availability of sub-products with potential for use in supplementation:

Soy production has risen 48% annually over the past 8 years.

Corn and wheat production has risen 18% annually over the past 8 years.

Dairy agroindustry data1:

Dairy accounts for 9.3% of agriculture/ livestock gross production value and ranks third behind beef and rice production.

Milk production: 1,582 million liters.

Shipments to plants: 89% of production.

70% of plant shipments exported (to 90 countries).

Dairy farms: 4,592.

Surface area: 849,000 hectares (6% of total).

Improved surface area: 58% of total.

Number of dairy cows: 408,000.

Exports: USD 442 million (7.3% of all exports; third in importance following beef and rice).

1 Data from 2007-2008

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1. World dairy market

Over the last 10 years, world production has risen 2.1% annually (see Figure 1). China has had the highest production growth and focuses on supplying its domestic market.

Chinese milk production rose at a rate of 17% annually between 2002 and 2008. In turn, Uruguay ranks second in the same period with a growth rate of 4.1% (see Figure 1). Milk production in Australia and

the European Union, two major players in world trade, has declined.

Figure 1: Milk production growth rates, 2002-2008 (selected countries)2

Global exports of dairy products have risen over the last 10 years at around 4% annually. Nevertheless, just 7% of world milk production is exported as manufactured products. New Zealand and the EU account for 65% of world dairy trade, while Uruguay accounts for 2% (see Figure 2).

2 Source: USDA – FAPRI (does not include China)

4,12% 4,02%

3,29% 3,16%

2,04% 2,02%

0,97%0,66%

-0,57%-0,93%

-2,79%

-7,69%-8%

-6%

-4%

-2%

0%

2%

4%

An

nu

al

acu

mu

lati

ve

gro

wth

Average world growth rate = 2.1%

6

Figure 2: World dairy share, 2008 (in milk equivalents)3

Given the low volume of milk sold internationally, any changes to global demand or supply lead to magnified price changes. This market is estimated to be very volatile in the medium and long term. Global demand for dairy products will continue to rise given the increasing recognition of the nutritional value of milk and the improvement of living standards in developing countries. The reasons behind these long-term auspicious forecasts for the dairy industry have not changed with the current global economic crisis. The Agricultural Outlook 2008-2017 report by the OECD-FAO states that global dairy imports could increase between 23% and 57% by 2017 as compared to the 2005-2007 average, and that developing countries will capitalize on the demand by nearly doubling exports (see Figure 3).

3 Source: based on data from Dutch Dairy Commodity Board, FAO and USDA

N. Zealand33%

European Union 32%

Australia11%

USA8%

Uruguay2%Others

14%

7

Figure 3: Estimates of increases in exports and imports of dairy products in 2017 vis à vis

2005-2007 average

The continual growth in milk production in Uruguay is sustained by its solid international positioning. With consumption equivalent to 219 liters per person per year (one of the highest in the world), the entire increase in production is exported. Uruguay ranks second in exposure to international competition, as milk exports represent 65% of production (see Figure 4).

-30%

-10%

10%

30%

50%

70%

90%

110%

130%

IMPORTS OECD Countries Developing Countries

EXPORTS

Powder milk (whole) Powder milk (skim)

Butter Cheese

8

Figure 4: Dairy product exports (% of production in milk equivalent), 2006-2008 average4

In short, the medium and long-term perspectives are encouraging for countries with a competitive dairy industry that will be able to increase their share in an expanding international dairy market. Milk production in Uruguay and its international position enable increased business opportunities throughout the value chain. For example, a few years ago, a New Zealand company sponsored the creation of the Uruguay-based and Auckland-listed New Zealand Farming Systems Uruguay (NZFSU). The objective of NZFSU is to capitalize on the opportunities to acquire lands and develop and adapt the New Zealand milk production system to the local environment (see Table 2).

2. Why invest in the Uruguayan dairy industry?

The following is a description of the value chain, to be used for the identification of business

opportunities.

2.1. Industry description

The average annual per person consumption of dairy products is 219 liters (in milk equivalents), which is similar to levels in more developed countries. The total value of the domestic market is estimated at USD 400 million in terms of consumer prices (2008). The main consumer product is liquid milk (240 million liters totaling approximately USD 120 million), followed by cheeses and yogurt. The recent deregulation of the liquid milk market

4 Source: FAO - USDA

0%

10%

20%

30%

40%

50%

60%

70%

80%

EEUU Canada Argentina Unión Europea

Australia Uruguay N. ZelandaUSA Canada Argentina EU Australia Uruguay N. Zealand

9

opens opportunities to small plants (see Appendix 1 for more information on the domestic liquid milk market).

Exports of dairy products in dollar terms rose 9% annually between 1991 and 2009 and 19% during the 2002-2009 period (see Figure 5). In 2009, sales were USD 369 million, down from the record USD 433 million achieved in 2008.

Figure 5: Dairy product exports (USD millions, FOB)5

Currently, the dairy sector exports to more than 60 countries. Brazil and Venezuela account for 46% of export income, followed by Mexico at 20% and Cuba at 6% (see Figure 6).

5 Source: Agriculture Statistics Bureau (DIEA), Office of Agriculture Programming and Policy (OPYPA) of the

Ministry of Livestock, Agriculture and Fishing (MGAP).

50 100 150 200 250 300 350 400 450

2002

2003

2004

2005

2006

2007

2008

Annual growth rate:1991 - 2009 = 8.9%2002 - 2009 = 19%

10

Figure 6: Major dairy export destinations, 2009 (in terms of value)6

Powdered milk (whole and skim) is the sector’s number one export product and accounts for 44% of exports, followed by cheeses at 36%.

Figure 7: Exports per product type, 2009 (value)

6 Source: Developed by Uruguay XXI based on Customs Bureau data.

BRAZIL25%

VENEZUELA21%

MEXICO20%

CUBA6%

SOUTH KOREA5%

GERMANY4%

SENEGAL4%

ALGERIA3%

MOROCCO3%

CHILE3% OTHERS

6%

0% 10% 20% 30% 40% 50%

MILK AND CREAM WITH ADDITION OF SUGAR

CHEESE AND CURD

BUTTER

SERUM

WHEY

MILK AND CREAM,NOT CONTAINING ADDED SUGAR

11

An analysis of export market destinations also shows a budding specialization with regard to

the type of products exported (see Figure 8).

Figure 8: Powdered milk and cheese exports, 2008 (volume)7

Venezuela, Mexico, Cuba, Brazil, South Korea and Senegal account for 73% of powdered milk exports and 89% of cheese exports (see Table 1).

The country’s largest dairy company, Conaprole, reports more than 50% of its income from exports (see Table 1) and is followed by Inlacsa (Mexican shareholders), Ecolat (Venezuelan shareholders) and Bonprole (joint venture between Bongrain of France and Conaprole).

Figure 9: Share of the top 10 dairy exporters, 20098

7 Source: Central Bank of Uruguay. Latest available data for 2008. 8 Source: Data developed by Uruguay XXI based on Customs Bureau data.

32% 9% 12% 11% 0% 8%19% 29% 19% 0% 19% 0%0%

5%

10%

15%

20%

25%

30%

35%

BRAZIL VENEZUELA MEXICO CUBA SOUTH KOREA SENEGAL

Milk powder Cheese

CONAPROLE54%

INLACSA 10%

ECOLAT URUGUAY

8%PETRA

6%

CALCAR6%

PILI 6%

CLALDY 4% DULEI 3%

SEYLINCO 2%

NIDERA URUGUAYA

1%

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Table 1

Cheese exports

In 2009, 37,000 tons of cheese were exported valued at USD 130 million. 60% of income from cheese exports corresponds to semi-firm cheeses (between 36% and 46% humidity). Examples include Swiss style cheeses: Gruyerito, Danbo, Edam, Fontina and Gouda (Dutch origin but Swiss style) (see Figure 10).

Figure 10: Exports of cheese per type, share in dollar terms (2009)

13% of income from cheese exports corresponds to firm cheeses (Sbrinz, Parmesan, Goya, Emmental) and 20% to soft cheeses (Colonia, Cuartirolo). The remaining 7% includes fresh, grated and melted cheeses. Of these, mozzarella has the highest share (64%).

Opportunities

Cheese consumption is increasing worldwide. The number of consumers is rising while traditional consumers are increasing their per capita consumption. For example, in the United States, some opportunities exist. Cheese consumption in the US has increased over the past 30 years. The desire to consume new varieties of cheeses with different flavors and textures in convenient packages has driven consumption growth. The “specialty cheeses” segment has been the main driver of per capita consumption.

This is a market niche that needs to be exploited. The highest growing market niche is linked to ethnic groups, e.g., Latin-style cheeses. Another high growth area is the artisan cheese segment. Although small, the potential for growth of this segment is high.

The type of food given to the Uruguayan dairy rodeo, in addition to the low volume of production and the character of some locally produced cheeses (Gruyerito and Colonia types) could mean new business opportunities. The intense yellow color of the cheese produced by cows fed with natural pastures is a positive attribute, given the consumer perceives it as a value added product.

Other7% Firm

13%

Semi firm 60%

Soft20%

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3. Industrial sector in growth phase

The industrial sector consists of 36 companies, which are mainly highly concentrated cooperatives that receive milk from producers (see Figure 11).

Figure 11: Reception of milk in plants for the top 10 companies (2009)9

Milk shipments to plants have risen 4% annually over the last 20 years, while industrial capacity has grown at a slightly greater pace. The volume of milk for consumption has fallen in absolute terms, and the entire increase in shipments to plants has gone towards the elaboration of manufactured products.

9 Source: Data developed by Uruguay XXI based on data from the Dairy Activity Financing and Sustainable

Development Fund (FFDSAL).

CONAPROLE65%

INLACSA S.A8%

ECOLAT URUGUAY

7%

CALCAR6% PILI S.A

4% CLALDY4%

DULEI S.A2%

BONPROLE S.A2%

GRANJA POCHA S.A1%

COLEME1%

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Figure 12: Reception of milk in industrial plants per destination (millions of liters)10

Processing capacity is 8.4 million liters per day. Capacity increases have accompanied an increase in shipments to plants and, above all, are able to supply springtime production peaks. The effective use of installed capacity is estimated at between 63% and 76% for the last few years.11

On average, production facilities could absorb an annual increase of 300 million liters (20% of 2008 milk shipments to plants) without having to increase installed capacity. This figure is slightly less than the annual production target set by New Zealand Farming Systems Uruguay for 2014 (see Table 2). It should be noted that this is not the only new undertaking in the primary level.

The dairy industry accounts for approximately 6% of the gross production value of Uruguayan industry (OPYPA, 2008). The industry employed 4,600 people in 2008 and employment has been rising over the past few years. The added value of the sector is estimated at 20% of the production value, which is below the industry average. Investments have generally been made to increase reception and primary processing capacity. Yet, there are no industrial sites devoted to competitively adding value to raw materials for production aimed at regional sales. As a result, value added products make up a small share of the overall product mix.

The most recent investments have been made by Claldy (whey plant), Inlacsa and Conaprole (a new powdered milk plant and improvements to other plants), Pili (whey nanofiltering and drying plant) and General Mills (a casein and whey plant that was later acquired by US-based Schreiber Foods in addition to the Dulei cheese plant and the Belficor whey plant). This company, which has

10 Source: Agriculture Statistics Bureau (DIEA) of the Ministry of Livestock, Agriculture and Fishing (MGAP). 11 Note: Assuming constant daily plant shipments for the highest production month (generally October or

November).

Elaboration of products Liquid consumption

Millions of liters

15

invested USD 30 million in the purchase of these plants, plans to employ 100 people and to eventually produce 450,000 liters of milk per day. Several other local plants have been acquired by foreign companies over the last six years, including Ecolat, Inlacsa, Quesería Helvética and Frigorífico Modelo.

Brazilian company Bom Gosto announced that it would begin to build its first plant in Uruguay in May with a USD 30 million investment. The plant will receive 600,000 liters of milk per day to produce powdered milk and butter.

The production mix has not changed substantially as compared to 1998, except for the loss in the share of liquid products (UHT and

acidified milk) and the increase of caseins and caseinates (see Figure 13).

Figure 13: Production mix, 2008 (% in milk equivalent)12

12 Source: Agriculture Statistics Bureau (DIEA) of the Ministry of Livestock, Agriculture and Fishing (MGAP).

Cheese39%

Milk powder43%

Butter / fat3%

Acidified2% (UHT)

8%

Casein/ates4%

Others1%

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4. Primary sector with major growth potential

The notable growth of the Uruguayan dairy industry's supply chain over the last 20 years has positioned it among the top exporting countries. This performance has been sustained by the competitiveness of the chain’s primary link where milk is produced at low international prices.

Total milk production was 1,750 million liters in 2009, including dairy farm production and consumption (Figure 14). In the same period, the number of producers fell 18%, from 5,522 to 4,507. This reflects a global trend in agriculture to the extent that market pressures and changes in business practices promote consolidation

towards larger establishments with better operational efficiencies.

It should be noted that, on average, producers ship approximately 80% of their production to industrial plants. The rest is used by the dairy farms themselves mainly for sub-products and fresh milk. This group of around 1,000 artisan producers industrializes its own production.

Figure 14: Milk production and number of producers (millions of liters, number)13

The surface area used for milk production was around 1 million hectares in the 1991-2002 period (see Figure 15). As of 2002, surface area was lost, mainly to rising agriculture uses.

13 Source: Cattle Monitoring Bureau (DICOSE) of the Ministry of Livestock, Agriculture and Fishing (MGAP).

Millions of liters Number of producers

Production Producers

17

Between 2002 and 2009, surface area for dairy production fell by 200,000 hectares to 800,000. The number of cows has risen slightly since 2005 to 420,000 by 2009.

As a result of these changes, average dairy farm surface areas have fallen 12% over the past 10 years from a peak of 211 hectares in 1999 to 184 in 2008. The number of dairy cows increased 15% in the same period, from 78 to 89 on average per farm.

Figure 15: Total surface area for dairy and number of cows14

The growth in the average size of dairy farms has caused milk production to be very concentrated. Currently, farms larger than 500 hectares represent 5% of all dairy establishments and account for 28% of milk production.

The growth in production is based on a significant technological change. Per hectare productivity rose 59% between 1998 and 2007. In this period, per cow productivity rose 21% and the number of dairy cows per hectare increased 26%. The number of milking cows with regard to total cows (a measure of the efficiency of dairy herd management) increased 7%. Nevertheless, the ratio between total cows and the dairy herd has remained constant (Appendix 1, Table 2).

In Uruguay, dairy cows are pasture-fed. Productivity increases stem from the progressive substitution of improved, high-yield pastures for natural pastures. About 60% of the surface area for dairy cows consisted of improved pasture in 2009. The use of concentrates has fallen, while the use of silos and silage for supplementation has increased.

14 Cattle Monitoring Bureau (DICOSE) of the Ministry of Livestock, Agriculture and Fishing (MGAP).

250

300

350

400

450

500

500

600

700

800

900

1000

1100

2002 2003 2004 2005 2006 2007 2008 2009p

Th

ou

san

ds o

f cattle

he

ad

s

Th

ou

san

ds

of

he

cta

res

Area lecheraNº vacas

Dairy production regionNumber of cows

18

Although productivity is rising, it is worth noting that at current levels, there is a significant technological gap in certain sized farms. This gap offers attractive investment opportunities. As seen in Appendix 1, Table 3, there is a significant per hectare productivity gap amongst the various sizes of farms. Although the information available does not show the causes for this gap, the most important factors are likely due to a lack of scale, land ownership (mainly leases), scant investment and apprehensiveness toward new technologies.

Although productivity is rising, it is worth noting that at current levels, there is a significant technological gap in certain sized establishments. This gap offers attractive investment opportunities. As seen in Appendix 1, Table 3, there is a significant per hectare productivity gap amongst the various sizes of farms. Although the information available does not show the causes for this gap, the most important factors are likely due to a lack of scale, land ownership (mainly leases), scant investment and apprehensiveness toward new technologies.

Likewise, relative to dairy farms in other countries, productivity levels of Uruguayan dairy farms are not high. For example, among other reasons, NZFSU decided to set up in Uruguay due to the per hectare productivity gap between New Zealand and Uruguay. The company identified an opportunity for growth without needing an expansion of land.

The genetic quality of Uruguayan herds is well recognized and heifers are exported to Peru, Brazil, Venezuela and recently China. For more than 30 years, semen from American and Canadian bulls has been used. Recently, semen from Australia and New Zealand has been added.

Land prices are low in comparison to the region and the world (USD 2,300 per hectare on average), enabling more investments in dairy activities. In fact, one of the factors that NZFSU valued positively with respect to its decision to invest in Uruguay was that the cost of acquiring and developing was less than 30% of the cost in New Zealand. The abundance of water and the possibility of irrigating pastures to increase the production of dry material

offer a new opportunity of technological change.

Irrigation and the agricultural used of lands also offer the possibility of producing milk under confined conditions. To date, two undertakings may implement this method. No further information is available at this time, however.

Milk production is concentrated mainly in the south of the country. The departments of Colonia, San José and Florida account for 84% of national

production and 55% of dairy farms and have most of the county’s production facilities.

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Table 2

New Zealand Farming Systems Uruguay (NZFSU), a company consisting of New Zealand capital, currently operates 31 dairy farms and plans to have a total of 49 by 2012. The total investment to date has been more

than USD 200 million. NZFSU has been sponsored by PGG Wrightson Limited (PGGW), New Zealand’s largest agriculture supply company.

“NZFSU was established to capitalize on the opportunities to acquire dairy farms in Uruguay, where the New Zealand production system, once adapted to the local conditions, can produce results comparable to those achieved in New Zealand.”

NZFSU considered that the acquisition of establishments in Uruguay and their later development/conversion to the New Zealand system could be done at a third of cost of acquiring a dairy establishment in New Zealand. Milk production in New Zealand is performed mainly with the intensive use of pastures (i.e., the production of large quantities of high quality forage per hectare and the widespread use of genetically superior cows). This system could be applied on lands with great potential and low cost that, in accordance with New Zealand standards, is being underutilized in dairy production.

The “conversion” of dairy farms and lands acquired in Uruguay for the New Zealand system will be done by a series of measures including: seeding new species of improved pastures, applying phosphate fertilizers, optimizing subdivisions to monitor pasture growth and improve yield, improving access to water for animals, increasing animal numbers to take advantage of the increase available forage, using animals with high genetic value and applying phosphates and nitrogen to maintain grazing areas.

As of June 2009, NZFSU operated 36,000 hectares with 53,000 heads of cattle, of which 11,300 were milking cows. The project was in advanced stages with nearly 70% of the investment program in place.

At the end of 2008 work began on the issuance of local market bonds and in July 2009, NZFSU successfully placed USD 30 million, which was acquired mainly by institutional investors. With this financing, infrastructure, irrigation and electrification tasks will be completed.

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APPENDIX 1. Table 1: The dairy industry in figures (2007/08)

Surface area (hectares) 847,000 (4.5% of productive surface area)

Dairy herd 744,000 cattle (408,000 cows)

Average number of cows 63

Average surface area (hectares) 184

Average productivity per cow per year 3,877 liters

Milk production 1,582 million liters

Shipments to industrial plants 98%

Dairy sector gross production value USD 466 million

Dairy sector gross added value USD 855 million

Milk utilization

Cheese 40% Whole powdered milk 24% Liquid consumer milk 19% Skim powdered milk/ Butter 10%

Major industrialized projects (tons)

Powdered milk ………. 63,523

Cheese………………..... 53,737

Butter………….….…….. 21,312

Caseins…………….……... 1,409

Exports

USD 442 million (7.3% of national total)

Powdered milk………….48,378 tons

Cheese………………………28,580 tons

Butter………………….........9,799 tons

UHT milk……..……7,174 million liters

Percentage of exported milk 63%

Major markets (value)

Venezuela 34%

Mexico 24%

Cuba 11%

Brazil 8%

Per capita consumption 219 liters (equivalent)

Labor force (direct employees)

Total: 23,984

Primary production: 19,320

Processing: 4,664

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Table 2: Main technological indicators15

1998 2007

Per hectare productivity (liters/hectare) 1,175 2,370

Per cow productivity (liters/cow) 3,192 3,875

Cows per hectare 0.38 0.48

Milking cows/total cows ratio 65% 69%

Cows/total dairy herd ratio 56% 55%

Improved pastures (% of total area) 40% 60%

Silo and hay supplement (kg/hectare) 471 1,239

Concentrate supplement (grams/liter) 150 138

Table 3: Productivity per farm size (2007)16

Farm size Productivity

Liters per cow Liters per hectare

< 50 hectares 14.7 1,943

between 50 and 199 hectares 16.7 2,436

between 200 and 499 hectares 18.2 2,312

between 500 and 999 hectares 19.1 2,594

between 1,000 and 2,499 hectares 19.2 2,334

< 2,500 hectares 18.2 1,932

National average 18.0 2,370

15

Based on data from the Agriculture Statistics Bureau (DIEA) of the Ministry of Livestock, Agriculture and Fishing (MGAP).

16 Based on data from the Agriculture Statistics Bureau (DIEA) of the Ministry of Livestock, Agriculture and

Fishing (MGAP).

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APPENDIX 2

Institutions

National Milk Institute (INALE), created by law 15,640, is the Ministry of Livestock,

Agriculture and Fishing (MGAP)’s arm to establish public policy.

National Agriculture and Livestock Research Institute (INIA) and School of Agronomy

(University of the Republic) research technologies for the primary production phase.

Animal Health Bureau of MGAP is in charge of sanitary policies.

Technology Laboratory of Uruguay (LATU), a private organization with government

participation, promotes technological development of industry and issues sanitary

certificates for export.

Dairy Industry Chamber of Uruguay (CILU) has practically all dairy product

manufacturers as members. This institution is a member of the Pan-American Dairy

Federation (FEPALE).

Business associations:

National Association of Milk Producers (CONAPROLE suppliers).

Milk Producers Business Association.

Milk Producers Chamber.

APPENDIX 3

Public policies

The dairy industry is regulated by laws that seek to attend to the special characteristics of

this agriculture sub-sector. The first, which dates back to 1935, is the law that created the

Conaprole cooperative. The latest is law 18,242 dated 27 December 2007 that implements

standards regarding production, development and regulation of the dairy industry. The law

created the National Milk Institute (INALE), a non-state entity subject to private law that

focuses on the dairy sector. The objective of INALE is to link public and private organizations

to create a new set of public policies for the sector to empower it and place it on a solid

footing for the future.

As of today, any company can participate in the supply of milk. Producers receive a single

price that is freely set for milk shipped to plants. The consumer price for liquid milk is set by

the Executive Branch. As a base price for the calculation, the national average price that

producers receive is used. This is estimated by the Agriculture Ministry based on information

supplied by dairy companies regarding prices paid for raw materials (milk) to producers.

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APPENDIX 4

Strategic Diagnostic

Primary Phase

Strengths:

Natural and human resources with very good aptitude for milk production.

Extremely competitive based on low production costs and good milk quality.

High integration.

Continual productivity growth.

Favorable attitude towards technological changes.

High level of mechanization and use of bulk goods.

Good public image.

Government support for smaller producers.

Opportunities:

Consolidate foreign trade possibilities for dairy farms to ensure access at the best possible prices.

Close the technological gap that exists for a large majority of dairy farmers to enable continued growth.

Take advantage of spillover caused by agriculture expansion: new areas, sub-product uses.

Implement irrigation systems to increase forage production and reduce risks of fluctuation.

Industrial Phase

Strengths:

Abundant raw materials of superior quality relative to the region at internationally low prices.

Geographic concentration of milk supply that offers reduced collection costs and facilitates the use of bulks.

Low seasonal variability that decreases capacity downtime.

Strong supply chain integration.

Export tradition.

Opportunities:

Development of differentiated products.

Access to regional raw materials when health barriers expire.

Creation and/or strengthening of non-traditional supply sources.

Consolidation of numerous geographically concentrated small companies.

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Uruguay in a nutshell (2009)17

Location South America, bordering Argentina and Brazil

Capital Montevideo

Surface area 176,215 km

2. 95% of the territory has soil suitable for agriculture and

livestock activities.

Population 3.3 million

Population growth 0.3% (annual)

GDP per capita USD 9,458

GDP per capita (PPP) USD 13,019

Currency Uruguayan peso ($)

Literacy rate 98%

Life expectancy at birth 76 years

Form of government Democratic republic with presidential system

Political divisions 19 departments

Time zone GMT - 03:00

Official language: Spanish

Location South America, bordering Argentina and Brazil

Main Economic Indicators 2004-2009

2005 2006 2007 2008 2009

Annual GDP growth rate 7.5% 4.3% 7.5% 8.5% 2.9%

GDP (PPP), USD millions 32,048 34,602 38,235 42,543 43,551

GDP, USD millions (current) 17,367 20,035 24,262 32,207 31,606

Exports (USD millions), goods and services 5,085 5,787 6,933 9,292 8,551

Imports (USD millions), goods and services 4,693 5,877 6,775 10,218 7,755

Trade Balance (USD millions) 393 -90 158 -926 796

Trade Balance (% of GDP) 2.3% -0.4% 0.7% -2.9% 2.5%

Current Account Surplus / Deficit (USD millions) 42 -392 -220 -1,503 259

Current Account Surplus / Deficit (% of GDP) 0.2% -2.0% -0.9% -4.7% -0,8%

Overall fiscal balance (% of GDP) -0.4% -0.5% 0.0% -1.4% -2.2%

Gross capital formation (% of GDP at current prices) 16.5% 18.6% 18.6% 20.2% 19.1%

Gross national savings (% of GDP) 17.6% 16.9% 19.0% 17.9% 17.1%

Foreign direct investment (USD millions) 847 1,493 1,329 1,840 1,139

Foreign direct investment (% of GDP) 4.8% 7.5% 5.4% 5.7% 3.6%

Exchange rate peso / USD 24.5 24.1 23.5 20.9 22.5

Reserve assets (USD millions) 3,071 3,097 4,121 6,329 8,373

Unemployment rate (% of EAP) 12.2% 11.4% 9.7% 7.9% 7.7%

Annual inflation rate 4.9% 6.4% 8.5% 9.2% 7.5%

Net foreign debt (USD millions) 8,938 9,157 9,662 8,254 11,123

17 Note: GDP data was taken from the IMF; data on foreign trade, FDI, exchange rate, international reserves

and foreign debt was provided by the Central Bank of Uruguay (BCU); population growth, literacy, unemployment and inflation data comes from the National Statistics Institute (INE).

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Investor Services

About Us

Uruguay XXI is the country’s investment and export promotion agency. Among other functions, Uruguay XXI provides no cost support to foreign investors, both those who are evaluating where to make investments as well as those currently operating in Uruguay.

Our Investor Services

Uruguay XXI is the first point of contact for foreign investors. Services we provide include:

Macroeconomic and industry information. Uruguay XXI regularly prepares reports on Uruguay and the various sectors of the economy.

Tailored information. We prepare customized information to answer specific questions, such as macroeconomic data, labor market information, tax and legal aspects, incentive programs for investments, location and costs.

Contact with key players. We provide contacts with government agencies, industry players, financial institutions, R&D centers and potential partners, among others.

Promotion. We promote investment opportunities at strategic events, business missions and round tables.

Facilitation of foreign investor visits, including organization of meetings with public authorities, suppliers, potential partners and business chambers.

Publication of investment opportunities. On our website, we periodically publish information on investment projects by public entities and private companies.