Despite the increase in feed, energy and fuel costs, it is still a remunerative price, both for the dairy farmer and for the industrial producer, it is a price that generates margin.

I think that what we are seeing worldwide, like everything good and bad, almost everything comes from China. What we are seeing so far in 2022 is that China has imported 100,000 tons less of skim milk powder and 100,000 tons less of whole milk powder.

This means that Fonterra, which is the big player in New Zealand, which is highly oriented to China, started to be more aggressive in a lot of other markets and this has generated, in a way, a pressure. At the country level they do not have more milk, but at the exportable supply level they do, because China stopped buying.

Consumption fell in China, but we do not know why, whether the stock is being consumed or whether local production has increased. I think it is a combination of factors and there is more than one explanation as to why China stopped buying these 200,000 thousand tons of milk powder. I can tell you that there are other products for which demand and imports have also fallen, but well, on the Chinese side you can explain what is happening.

Fonterra is very aggressive in South Asia, in North Africa, in some Latin American countries and in the rest of Africa, in a way, we are seeing it.

Uruguay has very concentrated sales in 3 markets, we know that Algeria, Brazil and China are the main ones, it was very encouraging what was happening because China, if it did not exist 3 years ago, had an important portion of Uruguayan exports and this has slowed down a little. It is uncertain to predict what is going to happen with the Chinese demand.

This forces us to be very active in the rest of the markets. You have Fonterra and New Zealand being very aggressive. You have Argentina with an important production peak and they are also quite aggressive, especially in Brazil and Algeria.

In addition, we are seeing that fortunately production in Europe and the United States, two other blocks, has not increased and is not generating export pressure right now.

DM: That is precisely one of the issues, there is no significant increase in production at global level, in fact, the numbers will probably close below last year or very similar. We have had complications in many places to produce milk and the drought in Europe will surely cause a very important pain to producers and the United States is not having a very good time either. And feed costs, which had risen a lot, although they went down a little, it seems to me that they did not go down enough for us to be able to say, well, the price went down, but production costs also went down. You have important production costs, because you have a very large dairy farm. How do you see the relationship with costs?

AS: We see a certain correlation between what is the price of feed, the price of milk powder and the price of energy, in general, oil which can be the indicator. There is a correlation, one always looks at what is happening with corn, what is happening with soybeans and what is happening with oil, and the price of milk powder correlates or follows the trend.

We have the bad luck that China, the main importing market, which is passing to Algeria, Brazil and Mexico, is having these strange behaviors, which we do not understand well, if they are eating the stock, if consumption has decreased, if local production has increased and this has somehow generated this terrible disruption.

As a company we have set up a feeding system, we want it to be as efficient as possible, 100% of the forage, which is equivalent to 50% of the diet, is produced by us, and this gives us autonomy and certain security when it comes to knowing what the costs are going to be. And 20% of the other half we produce internally as agricultural producers and the rest we have to buy.

That is the loose part we have in the cost equation, the other costs are known, known and foreseeable. Somehow, as a company, we have to prepare ourselves for a scenario, always trying to have a greater self-sufficiency in the feed item. We have always lowered it a lot, through the quality of silage and today 60% of the feed production costs in the system is ours.

On the other hand, we are closing this week with an average of 42 liters per cow, which is a very good number for this system. Fortunately, we have the milk powder plant working at full capacity, we closed the last fiscal year at 21 thousand tons, but this year with some improvements we are making we will continue to increase the productivity of the plant and some hundreds, if not more than a thousand tons will be produced.

An important factor is the fluid milk market and Uruguay, which is a market that has many problems when it comes to supplying the industry, with a large industrial idle capacity, many factories lack milk.

Two factories are closed, others are operating at half or less of their installed capacity and that gives us an excellent fluid milk market. We are seeing this as a trend that will remain for a few more years, because we are not seeing beyond that, that there is an incorporation of practices and certain technologies, the boom of hot beds and agriculture is incorporated more into the dairy business and is complemented with livestock.

We have many technical meetings with producers, especially with CREA groups in Uruguay, where we have open-door technical meetings and we share our experiences. We see that there is a tendency to intensify and increase productivity, but we start from very low values. In many Uruguayan dairy farms this is basically due to a cultural issue. There are the third or fourth generation dairy farmers who do not want to go out and do not want to sell the last cows.

At present, Uruguay has 500 thousand milking cows, 150 thousand of which should have been taken out of the market a long time ago and 350 thousand cows are left, and today, if you add 3 liters more to those cows, you have the million liters that the Uruguayan industry is lacking to work at full capacity.

That which seems so easy to achieve, is difficult, I say it as a rule of three and you say it is a more than achievable goal and true in two years, however, Uruguay is stagnant and cannot make the leap.

Sometimes, if you compare the Uruguayan dairy with the Argentinean, we have a lot of strengths in Uruguay, macroeconomic stability, low inflation, predictability, low rate credit and the rationality of all economic and political actors, on the other hand, also the mentality is much more conservative, the eagerness to invest and grow much more slowly.

We were together 2 months ago in Villa María and you saw the Argentine producer with a bad business, totally distorted relative prices, however, we see a lot of people who want to innovate, produce, invest, grow and do different things, there was a great desire to introduce technology and everything else they have been doing.

In Uruguay we have many windows, the price is almost 10 cents more per milk to the producer, however, we have more expensive costs. We pay 300 dollars for corn stalk, soybean is 600 dollars, fuel is more than twice as much and gas is several times more.

We compensate with certain advantages that the country has and with cheap credit, which allows you to make a lot of investments. The Uruguayan countryside is becoming more technical, especially in agriculture, livestock and certain intensive crops, but the level of investment in the Uruguayan countryside today is very high.

It is risky to farm in Uruguay because you have very shallow profiles, they do not store moisture and the summer is very hard, especially for coarse crops. However, Uruguay understood that, in order to do agriculture, but especially to integrate agriculture, livestock and dairy farming, you need irrigation. For this reason, at present, Uruguay incorporates more than 100 pivots per year.

The level of investment in the Uruguayan countryside, you go along the road and the whole countryside is worked, and if there are no crops, there are farms or there is a crop, a green cover bridge. There is a whole field management that is incorporated to forestry, sheep, cows, dairy, agriculture or whatever, the land is being worked.

What happens in Argentina, you can go for miles and there are fields that are not being worked. We are fortunate that Uruguay, thanks to credit, foreign investors and a change of mentality in the Uruguayan producer, is fully investing.

DM: You just told me that they achieved an average of 42 liters per cow, I would like you to expand on that point.

AS: Yes, we are at the beginning of the season. Although ours is a stable system, our difference between the peak and the lowest record can be between 5% and 6%. Our production system removes seasonality as it can be in a pastoral system. We have a very stable system, but in spite of that we have our favorable peak that makes the comfort and stress that the animals may have. We have it until the end of the year and we expect very good production levels.

This week we made a production record, we are approaching 540 thousand liters per day, the average is giving us over 42 liters per animal. We believe that productivity is compensating the increase in costs.

The higher feed and energy costs and the lower price of milk, we try to compensate with productivity, and this has been the path that the company has been following since it was founded.

This is a very unfavorable scenario because last year we had record costs for our inputs; however, the company has had a very good economic performance and has always been supported by productivity.

DM: When you talk about productivity, does that have to do with scale? More cows?

AS: No, obviously, if you do not have productivity, but you have a lot of scale, you will go bankrupt. We can be big, but if the cow, instead of 42 liters, gives 15 liters. And it eats the same as what the 42-liter cow eats, the equation is very bad. Somehow, we want to try to adjust and look at costs and have productivity.

Productivity, that is, liters per cow, number of cows in milking, work a lot on silos and improve the quality of all silages. Making a good silo or a bad silo is worth the same, so I prefer to do it well.

The whole meat business, which for us today is more than 10% of our income. We sell the holando steer, the heifer that did not get pregnant, the cow from the shelter and we have a whole exploitation of the low and the surplus of food with British breed beef cattle. Today the cattle business pushes, helps and is profitable.

The agricultural business, everything remains as feed for the cows and we try to manage it. We are in a CREA group, our colleagues are from a more agricultural area, which are more from the coast of Uruguay, from the departments of Colonia, Soriano, Rio Negro and Paysandú, which have much better conditions for agriculture, however, when it comes to yields and productivity, we in El Durazno, with soil and conditions not as good as the rest, have better indicators, that implies learning and making much use of technology. For example, we have 2,500 hectares under irrigation, which gives us a lot of security at the time of generation. Although there is a rotation scheme, we always look for fodder production with irrigation.

The milk powder plant has been growing from the efficiency that sometimes are micro investment or improvement projects that were 16, 17, 18, 19, 20 and 21. This year we expect to pass 22 and this type of productivity gain is what allows us to address the years of cost increases. We know that there are shekels, it is not that they are here to stay and surely in the future some things can be modified or improve our costs.

DM: How are you working on the human factor? do you have the sufficient number of people you need? is it easy to find people to work in Uruguay today who are willing to learn and who can get involved in a project that is permanently looking for profitability?

AS: Our company is quite young, the company started in 2007 and with the integration of the milk powder plant in 2015. Despite that we have a lot of loyalty from employees, the average duration of the 500 employees, we are with a seniority of 4 years and the average age of the employees of the company is 34 years.

We are a young company in every sense and there is a situation in the Durazno department, there is a third pulp mill under construction. That generates a lot of construction personnel and a railroad is being built from Montevideo to Paso de los Toros and a highway is being built. There is a lot of movement, especially in the construction and service areas, even so, there are people who like rural work, they like field work and we work with technical schools, with the local government and we look for people who often do not come from a rural environment, but they like the work. Fortunately, the situation today is more complicated than 3 years ago or before the pandemic, but that is an aspect from the company’s point of view that we have solved, but yes, it is not as easy as before.

DM: Speaking a little bit about this stability that Uruguay has, from the governmental point of view, a path is beginning that brought discussions within MERCOSUR, but that probably the actors of the countryside are looking at it with good eyes, which is the path of the free trade agreement with China. How do you see it? It is probably one of the sectors that can benefit the most from this treaty.

AS: We see it as something positive and very necessary. Obviously too late, you can see that in 20 years almost the whole world has China as its main customer and many as its main supplier, because they direct our imports such as electronics, textiles, raw materials, chemicals and glyphosate, everything comes from China.

Unfortunately we are arriving late because the trade that exploded with China of imports and exports in the last 20 years, paid huge tariffs and obviously our milk powder, to give you the example today pays 10% tariff. When it happens that New Zealand has a large quota of 0% tariff, which now from 2024 would be 0% unlimited tariff. That would be a huge disadvantage, so we see a great need for this free trade agreement.

Today there is a complementary economy, and if you want I can also talk about it as a block. If there is a block that complements China it is MERCOSUR, it fits perfectly because they produce many things that we do not produce and vice versa, they need food security for almost one and a half billion inhabitants, and the only place that can provide food security to China is South America and specifically MERCOSUR.

They complement each other very well, what we are paying today in tariffs on meat, milk, fruit, wool and leather are hundreds of millions of dollars, which in a free trade agreement would improve the profitability of the Uruguayan chain, producer and exporter. This is also applicable to MERCOSUR. It is a pity that it is not possible to negotiate as a block, but it is certain that the path that Uruguay has taken is the right one.

Today we have businesses that are exporters, we have to make a free trade agreement, because we are leaving a lot of money in tariffs along the way.

DM: I agree 100%, here in Argentina we constantly hear people talking about the need to increase exports, but we have not worked on any type of agreement in the last few years, except for the MERCOSUR agreement with the European Union, but it seems to be much more distant, and it is even more feasible that there is an agreement with China that has not yet been initiated.

AS: I think it is more feasible, for political reasons of necessity and political will, to implement the agreement with China than with the European Union.

MERCOSUR needs free trade with all the CIAN countries, with all Asia, with African countries, with the European Union and with Latin America.

We want to sell powdered milk in Colombia and there is a quota, for that quota you pay tariffs. You want to sell powdered milk in a lot of countries that are close to us, that speak the same language, and we are paying tariffs. Not to mention those countries that are more complicated.

Today, basically MERCOSUR trade, excluding intra-trade and then the United States, Canada and if you want to sell to a Middle Eastern country, you pay tariffs all over the world.

If we want to sell, you need the strength of free trade agreements. Think that the main supplier of dairy products to Colombia is Chile.

Chile is not a producer, it is a large importer, but it reprocesses and sends value-added products, but since it has a free trade agreement and enters with 0% tariff and no quota, it is competitive. So sometimes with the trade policies of the countries, it can generate competitiveness.

We have the soil, the climate, the water and a lot of natural advantages, but then you have to add the political advantage and in that MERCOSUR, Argentina and Uruguay have been doing their best for years. Uruguay has woken up and with China it is taking the right path. I think it is irreversible, even if the other MERCOSUR partners do not like it, Uruguay is going to sign this agreement and it is going to move forward. China will support it because it will later generate new agreements with other countries.

With the collaboration of María de los Ángeles Fuentes.