833.311/1–2253
The First Secretary of the Embassy in Uruguay ( Stuart ) to the Department of State 1
No. 531
Ref:
- Embassy D–521 of Jan. 16, 1953,2 and previous.
Subject:
- Critical Problem Raised by Shutdown of American Packing Plants in Montevideo: Brief Summation of Historical, Economic and Political Factors Involved.
The present shutdown of American packing plants in Montevideo, Compañia Swift de Montevideo and Frigorifico Artigas, S.A. (Armour), and the danger that this shutdown may become permanent constitutes one of the most serious problems between the Government of the United States and the Government of Uruguay. This despatch is an attempt to review the situation as it now stands and put together in one place the enormously complicated factors involved.
I. Background.
The basic trouble of the private packers stems directly from the fact that they are competing against a government-sponsored slaughtering house in a country which is semi-socialistic in character and tradition. This means competition, not only for markets and competition in price, but competition also for cattle, the essential raw material of their business, because the number of animals available for slaughter by the private packers is becoming less each year. And each year, the Uruguayan-sponsored frigorifico is demanding—and getting—new concessions for their business at the expense of the American and British firms.
To understand how the present situation came about, a brief historical review may be helpful. Uruguay since the time of its settlement two centuries ago has been a land of cattle and sheep. In the last century, the animals were slaughtered for home consumption with only a small amount of jerked beef, hides and fats going into the export market. Then the American packing houses came here shortly before the first world war, and the shipment of frozen beef for export became an essential part of the Uruguayan economy. Later, British interests established the Anglo packing house at Fray Bentos, a small city on the River Uruguay about 125 miles from Montevideo. This packing plant still supplies all the meat for Fray Bentos besides shipping frozen beef and processing by-products. Until the foreign packers arrived, by-products were largely wasted.
In the early part of the 20th century, the dominant Batllista faction of the Colorado Party set about transforming Uruguay into a semi-socialistic state. During subsequent years the government, under Batllista control, assumed ownership of a number of public utilities, set up a government-owned insurance system and a government bank. There has been a constant urge to extend the area of public ownership.
In 1928 Frigorifico Nacional was established as a packinghouse in competition with the private firms. The economic set-up of this concern is complicated. Private citizens, many of them cattle raisers, are on the board of directors but essentially it is a public business and the government has assumed the payment of its operating deficits. At the [Page 1552] time of its establishment, Frigorifico Nacional was described as an “ente testigo”; in other words, it was conceived as a “witness” or yardstick to measure and perhaps control indirectly the profits of foreign-owned packers. The idea behind it was that the cattle growers of Uruguay were at the mercy of foreign interests who, because of their monopoly position, could fix cattle prices at whatever figure they wished.
In the intervening years, Frigorifico Nacional has been the fastest growing unit in the packing business, due largely to the advantages conferred upon it by the Uruguayan Government. In fact, the original conception of Nacional as an “ente testigo” is outmoded. It is now the giant of the packing business and it is constantly engaged in a grim campaign to enlarge its operations at the expense of the private packers.
The American packers are convinced that the aim of Nacional is the ultimate extinction of the private packers, thus giving Nacional a complete monopoly. The reason behind this is not merely the natural desire for growth, but in the view of the American plant owners, it is motivated also by the fact that the private plants are more efficiently operated and hence their existence is a constant source of irritation to the operators of Nacional.
In its campaign against the private packers, Nacional has powerful political backing. As pointed out earlier, the majority Batllista political group has traditionally favored government ownership and, accordingly, tends to be sympathetic toward Nacional. It appears to have the support of strong associations of rural cattle growers. It has the support of leaders of the Herrerista Party, the minority, nationalistic party which traditionally has represented the interests of the large agricultural landowners and which is anti-United States in its political orientation. One of the Herrerista members (Alvaro Vargas) of the National Executive Council was for years retained by Nacional as its lawyer. And finally, the regulation of the packing industry is to a large extent in the hands of the Ministry of Agriculture and the evidence seems to support the view that many department officials are favoring Nacional against the legitimate interests of the private packers.
II. Present System under which Packinghouses Operate.
The private packing houses in Uruguay have been operating under an exceedingly complex system of government control. The essential elements of that control, as the Embassy understands it, may be briefly summarized as follows.
- 1.
- The prices which must be paid the producers for most types of cattle are fixed by the government. The cattle producers represent a powerful political group within the country and the prices appear to be fixed primarily on the basis of internal political considerations. Competitive [Page 1553] bidding among buyers in the livestock market is thus eliminated and the influence of consumer prices (prices in the world export market in the case of meat for export and domestic consumer prices in the case of meat consumed internally) which would exist under a free system is eliminated.
- 2.
- The principal markets for exportation of meat are divided among the several private frigorificos and Frigorifico Nacional (the government sponsored packinghouse) on a quota basis. Quotas allocated to several packinghouses bear a rough relationship to the historical export business of the respective houses. Export is controlled not only in the sense that each house must keep within its export quota but also in that prices obtained must be approved by the government. In the case of exports to the UK, the principal single export market, prices are fixed by inter-governmental agreement; in the case of shipments to the so-called free market, prices obtained must meet the minimum figure established by the government.
- 3.
- Frigorifico Nacional has a practical monopoly on the slaughter of cattle for consumption in the Montevideo market. In order that Frigorifico Nacional may obtain sufficient cattle to meet the Montevideo demand during the slack season it is permitted by decree to pay a higher price for cattle during four months of the year than that permitted the private slaughter houses. The higher prices which Frigorifico Nacional is authorized to pay during four months of the year means that the private frigorificos will be practically unable to purchase cattle during approximately six months of the year since cattle producers will either hold cattle from the market prior to the period of premium price or hasten it to the market during the latter part of that period in order to take advantage of the premium offered. Furthermore, the American private slaughter houses point out that Frigorifico Nacional’s dual role as supplier of the domestic Montevideo market and as exporter of meat permits it to juggle its cost figures in such a way as to show lower costs for exports and higher costs for internal supply. This is of particular importance owing to Frigorifico Nacional’s role as “ente testigo” mentioned above.
- 4.
- Since the prices fixed by the government for the purchase of cattle bear little relation to the internal or external prices for meat, the government has to bring these two economic factors into alignment by means of subsidy payments. The price of meat in the Montevideo market is fixed by the municipality and Frigorifico Nacional is paid as a subsidy the difference between the cost of production, including purchase of cattle, processing costs, and a reasonable margin of profit and the amount realized through the sale of the product. Similarly in the case of meat for export the amount of the subsidy is theoretically the difference between the costs of production including reasonable [Page 1554] profit and the amount realized through the sale of the product. The managers of American slaughter houses are careful to point out that although the subsidy determined as payable on their export production is paid directly to them it constitutes in fact compensation for the higher price in cattle which they have been obliged to pay and is therefore not a subsidy to the packinghouse but rather to the producers of cattle.
- 5.
- As will be apparent from the foregoing the determination of costs becomes under the existing system a matter of the utmost importance to the packinghouses. While a reasonable profit is theoretically included in the cost determination, cost figures submitted by the private frigorificos are reviewed by the government (attention is called again to Frigorifico Nacional’s function as “ente testigo”) and final determination of allowable cost figures is determined by the government. Until cost figures have been officially determined by the government it is impossible for the private packinghouses to determine whether their past operations have been conducted in fact at a profit or at a loss.
- 6.
- Salaries and wages paid employees and day workers are in final analysis fixed by the government.
- 7.
- Foreign exchange earned by the packers through their export operations must be converted through the Bank of the Republic at fixed rates. These rates vary with the type of meat product from 1.519 pesos per dollar in the case of chilled and frozen beef to 2.35 pesos per dollar in the case of canned meats. Foreign exchange thus bought by the Bank of the Republic is subsequently re-sold to importers at fixed rates and profits or losses on the exchange operations appear as earnings or charges against the Exchange Differential Fund. The subsidies paid to the packing houses (including Frigorifico Nacional for domestic supply) are likewise paid from this fund. The Minister of Finance has estimated that on the export of chilled and frozen beef to the UK the fund will earn 6,660,000 pesos and through the export of chilled and frozen meat to the European market 4,880,000 pesos during 1953. These profits result from the purchase of foreign exchange earned at the rate of 1.519 per dollar and the re-sale of the same at an average profit of .37 pesos per dollar. Similarly the Minister of Finance has estimated the following charges against the Exchange Differential Fund arising from meat: Subsidy of exports of chilled and frozen meat to the UK, 2,280,000 pesos; loss on exchange in exportation of canned meats owing to purchase of foreign exchange at 2.35 per dollar, 5,040,000 pesos; subsidies to Frigorifico Nacional on meat for domestic consumption, 5,500,000 pesos. From the foregoing figures it is apparent that during the coming year the Minister of Finance expects the exports of meat to earn a total of 11,240,000 for the Exchange Differential Fund while subsidies on the exportations [Page 1555] charged to the fund amount to 7,320,000 pesos leaving thus a net profit to the fund from exportation of meat of 3,920,000 pesos. This amount is, however, more than used up in the domestic subsidy of 5,500,000 referred to above. In other words on the basis of the Minister of Finance’s estimates for 1953, earnings on the exportation of meat will not only liquidate the corresponding subsidies but will provide a substantial part on the subsidy for domestic consumption. While there are no doubt strong reasons for maintaining the present low price on meat to the consumer in the Montevideo market arising from the government’s desire to control inflation and from political considerations, it is worth noting that this low price not only constitutes a drain on the Exchange Differential Fund but also encourages increasing consumption for meat internally thereby further accentuating the government’s balance of payments problem.
III. Difficulties of American Packing Houses.
The American meat packing houses in Montevideo have not purchased or slaughtered livestock since September 17, 1952. The American plant managers for Swift and Armour maintain that this drastic action was made necessary by the unworkable restrictions imposed upon their operations by the Uruguayan Government and that the plants cannot reopen until the government undertakes a sweeping remedial program to remove the obstacles about which they complain.
According to the managers of Swift and Armour, the principal factors which have compelled them to cease the purchase and slaughter of livestock are as follows:
- 1.
- Lack of operating capital with which to finance the purchase of livestock and pay operating expenses. The lack of operating capital is attributed to three causes: (a) failure on the part of the government to pay the companies subsidy funds which would compensate the companies for the prices which they are required by law to pay producers for livestock purchased. On the basis of their own cost figures for the past 2 years the companies estimate that the government owes them approximately 10 million pesos. (b) Inability to export, owing to government restrictions, large stocks of meat now held in cold storage. (c) Unwillingness or inability of the parent companies to invest more capital in the present uncertain circumstances. Finally the companies have about exhausted the possibility of obtaining further bank credits locally.
- 2.
- Delay on the part of appropriate governmental authorites in fixing and approving costs of production makes it impossible for the companies to determine whether their business operations over the past two years have been conducted at a profit or at a loss. Agreement between the government authorities and the frigorificos regarding cost for 1951 and 1952 has not been reached.
- 3.
- Frigorifico Nacional’s authority to pay a preferential price for cattle during part of the year makes it difficult, if not impossible, for the private companies to enter the market during approximately 6 months of the year.
In a letter to the President of the Agricultural and Livestock Committee of the NEC dated December 4 the companies stated that it would be impossible for them to purchase or slaughter any type of livestock unless an overall solution as outlined below is provided for the problems confronting the industry.
- a.
- An exchange rate or other facilities which would make it possible to cover costs and give a reasonable profit margin.
- b.
- Receipt by the companies of full value of the merchandise as stated in the preceding paragraph at the time of shipment.
- c.
- Assurances that the companies will be allowed to export soon after killing.
- d.
- Payment by the government of all amounts owed the companies and arrangements enabling the companies to export present stocks promptly, and
- e.
- Elimination of the preferential position of Frigorifico Nacional in the purchase of livestock.
In their present stand the American firms have been joined by the operator of Frigorifico Anglo, British owned packinghouse, so that in effect this constitutes a united stand of the private foreign-owned packinghouses against the economic policies pursued by the Uruguayan Government. The managers of the American packinghouses have informed the Embassy that this united stand, which has been approved by the parent organizations of the three companies, is unique in Uruguay where the companies normally are vigorous competitors and that it is an indication of the desperate conditions in which the companies find themselves. According to the same sources the companies are pledged at present to refuse any individual offers of settlement and to stand together in demanding relief along each of the lines indicated above.
The American plant managers think that the course pursued by the Uruguayan Government is tantamount to indirect expropriation of their holdings, and unless relief is given they are reconciled to the indefinite and perhaps permanent closing of their Montevideo plants. They are also aware of the possibility that their plants may be seized by the government.
IV. Attitude of the Uruguayan Government.
The Uruguayans argue that the foreign packers have made large profits in the past and that present profits including interest on money owed them by the government are guaranteed—hence the packers have little to complain of. (To this the packers reply that these are “paper” profits which may be wiped out entirely when cost figures are established and that in any case their problem of obtaining operating capital is not solved by piling up “paper” profits).
The provision of full relief as requested by the packers confronts the government with major difficulties. The packers themselves have expressed [Page 1557] the belief that the government does not have available and cannot raise at the moment the full amounts of money owed them. Furthermore, as long as Frigorifico Nacional is by law the sole supplier of the Montevideo market, abolition of its preferential position in the purchase of cattle during short season would risk meat shortages in Montevideo with resulting public dissatisfaction and unrest. The three foreign packers are being paid 4.3 million pesos of the total amount claimed by them (pesos 15 million) and draft legislation has been approved by the NEC for submission to the Uruguayan Congress which would permit the use of general government revenues rather than exchange earning fund (which is now exhausted) in paying the remainder. (Subsidy payments to Frigorifico Nacional have been made in this way.) There is the additional factor that the packers insist (to this date at least) that payment of arrears would remove only one of their difficulties and that the government must go much further in affording relief before operations are resumed.
The attitude of the Uruguayan Government toward the foreign-owned packinghouses is disturbing because after making due allowance for the factors listed in the preceding paragraph, including some recent improvement in the outlook, the Embassy has the clear impression that there exists within the government little sympathy for the foreign packinghouses and that on the contrary there is an underlying hostility toward them and a clear bias for Frigorifico Nacional. This is evidenced not only in the slowness of the government in advancing toward a solution of the problems confronting the private packers but also in the difficulties which the private packers appear to have had in obtaining serious consideration of their problems by the government, in the general trend of comments made publicly by high officials of the government including members of the NEC. Some of the comments of these officials have been transmitted to the Department in despatch No. 478 of December 24, 1952.3 The underlying tone of such comments has been to place emphasis on the harm to the national economy resulting from the suspension of operations by the private foreign owned packinghouses and to couple this with thinly veiled threats that unless the companies resume operations their export quotas may be reduced and their principal competitor, Frigorifico Nacional, may be given expanded facilities and put on a 24-hour a day basis in order that it might handle the entire slaughter. Notably absent in such comment and statements has been recognition of the claim of Swift, Armour and Anglo that closing of their plants is involuntary and that they simply cannot operate the plants in the circumstances in which they find themselves.
[Page 1558]V. Conclusion.
The American packers have generally been inclined to cry wolf whenever their traditional position in Uruguay appears threatened in any way. It has been, of course, impossible for the Embassy to determine conclusively the accuracy of some of their statements and charges and it is suspected that some times in the past they have been prone to exaggerate the magnitude of their difficulties. However, in the present case all of the evidence available to the Embassy indicates that their plight is, as stated by them, indeed desperate. The Embassy has no evidence to show that the prolonged inactivity of the government in the face of the situation of the companies arises from any present or conscious intent to force the companies into a position where expropriation in one form or another will follow. The Embassy believes that such is not the present intent of the government and that the delays in proposing any solution of their difficulties arise rather from the difficulties of the government in providing remedy and the general inertia of Uruguayan Government proceedings. However, the Embassy does not rule out the possibility that certain individuals within the government and in Frigorifico Nacional may view with complacency continuation of the present situation as paving the way to liquidation of the foreign packers and absorption of their share of the industries by Frigorifico Nacional. In short, while we are inclined to expect that the government will in due course propose some sort of compromise (which the companies may or may not accept), we see in the present situation indications that the private foreign packers will sooner or later lose their unequal struggle with Frigorifico Nacional and be forced to liquidate their enterprises in this country.