UNN-30

FILE' COPY

This report is not to be pubNished nor may itbe quoted as representing the Bank's views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

CATTLE MARKETING CONTROLS AND P2RICE POLICIES

IN

PARAGUAY

February 23, 1960

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CURRENCY EQUIVALENTS

US$ 1.000 - 120 Guaranies

1. Guarani - US$ 0.00833

1,000,000 Guaranies rT-$ 8.333

CATTIE ARKETItNG CONTROLS AND PRICE POY[CUSIN PARAGUAY

Basis of Report

A Bank mission visited Pa:raguay towa-rds the end of 1958. Themission reported that a general expansion in agricultural production andexports could not be achieved without a modificatiorL of existing pricepolitices and other marketing controls. :In particular, the missionpointed out that to achieve and maintain a higher level of beef exportscurrent controls over the cattle indust.y would have to be revised.

2. As a result of this report, the Bank in March 1959 offered toassist the Paraguayan Government by helping to obtainl the services of aquaalified expert to reconmend the precise changes needed in respect tothe cattle indiustry.

3. Following acceptance by the Paraguay-an Government of the offer,the Bank, in collaboration w'ith FAQ, arranged for the appointment as con-sultant of Mr. Earl F. Williams. the former general superintendent forArmour and Compamy in Latin America.

4. A Bank staff member, Mr, R. W. Wilson, joined Mr. Williams dur-ing his investigations in Paraguay. The followiwng repor't constitubestheir combined findings.

Introduction

5. Official figures list the cattle population in 1958 at 3,703,000OIt is commonly accepted in Paraguay, however, that the actual figure isbetween 5 and 6 million and that the number has remained relatively staticover the last few years.

6. The total number of cattle slaughtered for meat in 1958 isstated at 611,000, of which 178_,000 were for processing for export,mainlyin the form of canned beef., and 433,000 for domestic consumption. Of thelatter, 93,000 were required to meet Asuncion city meat consumnption needsand 4o-45,ooo the requirements of the armed forces located in and aroundthe city. The balance provided the requirements of the towns th.roughoutthe country,, the armed forces administering the Chaco and the consumptionon ranches.

7. Meat is the staple diet of the 1.7 million Paraguayan popula-tion. Domestic consumption is officially recorded at 61 kilogramas percapita annually in Asuncion and 44 kilograms per capita over the wholepopulation.

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8. tong-term Government policy with regard to the cattle industryhas had three- primary objectives:

a) Maintain retail prices for meat at alow level;

b) Maintain ample supplies of meat fordomestic consumption, and

c) Increase the volume of exports.

9. The mission first investigated the current methods for the inple-mentation of Government policy, and the extent to which the policy objec-tives had been attained. It then considered possible improvements in theinterest of producers, domestic consumers, exporters and the economy as awhole.

lHarktingControls

10.l Prior to 1944, the fresh meat requirements of Asuncion, thelargest individual center of consumption, werc- being supplied by the :L-,er-

national Products Company which operated a meat packing plant some milesout from the city. The Government did not control cattle prices or regulatedeliveries to the market, but decreed wholesale prices for the carcass meatsupplied by this company to retailers. The company, however9 was not ableto operate profitably at the prices that were fixed. As a result, aftex

incurring losses on these operations for several years, the company closeddown in 1944. This cessation of slaughtering by I.P.C. left the city with-out a source of supply of carcass meat.

11. As a consequence, the Government established the CorporaclonParaguay de Carnes (Copacar) by Iaw Decree Noo 2810 of March 6, 19144, toorganize supplies of meat required for local consumption.

12. Copacar is a nominally co-operative organization. The members ofthe Board comprise three representatives of the Rural Society selected bythe Minister of Agriculture from a panel of names submitted to him by theSociety, and two representatives of the Ministry of Agriculture who must becattle oitmers or otherwise experienced in the industxy. The chaixman isappointed by t,he Executive Authority on the recommendation of the Board.The Trustees are appointed by the Executive Authority.

13. Though the Rural Society nominally has majority control of theBoard and cattle owners have subscribed a substantial proportion of the Cor-porationt s capital, in practice, by reason of the Minister's powers ofselection of its members, Copacar is the Government instiment through whichthe Government's cattle industry policy is Implemented.

14. Copacar has attempted to give effect to its charter by the applica-tion of marketing controls. Thes; include the regulation of cattle deliv-eries, the fixing of cattle and meat prices, and the arrangement for theslaughtering for the Asuncion supply to be undertaken by Liebigs at its meatpacking plant outside the city. Copacar is pressing strongly at the presenttime for the establishment of a c-.1ty slaughterhouse and cold storage uneurits own cortrc]l tc han3le meat Sf.pp2oes fRr Asuncion. For practicJ,-al pumrpcseS,-

Copacar operates a Go,vee n :noncycoly.v

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kppl-Lcat4on' of lM.rlkek-e1,hg Cortrols by Copacar

15. Each 'testancierolt in Paraguay is required to submit annually aretwun detailing the cattle owned by him. These figures, with some arbi-tra:ry adjustments, are used by Copacar to fix the quota of cattle deliv-eries from each "testanciail during the forthcoming season. The quota is

approximately 12% of this adjusted figure and up to one quarter of thequota may be sold for industrialization (caming and processing), and the

balance is deliverable to Copacar.

16. The prices paid by Copauar for deliveries to it are firced byDecree and vary according to the average weight in each troop and the classof animal. There is no differential for quality. Prices paid for the sameweight and class of animal vary at the three receiving centers of Guasy-y-Cora, Ojeda-Cue, and Paraguari. During the 1959 season, prices for steers

ranged from $ 7.25 to X 8.140 per ki:lo liveweight and for cows from X 6045to Vi 8.00. During the off-season since last August, prices have been in-creased to about 10 for steers and X 9.40 for cows.. This off-seasonprice compares with the equivalent at current rates of exchange of $ 18per kilo being paid ranchers in Brazil for similar class cattle. It isclaimed by ranchers in Paraguay that they need to average $, 10 to X 12 per

kilo liveweight, excluding levies, for profitable operation.

17. Copacar is responsible for the provision of the meat requirementsof Asumcion. The cattle needed for this purpose are allocated by Copacarfrom the delivreries made to it and are slaughtered on Copacar's account lby

ILiebigs at a charge of $ 331 per head. This charge includes killing,treatment of by-products and delivery of the dressed carcass and by-productsat door of frigorifico into trucks owned anid operated by Copacar. A con-servati've estimate of the value of the hides and treated by-products deliverc,9

to Copacar is $ 830 per head. The return for by-products and hides over th<a

cost of killing that is obtained by Copacar under this arrangement approx;i-mates, therefore, $ 1,45' per kilo liveweight (average per head 342 kilos),

or X 2,90 per kilo dressed carcass weight (average per head 170 kilos) on

all beasts slaughtered.

18. The sale of meat in Asuncion is undertaken by retailers (allegedlynumbering about 600) who are supplied by Copacar in quarter-carcass form at

a wholesale price of A 12.140 per kilo. This figure approximately covers the

net average cost to Copacar of the meat fromn cattle purchased at main season

prices, after taking into account the charge for slaughtering and thbae returns

received for by-products and hides. Retail prices are fixed by decree and

range from $ 12 to X 145 according to cut. Retail price control is not

policed, however, and prices actually charged at the present time are at

least from 20 to 33% above the legal maximum. The conditions under which

meat is sold in the markets are uneconomic and usanitary.

19. Army requirements are supplied by Copacar on the hoof and approxa-&mate 120-140 beasts per day. The Army is permitted to select its chotce of

the animals from the deliveries to Copacar and is debited with the actual costs

Killing is undertaken by the A=my. at ito own slaughterhouse and by-produrtsAre retained. N*eat is allocated t4o personrel apparently on a scale accordihgto rank and in amounts that appear to exceed noxmal. fnamily requiremcnts'.

If, as suggested to the Mission, some of this meat finds its way into the

Asun.cion retail market, it would account in part at least for the officially

recorded decrease in annual slaughterings for Asuncion cityr consumption

from 123,000 head in 1951 to 91,000 head in 1958. The amount outstanding

in the books of Copacar for cattle delivered to the Arny and not paid for

is almost 0 100 million. It is reported that the Goverament intends to

place a zeparate item on its next budget to cover future purchases.

20. Pxrivately operated packing houses are licensed to obtain their

approved quota of cattle by direct purchase from producers by private treaty.

For the 1959 season, the quota- granted Liebigs and International Productswas 60,000 head each, while substantially lesser numbers were approved for

the Industria Paraguaya de Carnes, S.A,, Kemper, S.A. and a few other smal;ler

operators. A tax of fA 1.10 per kilo liveweight on all beasts purchased was

payable by packing houses to Copacar during the 1959 season. Later thischarge was waived, and in lieu thereof packing houses were required to delive.r

to Copacar, at a price of X 8h40 per kilo liveweight, one ou.t of every three

purchased by them. Prices paid producers by packing houses have exceededthe prices paid for deliveries to Copacar and at the present time approximate

10.50 per kilo liveweight delivered 'at slaughter centers.

21. Levies imrposed by Copacar on producers amount to , 4;9 per head on

all cattle sold. In addition, ranchers are required to pay a capital con-

tribution for shares in the Corporation of X 40 per head of cattle sold.

Dividends on the slhare capital thus subscribed are being paid in the form

of share issues.

Tmpact of Narketing Controls

22. The exanination of the operiations of Copacar discloses quite clearly-

that they have Sailed to attain, or even further, the obAectives of Govern-

ment policy. It discloses also that t-hese operations have constituted a

barrier to the proper development of the cattle indust.r to the disadvantage

of the economy as a whole.

23. The consumer has not benefited from price fixing. Though cattle

and wholesale meat prices have remained pegged during the supply shortageof the off-season, retail prices have been permitted to rise to the limit

that demand would allow. Thus, the retailer reaps the benefit that has

derived from artificially low levels of cattle and wholesale meat prices,while the consumer pays what a virtually free retail market dictates, During

the mission's stay actual retail prices for beef were 20% to 33% above the

legal ma)imum.

24. The supply of meat; to the domestic mlarket has been assured by

irrational means. Ranchers are required to make deliveries of cattle to

Copacar on demand up to the limit of their quota, irrespective of the con-

ditions of the cattle that they have available. As a consequence, a large

number of cattle in excessively poor condition are included in the slaughter-

ings. This has represented a substantial loss in the weight of meat that

would be produced if the cattle were held until they were fattened, and loss

in monetary return. A special effect has been to diszourage the development

by producers of supplies to meet off-season demand, Such developmenit is

necessary if sta70le year-round slupplies for domestic consumption are to be

assured.

23g. Exports have not been increased on a permanent basis, nor hasthe basis for expans.i.,on beenl established. Slatighterings of 178 000 headfor expo:; in 1958 showed an increase of 166,000 over 1953. Local con-suption during 1958., however, declined by '102,000 head compared with1953, and the additioml eports were accordingly obtained with an in-erease in overall slaughterings of only 6h,o00 head. These additionalcattle do not appear to have been drawn from the permanent breeding herds,They probably comprised aged and cull sto6k, accumulated by reason ofsomewhat less than average slaughterings during the intervening years,whose atilization in 1958 was motivated by the effort then being made toinerease the volume of exportable products, That this additional avai.l-ability is not recurrent, howeAver, appears to be confirmed by the diffi-culties being experienced in 1959 to maintain deliveries near the 1958level.

26. The price paid ranchers for cattle is determined on a basistlhat would permit low price meat to the local consumer. The producer hasreceived less than export parity and to that extent equivalently has bornethe cost of subsidization of domestic wholesale meat prices. In the cir-cumstances, the margin of profit over operating expenses for cattle rais-ing is very low, and the missionTs investigations showed that the presentreturn on capital invested even in the case of many of the better ra-nchesapproximates on4ly 3%. This level of return does not permit profitableinvestment in expansion and development. Furthermore, the absence ofdifferential prices for quality has discouraged expenditure on betternanagement and facilities required to effect improvement.

27. The profitability of cattle raising is reduced by the leviesmade to support the massive organization of Copacar, consisting of about4.00 employees. In addition to the direct levies on cattle handled byCopacgr, the levy on cattle purchased by private frigorificos is alsoindirectly borne by the producer through the reduction in price offeredby frigorificos because of their liability for -this chargeo These leviesare a substantial burden on an industry already arbitrarily restrictedin returns.

28. The default in payrments for cattle received by the Army wouldnot have been possible except under Goverrunent control of marketing. Ineffect, the Army is obtaining its supplies free of charge at the expenseof Copacar capital largely subscribed by producers, and to the furtherdetriment of availability of funds for investment by producers in develop-ment.

29. Under the foregoing circumstances, the mission considered thateither a rationalization of the operations of Copacar or the adoption ofdifferent means altogether would be necessary if the Governxment's policywas to be implemented. Because of the administrative problems and highcosts of Government controlled marketing, whether through Copacar or anyother institution, the mission decided to examaine alternativTe means forimplementing the GovernmentTs policy.

Suggested Method for Implementing Policy

30. The key price for the cattle industry in Paraguay is the pricepaid to 1ivestoc'k producers by exporters of carned corned beef The pricethat c&i be paid by *. H-s .Atated .by 'XiThi prir,s for cained.beefoThis should result in an average c-ttle price for the producer of 10 loe, 12 por kilo liveweight vlwich is required to nake caittle rai:siilg prof±t4leand permit economic investment in development0 The quality required forcanning is lower than that desirable for fresh meat consumption. It couldbe expected, therefore, that prices for locally consumed cattle wouldattract a price differential for quality and would rule at a figure slightlyabove export canner, prices.

31 A price to producers of A 10 to A 12 per kilo liveweight wouldincrease wholesale prices of meat for local consuription by up to 50% onthose ruling at present. As actual retail prices are now some 20 to 33%above those officially determined on the basis of current wholesale prices,retailers could absorb about one half of the increase. It appears in-

escapable, however^, that i-f cattle producers are to obtain a return suffi-cient to encourage development of the industry, current actual retailprices for meat could rise by about 25% during the off-season but the risewould be less during the flush season.

32. A rise in etail prices of this magnitude would still leavre meatprices low in comparison with other countries, being detenrined largely bycanned corned beef prices. At the higher price, meat would absorb an addi-tional 5% only of family budgets and be acceptable to consumers 0 A limitedrisein the price of meat should be acceptable in the context of Governmentpolicy for the development of the country1s major industry and its attend-ant broad benefit to the economy as a whole.

33. The time of marketing should be determined by the prci3ucer onthe price factor and under the dictates of efficient ranch management 0

Normally, the greater proportion of the anual turnoff would be requiredto be disposed of during the fluish season which extends from January toAugust in Paraguay. Until substantial expansion of the industry had takenplace and seasonal fluctuation of availability of cattle had been reduced,it would be necessary to restrict canning to the flush production periodof the year. Additionally, in the earlier stages of development, to ensureadequate domestic supplies, export quotas would need to be retained andlinited to the surplus of production over local consumption requirement,s.These quotas should be determined by the Government on the advice of anadvisory committee reoresentative of all sections of the industry. Thiscommittee would have no executive functions, enforcement of the quotasbeing the duty of appropriate Government departments.

34L. Pending development that would permit economic fattening of cattlein the off-season, it would be necessary to assure supplies for domesticconsumption. As the price of release from Government control, it would notbe unreasonable to require the Rural Society to undertake that, during atransition period, its mnembers would supply reasonable Asuncion fresh meatrequirements at the average price paid for cattle for domestic consumptionduring the precedirig season. The threat of reimposition of Government con-trols should be effective in -nsujxing the honoring of such an undertakirJ.

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35. In order to provide the Rural Society with recognizable recipientsof supplies which it undertakes to make available, the licensing of slaughter-houses will be required, The number which would be satisfactory for this

purpose is at present very anall and chiefly the frigorificos.

36. The Government might have reservations about complete dependenceon existing frigorificos, mainly under foreign control, to supply Asuncionmeat requirements. Additionally3 the three largest operators, Liebigs,T:hternationaJl Products and Industria de Carmes, are situated somae miles outof town and only connected to it by poor-class roads Their slaughteringfacilities generally are poor and would require extensive improvement andexpansion to handle domestic fresh meat concurrently with the increase incannery slaughtering that would be expected if the cattle industry isdeveloped and expanded. One of the smaller local operators - Kemper - isstated to be interested in participating in the supply of city meat. Thisfirm's works are conveniently located but would require substantial enlarge-ment to handle any large proportion of the fresh meat killings.

37. As considerable expenditure will be required to provide satisfac-tory slaughtering facilities, additional to those needed for export opera-tions, there could be merit in this being concentrated on the establishmentof a new centrally located slaughterhouse. This might be undertaken by theformation of a private stock company financed by local investment and sup-ported, if necessary, by the proposed Development Bank to erect a slaughter-house and cold storage, and to undertake the purchase and slaughter of cattleand the wholesaling of meat in Asuncion. Consideration might be given, ifKemper were agreeable, to the incorporation of that firm in the company, and

the use of its existing works to form the basis of the new abattoirs. In

addition, existing frigorificos should also be permitted to slaughter andsupply fresh meat for local consumption in order to insure that the newlyformed company did not become completely monopolistic. It would be furtherdesirable that all licensed slaughterhouses be required, under the license,

to provide within their capacity a slaughter service at a specified charge

for registered wholesale butchers purchasing cattle direct from producers.

38. Army meat requirements are substantial and have a real impact onthe question of supply availability. From an industry viewpoint, it is notmaterial whether the slaughtering is done by the Army itself or whether re-quirements are obtained from meat wholesalers in carcass form, provided in

either case that payment is made. It is suggested, however, that a review

could profitably be made to determine what is a more reasonable allocation

for the Armed Forces' use, and that budgetary provision should be made for

funds to permit its purchase, either on the hoof or in carcass form, accord-

ing to the Government's policy on this question.

Conclusions

39. Copacar has not proved a successful means for attaining themajor objectives of Gove=nent policy with respect to the Paraguayancattle industryx Costs of marketing controls have been high and havebeen maet by livestock producers. Under current arrangehments neitherconsunmers nor producers have benefited.

40. In view of the importance of the cattle industry to the nat-ional economy, it is essential that action be taken to give evexyencouragement to its development. Ranchers must be permitted retuxnssufficient to encourage investment in the improvement of their ranchesand to service loans contracted for this purpose. Further, the timingof marketing of cattle should be dictated by the technical requirementsof efficient ranch operation.

41. The key price for the Paraguayan cattle industry is the worldprice of canned conzed beef. This is low and limits the price that canbe paid by camers for cattle. Cur:ently, prices which could be paidby camers run between , 10 and 0 12 per kilo liveweight. Within thisrange prices to producers would be sufficient to encourage the develop-ment of production. Retail prices for meat for domestic consumptionwould be related to producer prices and would be comparatively low in

relation to those in neighboring countries, where prices are affectedby sizeable exports of higher value cattle products than canned cornedbeef.

42. Because of the relatively low prices which producers can ex-pect under the limits dictated by world prices for canned corned beef,producers cannot afford to bear the high costs of marketing contnlsexercised by Copacar and make the necossary development investments,Since these controls are u-nnecessary in the interests eitler of con-sumers or producers, the mission concludes that the operations of Copa,car should be disc6ntinued. at an early date, Control over the volumeof purchases of cattle for canned corned beef exports should be exer-cised. Off-season supplies of cattle for domestic consumption shouldbe assured during the transition period until the development of thecattle industry has advanced sufficiently to meet this demand adequately.

43. Given the conditions under which investment could be profit-ablY undertaken by ranchers, there is considerable scope for the devTelop-ment of the cattle industry in Paraguay. This development offers one ofthe most outstanding means of fairly quickly and substantially improvingmuch needed foreign exchange earnings, which in turn will assist Paraguaytowards the general development of her econonmr. Under satisfactory con-ditions and inducements, the cattle population could possibly be in-creased by one half over the next IQ-15 years and the annual percentagetur-off of' fat cattle substantially impxroved,

Tdr,;,C snnen.da ti on.S

44 The mission recommends the following action:

A, Xarketing

1, Immediate and concurrent: tc be undertaken by April 30, 1960, ordeferred until the commencement of the season in Jarluary 1961.

a) Repeal those portiorns of existing legislation that empowerCopacar to:

i) establish quotas for processing anid export, andfor deliveries for local consumption;

ii) fix cattle, meat and meat product prices;

iii) impose levies on cattle sold.

(This vould permit freedom in the marketing of cattle and would allow pricesfor cattle and meat to find their own level through competitive marketing.)

b) iMake provision for:

i) the licensing of all slaughterhouses with a condi-tion that will require them to provide publicslaughtering services under specified conrdltions;

ii) the registration of wholesale butcliers who will pur-chase and undertake or arrange the slaughter ofcattle and engage in wholesaling of meat and meatproducts3

iii) the prohibition of the export of cattle, meat andmeat products without Govenment approval for alimited transition period;

iv) the setting-up of an advisory committee representa-tive of all interest.s in tlhe industry, to advisethe Government on the quotas of cattle, meat andmaeat products that should be approved for exportduring the transition period.

v) slaughterhouse operators and wholesale butchers beingrequired to keen books of account of their opera-tions and for such books of account to be open forGoverment inspection.

(This legislation would remove Copacarts monopoly on the purchase of cattleand the supply of meat for Asuncion by permitting existing frigorifico opera-tors and wholesa:le butchers to operate in competition with one another. Itwould aim to ensure that slaughtering facilities were available for locallyconsumed cattle and that exports were confined to the surplus over domest'icrequirements. Licensing of slaughterhouses, and wholesale butchers would pro-vide a proper record of operators and could be used at a later stage to ensurathat sanrita-ion s.:d hygiene we-re - -. crx.eesi.vely enforced in the hand;ing ofmeat and meat prodvc._.ts. Access to books of account would enable it to beas;ce:ftsL:ned whether prlofi is b;ing m,±dc. ;ie.ra reas;a;ble.)

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c) The lvinister of Agriculture to obtain from the Rural Societyan undertaking that its members will deliver to frigori-ficos., or other licensed wholesale butchers5 reasonablesupplies of cattle for Asuncion city requirements duringthe off-season during a transition period of, say, twoyears at the previous main-season average prices, deter-mined by a formula to be agreed upon by the parties.

2. Supplementar-: immediately following completion of foregoinglegislation:

a) Arrange for Armed Forces to purchase their cattle require-ments direct from producers. (This would bring urnderreview the ration provided the Army, and would introducean additional competitive element in the purchasing ofc.attle.)

b) Sponsor the formation of a locally held private stock com-pany to construct and operate a slaughterhouse and coldstore, and to operate as a wholesale butcher in Asuncion.

B. Production

1. Private investment for the development of the cattle industryshould be encouraged initially along the following lines:-

a) The erection of boundary and subdivision fencing formore efficient utilization of pastures and improvedstock management in respect of fattening and breeding;

b) The installation of additional stock watering facilitiescomplementary to the subdivision of ranches;

c) The construction of bridges over fast-running streams topermit access to maiket without interruption anrd obviatethe injuries that cattle suffer when crossing sTwollenstreams. It would not be necessary or economic to pro-vide a road network for stock transport in the earlystages of development, provided vuninterrupted access toriver transport on the Paraguay Ri-ver is asslred;

d) The provision of loading docks for barges at selectedspots aloing the Paraguay River to minimize the drovingof fat stock on land and their bruising during loadingonto river transport.

2. The second phase, to be undertaken over the longer terms wouldcomprise:

a) The control of scrub growth and the establishment ofbetter-type pastures; and

b) Improvement in the class of cattle on the ranclchs by theintto duction and use of better sires and breeds most*uiter. to the envtironment.