Uruguay

The Country

Uruguay is a small country, smaller than the state of Oregon, or about the size of Cambodia, located on the east coast of South America between the two South American giants, Brazil and Argentina. The population is 3.2 million people, highly concentrated in the cities, and most of those in and around Montevideo. Most of the country is rural with a low population, with almost 87% used for agriculture, including forestry.

The Spanish language country is a stable democracy, and has had a particularly stable policy concerning forestry. This is important for a resource that may take 2 decades to grow.

The Resource

More than 3.6 million hectares (over 9 million acres) have been identified as suitable for forestry, and have proven to be able to produce fast growth, short rotation, high quality plantation crops - with among the fastest growth in the world. In the interest of economic development in areas with marginal farming potential, the government of Uruguay has declared forestry to be of national interest, established "Forestry Priority Areas", and initiated a program of credits and fiscal incentives to promote plant ation projects, including:

1. Subsidies of up to 50% of the estimated planting costs for reforestation, to be paid 1 year following completion of successful plantings.
2. Exemption from land taxes for plantation areas.
3. No tax on capital gains from tree plantations.
4. Duty free importation of equipment and supplies utilized in plantations.
5. "Soft" loans for up to 12 year, with a grace period of up to 10 years; interest rates are equivalent to the LIBOR rate plus 1.5%.

Forestry development in Uruguay is still in its youth. Established plantations were estimated to cover about 210,000 ha. after 1994 (over 500,000 acres), with plantations expanding at more than 40,000 ha./year. Nearly 80% of early plantings have been eucalyptus, and most of this is managed for pulpwood production. Only in the last couple of years has management to improve wood quality and tree size been implemented to improve solid wood products capabilities.

Foreign investment is open and non-discriminatory. Much of the recent plantation investment has come from outside the country, including important projects from Finland, Holland, Spain, Chile and Canada. Shell Oil Company has a sizable project in the west.

With the planting of approved species, the ready availability of relatively low priced land, and the most critical, the availability of dependable and qualified local management, investment possibility is most attractive.

The best soils and growing conditions are located in the north, near the city of Rivera and near the border with Brazil. Rainfall averages more than 65 inches/year, and falls almost equally throughtout the year. With a location near the 30th parallel, it has a generally subtropical climate allowing tree growth nearly year round. Freezing weather is unusual, but a light frost may occur in some years in mid-winter. It is this area that I will discuss the options for.

The Species

Approved species for planting under the inventive and benefits plan are 3 species of eucalyptus (globulus, grandis and sligna); 3 species of pine (P. pinaster,a pine native to the Mediterranean area; P. elliottii, aka slash pine; and P. taeda, aka loblolly pine); and 3 hybrid popular/willow species. I will concentrate this report on E. globulus and the southern pines, slash and loblolly since they represent the most widely planted successfully in the area I visited.

Eucalyptus globulus is a high density, short fiber hardwood that is already well known and widely used worldwide for pulp and paper production. Its native range consists of parts of the southeast area of Australia, including Tasmania. It has found increasing uses for solid wood products both through sawing and peeling. In the past, eucalyptus has been difficult to saw because of internal tension which caused warping and splitting of the sawn boards. Sawing and drying techniques are being developed which overcome these problems.

Loblolly and slash pines, "southern pines", are native to the southeastern United States. Loblolly pine is the leading commercial timber species in the southern US. Slash pine is very similar to loblolly, but able to grow in wetter conditions than the Loblolly, making it the alternative best suited for poorly drained areas. These woods have found wide use, demand and acceptance for a wide array of wood products including pulp and paper, lumber and veneer production, and are already known and accepted worldwide.

Growth and Yield

In the Northern Region, E. Globulus is estimated to grow at 40 to 45 cubic meters/hectare/year over a rotation on suitable sites. Pulpwood stands are grown for 8 to 10 years. Stands grown for solid wood are on rotations of 12 to 14 years.

Yields:

* Conversion used: 4 board feet log scale/cubic foot (this is based on the conservative side of Scribner scale, long logs); 1 cubic meter equals 140 board feet, log scale; 1 hectare equals 2.47 acres. (MBF equals thousand board feet)

Pine

Pine is estimated to grow at 22 to 30 cubic meters/ha/yr in this region. Using an average of 25, this yields a total of 500 cubic meters/ha. over a projected 20 year rotation.

There is still limited information for both pine and eucalyptus for the exact rates of growth to predict, and there is only limited sharing of information between growers, and few areas harvested which have been managed under what is now recognized to be important management techniques. Estimates made are generally believed to be conservative based on early growth indications of young plantations.

Land Conditions and Costs

Most of the countryside of Uruguay consists of gently undulated grasslands. Approximately 82% of the total land area is under agricultural use, 78% of which is pasture of livestock. Only 3.3% contains native forest cover.

In the northern area, few farms offered for sale have slopes exceeding 20%, and most areas are well below 10%. The clean nature of the lands, and the gentle slopes provide for low tree establishment costs and low management and maintenance costs. Good, all weather roads lead to most of the farms. Internal roads tend to be dirt tracks.

Typically, with buffer necessary along streams, and required firebreaks along roads and between tree blocks of no more than 30 hectares, 80 to 90% of land area on a farm can be planted.

Land prices are low, but have risen steadily over the last few years. Currently, (May 1996) farms are readily available for US$450 to $500/hectare ($180 to $200/acre). A typical farm would be nearly 100% grasslands, all fenced, with at least one small house. Farms are available from 100 ha. in size and larger.

Plantation Management and Investment

Plantation management of these sites has advanced dramatically over the last 5 to 10 years to the point that outstanding success and exceptional growth can be expected. Many of the markets are still limited, but with the rapidly expanding resource, and the substantial investment in plantations from medium and large foreign investors, local markets are expected to expend with the resource. Prices in the analysis are based only on currently available markets at current prices, which tend to be low by international standards. This leaves a lot of room for upward movement in the results if expected changes occur.

For example, the primary market for eucalyptus at present is as pulpwood for export in round wood form from Montevideo. From the northern region, this requires transport of 250 to 300 miles to get wood to port. There are no pulping facilities or paper manufacturing facilities in Uruguay, and only very limited use of eucalyptus in sawing. Most sawmilling of pine occurs in small, relatively inefficient operations.

But even under these conditions, expected rates of return on investment are very attractive.

Costs/Income of a typical management regime per plantable hectare (in US$):

Eucalyptus:

Internal rate of return calculated by government agencies, forest consultants and myself range from 16.5% to 27% annualized return on investment.

Pine

Internal rate of return, from the same source as above range from 14% to 21% annualized return on investment.

Infrastructure and Other Costs Factors

There is a good basic road and transportation system in place. Roads from Montevideo to Rivera are straight, 2 lane, paved roads with wide shoulders in good condition. They are not, however, designed to be able to handle the heavy traffic that would occur with large increasing is loaded trucks hauling wood. There is also a ready availability of railroad systems, but it is reported that many sections are in poor repair. It would be hoped that improvement would continue to be made in these systems in the next decade to adequately handle increase use as more wood is harvested.

Basic wages are low, as is true throughout most of South America. Minimum wage is approximately $200/month, plus $50 to $60 in social and pension benefits. There is a readily available work force with a farming background for forestry projects.

One advantage of these plantations is that because of the gentle nature of the land and the drainage capabilities of the soil make the sites readily suitable for mechanical harvesting at low cost no matter what the future brings in the way of wage increases. This area should always be suitable for low cost production of forest crops.

Management

A keep part of the potential success of a forest plantation project from a distance is the availability of local, trustworthy management by qualified professionals. This is available in the Rivera area, managing lands owned by Chilean, Canadian, as well as Uruguayan interests.

Foreign Ownership

1. There are no restrictions or limitations to ownership of land or businesses by foreign interests. Uruguay grants equal treatment for national and foreign investors.
2. There are no restrictions to repatriation of capital or profits. Uruguay has been used for years by Argentina investors to move funds from Argentina to protect value during the time Argentina was suffering from crushing inflation.
3. Rules developed to promote forestry investment provide a nearly tax-free investment.

a. Plantations are exempt from land taxes

b. There is no income or earnings tax for companies or individuals for the sale of timber products

c. Equipment and supplies imported for use in forestry operations are exempt from tariffs and import duties

• Uruguay is a stable democracy with a high literacy and good educational system available to all citizens. Literacy is said to be 94%.
• Uruguay is strategically located to take advantage of regional economic growth in South America, as well as supplying wood into other international markets. It lies between the 2 South American giants, Brazil and Argentina, and close to the population centers of both of those countries. Brazil, with a population of over 160 million people, and Argentina, with 35 million people, are both developing rapidly. Argentina already has a wood deficit and imports large volumes of wood. Brazil is expected to become short of solid wood products within the next 5 to 10 years and will need to begin the importation of wood. In both these countries, a large portion of the population is very young, and have not yet begun household formation. More than 30% are less than 15 years old. This indicates a huge potential for wood demand and this population ages.

To discuss your interest in Uruguay Plantations contact:

Bill McKinnie
IFI - International Forestry Investments
3345 S W Long Ave, Corvallis, Oregon 97333 U.S.A.
Telephone: (541) 757-6540, Fax: (541) 754-0507
E-mail ifi1@comcast.net

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