EPA-230/1-73-003
OCTOBER, 1973
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
Cane Sugar Refining Industry
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington,, D.C. 20460
\
UJ
C3
-------
This report has been reviewed by the Office of Planning
and Evaluation, EPA, and approved for publication.
Approval does not signify that the contents necessarily
reflect the views and policies of the Environmental
Protection Agency, nor does mention of trade names or
commercial products constitute endorsement or recom-
mendation for use.
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EPA - 230/1-73-003
ECONOMIC IMPACT OF
COSTS OF PROPOSED EFFLUENT LIMITATION GUIDELINES
FOR THE CANE SUGAR REFINING SEGMENT OF THE
SUGAR PROCESSING INDUSTRY
Milton L. David
Robert!. Buzenberg
October, 1973
Prepared for
Office of Planning and Evaluation
Environmental Protection Agency
Washington, D. C. 20460
U.S. Fnvirc-n'--.'-'.? P.-. '..--': A en Agcpc
Begion o, ;,: -. . < - '*
2150 S. Iij:'...(-.: ' : -J .-;.. :.GVO
Chicago, --.L Cuj.,4
-------
This document is available in limited
quantities through the U.S. Environmental Protection Agency,
Information Center, Room W-327 Waterside Mall,
Washington, B.C. 20460
The document will subsequently be available
through the National Technical Information Service,
Springfield, Virginia 22151
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PREFACE
The attached document is a contractor's study prepared for the Office
of Planning and Evaluation of the Environmental Protection Agency
("EPA"). The purpose of the study is to analyze the economic impact
which could result from the application of alternative effluent limitation
guidelines and standards of performance to be established under sections
304(b) and 306 of the Federal Water Pollution Control Act, as amended.
The study supplements the technical study ("EPA Development Document")
supporting the issuance of proposed regulations under sections 304(b) and
306. The Development Document surveys existing and potential waste
treatment control methods and technology within particular industrial
source categories and Supports promulgation of certain effluent limitation
guidelines and standards of performance based, upon an analysis of the
feasibility of these guidelines and standards in accordance with the require-
ments of sections 304(b) and 306 of the Act. Presented in the Development
Document are the investment and operating costs associated with various
alternative control and treatment technologies. The attached document
supplements this analysis by estimating the broader economic effects
which might result frot.i the required application of various control
methods and technolog es. This study investigate s the effect of alter-
native approaches in trrms of product price increases, effects upon em-
ployment and the continued viability of affected plants, effects upon
foreign trade and other competitive effects.
The study has been prepared with the supervision and review of the Office
of Planning and Evaluation of EPA. This report was submitted in fulfill-
ment of Contract No. 68-01-1533, Task Order No. 5 by Development
Planning and Research Associates, Inc. Work was completed as of
October, 1973
This report is being released and circulated at approximately the same
time as publication in the Federal Register of a notice of proposed rule
making under sections 304(b) and 306 of the Act for the subject point
source category. The study has not been reviewed by EPA and is not
an official EPA publication. The study will be considered along with the
information contained in the Development Document and any comments
received by EPA on either document before or during proposed rule making
proceedings necessary to establish final regulations. Prior to final promul-
gation of regulations, the accompanying study shall have standing in any
EPA proceeding or court proceeding only to the extent that it represents
the views of the contractor who studied the subject industry. It cannot be
cited, referenced, or represented in any respect in any such proceeding
as a statement of EPA's views regarding the subject industry.
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CONTENTS
I INDUSTRY SEGMENTS
A. Types of Firms
1. Size of Firms
2. Level of Integration
3. Number of P,lants
4. Products
5. Level of Diversification
B. Types of Plants
1. Size
2. Locations
3. Level of Technology and Efficiency
C. Number of Plants and Employment by
Segment
D. Relationship of Segments to Total Industry
II FINANCIAL PROFILE
A. Plants by Segment
1. Annual Profit
2. Annual Cash Flows
3. Market (Salvage) Value of Assets
4. Cost Structure
B. Distribution of Financial Data
C. Ability to Finance New Investment
III PRICING
A. Price Determination
1. Demand
2. Government Sugar Policy
3. Base Point Pricing
4. Supplies
B. Expected Price Impacts
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CONTENTS
Page
IV ECONOMIC IMPACT ANALYSIS METHODOLOGY IV-1
A. Fundamental Methodology IV-1
1. Benefits IV-6
2. Investment IV-7
3. Cost of Capital - After Tax IV-7
4. Construction of the Cash Flow IV-9
B. Price Effects IV-10
C. Financial Effects _ IV-11
D. Production Effects IV-12
E. Employment Effects IV-12
F. Community Effects IV-13
G. Other Effects IV-13
V POLLUTION CONTROL REQUIREMENTS AND COSTS V-l
A. Alternative Effluent Control Levels V-l
B. Current Level of Control V-3
C. Water Pollution Abatement Costs V-8
1. Investment V-8
2. Operating and Ownership Costs V-14
3. Estimated Costs V-14
VI IMPACT ANALYSIS VI-1
A. Price Effects VI-1
B. Financial Effects VI-4
1. Profitability VI-4
2. Capital Availability Level VI-7
C. Production Effects VI-7
1. Potential Plant Closure VI-7
2. Sensitivity Analysis VI-13
D. Employment Effects VI-13
E. Community Effects VI-15
F. Balance of Payments Effects VI-15
VII LIMITS TO ANALYSIS VII-1
A. General Accuracy VII-1
B. Possible Range of Error VII-1
C. New Technology VII-2
D. Critical Assumptions VII-3
E. Remaining Questions VII-3
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I. INDUSTRY SEGMENTS
For identification, this study deals with one of the three functions in the
production of sugar from cane defined by industry code as follows:
SIC 2062 Sugar Cane Refining
The other functions, that of cane growing and harvesting and sugar cane
milling (SIC 2061), have no direct bearing on the currently proposed
water pollution, but through their indirect activity, they will be referred
to in several places.
A. Types of Firms
The firms that own and control the cane sugar industry vary from the very
small individual mill or refinery to the giants of U.S. Industry. By and
large, large U.S. companies dominate cane sugar refining and have a
position in cane milling and growing but no one company has more than
20 percent of a given segment.
1. Size of Firms
Table 1-1 lists the 20 large firms that have the dominant position in the
cane sugar industry. Atnstar, by virtue of its five cane sugar refineries,
and its ownership of Spreckels, a beet sugar company based in California,
has the dominant position in sugar. Spreckels1 capacity in beet sugar is
about 12 percent of the U.S. beet capacity and this subsidiary also has
acquired a -wet corn milling company and are therefore in all phases
of the sweetner industry.
Beyond the 20 large companies that have 77 percent of the refinery capacity
and 34 percent of the sugar cane milling capacity, there are 60 companies
of various sizes and types that process the rest of that which is considered
domestic cane sugar production. These companies are grouped in specific
areas as seen in Tables 1-2 and 1-3. The companies operating refineries
are shown in Table 1-4.
2. Level of Integration
From Table I-1 it can be seen that there is integration of companies with-
in larger firms and there is a vertical integration in sugar cane production
including growing, harvesting and cane milling. Some integration extends
into refining also.
1-1
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Table 1-1. Dominant cane sugar firms and relation to industry
1.
z.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Firms
Amstar
C & H
Borden, Inc.
Su Crest Corp.
Archer Daniels Midland
CPC International
United Brands
Savannah Foods.
Imperial Sugar
Zapata-Narness
U. S. Sugar Co.
Gulf & Western Foods
Southdown Lands
Jim Walters Co.
Alexander Baldwin Ltd.
A rnfa c
C. Brewer & Co.
Theo H. Davis
Castle & Cooke Inc.
Pepsico
Sub -Total
Other Companies -U.S.
Other Companies - Puerto
Estimated Other Sweetners Cane
Net Worth Corn
($million)
175 X
NA
725
20
124
510 X
494
32
NA
NA
55
673
132
345
143
210
90
NA
224
440
Rican
Beet Grower
X
X
X
X
X
X
X
X
X
X
X
No.
4
2
1
3
1
4
6
8
3
2
34
35
16
Cane Sugar
Mills Refineries
TPD Pet. No.
5
Z
3
2
1
1
1
2
1
14,400 1
18,500
8,000
10,700
4,000
13, 100
17,250
17,300
7,000
7,000
1
117,250 34 20
159,185 45 4
71,500 21 5
TPD Pet.
iU,050
3,690
2,190
1,670
700
1,800
1,200
2*550
1,500
660
800
27,810 77
5,060 16
1,820 7
Total Domestic Cane Sugar Industry
85
347,935 100 29
34,690 100
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Table 1-2. Raw sugar mill companies by geographical area and
number of mills
Location
Louisiana
Puerto Rico
Hawaii
Florida
Total
Table 1-3. Cane sugar
Location
Louisiana
Puerto Rico
Hawaii
Florida
West Coast
East Coast
Texas
Midwest
Total
Number of
Owners
38
12
6
8
64
refinery companies by ge
number of refineries
Number of
Owners
n
"3
1
3
1
8
1
2
I?!/
Number of
Companies
38
16
22
8
84
Number of
Mills
43
16
26
9
94
ographical area and
Number of
Companies
5
3
1
8
1
2
27
Numoer of
Refineries
0
5
3
1
10
1
2
29
I/
Total doesn't add due to multiregional operations owners.
1-3
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Table 1-4. Ownership of domestic refineries
Percent of
Industry
Capacity
Company
Location
3Z.9
Amstar Corporation
11.6
6.3
7.4
1.3
4.9
4.3
5.8
2.3
California & Hawaiian Sugar Co.
Borden Inc.
North American Sugar Industries Inc.
Colonial Sugars Co.
Florida Sugar Refinery, Inc.
Industrial Sugars, Inc.
Savannah Foods & Industries, Inc.
Everglades Sugar Refinery Inc.
Glades County Sugar Grower Coop Assn.
Godchaux - Henderson Sugar Co.
Imperial Sugar Co.
National Sugar Refining Co.
PepsiCo Inc.
Brooklyn, N. Y.
Boston, Mass.
Baltimore, Md.
New Orleans, La.
Philadelphia, Pa.
Crockett, Calif.
Aiea, Hawaii
Gramercy, La.
Belle Glade, Fla.
St. Louis, Mo.
Savannah, Ga.
C lewis ton, Fla.
Moore Haven, Fla.
Reserve, La.
Sugarland, Tex.
Philadelphia, Pa.
Long Island City, N.Y.
continued--
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Table 1-4. (continued)
Percent of
Industry
Capacity
Company
Location
3.5
2.0
5.2
1.9
4.8
2.0
5.2
United Brands
Revere Suyar Refinery
Jim Waiter Company
The South Coast Corporation
CPC International
Refined Syrups and Sugars, Inc.
Zapata - Nornuss
Southdown, Inc.
SuCrest Corporation
Archer Dauielt. Midland
Supreme Sxigar Refinery
Refineries of Puerto Rico (5)
Charlestown, Mass.
Ma thews, La.
Yonkers, N.Y.
Houma, La.
Brooklyn, N.Y.
Chicago, 111.
Supreme, La.
Puerto Rico
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The cane sugar industry is characterized by a vertical integration which
is far different from the structure than found in the beet sugar industry.
In the beet sugar industry, until this past year, the sugar companies
were separate from the growers and have bargained through growers'
associations for the price and supply of beets. With the advent of coop
ownership of beet sugar factories, the picture has somewhat changed
since the beet grower has an interest in the processing operation.
In cane sugar, the growing of cane and cane sugar milling facilities
demonstrates a high degree of integration through direct ownership
or cooperative organization. Each of the four geographical areas has
its own characteristic as to how integration has developed ove r the years.
Reference to Tables 1-5 and 1-6 will indicate that Puerto Rico is essen-
tially an integrated operation inasmuch as the mills' refineries are either
outright owned by the Puerto Rican Commonwealth or subsidized by this
governmental body. Although there are many small farms, the growers
are closely tied to the mills that they are supplying.
In Hawaii, essentially five companies own the 19 mills expected to be
operating in 1973, and, with the exception of 500 cane growers that have
varying degrees of tie-in with the mills, the cane land is owned by the
processing mill companies. In turn, all of these companies and pro-
cessors own the refinery operations of C&H in Hawaii and on the mainland
near San Francisco. All of the marketing of sugar is done through this
organization.
Florida has only one mill that is vertically integrated from growing to
refining, but this accounts for seven percent of the Florida raw sugar
production. All of the other mills are land owners and, therefore,
there is integration of the grower and the mill covering the 130 farms
in Florida and 90 percent of the state's raw sugar production.
Louisiana has the only area of extensive independent ownership of both
cane farm and milling operations. Figures are not available to give a
definite acreage, but it is estimated that half of the production in
Louisiana is that of independent growers and independently owned mills.
Seven of the mills owned by three companies are vertically integrated
into the three operations of the cane sugar industry.
1-6
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Table 1-5. Cane sugar processing integration relationship, grower--
mill integration, 1971 production
Louisiana
Florida Hawaii
Production Pet Production Pet Production
Total Cane (000 acres)
Total Cane (000 tons)
No. of Farms
Total Raw Sugar (000 tons)
Total Mills
Grower-Mill Integration
Co-op Mills
Administration Cane (000 tons)
Independent Cane (000 tons)'
Total Cane
Corporation Mills
Administration Cane (000 tons)
Independent Cane (000 tons)
Total Cane (000 tons)
Government Mills
Administration Cane (000 tons)
Independent Cane (000 tons)
Total Cane (000 tons)
Total Administration Cane (000 tons)
Total Independent Cane (000 tons)
Total Cane (000 tons)
301
7,974
1,513
571
43
8
2,536
417
2,953
3b
1,663
3,358
5,021
0
0
0
0
4, 199
3,775
7,974
Total cane acreage - only 1/2 harvested each
Sources: Hawaiian Sugar Planter's Association
Gilmore Sugar Manual 1971
34 194 22
25 6,388 20 10,
130
20 635 23 1,
8
3
86 2,127 99
14 11 1
2, 138
5
33 3,630 85 10,
67 620 15
4,250 10,
0
0
0
0
53 5,757 90 10,
47 631 10
6,388 10,
year due to 22-24 month
Sugar Manual, 1973
232^
685
528
229
19
0
0
0
0
19
151
534
685
0
0
0
0
151
534
685
crop
Puerto Rico Total
Pet Production Pet Production Pet
26 153
34 6,437
4,202
45 324
16
0
0
0
0
0
95 0
5 0
0
16
6,437
0
6,437
95 6,437
5 0
6,437
maturity.
18 880
21 31,484
6,373
12 2,759
86
11
4,663
428
5,091
59
15,444
4, 512
19,956
16
6,437
0
6,437
100 26,544
0 4,940
31,484
100
100
100
92
8
77
23
100
0
84
16
USDA -ASCS various data
Puerto Rico Land Administration Data
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Table 1-6. Cane sugar processing integration relationship, mill-refinery
integration, 1971 production
CD
Louisiana Florida Hawaii Puerto Rico
Total
Production Pet Production PctProduction Pet Production Pet Production Pet
Total Cane (000 acres)
Total Cane (000 tons)
No. of Farms
Total Raw Sugar (000 tons)
Total Mills
Mill-Refinery Integration
Integrated Mill
Raw Sugar (000 tons)
Non Integrated Mill
Raw Sugar (000 tons)
Total Raw Sugar
Total cane acreage - only 1/2
301 34
7,974 25 6,
1,513
571 20
43
8
124 22
35
447 78
571
harvested each year due
Sources: Hawaiian Sugar Planter's Assn. Sugar Manual,
Gilmore Sugar Manual
1971
194
388
130
635
8
1
46
7
589
635
to 22
1972.
22 232-/26'
20 10,685 34 6
528 4
23 1,229 45
19
19
7 1,229 100
0
93 00
1,229
-24 month crop maturity
153 18
,437 21
,202
324 12
16
16
324 100
0
0
324
880
31,484
6,373
2,759
86
44
1,7^3
42
1,036
2,759
100
100
100
62
38
USDA-ASCS Various data
Puerto Rico Land Administration Data
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3. Number of Plants
The three parts of the cane sugar industry are composed of:
6,373 Cane farms or plantations
85 Cane mills
29 Refineries
The previous tables, 1-5 and 1-6, have given some of the statistics of
integration between farms, mills and refineries. Inasmuch as the mills
are in the middle of the chain, it would be well to summarize the degree
of integration from this standpoint. Table 1-5 shows that 84 percent of
the sugar cane goes to a mill. Table 1-7 shows that 23 percent of the
refined cane sugar end-product comes from a mill integrated with the
refinery.
4. Products
The cane sugar refining industry is essentially a one product industry ~-
refined cane sugar. Cane sugar does take on many forms and variations
but the product is still cane sugar -- chemically sucrose. Some sugar
is produced in liquid form without being crystalized, but the percent is
very small. _i' Crystalline sugar is produced in varying degrees of
"olor.. fineness and concentrations. Still other combinations include
packaging in bulk, in 100 pound bags. -, c m the myriad of Consumer
oacKets, -..epeatiru-;, rht- mosi . ornrrion product .= , /'- = !a ilized white
. ane sugar pricea and solJ ;n iG'J oovuni Jaa.
llit; mili.^ croducc liiroc oy- roci.1'-1 -^ - x& L>C' ~? - c ryi o .* a. .^ s e s , 5.riii 3'i
rue rmedia '.e, prociucL, raw su;j,ar. j-3d-,-'°se) ne "'uio : rom -he cane,
omparabie co some extent \"ith beet puip iron" beet ^ugar, : s mo.-'i
frequently used as tuel in the milling process. In boilers '.esigned :o
handle bagasse it is burned for energy with iiatural gas or fuel oil.
Surpluses are sold for animal feeds and some bagasse ends up in the
building material known as celotex. Revenue figures from all mills
show almost insignificant income from bagasse sales.
Molasses is the important by-product; its prime use is as an animal
feed supplement. A small percentage becomes edible molasses for a
variety of food flavorings, colorings and syrups. About 3. 6 percent
of the returns to a milling operation comes from molasses.
Liquid sugar is common, but most often crmes from putting
- v?talline suqa - into 'iquid form aite>- tne ^ef-rin : orores?.
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Table 1-7. Refinery-mill integration by company and
relationship to total industry
Refineries integrated
C & H
Glades County Coop.
South Coast
Southdown
Supreme
Puerto Rico
Integrated Refinery Total
Non Integrated Total
Total - All Refineries
Capacity
3,690
460
700
660
700
1,820
8,030
26,660
34,690
No. of
Refineries
2
1
1
1
1
5
11
18
29
Pe rcent
of Capacity
10.6
1.3
2.0
1.9
2.0
5.2
23.0
77.0
100.0
1-10
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Summarizing, the product that shall be most discussed in this report
is refined cane sugar from the intermediate product raw sugar.
5. Level of Diversification
Referring again to Table 1-1, it can be seen that the large companies
listed are recognized as diversified firms. Cane sugar processing
with few exceptions, is a small part of the business for the 20 large
companies. The notable exception is Amstar which has approximately
60 percent of its inventory in some form of cane sugar and, presumably,
its sales and assets assume a similar proportion.
The other companies by and large are smaller and primarily derive their
sales from cane sugar production and processing.
B. Types of Plants
Essentially, there are three types of plants in the cane sugar industry --
farms or plantations, mills and refineries. The first and second types,
the farm or plantation, and cane mills, will not be directly considered in
this study. The remaining plants or refineries are distinct and readily
identifiable by name, size, location and output.
1. Size
Refineries are industrial plants that operate on a year around basis
as contrasted with the mills that have a seasonal operation which
coincides with the cane harvest. The tonnage figures in Table 1-8
are raw sugar tons which is approximately 97 percent pure sugar.
As can be anticipated, the larger refineries are in the large population
centers and the nine refineries that have a capacity of over 1,500 tons
per day account for 58 percent of the total U.S. refining capacity.
With the exception of three plants, all of the refineries are over 50
years old and have been well maintained and kept up-to-date. For this
reason there is no significant difference in refineries based on age ex-
cept as will be noted under the following section.
I-11
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Table 1-8. United States cane sugar refinery companies, location and capacity
No.
Company Name
Refinery Location
Liquid refineries
1
2
3
4
5
Rural: Small
1
2
3
L 4
5
6
7
8
Large
1
2
3
4
SuCrest
Pepsico
Industrial
Florida Sugar
Ponce Candy
.
crystalline refineries - 700 tons/day or less
Glades Co. Cooperative
C & H
Puerto Rico Land Administration
Puerto Rico Land Administration
Everglades
Southdown
Puerto Rico Land Administration
Puerto Rico Land Administration
crystalline refineries - over 700 tons /day
J. Aron
Colonial
South Coast
Godchaux
Chicago, Illinois
Long Island City, N. Y.
St. Louis, Missouri
Belle Glade, Florida
Ponce, Puerto Rico
Moore Haven, Florida
Aiea, Hawaii
Guanica, Puerto Rico
Humacao, Puerto Rico
Clewiston, Florida
Houma , Louisiana
Mercedita, Puerto Rico
Igualdad, Puerto Rico
Supreme- , Louisiana
Gramercy, Louisiana
Mathews, louisiana
Reserve, louioidna
~ ., Total Daily
Capacity '
Capacity
(TPD) (Pet.)
850
800
300
390
100
2 , 440 7
460
190
220
400
350
660
600
700
3,580 10
700
1, 500
700
1, 700
4,600
(continued)
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Table 1-8. (Continued)
No. Company Name
Refinery Location Capacity
(TPD)
Total Daily
Ca pa c it y
(Pet.)
Urban: Crystalline refineries
1
2
3
4
5
6
7
8
U. S.
Amstar
M
1C
1 1
II
Imperial
CPC
National
Savannah
Revere
SuCrest
C & H
Total companies (24)
Baltimore, Maryland
Brooklyn, New York
Chalmette, Louisiana
Philadelphia, Pennsylvania
Boston, Massachusetts
Sugar land, Texas
Yonkers, New York
Philadelphia, Pennsylvania
Port Wentworth, Georgia
Charlestown, Massachusetts
Brooklyn, New York
Crockett, California
Total Daily Capacity
2,600
2, 100
3,250
2, 100
1,000
1,500
1,800
2,000
2,200
1,200
820
3,500
24,070
34,690
70
100
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2. Locations
Referring to Table 1-8 and Figure 1-1, the locations of refineries point
to two of their essential requirements: deep water ports for shipping of
raw sugar, domestic and imported, and close proximity to population
centers and markets.
Raw sugar is not considered a food product and therefore can be shipped
by bulk in cargo ships with a variety of cargo capabilities. Refined
sugar, on the other hand, is a food and its transport is at a much higher
rate because of the sanitary requirements as well as its higher value.
Sugar refineries have had dockside locations for many years as mentioned
in the previous section on age. These areas are highly Industralized now
and for that reason additional land which may be needed for water pollution
control may be difficult and expensive to obtain adjacent to the refinery.
This may not be true of new plants and rural plants (Table 1-8). The
Chicago and St. Louis refineries are not deep water port locations
although Chicago is an international port. Raw sugar to St. Louis is
shipped by barge up the Mississippi. Both ports do qualify for lower
cost transport by water and serve large market areas.
3. Level of Technology and Efficiency
The cane producing and harvesting part of the industry is essentially
agricultural and uses large amounts of relatively unskilled labor.
Mechanization of the harvesting and loading operations are increasing
but the equipment is not sophisticated.
Refining is more capital intensive than milling. This is seen by the
fact that less than 12,000 men refine all domestic and import raw sugar as
compared to 15,000 employees for milling which produces only one-third
the amount of raw sugar the refineries process. The plants are industrial
in nature and located in industrial areas as contrasted to the agriculturally-
oriented mills.
From Table 1-9 the break-down of plants according to technology is
shown:
14 Crystalline refineries
5 Liquid sugar refineries
2 Liquid-crystalline refineries
8 Refineries operating with mills
Seventy-four percent of the industry capacity is the normal standardized
crystalline refinery discussed below.
1-14
-------
^L Boston (2)
[^^"SA (Charleston)
[tT^^New York (5)
(Brooklyn)
(Yonkers)
. .(Long Island City)
''VjRf^&- Baltimore
New Orleans
(Chalmette)
Supreme
Gramercy
Ma thews
7 Savannah
(Port Wentworth)
Belle Glade
Moore Haven
Clewiston
Houma
Reserve
Figure 1-1. Location of mainland cane sugar refineries.
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Table 1-9. Cane sugar refineries by type and capacity
Percent of
total domestic
Refinery - Type and Company Location capacity
Crystalline Refineries
1. Amstar Baltimore, Md.
Z. Amstar Boston, Mass.
3. Amstar Brooklyn, N. Y.
4. Amstar Chalmette, La.
5. Amstar Philadelphia, Penn.
6. California fe Hawaiian Crockett, Calif.
7. California & Hawaiian Aiea, Hawaii
3. Colonial (Borden) Gramercy, La.
9. Ever glade (Savannah Foods) Clewiston, Fla.
10. Godchaux Reserve, La.
11. Imperial Sugarland, Texas
1Z. National Philadelphia, Penn.
13. Revere Charlestown, Mass.
14. Savannah Foods Port Wentworth, Ga. 74
Liquid Sugar Refineries
1. Florida Sugar (Borden) Belle Glade, Fla.
Z. Industrial (Borden) St. Louis, Mo.
3. Pepsico Long Island, N. Y.
4. SuCrest Chicago, 111. 1
5. Ponce Candy Puerto Rica
Liquid-Crystalline Refineries
1. CPC Yonkers, N. Y.
Z. SuCrest Brooklyn, N. Y. 8
Refineries Operating with Sugar Factories
1. Glades County Moorehaven, Fla
2. Guanica Ensenada, P. R.
3. Iqualdad Mayaquez, P. R.
4. J. Aron & Company Supreme, La.
5. Mercedita Ponce, P. R.
6. Roig Yubacoa, P. R.
7. South Coast Ma thews , La.
8. Southdown Houma, La. 11
1-16
-------
The raw material for cane sugar refining is the raw, crystalline sugar
produced by the cane sugar factories. Raw sugar crystals contain a film
of molasses, the thickness of which varies with the purity of the sugar and
in which the non-sucrose components are concentrated.
The raw sugar processed by the American refineries may be domestic or
foreign but from a refining process viewpoint, there is little difference in
raw sugar related to its source other than the amount of impurities present.
A cane sugar refinefy receives raw sugar in bulk form by truck, rail, barge,
and/or ship, and stores it for periods up to several months in large ware-
houses.
Jlffination and Melting The first step in the refining process is mingling,
or placing the raw crystals into a syrup solution. The magma is fed into
centrifugals, which separate the syrup and molasses from the sugar. Hot
water is then added to provide a washing action. The washed sugar is dis-
charged into a melter which also contains about one-half of the sugar's
weight in water.
Clarification (Defecation)-- The screened melt liquor still contains fine
suspended and colloidal matter which are removed in clarification. Clari-
fication may involve coagulation and floatation clarifiers or pressure
filtration.
Decolorization--After affination and clarification the sugar liquor still con-
tains impurities and color that require physical adsorption for removel.
Most large crystalline refineries use fixed bed bone char cisterns (also
called filters).
Sugar liquor passes in parallel through each cistern in a downward direc-
tion and undergoes adsorption of the color bodies and ions. From 90 to
99 percent of color is removed, with the higher percentage removal
occurring at the beginning of the cycle.
Powdered activated carbon is used for decolorization in small refineries
and in liquid sugar production. .Regeneration of powdered carbon is diffi-
cult and it is normally discarded after one or two cycles. However, in
1972 one company announced the successful and economical regeneration
of powdered activated carbon.
"i.Pti°n adaPted from Develogment Document for Efflux
Guideline..
1-17
-------
Evaporation--No matter what method of decolonisation is used, the final
steps of re crystallizing and granulating are essentially the same in all
refineries. The first step in re crystallization may be concentration of
the decolorized sugar liquor and sweet waters in continuous type evapor-
ators. Since the liquors in a refinery are kept as highly concentrated as
possible, refinery pans are relatively small compared with the evapor-
ators in a raw sugar factory.
Crystallization--After concentration in evaporators, the sugar liquor and
sweet waters are crystallized in single effect, batch type evaporators called
vacuum pans. Several pans are used exclusively for commercial granulated
sugar and the resulting syrups are boiled in other pans.
Finishing--The dryer or granulator is usually a horizontal, rotating drum
1.5 to 2,4 meters (five to eight feet) in diameter and 7. 6 to 11 meters (25 to
35 feet) long which receives steam heated air along with the sugar crystals.
It may consist of one drum or more in parallel. The granulators remove
most of the one percent moisture still remaining in the sugar after centri-
fugation, reducing the moisture content to 0.02 percent or less. In addition,
the dryers serve to separate the crystals from one another. After drying,
the sugar goes to coolers. Coolers are similar drums, but without the
heating elements.
Any lumps remaining in the sugar are then removed by fine screening.
Screening also accomplishes crystal size grading.
Other Variations--Four plants representing seven percent of total capacity
are liquid sugar refineries. The initial refining steps of affiliation, decolor-
ization, and even evaporation in a liquid sugar refinery are essentially the
same as in a granulated sugar refinery. The primary difference occurs in
the fact liquid sugar refineries do not recrystallize their primary product
and therefore do not use vacuum pans for this purpose. The result is the
need for considerably less condenser water and process steam.
Two plants operate both liquid and crystalline refineries and eight are
directly integrated with the cane mills. These latter plants refine the raw
sugar directly in much the same manner of the beet sugar plants without
the crystallization and remelt steps.
1-18
-------
C. Number of Plants and Employment by Segment
In the entire U.S. cane sugar industry, there was estimated to be a
total of 92, 140 employees in 1970. This estimate was made up of:
Subsegment Number of Employees
Farm 64,900
Mill 15,000
Refinery 12,240
Total 92, i40
As stated, employment in the sugar refineries is low and the industry
is characterized as capital intensive rather than labor intensive. In
1968 the total employment in refinery operations was estimated at
13,049. Since that time, due to improved efficiency and productivity
(estimated at 1-2 percent per year), 1972 total employment was 12,240.
Table I-10 shows estimated number of employees in each area based on
the current productivity of 237 employees per 1,000 tons per day refinery
capacity.
D. Relationship of Segments to Total Industry
Subsequent financial profiles and impact analyses will depend upon the
use of model plants to represent the various segmettr.s and subsegments
of the cane sugar industry. The rationale for use of model plants is
largely dictated by the paucity of financial data. The model plants,
developed to represent the various segments by size, geography and
type, are shown in Table I-11.
1-19
-------
Table I-10. Cane sugar refinery employment by cities in 1970
Location
New Orleans
New York
San Francisco
Philadelphia
Baltimore
Boston
Savannah
Sugar Land
Chicago
Clewiston
Puerto Rico
Sub- total
Other locations
Total
Number employed
2,280
2,541
1,646
1,223
797
982
572
495
215
32
940
11,723
517
12,240
Source: U. S. Cane Sugar Refiners Association, Washington, D. C. ,
by Robert R. Nathan, Assoc. , Inc.
1-20
-------
Table I- 11. Relationship of segment models to industry for cane sugar refinery segments
Industry
Model
Type
Liquid
Crystalline
Location Size
U rban
Rural Small
Large
Urban Large
Capacity
(TPD)
500
400
1,200
2,000
No. of
plants
5
8
4
12
29
A ve ra ge
capacity
(TPD)
585
409
1, 150
2,005
1,037
Total
(TPD)
2,340
3,680
4,600
24,070
34,690
capacity
(Pet)
7
11
13
69
100
-------
II. FINANCIAL PROFILE
A. Plants by Segment
Because the cane s .gar industry is ^ubject to a considerable amount
of government control and allotments, marketing and regulations under
the Sugar Act, there is a lot of financial data on cane production and
milling which is av dlable through the Department 01 Agriculture and
th- Sugar Division .£ the Agricultural Stabilization and Conservation
Se rvice.
Unfortunately, the fJSDA cost studies exclude the cane sugar refining
segment and therefore subsequent financial data wao constructed from
previous material in an earlier study entitled "Initial Analysis of Econ-
omic Impact of Wai-^r Pollution Control Costs Upon U.S. Cane Sugar
Industry," by ERS .f USDA.» In addition, other figures were obtained
from the U.S. Can-- Sugar Refine rics Association and from a partial
economic study wh ;h was done for that association by Robert R. Nathan
and Associates of "Washington, D. C. Finally, in addition to bringing
this basic materia^ of 1968 up to 1972, a complete reconstruction was
made and all of the e data were then checked with a number of industry
sources represent! 'g various sizes and locations of sugar cane refineries.
1. Annual Profit
Table II-1 contains sales and earnings shown in model form for the
two types, liquid and crystalline, and the five sizes of cane sugar re-
fineries. These data were constructed from a number of sources and
while none of the models a re a real refinery, the overall effect does
represent the industry.
Table II-2 are actual figures of industry totals submitted to the Cost
of Living Council. For example, the industry-wide profit for 1972 of
$20 million is close to the $25,000, 000 industry profit that a weighted
total of the five model plants would show. The former figure repre-
sents 91 percent of industry and the latter figure is 100 percent.
II-1
-------
Table II-l . Cane sugar refinery models - sales, costs, production and cash flow
Crystalline
Small rural
Capacity(TPD)
Operating days
Production - raw value
Millions hundredweight
Production refined^.'
Millions hundredweight
Sales
Raw sugar
Other costs
Interest
Depreciation
Total costs
Net profit before tax
Net profit after tax
4/
After tax cash proceeds-
Liquid
500
250
2.500
2.336
28, 032
22,659
4, 571
194
140
27, 564
468
243
484
PR.L/
400
250
2. 000
1.869
22, 335
16, 896
5, 430
270
168
22, 764
(429)
(429)
9
Other2/
400
250
2. 000
1.869
-------
Table II- 2. Profit levels of sugar refineries, 1971-1973
Number Percent Net Profit Net Profit
of of Before Taxes Change Before Tax
Time Period Companies Total for From From per 100 Ibs.
Industry Period - 71-72 71-73 Refined
Capacity Sugar
1971
1972
1st Quarter '71
1st Quarter '72
1st Quarter '73
2nd Quarter '71
2nd Quarter '72
2nd Quarter '73
12
12
12
12
12
11
11
11
%
91
91
91
91
91
89
89
89
$ % %
41, 611, 437
2/
20,239,769- -51.4
10, 194, 362
2,954,662 -71.0
3/
2, 433, 078- -7c. 1
13, 974, 305
8,472,760 -39.0
2/
2,469,634" -82.3
$
2 1 3
. 152
,3.0
. 100
. 080
. 428
. 258
. 077
Source: U. S. Cane Sugar Refineries Assn. , Washington, D. C. based on
survey and data filed with Cost of Living Council, 1973.
Consolidated data for industry.
Includes 3 companies that operated at net loss.
Includes 5 companies that operated at net loss.
II-3
-------
Actual industry profits for this time period show a dramatic decline
over the '71 to '73 years and indicates that there are companies
experiencing losses.
In the model plants the only segment to show a loss was the small
rural refineries which included essentially the four refineries from
Puerto Rico.
Other than the refineries operating in Puerto Rico, there appears to
be no segment by virtue of its size or location that shows loss. Rather,
as will be shown later, the profitability of refineries and of their com-
panies seems to be a function of management and the philosophy of man-
agement that has been pursued over the years.
>
Table II-3 showing the returns on sales and the returns on investment,
however, indicates an industry with very low returns and taken a.s a
whole, one that is not financially healthy and vigorous.
2. Annual Cash Flows
Estimated annual cashflows (after tax earnings plus depreciation) is
displayed in Tables II-1 and II-3. Positive cash flows were obtained
for all configurations except the small rural Puerto Rican group. In
the other four groups cash flows are similar and there appears to be
no significant difference for each of the four segments that do show a
positive cash flow.
3. Market (Salvage) Value of Assets
Data appearing in an earlier economic study showed total asset
values based on hundredweights of sugar produced. However, the
data which was 1968 data, did seem to have a large margin of error.
Therefore, in this analysis, the figures are based on interviews with
knowledgeable industry people representing a broad section of the re-
fineries themselves and are based on 1972 figures.
_L' "Initial Analysis of the Economic Impact of Water Pollution Control
Costs Upon the U.S. Cane Sugar Industry." USDA - ERS, Bruce J.
Walter and Peter M. Emerson.
II-4
-------
Table II-3. Cane sugar refinery models - cash flow, ROI, ROS
Crystalline
Small rural
Net profit before tax($000)
Net profit after tax($000)
After tax cash proceeds
($000)
Liquid
468
243
484
Total investment- 9,750
($000)
ROI before tax (percent)
ROS before tax (percent)
ROI after tax (percent)
ROS after tax (percent
Cash flow (percent on
investment)
4.8
1.7
2.5
0.9
5. 0
PR
(429)
(429)
9
13, 500
(3.2)
(1.9)
(3.2)
(1.9)
0. 1
Other
431
224
533
13,500
3.2
1.9
1.7
i. G
3. V
Large
rural
1, 008
524
1, 378
28,200
3.6
1.5
1.9
0.8
4.9
Urban
1, 775
923
2,754
41, 250
4.3
1. 5
2.2
0.8
6. 7
Estimate,i book value.
11-5
-------
Estimated Model Plant Investment
The data shown here in Table II-4 are projected to be the book values
for various model plants based on 1972 figures.- Liquid refineries have
somewhat less of an investment than the crystalline refineries due to a
simplified process and a practice which is quite common in liquid
refineries - that of using higher value raw sugar. The refining
process is not faced with the removal of as large a percentage of
impurities as is necessary in most crystalline refineries that operate
with the world sugar. Even though these basic plants are 50 years
old, the machinery and equipment and its value is current due to
modernization and continual replacement. The land values arc based
on original purchase prices and, therefore, are book values as corn-
pa red to. replacement values which probably would be higher. From
these data, it appears as a rule of thumb that the depreciable assets
or equipment 'represent approximately one-third of the total investment
in the operation.
Salvage Values
In looking at salvage values as well as investment values, the individual
plants were considered on their own merits rather than being part of a
multi-plant company. Inasmuch as only one company operates five
refineries, the rest basically operate one refinery and it was felt that
the individual unit should be considered. Under multi-plant operations
in the refinery business , however, the working capital is combined for
the company rather than operated for individual mills and might show a
somewhat different arrangement for salvage value than has been indi-
cated here.
In estimating salvage values in Table II-4, the rationale used was
that net working capital is considered a current asset and therefore
fully recoverable. Depreciable assets, building and equipment, are
shown to be recoverable at approximately 10 percent of the book value.
For land, it is felt that book values represent market value in a very
conservative appraisal.
II-6
-------
Table 11- -i,
autj, i >.i,iic t-ies investmem and salvage values
Liquid
Invest- Per-
ui ent cent
21
, ci.,Lial 2.50 100
L)i pi<- i. i.il.li-
-ibddft 3.50 10
Land .50 100
Dol.t 3. 25
lot C.I
in . i t. . , i , .. i , 1 V . / 5
Total
Sdl> ,u,
i /
Kst iin.ii t-d book value.
2/
Mi 1 lu.ii£> ol d^lla rs .
Small Rural Large Rural Large Urban
Invest- Per- Invest- Per- Invest- Per-
Salvat;^ mcui cent Salvage ment cent Salvage ment cent Salvage
2/ 21 21 21 21 21 21
2.50 3.->i) 1UO 3.50 8.00 100 8.00 12.00 100 12.00
.35 5.40 10 .55 10.00 10 1.00 15.00 10 1.50
.50 .50 JOO .50 .80 100 .80 1.50 100 1.50
-].oU 9.40 13.75
Jl.OU 28.20 42.25
3, 3'< 4.55 9.80 15.00
-------
4. Cost Structure
In Table II-5, the budgets of cost for the five segments of model plants
are extremely consolidated to show just basic elements. The sales are
income figures that are somewhat representative of the published whole-
sale price of refined sugar quoted in various markets. Below are listed
the 1972 average wholesale prices per hundredweight of refined sugar.
Northeast $13.09
Chicago and West 12. 00
Gulf 12. 14
Southeast 12.74
Pacific 11.65
Average U.S. 12.29
While average sale prices to the distributor reflect these wholesale
prices, they vary from them due to discounts and various trade
allowances. Because the northeast market traditionally carries the
highest wholesale price, the urban refineries show the highest returns
as they are primarily located in this market.
The raw sugar price in the cost budgets bears a consistent relationship
to New York spot prices which depends on location of the refinery and
the source of the raws. 1972 quoted raw sugar prices are shown below:
Raw Cane Spot-Price-World $8.53
Raw Cane Spot-Price-Domestic 9.09
The liquid sugar plants traditionally buy a higher purity or higher polarity
domestic sugar than do the crystalline sugar refineries. Since the liquid
refineries normally pay a premium for their raw sugar, Table II-5 shows
the highest raw sugar price at $9.70 per hundredweight for three plants.
All other refinery costs vary from a low of $2. 04 for the liquid plants
to a high of $3.25 for the urban plants. The urban plants reflect higher
labor and other costs of the urban area in total and the liquid plants
indicate less costly processing, less investment and, therefore, less
cost to produce liquid sugar. The small rural plants of the crystalline
refineries have a higher cost than the other rural plants, due largely to
the higher costs associated with Puerto Rico.
II-8
-------
Table II- 5. Refinery cost by model size - 1972
Returns
Raw sugar
Other costs
Depreciation
Total costs
Net profit
Liquid
$12.00
9.70
2.04
. 06
11.80
.20
Smal
i'
$11.95
9. 04
3.05
.09
12. 18
-(23)
1 rural
Other^*
u , ,
$11.95
9. 04
2.59
.09
11.72
.23
Crystalline
Large rural
Uf- f A
$12.04
9.09
2.67
.10
11.86
.18
Large urban
$12.72
9.13
3.25
.15
12.53
.19
Includes four Puerto Rican refineries.
Includes four domestic mainland refineries.
II-9
-------
Depreciation costs vary from $. 06 per hundred weight for the liquid
refineries to $. 15 for the urban refineries. This is from 4. 28 per-
cent to 10.0 percent based on the net asset value.
In estimating income taxes for all model plants, a straight 4b percent
tax rate was used on earnings. No carry forward or back provisions
were assumed in the case of losses.
Summing up the cost structure, it can be said that raw sugar costs, i.e. ,
raw material, are the major costs and that equipment and investment are
significant factors. The industry is characterized as capital intensive
rather than labor intensive.
B. Distribution of Financial Data
As shown in the preceding discussion of the financial profile of the
cane sugar industry, little variance in financial parameters of location
and plant size was found.
Table I-11 shows that the model refineries do closely resemble the
industry quite accurately but in neither case, the model plants nor the
real plants, does size or location make a significant difference in
profit or returns.
11-10
-------
C. Ability to Finance New Investment
The ability of a firm to finance new investment for pollution abate-
ment is a function of several critical financial and economic factors.
In general terms, new capital must come from one or more of the
following sources: (1) funds borrowed from outside sources; (2) equity
capital through the sale of common or preferred stock; (3) internally
generated funds--retained earnings and the stream of funds attributed
to depreciation of fixed assets.
For each of the three major sources of new investment, the most
critical set of factors is the financial condition of the individual firm.
For debt financing, the firm's credit rating, earnings record over a
period of years, stability of earnings, existing debt-equity ratio and
the lenders' confidence in management will be major considerations.
New equity funds through the sale of securities will depend upon the
firm's future earnings as anticipated by investors, which in turn will
reflect past earnings records. The firm's record, compared to others
in its own industry and to firms in other similar industries, will be a
major determinant of the ease with which new equity capital can be ac-
quired. In the comparisons, the investor will probably look at the trend
of earnings'for the past five or so years.
Internally generated funds depend upon the margin of profitability and
the cash flow from operations. Also, in publicly held corporations,
stockholders must be willing to forego dividends in order to make earnings
available for reinvestment.
The condition of the firm's industry and the general economy are also
major considerations in attracting new capital. The industry will be
compared to other similar industries (i.e. ,' other processing industries)
in terms of net profits on sales and on net worth, supply-demand relation-
ships, trends in production and consumption, the state of technology,
impact of government regulation, foreign trade and other significant
variables. Declining or depressed industries are not good prospects
for attracting new capital. At the same time, the overall condition
of the domestic and international economy can influence capital markets.
A firm is more likely to attract new capital during a boom period than
during a recession. On the other hand, the cost of new capital will
usually be higher during an expansionary period. Furthermore, the
money markets play a determining role in new financing; example, the
1973 year has been viewed as especially difficult for new equity issues.
II-ll
-------
As was seen in Table I-11, there appears to be no significant difference
in the earning ability of a cane sugar refinery based on size or location.
Except for Puerto Rico which is a special situation and involves com-
panies that are not competing in the open investment dollar market ,
all earnings records depend on management.
There are only limited financial data available for companies which
operate cane sugar refineries. Table II-6 presents selected data on
four companies, three of which are primarily sugar companies. The
fourth company, Southdown, a producer of both raw sugar and refined
sugar, is a widely diversified company whose operating data are not at
all representative of the cane sugar refining industry. Although South-
down is included in the table, it will be ignored in the analysis which
follows.
Profit margins (income before interest and federal income taxes as a
percent of sales) have averaged in recent years 7.0 percent for Savannah,
6.9 pe rcent for Am star and 3 . 4 pe rcent for Sue rest. Net income as a
percent of sales has averaged 2. 5 for Savannah, 2.3 for Amstar and
0.9 for Sucrest.
Net income as a percent of net worth has been estimated for Savannah
as 13. 1 (for two years, 1970-71), for Amstar as 8. 5 (5-yea r average,
1968-72) and for Sucrest as 5.7 (5-year average, 1968-72).
Depreciation has averaged three to four percent of gross property values
for these three companies, producing an average cash flow as a percent
of sales of 4. 1 percent for Amstar and Savannah and 1. 9 percent for
Sucrest.
These three companies appear sufficiently profitable to be able to
finance new investment. Sucrest has a very low profit margin and
earns only about one percent on sales and five to six percent on equity.
Its profitability is well below average for manufacturing in general.
At the same time, Sucrest has laid out from $1.4 to $3. 1 million
annually for capital expenditures from 1968 through 1972.
The long-term debt situation shows that the three companies have
from 20 to 30 percent of gross property in fixed debt; Savannah has a
1972 debt/equity ratio of 98.3 percent compared to 44.7 percent for
Amstar and Sucrest. Although Sucrest is highly leveraged, the three
companies show no evidence to indicate that there would be barriers
to borrowing for pollution abatement capital expenditures.
11-12
-------
Table II- 6. Financial ratios for selected cane sugar refining companies,
1968 - 1972
Year
Savannah
Amstar Foods Southdown
Sue rest
Profit Margin (%)
1968
1969
1970
1971
1972
Av.
6.6
5.9
7.3
8.0
6.5
6.9
N.A.
N.A.
7.3
6.7
N.A.
7.0
6.4
19.2
12.6
13.7
15.2
13.4
3.2
3.0
3.7
4. 1
3. 1
3.4
Net Income to Sales (%)
1968
1969
1970
1971
1972
Av.
1968
1969
1970
1971
1972
Av.
1968
1969
1970
1971
1972
Av.
2. 1
1.6
2.5
3. 1
2.4
2.3
Depreciation
3.3
1.7
3.5
3.4
3.4
3. 1
Cash
3.9
3.6
4.3
4.6
4.0
4. 1
N.A.
N.A.
2.9
2. 5
2.0 -'
2.5
to Gross Property (
N.A.
N.A.
3.4
3.5
N.A.
3. 5
Flow to Sales (%)
N.A.
N.A.
4.2
3.9
N.A.
4. ]
22.2
24.6
8.7
9. 1
10.6
15.0
%)
3.4
0.6
3.9
4.3
3.5
3. 1
18.0
19. 1
8.5
9.4
9.9
13.0
1.0
0.8
1.0
1. 1
0.6
0.9
4. 1
4.3
4.3
4.2
4.2
4.2
2. 1
1.9
2.0
2. 1
1.6
1.9
11-13
-------
Table II-6. (continued)
Savannah
Year Amstar Foods Southdown Sucrest
Net Income to Net Worth (%)
1968 7.4^ 13.6 i/ 14.8 i/ 4.8^
1969 7.0^ 14. 1 U N.A. 4.6-'
1970 9. 3i/ 13.8 I/ N.A. 6.6i/
1971 13.6 1Z.Z N.A. 7.7
1972 9.7 N.A. N.A. 4.6
Av. 9.4 13.4 14.8 5.7
Long-term Debt to Gross Property (%)
1968
1969
1970
1971
1972
Av,
i /
-' 9
28.0
27.2
25.3
22.8
21.0
24.9
months
N.A.
N.A.
31.4
28.9
N.A.
49.0
N.A.
26.7
50.2
54.9
60.3
48.0
41.5
36.9
33.7
31.0
27.8
34.2
.?_' From Report of the Federal Trade Commission on Rates of Returns
in Selected Manufacturing Industries, Federal Trade Commission, 1961-1970,
p. 35.
Source: Standard and Poor's Stock Market Reports.
11-14
-------
With respect to the industry's overall ability to fund new investment for
pollution control, the limited data available indicate that some cane sugar
refineries may encounter difficulty, based on recent levels of profitability.
While other factors may influence the decision concerning new investment
in these small refineries, the low return on investment suggests strongly
that these resources could be more profitable elsewhere.
It should be noted that these financial analyses have not included
Puerto Rican refineries. The picture is complicated by the fact
that the Commonwealth of Puerto Rico owns or leases the company's
properties.
11-15
-------
III. PRICING
Cane sugar processors are only one component of the sugar industry,
which in turn is a member of the sweetener sector of the U. S. food
system. Sugar (sucrose) can be either beet sugar or cane sugar with
cane sugar accounting for more of the domestic market (see Figure III-l).
Refined beet sugar and cane sugar compete as perfect substitutes in the
wholesale market. Through a quota system the government regulates
the production and importation of sugar so as to stabilize and maintain
prices at-specified levels. Refined sugar is marketed by refiners and
processors under a system of base point pricing. It will be shown that
the structure of the sugar industry and government policy provides possible
limitations on the sugar processors ability to shift the cost of additional
pollution abatement to the consumers in the long run.
A. Price Determination
1. Demand
All but a small fraction of domestic sugar consumption is for human food.
U. S. per capita sugar consumption (Table Ill-l)has been fairly stable
since the 1930's, ranging between 90 and 100 pounds. Recent increases
above 100 pounds are attributed to the Food and Drug Administration
restrictions on the use of cyclamates. Sugar and corn sweeteners (corn
syrup and dextrose) are known as nutritive sweeteners while cyclamates
and saccharine are called noncaloric sweeteners. About two-thirds of
all sugar is consumed in industrial uses, especially by food processing
industries. Only one-fourth is purchased for home use--kitchen and
table. The remainder is used in restaurant and institutional meal pre-
paration.
Industrial uses for sugar are mainly in food processing with minor other
industrial uses (Table III-2 ). The beverage industry is the largest user
of sugar and has made little use of corn sweeteners as a substitute for
sugar. The beverage industry is also the highest user of noncaloric sweeten-
ers. Baking, the next largest user, has dropped its use of sugar from
III-l
-------
PRODUCERS World
Acres
Domestic f '
Acres 35% 1 40% 25%
31 Export Countries 7% 3% 1 5%
PRODUCTS Raw
PROCESSORS
PRODUCTS
_
Sugar
CONSUMERS Market
Sweetenei
Market
Sugar Sugar Cane Sugar Beets Corn
Cane Mills
~T
Raw Sugar
;
! .
Refineries Beet Sugar Wet Corn
1 , . , Factories Mills
1 1 !
Refined Sugar Beet Sugar Corn Sweeteners
. i , r |
I 1
47% i 22% I 31%
' " - - 1
1 i ^^^
40% , 19% J 26% 15%
Figure HI-1. Structure of the domestic sweetener industry.
-------
Table III-l. Trends in per capita distribution of nutritive sweeteners ana the
share that each sweetener represents of the total distribution,
1956-71
Calendar
year
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1956-67
trend
1968-71
trend
1956-71
trend
Nutritive
sweeteners
110.8
106.4
109.8
109.9
110.9
111 .6
113.1
113.7
113.3
113.6
115.3
114.5
117.7
ilS.l
121.0
122.3
+ .61
+1.67
+ .84
Sugar
Pounds
98.7
94.6
96.9
96.4
97.5
97.7
98.0
97.6
96.2
96.6
98.1
97.2
100.2
100.3
102.5
102.9
+ .04
+ 1.03
+ .34
:Corn sirup: Dextrose
per capita
8.3
8.2
8.7
9.1
9.3
9.7
10.7
11.1
12.2
12.2
12.5
12.6
12.8
13.0
13.1
13.7
+ .46
+ .28
+ .39
refined
3.7
3.6
4.1
4.3
4.1
4.2
4.4
5.0
4.9
4.8
4.7
4.6
4.7
4.8
5.4
5.7
+ .11
+ .36
+ .11
Percent of total
nutritive sweeteners
Sugar
89.1
88.9
88.3
87.7
87.9
87.5
86.6
85.8
84.9
84.9
85.1
84.9
35.1
84.9
84.7
84.1
-.44
-.32
-.34
:Corn sirup
Percent
7.5
7.7
8.0
8.2
8.4
8.7
9.5
9.8
10.8
10.8
10.9
11.0
10.9
11.0
10.8
11.2
+ .37
+ .07
+ .28
Dextrose
3.4
3.4
3.7
3.9
3.7
3.8
3.9
4.4
4.3
4.3
4.0
4.1
-1.0
"' '
4.5
4.7
+ .08
+ .25
+ .06
Source: USDA, ASCS, Sugar Reports.
Ill-3
-------
Table III-2. Sugar deliveries, by type of sugar and by type of product or
business of buyer, calendar year 1971.
Product or business of buyer
Industrial
Bakery, cereal and allied
Confectionery and related
Ice cream and dairy products.
Canned, bottled, frozen
foods, jams, jellies and
Multiple and all other food
Non-industrial
Hotels, restaurants,
Wholesale grocers, jobbers,
Retail grocers, chain stores,
All other deliveries , in-
cluding deliveries to
Included in totals:
Deliveries in consumer-size
packages (less then 50 Ibs]
Deliveries In bulk (unpack-
aged)
Beet
: Cane ;
Imported :
direct
consuciptior.
Total :
Liquid
Included
Beet
sugar
in totals
: Cane
Hunderedweights 2/
9*847,388
6,653,051
4,074,342
11,926,601
9,458,478
4,003,454
282.605
46,245,919
98,375
12.522,604
4.799,114
591.438
18,011.531
64.257,450
9.591.717
25.318.587
17,115,774
14,236,521
7,001,147
35,310.248
11,004,504
5,855,962
1.537.700
92,061.856
1.455.605
30.132.194
21,031,042
1,309.258
53.928.099
145,989.955
41.954.005
34,622.624
161,348
156,920
49,445
50,103
111,587
58,025
40.276
627,704
33,566
542,662
750,163
2.588
1.328.979
1.956,683
652,985
144,527
27,124,510
21,046,492
11,124,934
47,286,952
20,574,569
9,917,441
1,860,581
138,935.479
1,587,546
43,197,460
26.580,319
1.903.284
73.268.609
212,204,088
52,198.707
60,085,738
292,403
167,552
2,150,928
5,831,266
3,564,693
269,138
5<»,002
12.329,982
12,868
345,371
116,833
100 , 84 1
12.905,895
2,377,746
3,269,348
4,783,993
22,768,934
5,325,399
1,585,445
581,339
40,692,204
100,862
311,983
227,642
81.350
721.837.
41,414,041
y Represents approximately 100.0 percent of deliveries by primary distributors in continental United States.
21 Reported as produced or Imported and delivered except liquid sugar which is on a sugar solid* content basis.
Source: USDA-ASCS, Sugar Reports. No. 238 (March, 1972), p. 14.
Ill-4
-------
80 percent of total nutritive sweeteners in 1956 to less than 74 percent
in 1972. Sugar's share of confectionary demand for nutritive sweeteners
has been more stable, declining from 70 percent in 1956 to 68 percent in
1C>72. Although sugar's share of canning demand has fallen from 87 per-
cent in 1956 to 82 percent in 1972, its share has risen since hitting a low
in 1967. During the period from 1956 to 1972 the price of corn sweeteners
has fallen relative to sugar and new production techniques have improved
the quality of corn syrup.
As shown above, some substitution ,Among sweeteners exists. Noncaloric
sweeteners are used to meet the demands of those consumers seeking to
limit sugar intake. Some substitution of noncaloric sweeteners for sugar
is associated with relative price changes. However, for noncaloric
sweeteners quality considerations appear to be more important. Corn
sweeteners are sugar's major price competitor. Technical improvements
in corn syrup manufacture have produced a range of syrups of different
qualities. Thus, corn syrup is better able to meet the different specifica-
tions of users. A limiting factor is the degree of corn syrup's sweetness
which is less than sugar. However, research in improving "corn syrup's
sweetness" is promising.
Japan's recent development of processes for the production of high
levulose and high fructose corn syrups show great promise and may
have a significant impact on the U. S. sweetener market in the future.
These syrups, produced by partial isome risation of dextrose (corn
sugar) into levulose, are said to be comparable to sucrose (cane and
beet sugar) in sweetening power and unlike other corn syrups can be
used as complete substitutes for sucrose. Thus an improved product
and lower relative prices have made corn syrup a stronger competitor
of suga r.
The substitution of corn syrup is a gradual process and the market reacts
to long-run changes in prices. Substitution of corn syrups may require
changes in manufacturing techniques and alter the quality of the final
product. Firms making the substitution must invest in new techniques
and develop promotional programs to "educate" the consun.er to prefer
the new product. Such difficulties mean that the food processor will shift
from one source to another slowly and when the processor can justify the
change for a long period. In some instances, the level of use of corn syrup
is restricted by the Food and Drug Administration. In other cases, corn
syrup may not be an acceptable substitute thus limiting the extent of
substitutibility.
A price war beginning in December 1971 among the corn syrup producers
dropped the equivalent cost ratio of corn syrup to sugar from 70 percent to
36 percent. Even now as corn syrup prices come up to 7.25 cents per pound
in New York as of April, 1973, this price is still only 55 percent of the
equivalent sugar price in the Northeast (Table III-3).
I1I-5
-------
Table III-3. Wholesale prices of sugar, corn syrup, and dextrose.
Refined sugar Dextrose
Northeast N.Y.
Year
1956
1957
1958
1959
I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973 (April)
8.77
9-15
9- 27
9.33
9.43
9.40
9- 60
11.94
10.68
10. 22
10. 36
10.62
10. 84
11.44
11.97
12.48
13.09
13.31
cents per pound,
7.91
8. 32
8.33
8. 13
8. 13
8. 10
8. 04
9- 10
8. 85
8. 70
8. 87
9.49
9-49
9-96
10. 20
10.71
10.07
10.65
Corn Syrup
N.Y.
dry basis
8.90
9-17
9. 18
9- 10
9.12
9.00
8.73
9. 19
8.36
8. 27
8.34
8.40
7. 85
8.01
8.45
8.77
5.78
7.25
Dextrose
relative
to sugar
90
91
90
87
86
86
84
76
83
85
86
86
86
85
85
86
77
80
Corn syrup
relative
to sugar
101
100
99
98
97
96
91
77
78
81
81
79
72
68
70
44
55
Source: Sugar Reports, USDA-ASCS, selected issues.
Ill-6
-------
Production of corn syrup is up and production facilities are fully utilized.
A new entry into corn syrup production is .Arms tar, a cane sugar producer
of ''Domino" sugar and an owner of Spreckels beet sugar division,
Demand and Price Elasticity
Estimates of price elasticity and cross elasticity of demand for sugar
in industrial uses do not exist. However, price consciousness appears
to increase as the cost of sugar increases in proportion to total food
costs. Thus substitution seems to be occurring^ The gradual adjustments
indicate that demand is much more price elastic in the long run as time
for adjustment is increased.
Household use accounts for about one quarter of total consumption. Sugar
is a minor item in the household budget. Households do not appear to
make substitution for sugar when the price changes. Estimates of price
elasticity of demand for household use of sugar confirm this inelasticity
with estimates ranging from -0. 16 to -0.24. _' Likewise, income has
little influence with income elasticity eslimates ranging from .03 to
0.15. _ The corn syrup price cross elasticity is also small at 0. 05. _'
Thus households will make little change in sugar consumption in response
to changes in prices or incomes.
2. Government Sugar Policy
The U S. sugar industry has been protected and regulated by the
Federal Government since 1789. A quota system of control was initiated
in 1934 and has been amended and extended periodically since then. The
current legislation governing the industry is the Sugar Act of 1948 as
amended in 1971. This legislation became effective January 1, 1972 and
extended the Act through December 31, 1974.
Thomas H. Bates and Andrew Schmitz, "A Spatial Equilibrium
Analysis of the World Sugar Economy, " Giannini Foundation Mono-
graph No. 24, Univ. of Calif. , Berkeley, 1969, and P. S. George
and G. A. King, "Consumer Demand for Food Commodities in the
U.S. with Projections for 1980," Giannini Foundation, Monograph
No. 26, Univ. of Calif., Berkeley, 1971.
Adapted from "Initial Analysis of the Economic Impact of Water
Pollution Control Costs upon the U.S. Cane Sugar Industry," Bruce
J. Walter and Peter M. Emerson, ERS, USDA. (1973)
III- 7
-------
The principal provisions of the U. S. Sugar Act are (a) limitation of the
total supply of sugar available to U. S. consumers, (b) Government sub-
sidy payments to U. S. sugar cane and sugar beet growers, (c) an excise
tax on all sugar marketed within the U. S. , and (d) a tariff on sugar imports.
Under the supply limitation provision of the Sugar Act, the Secretary of
Agriculture each year (a) determines the quantity of sugar needed to meet
the requirements of domestic consumers and to attain the price objective
specified in the Sugar Act, (b) divides, by means of quotas, this total
supply requirement among specified domestic and foreign production
areas, (c) assigns, when necessary for orderly production, "proportion-
ate shares" of each domestic production area quota to individual farms
within that production area, and (d) imposes, when necessary for orderly
marketing, a refined sugar "marketing allotment" upon each refining and
importing firm. (See Table III-4 for the 1970, 1971, and 197Z quotas
assigned to each domestic production area and foreign country. ) Through
these strong supply limitation powers granted by the Sugar Act, 'he
Secretary of Agriculture is able to control the price of raw sugar.
The price objective specified in the Sugar Act is to maintain the same
ratio between (a) the price of raw sugar, as registered in the New York
market, and (b) the average of (i) the parity index (the index of prices
paid by all farmers for commodities and services, including interest,
taxes, and farm wages, 1967 = 100) and (ii) the wholesale price index
(1967 = 100) as the ratio that existed during the period September 1, 1970,
through August 31, 1971. The Secretary of Agriculture is required to
make appropriate adjustments in his determination of national consump-
tion requirements whenever the average price of raw sugar varies from
the objective by 4 percent or more for 7 consecutive days (3 percent or
more during November, December, January and February).
Sugar marketing is controlled under the provisions of the U. S. Sugar
Act and numerous changes in the law since 1934 have permitted signifi-
cant increases in the output of domestically produced raw sugar. Even
larger increases have been granted to domestic refiners. Over time,
the increases granted to each of the domestic sugarcane producing areas
have been markedly different. This has affected the degree of moderniza-
tion and the average size of the mills producing raw sugar in each area
although little effect on sugar refineries.
The Sugar Act provides for subsidy payments to U. S. sugarcane and
sugar beet growers. These payments are made only to growers who meet
the following conditions:
a. That the grower has not marketed cane or beets in excess
of the proportionate share for the farm, as determined by
the Secretary of Agriculture;
b. That no child labor (except family members) has been
employed on the farm;
III-8
-------
Table III-4. U.S. Sugar quotas: 1970, 1971 and 1972 basic and adjusted quotas by domestic production
area and foreign country
1970
Production area
Basic
Quota
Adjusted
Quota '
(short tons, raw value)
Domestic
Domestic beet
Mainland cane
Hawaii
Puerto Rico
Virgin Islands
Total domestic
JH Foreign
"i"1 Total Foreign
Grand Total
3,597,000
1,308,000
1, 145,486
1, 140,000
15,000
7,205,486
4,394,514
11,600,000
3,
1,
1,
6,
5,
11.
597,000
308,000
145,486
360,000
--
410,486
189,514
600,000
1971
Basic
Quota
Adjusted
Quota U
(short tons, raw value)
3,454,
1,256,
1,110,
1, 140,
15,
6,975,
4,325,
11,300,
000
000
000
000
000
000
000
000
3,
1,
1,
5,
5,
H,
406,333
256,000
110,000
150,000
--
922,333
377,667
300,000
1972
Basic
Quota
(short tons
3,692,
1,643,
1,218,
855,
--
7,408,
4,391,
11,800,
000
000
238
000
238
762
000
Adjusted
Quota I/
, raw va lue )
3,400,
1,643,
1,218,
175,
--
6,436,
5,363,
11,800,
000
000
238
000
238
762
000
Adjustments reflect (a) changes in total U.S. sugar requirements, (b) withheld quotas, and (c) deficits and
deficit prorations.
Source: USDA-ASCS, Sugar Reports, No. 243 (August 1972), pp. 22-24.
-------
c. That all employed labor has been paid in full at not less
than the minimum wage determined by the Secretary;
d. That growers who are also processors have paid other
growers for purchased cane or beets at prices not less
than those set by the Secretary.
Subsidy payments provide a powerful financial incentive for growers
to observe the conditions imposed by the Sugar Act. If a grower fails
to meet these conditions---!, e. , if he attempts to market beets or
cane in excess of his assigned'proportionate shareL-his payments are
reduced or withheld entirely. Thus, subsidy payments are the principal
legal device for obtaining compliance by domestic growers, just as
import licenses are the means for obtaining compliance for foreign
suppliers.
Conditional payments are made at the basic rate of 80 cents per 100
pounds of sugar recoverable from the cane or beets grown on farms pro-
ducing less than 350 tons of sugar, raw value. The rate declines by
stages to 30 cents per 100 pounds tor all sugar in excess of 30, 000 tons
produced on a farm. In addition, growers may receive payments for
abandoned acreage at the rate of one-third the normal yield for the farm;
payments may also be received for crop deficiencies caused by
drought, flood, storm, freezing, disease, or insects which result in
yields below 80 percent of normal. Generally, the payments for aban-
donment and deficiency are much smaller than the conditional payments
made for sugar cane and sugar beets which are harvested and marketed.
The 1970 and 1946-69 average return to sugar cane growers, including
government payments, are presented in Table III-5 by production area
and revenue source.
An excise tax is levied on sugar at the rate of 50 cents per 100 pounds,
raw value. This tax is collected on all sugar marketed in the United
States regardless of source. Receipts from the tax in recent, years have
averaged more than $100 million per year, but payments to sugar cane
and sugar beet growers have averaged about 15 percent less than the tax.
Thus, the U. S. sugar program generates revenue which is deposited in
the general funds of the U. S. treasury. However, it should be noted that
the subsidy payments made under the Sugar Act and the sugar excise tax
are legally separate. Thus, either one could be amended or repealed
without affecting the other.
The equitable distribution of the benefits which the Sugar Act created was
provided in addition to controlling the supply of sugar, imposing a tax on
sugar sales and subsidizing sugar cane and sugar beet growers. For
III-10
-------
Table III-5. Sugarcane growers' returns by production area and source, 1970 and 1946-69 average.
Production
Area
Louisiana
1946-69 avg.
1970
Florida
1946-69 avg.
1970
Hawaii
1946-69 avg.
1970
Puerto Rico
1946-69 avg.
1970
Basis of Payment I/ : Processor Payments : Sugar
Raw sugar :
'per pound/ : (
Cents
6.50
8.19
6.45
8.37
NA
5.93
7.32
: Per ton of sugarcane: :Per ton of
Molasses : produced for sugar .-Total; produced
Act Payments
sugarcane :
for sugar :_.._.,
per galloi>:s : Molas,e9 : 2/ :: Abandonment
: : : : : deficiency
1,000
Cents Dollars per ton Dollars Dollars
14.73 7.13 .29 43,813 1.24
13.08 9.09 .24 64,629 1.25
14.98 7.86 .28 23,473 .89
14.15 11.67 .27 67,712 1.08
NA NA NA NA NA
11.26 7.92 .35 78,434 1.44
11.63 7.18 .59 45,773 1.08
I/ Seasons' average prices based on selected periods of varying length.
_2/ Seasons' average prices including molasses payment paid by processors to
production.
,37 Less than 0.5 cents.
4/ Includes Commodity Credit Corporation payments for 1945-46.
Source: The Gilmore Louisiana-Florida-Hawaii Sugar Manual. 1971.
per ton
.03
.01
.02
I/
NA
.02
0
growers
and:
1,000
Dollars
7,319
8,692
2,540
6,121
NA
4/15,045
6,341
multiplied
Total Payments
=r ton of sugarcane
produced for
sugar
Dollars per ton
8.68
10.59
9.05
13.02
NA
9.73
8.85
by sugarcane
|Total
1,000
Dollars
51,133
73,321
26,001
73,833
NA
93,898
52,114
USDA-ASCS, Sugar Reports, various issues.
-------
example, most small-scale sugar cane growers have no investment in
the mill to which they sell their cane and usually have little freedom in
selecting a mill. In most cases, only one or two mills are located near
enough to a given farm to permit the economical transportation of cane.
In order to protect such growers, the USDA annually determines a
minimum price for sugar cane grown in each of the four domestic pro-
duction areas. This price is established by a formula related to the
quality of the sugar cane and the market price of raw sugar for a speci-
fied period. For most independent growers in most years, this minumum
price is the actual price received. The independent grower's ability to
influence the price of sugar cane largely depends, therelore, upon the
arguments and evidence which he can present to the Sugar Act administra-
tors who set the minimum prices.
Imported sugar is sold at the same level of prices paid for domestically pro-
duced sugar. Sugar prices in the United States generally have been much
higher than those prevailing in the world market (Table III-6). During
the past two decades, world prices have exceeded the U. S. price only in
1950-51, 1957-', 1963-64, and 1972. i' HighU. S. sugar prices make -his
country a very desirable market for sugar exporting nations, ^specially
those which do not have other preferred markets such ar- the United
Kingdom or France. The value of the U. S. sugar market to an exporting
nation is also affected by the importance of sugar exports to that nation's
economy and the share of its sugar exports which can be sold in the United
States. In addition to being the dominant factor in determining domestic
sugar prices, the U. S. sugar program is, at times, also an important
factor influencing world sugar prices. Each time that world sugar prices
have risen sharply, U. S. prices have also risen, but more moderately.
When world prices have increased, the Secretary of Agriculture has
increased the U. S. sugar consumption requirement so as to make more
sugar available to consumers here. In 1950, the increase was from 7.5
million to 8. 7 million tons; in 1957, from 8. 8 million to 9. 3 million tons;
in 1963, from 9. 8 million to 10. 4 million tons; and in 1972 from 11.2
million to 11.8 million tons. In each case, the increased supply of sugar
for U. S. consumers moderated the price rise here but, by decreasing
supplies available for other importing countries, caused world prices to
rise even further than expected. Since the United States is by far the
world's largest importer of sugar--taking 20 to 25 percent of the total
in world trade--unexpected changes in the volume of this country's im-
ports have an appreciable effect on all other sugar importing and export-
ing countries.
Although U. S. sugar prices since the end of World War II have usually
been maintained above the world market level, it does not follow that
U. S. prices would have declined to the world level if quotas had not
Exceeded U.S. prices in some months but not for year average.
Ill-12
-------
Table III-6. Raw sugar prices in New York and the world market,
1948-72
Year
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Raw sugar in
Now York
..- 5.54
..: 5.81
5.93
6.06
..: 6.26
6.29
6.09
..: 5.95
..-. 6.09
..: 6.24
..: 6.27
6.24
6.30
6.30
6.45
. . : 8 . 18
.. : 6.90
..: 6.75
..: 6.99
..: 7.28
..: 7.52
..: 7.75
..: 8.07
..: 8.52
..: 9.09
World sugar I/ ]
Cents per pound------
5.13
5.03
5.82
6.66
5.08
4.27
4.14
4.19
4.47
6.10
4.36
3.86
4.09
3.85
3.87
9.41
6.79
3.07
2.81
2.95
2.96
4.37
4.88
5.65
8.53
Difference :
New York
over
world
0.41
0.78
0.11
-0.60
1:18
2.02
1.95
1.76
1.62
0.14
1.19
2.38
2.21
2.45
2.58
-1.21
0.11
3.68
4.18
4.33
4.56
3.38
3.19
2.87
0.56
Tj Adjusted to the New York delivery base.
Source: USDA-ASCS, Sugar Reports.
Ill- 13
-------
existed and import duties were unchanged. Without quotas, U. S. prices
would have declined and those in the world market would have risen until
they balanced at some intermediate level. No estimates of changes in
U. S. and world prices, based on various assumptions regarding changes
in quotas and tax policies, are available.
The U. S. sugar program has both benefited the domestic sugar industry
and increased the average price paid by sugar users. The disadvantage
to consumers of higher sugar prices has been partially offset by the bene-
fit of extreme price stability relative to the prices of other agricultural
products.
The Secretary of Agriculture also must adjust quotas for domestic areas.
For example, should the effluent limitation guideline costs close mills
and production is abandoned, the Secretary of Agriculture is required by
law to distribute these acreages to other domestic quota areas first and
then to import quotas. The Secretary is directed to set quotas for the
coming year such that the price objective for raw sugar as defined in the
law is satisfied. If abandoned production was not reallocated, there would
be a short run shortage of sugar forcing wholesale prices up causing re-
finers to bid up the price of raw sugar, and thus causing divergence away
from the price objective.
3. Base Point Pricing
Base point pricing developed because large refineries found it economical
to locate close to ports of entry or adjacent to major population centers.
This gave them ready access to off-shore sugar from which the bulk of
refined cane sugar is manufactured. Because these refineries became
the major sellers in their respective areas, they established base point
pricing. Eight points of origin are used in this base point pricing. Within
a region the price at any point is the origin sugar price plus the freight
cost from base point to the buyer's location. The principal seller in a
region sets the price so as to maximize his profit in the region. All
sellers of sugar compete to sell their excess sugar in the Chicago market.
The Chicago market has been used because many food processors are
located there and because the nation's rail system tends to come together
at Chicago. Thus the result of base point pricing is a lower price in
Chicago as can be seen in Table III-7. Obviously, the wholesale market
for sugar is not one of perfect competition.
Ill-14
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Table III-7 . Wholesale prices for refined sugar, March 1973.
100 Ib. bag
Location
Northeast
Midcentral
Western Ohio-Lower Michigan
Southeast
Gulf
Chicago - West
Intermountain North
Pacific Coast
1
1
1
3.
2.
2.
12.
1
1
1
1
2.
1.
2.
1.
cents per
31
85
20
95
40
75
05
85
bulk
Ib.
12.
12.
12.
12.
12.
11.
11.
11.
70
25
05
45
05
55
80
70
Source: Sugar Reports, USDA-ASCS (April, 1973).
Ill-15
-------
4. Supplies
In the total supply of sugar for the U.S. , imports play a major role.
Forty-five percent of this total supply is imported, 26 percent of the
total comes from domestic sugar cane, and 29 percent from domestic
sugar beets.
B. Expected Price Impacts
Since the demand for sugar for household use is relatively inelastic, we
doubt that a price increase would alter the consumption patterns signi-
ficantly. Although price elasticities for industrial uses or cross elas-
ticities with other sweeteners, such as beet sugar, corn sweeteners and
synthetics, are not known with certainty, this market representing about
two-thirds of sugar use appears to be price conscious and with the in-
direct government price controls oriented toward price stability, it is
doubtful that significant price increase;, can be achieved in the long run
by the cane sugar industry to offset investment :ri non-proau<. tr. e pollu-
tion control equipment.
The price situation is further compounded by the role of sugar imports,
which represent about 45 percent of total sugar consumption. Also in-
fluencing expected price impacts will be the response of the beet sugar
industry to pollution controls. However, it should be noted that in an
analysis of the impacts on the beet sugar industry' it was concluded
that imposition of water pollution controls would not significantly in-
crease prices due to the large amount of in-place control currently being
achieved.
The ability of the industry to pass along cost increases will ultimately
depend on government sugar policy. Supply curtailment in the cane mill
segment could mean price increases to refiners and consumers, if quotas
are not adjusted accordingly and world sugar prices remain at present
levels. Any significant curtailment of U. S. domestic cane production
could mean that the exceptionally strong world sugar prices will continue,
since U. S. actions tend to impact the world price, as pointed up above
in the discussion of government sugar policy. At the present stage of
analysis, we suspect that much of the projected price effect will depend
on the impact on cane mill production.
~J Economic Impact of Costs of Proposed Effluent Limitation Guide-
lines for the Beet Sugar Industry, Draft Report, Development Planning
and Research Associates , Inc., (1973).
Ill-16
-------
IV. ECONOMIC IMPACT ANALYSIS METHODOLOGY
The following economic impact analysis utilizes the basic industry infor-
mation developed in Chapters I-III plus the pollution abatement technology
and costs provided by Environmental Protection Agency. The impacts
examined include:
Price effects
Financial effects
Production effects
Employment effects
Community effects
Other effects
Due to the crucial nature of potential plant shutdowns (financial and
production effects) to the other impacts, a disproportionate amount of
time will be devoted to the financial and plant closure analysis.
In general, the approa.ch taken in the impact analysis is the same as that
normally done for any feasibility capital budgeting study of new invest-
ments. In the simplest of terms, it is the problem of deciding whether
a commitment of time or money to a project is worthwhile in terms of
the expected benefits derived. This decision process is complicated by
the fact that benefits will accrue over a period of time and that in prac-
tice the analyst is not sufficiently clairvoyant nor physically able to re-
flect all of the required information, which by definition must deal with
projections of the future, in the cost and benefit analysis. In the face
of imperfect and incomplete information and time constraints, the industry
segments were reduced to money relationships insofar as possible and the
key non-quantifiable factors were incorporated into the analytical thought
process to modify the quantified data. The latter process is particularly
important in view of the use of model plants in the financial analysis. In
practice, actual plants will deviate from the model and these variances
will be considered in interpreting financial results based on model plants.
A. Fundamental Methodology
Much of the underlying analysis regarding price, financial, and produc-
tion effects is common to each kind of impact. Consequently, this case
methodology is described here as a unit with the specific impact inter-
pretations being discussed under the appropriate headings following this
section.
IV-1
-------
The core analysis for this inquiry was based upon synthesizing physical
and financial characteristics of the various industry segments through
model or representative plants. The estimated cash flows for these
model plants are summarized in Chapter II. The primary factors involved
in assessing the financial and production impact of pollution control are
profitability changes, which are a function of the cost of pollution control
and the ability to pass along these costs in higher prices. Admittedly,
in reality, closure decisions are seldom made on a set of well defined
common economic rules, but also include a wide range of personal values,
external forces such as the ability to obtain financing or consideration of
production unit as an integrated part of a larger cost center where total
profit center must be considered.
Such circumstances include but are not limited to the following factors:
1. There is a lack of knowledge on the part of the owner-
operator concerning the actual financial condition of the
operation due to faulty or inadequate accounting systems
or procedure:;. This is especially likely to occur amont/
small, independent operators wao tiu not have eife*. T^/K
cost accounting systems.
2. Plant and equipment are old and fully depreciated and the
owner has, no intention of replacing or modernizing them.
He can continue in production as long as he can cover labor
and materials costs and/or until the equipment deteriorates
to an irrepairable and inoperative condition.
3. Opportunitites for changes in the ownership structure of the
plants (or firms) exist through the acquisition of the plants
by grower cooperatives where the principal incentive is that
of maintaining sugar caneacreages in situations where
grower returns from sugar cane production are substantially
above returns from alternative cropping opportunities. In
this situation, which presently exists in the cane sugar in-
dustry, growers may elect to form producer-processor
cooperatives and acquire ownership of processing plants
which they would continue to operate at levels of return
generally unattractive to private owners.
4. Personal values and goals associated with business ownership
that override or ameliorate rational economic rules is a
complex of factors commonly referred to as a value of psychic
income.
IV-2
-------
5. The plant is a part of a larger integrated entity and it either
uses raw materials being produced profitably in another of
the firm's operating units wherein an assured market is
critical or, alternatively, it supplies raw materials to
another of the firm's operations wherein the source of supply
is critical. When the profitability of the second operation
offsets the losses in the first plant, the unprofitable oper-
ation may continue indefinitely because the total enterprise
is profitable.
6. The owner-operator expects that losses are temporary and
that adverse conditions will dissipate in the future. His
ability to absorb short-term losses depends upon his access
to funds, through credit or personal resources not presently
utilized in this particular operation.
7. There are very" low (approaching zero) opportunity costs for
the fixed assets and for the owner-operator's managerial
skills and/or labor. As long as the operator can meet labor
and materials costs, he will continue to operate. He may
even operate with gross revenues below variable costs until
he has exhausted his working capital and credit.
8. The value of the land on which the plant is located is appreci-
ating at a rate sufficient to offset short-term losses, funds
are available to meet operating needs and opportunity costs
of the owner-operator's managerial skills are low.
The above factors, which may be at variance with common economic
decision rules, are generally a ssociated with proprietorships and
closely held enterprises rather than publicly held corporations.
While the above factors are present in and relevant to business decisions,
it is argued that common economic rules are sufficiently universal. To
provide an useful and reliable insight into potential business responses
to new investment decisions, as represented by required investment in
pollution control facilities, economic analysis will be used as the
core analytical procedure. Given the pricing conditions, the impact on
profitability (and possible closure) can be determined by simply computing
the ROI (or any other profitability measure) under conditions of the new
price and incremental investment in pollution control. The primary con-
sequence of profitability changes is the impact on the plant in terms of a
plant shutdown rather than making the required investment to meet
pollution control requirements.
IV-3
-------
In the most fundamental case, a plant will be closed when variable ex-
penses (Vc; are greater than revenues (R),since by closing the plant
losses can be avoided. However, in practice, plants continue to operate
where apparently Vc > R. Reasons for this inciude:
lack of cost accounting detail to determine when Vc > R.
opportunity cost of labor or some other resource is less
than market values. This wouid be particularly prevalent
in proprietorships where the owner considers his labor as
fixed.
other persona) and external financial factors.
expectations that revenues will shortly increase to cover
variable expenses.
A more probable situation is the -~ase "/hore Vc ^ R. but revenues ?.re
less than /arinblo . ^-r. ? plus .-j-h eve rht-:-.c ...-cp.-.-nse s .TCv-) n-hich '.re
fixed in the siiori run. 11 this .situation ^ print would continue to <:per-
ate as tonkas -'ontributions are be in 15 inatU; , ward covering a port um or
these fixed cash rvf mead -.xoetise s. Tiio : rm .varmct ope i .lie iiiaef'mi-v iv
under tnis condition. ->ut ir.e icngLr. ot r.his oor;cu is uncertain. Lasic it.
'his strategy of continuing operations is the zVrrrvs expectaticn r.hnt re-
venues will increase ^o cover cash, outlays. Factors involved in this tvpe
of closure decision include:
extent of capital resources. If the owner has other business
interests or debt sources that will supply capital input, the
plant \vill continue.
lack of cost accounting detail or procedures to know that TCc>R,
particularly in multiplant business situations.
labor or other resources may be considered fixed and the
opportunity cost for these items is less than market value.
Identification of plants where TCc > R but Vc < R leads to an estimate
of plants that should be closed over some period of time if revenues do
not increase. However, the timing of such closures is difficult to predict.
The next level of analysis, where TCc ^ R, involves estimating the
earnings before and after investment in pollution abatement. So long
as TCc R it seems likely that investment in pollution control will be
made and plant operations continued 30 Ions as the capitalized value
IV-4
-------
of earnings (CV), at the firms (industry) cost of capital, is greater
than the scrap or salvage value (S) of the sunk plant investment. If
S > CV, the firm could realize S in cash and reinvest and be financially
better off. This presumes reinvesting at least at the firms (industry)
cost of capital.
Computation of CV involves discounting the future earnings flow to
present worth through the general discounting function:
A (Hi)-n
n=l
where
V = present value
An = a future value in n**1 year
i = discount rate as target ROI rate
n = number of conversion products, i.e.,
1 year, 2 years, etc.
t = terminal number (or year)
It should be noted that a more common measure of rate of return is
the book rate, which measures the after-tax profits as a ratio of in-
vested capital, net worth, or sales. These ratios should not be
viewed as a different estimate of profitability as opposed to DCF
(discounted cash flow) measures but rather as an entirely different
profitability concept. The reader is cautioned not to directly compare
the DCF rates with DCOK rates. Although both measures will be reported
in the analyses, the book rate is reported for informational purposes only.
The two primary types of DCF measures of profitability are used. One
is called the internal rate of return or yield and is the computed discount
rate (yield) which produces a zero present value of the cash flow. The
yield is the highest rate of interest the investor could pay if all funds
were borrowed and the lean was returned from cash proceeds of the
investment. The second DCF measure is the net present value concept.
Rather than solve for the yield, a discount rare equivalent to the firms
cost of capital is used. Independent investments with net present values
of above zero are accepted; those below zero are rejected. The concept
of comparing capitalized earnings with the sunk investment value is
a variation of the net ore sent value method.
IV-5
-------
The data input requirements for book and DCF measures are derived,
to a large extent, from the same basic information although the final
inputs are handled differently for each.
1. Benefits
For purposes of this analysis, benefits for the book analysis have been
called after-tax income and for the DCF analysis after-tax cash proceeds,
The computation of each is shown below.
After tax income = (l-T)x(R-E-I-D)
After tax cash proceeds = (1 - T)x(R - E - D) + D
where
T = tax rate
R = revenues
E = expenses other than depreciation and interest
I = = interest expense
D = depreciation charges
Interest in the cash proceeds computation is omitted since it is reflected
in the discount rate, which is the after-tax cost of capital, arid will be
described below. Depreciation is included in the DCF measure only ia
terms of its tax effect and is then added back so that a cash flow over
time is obtained.
A tax rate of 48 percent was used throughout the analysis. Accelerated
depreciation methods, investment credits, and carry forward and carry
back provisions were not used due to their complexity and special limi-
tations. It is recognized that in some instances the effective tax rate
may be lower for single plant but, with the dominance of multiplant
firms, the industry's tax rate will be close to the 48 percent rate.
Revenue, expenses, interest and depreciation charges used were those
discussed in Chapter II. Chapter V discusses the cost of pollution con-
trol facilities. These items were assumed to be constant over the
period of analysis.
IV-6
-------
2. Investment
Investment is normally thought of as oatlays for fixed assets and working
capital. However, in evaluating closure of an on-going plant where the
basic investment is sunk, the value of that investment must be analyzed
in terms of its liquidation or salvage value, that is its opportunity cost
or shadow price. _' For purposes of this analysis, sunk investment was
taken as the sum of equipment salvage value plus land at book value plus
the value of the net working capital (current assets less current liabilities)
tied up by the plant (see Chapter II for values). This same amount was
taken as a negative investment in the terminal year. Replacement in-
vestment for plant maintenance was taken as equal to annual depreciation,
which corresponds to operating policies of some managements and serves
as a good decision rule for replacement in an on-going business.
Investment in pollution control facilities was taken as the estimates
provided by EPA and shown in Chapter V. Only incremental values
were used to reflect in-place facilities. The value of the land involved
was taken as a negative investment in the terminal year.
The above discussion refers primarily to the DCF analysis. Investment
used in estimating book rates was taken as invested capital--book value
of assets plus net working capital. In the case of new investment, its
book rate was estimated as 50 percent of the original value.
3. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U. S. business.
It provides both a measure of actual performance of a firm as well as
expected performance. In this latter case, it is also called the cost
of capital. The cost of capital is defined as the weighted average of
the cost of each type of capital (equities and interest bearing liabilities)
employed by the firm. There is no methodology that yields the precise
cost of capital, but it can be' approximated within reasonable bounds.
The cost of equities was estimated by two me thods -- the dividend yield
method and the earnings stock price (E/P ratio) method. Both are
simplifications of the more complex DCF methodology. The dividend
method is:
This should not be confused with a simple buy-sell situation which
merely involves a transfer of ownership from one firm to another.
In this instance, the opportunity cost (shadow price) of the invest-
ment may take on a different value.
IV-7
-------
k = -- +g
p 8
where
k = cost of capital
D = dividend yield
P = stock price
g = growth
and the E/P method is simply
k = E/P
where k = cost of capital
E ~ earnings
P = stock price
and is a further simplication of the first. The Latter assumes future
earnings as a level, perpetual stream.
The after tax cost oi debt capital \* a s pstimatc-d by us me; reported micros;
costs as a percent ot total debt ana n-, iitiply.n>; '.;y . ~ Z - - assurr.mr o 48 pi r-
cent tax rate. These values were '.vei^n'.^u o\ ihc- respective cquilv u> tola]
asset and total liabilities L' to total asset ratios.
The average cost of capital for the su
-------
As shown in the above computations, the estimated after-tax cost is 6.8
to 8. 5 percent. The subsequent analysis was based on 6. 5 and 7. 5 percent,
since it was felt that this was representative of the industry. However,
the above 6.8 to 8.5 percent were estimated from only four firms. The
lower estimate presumes a four percent growth factor which is roughly
equal to inflation expectations.
4. Construction of the Cash Flow
A twenty-two period cash flow was used in this analysis and was
constructed as follows:
1. Sunk investment (salvage market value of fixed assets plus
net working capital) taken in year t .
2. After tax cash proceeds taken for years tj to t2Q-
3. Annual replacement investment equal to annual current
depreciation taken for years tj to
4. Terminal value equal to sunk investment taken in year t2j-
5. Incremental pollution control investment taken in year tQ
for 1977 standards and year t^ for 1983 standards.
6. Incremental pollution expenses taken for years tj to t^g
for 1977 standards and years t., to t2Q for 1983 standards,
if additive to the 1977 standards.
7. No replacement investment taken on incremental pollution
investment on the assumption of a 20 year life.
8. No terminal value of pollution facilities was taken in year I,,, .
Often land would be taken, but because it represents such
a small quantity, the value was ignored.
-------
B. Price Effects
At the outset, it must be recognized that price effects and production
effects are intertwined with one effect having an impact upon the other.
In fact, the very basis of price analysis is the premise that prices and
supplies (production) are functionally related variables which are simul-
taneously resolved.
Solution of this requires knowledge of demand growth, price elasticities,
supply elasticities, the degree to which regional markets exist, the degree
of dominance experienced by large firms in the industry, market concen-
tration exhibited by both the industry's suppliers of inputs and purchasers
of outputs, organization and coordination within the industry, relation-
ship of domestic output with the world market, existence and nature of
complementary goods, cyclical trends in the industry, curreat utilization
of capacity and, exogenous influences upon price determination (e.g. ,
governmental regulation).
In view of the complexity and diversity of factors involved in determin-
ation of the market price, a purely quantitative approach to the problem
of price effects is not feasible. Hence, the simultaneous considerations
suggested above will be made. The judgment factor will be heavily em-
ployed in determining the supply response to a price change and altern-
ative price changes to be employed.
As a guide to the analysis of price effects, the estimated price required
to leave the model plant segment as well off as it is today will be computed.
The required price increase at the firm level will be evaluated in light of the
relationship of the model plant to the industry and the understanding of
the competitive position of the industry. The required price increase can
be readily computed using the DCF analysis described above, but dealing
only with the incremental pollution investment and cash proceeds.
Application of the above DCF procedure to these costs will yield the present
value of pollution control costs (i.e. , investment plus operating cost less
tax savings). If this is known, the price increase required to pay for
pollution control can readily be calculated by the formula
IV- 10
-------
(PVP) (100)
X - (1-T) (PVR)
where:
X = required percentage increase in price
PVP = present value of pollution control costs
PVR = present value of gross revenue starting in the year
pollution control is imposed
T = tax rate
Note that this formula implies that incremental profits resulting from
the price increase, will be taxed at a rate of 48 percent.
C. Financial Effects
In Chapter II, the financial characteristics of model plants were presented.
These data will serve as the base point for the analysis of financial effects
of pollution control. The primary focus of analysis will be upon profit-
ability in the industry and the ability of the firms to secure external
capital. Hence, it is ob%rious that this portion of the analysis cannot
be divorced from production effects since profit levels and the ability
to finance pollution abatement facilities will have a direct influence on
supply responses -- utilization of capacity and plant closures.
The measures of profitability utilized will include after-tax book rate
of return on invested capital and cash flow (after-tax profit plus
depreciation). After-tax profit as a percent of sales will
also be reported to assist in comparing financial data with standard
industrial measures.
In addition to these factors, two additional measures of economic profita-
bility will also be examined: (1) capitalized value of earnings and (2)
present values estimated by the procedures described in Section A above.
Both of these measures will be calculated on pre- and post-pollution control
bases.
Given these financial measurements, the ability of the industry to
finance the required pollution control expenditures will be reexammed
in light of the financial results and the information shown in Chapter II.
This ability will vary from one industry subsector to another due to
different financial structures, profitability, and abatement requirements.
Hence, capital availability and cost will probably have to be examined on
a model plant by model plant basis.
IV- 1 1
-------
D. Production Effects
Potential production effects include reductions of capacity utilization
rates, plant closures and stagnation of industry growth. It is antici-
pated that reductions in capacity utilization will be estimated via quali-
tative techniques given the analysts' knowledge of the industry. The
same is true for assessing the extent to which plant closures may be
offset by increases in capacity utilization on the part of plants remaining
in operation. Data limitations and time constraints are expecced to re-
quire that the impact of pollution control standards upon future growth
of the industry also be estimated via qualitative methods.
The remaining effect, plant closures, is very difficult to measure
realistically as discussed above in Section A. As a starting point
in the plant closure analysis, a shutdown model will be employed
to indicate which model plants should be closed, the marginal oper-
ations and the sound operations. These conclusions will be based upon
the decision rule that a plant will be closed when the net present value
of the cash flow is less than zero.
It is recognized that the use of models to represent an industry is
imperfect and that not all of the relevant values or factors can be
included in the models. Hence, in this industry, the appropriate
model plant results will be equated with e^ch cane sugar plant and
the variances to the model plant parameters will be subjectively eval-
uated to arrive at an estimate of the probability of closure.
In Chapter VI a list of the 6 model parameters are shown against which
eacn plant in the industry was compared.
The above analysis will be done under a'without pollution "control condi-
tion and a"with pollution"control condition. The former (and including
historical trends) will establish a baseline against which total closures
after pollution control will be compared, to arrive at an estimate of
closures due to pollution control.
E. Employment Effects
Given the production effects of estimated production curtailments, plant
closings and changes in industry growth, a major consideration arises
in the implications of these factors upon employment in the industry.
The employment effects stemming from each of these production impacts
will be estimated. To the extent possible, the major employee classifi-
cations involved will be examined with respect to the potential for re-employment.
IV-12
-------
F. Community Effects
The direct impacts of job losses upon a community are immediately ap-
parent. However, in many cases, plant closures and cutbacks have a
far greater impact than just the employment lost. Multiplier effects
may result in even more unemployment. Badly needed taxes for vital
community services may dwindle. Community pride and spirit may be
dampened. However, in some cases, the negative community aspects
of production effects may be very short-term in nature with the total
impact barely visible from the viewpoint of the overall community. In
a few cases, the closure of a plant may actually be viewed as a positive
net community effect (e.g., a small plant with a high effluent load in an
area with a labor shortage). These impact factors will be qualitively
analyzed as appropriate.
G. Other Effects
Other impacts such as direct balance of payments effects will also be
included in the analysis. This analysis too, will involve qualitative
judgments.
IV-13
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V. POLLUTION CONTROL REQUIREMENTS AND COSTS
Water pollution control standards, technology and costs used in this.
analysis were provided by the Environmental Protection Agency. The
conclusions of this report are based on those costs. During the prepar-
ation of this report, a number of changes were introduced by EPA but
it is believed by the contractor that the cost figures and investment
amounts shown in the analytical portion of this report are current.
Several factors, however, have been spelled out in the limits to this
analysis which bear specifically on the information and cost as pro-
vided by EPA. Further, it should be noted that the information shown
below refers specifically to cane sugar refineries. Sugar cane milling
costs and impacts are not shown and are not to be considered at this time.
Alternative Effluent Control Levels
General levels of pollution control for the cane sugar refinery industry,
both the liquid sugar segment and the crystalline sugar segment are set forth
below. Each of these levels indicate an effluent discharge and the loadings
for this discharge in BOD and Suspended Solids are shown in Table V-l.
1. Alternative A: No waste treatment or control. Essentially
the effluent from this alternative is the raw effluent and
there is neither treatment or cost involved with this alter-
native.
Z. Alternative B: Elimination of discharge from filters. This
alternative can be achieved by either impounding the mud
resulting from slurrying the filter cake with water or by dry
hauling the desweetened filter cake to land fill. B-l assumes
that the filter slurry is impounded and B-2 assumes dry
disposal of the filter cake.
3. Alternative C: Inplant modifications to reduce entrainment
of sucrose into conderiser water. This alternative includes
the installation of the demisters and external separators in
order to reduce entrainment of sucrose in condenser water.
In addition, refineries have good baffling and operation
controls in the evaporators and vacuum pans as well as
good vapor height.
V-l
-------
Table V-l. Summary of waste loads from effluent treatment alternatives
for cane sugar refineries
Liquid
BOD SS
Crystalline
BOD SS
i i at ;^ t^~
Alternative A
Alternative B-l
Alternative B-2
Alternative C
Alternative D
Alternative E - 1
Alternative E -2
Source: Development
3.43 1.56 1.54 1
3.25 1.00
3.25 1.00
2.90 1 . t 0
0. 24 0. 10
0.06 0.03
0.06 0.03
Document for Effluem
and Standards of Performance; Cane
of the Suga r
1.36 1.30
1.36 1.30
1.16 1. 30
0.38 0.06
0.04 0.03
0.04 0.03
Limitations Guidelines
Sugar Refining Segment
Processing Industry, Environmental Protection
A gency.
V-2
-------
4. Alternative D: Biological treatment of process watej-. This
alternative assumes the use of an activated sludge plant to
treat process water in addition to the treatment under Alter-
native B and C. While there are presently no refineries which
have their own biological treatment systems, the process waste
water is highly bio-degradable and thus well suited for biologn al
treatment in the opinion of the Development Document as
furnished by EPA.
5. Alternative E: Recycle of condenser water and biological
treatment of blowdown. This alternative includes, in addi-
tion to Alternative D, the recycle of condenser water followed
by biological treatment of the blowdown in an activated sludge
unit. The blowdown is to be approximately two percent of
the total flow. Recycle of condenser water accomplishes
two important things. One, it cools the water, thus removing
the heat normally discharged and, (Z) it concentrates the waste
loadings into the smaller blowdown stream, making biological
treatment of this waste stream feasible. Alternative E-l
assumes a cooling tower. Alternative E-2 assumes a spray
pond. Furthermore, where the E technology is used in con-
junction with Alternative D, a sand filter must also be added
at the end of the line for removal of suspended solids.
Within the above context and water pollution abatement requirements
under the Federal Water Pollution Control amendments for 1972, the
following three categories of. control we re evaluated. Referring to
Table V-2, the three levels of control are Best Practical Control Tech-
nology Currently Available, which is to be instituted by 1977, Best
Available Technology Economically Achievable which is to be instituted
by 1983, and the New Source Performance Standards which will be in
effect for all new sources coming onstream by 1974. From the proposed
guidelines for liquid and crystalline refineries in the Development Document,
all refineries need to achieve Level D of the alternatives for Best Practical
Control Technology Currently Available (BPT) by 1977 and Alternative E
for Best Available Technology Economically Achievable (BAT) by 1983.
B. Current Level of Control
To identify current levels of control or inplace technologies refer to
Table V-3, which is a listing of the methods of disposal of waste water
at each refinery. This listing is from the EPA Development Document for
Effluent Limitations Guidelines. Although specific refineries cannot be
identified, refer to Table V-4 which indicates by Code Number, the type
of refinery, its capacity, and its model classification.
V-3
-------
Table V-2. Proposed effluent limitations guidelines
BPT- BAT- NSPS^
BOD SS BOD SS BOD SS
kilograms per metric ton of melt
Monthly average
Liquid 0.24 0.10 0.06 0.03 0.06 0,03
(0..48)!/ (0.20) (0.12) (0.06) (0.12) (0.06)
Crystalline 0.38 0.06 0.04 0.03 0.04 0.03
(0.76) (0.12) (0.08) (0.06) (0.08) (0.06)
Daily average
Liquid 0.85 0.45 0.21 0.14 0.21 0.14
(1.70) (0.90) (0.42) (0.28) (0.42) (0.28)
Crystalline 1.14 0 24 0.12 0.12 0.12 0.12
(2.28) (0.48) (0.24) (0.24) (0.24) (0.24)
Best practical control technology currently available - 1977.
2/
Best available technology economically achievable - 1983.
New source performance standards.
4/
Bracket figures are pounds per ton.
Source: Development Document For Effluent Limitations Guidelines
and Standards of Performance; Cane Sugar Refinery Segment
of the Sugar Processing Industry, Environmental Protection
Agency.
V-4
-------
Table V-3. Summary of wastewater treatment and disposal
techniques of United States' cane sugar refineries _L/
Refinery Disposal of Wastewaters
C-l All process wastewater to municipal sewers; condenser
water to river.
C-2 All process wastewater to municipal sewers; condenser
water to river.
C-3 All liquid wastes to river.
C-4 All process wastewater to municipal sewers; condenser
water to river.
C-5 All process wastes to municipal sewers; condenser water
to river.
C-6 All liquid wastes to river.
C-7 Primary settling of process wastes; all discharge to
river.
C-8 All liquid wastes currently to river. Hook up to municipal
system completed for process water and expected tobe
ope rational before 1977.
C-9 Most process wastewater to municipal sewers; condenser
water to river.
C-10 Most process wastewater to municipal sewers; condenser
water to river.
C-ll Discharge into a swamp after traveling
through a two and a half mile canal.
C-12 Total impoundment of wastewater resulting in no dis-
charge to navigable waters.
C-13 Discharges into a swamp.
C-14 All process wastes to municipal sewers; recycle of con-
denser water through a cooling tower and discharge of
blowdown to municipal sewers.
V-5
-------
Table V-3. Summary of wastewater treatment and disposal
techniques of United States' cane sugar refineries
(continued)
Refinery Disposal of Wastewaters
L-l All liquid wastes to municipal sewers.
L.-2 All liquid wastes to municipal sewer; condenser water
to river.
L-3 All process wastewater to municipal sewer; condenser
water to river.
L-4 Total impoundment of wastewaters resulting in no dis-
charge to navigable waters.
L-5 Discharge of process water; cooling tower for condenser water
CL-1 All process wastewater to municipal sewers; condenser
water to river.
CL-2 Most of process wastes to municipal sewers; condenser
wate r to river .
CF-1 Closed system of canals and holding ponds resulting in
no discharge to navigable waters.
CF-2 Total impoundment of acid/caustic wastes and filter
cake slurry; impoundment with overflow of all other
wastewaters.
CF-3 Condenser water passed through spray pond (partial
recycle possible) before discharge; all process waste-
waters discharged to impoundage.
CF-4 Condenser water impounded then discharged; all other
waters impounded completely in ponds; cooling tower
recently built.
CF-5 Partial impoundment.
CF-6 Partial reuse of wastewaters in raw sugar factory
for cane washings during grinding season.
CF-7 Partial impoundment.
CF-8 Partial impoundment.
Source: Development Document for Effluent Limitations Guidelines and
Standards of Performance; Cane Sugar Refinery Segment of the Sugar
Processing Industry, Environmental Protection Agency.
V-6
-------
Table V-4. Cane sugar refineries, code, capacity and classification
Code
C-l
C-2
C-3
C-4
C-5
C-6
C-7
C-8
C-9
C-10
C-ll
C-12
C-13
C-14
L-l
L-2
L-3
L-4
L-5
CL-1
CL-2
CF-1
CF-2
CF-3
CF-4
CF-5
CF-6
CF-7
CF-8
Capa city
ton/day
2,600
2, 100
3,250
2, 100
1,000
190
3,500
1,500
2,000
1,200
1,500
350
1,700
2,200
300
800
850
390
100
1,800
820
460
700
660
700
220
600
400
700
Type of Refinery Classification _
Crystalline 4
4
4
" 4
4
2
4
4
" 4
4
" 3
" 2
11 3
4
Liquid 1
1
1 1
1
1
Crystalline-Liquid 4
4
Ref.-Mill 2
" 3
2
3
2
2
" 2
2
Classification refers to model segment:
1 - Liquid
2 - Small rural crystalline
3 - Large rural crystalline
4 - Urban crystalline
V-7
-------
Table V-5 indicates the type and extent of treatment at each specific
refinery showing how the process water and the condenser water is
currently handled. While it was not possible to translate each of the
descriptions of how the discharge was handled into specific alternative
levels of technology, a close, and we feel reasonable appraisal of the
inplace technology was made. For each of the cane sugar refineries,
a designation of the current status of inplace control is shown in Table
V-5.
From this table it can be seen that 16 plants currently either discharge
their process water to a municipal system or have some other form of total
treatment so that there is effectively no discharge of effluent from the
process water to surface water bodies. By the same analysis, there
are only five plants that have either treatment for their conde:nser
water or discharge the condenser water to a municipal system. This
would indicate that treatment for condenser water is a major consideration.
Supportive of this position is the fact that there are 14 plants that discharge
condenser water after making one pass through the condenser.
C. Water Pollution Abatement Costs
The costs of the various alternatives of treatment from B through E
were furnished by the Environmental Protection Agency through Supple-
ment A of The Development Document for Effluent Limitations Guide-
lines. Table V-6 shows a summary of these costs for both liquid and
crystalline plants and shows the incremental investment and annual cost
of operation involved for each level of treatment.
1. Investment
The figures on investment for each level of technology were used in total
as received and the conclusions, as far as the impact of costs shown in
the next chapter, follow from these estimates.
The assumption was made that B-l or B-2 was in place for most refineries
and therefore, the investments for the B-l or B-Z technology was used only
in evaluating one refinery in Table V-7. Similarly the need for Alternative
C technology, involving various entrainment devices for the vacuum pans
and the evaporators, was not clearly defined. The amount of investment
for Alternative C appeared to be a small part of the total investment, how-
ever, when compared to the D and E levels, therefore the lack of specific-
knowledge was not considered serious.
V-8
-------
Table V-5. Cane sugar refineries, water effluent discharge status
Process Water Condenser Water
Code
C-l
C-2
C-3
C-4
C-5
C-6
C-7
C-8
C-9
C-10
C-ll
C-12
C-13
C-14
L-l
1.-2
L-3
L-4
L-5
CL-1
CL-2
No
Treat- Municipal
ment system
X
X
X
X
X
X
J./
xi/
xi/
X
X
X
X
X
X
X '
Partial Total Direct dis- Partial Cool
Treat- Treat- charge to Municipal Treat- and
ment ment water bodies system ment Recycle
X
X
X
X
X
X
X X
X X
X
x
x!' x
X
X-J / If
-A.
X
X
X
X
X
X
X
X
Total
Treat-
ment
X
X
continued--
-------
Table V-5. (continued)
Code
CF-1
CF-2
CF-3
CF-4
CF-5
CF-6
CF-7
CF-8
Process Water
No Partial
Treat- Municipal Treat-
ment system ment
X
X
X
X
Condenser Water
Total Direct dis-
Treat- charge to Municipal
ment watt.r bodies system
X
X
X
X
Partial Cool Total
Treat- and Treat-
ment Recycle ment
X
X
X
X
X
X
X
X
J7 Expect to be on municipal hookup by the end of 1973.
I Most process water to a municipal system.
I./ Discharge to a swamp - not to a navigable river.
-------
Table V-6. Cane sugar refinery water pollution control investment and annual costs ' by technologies
Liquid
Investment
Annual cost '
j Crystalline
' Small
V'
> Investment
Annual cost _'
Large
Investment
Annual cost _'
' All costs updated
A
0
0
0
0
0
0
from
B-l
33.0
6.2
35.5
5.8
71.0
15.0
B-2
66.0
39.5
66.0
39.5
66.0
68.5
C
58.0
23.6
56.0
20.3
79.0
25. 1
1971 to 1972 by use of 1.076
' Annual maintenance and operating cost les
_' Includes cost of sand filter.
Source- Development Document for Effluent
Cane Suga r
Refining Segment
D
E-l
$1,000 --
362.0 157.
145.9 18.
273, 0
127.6
712.0
169. 1
multiplier.
339.
46.
709.
109.
E-l!/ E-2
0 187.0 133.0
4 20.0 15.5
0 371.9 270.0
4 48.0 40.6
0 766.0 584,0
0 113.4 87.7
E-2!/
163.0
17. 1
302. 9
42. 1
640. 0
92. 1
s depreciation and interest.
Limitations Guidelines
of Sugar Processing Industry
and
Standards of Pe rformance;
- Supplement A , Cost Analysis .
Environmental Protection Agency
-------
Table V-7. Cane sugar refineries estimated technology needs and costs to meet best practical control technology
currently available
Code
C-l
C-2
C-3
C-4
C-5
C-6
C-7
C-8
C-9
f C-10
K c-n
C-12
C-l 3
C-14
L-l
L-2
L-3
L-4
L-5
CL-1
CL-2
B-li/ B-2 L1
Capacity Invest- Annual Invest- Annual
ton/day ment Cost ment Cost
2,600
2, 100
3,250 71 . 15.0
2, 100
1,000
190
3,500
1,500
2,000
1,200
1,500
350
1,700
2,200
300
800
850
390
100
1,800
820
C
Invest-
ment
__ "ROOD
56
79
79
79
58
58
58
56
Annual
Cost
20.3
25. 1
25. 1
25. 1
23.6
23.6
23.6
20.3
D
Total
Invest- Annual Invest- Annual
ment Cost ment Cost
711 169.1 782
273 127.6 329
711 169.1 790
79
79
711 169.1 711
711 169.1 711
58
58
362 145.9 420
56
184. 1
147.9
194.2
25. 1
25. 1
169. 1
169. 1
23.6
23.6
169.5
20.3
continued--
-------
Table V-7 (continued)
Code
CF-1
CF-2
CF-3
CF-4
CF-5
CF-6
CF-7
CF-8
Totals
No. of
B-l17 B-21/
Capacity Invest- Annual Invest- Annual
ton/day ment Cost ment Cost
460
700
6 660
700
220
600
400
700
71 15.0 0 0
Refineries 1 0
C
Invest-
ment
- -tni
56
56
56
56
56
56
56
915
15
Annual
Cost
~\n __ _ .
20.3
20.3
20.3
20.3
20.3
20.3
20.3
328.8
D
Invest-
ment
273
273
273
273
4,571
10
Annual
Cost
127.6
127.6
127.6
127.6
1,460.3
Total
Invest-
ment
56
56
56
329
329
329
329
5,557
18
Annual
Cost
20.3
20.3
20.3
147.9
147.9
147.9
147.9
1,804. 1
Arbitrarily B-l costs we assumed for rural and B-2 costs for urban refineries.
-------
Table V-7 taken in total shows the various refineries that require invest-
ment and expense to meet the BPT level and Table V-8 shows what in-
cremental investments and expenses need to be made by 1983 in order
to achieve the BAT level of control.
2. Operating and Ownership Costs
In contrast with the beet sugar industry, for example, operating and
maintenance costs are a significant part of the total costs of water
pollution control equipment and practices as compared to the total
cost of investment. As will be seen later, the amount of annual ex-
pense does have a significant impact on the refineries and the results
of the discounted cash flow analysis. Annual depreciation charges of
five percent were taken on equipment on the presumption that this
equipment would have a 20-year life and no salvage value.
3. Estimated Costs
Based on the data which have been described above, it was possible to
make a total cost estimate for each refinery. For the purposes of
the impact analysis this cost information was then blended in with each
model plant in order to measure the impact on a plant by plant basis.
Overall on the industry wide basis for the BPT level of treatment, a
total of $5,557,000 would need to be invested. For the BAT Level, this
investment is an additional $11, 120, 000.
These costs, as previously mentioned, assume that the levels of tech-
nology specified will produce the level of treatment required to meet
the guidelines and, secondly, that the alternatives of treatment are
properly costed so that these do, in fact, represent actual dollars to
be spent by each refinery. Of the 29 refineries, 18 will be required to
invest money by 1977 and a total of 22 will be investing in water pollu-
tion control by 1983.
V-14
-------
Table V-8. Cane sugar refineries estimated technology needs and costs to meet best available technology
economically achievable - 1972 data
Cocki
C-l
C-2
C-3
C-4
C-5
C-6
C-7
C-8
C-9
C-10
C-ll
C-12
C-13
C-14
L-l
L~2
L-3
L-4
L-5
CL-1
CL-2
Capacity
ton/day
2,600
2, 100
3,250
2, 100
1,000
190
3,500
1,500
2,000
1,200
1,500
350
1,700
Z.200
300
800
850
390
100
1, 800
820
E-
Invest-
ment
709
709
766
709
709
766
709
709
709
157
157
28
709
339
-i-i' E-zi'
Annual Invest- Annual
Cost ment Cost
_ __
-------
Table V-8 (continued)
V 1 ll TT ? l>
ii- i Cj-i,
Code
Capacity
ton /day
Invest- Annual Invest-
ment Cost ment
Annual
Cost
Invest-
ment
Total
Annual
Cost
. _ _
-------
VI. IMPACT ANALYSIS
The impacts considered in this analysis include the following:
Price effects
Financial effects
Production effects
Employment effects
Community effects
Balance of payments effects
A comprehensive and detailed analysis of each of the above was beyond
the scope of this study. Consequently, efforts were allocated more to
the financial and plant closure analysis with lesser effort on the other
macro-economic impacts.
A. Price Effects
Estimated price increases necessary for the industry to maintain its
current level of profitability are not large, although certain segments
will require much hi her increases than others. Table VI-1 shows
estimated price increases required to maintain estimated current
profitability levels based on the model plant analysis. It shows the
incremental increases involved in the BPT level, the BAT level, and
the total of both, which would be required by 1983.
Except for the segment of refineries listed as small rural, all price
increases needed are less than one percent. The liquid plants need the
least price increase, only . 14 of one percent. The small rural plants,
and this is only some of the plants in this group, show a need for 2.07
percent increase while the large rural is . 92 of one percent and the
urban plants require .61 of one percent increase. Actually, five plants,
which require no treatment costs whatsoever represent 11 percent of
the total refinery capacity and would show in this table to need a zero
price increase.
In the case of the sugar beet industry, a larger percent of the total
industry was not required to spend money for water pollution control
due to the fact that they were operating at zero discharge already.
This percentage was approximately 30 percent. In the case of cane
sugar, only 11 percent of the industry is currently meeting both the
1977 and 1983 guidelines. On the other hand, the need for price increases
and the amount of price impact in cane sugar is about the same as the beet
sugar industry.
VI- 1
-------
Table VI-1. Percentage price increases needed to maintain profitability
BPT BAT Total increase by '83
Model Min. Max. Min. Max. Min. Max.
Liquid 0 0 0.14 0 .14
Crystalline
Small rural 0 1.74 0 . 33 0 2.07
Large rural 0 .68 0 .24 0 .92
Urban 0 .44 .16 .16 .16 .61
VI-2
-------
Since the demand for sugar at the household level is relatively inelastic,
we doubt that such price increases would alter this consumption pattern
significantly. Although price elasticities for industrial users and cross
elasticities with other sweeteners, such as beet sugar, corn sweeteners,
and synthetics, are not known with certainty, there appears to be a possi-
bility that sugar itself, both beet and cane, could become less competitive.
Because of this price pressure, it may be that some companies will with-
draw from specific markets in which they compete at a disadvantage and
thus independently find ways and means of satisfying their own need for
price increases. A recent example noted in the press was that of Holly
Sugar, a beet sugar company announcing it was withdrawing from the
Chicago market sinc<- they did not have enough sugar to compete in all
markets and the Chi. ago market paid the lowest price.
However, under present legislation, sugar's ultimate competitive position
will depend upon the Department of Agriculture's policy regarding such
costs and how these are interpreted in relation to import quotas. Objectives
of the Sugar Act, dif- ussed in Chapter III, suggested that pollution control
costs could receive ome consideration', but again it needs to be pointed
out that it is strictly at the option of the Secretary to act under broad
powers rather than specific powers in the Act.
The Act in Section 2n5 entitled "Allotments of Quotas or Prorations"
states that the Secretary of Agriculture shall make allotments to assure
an orderly and adequate flow of sugar to prevent disorderly marketing
or importation, and o maintain a continuous and stable supply of sugar so
as to afford all interested persons an equitable opportunity to market
sugar. It seems tha , under this section, the Secretary could make
adjustments in quotas to adjust for increased costs of pollution. However,
in doing so, it is suspected that the Secretary would take into account
the cost of impacts of pollution control in both the beet and cane sugar
industries. In doing so the Secretary could be constrained to variances
in the price of some three or four percent, as defined in Section 202
of the Act.
Thus, an important factor for price changes in response to the imposition
of pollution controls appears to be the position which the Secretary chooses
to take. It is of interest to note that some members of the sugar industry
believe the Secretary is not taking full advantage of his powers to insure
their welfare. However, some professionals who have studied the United
States sugar policy have suggested that the benefits of a domestic sugar
industry are considerably less than the cost of maintaining this industry
VI-3
-------
and that policy be redirected in favor of increased imports. Given the
current posture toward the removal of government agricultural controls,
it seems that a ruling by the Secretary in favor of increased prices for
the domestic sugar industry can not be automatically expected.
Satisfaction of one purpose could also be in conflict with another. In
view of current pressures to keep food prices down, the provision of
ample sugar supplies at reasonable prices might well receive greater
weight than other purposes.
Current price ceilings due to wage arid price < ontrols have tended to
hold down any normal price increases whi« h might be expected in the
entire sweetener industry. With the termination of such controls or
allowable adjustments, there will probably be some movement of prices
upward due to the depressed earnings of the entire suyar industry.
It is felt, however, that price iru reaves specifically Beared to v/ater
pollution control costs are not possible under I he- existing conditions of
the Sugar A
-------
Present values were computed using both a 6 1/2 percent and a 7 1/2
percent discount rate, which is the approximate after-tax cost of capital
(equity and debt) in the cane sugar refinery industry as was shown in the
computation in Chapter V. A higher rate would make these impacts more
severe and a lower rate would reduce the impacts. In these terms, present
value of cash flows, after adding pollution control costs, show a significant
financial impact with either discount rate.
In order to apply the discounted cash flow procedure to the sugar re-
fineries, certain steps have been taken. First of all the costs of various
alternatives of water pollution control--both investment and annual oper-
ating costs--have been applied to specific model refineries. Discounted
cash flows, assuming a 6.5 percent and a 7.5 percent rate after taxes ,
were computed for two cases--before (Base case) and after (BPT and
BAT) were computed for pollution control.
The results of these runs are shown in Table VT-2. The specific costs
for each level of treatment technology were taken from Table V-7 for
BPT and V-8 for BAT. Water pollution control costs from these tables
varied from zero to as much as $790,000 for the C-7 refinery for 1977
BPT guidelines. For the BAT 1983 proposed guidelines, the incremental
costs varied from zero to $766,000.
It was the costs from Tables V-7 and V-8, added to the appropriate
model base case that resulted in Table VI-2. Refineries that had zero
costs show no impact. Refineries such as C-7 that needed Alternatives B,
D and E-l that show an impact by having the net present value of a targeted
discounted cash flow of 6. 5 percent drop from $3, 949, 000 before pollution
control costs to a negative amount. This negative number indicates that
the model plant, when impacted by costs of pollution control, refinery,
cannot maintain a cash flow that will meet its or the industry's profit
targets.
Approximately 30 percent of the total capacity of the industry does show
some impact from the costs of these levels of control. The total impact
on these plants will be discussed in the next section. Further examination
of the data in Table VI-2 indicates that the cost required to institute treat-
ment alternatives, E-l or E-2, for condenser water has an impact on all
refineries. From Table V-8 it can be seen that 23 of the 29 plants will have
to make an investment in condenser cooling tower or spray pond, but
probably more significant is the annual maintenance and operating costs
that will be expended each year. Annual maintenance and operating costs
over $100,000 per year are significant and markedly affect the current
net values.
VI-5
-------
Table VI-2. Discounted cash flow for model refineries impacted with water pollution
control costs from specific refineries
A Ite rna tive
Needed 1'
Liquid
Liquid
2/
S. Crystalline
S. Crystalline
S. Crystalline
2/
LT C rystalline
L. Crystalline
I-H L. Crystalline
L. Crystalline
L. Crystalline
c.
C
Rural C,
Rural C,
Rural C,
Rural C,
Rural C,
Rural D,
Urban E-
Urban C,
E-l
D.E-1
E-l
E-l!/
E-2
E-l
E-2
1
D.E-1
Base
6.5
1,345
1, 345
701
701
701
1,849
1.849
1,849
3,949
3,949
7.5
892
89?
170
170
170
681
681
68i
2, 076
2,076
1
1
(1
1
1
3
2
BPT
6.5
$000
,037
,037
,258) (1
421
421
,569
,569
(725) (i
, 949 2
,786
BAT
7.5
604
604
,666)
(93)
(93)
418
418
,734)
, 076
(693)
6
1
(1
1
1
(1
1
.5
815
, 009
,724)
(100)
421
, 132
, 309
,734)
, 019
(208)
7.5
402
578
(2,095)
(568)
(93)
20
179
(2,674)
1, 015
(1,812)
Refineries requiring pollution control investment TOTAL
Refineries with no pollution control
Refineries with negative
cash flow,
required
therefore
not considered in this
analysis
Percent of
total production
4
1
1
2
2
2
2
9
38
22
83
11
6
Costs are for levels of technologies per Supplement A of Development Document Effluent Limitations
Guidelines.
?L/ S = Small; L = Large
Needs only sand filter.
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2. Capital Availability Level
As discussed in Chapter II, the cane sugar refining industry as a whole
appears to be hard pressed to attract new capital. Imposition of new
capital requirements, particularly for non-productive assets, would appear
to be a problem for the entire industry. However, as previously pointed
out, this problem does not appear to be more significant for any particular
segment of the industry but is going to depend upon a company by company
analysis of its individual earnings. The health of an individual company
and its ability to operate profitably, or at least to show performance
ratings superior to other plants in the same group, rests with its current
competence of management, its past management philosophies , and the
degree of cost consciousness which management has been able to instill
in its employees.
C. Production Effects
Of critical and fundamental interest is the production impact which the
cost of pollution control may cause. This effect is shown graphically by
looking at the results of discounted cash flows and estimating the potential
plant closures due to the impact of costs of water pollution controls. As
discussed in Chapter IV, the methodology used was to apply shutdown models
to represent plants and to compare the appropriate model plant results
with each of the firms in the cane sugar refining industry and thus d raw
inferences for each based on its relationship to the model.
1. Potential Plant Closures
Present values were computed at 6. 5 and 7. 5 percent after tax cost of
capital for each of the models as shown in Table VT-2. Referring to
Table VI-3, impact, as shown by the discounted cash flow analysis has
been put into a table and evaluated on the basis of this impact along with
many other possible closure factors. In this way a plant by plant analysis
was made. In interpreting discounted cash flow columns in this table, we
have shown L for low impact, M for moderate impact and H for high impact.
In other words, those with an H could be considered highly likely to close
if this matter of discounted cash flow were the only criteria to be measured.
Were that the case, the values of discounted cash flows which are less than
zero would indicate that the firms would be financially better off by liqui-
dating the sunk investment and reinvesting the money where it would yield
the industry's target return. However, as indicated, there are other
factors to consider and it is a matter of judgment as to the parameters
and the weight to be given to each parameter when making statements
regarding potential plant closures.
VI-7
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Table VI-3. Factors considered in cane sugar refinery closure analysis
i
co
Code
C 1
C 2
C 3
C 4
C 5
C 6
C 7
C 8
C 9
C 10
Cll
C 12-'
C131/
C 14-
11
L 1-
L2
L 3
L 4 '
L 5
CL 1
CL2
CF I-'
CF 2
CF 3
CF 4
Capacity
TPD-
2,600
2, 100
3,250
2, 100
i, ooo
190
3,500
1,500
2,000
1,200
1,500
350
1,700
2,200
300
800
850
390
100
1,800
820
460
700
660
700
Ownership
type
Multiplant
Multiplant
Multiplant
Multiplant
Multiplant
Integrated
Integrated
Single
Single
Single
Multiplant
Multiplant
Single
Multiplant
Multiplant
Single
Multiplant
Multiplant
Integrated
Single
Multiplant
Integrated
Integrated
Integrated
Integrated
Integrated Rural
with mill Urban
U
U
. U
U
U
X R
X U
U
U
U
R
R
R
U
U
U
U
R
X R
U
U
X R
X R
X R
X R
Winter Market
climate advantage
Mod. 0
Severe 0
Mild 0
Mod. . 0
Severe 0
Mild +
Mild
Mild
Mod. 0
Severe 0-
Mild
Mild
Mild
Mild
Severe +
Severe +
Severe +
Mild
Mild +
Severe +
Severe +
Mild
Mild
Mild
Mild
Discounted cash flow
Base
L
L
L,
L
L
M
L
L
L
L
M
M
M
L
L '
L
L
L
H
L
L
M
L
M
L
BPT
L
L
H
L
I,
H
H
L
L
L
H
M
H
L
L
L
L
I,
H
L
1,
M
L,
M
I,
BAT
L
L
H
L
L
H
H
L
M
M
H
M
H
L
L
L
L
L
H
M
M
M
M
M
L
continued
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I/
Table VI-3. Factors considered in cane sugar refinery closure analysis (continued)
Code
CF 5
CF 6
CF 7
CF 8
Capacity
TPD
220
600
400
700
Ownership
type
Integrated
Integrated
Integrated
Integrated
Integrated
with mill
X
X
X
X
Rural
Urban
R
R
R
R
Winter
climate
Mild
Mild
Mild
Mild
Market Discounted cash flow
advantage Base
+ H
+ H
+ H
+ H
BPT
H
H
H
H
BAT
H
H
H
H
Eleven percent of total refinery production now has no effluent discharge except to municipal sewage system.
vO
-------
In Table VI-3 the code for each plant is listed along with its capacity.
In evaluating a specific plant, the capacity of the actual plant as com-
pared to the capacity of the model does give some indication of its vul-
nerability to closing based on capacity. It is assumed that a plant that
is larger than the model would be somewhat less impacted than a plant
that was smaller than model. Two examples that were considered were
C-3 and C-7. Both of these are ranked first-second in the industry
as far as capacity is concerned and are substantially over the capacity
of the urban model (2,000 tons per day). At the other end of the scale,
there is the greater impact on the plant C-6 which has only a 190 tons
per day capacity as compared to the small refinery model with 400 tons
per day.
Ownership type was also considered in the plant analysis closure. For
example, a single plant and a single company seems to be more vulnerable
to closure than would be a plant which is integrated with a. mill, since the
combined operation would be considered when evaluating the plant in terms
of closure. In a case of a multi-plant operation, the resources of a com-
pany that has severla plants are usually greater than a single plant and,
thus, make it less vulnerable to closing. Also a case can be made for
closing one plant of a multi-plant operation on the basis that production
could be consolidated or transferred to another unit with expanding output.
As previously stated, those refineries that are integrated with a mill
would seem to have a higher resistance to closing than those not inte-
grated.
Whether a plant is a rural or a city refinery has its greatest significance
in the area of costs and thus shows up in the DCF analysis. However,
there seems to be no particular case where a plant in an urban area is
more or less vulnerable than a plant in a rural area just on the basis of
its location.
The winter climate is somewhat of a factor in the closure analysis because
the major cost impact on all refineries is the treatment of the condenser
water. Those plants which will be required to operate cooling towers or
spray ponds have a particular problem where they are located in an area
with severe winters as compared to those plants that are located in mild
climates. Operating a cooling tower in freezing weather is hazardous and
has a higher cost factor than operating one in year-round mild weather.
Another factor to consider is what we have termed "market advantage'1 on a
plus, minus, or zero basis. Those plants that have some advantage in their
market in that they are the only refinery in the area and don't have the cost
competition of other refineries should have a higher price potential than the
vi-io
-------
model plant would. For example, one plant which may be impacted from
costs of water pollution control and penalized for its small size, never-
theless, does have a real advantage in its market compared with any other
refinery located hundreds of miles away. By the same token, a refinery
operating in Chicago would seem to have a market advantage, by virtue
of its being located there rather than having to ship its sugar to this
larger market. On the other side, those plants that are located away
from the market and require absorption of freight and other costs seem
to have a market disadvantage and thus are rated with a minus factor.
Referring now to the columns which deal with DCF analysis, we find that
the refineries of Puerto Rico are shown to be highly impacted in the base
case before pollution control money is spent and at the BPT and the BAT
level as well. It has been difficult to evaluate these plants since we feel
that the Commonwealth of Puerto Rico is subsidizing them and it is diffi-
cult to anticipate to what degree subsidization in the future will continue.
On the other hand, faced with the costs
-------
Twenty-three of the 29 plants therefore, based on the information,
costs, and other conditions previously stated, would, at this point,
appear to have a low impact and a low likelihood of closure. Those
plants that are highly impacted represent 10 percent of the number of
plants (3) and 6 percent of productive capacity (2020 TPD). Plants
which are moderately impacted represent another 10 percent of the
plants (3) and an additional 6 percent of production (2090 TPD), and
those plants least impacted represent 80 percent of the plants (23) and
88 percent of the production (30,580 TPD).
In looking into the production effects that are caused by events described
above, it is seen that two to three plant closures are in Puerto Rico
representing two percent of the production.
This 2 percent production can easily be absorbed by other Puerto Rican
refineries as they have unused capacity.
The 10 percent balance of lost production is on the mainland U.S. There
are no prospects for new refining construction due to low industry earnings
and all refineries are operating at essentially total or full capacity.
It is speculated that the following events might therefore take place:
(a) Domestic raw sugar now going to a closed refine ry would
be diverted to another refinery and the import quota lowered
by ten pe rcent.
(b) The ten percent cane sugar loss might be made up by beet
sugar if beet sugar production can be increased in the face
of water pollution costs in that segment.
(c) Substitute sweetners might take over the ten percent loss
as both caloric and no caloric sweetners are expanding their
share of the sweetner market rapidly.
VI-12
-------
2. Sensitivity Analysis
As shown above, the impact of pollution control costs on potential
plant closures is believed to be moderate. However, should pollu-
tion control costs differ from those used in the analysis, the expected
impact would likely be changed. To gain an insight into the magnitude
of such changes, an evaluation of Table VI-2 along with pollution con-
trol costs will form the basis of a sensitivity analysis.
As a point of reference, key data from Tables VI-2, V-7 and V-8 are
displayed in Table VI-4 by refinery model. As can be seen, an addi-
tional investment of $156,800 and $18,400 O&M costs in pollution control
in liquid refineries reduces the net present value by $200,000. For
type 2 plants, a small investment of $56,000 and $20,300 O&M costs
reduces NPV to below zero. In the case of the model No. 3 units (large
rural), an investment of only $270, 000 reduces NPV by $400, 000. This
suggests that an additional $100, 000 to $150, 000 investment and associ-
ated O&M costs would reduce NPV to zero, suggesting possible closure.
A similar pattern exists for the model No. 4 plants (urban), although the
absolute level of investment is greater.
These data could be plotted and additional indicative analyses performed
in order to assess possible impacts of differing control Ivels and costs.
The essential point is that imposition of more strict BPT and BAT
standards, with presumably higher costs, could quickly lead to a
much higher potential closure rate. The ultimate effect would, of
course, depend on the magnitude of the additional costs. However,
given typical cost-level of control relationships, one would conjecture
that stricter standards in the cane sugar industry would dramatically
increase the rate of potential closures in this industry.
D. Employment Effects
Cane sugar refineries do not employ large labor forces for the size of
their output when measured in dollars or tons. The small refinery
would employ as'few as 32 full time people and the large refinery might
employ seven or eight hundred people. Within this group there are both
unskilled workers involved largely in handling sugar, loading and un-
loading, and operating materials and handling equipment. The technicians
that are involved in actually operating the plant would be highly skilled and
years of experience would be required on their part.
VI-13
-------
Table VI-4. Sensitivity of model net present values to effluent
treatment costs
Type
Refinery
1
1
2
2
2
2
3
3
3
4
4
4
Net Present
Value Before
Impact
892
892
170
170
170 I/
* /
681
681
681
2,076
2,076
2,076
Effluent
Investment
-------
E. Community Effects
Community effects due to closures are more difficult to assess. In the
urban areas, the impact of sugar plants would be relatively small due to
the fact that the employment and tax dollars lost would be the measure of
the impact. The loss of value of raw material which is usually imported
or shipped a long distance by a domestic industry would not be felt locally.
In the case of rural plants where refinery is located in conjunction with
a raw sugar cane mill, community effects would be greater. In these
areas sugar is a prime industry and its effects would be felt throughout
the area from the refinery to the mill to the sugar cane grower. The
impact of closure as shown in "Production Effects" would indicate that
3 to 6 small communities might be affected.
F. Blance of Payments Effects
With the implementation of discharge controls, it has been shown that
6 to 12 percent of the cane sugar refinery capacity may be impacted
sufficiently to close. Were this to happen, the refining of sugar could
be shifted as discussed in "Production Effects" to:
(a) Other expanded cane sugar refineries
(b) Beet sugar production
(c) Importation of refined sugar
If (a) or (b) did not happen due to any number of factors such as the
weather or lack of availability of other production facilities, then the
increase in foreign imported refined sugar would adversely affect the
balance of payments. This would be of particular concern at present
since every effort is being made by government to improve the balance
of payments.
At this time it is not known what effect the guidelines will have on beet
sugar production although the construction of new beet sugar plants and
resulting new production should offset the loss of production due to the
closure of impacted plants. No new cane sugar refineries have been
built for many years and it is doubtful if they will be now.
VI-15
-------
The possible expansion of the current refineries is the most likely
event and, therefore the balance of payments effects should be minimal.
One question not yet answered is the impact of pollution control costs on
sugar cane mills. Should this segment be impacted and domestic raw
sugar production lost, adjustments by the Secretary of Agriculture
would undoubtedly take place to increase the flow of imported raw sugar.
Such an event would create a balance of payment effect of adverse con-
sequences .
VI-16
-------
VII. LIMITS TO ANALYSIS
A. General Accuracy
Data gathered were of secondary nature drawn from previously published
reports, from private sources, contracted government studies and regular-
ly reported government services. Personal interviews of key personnel
of refinery and sugar cane milling companies and trade associations were
conducted.
Throughout the study an effort was made to evaluate data and other infor-
mation used and to update these materials, wherever possible. Data were
reworked so as to make, its presentation more clear in light of the purpose
of this report and to the use that is intended.
As a result of the data and the step by step methodology by which the con-
clusions are drawn, this analysis represents a systematic evaluation of
the impact of effluent limitation guidelines on the cane sugar refinery
industry. However, it must be recognized that judgements based on this
data are not absolute and the estimates represent the best relative conclu-
sions given the limitations of time and budget.
B. Possible Range of Error
The instructions of the contract required that the contractor use the cost
data provided by EPA under Supplement A of the Development Document.
The following items indicate some of the range of error that is possible
based on the use of the data supplied by EPA and the basic financial data.
Different data series and different sections of the analysis will have
different possible ranges of error. Estimated error ranges as an order
of magnitude are as follows:
Error Range
1. For number, location, capacity,
and processes of plants _+0. 2%
2. Price information on products,
materials and equipment -10.0%
VII-1
-------
3. Sunk investment
4. Plant operating costs
5. Land values
6. Pollution
7. Plant closures
Error Range
J- 20. 0%
_+ 10.0%
$1,000 - $100,000 acre
_f 50. 0%
+ 15.0%
C. New Technology
Two new technologies, not evaluated, \vhith have potential impacts on
waste water disposal are in the ea rly stages of i ons i do ration or use by
the industry. One is the condensation of sugar vapor by Compression
rather than by cooling in a i onden.st- r. This toi hnolo -j.} , not fully de-
veloped for application to cane sugar, is of interest, bciause it elimin-
ates the need for large volumes of water lor Condenser tooling and,
thus the entrainment of sugar in the cooling water.
The principle involves the use of a compressor for compressing the
sugar vapor into liquid. Energy is required to accomplish this but a
by-product of the process is that the heat generated in the compressing
phase can be used as heat ene rgy in the total suga r refining p rocess .
"Dry cooling towers" which eliminate or reduce fog producing and air
polluting tendencies are under development. Little data concerning
them is known at this time except that both the investment cost and
operating expense may run 3 times the figures of currently operating
"wet cooling towers."
VII-2
-------
D. Critical As sumptions
A key assumption in the analysis concerns the action of the Department
of Agriculture in response to maintaining the health of the sugar industry.
The Secretary of Agriculture can act on certain conditions which include
maintaining orderly marketing and supply processes. Further, under
the broad terms of the Sugar Act, there are provisions to assure an
equitable division of returns from sugar between beet and cane growers,
farmworkers and processors. However, it is unknown as to whether or
how the Secretary would act in response to added costs to the processors
arising from pollution control requirements.
Those refineries now on municipal hookups are dependent upon two
assumptions: (a) that user charges for the future will be within pre-
dictable limits and be economically affordable by refineries; (b) that
no forms of pre-treatment for refineries in the future will be required.
A final critical assumption lies in the reliability of the cost data and
the contractor's ability to project by models these cost data. Care has
been taken in working with these data but without access by the contractor
to financial information of specific refineries, necessary assumption of
costs have had to be made.
E. Remaining Questions
One question for cane sugar refineries concerns the impact on sugarcane
mills. The mills' water pollution problem is more difficult by a factor of
at least 2 than that of the cane sugar refiner. The ultimate impact on many
refineries may depend on the impact of pollution controls on the mills.
This is due to both the integrated ownership of mills and refineries and the
location proximities of mills and refineries.
Further questions depend on costs, adequacy of treatment technology,
and relations with municipal sewage systems alluded to in the previous
section.
VII-3
-------
BIBLIOGRAPHIC DATA
SHEET
1. Report No.
EPA-230/1-73-003
4. TK!C and Subtitle Economic Impact of Costs of Proposed Effluent
Limitation (guidelines for the Cane Sugar Refining Segment of
the Sugar Processing Industry
3* Recipient's Accession No.
5. Report Date October, 1973
Date of completion
6.
7. Author(s)
Milton L. David, Robert!. Buzenber^
8. Performing Organization Reft.
No. 122
9. Performing Organization, Name and Address
Development Planning and Research Associates, Inc.
P. O. Box 727
Manhattan, Kansas 66502
10. Protect/1 ask, »ork Unit .No.
Task Order No. 5
11. Contract/Grant No.
Contract No.
68-01-1533
12. Sponsoring Organization Name and Address
Environmental Protection Agency
Waterside Mall
4th and M Streets, S.W.
Washington, D. C. 20460
13. Type ot Report & Period
Covered
Final Report
14.
15. Supplementary Notes
16. Abstracts The cane sugar refining segment of the sugar industry (SIC 2062) is com-
posed of 29 refineries operated by 20 companies. Most refineries, though over 50 years
old, have been modernized and operate at full capacity refining raw sugar -- 32 percent
of domestic sources and 68 percent imported. Two companies purchase 45 percent of
the total capacity. Estimated after-tax return on sales are about one percent for all
sizes of liquid and crystalline refineries. Prices are controlled indirectly under the
Sugar Act by adjustments in the supply by the Secretary of Agriculture. There is
price competition from other sweeteners.
Imposition of effluent limitations are not expected to raise prices.
Potential refinery closures by 1977 due to the imposition of the effluent limitation guide-
lines are estimated to be from three to six refineries representing from six to twelve
percent of total production. No additional closures by 1983 are expected.
17. Key U'ords and Document Analysis. 17a. Descriptors
Pollution, wite r pollution, industrial wastes , cane sugar, sugar refineries, economic,
economic analysis, discounted cashflow, demand, supply, prices, fixed costs, variable
costs, community, production capacity, fixed investment
17b. Identifiers/Open-Ended Terms
17c. CP
-------
16. (continued)
Employment and community impacts appear to be small. The
impact analysis is based on a number of assumptions and cost estimates
which are identified in the report.
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