EPA-230/1-73-005
NOVEMBER, 1973
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
For The Dairy Processing Industry
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
\
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This document is available in limited
quantities through the U.S. Environmental Protection Agency,
Information Center, Room W-327 Waterside Mall,
Washington, -D. C. 20460
The document will subsequently be available
through the National Technical Information Service,
Springfield, Virginia 22151
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ECONOMIC IMPACT OF
COSTS OF PROPOSED EFFLUENT LIMITATION GUIDELINES
FOR THE DAIRY PROCESSING INDUSTRY
FINAL DRAFT
Donald J. Wissman
S. MacCallum King
To
Environmental Protection Agency
Contract No. 68-01-1533
Task Order No. 7
November, 1973
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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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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 from the required application of various control
methods and technologies. This study investigates the effect of alter-
native approaches in terms 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. 7, by Development
Planning and Research Associates, Inc. Work was completed as of
November, 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
Page
I. INDUSTRY SEGMENTS 1-2
A. Recent Trends 1-2
B. Types of Firms 1-4
Size of Firms 1-4
Level of Integration 1-5
Number of Plants 1-7
Number of Products I-11
Level of Diversification .1-14
C. Types of Plants 1-15
Size of Plants 1-16
Age of Plants 1-16
Location of Plants I-17
Level of Technology 1-21
Plant Operating Capacity 1-21
Level of Production Integration 1-22
D. Number of Plants and Employment by Segment 1-23
E. Relationship of Segments to Total Industry 1-25
Number of Plants 1-25
Value of Production 1-25
Employment 1-27
II. FINANCIAL PROFILE II-l
A. Plants by Segment II-l
1. Annual Profit Before Taxes II-3
2. Annual Cash Flow II-3
3. Market (Salvage) Value of Assets II-6
4. Cost Structure II-8
B. Distribution of Model Plant Financial Data 11-26
C. Ability to Finance New Investment 11-29
1. General Industry Trends 11-30
2. Dominant Firms and Diversification 11-32
3. Industry Segments 11-35
III. PRICING III-1
A. Determination III-1
1. Demand III-1
2. Supply HI-7
3. P.ricing in the Dairy Industry III-9
B. Expected Price Effect 111-21
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CONTENTS
Page
IV. ECONOMIC IMPACT ANALYSIS METHODOLOGY IV-1
A. Proposed Standards IV-2
B. Fundamental Methodology IV-3
1. Benefits IV-7
2. Investment IV-8
3. Cost of Capital - After Tax IV-8
4. Construction of the Cash Flow IV-9
C. Price Effects [V-iO
D. Financial Effects TV-li
E. Produc'.ion Effects IV-11
F. Employment Effects IV-13
G. Community Effects IV-13
H. Other Effects IV-13
V. COST OF POLLUTION CONTROL V-l
A. Present Industry Status V-2
B. Cost V-3
VI. IMPACT ANALYSIS VI-1
A. Price Effects VI-1
1. Price Increase VI-1
B. Financial Effects VI-5
1. Profitability VI-5
C. Production Effects VI-13
1. Plant Shutdowns Resulting from
Pollution Control Guidelines VI- 14
2. Production Trends VI- 18
D. Employment Effects VI- 19
1. Changes in Industry Growth VI- 22
E. Community Effects VI- 22
1 . Location of Plant Closings VI- 22
2. Impacted Communities VI- Z2
3. New Plants in [rnpacte^1 (~ f_ TT."Muniti e a VI- M
- Di s Ic'-a^ed " • ~ jJoy-.'>-3 Vi.- -' -i.
~-,. Sc< .eclary •<•• ,> V . • .. r
!• .-' • r ,-•*. '.'I . " radi; V ' - J.'
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CONTENTS (continued)
VII. LIMITS OF THE ANALYSIS
A. Accuracy
B. Range of Error
C. Critical Assumptions
D. Remaining Issues
APPENDIX
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THE DAIRY INDUSTRY
The purpose of this study is to analyze the economic impact of the cost
of proposed effluent control guidelines on the dairy processing industry.
These requirements are being developed by EPA pursuant to the Federal
Water Pollution Control Amendments of 1972.
For the purposes of this analysis, three levels of waste-water treat-
ment for each applicable segment of the industry will be considered.
1. Best practicable control technology currently available
(BPT) - to be met by industrial dischargers by 1977.
2. Best available technology economically achievable (BAT) -
to be met by 1983.
3. New source performance standards (NSPS) - to be applied
to all new facilities (that discharge directly to navigable
waters) constructed after the promulgation of these guide-
lines (approximately January 1, 1974).
A fourth level - new source pretreatment standards - which would be
applied to all facilities that use municipal systems constructed after
promulgation of the proposed guidelines is not considered further in
this report. No cost data are provided for these standards.
It is further noted that the (NSPS) standards above are taken as equal
to (BAT) standards. The treatment requirement and costs are assumed
to be equal for purposes of this analysis.
This report will deal with the industry in its entirety(Standard Industrial
Classification SIC Code 202) as well as with its segments. The latter
are classified by the Census of Manufactures according to major product
output:
SIC Code
2021 Creamery Butter
2022 Cheese, Natural and Processed
2023 Condensed and Evaporated Milk
2024 Ice Cream and Frozen Desserts
2026 Fluid Milk
Each category produces a number of secondary products; these will be
listed in a later section.
1-1
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I. INDUSTRY SEGMENTS
A structural characterization of the dairy industry includes the types of
firms, the types of plants, the number of plants and the employment
therein, and the segments likely to be impacted. This chapter will in-
clude a brief introduction outlining recent trends and will describe the
industry and its segments in detail.
A. Recent Trends
Some of the more significant industry changes that have occurred within
the past 20 years are:
1. Greater influence of Federal milk marketing orders. The
effect of these orders on pricing, and the basis of pricing
at both farm and product levels will be described in. a sub-
sequent section.
2. Declining number of small processing plants. In 1963, the
Census of Manufactures reported 5,000 small plants (i.e. ,
with fewer than 20 employees) manufacturing dairy products.
In 1967, there were 3,682 and in 1972 we estimated that
there were no more than 2,560. The actual number is less
than this because some small plants manufacture more than
one product.
3. Increasing number of large processing plants. Largely be-
cause of significant economies of scale, particularly in distri-
bution, bigger plants (more than 100 employees) are being
built, although the total number is decreasing. In L967 , there
were 626 (Census of Manufactures), and in 1972, we estimated
575 large plants.
4. Greater hauling distances for both raw milk and manufactured
products. The number of milk receiving stations is rapidly
decreasing, thus creating greater efficiencies. Centralization
of processing by large companies is being done because it is
cheaper to ship dairy products several hundred miles from a
single large and efficient plant than it is to maintain, several
relatively inefficient processing plants.
5. Increasing influence of cooperatives. In the United States, the
number of dairy marketing cooperatives declined by more
than one-third between 1946-47 and 1966-67 (1). However,
volume of sales increased from approximately $2 billion in
1946-47 to $5 billion in 1966-67. In 1946-47, cooperative
1-2
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membership was 38 percent ot the number of farmers selling
milk or cream in 1949; in 1966-67, it was 72 percent of the
number of farmers selling milk or cream in 1964. Existence
of the Federal order program apparently has encouraged
producers to join cooperatives.
6. Larger quantities of store sales of milk. Chiefly because of
increasing higher costs of labor, milk delivery on most retail
routes has been reduced to two or three times a week. Sales
through stores have increased at the same time because the
price per gallon is usually less.
7. The dominate outlet for fluid milk and other dairy products
is the supermarket. They now account for slightly over 30
percent of all fluid milk sold. Home delivery amounts to about
26 percent.
8. Increasing demand for products lower in fat. Per capita
consumption of milk fat solids in the U.S. decreased from
24.5 pounds per year in I960 to 20.5 pounds per year (pre-
liminary figure) in 1971 (2).
9. Substitution of margarine for butter. In 1954, the U.S. per
capita consumption of butter and margarine was 8. 9 and 8. 5
pounds, respectively (2). In 1971, the figures for the same
products were 5. 1 and 11.1 pounds. Butter consumption in
1972 dropped to an estimated 5 pounds per person.
10. Declining demand for condensed and evaporated milk. From
a high of nearly 17 pounds per capita in the mid-fifties, con-
sumption has declined to 6.2 pounds per person per year (3).
11. Increasing demand for cheese. There was a 38 percent in-
crease in per capita cheese consumption between 1965 and
1972. The rise is continuing, accelerated by current high
prices of meat protein.
12. Milk marketings by farmers have been cyclical within a rela-
tively narrow range since I960. In I960, 104 billion pounds
of milk was sold to plants and dealers. This increased to 114
billion by 1964 and subsequently declined to 109 billion by 1969.
By 1972 production increased to slightly over 114 billion pounds.
The reasons for the above changes in the dairy industry, including pro-
cessing, marketing, distribution and per capita consumption will be
examined in detail in this report.
1-3
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B. Types of Firms
The dairy product processing industry is large and diversified. In 1967,
according to the Census of Manufactures, it comprised 5,990 companies
and 6, 188 establishments. —' There were an estimated 231,700 employees
and 107,300 production workers at that time.
Size of Firms
Dairy processing firms range in size from very small to very large.
Many of the small firms are single plant operations with family owner-
ship, manufacturing one or two products. The large firms are multi-
million dollar corporations which operate several plants and process a
wide range of products.
A financial report of the industry (5) for the fiscal year July 1, 1967
through June 30, 1968 indicates the following distribution by number of
establishments and size:
Total Receipts per
Size of As sets Number of Receipts Firm
$1,000 Establishments $1,000.000 $1,000
Under 50
51 - 100
101- 250
251 - 500
501 - 1,000
1,001 - 5,000
5,001 - 10,000
10,001 - 25,000
25,001 - 50,000
50,000 - 100,000
100,001 - 250,000
More than 250,000
Total
794
377
871
481
464
308
38
12
4
2
1
3,356
$ 314.4
104.6
581.3
599.7
1,333. 1
1,955. 1
786.3
344.3
339.0
387.2
346.4
4,776.1
$11,867. 5
$
396
277
667
1,247
2,873
6,348
20,692
28,692
84,750
193,600
346,400
1, 194,025
— These numbers do not appear to be consistent with additional infor-
mation obtained from Troy's Almanac of Business and Financial Ratios
which reports 3,356 firms in 1968. See discussion Under I-B, Size of
Firm and Number of Plants.
1-4
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This listing does not take into account all the firms that were counted
in 1967 by the Census of Manufactures. The differences may be due to
different definitions, non-reporting, method of reporting by multi-
establishment firms, and/or the exclusion of certain large firms con-
sidering dairy product manufacture a secondary part of their total
business.
When the industry is divided approximately into three groups according
to total receipts, the following picture results:
Size of . Total Number of Receipts of the Group
Group — Receipts Establishments as a Percentage of Total
($000,000)
Small $ 419.0 1,171 3.5
Medium 1,181.0 1,352 10.0
Laro-e 10,267. 5 833 86.5
$11,867.5 3,356
It is obvious that the large firms, which comprise about 25 percent of
the total firms reporting, produce by far the highest percentage of total
sales. The small and medium firms combined account for only 13. 5
percent of total sales.
Level of Integration
A first merger movement within the dairy industry occurred in the last
half of the 1920's. A second merger movement came about in the first
half of the 1950's. Horizontal acquisitions made by dairy companies
have slowed substantially since 1957, primarily because the FTC has
challenged acquisition efforts of a number of the large companies under
Section 7 of the Clayton Act (6), However, between 1922 and 1964, eight
large dairy companies acquired 2, 000 smaller ones, and the two largest,
Borden and Kraftco, accounted for 63 percent of the acquisitions (7).
Most large "dairy" companies, now prevented from expanding their ac-
tivities in the dairy industry, have been diversifying into a wider variety
of product lines, many of which are outside the food industry. For ex-
ample, Borden1 s Inc. recently announced an agreement to purchase a
company manufacturing women's sportswear and dresses (7). Such
diversification has provided higher margins of profit and generated
capital to invest in new or modernized dairy processing plants.
— Small - Less than $1, 000, 000 assets.
Medium - $100, 000 to $500, 000 of assets.
Large - Greater than $500, 000 worth of assets.
1-5
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Integration of fluid milk processing with farm milk production through
ownership is of minor significance (8). Most of the integration has been
from the farm level forward into processing. In 1948 there were 11,319
fluid milk processing plants owned by producers-dealers. By 1965 this
number had declined to 1,677 or a reduction of 85 percent. In January
1965, producer-dealers in ten representative Federal milk marketing
order areas accounted for thirty percent of total plants but only three
percent of the total fluid milk sales. Only a very small number of chains
both produce and retail their milk.
There has been a much more significant movement of retail stores
into dairy processing, particularly as related to fluid milk and Lee
cream. In 1965, for example, eight of sixteen large retail food
chains manufactured ice cream (Table 1-1).
Table 1-1. Percentage and number of retail food chains manufacturing
or packing selected dairy products, by size of firm, 1965
Size of Chain-
Small
Product
Homogenized milk
Ice cream
American cheese
Butter
Cottage cheese
Evaporated milk
Nonfat dry milk
No.
2
5
4
2
2
1
0
Percent
3
5
4
3
3
1
0
Medium
No.
7
10
16
3
5
2
1
Percent
15
20
33
6
11
4
2
Large
No.
5
8
5
3
3
4
4
Percent
31
47
31
19
19
25
25
— Small = Annual sales under $50 million (82 firms).
Medium = Annual sales $50 - $249.9 million (49 firms).
Large - Annual sales $250 million or more (16 firms).
Source: Organization and Competition in the Dairy Industry. 1966.
Technical Study No. 3, National Commission on Food
Marketing.
Generally, the processors are handlers who contract with and provide
retailers with their product requirements.
1-6
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Number of Plants
As agriculture became established in the U.S. , many processing plants
that were very small by today's standards were built, chiefly in small
towns and rural areas. These plants have gradually become unprofit-
able for a number of reasons: shrinking milk supply in the region close
to the plant; outmoded equipment; difficulties in sanitation procedures;
and competition -with newer and larger plants. These factors have applied
generally to plants in all manufacturing categories, resulting in a steady
and significant decline in plant numbers across the industry (Table 1-2).
Nevertheless, although there were 39 percent fewer plants in 1972 than
in 1963, those plants produced dairy products worth 18 percent more.
Table 1-2. Dairy industry (SIC 202) profile: Total numbers of plants and
value of shipments for 1963, 1967 and 1972 (est.)
Year
1963
1967
1972
(est.)
- Small:
Size of Plant-
Small
Medium
Large
Total
Small
Medium
Large
Total
Small
Medium
Large
Total
1-19 employee
Number of
Plants
5, 114
2,248
638
8, 000
3,682
1,880
626
6, 188
2, 560
1, 735
575
4, 870
s; Medium:
Percent of
Total
63.9
28.1
8.0
59.5
30.4
10.1
52.6
31.5
15.9
20-99 employees
Value of
Shipments
(million $)
1, 461.5
4, 537.0
' 5,201.4
11,999.9
1, 230.4
5, 064.2
6, 520.6
12, 815.2
636.7
5,234.9
8, 277.0
14, 148.6
3; Large: > 100
Percent of
Total
13.0
40.5
46.5
9.6
39.5
50.9
4.5
37.0
58.5
employees.
Source: Production of Manufactured Dairy Products 1969, USDA-SRS, July 1970.
Production of Manufactured Dairy Products 1971, USDA-SRS, July 1972.
1963 Census of Manufactures, U. S. Department of Commerce.
1967 Census of Manufactures, U. S. Department of Commerce.
1970 Annual Survey of Manufactures, U. S. Department of Commerce.
1-7
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A further breakdown according to size of plant based on numbers of em-
ployees (adapted from the Census of Manufactures' data) shows that
there is a trend to larger plants and that those plants are producing a
higher percentage of gross sales (Table 1-2). For example, in 1963,
63.9 percent of the plants were small (1 - 19 employees) and produced
13 percent of the total value of the shipments. By 1972, only 52.6 percent
of the plants were classified as small: they produced only 4.5 percent of
the shipment value.
Over the same period, the number of large plants decreased, but they
comprised nearly 16 percent of total plants in 1972, compared with only
eight percent in 1963. The large plants sold 58.5 percent of the dairy
products in 1972, compared with only 47.5 percent in 1963.
This indicated degree of concentration in the industry can be further
documented by statistics showing that approximately eight to 50 of
the largest companies in each segment, a very small percentage of
the segment total, account for about half the sales volume (Table 1-3).
From 1958 to 1967, the eight largest fluid milk companies maintained
their 29- percent share of the national market. The next 12 largest
companies increased their share. This is the most concentrated seg-
ment.
In the same period, the 20 largest companies in the butter industry in-
creased their share from 24 to 33 percent. This was largely due to
the diminution of small companies. Butter processing is the least con-
centrated. No data were found to show the trend in concentration since
1967.
Another indicator of the level of concentration is the number of plants
per company (Table 1-4). As is to be expected, the largest companies
own the most plants.
1-8
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Table 1-3. Concentration in dairy manufacturing and fluid milk
industries, census yea^e 1958-67
Industry and year
Butter:
1958
1963
1967
Cheese:
1963
1967
Condensed/ evaporated
milk:
1958
1963
1967
Ice cream and ices:
1958
1963
1967
Fluid milk, etc. :
1958
1963
1967
Value of shipments ac
4 largest companies
11
8
14
45
45
39
33
35
35
34
32
23
22
21
:counted for by --
8 largest companies
0
15
14
20
50
53
48
42
47
44
43
42
29
29
29
20 largest companies
24
25
33
59
62
58
55
61
54
57
57
37
38
40
Source: Census of Manufactures, 1967.
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Table 1-4. Total and average number of plants operated by the 50
largest companies in each of the five segments of the dairy
industry, 1967
Number
Industry companies
Butter
(Z021)
Cheese
(20Z2)
Condensed/ evaporated
milk
(2023)
Ice cream and ices
(2024)
Fluid milk, etc.
(20Z6]f
of largest
in segment
4
8
20
50
4
8
20
50
4
8
20
50
4
8
20
50
4
8
20
50
Number of
plant s
22
27
43
81
82
103
123
164
46
93
119
157
77
102
152
178
209
278
383
453
Number of plants
per company
5.5
3.4
2.0
1.6
20.5
13.0
6.0
3. 3
11.2
12.0
6.0
3.0
'19.0
13.0
8.0
3.6
52.0
35.0
19.0
9.0
Source: Census of Manufactures, 1967.
I-10
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Number of Products
The dairy industry manufactures about 60 products, a relatively small
number. The major raw material is, of course, milk. Frozen desserts
can be made with varying amounts of milk as a base; the same product
can be manufactured using different dairy ingredients.
There is some degree of flexibility in manufacturing: certain plants can
change over from one product to a other, depending on the supply/demand/
profit situation. For example, a plant manufacturing butter can often
manufacture butter-powder, but because of favorable cheese prices,
many plants have remodelled in order to make cheese instead of butter-
powder.
Secondary and by-products also are manufactured, the number and
amount depending on the process and the equipment. The industry
has been aware of the need to prevent water degradation, and has
therefore attempted, in many cases successfully, to utilize as much
as possible of all of the milk solids.
Tonnages of the major products of the industry, together with the amount
of milk needed to make each product, are shown in Table 1-5. Many pro-
ducts are made with a combination of milk and other ingredients.
Within each major product category as stated by the Census of Manu-
factures, there are several secondary and by-products. A listing is con-
tained in Table 1-6.
Nonfat dry milk and dry whey originate as fluid secondary products that
are processed into a dry and salable form. There has been a slight in-
crease since 1968 in the number of plants that are drying whey. The new
plants often are large enough to process whey from several cottage cheese
(acid whey) and/or cheese (sweet whey) plants. Often the whey-drying
plants are centralized and owned by other companies. This trend will
assure that more and more whey will find its way into commercial
channels.
Tonnage statistics confirm the above trend. In 1968, 495.2 million pounds of
dry whey were produced, compared with 679.4 million pounds in 1971.
From 1970 to 1971, there was a nine percent increase in dry whey pro-
duction. Based on the annual production of natural or ripened cheese and
cottage cheese, there is a potential for making 1, 819, 680, 000 pounds of
I-11
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Table 1-5. Major dairy products, amount of milk required to produce
each one, and tonnage produced in 1972 i/
Milk requirement Milk equivalent U. S. dairy
Product per pound used for dairy product
of product products in the production
United States
(pounds) (billion pounds)
Fluid milk products 1.01 52.5
Ice cream & frozen desserts 12.0 11.2
Cheese 9. 9 23. i
Cottage cheese b. 25— '' 1.3
Non-fat dry milk __ 11.0—' 15.4
Evaporated & condensed milk 2. 15 3. 0
Butter 21.3 22.9
Dry whey 15. 0 10. 5
(billion pounds)
53
5.2
2. 4
1. 8
1. 4
1. 3
1. 1
0. 7
I/
~ Total milk used adds up to more than U. S. production of 118.6 billion
pounds (1971) because of some products that are used as inputs for other
final products, i.e. , some condensed milk goes into ice cream
21
~! Skim milk.
1-12
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Table 1-6. Dairy industry products and by-products
Major Product Category
Major Products Secondary & By-products
Creamery butter
Creamery butter
Non-fat dry milk (NFDM)
for human consumption
NFDM for animal con-
sumption
Buttermilk and dry
buttermilk
Cheese, natural
and processed
Condensed and
evaporated milk
Cheddar cheese
American cheese
Swiss cheese
Italian cheese
Processed cheese
Sw^et whey, liquid
Dried whey for human
consumption
Dried whey for animal
consumption
Whey cream butter
Condensed whey
Bulk condensed sweetened
whole milk
Bulk condensed sweetened
skim milk
Bulk condensed un-
sweetened whole milk
Bulk condensed un-
sweetened skim milk
Canned condensed whole
milk
Canned evaporated
whole milk
Dry whole milk
Crude milk sugar
Dry casein
Ice cream and
frozen desserts
Ice cream
Ice milk
Milk sherbert
Other frozen products
"Mellorine-type" frozen
desserts
Mixes (ice cream, ice
milk, sherbet, novelties,
"Mellorine-type")
Water ices
continued.
1-13
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Table 1-6. Dairy industry products and by-products (continued)
Major Product Category Major Products
Secondary & By-products
Fluid milk
Packaged whole milk
Bulk whole milk
Skim milk
Low-fat milk
Flavored milks
Fruit-flavored drinks
Cottage cheese curd
Cultured buttermilk
Creams: Sour, table,
whipping, half and
half
Creamed cottage cheese
Partially creamed
cottage cheese
Acid whey
Yogurt
Dips
dried whey. In other words, approximately 63 percent of the whey
currently produced is not dried. A small percentage of this amount is
being fed to hogs or spread on agricultural land.
Level of Diversification
The segments of the dairy industry are rather specialized, in spite of the
number of products listed in the previous section. The Census of Manu-
factures calculates a "Primary Product Specialization Ratio" which is
the proportion of primary plus secondary product shipments that is repre-
sented by primary products of the industry segment.
According to the Census of Manufactures in 1967, the year for which most
recent data are available, the Specialization Ratios were:
2021 Creamery butter .71
2022 Cheese, natural and processed . 93
2023 Condensed and evaporated milk . 82
2024 Ice cream and frozen desserts .97
2026 Fluid milk .90
Between 1963 and 1967, there was very little change in these ratios.
Based on our knowledge of developments in the industry, the 1973 ratios
are estimated to be approximately the same. The ranges are comparable
to those in other food processing industries.
1-14
-------
Another less quantitative measure of degree of diversification is the
statistic of the number of plants manufacturing one or more dairy pro-
ducts (9). The top ten dairy manufacturing states (in terms of diversified
plants) are listed in Table 1-7, together with the total number of plants
and the proportion manufacturing more than one product.
Table 1-7. Approximate numbers of dairy plants and percent
manufacturing two or more dairy products, U. S. 1971
State
Wisconsin
California
New York
Pennsylvania
Illinois
Ohio
Minnesota
Iowa
Michigan
Texas
Approximate
Total Dairy Plants
742
493
513
450
219
268
273
203
222
147
Dairy Plants
Two or More
Number
631
324
223
192
165
162
153
112
111
94
Manufacturing
Dairy Products
Percent
85
65
43
43
75
60
56
55
50
63
The indicated degree of diversification is not as high as that in the
Census of Manufactures statistics because of likely duplication of many
of the numbers. It is apparent, however, that a majority of plants
manufactures at least two primary and secondary products.
C. Types of Plants
There is a great diversity in the types of plants in the dairy industry.
Within each segment, plants also vary, not only in size but also in
product mix because of the possibilities of manufacturing a range of
products. The types of plants will be described with respect to size,
age, location and other factors.
1-15
-------
Size of Plants
The Census of Manufactures reports plant size by number of employees.
For purposes of defining plant size in this report, employee number
categories were combined in order to state:
Small plants Fewer than 20 employees
Medium plants 20 - 99 employees
Large plants More than 100 employees
This categorization does not relate directly to other industry data re-
porting size of establishment by value of assets, because in many cases
the companies reporting owned two or more plants and provided a cor-
porate financial statement rather than a per-plant statement. Partial
exceptions to these ranges of plant size may be some of the large con-
densed and evaporated milk plants operating with fewer than 100 em-
ployees. Nevertheless, the range is generally applicable to all in-
dustry segments.
The trend has been for the average plant size to im rease. New, lar^e
plants have taken advantages of technology to effect profits. The industry
has approximately 575 large plants (Table 1-1), which account for 15.9
percent of the total plant numbers and 58. 5 percent of the sales.
Many so-called medium size plants are on the borderline between profit
and loss today. There are about 1,735 processing plants in this category,
amounting to 31.5 percent of the plants and accounting for 37 percent of
the plant sales.
In spite of the small plant attrition, many are still operating and at a
profit. Reasons for this include family ownership and depreciated
assets. The industry has about 2, 560 small plants, 52.6 percent of
total plant numbers. However, these account for only 4.5 percent of
shipments.
Age of Plants
No data are available to quantify the age of dairy plants. In general,
nearly all of the small plants and about half of the medium-sized plants
are more than 20 years old. Most of the large plants have been built
or remodeled since 1955. Even if statistics were available on building
age, however, it would be impossible to relate these directly to age of
1-16
-------
equipment. Many older plants have modernized their processing
equipment and/or have built additions and installed new equipment.
Location of Plants
Although listings of numbers of dairy processing plants by county are
available for some states, these data have not been collected because
it was felt they would contribute little to identifying potential plant
closures or revealing impacted plants. Such information is deficient
because it does not contain the following.
the location (rural, semi-rural or urban)
the plant sizes
the product mix
the method of waste disposal.
This section therefore deals in quantitative terms only with the numbers
of plants and total production by product and state. An average of the
production per plant would be meaningless because of the lack of spe-
cific data on plant size.
The following tables do state, however, the states with the greatest
number of processing plants in each category (Tables 1-8 to 1-13).
The regions of industry concentration are therefore indicated. The
Lake States, Ohio, Iowa, Indiana, Illinois, New York and California
have the most processing plants for the product* indicated. Fluid
milk is not included. No fewer than six of the states producing the
most dairy products in the U.S. are listed in the top 10 states of
any product category.
Confirmation of geographical areas with highest numbers of processing
plants was made by checking state milk production data (10). Of the
milk sold to plants and dealers by farmers, Z8.8 percent was in the
east north central states (Ohio, Indiana, Illinois, Michigan and Wisconsin).
An additional 15. 3 percent was sold from New York and Pennsylvania,
and 15. 2 percent from Minnesota, Iowa and Missouri farmers. The
state of California accounted for 7.7 percent of marketings. These 11
states produced 67 percent of the U. S. milk supply.
1-17
-------
Table 1-8. Production and number of plants making creamery
butter in the top 10 states, 1971
State
Minn.
Wis.
Calif.
Iowa
N. Y.
Mich.
Mo.
Nebr.
Wash.
Okla.
Plant
No.
101
61
23
45
28
16
9
16
15
5
Production
1,000 Ib.
286,580
202, 320
94, 457
91,754
48,030
35, 024
31, 598
30,737
25,743
25, 122
Source: Production of Manufactured Dairy Products 1971. July,
1972. Crop Reporting Board, SRS, USDA.
Table 1-9. Production and number of plants making cheese
in the top 10 states, 1971
Product
Total cheese,
excluding full-
skim
American
and cottage
Source: Production
State
Wis.
Minn.
N. Y.
Iowa
Mo.
111.
Ky.
Idaho
S. Dak.
Nebr.
of Manufactured
Plant
No.
458
17
62
25
23
34
13
16
19
14
Dairy Products
Production
1,000 Ib.
986,369
202, 348
176, 159
118,205
104,754
91,305
63, 375
59,792
51,748
49, 113
1971. Ju]y, 1972.
Crop Reporting Board, SRS, USDA.
1-18
-------
Table I- 10. Production and number of plants making cottage
cheese curd in the top 10 states, 1971
Product
Cottage cheese
curd
Source: Production
State
Calif.
N. Y.
Ohio
111.
Mich.
Wis.
Ind.
Fla.
Texas
Vt.
of Manufactured
Plant
No.
22
29
56
23
25
20
15
6
17
5
Dairy Products
Production
1, 000 Ib.
113,344
105,949
50,842
47,479
43,512
39,971
20,893
19,514
18,925
18,539
1971. July, 1972.
Crop Reporting Board, SRS, USDA.
Table I-11. Production and number of plants making condensed
milk in the top 10 states, 1971
Product
Unsweetened
unskimmed
bulk con-
densed
milk
Source: Production
State
Wis.
Calif.
N. Y.
Mich.
Pa.
Ohio
Iowa
Ind.
Mo.
Wash.
of Manufactured
. Plant
No.
16
17
13
7
18
8
4
5
5
6
Dairy Products
Production
1, 000 Ib.
184, 122
117,708
110,788
105, 134
76,818
46,834
37,727
37,256
29,927
27,525
1971. July, 1972.
Crop Reporting Board, SRS, USDA.
1-19
-------
Table I- 12. Production and number of plants making non-fat
dry milk for human food in the top 10 states, 1971
Product
Non-fat dry
milk for human
food; spray
and roller
processes
Source: Production
State
Minn.
Wis.
Calif.
Iowa
N. Y.
S. Dak.
Idaho
Wash.
Ohio
Pa.
of Manufactured
Plant
No.
30
22
19
14
17
5
5
6
10
12
Dairy Products
Production
1, 000 Ib.
430, 631
181, 100
133, 695
130, 365
89,516
40,991
39,823
34, 070
34, 010
31,835
1971. July, 1972.
Crop Reporting Board, SRS, USDA.
Table I- 13, Production and number of plants making hard ice
cream in the top 10 states, 1971
Product
Hard
ice cream
Source: Production
State
Calif.
Pa.
N. Y.
Ohio
111.
Mass.
Mich.
Texas
Minn.
Ind.
of Manufactured
Plants
No.
220
111
106
74
65
58
60
59
26
40
Dairy Products
Production
1, 000 gal.
72,638
72,443
59,665
45,437
40, 958
39,948
35,877
30, 141
28, 042
22,578
1971. July 1972.
Crop Reporting Board, SRS, USDA.
1-20
-------
Level of Technology
The level of technology in the dairy processing industry has evolved
and risen slowly and continuously, rather than dramatically, through
the years. Many older plants have kept pace by adding new technology
as it has become available and economic conditions warrent installation.
Generally, the industry has adapted to the new technology as it has be-
come available through research and development. In general, some of
the more salient features of the "new technology" have been
in-place cleaning
flash pasteurization
- continuous, rather than batch, processing
increased mechanization to decrease labor per pound of product
instantized dry milk products, principally non-fat dry milk
one-way packaging
ultra-high temperature processing combined with aseptic
packaging to achieve extended shelf life
bulk transport of raw product
automatic testing for milk fat and solids -not fat components
We expect that new technology will continue to develop, with emphasis on
mechanization and large-scale proce ssing in order to keep production costs
as low as possible.
Plant Operating Capacity
There is no single definition for in-plant manufacturing operating capacity.
For instance, a given production level at a theoretical 100 percent capacity
could be attained in one eight-hour shift per day, five days a week, for
52 weeks. If milk is available and facilities are adequate, production
could be theoretically almost doubled by going to two eight-hour shifts.
Was the plant operating at only 50 percent capacity with one shift operating?
According to dairy processing specialists, it was not; it was at 100 percent
capacity under each regime.
Dairy plants experience highs and lows in terms of milk input, depending
on the time of year. This is one of the two major factors affecting plant
efficiency in terms of utilization of labor and processing equipment. The
second most important factor is seasonality of utilization. For example,
the requirement for fluid milk jumps significantly when school sessions
begin each fall. Plants may diminish their loss of efficiency when milk
input is low by employing fewer people for fewer hours.
1-21
-------
Most plants measure product output per man-hour and strive to increase
this figure by various means. One statement of efficiency could therefore
be in these terms, but it would be difficult to quantify, in terms of percent-
age, an average of all plants processing a given product line. Each plant,
therefore, might use output per man-hour as its own indicator of efficiency,
measuring against its previous performance or an estimated industry
average if one could be determined.
An extrapolation from the data of Williams, et al. (1) showed that it
took 40 percent more milk in 1970 than in 1965 to operate a fluid milk
processing plant at lowest unit cost. Nevertheless, there is usually a
considerable range in volume over which differences in unit costs are
comparatively small.
Given a maximum theoretical output under a stated set of conditions,
most dairy processing plants operate within a range of 70 to 90 percent
of that output. Our model plants were developed on the basis of plant
operating capacity ranging from 75-90 percent.
Level of Production Integration
In many situations the large amount of use needed to employ expensive
equipment effectively has added to the incentive to limit a plant's produc-
tion to a comparatively narrow line of products. Traditionally, therefore,
dairy processing plants have been designed with minimum product diver-
sity in mind. Several research workers have pointed out the disadvantages
of producing a wide variety of products and container sizes in a fluid milk
plant ( 1 ). One of these studies concluded that plant labor requirements to
process and package 105, 000 gallons of product a week were only three-
fourths as large in a plant producing only fluid milk and half-and-half as in
a plant producing a wider line of products.
Many firms require a relatively broad product line in order to hold trade,
particularly when selling to retail stores. They can obtain products other
than those they themselves manufacture by purchase or exchange with other
manufacturers.
I-Z2
-------
A plant usually processes one or two main products and anywhere from one
or two to many secondary products.
In addition to butter, a butter plant might make non-fat dry milk and dried butter-
milk. Cheese plants are usually designed to make a single type of cheese;
although the equipment requirements are generally similar, they seldom
change from, for example, Italian cheese to Swiss cheese. Sweet whey is
a by-product. Many plants have installed drying equipment in order to
process the whey into a saleable product.
The major product of a condensery is evaporated milk, which has to meet
certain standards. It may be packaged in several types of containers, but
the process is the same. The next most important product in this category
is condensed milk, which can vary in composition and requires relatively
little equipment investment over and above that needed for evaporated milk.
The ice cream plants have the second highest degree (next to fluid milk) of
production integration. Most produce a full line of frozen products. They
have an advantage in that some products can be stored until summer, the
time of peak sales. Novelties, for example, such as ice cream bars and
popsicles can be made in winter and spring and stored until summer.
The fluid milk segment has the greatest amount of production integration.
In addition to fluid milks (processed with varying percentages of butter fat),
cottage cheese is another major product. The product line can also
include many kinds of creams and dips.
D. Number of Plants and Employment by Segment
The Census of Manufactures collects the most definitive data on number of
plants and employment by segment. The most recent census was carried
out in 1967. Data from the 1970 Annual Survey of Manufactures and from the
U. S. Department of Agriculture were used to extrapolate an estimated
number of plants in 1972.
As has already been indicated, the number of plants has been decreasing
(Table I- 14). The greatest decrease has been in the number of small plants,
with significant changes in all product categories. Between 1963 and 1972,
the losses in small plant numbers were:
Product Category Percentage decline of small plants
Butter 54
Cheese 43
Condensed/evaporated milk 22
Ice cream 47
Fluid products/cottage cheese 51
Industry 48.5
1-23
-------
Table 1-14. Number and employment of dairy processing plants by segment
1963, 1967, 1972 (est.)
SIC
No .
2021
2022
2023
2024
2026
Product
Butter
Cheese
(natural)
Condensed/
evaporated
Ice Cream
Fluid Pro-
ducts/Cottage
Cheese
Year Plants
1963 588
1967 402
1972(est) 270
1963 932
1967 788
1972(est) 530
1963 115
1967 122
1972(est) 90
1963 694
1967 525
1972(est) 370
1963 2,670
1967 1,845
1972 ' 1, 300
(est)
1 - 19
Employment
3, 773
2, 300
1, 750
5, 150
4, 500
2, 200
970
1, 000
850
4, 539
3, 100
2, 600
19, 006
11, 300
7,800
Number
of Employees
20 - 99
Plants
166
129
80
178
206
230
135
138
115
321
261
210
1,448
1, 146
1, 100
Employment
6,590
5, 200
3; 250
7, 076
8, 400
9, 000
6,296
6,600
6,200
13,987
11, 400
8,500
65, 375
53, 200
47, 500
Plants
12
9
10
28
32
40
31
31
35
66
64
70
501
490
420
100 +
Employment
1,629
1,200
1,200
5,730
6,900
8,800
4,989
5,200
5,950
10,617
10, 100
11,900
100,669
100, 900
80,700
Plants
766
540
360
1, 138
1, 026
800
281
291
240
1, 081
850
650
4,619
3,481
2, 820
Total
Employmen
11,992
8,700
6,200
17,956
20,000
20, 000
12,255
13,200
13,000
29, 143
24,600
23,000
185,050
165,200
136, 000
-------
The loss of condensed/evaporated plants was less during this period
because that segment lost most of its small plants during the forties and
fifties. During that period, larger plants were built.
The fluid milk segment has the most processing plants, followed in order
by cheese, ice cream, butter and condensed/evaporated milk. Fifteen
percent of the fluid milk plants are classified as large. Percentagewise,
the decline in industry employment between 1963 and 1972 was 22. 7 per-
cent—less than half the decline in plant numbers. A large plant employs
more workers than many small plants, even though the production per
man-hour is much higher. The employment pattern is slightly different
than the pattern of plant numbers: while fluid milk has the most employees,
it is followed by ice cream, cheese, condensed/evaporated and butter
segments in that order.
In all segments except evaporated/condensed milk, the small plants repre-
sent the highest percentage by size. The large plants in each segment,
however, employ a higher total number of people than the small plants,
except for butter plants.
E. Relationship of Segments to Total Industry
In spite of the changes taking place in the industry, each segment of it has
maintained more or less the same relationship to the total industry. In
other words, the ratios to the industry of numbers of plants, value of pro-
duction and employment within each segment have remained fairly constant.
Numbers of Plants
The fluid milk industry has by far the highest percentage (59) of the total
plants in the industry (Table 1-15). The butter and evaporated/condensed
plants account for only seven and five percent, respectively. The relative
position of each segment will probably remain as it is, as number of plants
continues to diminish.
Value of Production
The percentage value of fluid milk production as a percent of total industry
production is the same as the number of plants--59 percent. Cheese pro-
duction value is less than one-third that of fluid milk, and 17 percent of the
value of industry production. Butter production has the least value.
1-25
-------
Table 1-15. Estimated total number of plants, value of production and employment by dairy
industry segment expressed as percentages of total industry, 1972
SIC
No.
2021
2022
2023
2024
2026
Product
Creamery butter
Cheese (natural fk processed)
Evaporated /condensed
milk
Ice cream and frozen
desserts
Fluid milk 2,
Total 4,
Plants
Value of Production
No. % of Total Million $
360 7
800 16
240 5
650 13
820 59
870
900
2, 350
1, 390
1, 150
8, 360
14, 150
Employment
% of Total Number %
6 6,
17 20,
10 13,
8 23,
59 136,
198,
200
000
000
000
000
200
of Total
3
10
7
12
60
-------
Employment
The i'luicl milk segment employs the most people--68 percent of total
industry employees. The ice cream and frozen dessert segment and
the cheese segment employ 1Z percent and 10 percent, respectively,
of the total employment. Creamery butter manufacturing utilizes only
three percent of the industry's labor force.
1-27
-------
1. Annual Profit Before Taxes
Historically, the dairy products industry has generally been profitable,
but with relatively low profit margins. In 1972, profits before taxes
averaged 3.6 cents per dollar of sales (11). After taxes, .profits were
2.0 cents per dollar of sales. Net profit before taxes was three percent
less in the fourth quarter of 1972 than in the comparable period of 1971.
No segment of the dairy industry has historically maintained a high profit
level. Table II-2 indicates that under today's financial and operating con-
straints, only larger processing plants are likely to develop a significant
profit. However, the same depreciation scales were applied to the models
of the smaller, older plants, as to the large plants. This may result in an
indicated lower margin of profit (or higher deficit) than would actually be
the case in many of the older plants which have been depreciated.
Another factor affecting the profit picture in older plants is the fact that
many are still family-owned. Family labor, therefore, may in certain
plants not be charged to administrative or operating budgets, or may be
charged at a lower than prevailing rate. This too would result in a higher
annual profit in many small plants.
For these reasons, we feel that the higher than industry average pre-tax
net incomes and ROI figures (Table II-2) of the large plants are reasonable.
2. Annual Cash Flow
The estimated annual cash flows of each of the model plants are
shown in Table II-3. The depreciation schedule in all cases except
the evaporated milk model was 20 years for buildings and 15 years for
equipment. In the case of evaporated milk, it was 25 years for both
buildings and equipment.
These schedules are accepted by much of the industry, but because of the
current "profit squeeze," companies may discard existing equipment sooner
and install larger or more mechanized equipment either in an existing plant
or a new one. In general, a firm needs to exploit whatever advantage of
economies of scale that it can achieve in its technical units as well as
employ the latest technology and factor substititon that is profitable in the
market situation in which it operates.
The cash flows seem satisfactory in the case of some medium-sized plants
and all large plants. In the case of some small and medium plants, there
is a negative net income but a positive cash flow. Many of these plants, as
was indicated earlier, are older and depreciated and, therefore, more
profitable in terms of cash flow than our models indicate.
II-3
-------
Table II-2. Pre-tax net income and rate of return on average invested
capital and after tax return on sales
for dairy processing plants
Pre-tax Pre-tax After-tax After-tax
Type and size of plant income ROI¥ ROI^ Return on sales
($000) (%j (%j
Butter
Small (46.1) -0 ^0 <0
Medium 122.8 13.6 7.8 1.8
Large 371.1 26.2 14.1 2.4
Cheese
Extra small (15.7) 0 <0 ^-0
Small 12.4 3.7 2.9 0.9
Medium 168.7 21.4 12.0 2.5
Large 938.7 23.0 12.1 3.2
Evaporated Milk
Medium 63 3.4 2. 1 1.1
Large 214 8.2 4.5 1.7
Ice Cream
Small (46.3) .0 ^0 <,0
Medium 181.5 11.9 6.6 2.4
Large 650.3 25.4 13.4 4.0
Milk
Extra small (1.1) <-0 ^0 ^ 0
Small 241.9 17-5 9.6 2.7
Medium 1,121.0 21.0 11.5 3.0
Large 2,787.3 31.8 16.6 3.6
Milk and Cottage Cheese
Medium 866 18.4 9.7 2.4
Large 2,136 24.0 12.6 2.9
~l "
— Average return on fixed investment calculated by financial statement
method.
II-4
-------
1. Annual Profit Before Taxes
Historically, the dairy products industry has generally been profitable,
but with relatively low profit margins. In 1972, profits before taxes
averaged 3.6 cents per dollar of sales (11). After taxes, profits were
2.0 cents per dollar of sales. Net profit before taxes was three percent
less in the fourth quarter of 1972 than in the comparable period of 1971.
No segment of the dairy industry has historically maintained a high profit
level. Table II-2 indicates that under today's financial and operating con-
straints, only larger processing plants are likely to develop a significant
profit. However, the same depreciation scales were applied to the models
of the smaller, older plants, as to the large plants. This may result in an
indicated lower margin of profit (or higher deficit) than would actually be
the case in many of the older plants which have been depreciated.
Another factor affecting the profit picture in older plants is the fact that
many are still family-owned. Family labor, therefore, may in certain
plants not be charged to administrative or operating budgets, or may be
charged at a lower than prevailing rate. This too would result in a higher
annual profit in many small plants.
For these reasons, we feel that the higher than industry average pre-tax
net incomes and ROI figures (Table II-2) of the large plants are reasonable.
2. Annual Cash Flow
The estimated annual cash flows of each of the model plants are
shown in Table II-3. The depreciation schedule in all cases except
the evaporated milk model was 20 years for buildings and 15 years for
equipment. In the case of evaporated milk, it was 25 years for both
buildings and equipment.
These schedules are accepted by much of the industry, but because of the
current "profit squeeze," companies may discard existing equipment sooner
and install larger or more mechanized equipment either in an existing plant
or a new one. In general, a firm needs to exploit whatever advantage of
economies of scale that it can achieve in its technical units as well as
employ the latest technology and factor substititon that is profitable in the
market situation in which it operates.
The cash flows seem satisfactory in the case of some medium-sized plants
and all large plants. In the case of some small and medium plants, there
is a negative net income but a positive cash flow. Many of these plants, as
was indicated earlier, are older and depreciated and, therefore, more
profitable in terms of cash flow than our models indicate.
II-3
-------
Table II-2. Pre-tax net income and rate of return on average invested
capital and after tax return on sales
for dairy processing plants
Type and size of plant
Pre-tax
income
Pre-tax
ROI*
After-tax
ROI*
After-tax
Return on sales
($000)
Butter
Small
Medium
Large
Cheese
Extra small
Small
Medium
Large
Evaporated Milk
Medium
Large
Ice Cream
Small
Medium
Large
Milk
Extra small
Small
Medium
Large
Milk and Cottage Cheese
Medium
Large
(46. 1)
122.8
371. 1
(15.7)
12.4
168.7
938.7
63
214
(46.3)
181.5
650.3
d.l)
241.9
1, 121.0
2,787.3
866
2, 136
-0
13.6
26.2
0
3.7
21.4
23.0
3.4
8.2
.0
11.9
25.4
17. 5
21.0
31.8
18.4
24. 0
7.8
14. 1
<0
2.9
12.0
12. 1
2. 1
4.5
6.6
13.4
9.6
11.5
16.6
9.7
12.6
1.8
2.4
0.9
2.5
3.2
1. 1
1.7
2.4
4.0
2.7
3.0
3.6
2.4
2.9
— Average return on fixed investment calculated by financial statement
method.
II-4
-------
Table II-3. Estimated cash flow for dairy processing plants
Annual
Type and size of plant Cash Flow
Butte r
Small
Medium
Large
Cheese
Extra small
Small
Medium
Large
Condensed & Evaporated Milk
Medium
Large
Ice Cream
Small
Medium
Large
Milk
Extra small
Small
Medium
Large
Milk and Cottage Cheese
Medium
Large
($000)
19
156
324
2
40
157
847
228
496
38
243
624
9
282
1,129
2,556
1,010
2,040
Cash Flow on Average
Fixed Investment
(%)
2.8
17.3
22.9
1.1
12.1
20.1
20.8
12.5
19.0
4.8
15.9
24.4
8.8
20.4
22.0
26.9
21.4
23.0
II-5
-------
3^. Market (Salvage) Value of Assets
New dairy plant equipment generally amounts to 30-35 percent of the
fixed investment costs. However, equipment that is even a few years
old has little market value and must be sold for scrap. The dairy in-
dustry is passing through a phase of rapid scaling up to larger sizes of
all equipment, and there is, therefore, little or no market in the U.S.
for used equipment.
An average salvage value figure commonly used by the industry is 10
percent. Refrigeration and boiler equipment is worth somewhat more.
The estimated replacement value of fixed investments (Table II-4) includes
land, buildings, equipment and equipment installation. Installation cost for
equipment is approximately equal to the cost of the equipment itself. Total:
working capital for each segment was derived from the formula:
TWC = (Total Ingredient Cost x Number of Weeks Money Out)
52
+ . Fixed Costs + Variable Costs
12
The number of weeks varied from five to twelve, depending on extent of
inventory and turnover rate of money.
The larger model plants had sufficient working capital, but indications ,
were that the smaller ones would often have, financing problems.
The Dairy industry figures for total working capital/sales were determined
by size of corporation by Troy Almanac from IRS data. The large, medium
and small corporations averaged 20. 1, 15.7^and 16.0 percent respectively."'
Since a good average was hot obtainable, the formula method was used.
Model plants therefore averaged 15 percent of sales for small plants and
14.3 percent for large. Milk plants had the lowest level of working
capital at about 9 percent because of a rapid turnover of inventory. Con-
densed/evaporated was highest with about 19 percent. The ratio of net
sales/current assets was reported by IRS Industry Reports as 7. 98.
II-6
-------
Table II-4. Estimated replacement value and working capital
requirements for dairy processing plants
Type and size of plant
Butte r
Small
Medium
Large
Cheese
Extra si-nail
Small
Medium
Large
Evaporated Milk
Medium
Large
Ice Cream
Small
Medium
Large
Milk
Extra Small
Small
Medium
Large
Milk and Cottage Cheese
Medium
Large
Replacement Value
of Plant,
Equipment 8* Site
($000)
1,139
1,469
2, 175
291
500
1,057
6,061
3,000
4,000
1,500
2,500
4;091
188
2,441
9,000
15,000
9,220
15,347
Total Working
Capital
Requirements
($000)
264
534
1,077
88
185
606
2,514
643
1,278
81
662
1,314
26
398
1,570
3, 155
1,521
3,027
Replacement
Value of
Total Assets
($000)
1,403
2,003
3,252
379
685
1,663
8,575
3,643
5,278
1,581
3, 162
5,405
214
2,839
10,570
18, 155
10,741
18,374
II-7
-------
Capital Structure - Agricultural processing industries, generally requires
a relatively low investment per dollar of sales. Stated another way, the
sales per dollar of investment are relatively high. Conversely, in the
fertilizer industry, for example, a high capital investment of about $1. 50
is required to produce one dollar of sales.
For example, an investment of one dollar in a large butter plant results in
sales of $3. 67. An investment of a dollar in an evaporated milk plaint
results in a somewhat higher return: $4. 34. One of the highest returns
per dollar of investment can be found in a large cheese plant: $7. 76.
Stated another way, an investment of 1 3 cents could produce a dollar's
worth of sales. These ratios and returns are much smaller in the case
of the smaller plants.
A study of ratios of sales/dollar of stockholder equity by Fortune—l
confirms that food industry firms gain a high number of sales dollars per
dollar of stockholder equity. Associated Milk Producers in the leading
dairy processing firm in this regard. It is the sixth highest in the
country in terms of this ratio producing sales of $21. 20 per dollar of
stockholder equity.
4. Cost Structure
In the absence of actual industry data for the respective industry seg-
ments, cash flows for model plants were prepared to estimate "repre-
sentative" cost structures for various size plants in all major segments
of the industry. These are shown in Tables II- 6 through II- 11 .
Variable or production related expenses were defined as those which
generally vary proportionately with throughput and can often be costed
as a fixed amount per unit of product.
II
II-S
-------
Table II-5. Dairy industry conversion factors
Pounds Milk
to
One pound product
21.3
9.9
2. 1
2.4
7.4
13.5
12.0
Butter
Whole milk cheese
Evaporated milk
Condensed milk
Whole milk powder
Powdered cream
1 gal ice cream
6.25 Ib skim milk
11. 00 Ib skim milk
1.8 Ib NFDM are produced with
1 Ib butter
1 Ib whole milk (3.5% B.F.) x (Factor)
.04305
.0798
.00402
.095
.0567
.00246
1 quart milk weighs 2. 15 Ib.
1 gallon ice cream weighs 4.5 Ib.
1 Ib cottage choose
1 Ib NFDM
1 Ib. product
butte r
NFDM
dry buttermilk
cheese
dry whey
whey cream butter
H-9
-------
Table II-6. Estimated cash flow for model butter and non fat dry milk processing plant ($000)
Small Plant
Plant Utilization (Percent)
Hours/day
Days/week
Days/year
Hours /year
Annual ME in (000 Ib)
Annual Butter out (000 Ib)
Nonfat dry milk out (000 Ib)
Sales
Butter @ . 67 /Ib.
NFDM @ . 397/lb.
Raw Product Cost (@ 5. 49/cwt)
Variable Cost Labor
Labor
Utilities $.86/1
Packaging Material ($.50/1,000 Ib.
whole milk)
Other
Total Variable
Fixed: SG&A
Insurance, tax &t other
Cash Earnings
Total
77
8
5
250
2,000
28,875
1,355
2,439
907. 9
968.2
$1,876. 1
1,582. 2
100.6
,000 24.8
14.4
33. 2
173.0
61
17
78
29. 9
Percent
of sales
100. 0
84. 5
5.4
1. 3
. 8
1.7
9-2
3. 3
.9
4.7
1.6
Medium Plant
Total
80
8
5
250
2,000
60,000
2,816
5,069
1, 886. 7
2,012.4
$3,899- 1
3,294.0
111.8
$.82/1000 49.2
30.0
45. 3
236= 3
117.0
22.0
139-0
229- 8
c
Percent
of sales
100. 0
84. 5
2. 9
1.3
. 8
1. 2
6,1
3.0
. 6
5.9
ontinued--
Large
Total
82
16
5
250
4,000
123,000
5,774
10,391
3,868.6
4, 125.2
$7,993.8
$6,752.7
133.7
$.75/1000 92. 3
61. 5
61.5
349,0
319
29
348
544. i
Plant
Percent
of sales
100. 0
84.5
1.7
1.2
.8
.8
~4~T
4.0
.4
ITT
6.8
-------
Table II-6. (continued)
Depreciation
Interest (. 6 % sales)
Pre-Tax Income
Income Tax
After Tax Income
Annual Cash Flow
Replacement Value
Land & Building
Equipment
Total Replacement Value
Average Fixed Asset
Total Working Capital
Raw Product x _.? ••• Y9+^?
52 12
Current Liabilities (9.4% sales)
Average Fixed Investment
Pre-tax income /A FI
Net Income/AFI
Annual Cash Flow/AFI
Small Plant
Percent
Total of sales
65 3.5
11 .6
(46.1) -0
(46.1) 0
18.9
456
683 60%
1,139
570
264
176
658
<0
-------
Table II-7. Estimated cash flow for model cheddar cheese plant ($000) with whey drying process installed
Plant utihza'ioii (%)
Hours /day
Days/week ,
Days /year
Hours /year : • • '
Total raw product in (1,000 Ib/yr) i
Total cheese out (1,000 Ib/yr) • ;
Total dried whey out (1,000 Ib/yr) —'
Cheese sales @ $0.638/lb (000)
Whey sales @ $.08/lb (1,000)
Total . T 1
Raw product cost® 5.49/cwt-'
Processing Cost:
Labor
Container, supplies, other
Total processing ($000)
Fixed Cost:
SG&A @ % sales
Insurance fk Tax and Other
Total fixed cost
Cash earnings
Depreciation
Interest (.6% sales)
Pre Tax Income
Income Tax
After tax income (net income)
i replacement Value
Land and buildings
Equipment
Total replacement
X-Small
Total
75
10
7
365
2,555
7,500
758
505
483.6
40.4
524.0
411.7
27
55.3
82.3
20
5
25
5.0
17.7
3
(15.7)
--
(15.7)
95
196
291
Plant
% of
sales
100.0
78.6
5.1
10.6
15,7
3.8
1.0
4.8
1.0
3.4
0.6
0
0
Small
Total
80
12
7
365
3,066
16,000
1,616
1,077
1,031.0
86.2
1, 117.2
•878.4
38.5
110.0
148. j
31
9.2
40.2
49.7
30.3
7.0
12.4
2.7
' 9.7
175
.325
500
Plant
% of
sales
100. 0
78.6
3.4
9.8
13.2
- 2.8
0. 8
3.6
4.4
2.7
0.6
1. !
0.2
0.9
Medium Plant
% of
Total sales
8'
10
7
365
2,555
53, 125
5,366
3, 577
3,423.5
286.2
3,709.7 IdO. 0
2,916.6 (K.6
107 .'.9
298. t K. n
->05. 1 )').<>
107 2.9
26 0.7
133 3.6
255 6.9
64.3 1.7
L i i) . 6
J68.7 4,5
74.5 2.0
94.2 2 . 5
"i I '•
t.Sl
I ,.)>,,
Large
Total
90
1C
7
365
2,555
225,000
22,727
15, 151
14,499.8
1,212. 1
15,711.9
12,352.0
269
' , 139. 4
1,408.4
518
50
568
1 , 383. 5
350.3
94
938.7
442.2
196. j
• ., .: .'. u
2 , 84 1
t., 061
Plant
% of
sales
100.0
78.6
1.7
7 ^
9.0
3.3
0. 3
3.6
8, 8
2.2
0.6
6.0
2.8
3.2
-------
Table II-7. (continued)
Total Working Capital =
Cost raw oroduct x A° + VC+F(
Current Liabilities (9.4% sales)
Annual cash flow
Average fixed assets
Average fixed investment
Pre-tax income/AFI
Net Income/AFI
Annual Cash Flow/AFI
X-Small Plant Small Plant
% of % of
Total sales Total sales
^
>_<
88.1 184.6
49.3 105.0
2.0 40.0
145.5 250
184.0 330
Percent
0 3.7
0 2.9
1.1 12.1
Medium Plant
% of
Total sales
605.7
348.7
158.5
528
785
21.4
12.0
20. 1
Large Plant
% of
Total sales
2,514.3
1,476.9
846.8
3,031
4,068.4
23.0
12. 1
20.8
L' 0. 67 Ib dried whey per pound of manufactured cheese
— No charge for whey input
-------
Table II-8. Estimated cash flow for evaporated milk processing plant ($000)
Medium Plant
Plant Utilization (Percent)
Hours/day
Days/week
Days/year
Hours /year
Annual throughput -milk in (000 Ibs.)
Annual throughput -milk out (000 Ibs.)
(Cases @ 50 Ib.)
Sales ($8. 68/50 Ib or .173 Ib)
Raw Product cost ($5.49/cwt)
Variable Cost
Labor
Sterilizer
Utilities
Cans
Other
Total Variable
Fixed Cost
SG&A
Other
Total Fixed
Cash Earnings
Depreciation (25 years)
Interest . 6% sales
Total
60
16
5
250
4,000
42,000
20,000
400
3,472
2, 306
$. 2375/case 95
.04/case 16
.02/case 8
1.25/case 500
.05/case 20
639
.2375/case 9L-
. 150/case 60
155
372
- ,,189,
120
Percent of
100. 0
66.4
2.7
. 5
. 2
14.4
.6
18.4
2.7
1.7
4. 5
10.7
' ?,? 4 ,
3. 4
Sales Total
60
16
5
250
4,000
84,000
40,000
800
6,944
4,612
. 2037/case 163
.04/case 32
. 02/case 16
1. 25/casel,000
.04/'case 32
1,243
. 196/case 157
. 125/case 100
257
•83~2
: 378 ,
240
Large Plant
Percent of Sales
100. 0
66.4
2. 3
. 5
. 2
14. 4
. 5
17.9
2. 3
1.4
3. 7
12. 0
5.4
3. 5
c ont inued - -
-------
Table II-8. (continued)
•
Pre-Tax Income $0. 158/case
Income Tax
After tax income
Replacement value
Land & Building (non ref. warehouse)
Equipment
Total Replacement Value
Total Working Capital Raw milk x 11 + FC+VC
52 12
Current Liabilities (9.4 percent of sales)
Annual Cash Flow
Average Fixed Asset
Average Fixed Investment
Pre-tax income/AFI
Net income/AFI
Annual Cash Flow/AFI
Medium Plant
Total Percent of Sales
63 1.8
24 .7
39 1. 1
2,000
1,000
3,000
643
326
228
1,500
1,817
3.4
2. 1
12. 5
Total
$0.267/cs 214
96. 2
117. 8
2,000
2,000
4,000
1,278
667
495. 8
2,000
2,611
8. 2
4. 5
19- 0
Large Plant
Percent of Sales
3. 1
1.4
1.7
-------
Table II-9. Estimated cash flow for model ice cream manufacturing plants ($000)
Plant Utilization (Percent)
Hours /day
Days/week
Days/year
Hours/year
Annual raw product in (000 Ibs.)
Annual ice cream out (000 gal)
(12:1 conversion)
Sales ($1. 30 gal)
K M. E. & Ingredient Cost ($. 75/gal)
1— '
°" Variable Cost
Labor
Fuel & Power
Other V.C.
Cartons
Total Variable Cost
Fixed Cost (SG&A & other)
Cash Earnings
Depreciation
Interest (. 6 % sales)
Small Plant
Percent
Total of sales
75
8
5
250
2,000
4,500
375
$487.5 100.0
281.5 57.7
.110/gal 41.3 8.5
. 01/gal 3.7 .8
. 02/gal 7.4 1.5
,0935/gal 35.0 7.2
87.4 17.9
78.0 16.0
(40.6)
84.0 17.4
2.9 -6
Medium Plant Large Plant
Total
80
12
5
250
2,000
38,400
3,200
$4,160
2,400
. 123/gal 393. 6
.01/gal 32.0
.02/gal 64.0
.0935/gal 298.0
787.6
624.0
348.4
142. 0
24. 9
Percent
of sales Total
100.0
57.7
9.5
. 8
1. 5
7. 2
18. 9
15.0
8.4
3.4
. 6
82
16
5
250
2,000
78,720
6,560
$8,528
4,920.0
.109/gal 715.0
.01/gal 65.6
.02/gal 131.2
.0935/gal 608.4
1,520.2
1,151. 3
936. 5
235.0
51. 2
Percent
of sales
100.0
57.7
8.4
. 8
1.5
7. 1
17. 8
13. 5
11. 0
2. 8
. 6
continued--
-------
Table II-9. (continued)
Pre-Tax Income
Income Tax
After tax income (net income)
Replacement value
Land & Building
Equipment
Total Replacement Value
Total Working Capital (12 weeks)
17 v r* j.r\ f
R.TUtr Pr«H,i/~<- v ie- + VO-t-lJ^
52 12
Current Liabilities (9.4% sales)
Annual Cash Flow
Average Fixed Assets
Average Fixed Investment
Pre-tax /AFI
Net income / AFI
Annual Cash Flow / AIT
Small Plant
Percent
Total of sales
(46.3) <0
_
(46.3) sO
900
600 40%
1,500
81
46
37.7
750
785
<0
<0
4. 8
Medium Plant
Percent
Total of sales
181.5 4.4
80.7 1.9
100.8 2.4
1,500
1,000 40%
2,500
662
391
242.8
1,250
1,521
Percent
11.9
6.6
15.9
Large Plant
Percent
Total of sales
650.3 7.6
305.7 3.6
344. 6 4. 0
2,250
1 , 841 40%
4,091
1,314
802
623.9
2,046
2,558
25.4
13.4
24.4
-------
Table 11-10. Estimated cashflow for model fluid milk processing plant ($000)
x-Small Plant
Plant utilization (%)
Hours/day
Days /week
Days /year
In raw milk (000 Ib/yr)
Product processing loss (%)
Out processed milk (000 Ib/yr)
Sales @ (.10930 /lb ba^ed on $. 94(gal. )
(8.6 Ib/gal)
Raw product costs (U.S. Class I price)
Jan. 1, 1973-$7. 49/100 lb)
Proces s ing:
Labor ($.00798/lb)
Containers ($.0157/qt)
Supplies (14% of cost)
Other
Total Processing Cost
Fixed Costs :
S, G&A
Insurance and taxes
Other
Total Fixed Cost
Cash earnings
Depreciation (1/20 of bldg. & land, I/ 15 equip)
Interest @ .6% sales
Pre-tax Income
Income Tax
After tax income (net income)
Replacement Values:
Land and Buildings
Equipment
Total
Total
85
10
6
300
2,741
1.6
2,697
294.8
205. 3
21.9
20.0
2.9
6.0
50.8
17. 7
7.0
3.0
27.7
11.0
10.3
1.8
(1.1)
(1.1)
Percent
40
60
TM
% of
sales
100.0
69.6
7.4
6.8
1.0
2. 0
17.2
6.0
2.3
1.0
9.4
3,7
3.4
0.6
<0
-
<0
75
113
TM
Small Plant
Total
85
12
6
300
45,688
1 1
45,0i8
4, 923. 9
3,422.0
($.00598/lb) 273.2
($.0154/qt) 327.3
(14.3% of cost) 46 8
98.0
745. 3
280. t
2<;. 5
24. 6
334. 7
421. 9
149.8
30.2
241.9
109. 7
132.2
Percent
32
68
100
% of
sales
10U. U
6'i. 5
3.5
6.6
1. 0
2,0
15, 1
5. /
0. o
J. 5
6.8
8.6
3.0
0.6
4. 9
2 2
2. 7
Medium
Total
182,
180,
19,
13,
($. 00677 /lb) 1,
($.0152/qt) 1,
(9. 0% of cost)
2,
1,
1,
1,
1,
85
24
6
300
750
1.
557
735.
688.
182.
292.
126.
244.
845.
203.
98.
1 18.
421.
781.
540.
120.
121,
531.
589.
2
9
0
4
0
6
0
0
9
7
4
0
9
0
9
0
7
3
% of
sales
100.0
69.3
6. 0
6.
0.6
1.2
14. 1
6. 1
0. 5
0.6
7.2
9.0
2.7
0.6
5.7
2. 7
3. 0
Percent
771
1,670
2,441
40
60
100
3,600
5,400
9,000
Large Plant
Total
365,
361,
39.
27,
J$.0065/lb) 2,
($.0152/qt) 2,
(10% of cost)
5,
2,
2,
3,
2,
1,
1,
85
24
6
300
500
1.0
845
942. 6
646.9
378. 9
583.7
258.4
389.0
610.0
396.6
159.8
199.7
756. 1
929. 6
900.0
242.3
787. 3
331. 5
455. 8
% of
sales
100.0
69. 1
5.9
6.4
0.6
1.0
13.8
6.0
0.4
0.5
6.9
9-8
2.3
0.6
7. 0
3. 3
3.6
Percent
40
60
100
6,000
9, 000
15,000
-------
Table 11-10. (continued)
x-Small Plant
% of
Total sales
Small Plant
% of
Total sales
Medium Plant
%o£
Total sales
Large Plane
% 01"
Total sales
Total Working Capital =
Raw milk cost x _! + VC+FC
52
12
Current Liabilities (60% of Total Working
Capital)
25.8
15.3
398.1
238.9
1.569.9
941.9
3. 155.4
1,893.2
t-t
1
*o
Annual cash flow
Average fixed assets
Average fixed investment
Pre-tax/AFI
Net Income/AFI
Annual Cash Flow/AFI
9.
94.
105.
*-0
<0
8.
2
0
0
8
282.
1,220
1,379
17.
9.
20.
0
Percent
5
6
4
1,
4,
5,
129.
500
128
21.
11.
22.
3
8
5
0
2,355.
7,500.
8,762
31.8
16.6
26.9
8
0
— Recent industry figures indicate that the average net income is about 1 percent of sales; 2 percent would be excellent. A recent FIC study
indicates that about 25 percent of the plants are in a loss position (these would mainly be small and extra-small plants). These models
may present an overly-optimistic situation.
-------
Table II-11. Estimated cash flow for model fluid milk and cottage cheese manufacturing plant
with whey dried and sold ($000)
Plant utilization
Hours per day
Days per week
Days per year
Raw milk in 3. 55% fat (1000 Ibs)
Fluid milk (85 percent) (000 Ibs)
Cottage cheese (15 percent) (000 Ibs)
Output — ' (pounds)
Fluid milk @ 3.25% butterfat (assume 1% processing
loss)
1-1 Creamed curd
^ 35% cream-from milk std or separation
0 Dried whey —1
Sales
Fluid milk @ $0, 10930 per Ib
Cottage cheese @ $0.281 per Ib
35% cream @ $0. 807/lb fat
Dried whey @ $0. 08/lb
Total Sales
Raw Product:
M.E. for fluid milk® $7.49
M.E. for cottage cheese @ $5.64
Total raw product
Processing
Labor
Containers
Supplies
Other, incl. utilities
Total processing cost
Medium Plant
Total Percent of Sales
85
24
6
300
182,750
155,338
27,413
152,500
3,786
3,872
1, 173
16,669
1,064
1,094
94
18,919 100.0
11,635
1,546
13,181 68.7
1,210 6.3
1,230 6.4
116 0.6
284 1.5
2,840 14.8
Large Plant
Total Percent of Sales
85
24
6
300
365,500
310,675
54,825
305,000
7,572
7,743
2,347
33,337
2, 127
2, 187
188
37,839 100.0
23 270
3,092
26,362 68.4
2,429 6.3
2,434 6.3
245 0.6
469 1.2
5,577 14.5
-------
Table II-11. (continued)
Fixed Cost
SG&A
Insurance and Taxes
Other
Total fixed cost
Cash Earnings
Depreciation
Interest , 6% sales
Pretax income
Income tax
After tax income (net income)
Replacement Values:
E Land and Bldg.
£J Equipment
Total replacement value
Total Working Capital =
rngt nf milk v _! 4- VC+FC
52 12
Current Liabilities (60% of Total Working Capital)
Annual cash flow
Average fixed assets
Average fixed investment
Pre-tax income/AFI
Net income/AFI
Annual cash flow/AFI
Total
1, 154
95
114
1,363
1,535
553
116
866
409
457
3,600
5,610
9,220
1,520.
912.
1,010
4, 110
4,718
18.4
9.7
21.4
Medium Plant
Percent of Sales
6.1
.5
.6
7,2
8. 1
2.9
.6
4.6
2. 1
2.4
61%
5
3
Percent
Large Plant
Total Percent
2,270
151
189
2,610
3,290
923
231
2, 136
1,019
1, 117
6,000 61%
9,347
15,347
3,026.5
1.81D.9
2,040
7,673
8,884
24.0
12.6
23.0
of Sales
6.0
.4
.5
6.9
8.7
2.4
0.6
5.6
2.7
2.9
Footnotes on following page
-------
Footnotes for Table II-11
— Basic assumption for fluid milk and cottage cheese model plant-
Milk in:
Conversion
365,500,000
85% fluid milk
310,670,000 Ib
Standardized to 3.25% fat
Yield: 308, 010,000 fluid
milk
932,010# surplus fat
or 2,662,800# cream (35%)
Ibs raw milk in
15% cottage cheese
54,825,000 @ 3. 55%
Separate to 0. 15% skim
Yield: 49,500,000 skim
5,325,000# cream
or 1,864,000# fat
12.50# curd per 100# skim
Yield 7,335,900 uncreamed curd
Use 4.0# cream/3 l# uncreamed curd
Then:
7,335.900 ,,x ,,,„
—'——p = 236, 642# cream
Yield 7,572,542 creamed curd
Total output:
7,572,542# creamed curd
7,743,359# 35% cream
308, 100,000# of 3.25% milk minus 1% processing loss
21
— 0.31 Ib per pound of cottage cheese manufactured.
11-22
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These include:
- raw materials
operating labor
- powe r
- water
plant supervision and fringe benefits
chemicals
Separate estimates were made for interest costs and depreciation.
a. Fixed Costs
As shown in Tables II-6 through 11-11, fixed costs range from 3.6 percent
to 13. 0 percent of total large plant costs and from 4. 5 to 16. 0 percent in
small plants. This cost is assumed to contain a portion of the administration
and sales expenses incurred at a regional or national office and allocated
back to a specific "model" plant. Sales cost do not include delivery cost
but all product prices are listed for f. o.b. plant. Likewise raw product
costs do not include assembly. To estimate assembly and distribution
cost was considered beyond the scope of work in this project.
Depreciation as a percent of sales is at a maximum in the case of the
small ice cream plant model (17. 4 percent). This is due in part to the
extra investment needed for freezing space storage. At the other end
of the scale, depreciation in the model of the large cheese plant was
0. 8 percent of sales.
An industry average calculated from IRS data showed depreciation as
1.75 percent of sales. The model plants averaged about twice this
amount. This is primarily because depreciation was calculated on the
basis of replacement value whereas actual IRS data is based on plant and
equipment of lower cost and partially depreciated out already.
Interest costs had been determined by IRS to range from 1. 6 percent of
sales down to 0. 5 percent with no clearly visible relationship between
interest cost and size of establishment. In the model plants, an average
of 0.6 percent of sales was therefore taken.
11-23
-------
b. Variable costs
Two categories of direct costs are shown in Tables II-6 to II-l 1 for
industry segments and model plant sizes. By far, the highest percentage
of all costs, fixed and variable, is for the raw materials, mostly milk.
In the case of ice cream manufacture, milk equivalent and other other
materials are combined as a cost per gallon of ice cream. Other dairy
products may often be made partly with milk-based ingredients such as
cream and nonfat dry milk. In terms of tonnage inputs, these are con-
verted into milk equivalent terms. However, for the sake of simplicity,
milk was considered the only raw material utilized in the model plants
(with the exception of the ice cream plants).
As a percent of sales, raw material costs varied from 57.7 percent in
the model ice cream plants to 88 percent in the cheese plants. The next
highest direct cost was for labor, which usually accounts for from four
to seven percent of total costs. The total direct costs were lower in lare,e
plants, largely because of the labor savings effected by large scale
mechanization -- a trend which is proceeding at a rapid pace. They
ranged from 11.8 percent in the model cheese plant to 32. 5 percent in
the evaporated milk plant. A large share of the cost in the latter is spent
for power.
c. Sales
Product output was priced according to the U. S. Department of Agriculture's
wholesale or retail price data at a time as close to January 1, 1973 as possible.
All prices are f.o.b. plant. Most wholesale price data were readily available.
Because each model plant is processing entity, it does not take distribution
costs into account. In some cases, a markdown from wholesale prices of 2-4
cents per pound of product was taken to make the closest approximation to
f.o.b. plant price. Manufacturers' price estimates confirmed this calculation.
A summary of prices used in the model plants is shown in Table 11-12.
11-24
-------
Table 11-12. Summary of prices used in model plant construction based
on January 1, 1973
Wholesale Retail
(f.o.b. Plant)
Input
Milk
Class I $7.49/cwt
Class II 5.64/cwt
Class III 5.49/cwt
Output
Product
Butter $ .67/lb $ .87/lb
NFDM .397/lb
Cheddar cheese .638/lb $ . 57/1/2 Ib
Evaporated milk $8. 68/50 Ib case $ . 20/14 oz can
Ice cream $1.30/gal $ . 86/ 1/2 gal
Whole milk $ .215/qtor $ .60/ 1/2 gal
. 10930/lb
Cottage cheese $ .281/lb
Butterfat $ ,807/lb
Source: Basic data taken from USDA: Dairy Situation, and adjusted as per
industry discussion.
11-25
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B. Distribution of Model Plant Financial Data
It is not possible to obtain the required financial parameter for individual
industry segment from published sources. Thus, we utilized the financial
data from the model plants. These data were reported in Section A and
the reader is referred to that section for information regarding the
distribution of key financial data within and among segments.
Sources of model plant financial data are listed in the bibliography. A
number of research workers at land grant universities and in the USDA
have made studies of various aspects of processing plants. The informa-
tion has included design engineering, costs and methods of milk pick-up and
product distribution. A limitation in their use is the fact that most of the
cost figures are out of date. In these cases, the national GNP price index
(Table 11-13) was used to convert data to a 1972 base.
Table 11-13. GN^ price indices, 1958-1972
Year
1958
1950
1955
I960
1961
1962
1963
1964
Source:
Index
100
80.2
90.9
103.3
104.6
105.7
107.1
108.8
Statistical Abstract, 1972, p.
Year
1965
1966
1967
1968
1969
1970
1971
1972
313 and Demand and
Index
110.9
113.7
117.3
122. 3
128.2
135.3
141.6
145.9
Price Situation.
11-26
-------
Although manufacturers in each segment of the dairy industry belong to
and support a central organization or institute, the latter do not collect
or analyze data relating to plant production costs, productivity and profit-
ability. A number of manufacturers were contacted in order to verify
production data.
Even so, management is many times reluctant, for various and valid
reasons, to divulge information on operating costs and returns. In
spite of the inherent difficulties, sufficient information was obtained
directly from the industry and other sources to generate what we be-
lieve is a realistic series of model plants. Where data were missing,
personal judgments and approximations were made. Those resulted
in "ball park" estimates which are the best possible at this point. The
most definitive picture can be obtained only through an in-depth industry
survey.
Additional information relating to the industry as a whole, but not to its
segments, was obtained from IRS business statistics and from financial
research organizations such as Dun & Bradstreet, Inc. and "Fortune".
The averages and ratios reported for the industry were helpful indicators
in developing the financial data relating to the model plants.
Another helpful indicator, not only of the financial structure of the in-
dustry but also of each segment thereof, was the "Census of Manufactures"
and the annual surveys of manufactures. These sources provided not only
hard data on numbers of plants and employees, value of shipments, and
capital expenditures, but also indicative ratios of productivity and profits.
Table 11-14 summarizes, by industry and segment, some of the industry
trends.
The decline in the creamery butter industry parallels the diminishing per
capita consumption of butter that is detailed in the next chapter ("Pricing").
The improvement in the financial picture in the cheese industry has been
particuarly noticeable in recent years, and has continued since 1970, the
last year for which data were available. Productivity has increased in all
segments. Value added has increased in every segment except creamery
butter (20Z1).
11-27
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Table II- 14. Annual percentage changes in certain physical and financial aspects of the dairy industry
and its segments period, 1958-1970
Industry and SIC Code
Dairy products
Creamery butter
Cheese, natural and
processed
h- 1
i Condensed and evap-
oo orated milk
Ice cream and frozen
desserts
Fluid milk
Source: Annual Survey
Number
of
Employees
202 -3.0
2021 -9.2
2022 1.7
2023 -0.4
2024 -2.8
2026 -3.4
of Manufactures,
Number of
Production
Workers
-3.3
-9. 1
1.6
-1. 1
-2. 0
-4.5
M70 (AS) - 10,
Value
Added
2.2
-3.5
8.8
5.8
0.9
1.7
Industry
Value
of
Shipments
2.6
-2. 0
7. 9
4.2
1.6
2. 1
Capital
Expendi-
tures
1.4
-7.9
3. 5
4.8
5. 4
0.4
Profiles, Bureau of the
Value of
Shipmts. per
Prod. Worker
6.2
7.9
6.2
5. 4
3.7
7. 0
Census, U. S.
Wage per
Productior
Worker
4.6
4. 5
3. 7
4.5
4. 1
5.0
Depart-
ment of Commerce, 1972.'
-------
C. Ability to Finance New Investment
The ability of a firm to finance new investment for pollution abatement
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 acquired. 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, im-
pact of government regulation, foreign trade and other signficant 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; the 1973 year has been viewed as especially difficult
for new equity issues.
These general guidelines can be applied to the dairy industry by
looking at general economic data, industry performance and available
corporate records.
11-29
-------
1. General Industry Trends —
As with most industries which process agricultural products, the dairy
industry typically earns very low net profits on sales. In 1971,
the industry's return (1.39) ranked in the bottom 2 percent of Dun and
Bradstreet's estimates for major manufacturing and construction in-
dustries. — Industries with lower net profits on sales in 1971 were
limited to meat packing (0.87); plumbing, heating and air conditioning
(1.30); and several industries producing clothing and apparals (0.64 -
1.32).
Perhaps as important as level of profit margins is the stability of
margins. Here again, the industry's performance is unfavorable.
Pushed by higher labor costs, intense competition and strong inflation-
ary pressures on new plant and equipment, net profits on sales have
exhibited a marked downward trend in recent years. The industry
average reported by IRS dropped from 2.3 percent in 1967-68 to
1,6 in 1969-70. As noted above, Dun and Bradstreet reported a median
of 1.39 in 1971. Further movements have not been documented to the
extent requisite for meaningful comparisons.
Even though the above discussion cites data which will no doubt influence
the industry's ability to attract capital, the portrayal is somewhat de-
deptive. Low profits on sales do not necessarily imply depressed returns
in total. To illustrate this point, it is noted that Dun and Bradstreet reports
an 8.71 percent median net profit on tangible net worth for the dairy in-
dustry in 1971. This figure is much closer to what would be considered
an "average" or "normal" profit rate. However, this measure also
exhibited a strong downward trend in the late I9601 s--dropping from
10. 1 in 1967-68 to 7.0 in 1969-70 (IRS data). It is not clear whether the
8.71 reported for 1971 represents an improved situation or merely a
difference in the sampling bases employed.
— Data in this section referenced as being from IRS sources were ob-
tained or derived from Troy, Leo, Almanac of Business and Industrial
Financial Ratios, 1971, 1972, and 1973 editions, Prentice-Hall, Inc.,
Englewood Cliffs, New Jersey.
21
— Anonymous, 1971 Key Business Ratios, Dun and Bradstreet, Inc.,
New York.
11-30
-------
One of the key items of concern from a lender's standpoint is profit
performance compared to the total capital stock employed by the in-
dustry. Again, the strong downward trend prevailed in the late 1960's.
Net income as a percent of total assets dropped from 5. 9 in 1967-68
to 3.9 in 1960/70. according to IRS data. Comparable data for 1971
and 1972 are not yet available.
Since current liabilities tend to fluctuate substantially in some industries,
another measure of profitability is perhaps more meaningful than return
on total assets: i.e. , return on fixed investment whe re fixed investment
equals total assets less current liabilities. However, in this case,
the trend remains unaltered: 8.4 percent in 1967-68 to 5.7 in 1969-70.
Again, comparable data are not available for more current periods.
As would be expected, this unfavorable profit picture has its impact — both
in terms of plant closures and the capital structure of the industry. The
number of firms included in the IRS data dropped from 3,356 in 1967-68
to 2, 502 in 1969-70 while total receipts increased from $11.9 billion to
$14.6 billion. Meanwhile the current ratio (current assets to current
liabilities) dropped from 1.7 to 1.5. Current liabilities to net worth
increased from 49. 1 to 56.4 percent and current liabilities to total assets
increased from 28. 9 to 31.3 percent. Total debt as a percent of total
assets held at 41.2 during 1967-69 and then jumped to 44.4 in 1969-70.
Although the current ratio returned to 1.6 and current liabilities to net
worth dropped to 50.7 in 1971, external capital continued to become an
increasingly important factor with total debt reaching 45.0 percent of
total assets. Data concerning the capital structure shifts in 1972 are not
yet available.
In interpreting the above trends, it is perhaps worthwhile to caution the
reader that the dairy industry is dynamic and many forces are at play.
It is true that profits on sales are low, profits (regardless of the measure
used) are declining and the utilization of borrowed capital is increasing.
Average net profit on fixed investment and net profit on net worth cur-
rently appear to be low but not exceptionally low when compared to a
broad cross section of manufacturing industries.
Also, it is possible that changes in the capital structure of the dairy
processing industry may be highly influenced by construction of large,
highly automated plants with rapidly escalating price tags. Further-
more, profits are not shared alike in the industry, capital structures vary
tremendously from firm to firm and diversification programs currently
being followed by the dominant firms tend to distort data based upon
industry averages.
11-31
-------
2. Dominant Firms and Diversification
At this juncture, it is necessary to briefly examine the nature of
competition and diversification in the industry. The larger companies
and cooperatives are commonly diversified into two or more of the
industry's five primary segments. Hence, it is most difficult to iso-
late the impacts of pollution abatement standards by industry segment.
And, still another problem is posed in that the largest firms are actively
involved in enterprises totaly removed from the dairy industry.
For those firms included in the IRS data, it is interesting to note that
the smallest 50 percent (measured by value of assets) accounted for only
about 5 percent of total industry receipts during 1967-70. On the other
hand, the largest one percent of firms accounted for roughly 60 percent
of total industry receipts. In face of such a distribution of sales, ',he
potential hazards of basing conclusions upon industry averages become
immediately obvious. The impact of pollution control standards on a
company such as Kraftco Corporation (1972 sales of $3.2 billion) or a
cooperative like Associated Milk Producers (1972 sales of $1. 1 billion)
will obviously be different than on a small family owned cheese plant-!'
The large processors not only have different cost structures and debt-
equity structures; to a certain extent they can spread the impact across
industry segments in the short run. In the case of the conglome raLe s which
have evolved from the dairy industry, the impact can be at least partially
offset by operations in other industries --even other countries. Also, the
large companies usually will have more alternative sources of funds.
Conversely, they probably will be more inclined to close down plants in
face of unfavorable impacts than would the smaller companies.
To further illustrate the analytical problems imposed by the large com-
panies , Borden, Inc. is cited as an example. _' Borden is one of the
largest processor-distributors of dairy products in the United States.
It's 1972 sales of $2.2 billion rank it 48ih in Fortune's current Directory
of the Largest Industrial Corporations.— In addition to dairy products,
it has diversified into a wide variety of fields such as restaurants, snack
and processed foods, chemicals, bottled water, and women's sportswear
and dresses. The most recently available data reveals the Dairy and
_' Sales data are from Fortune, May, 1973.
_' The remaining data for this subsection were obtained from various
publications by Standard &c Poor's Corporation unless otherwise noted.
5/
— Sales data are from Fortune, May, 1973.
11-32
-------
Services Division accounting for only 28 percent of corporate sales
and an even lower 17 percent of corporate operating earnings. Per-
centage sales and earnings, respectively, for other divisions are:
Foods 38 and 40, Chemicals 19 and 24, and International 15 and 19.
Per share earnings are expected to rise to $2.35, up from the record
$2. 18 of 1972. Since recovering from a slump in 1968, total net income
and earnings per share have increased each year. Much of the com-
pany1 s success in recent years has been attributed to its sound diversi-
fication program with a de-emphasis on dairy products. To provide a
rough comparison with the industry averages above, Borden's earnings
per dollar of book value of common stock was 10. 9 percent and its cur-
rent ratio was 2.4. Net earnings as a percent of sales since 1967 range
from 2.7 to 3. 5 with 2. 9 being realized for both 1970 and 1971.
To further illustrate the problem, one can examine the "Composite In-
dustry Data" reported for the dairy industry by Standard and Poor's.
The companies currently included in the analysis are: Beatrice Foods, Borden
Inc. , Kraftco Corp. and Pet Inc. For the group as a whole, net earnings
as a percent of sales has varied from 2. 91 to 2. 98 during the 1968-71
period. In the four years preceding 1968, earnings exceeded 3.0 percent
of sales. The return on book value of stock ranged from 12.0 to 12.9
percent during 1967-70 with a preliminary estimate of 13.3 for 1971.
To completely unravel the financial and capital structure problem of
the dairy processing industry would obviously represent a task far
beyond the scope of this project. However, it does appear that one can
safely draw some general conclusions:
1. A very small number of firms control a very large share
of the market.
2. A very large number of firms control a very small share of
the market.
3. The large firms appear to realize substantially higher
profits.
4. The large firms are not experiencing a significant erosion
of profits.
5. The large firms are likely to possess capital structures
substantially different from those exhibited by the small
companies.
11-33
-------
6. Through diversification, the large firms have a better ability
to
a. withstand the impact of adverse conditions in one
industry segment
b. readily and profitably invest capital in alternative
fields when operations cease to be lucrative in any
given industry segment.
Furthermore, by removing the influence of the large firms from the in-
dustry averages, the following seem to be logical conclusions which
generally hold:
1. Small firms experience net profits on total fixed investment
which are less than the industry average.
2. Profits for small firms are decreasing faster than the in-
dustry average.
3. The ratio of debt to total assets is larger for small firms
than for large firms.£.'
4. Retained earnings are smaller in relation to total assets
for the smaller firms. _'
Given the added flexibility of large corporations in securing capital and
the above conclusions, it would seem the large firms in the dairy processing
industry should have little trouble in obtaining the requisite capital for
meeting pollution control standards. If the costs were of such large mag-
nitude that financing posed serious problems, the large firms would
probably divest their operations in that industry segment(s) due to their
relatively high opportunity cost for capital.
On the other hand, the small firms pose a far more serious problem.
Profits are generally low and the trend has been for even lower profits.
Debt levels are already fairly high in proportion to total assets (e. g. in
1969-70 IRS data reveals 1,485 firms in small to medium size classes
where current liabilities exceed net worth). It is anticipated that the
capital required for sizeable pollution abatement investments would be
most difficult to secure for many of the small and medium sized firms.
_' These conclusions are based in part on IRS data not reported separately
herein. There seems to be a certain degree of consistency in long-term
debt between firm sizes but current liabilities are higher for small firms.
U Ibid.
11-34
-------
And, if secured as borrowed capital, the requirements for retiring the
added debt might be beyond the financial capabilities of the firm.
Under these circumstances, it also seems appropriate to recognize
that the cost of borrowed capital for the small and medium companies
would probably be higher than for the large companies. This added
cost would further reduce the ability of the small and medium firms
to pay the cost of pollution control.
If the small and medium firms utilized the depreciation component
of their after tax cash flow to pay for pollution abatement, the result
would probably be basically the same. Rapidly escalating costs of new
plants and increasing profit pressure on small firms resulting from
the economies of scale being realized in the new, extra-large plants
would eventually, in the long run, force the small plants into a shutdown
situation.
3. Industry Segments
As noted in the previous chapters of this report, financial data by se'g-
ment of the dairy processing industry are extremely sparse. Published
data do not give sufficient basis for any conclusions with respect to
differential capital availabilities. However, based upon the model plant
data presented in Chapter II, above, and the valued opinion of several
prominent industry specialists, we feel it is possible to reflect upon the
relative likelihood of securing capital in the segments. Viewing our model
plant data as representative of the segments, it is our judgment that the
relative order of segments in terms of ease of securing capital for meeting
pollution control standards is as follows with the easiest first and the most
difficult last:
1. Cheeses
2. Ice cream and frozen desserts
3. Fluid milk products
4. Condensed/evaporated milk
5. Creamery butter
At the risk of repetition, the reader is again reminded that very few
medium and large firms confine their operations to a single segment.
Many of the smaller firms also process a diversified product line,
while many do not.
11-35
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III. PRICING
This chapter describes the demand and supply picture for dairy products;
the pricing policies relating to milk, the raw product of all segments; and
the effects of those policies on consumer prices for manufactured dairy
products.
A. Price Determination
In 1969, 78.2 percent of fluid grade milk was sold to plants and dealers
under Federal milk marketing orders. The methods of pricing in the dairy
industry and the effects of their pricing policies on consumer prices is
described in following Section 3.
1. Demand
and retail prices of dairy products have remained relatively
Retail price changes have not been drastic, but have trended up-
ward as the price paid to farmers for milk has gone up (Table III-l).
Consumer demand for all dairy products has diminished slightly over
recent years, and milk production has adjusted accordingly. In 1965,
124.2 million pounds of milk were produced. In 1969, 116. 1 billion
pounds of milk were produced. However, since then there has been a
slight uptrend in production to 1 18. 6 billion pounds in 1971. This fact
may be related to an increase in demand for cheese (Figure III- 1).
A general decline in per capita fluid milk consumption since 1955 stopped
in 1972. The decrease in consumption of evaporated milk has continued.
Ice cream consumption has remained stable at just under 20 pounds per
person per year.
Cheese consumption has increased, with a continuous upward trend since
I960 and an accelerated trend since 1971. The latter has been due in a
large part to higher prices for meat protein, resulting in substitution of
cheese by consumers.
Price elasticity is defined as percentage change in quantity demanded
associated with a percentage change in price with other demand variables
held constant. Cross elasticity of demand is defined as the percentage
change in quantity demanded of a given product associated with a percent-
age change in the price of another product. Table III-2 shows demand
interrelationships (price elasticities and cross elasticities) at the retail
III-l
-------
Table III-1. Average retail prices for selected dairy products, 1950-1972
Year
1950
1955
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Prices
Fresh Milk Ice Cream Butter Am.Proc.Chee
£/l/2 gal. £/l/2 gal. cents/lb. £/l/21b.
38.6
43. 8
49. 4
49.2
48. 8
48.6
47. 7
47. 3
49.8
51. 7
53. 7
55. 1
57.4
58. 9
59. 8 1/
(NA)
58.0
86.8
86. 4
85. 8
85. 0
80.4
78.7
80.6
80.9
80.7
81. 3
84.5
85.4
85. 81J
72.9
70. 9
74. 9
76.3
75.2
75. 0
74. 4
75. 4
82.2
83. 0
83.6
84. 6
86.6
87. 6
87. lL/
25.9
28.9
34. 3
36.4
36.2
36.3
36.7
37. 7
42.2
43.6
44. 4
47. 0
50.4
52.8
54. 3L/
I/
— Preliminary
Sources :
Statistical Abstract of
issues), U. S. Dept.
the United States,
(1963, and
of Commerce, Bureau of the
Marketing and Transportation Situation,
February,
subsequent
Census.
1973,
ERS, USDA.
Ill-2
-------
Pounds per capita
330
320
310
300
290
280
270 •
260 •
250 •
240 •
#
4
20 i
10
Fluid milk
Butt
er
Year
1955
I960
1965
1970
"TV
1980
Figure III-1. Per capita consumption of selected dairy products in the
U.S. for selected years 1954-1972, with a forecast to 1980.
Note: 1972 Data are preliminary.
Source: George, P. S. and G. A. King. Consumer Demand for Food
Commodities in the U.S. with Projections for 1980, Giannini
Foundation Monograph #26, March, 1971, University of Calif.
for 1955-1965. Data for 1966-1972 and projection to 1980
from USDA, ERS.
Ill-3
-------
level. A one percent rise in butter price would lower the quantity demanded
by 0. 6 percent. Ice cream and cheese would be affected almost as much,
with a drop in quantity taken of about 0. 5 percent. Fresh milk and evapor-
ated milk would be affected the least, with quantity taken over 0. 3 percent.
Table III-2. Demand interrelationships of dairy products at
the retail level, 1965
Commodities
Butter
Fresh milk
Evap. milk
Cheese
Ice cream
Butter
-„ 652435
„ 001409
. 002347
. 001190
. 000793
Fresh
Milk
. 007233
-. 345546
.214688
.001250
-. 000915
Evap.
Milk
„ 000439
. 010047
-. 319806
-. 000069
-.000185
Cheese
.001997
.000673
. 001236
-.460142
.007235
Ice
Cream
.001225
. 000413
. 000759
. 005526
-.527608
Income
.318
.204
.000
.249
.331
Source: George, P. S. and G. A. King, 1971. Consumer Demand for Food
Commodities in the United States with Projections for 1980.
Giannini Foundation Monograph No. 26, University of California.
The only significant cross elasticity in the table is that of evaporated milk
with price of fluid milk. A one percent increase in retail price of fresh milk
would increase the demand for evaporated milk by 0. 2 percent. This bears
out other data (Table III-2) showing that evaporated milk is an'lnferior" good
era good whose consumption declines = ? income increases.
Two separate estimates of income elasticities were obtained by George
and King. The first are connected with the estimation of the complete
system of price and cross elasticities of demand, Table III-2. The second
are from household food consumption survey data, spring 1965, Table III-3.
Both sets of estimates find dairy products to be highly income inelastic, in
other words, consumption changes in relatively small volume compared
with changes in income levels. In Table III-2, the products in declining
order of income elasticity are ice cream, butter, cheese, fresh milk and
evaporated milk whereas in Table III-3 the order is fresh milk, ice cream,
butter, cheese and evaporated milk.
Based on recent trends, per capita consumption of fluid milk can be
expected to decline to about 265-270 pounds per year by 1980. The con-
sumption of American cheese, however, has been increasing over the past
decade and is projected to a consumption level of about 14 pounds by 1980.
Til-4
-------
Table III-3. Comparison of income elasticities obtained from
weighted regressions of representative foods based on
household food consumption survey data, spring of 1965
Commodity Income Elasticity
Beef .290
Chicken -.037
Butter .318
Margarine -. 022
Fresh milk . 377
Evaporated milk -. 674
Cheese .249
Ice cream .331
Source: George, P. S. and G. .A. King, 1971. Consumer
Demand for Food Commodities in the United States
with Projections for 1980. Giannini Foundation Mono-
graph No. 26, University of California.
Estimated consumption of evaporated milk is based on a negative time
trend and no income effect. Evaporated milk was projected at 5 pounds
per capita by 1980, close to what would be obtained from a simple time
trend. Estimated consumption for 1980 based on an income coefficient
is 20 pounds. Projected consumption for butter in 1980 is 4.9 pounds.
This is based on a positive income elasticity and a negative time trend
which indicates a change in preference away from butter.
Another significant trend has been that of increasing cottage cheese con-
sumption. This has probably been due in large part to the desire of
many people to take off or keep off weight by eating low-fat products.
Cottage cheese is also a cheap source of protein.
Table III-4 provides an indication of the importance of dairy products in
consumer budgets. In 1966 consumers spent nearly 23 percent of their
disposable personal income for food. Dairy products accounted for
nearly 4 percent of total expenditures and 17 percent of all food purchases.
Fresh milk is by far the most important item accounting for more than
half of the expenditure of dairy products.
Ill-5
-------
Table III-4. Dairy products as a proportion of retail food
and total expenditure
Proportion expressed as a percentage of
Food All
Commodity Expenditures Expenditures
Dairy Products
Butter
Cheese
Evaporated Milk
Ice Cream
Fresh Milk
Total
1.419
2.933
.473
2.081
9.887
16.793
.3235
.6685
. 1078
.4744
2.2535
3.8277
Total All Food 100.00 22.79
Total Non-Food 76.823
Source: George, P. S. and G. A. King. Consumer Demand for
Food Commodities in the U. S . with Projections for 1980,
Giannini Foundation Monograph #26, March 1971.
University of California.
In a study by George and King (4) the elasticity of price transmission
expressing the percentage change in retail price to a one percent change
in farm price for various dairy products was calculated. The results
indicate a one percent change in price at the farm level will result in the
following change at the retail level:
Elasticity
Butter .71
Milk . 94
Evaporated milk 2. 56
Cheese 2.74
Ice cream . 86
This suggests that the elasticity of price transmission is relatively high
and that price increases at the producer level can be passed through to
the consumer.
Ill-6
-------
2. Supply
Total milk production has been declining slightly since reaching a peak
in the mid-sixties (Table III-5). This slight decrease in total production
has been accompanied by a sharp decrease in cow numbers, from 21.9
million in 1950 to 17. 5 million in I960 and 12. 3 million in 1972. Produc-
tion per cow has risen dramatically during this period increasing from
5, 300 pounds in 1950 to 9,600 pounds in 1972.
According to the Census of Agriculture, the total number of farms with
milk cows has declined sharply from 1.8 million in 1959 to 1. 1 million
in 1964 and to 600 thousand in 1969. However, in 1969 only about 400
thousand were marketing milk and cream. From all indications this
trend is continuing through the early 70's. As the number of farms de-
crease, and herds become larger, the level of management of the remain-
ing dairy farms is becoming increasingly sophisticated. With better record-
keeping practices, dairy farmers can cull herds more efficiently and carry out
better feeding and breeding programs.
Fluid grade milk (Grade A) production has increased to about 76 percent
of all milk farmers sold to plants and dealers in 1972. This is an increase
from 61 percent in 1950. Dairy farmers are increasingly converting from
manufacturing grade to Grade A milk production. The USDA predicts that
the trend to Grade A production will continue and eventually all our production
will become Grade A.
As the level of farm production has become more sophisticated, so has the
manner of marketing raw milk. Dairy farmers have organized into farm
cooperatives and have developed a stronger voice in the marketing activities.
The farm cooperatives are now the key element in the supply of raw milk.
They represent the farm producer in Federal order pricing procedures in
all but a few isolated markets.
In recent years cooperatives have organized complete assembly and pro-
curement systems; they manage fluid milk supplies to dealers and handle
so-called fluid surpluses by diversion to processing facilities (which may
be owned by cooperatives). This system has become the major economic
interface between the producers and processors. For example, eight
large federations of milk cooperatives representing more than a quarter
of a million dairy farmers contract more than 50 billion pounds of fluid
milk. These eight groups represent more than 40 percent of the nation's
milk supply.
Ill-7
-------
Table III-5. Supply characteristics of milk production.
i
oo
Year
1950
1955
1960
1965
1970
1971
1972
Milk cows
on farms —
(Thousand)
21,944
21,044
17, 515
14,954
12,483
12,483
12,347
Milk
Per cow
(Pounds)
5, 314
5,842
7, 029
8,304
9,385
9,609
Products
Total
(Million pounds)
116,602
122,945
123, 109
124, 173
117, 149
118,640
Farms with
Year milk cows
(Thousand)
1959 1,792
1964 1,133
1969 579
— Average during year.
Source :
ERS, Dairy Situation, Bureau
of the Census, Census
of Agriculture.
-------
3. Pricing in the Dairy Industry
Pricing systems and institutions that exist today in the dairy industry
have emerged as a result of the interaction of processes related to the de-
velopment and location of our major cities and industries. Technological
innovations in food processing, transport, and legislation affecting the
food sector combined with and paralleled major changes in the economic
power and role of marketing firms involved in the chain from producer to
consumer.
Perhaps one of the most important and useful concepts that serves to
categorize and relate the various interdependent pricing mechanisms in
the dairy industry over time is that of product perishability. Because of
the historical importance of perishability and its input on health regu-
lations, legislative practices and market development, it is convenient
to define two broad segments of the dairy industry:
fluid milk
manufacturing milk.
These two segments are highly interrelated and interdependent in terms
of their institutions, product flows, and pricing sensitivities. We will
fiirther define industries within the manufacturing milk segment.
The Fluid Milk Industry
Historically, fluid milk markets emerged as a geographic pattern of
small isolated markets serving the needs of small villages and cities
forfresh milk. Levels in the "state of the art" in food technology,
transport, processing, and local institutional arrangements set defin-
ite limits to the size of local markets and their economic interaction
with other similar markets. Over time, specialization of activities
occurred with economic development. Separate and specialized produc-
ing, assembly, processing and distribution systems developed. Milk
producers, with appropriate national legislation, developed marketing
and pricing methods to sell raw fluid grade milk to milk processors.
Over time, producer-processor-distributors disappeared as a market
force. Producer cooperatives emerged as the dominant agents repre-
senting producers in the pricing process at the first stage of market
transactions.
With further development of the economy rapid changes occurred in
the organization of fluid milk markets and the structure of the industry.
Isolated city markets began to interact due to technological developments
in packaging, transport, processing and the breaking down of legal
barriers to market entry. Paralleling the development was unprec-
edent growth in the food retail industry with the emergence of the super-
market as the most powerful common element in food distribution.
Ill-9
-------
Today, the most important considerations are the rapid and continued
development of large regional dairy cooperatives representing farm
producers, and the emergence of the powerful position of the large
supermarkets in defining the "rules of the game" in the packaged milk
market.
On the farm production side, eight large federations of milk cooperatives
representing more than a quarter of a million dairy farmers contract
more than 50 billion pounds of fluid milk or more than 40 percent of the
nation's milk supply. Some of these associations have sales in excess
of one billion dollars annually.
On the distribution side, large supermarkets have emerged to account
for more than one-third of the milk sold. Sandwiched in between are the
larger fluid milk processors or handlers who are probably becoming less
dominant in the pricing process as they face more powerful groups in
their procurement and distribution markets. The rapid flow of economic
and technological events has resulted in a concentration of economic power
with its attendant large size of firm and large scale plants, with the
consequent exit of many small firms and plants from the industry.
Pricing Stages - Fluid milk passes through several pricing stages from
the farmer to the ultimate consumer:
raw fluid milk market -- generally defined as grade A
markets -- transactions between producer cooperatives and
large processors or handlers.
processed fluid and fluid products market -- transactions
primarily between large processors and food chains,
institutional users and to some extent home delivery.
consumer retail markets -- transactions primarily be-
tween food retailers or institutional users and consumers.
Any classification scheme of stages of the marketing process will be
somewhat arbitrary and contain exceptions if its purpose is to serve
as a simplified, understandable approximation of reality. A rapid
overview of the relevant segments and their importance in the distribution
chain is presented in Table III-6.
Commercial processors are the dominant processing element or point
of contact by the producer's agents, e.g. , large regional farmer co-
operatives. Almost one-half of commercial processor or handler sales
are made to grocery stores with nearly one-third of all sales going to
supermarkets. Home delivery sales are rapidly declining nationally
but still constitute a highly significant market for "some medium size
and small processors.
Ill-10
-------
Table III-6. Estimated percentage distribution of fluid milk products,
by type of outlet and producer, 1967.
Outlet
Commercial Sub- Producer-
Processor Dealer Distributor Total
Home delivered 19.2 6.3 0.5
Plant and farm sales to consumer 2.6 - 1.0
Stores:'
Supermarkets 30. 7 0.3
Convenience stores 1.8
Other grocery stores & delicatessens 6.4 3.9 0.3
Commissary stores 0.8
Dairy stores 5. 3 * 0. 9
All stores 45. 0 4.2 1.2
26.0
3.6
31.0
1.8
10.6
0.8
6.2
50.4
Institutional outlets:
Military
Schools
Restaurants, hotels, institutions
All institutions
Vending machines
Total
2.
5.
7.
14.
2.
83.
1
1
0
2
2
2
1.
1.
2.
0.
13.
-
4
0
4
8
7
0.
0.
0.
3.
-
2
2
4
#
1
2.
6.
8.
17.
3.
100.
1
7
2
0
0
0
Less than 0. 05 percent.
Sources: Agricultural Economics Report, No. 207, Table 2, June, 1971,
ERS, USD A.
Estimated from survey data, North Central Regional Dairy Market-
ing Committee and other data.
Legal Basis for Federal Orders - The Agricultural Marketing Act of 1937
as amended is the legal basis for Federal milk orders and defines the role
of government. The United States Department of Agriculture is charged
•with administration of the orders.
Ill-11
-------
Pricing Raw Fluid Milk - Fluid raw milk for ultimate sale as packaged
milk or associated milk products, i.e., ice cream, cottage cheese, etc.
is priced under Federal or State order regulations; the pricing principles
are the same and the outcome is generally called "administrative pricing. '
Negotiated pricing arrangements can exist in conjunction with, but inde-
pendent of, order pricing procedures.
Farm cooperatives are the key agents representing farm producers in
Federal order pricing procedures. Such cooperatives represent pro-
ducers in the price making process in all but a few isolated markets.
In recent years cooperatives have acquired complete assembly and pro-
curement systems; they manage fluid milk supplies to dealers, and handle
so-called fluid surpluses by diversion to processing facilities (which may
be owned by the cooperatives). This system is the major economic inter-
face between the producers and processors.
Federal marketing orders are designed to:
ensure an adequate supply of milk
provide reasonable and stable levels of income to producer
provide an orderly marketing process
. to be in the public interest
Elements of Federal Orders - Basically an order is a legal instrument
arrived at through legal processes that defines
. the final sales area to be regulated
the processors or handlers to be regulated
indirectly, the producers who are to be affected by the
pricing procedure
. procedures classifying market sales into utilization categories
according to the value of product
procedures for administrative pricing of milk in each
category of sales
. audit procedures to verify handler sales and usage by-
class of sales
pooling procedures to arrive at costs of milk to each handler
by class of use plus total value of all producers' milk in the
market.
Simplified Example - In a simplified hypothetical case, assume dealer
A in a market has 80 percent of his sales in packaged milk and 20 per-
cent in cottage cheese. He would be charged in most cases a "Class I
price" for 80 percent of his milk as packaged milk and a lower "Class II
price" for milk used for cottage cheese. Additional class categories can
and are used in many markets.
Ill-12
-------
A processor's or dealer's total milk bill depends on his product sales
allocation, then on his sales utilization. He furnishes such a statement
as determined in the above manner to a "market administrator" who
supervises a market-wide pool of all dealers in that marketing order area.
Producers, usually represented by a cooperative, receive a weighted
average or blend price of all milk sold in the market in the above fashion.
There are other refinements in practice, such as butter-fat differentials,
administrative costs, etc.-
Classified Pricing in Federal Orders - Classified pricing systems at
the first transaction level in fluid markets are based on the concept that
a product which is non-differentiated in a physical sense can be differ-
entiated into separate components or markets in an economic sense,
thereby enhancing or increasing the total dollar that can be gained from
its sale.
In Federal Order Markets, Class I or II prices are established
either by
. using manufacturing producer pay prices as a base and adding
a differential or
economic formulas.
In the Midwest, because of its proximity to large supplies of manufacturing
milk, many Federal orders use as a base price the so-called Minnesota-
Wisconsin manufacturing milk price series. The latter series is published
by the USDA. Details of arriving at class prices used in Federal orders
and prices so derived are a matter of public record in each Federal order
in operation in the U. S.
Full Supply Contracts - Many handlers have full supply contracts with
producers. Thus, most handlers are no longer concerned with the
problems of adjusting fluid milk supplies to daily processing needs or
disposing of "surplus fluid milk."
Negotiated Premiums - Standby Pools - In part because of the influence
of Federal orders on markets and because of the growth in large-scale
producer marketing organizations, an economic environment has de-
veloped whereby cooperatives have engaged in managing a central milk
supply. Marketing strategies such as standby pools and other procedures
have resulted in premiums paid by handlers to farmer cooperatives in
about two-thirds of the Federal order markets. These premiums as well
as transfer costs for inter-market shipments must be taken into account
in arriving at actual prices dealers pay to milk suppliers.
— For further discussion see the Federal Milk Order Program Marketing
Bulletin 27, "Consumer and Marketing Service," USDA, April 1968.
Ill- 1 3
-------
Market Information - Order prices that all milk processors pay arid
prices that producers receive in both State and Federal orders are a
matter of public record. Regular market reports are issued by market
administrators in Federal order regions and are published in various
forms by the USDA.
Dairy Price Support Program - Government price supports in the dairy
industry are carried out by the authority of the Agricultural Act of 1949.
This Act requires that the national average price of all milk and butterfat
at the farm level be supported between 70 and 90 percent of parity. The
Act further requires that the parity objectives be achieved by loans or
by purchase of milk and butterfat or processed products of milk arid
butterfat.
The above Act was amended by the Agricultural Act of 1970 which suspended
from April 1, 1971, until March 31, 1974, the requirement to support
butterfat on farm separated cream and to provide loans. L'
Price supports in previous legislation have been carried out by purchases
of butter, Cheddar cheese, and non-fat dry milk to achieve target national
average prices for milk and butterfat at farm levels.
jlelationship of Federal Orders to Dairy Price Supports - The dairy price
support program affects manufacturing support prices by establishing an
effective minimum floor for the total dairy sector. The relationship
between manufacturing milk prices and the structure of raw milk prices
in the fluid industry is rather direct. As indicated in a previous section,
in many Federal orders class prices are based on manufacturing milk
prices or on economic formulae closely related to supply and demand con-
ditions in the manufacturing sector. Studies have indicated that changes in
manufacturing milk prices explain 90 percent of changes in dealers' aver-
age buying prices for Class I milk. About 75 percent of the nation's milk
supply is grade A and about one half of this is used for fluid purposes.
Federal orders are used to price about 60 percent of the nation's total
milk supply. The interdependence of the two programs, i.e. , the Federal
Order Program and the Dairy Price Support Program is thus apparent.?/
\J See the Agricultural Act of 1973 for further changes in support price
procedures affecting the industry.
U See Report of the Milk Pricing Advisory Committee, USDA, Parti,
Milk Pricing Policy and Procedures. March 15, 1972, p. 11 for
further details.
Ill-14
-------
Manufacturing Milk Priceji - Several published sources of price information
for raw manufacturing milk prices paid to farmers exist. Probably the most
common and widely accepted is the Minnesota-Wisconsin series. Because
of the predominance in the U. S. picture of the supplies of manufacturing
milk in these two states, this series has considerable validity for pricing
purposes. Its use as a basis for pricing fluid milk has been the subject
of numerous studies and concern as the nation's milk supply moves at an
increasing rate towards one grade of milk.
Handler Pricing of Milk Products - There is no single price for fluid milk
products in a given market. A wide range of services is offered by handlers
to wholesale buyers, ranging from full service retail store delivery to on-
dock delivery. Auxiliary services to wholesale buyers may include loans,
credit servicing of display equipment, or certain forms of advertising when
not prohibited. As indicated in Table III-6 , the most important wholesale
buyers are grocery retailers and individual customers on retail routes.
The economic structure of the industry results in a high degree of inter-
dependence among processors. Nevertheless, competition does exist in
price and non-price forms. Variations in products, containers, and
associated services are very important. To a limited extent price
competition is exhibited.-i' Because of the extreme complexity of
the pricing process, particularly at the wholesale level, great care
must be exercised in specifying "what price" one is paying in "what
market, " for "what product including services, " and for "what time
period." To the extent that vertical integration occurs (it does to
some extent in some food chains), a further specification of the terms
of price is clearly essential.
Retail Store Pricing - Fluid Milk Products - The dominant outlet in this
area is the supermarket dealing in packaged milk and a variety of aux-
iliary Class I and II products along with associated "hard products" and
dairy foods. Supermarkets are large volume contract buyers dealing in
packer and private label brands which are readily shifted among pro-
curement sources. As a result of the market power exerted by super-
markets, dominant parties to such transactions are the large processors.
Pricing is by all odds one of the most important merchandising strategies
in a supermarket. One goal is to develop a price image in the mind of
the housewife that is conducive to repeat sales. To do this, most super-
markets establish price margins. In a recent study, the wholesale :
retail margin was stated as a percent of selling price:.?/
- For a more complete discussion see Williams, S. et al. Organization
and Competiton in the Midwest Dairy Industries. The Iowa State Univ.
Press, Ames, 1970, p. 121.
2/
- Chain Store Age. 1966 fc 1970. Supermarket Sales Manual Issue, Vol.
42, 7A, Mid-July 1966 and July 1970.
Ill- 15
-------
Wholesale: retail margin
as a percent of selling price
Fluid milk 19. U
Ice cream 27. 7
Cheese 25.0
Butter 19.0
There tends to be a base price for half-gallon paper containers of rnilk
established in each supermarket -- usually the supermarket brand. Com-
plex pricing arrangements above and below exist for other container sizes,
and other products of other firms selling in the market.i.'
Wholesale Pricing - Hotels and Other Institutional Buyers - Fluid milk
product sales to institutional users are usually on a quoted price basis.
Home Delivery (Retail Route) Pricing^ - A wide range of pricing structures
exists for home delivery routes. This is due in part to limited price
knowledge on the part of buyers and the wide array of containers used.
Quantity discounts are common. The home delivery market and the non-
supermarket are highly important sales outlets for the medium size pro-
cessor. These combined markets account for nearly 70 percent of all
packaged milk distributed (Table III-6).
The Manufactured Milk Sector
For purposes of this report the principal manufactured dairy products
discussed will be butter, cheese (except cottage), evaporated milk ,
nonfat dry milk and ice cream.
Procurement Markets - Two general sources exist for manufacturing
grade milk--manufacturing milk and surplus grade A fluid milk.
Manufacturing Milk Producers - Manufacturing milk producers tend to be
much smaller in size than grade A producers and are represented much
less by farmer cooperatives than fluid milk producers in the exchange
process. This segment of the industry, however, is slowly exiting as
the nation's milk supply moves towards one grade of milk. Generally,
producers in this segment are much less knowledgeable of factors affect-
ing and determining their prices than in fluid markets. Without bargain-
ing agents, manufacturing milk producers are "price takers."
Surplus Fluid Milk - More than a third of the nation's supply of milk for
manufactured dairy products is surplus milk of bottling quality. These
supplies are carefully managed and priced by large farmer cooperatives
who in recent years have acquired substantial interest in their own pro-
cessing facilities.
— See Agr. Econ. Report 207, ERS, USDA, June, 1971, p. 28, for further
details.
Ill- 16
-------
The Butter Industry - The butter industry is heavily concentrated in the
principal dairy producing states. Specialized butter rather than butter-
powder plants dominate the industry in terms of total volume but butter-
powder plants tend to average larger in size/output. £/ Concentration of
market shares among few firms in the butter industry is low. While
horizontal integration is not important due to the diminishing influence of
corporations such as Swift, Beatrice, Armour and Kraftco, many coop-
eratives affiliate with large cooperative sales agencies such as Land O1
Lakes Creameries. Vertical integration, therefore, is important in the
industry. Butter is handled by a relatively few buyers at country manu-
facturing points (Table III-8).
Table HI-8 . Butter manufactured by cooperatives, large dairy
companies, and meat packers, 1951 and 1965-L'
Type of Firm 1951 1965
percent
Cooperative sales agencies 15 48
Large dairy companies 24 8
Meat packers 23 11
Wholesalers 22 22
Food chains 16 11
All types 100 100
Source: Williams, et al. Organization and Competition^
in the Midwest Dairy Industries, Iowa State
Univ. Press, Ames, 1970.
The price formation environment at the primary or first point of sale is
characterized by a large number of manufacturers with limited concentra-
tion of market power facing a small number of intermediate handlers
(buyers). When other aspects of the market situation do not override this
situation, some form of joint pricing activity by the buyers would be ex-
pected to emerge. At least two major factors have operated to temper
the possibility of price depressing actions. These include:
a. the open ended committment of the C. C. C. under price support
operations to buy butter at floor prices and,
b. the market policies of the large cooperative sales agencies.
— See Williams, et al. Organization and Competition in the Midwest
Dairy Industry, 1970. Iowa State University^ Press, Ames, 1970.
Ill- 1 7
-------
Country Point Pricing - Most butter is priced at the intermediate
handler stage previously described by sales agreement. This is
usually based on a central market quotation for 92 score butter
less transportation to the central market plus quality premiums
and discounts. Commonly used is the Urner-Barry Publishing
Company's quotations from the New York market for pricing
butter in Minnesota and Iowa.
For Wisconsin, the Chicago Price Current is more widely used.
Commodity Credit Corporation price support operations affect
the level of basing point prices described above. Butter not
moving in domestic channels in the above manner may be sold
to the CCC when profitable to do so.
Intermediate Markets - Marketing channels between intermediate
handlers and buyers such as wholesale grocers, institutional
users and food manufacturers are referred to as the intermediate
market. Pricing of packer and local brands at this wholesale
level is based on central market quotations plus a fixed markup
to include costs of assembly, printing, storing, handling and
distribution.
Retail Pricing - Food stores constitute the primary retail outlet.
Observations indicate that different prices are established for
packer brands and retailers' brands of the same grade of butter.
Non-Fat Dry Milk Industry - Because of large economies of scale in
processing, and the high cost of processing equipment, there are substan-
tially fewer plants and firms in the non-fat dry milk industry than any
other segment of the dairy sector except evaporated milk. Most of the
plants are located in areas of heavy concentration of milk production.
-At the manufacturing level the industry may be characterized by relatively
low market power by sellers who are mutually integrated to a limited extent.
Intermediate handlers play a role in marketing, but in some years as much
as 90 percent of domestic sales has gone direct to industrial users. In
general, manufacturers sell to intermediate handlers, thence directly to
industrial users and to the CCC. Among these outlets the CCC is generally
the most important and the dominant price setting agent because it utilizes
the price support level. In some years it has acquired as much as 70 per-
cent of the supply.
Ill- 18
-------
Large manufacturers generally start with the CCC price plus transport
plus a product type differential. Some national distributors use zone
pricing.
Natural and Processed Cheese - The natural and processed cheese indus-
try exhibits a high degree of specialization in manufacturing. Because of
great similarities in distribution, the sub-specialization groups (e.g.,
American, Italian, Swiss cheese) will be considered as one industry in
this discussion. At the manufacturing level the industry is made up of a
relatively large number of competitive firms. Cheese is sold by manu-
facturers for marketing as natural cheese, processed cheese, cheese
foods, spreads and convenience foods. A limited number of large firms
and a fringe of small firms make up the buyers' side of the market.
Several of the large firms have attained their exclusive position over a
period of many years by holding or acquiring processed cheese patents.
Primary Markets - Assembly - The Wisconsin cheese exchange
is generally recognized as the source of the base price for
American cheese. Specialty cheeses are priced in other ways.
Kraft has been considered a price leader for Swiss cheese.
Secondary Markets - Intermediate Handling-Processing - This
market occurs at the stage of storage, cutting, and wrapping
natural cheese for sale to wholesalers and retailers or by
further processing by firms who also perform a major part
of the intermediate handling function. Four large companies
dominate this market.
Retail Markets - Because of the early control and acquisition
of patents and the development of brand advertising the large
intermediate handler-processing firms dominate the natural
cheese and processed cheese markets. Distribution is pri-
marily through retail grocery stores.
j?he Evaporated Milk Industry - High concentration of market shares,
major geographic relocations of the industry to the south and east, a
declining national market, and extensive horizontal and vertical integra-
tion characterize this industry. These and other characteristics have
been associated with a high degree of brand differentiation by the three
largest companies. Entry into the industry is difficult and not particular-
ly attractive.
Ill-19
-------
Markets and Pricing - There are no central markets for
evaporated milk. Industry organization suggests an expected
behavior of price leadership. Borden has used a formula
pricing system to arrive at quotations to buyers. Large
companies have tended to use a form of price discrimination
in which prices of their brands have been priced higher than
private label.
The Ice Cream Industry - Pricing policies and practices of the ice cream
industry are similar to those of the fluid milk industry. Although the
industry and many of the component companies are distinct from fluid
milk, their patterns of distribution are similar. The ice cream output
of firms which handle both fluid milk and ice cream is substantially
greater than that of specialized ice cream firms.
Ill-20
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B. Expected Price Effect
In 1969, 78 percent of all fluid grade milk was sold to plants and dealers
under Federal milk marketing orders. This price is derived under Federal
or State order regulations based on supply and demand conditions and can
be classified as "administrative pricing". Another very important consider-
ation on the production side is the rapid and continual development of the
large milk producer cooperatives. Eight large federations of milk coopera-
tives, representing more than a quarter of a million farmers, control more
than 40 percent of the nation's supply.
On the distribution side, large supermarkets have emerged to account for
more than one-third of the milk sold. Sandwiched in between are the
processors who are probably becoming less dominant in the pricing process
as they face more powerful groups in their procurement and distribution
markets.
Consumer demand for dairy products has diminished slightly over recent
years with an approximate decline of 1 percent per year. Per capita con-
sumption of fluid milk, evaporated milk and butter have declined faster than
the increase in total population, but per capita consumption of cheese has
increased. A look at the price elasticities indicated that dairy products are
relatively inelastic or unresponsive to price changes. A one percent in-
crease in the retail price would result in a decrease of . 3 1 for evaporated
milk, . 34 for fresh milk, . 46 for cheese, . 53 for ice cream and . 65 for
butter. Disregarding institutional factors, this suggests that it would be
relatively easy to pass the increased costs through to the consumer,
especially for fresh milk, the major component of the industry.
The impact resulting from increased costs of stricter effluent standards
is expected to be different by industry segment. For the evaporated milk
segment with primarily large plants, the expected reaction would be to
effectively pass the increased prices forward with little direct quantity or
financial impact on the industry. In those segments which are character-
ized by a relatively large number of small firms, such as fluid milk,
the situation for the processors is quite different.
Ill- 2 1
-------
Basically the increased cost will be subject to economies of scale;
therefore, stricter standards would result in a smaller incremental
unit cost increase for large plants than for smaller plants. Depending
on the relative amount of cost increase, this could have serious im-
pact on the industry structure as described below.
Potential price impacts of the imposition of stricter water pollution
standards on the dairy industry are higher retail prices, lower profits
for processors, lower consumption of dairy products and lower level
of production at the farm level. (Theoretically, producers (farmers) could
reduce price to the point where they would absorb the processing
cost increase and maintain volume, but with the institutional controls
they would rationally choose to reduce production slightly rather than
reduce cost to the point where the total consumption would not be affected).
Still, disregarding the institutional factors on the retail side, the pro-
cessing plants may successfully pass the additional processing cost
on to the consumer. The relative amount to be passed on depends
upon the incremental amount of costs incurred by the different sized
plants and the relevant price elasticities. The industry structure
suggests this would be approximately at the point of additional costs
incurred by the large plants. The market would then reach a new
equilibrium at this point. The small and medium size plants would
then be able to pass forward a portion of their increased costs but would
be forced (by market competition) to absorb any costs incurred greater
than the new equilibrium price. Depending upon the magnitude of the
increased cost, the small and medium size plants could absorb the
remainder of pollution abatement costs in the form of reduced profits,
operate temporarily on their built up reserves with eventual closure,
or shut down immediately.
Exhibit III-2 demonstrates the market reponse to increased processing
costs. Dr is the aggregate demand curve for dairy products at the retail
level. Df is the derived demand curve for raw milk at the farm level.
This curve is obtained from the relationship between farm price arid retail
price. George and King found the following price relationship using
quantity data:
PmUk =0.89 + 0.695P-tail R2 =
The strong relationship suggest that reta.il prices have followed closely
in changes in farm prices.
Ill-2 2
-------
With the imposition of stricter effluent standards, processor costs
will be passed forward through the wholesaler and retailer to the
consumer. With higher retail prices the consumer will reduce
consumption by about 0.3 percent for each percentage increase in
price from Pr to Pr1. This shifts the derived demand at the farm
level. Because of the institutional factors controlling the farm
o
supply level, the price is maintained at P but quantity is shifted
from Oj to 02.
The magnitude of these shifts will be determined by the extent of
price increase in processing costs and the relative power of position
of the production, processing and marketing groups. With 78 percent
of the supply under Federal Marketing Orders and the power of the
large cooperatives it is doubtful if farm prices would be reduced
(as assumed in the model). Supermarkets will resist price increases
at the processors level and the interaction between the two groups
will tend to set the new price equilibrium level.
Ill-2 3
-------
\
W
rt
w"
Dr
QUANTITY OF DAIRY PRODUCTS
Exhibit III-2. Supply-demand-price relationships in the processed
dairy products industry
111-24
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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 approach 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.
IV-1
-------
A. Proposed Standards
For the purposes of the impact analysis, three levels of wastewater treat-
ment for each applicable segment of the industry will be considered.
1. Best practicable control technology currently available
(BPT) - to be met by industrial dischargers by 1977.
2. Best available technology economically achievable (BAT) -
to be met by 1983.
3. New source performance standards (NSPS) - to be applied to
all new facilities (that discharge directly to navigable waters)
constructed after the promulgation of these guidelines (approxi-
mately January 1, 1974).
A fourth level - new source pretreatment standards - which would be
applied to all facilities that use municipal systems constructed after
promulgation of the proposed guidelines is not considered further Ln
this report. No cost data are provided for these standards.
It is further noted that the NSPS standards above are taken as equal to BAT
standards. The treatment requirement and costs are assumed to be
equal for purposes of this analysis.
The following effluent limitation guidelines for both BOD's and suspended
solids were recommended in the Development Document. —'
Effluent Limitation Guidelines
(Kg BOD5 per 100 Kg BOD Received)
Subcategory BPT BAT NSPS
Receiving Station
Cans
Bulk
Fluid Products
Cultured Products"
Butter
Natural Cheese
Cottage Cheese
Ice Cream
Ice Cream Mix
Condensed Milk
Dry Milk
Condensed Whey
Dry Whey
0.020 0.006
0.012 0.003
0.060 0.008
0.080 0.011
0.081 0.013
0.028 0.006
0.456 0.107
0.240 0.035
0.060 0.008
0.040 0.008
0.060 0.011
0.040 0.008
0.060 0.011
I/ U. S. Environmental Protection Agency Development Document
Guidelines and Standards
0.006
0.003
0.008
0. Oil
0.013
0. 006
0. 107
0. 035
0. 008
0.008
0.011
0. 008
0. Oil
for Effluent
of Performance Dairy Product Industry Proposed by
Kearney: Management Consultants .
IV-2
-------
B. Fundamental Methodology
Much of the underlying analysis regarding prices, 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 interpre-
tations being discussed under the appropriate heading following this
section.
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 cashflows 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 and/or consideration
of the production unit as an integrated part of a larger profit center.
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 procedures. This is especially likely to occur among
small, independent operators who do not have effective
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.
IV-3
-------
3. Opportunities for changes in the ownership structure of
the plants (or firms) exist through acquisition by con-
glomerates, large diversified firms, or through other
acquisition circumstances which would permit re-
evaluation of assets or in situations where new owner-
ship may be willing to accept temporary low returns
with the expectation that operations can be returned
to profitable levels.
4. Personal values and goals associated with business owner-
ship that override or ameliorate rational economic rules
is a complex of factors commonly referred to as a value
of psychic income.
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-opera tor 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 owne r-opera to r'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 associated with proprietorships and
closely held enterprises rather than publicly held corporations.
IV-4
-------
While the above factors are present in and relevant to business decisions,
it is argued that common economic rules are sufficiently universal. To
provide a 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 regarding
plant shutdown rather than making the required investment in meeting
pollution control requirements.
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
in the short run where apparently Vc > R. Reasons for this include:
lack of cost accounting detail to determine when Vc >R.
opportunity cost of labor or some other resource is less
than market values. This would be particularly prevalent
in proprietorships where the owner considers his labor as
fixed.
other personal and external financial factors.
expectations that revenues will shortly increase to cover
variable expenses.
A more probable situation is the case where Vc ^ R but revenues are
less than variable costs plus cash overhead expenses (TCc) which are
fixed in the short run. In this situation a plant would likely continue
to operate as contributions are being made toward covering a portion of
these fixed cash overhead expenses. The firm cannot operate indefinitely
under this condition, but the length of this period is uncertain. Basic to
this strategy of continuing operations is the firm's expectation that re-
venues will increase to cover cash outlay. Factors involved in closure
decisions include:
extent of capital resources. If the owner has other business
interests or debt sources that will supply capital input, the
plant will continue.
lack of cost accounting detail or procedures to know that TCc>R,
particularly in multiplant or business situation.
* labor or other resources may be considered fixed and the
opportunity cost for these items is less than market value.
IV-5
-------
Identification of plants where TCc > R, but Vc 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:
v = A A>.
n=i
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.
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
measures (discounted cash flow) but rather an entirely different
profitability concept. The reader is cautioned not to directly compare
the DCF rates with book rates. Although both measures will be reported
in the analyses, the book rate is reported for informational purposes only.
IV-6
-------
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 loan 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 rate 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
3 variation of the net present value method.
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 = (1 - 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, and will be
described below. Depreciation is included in the DCF measure only in
terms of its tax effect and is then added back so that a cash flow over
time is obtained.
IV-7
-------
A tax rate of 22 percent on the first $25,000 and 48 percent on the re-
maining depreciation methods, investment credits, carry forward
and carry back provisions were not used due to their complexity arid
special limitations.
Revenue, expenses, interest and depreciation charges used were those
discussed in Chapter II and Chapter V for pollution control facilities.
These items were assumed to constant over the period of analysis.
2. Investment
Investment is normally thought of as outlays 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 made 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 current market 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
investment for plant maintenance was taken as equal to annual depreciation,
which corresponds to operating policies of some managements and serves
as a good proxy 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.
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
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 employed by the firm, in general terms
equities and interest bearing liabilities. There is no methodology that
yields the precise cost of capital, but it was approximated as follows:
}] 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 investment
may take on a different value.
IV-8
-------
1. A = Debt (from 1969 corporation tax = . 861
Equity returns)
2. B = Cost of debt (from industry data 1972) = 7. 5
3. P. E. = P. E. Ratio (FTC Quarterly -9.6
Reports)
4. t = Tax Rate (Marginal Tax Rate Corp. ) = . 48
5. cc = cost of capital
cc = (l-t)(B)(A) + (1/P.E.) (100) = 7.4%
(1 +A)
4. Construction of the Cash Flow
A twenty-two period cash flow was used in this analysis and was con-
structed 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 t to t7fl.
J. Lt\)
3. Annual replacement investment, equal to annual current
depreciation taken for years t, to tog-
4. Terminal value equal to sunk investment taken in year t^•
5. Incremental pollution control investment taken in tear t
for 1977 standa!
1983 standards.
o
for 1977 standards. No additional costs were incurred for
6. Incremental pollution expenses taken for years t to t
for 1977 standards. 1
7. No replacement investment taken on baseline pollution in-
vestment on assumption of 20-year useful life.
8. Terminal value of pollution facilities equal to 10 percent of
original cost taken in year
IV-9
-------
C. 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, and organization and coordination within the industry.
The required price increase at the firm level to cover pollution control
costs will be evaluated in light of the relationship of the model plant to
the industry and the understanding of the competitive position of the in-
dustry. However, the new price equilibrium will be made relying heavily
on the judgment factor. The required price increase can be readily com-
puted 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
_ (PVP) (100)
~ (1-T) (PVR)
where:
X = required percentage1 increase in price
PVP = present value of pollution control costs
PVR = present value of gross revenue starting in the year
pollution control is imposed
Note that this formula implies that incremental profits resulting from
the price increase will be taxed at a rate of 48 percent.
IV-10
-------
D. 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 obvious 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 deprec-
iation) will be measured. 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 Sections 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 reexamined
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
differential 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.
E. 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 expected to re-
quire that the impact of pollution control standards upon future growth
of the industry also be estimated via quali ;auve metnoas.
IV-11
-------
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 operations
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 model plants to represent an industry is
imperfect and that not all of the relevant factors can be included in the
models. In other words, for any given model plant, one would expect to
find some actual plants with profits lower and some higher than shown for
the model plant. In a statistical sense, one can describe this phenomenon
via distribution functions. By examining various publications by Dun and
Bradstreet, Inc. , we estimate the industry-wide standard deviation of
net profit as a percent of sales at 1.0 when normality is assumed.
Financial data on the various industry segments is simply not available.
For the purpose of analyzing financial and plant closure effects, the dis-
tribution of net present value (discounted) as a percent of sales was ex-
amined. Because of a lack of more definitive data, it was assumed that
this distribution was normal for each of the model plants. As a starting
point, it was noted that the 1.0 standard deviation of net profits as a percent
of sales would equal . 174 if multiplied by the 7. 5 percent annuity factor for
20 years. Of course, annual profits for an actual plant vary temporarily
and a large part of the variation is due to plant type and size variations.
Based upon published data in the contractor's files, we estimate the standard
deviation of net present value as a percent of sales for the distribution repre-
sented by the model plants to be .34. Furthermore, it is assumed that re-
sults for each model plant represents the median for the appropriate distri-
bution function. By using these median and standard deviation values,
one can readily estimate the percentage of firms with negative net present
values through accepted statistical techniques.
The above analysis will be done under a without pollution control condition
and a with pollution control condition. The use of historical trends will
establish a baseline against which total closures after pollution control
will be compared. However, under certain circumstances as described
in Section B of this Chapter, a firm may decide to continue to operate a
plant even though liquidation value exceeds capitalized earnings. Such
circumstances require a qualitative review of the statistical data from
the shutdown model to arrive at possible shutdown numbers.
IV-12
-------
F. 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 as will the potential for re-employment.
G. 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 loss. 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 po-sitive
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 qualitatively analyzed as appropriate.
H. Other Effects
Other impacts such as direct balance of payments effects will also be
included in the analysis. This too will involve qualitative analyses.
IV-13
-------
V. COSTS OF POLLUTION CONTROL
The costs of pollution control are related to the types of waste materials
to be disposed of and to the level to which potentially polluting wastes are
to be reduced.
Several potential pollutants have been identified in dairy plant wastewater:
1. BOD_ (5-day biological oxygen demand). The majority of
true waste material in dairy plant wastewaters is milk
solids and other organic compounds. The BOD- level can be
reduced by in-plant control and/or treatment or disposal on
land. Effluent limitation guidelines for this parameter are
stated in Chapter IV-A.
2. COD (chemical oxygen demand). There are a number of
variations in the BOD5: COD ratio that are not fully under-
stood. It is not included in the guidelines.
3. Suspended solids. The amount can be reduced through in-
plant control or treatment. The desirable levels of suspended
solids are the same as those of BOD,- and are expressed in the
same units (pounds or kilograms of pollutant out per 10 pounds
or kilograms of the pollutant in).
4. pH (acidity or basicity of the waste stream). No guideline is
recommended, but pH should be monitored and be in the range
of 6. 0 - 9. 0 at all times.
5. Temperatures of raw dairy waste water fall within acceptable
ranges, and therefore, this parameter is not included in the
guidelines.
6. Phosphorous. The amount of this chemical element in effluent
can be lowered by using non-phosphorous detergents, providing
sanitation standards can be met.
7. Chloride. It is not susceptible to biological treatment, but
should be monitored. Information on this parameter is in-
sufficient at the present time and therefore not included in
the guidelines.
8. Nitrogen. There should be a negligible quantity of ammonium
nitrogen in effluent. Since nitrogen is consumed in a biological
treatment system, there should be a negligible quantity of this
substance in the final effluent. Thus, a guideline for ammonium
nitrogen is not included.
V-l
-------
The two parameters of concern in this report are BOD,- and suspended
solids. Equipment or processes that reduce quantities of the former
also reduce the latter in the approximately same proportions.
A. Present Industry Status
There are two methods employed in the industry for disposing of waste
water: plant associated treatment and disposal into municipal treatment
systems. In the absence of definative information regarding the present
industry status, EPA has developed estimates of in place treatment and
use of municipal treatment by industry segment. Plants disposing of
waste water into municipal systems are estimated as:
Percent of Plants Disposing into Municipal System
Percent of
Type total plants X-Small Small Medium Large
Butter
Cheese
Evap. /Cond.
Ice Cream
Fluid Milk
14
17
5
14
56
.
20
-
-
60
20
20
20
60
60
40
40
40
80
80
60
60
60
90
90
On the basis of the above numbers of plants on municipal systems, it was
assumed that 32 percent of the total number of plants were direct dis-
charges. For this group of plants EPA made the following assumptions
regarding in plant controls:
Controls in Place
Percent of Total Percent of Percent of
Industry Plants Direct Discharges Controls in Place
3.0 10 100
13.5 45 25
13.5 45 0
Total 30.0 100
It was further assumed that the 3.2 percent of plants with 100 percent of
controls in place were large plants, the plants with 25 percent of controls
in place were large to medium size plants and with no controls in place
were medium to small plants.
V-2
-------
Relatively few plants have an associated secondary sewage treatment
system (e.g. , activated sludge, trickling filter), much less a tertiary
treatment system (e.g. , sand filter, reverse osmosis). In some cases,
land, even the three acres required for activated sludge treatment, is not
available for the treatment area.
B. Cost
In choosing and designing a wastewater treatment plant, consideration
should be given to the capital and operating costs as well as to other fac-
tors such as location, available land, and future plant expansion.
Three common methods of secondary treatment are activated sludge
trickling filter and aerated lagoon. The Development Document recommends
the activated sludge system for BPT standards (combined with a sand filtra-
tion system) recognizing that the other systems including ridge and furrow
and spray irrigation may be used. The capital and operating cost of the
activated sludge system and trickling filter systems are approximately the
same, and higher than the trickling filter, but the former is understood to
be most effective over a period of years. Based on the Development Document
the annual cost (including interest and depreciation) for various types of
units is estimated at the following (adjusted to 1972):
Cents per 1,000 gallon
I/
Activated sludge
Trickling filter .
Aerated lagoon
Package activated sludge
Ridge and furrow irrigation
Spray irrigation
50,000
GPD
351
288
175
160
35
140
100,000
GPD
198
177
101
86
35
140
250,000
GPD
114
101
57
NA
35
140
500,000
GPD
81
75
42
NA
35
140
— Based on 2, 000 ppm BOD
The two irrigation systems, ridge and furrow and spray may have applica-
bility in some cases where weather and soil conditions are suitable. A package
activated was recommended for plants with a wastewater flow of less than
100,000 BPD.
V-3
-------
Several partial tertiary systems can be used to remove an additional
increment of BOD^. The sand filter was recommended in the Develop-
ment Document to achieve BPT standards although it is understood that
the Standards may fee achieved without sand filtration. If a plant can
achieve BPT Standards without sand Filtration, the investment in the
sand filtration system (or comparable system) can be delayed until
activation of BAT Standards. The sand filtration system is cheaper than
some other partial tertiary systems, and it effectively removes 60 percent
of the BOD- remaining after activated sludge treatment.
Based on the recommendations made in the Development Document, the
activated sludge system combined with the sand filtration unit as used to
achieve the BPT standards are used in this impact analysis. The package
activated sludge system is used where applicable. As indicated in the
Development Document, the cost for in plant controls was assumed to
equal the savings in product.
The wastewater treatment system as recommended in the Development
Document including activated sludge and sand filtration installed in
1976-1977 will achieve the BAT guidelines proposed for 1983. This is
because of improved in-plant practices and an increase in efficiency of
the activated sludge plant from 90 to 96 percent BOD_ removal. No
additional costs were assumed.
Because a "zero discharge" level is not proposed, the effects of the
high costs associated with achieving it are not analyzed. It would cost
about 8 to 12 times as much to remove a pound of BOD^ by complete
recycling (100 percent reduction) as it would to remove a pound by
activated sludge and A sand filter.
Cost information-for the recommended systems applicable to the model
plants is summarized in Table V-l. The amounts of input milk are those
used in the representative industry models described in Chapter II. Sources
of other data are stated in the footnotes. The appropriate capital and vari-
able costs were utilized in calculating the model plants' profitability
following investment in pollution control equipment in 1976. Investment
and operating costs for pollution control facilities are shown graphically
in Exhibits V-l through V-3 (see also Appendix Tables A-l and A-2).
V-4
-------
Table V-l. Incremental BODs and cost efficiency of Level I, II and III waste removal
system for model plants
Tyv? ol Plan',
Butter I-TDM
(Bauer-Powder)
Chc^i
Eva p. Milk
ice Cream
Fluid Milk
B'l. rmlo /co,tta gi
cliecse -'
Plant Size
t.DPRA Models)
Small
Medium
Large
X- small
Small
Medium
Large
Medium
Large
Small
Medium
La rge
X-small
Small
Medium
Large
Medium
Large
Yearly
Ib M.E.
28,875,000
60,000,000
123,000,000
7,500,000
16,000,000
53, 125,000
225,000,000
42,000,000
84,000,000
4,500,000
38,400,000
78,720,000
2,741,000
45,688,000
182,750,000
365,500,000
182,750,000
365,500,000
Yearly
Input 2/
Ib BOD 5 -
2,887,500
6,000,000
12,300,000
750,000
1,600,000
5,312,500
22,500,000
4,200,000
8,400,000
450,000
3,840,000
7,872,000
274, 100
4,568,800
18,275,000
36,550,000
18,275,000
36,550,000
No. oper-
ating days
(model
plants)
. 250
250
250
365
365
365
365
250
250
250
250
250
300
300
300
300
300
300
Waste-water
gal/ 1 000 .
IbM.E.-'
325 ±'
325 £/
3251'
225 i/
225 y.
225 1
225 -'
475
475
500
500
500
465
465
465
465
553 i/
553 i'
gal/day -
37,540
78,000
159,900
4,620
9,860
32,750
138,700
79,800
159,600
9.000
76,800
157,440
4,250
70,820
283,260
566,520
336,870
673,740
OUTPUT (Minimum in-
plant control)
,lb BOD5 per
100 Ib M.E.
3. 9 f.
3 9 I/
" n 1
3. 9 I7
2.0—'
2. 0 — — •
2.0 i2/
z.oH'
1.0
1.0
4.0
4.0
4.0
1.5
1.5
1.5
1.5
2-57i(
2.5^
Ib BOD5
in per day
450
936
1,919
41
88
291
1,233
168
336
72
614
1,260
14
228
914
1,827
1, 523
3, 046
OUTPUT ApHIEVABLE
through in-plant control
by application by BPT
Standards
Ib BOD5 per
100 lbBOD5 in
2.1
2.1
2. 1
0.7
0.7
0.7
0.7
1.0
1.0
6.0
6.0
6.0
1.5
1.5
1.5
1.5
2.2
2.2
Ib BOD5
per day
242
504
1,034
14
31
102
432
168
336
108
922
1,890
14
228
914 v
1,827
1, 340
2,680
continued.
-------
Table V-l. Incremental BOD, and cost efficiency of Level I, II and III waste removal system for model plants
(continued)
LEVEL I: 90% reduction in waste condition by secondary (activated sludge)-LE.' treatment and an additional 60% by partial
BODg reduction
by activated
sludge (90%)
Ib/day
218
453
931
13
28
92
389
151
302
97
830
1,701
13
205
823
1,644
1,206
2,412
Lb BOD rem
Per day
24
51
103
1
3
10
43
17
34
11
92
189
1
23
91
183
134
268
,,. .ACTIVATED SLUDGE TOTA
.tmng xn effluent INyESTED CApITAL
Per 100 BODc
in!!/
.21
.21
.21
.07
.07
.07
.07
. 1
. 1
.6
.6
.6
.15
.15
.15
.15
.22
.22
LandS^'
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
'3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
Ccaop7i°/
150,000
162,000
480,000
80,000
105,000
146,000
450,000
164,000
480,000
102,000
163,000
475,000
77,000
162,000
645,000
1,010,000
720,000
1, l'45,000
L
Yearly
Variable
Cost —'
13, 140
13,950
38,520
13,575
12,776
13, 149
37,463
13,544
38,520
13,041
14,016
38,502
13,651
12,795
45,492
59,966
48,445
65, 168
tertiary (sand filter) 17/ treatment
SAND INFILTRATION
BOD5 redu
tion (60%)
Ib/day
14.4
30.6
61.8
0.6
1.8
6.0
25.8
10.2
20.4
6.6
55.2
113.4
0.6
13.8
54.6
109.8
80.4
160.8
c- Lb BOD5 remaining in effluentTotal invested
Per 100 BOD5
Per day in 2J2/
9.6
20.4
41.2
0.4
1.2
4.0
17.2
6.8
13.6
4.4
36.8
75.6
0.4
9.2
35.4
73.2
53.6
107.Z
continued.
081
081
081
028
028
028
028
04
04
24
24
24
06
06
06
06
12
12
Capital
Capital cost$H7
21,500
26,800
36,000
15,500
16,900
20,800
34,000
27,000
36,000
16,400
26,300
36,000
15,300
26,000
49,000
81,000
55,000
94,000
Yearly
Variable
Cost $il
890
3,560
7, 179
22
76
741
6,075
3,714
7, 165
66
3.504
7,068
20
\3, 154
12,510
24, 193
14,755
27,665
-------
Table V-l. Incremental BOD. and cost efficiency of Level I, II and III waste removal system for model plants
(continued)
LEVELS II ajid III
: 96% reduction
OUTPUT ACHIEVABLE
through in-plant control by
application of BAT Standards
Ib BODs per 100
Ib BODs in 257
0.8
0.8
0.8
0.4
0.4
0.4
0.4
0.5
0.5
2.2
2.2
2.2
0.5
0.5
0.5
0.5
1.4
1.4
per day 26/
92
192
394
8
18
58
247
84
168
40
338
693
5
76
305
609
853
1,705
in waste
BODg re
duction (
Ib/day
88.3
184.3
378.2
7.7
17.3
55.7
237.1
80.6
161.3
38.4
3Z4.5
665.3
4.8
73.0
292.8
584.6
818.9
1,636.8
condition by secondary (activated sludge)
ACTIVATED
Lbs BOD
96%)
Per day
3.7
7,7
15.8
0.3
0.7
2.3
9.9
3.4
6.7
1.6
13.5
27.7
0.2
3.0
12.2
24.4
34. 1
68.2
SLUDGE
remaining in effluent
Per 100 BODg in
.032
.032
.032
.016
.016
.016
.016
.02
.02
.088
.088
.088
.02
.02
.02
.02
.056
.056
treatment and an additional
BOD 5 reduction
!1V (60%) Ib/day
2.2
4.6
9.5
.2
.4
1.4.
5.9
2.0
4.0
1.0
8.1
16.6
. 1
1.8
7.3
14.6
20.5
40.9
60% by partial tertiaryjsand filter) treatment
SAND FILTRATION
Lbs BOD. remaining in
Per day Per 100
1.5
3.1
6,3
.1
.3
.9
4.0
1.4
2.7
.6
5.4
11.1
. 1
1.2
4.9
9.8
13.6
27.3
effluent
BODj in!8'
,013
.0)3
.013
.006
.006
.006
.006
.008
.008
.035
.035
.035
.008
.008
.008
.008
.023
.023
-------
Footnotes to Table V-l.
— 85 percent of input M. E. to fluid milk and 15 percent to cottage cheese.
— 10 percent of whole milk (Development Document, p. 51); no other
inputs assumed in calculating BOD5 levels of 1977 and 1983. BOD5 is
the 5-day biological oxygen demand.
— From Development Document, averages of good current industry prac-
tice. No data are available on the amount of wastewater output which
might be achieved by implementing the "best possible" in-plant practices.
4/
— Based on 100 gal. per 1, 000 Ib. of M.E. input for the butter-making
process plus 225 gal. per 1,000 Ib. of M.E. input for the powder process
(Development Document, Table 30. )
— Based on 100 gal. per 1,000 Ib. of M.E. input for the cheese-making
process plus 125 gal. per 1,000 Ib. of M.E. input for the whey-drying
process.
6/
Based on the previously-stated percentages of milk used for each process,
and on 465 gal. per 1, 000 Ib. of M.E. input for the fluid milk processing,
and 925 gal. per 1, 000 Ib. of M.E. input for the cottage cheese process-
ing plus 125 gal. per 1,000 Ib. of M.E. input for the whey-drying process.
— Calculted on the basis of indicated number of operating days and rounded
to nearest 10. The waste processing plant, however, receives water
every day of the year.
8_/
Present industry averages as stated in USDA Impact Study.
o /
—' Higher than USDA figure on the assumption that additional cream is added,
a common industry practice. Therefore, the resulting BOD^ is higher
than if whole milk only is used.
10/
— Whey is dried and not in effluent.
— 1.5 Ib. BOD5 in wastewater per 1, 000 Ib. M.E. input for fluid milk and
8.5 Ib. BODc in wastewater per 1,000 Ib. M.E. input for cottage cheese,
assuming whey to be dried and not in effluent. If whey is discharged
in effluent, then wastewater contains 38.5 Ib. BOD^ per 1,000 Ibs. of
M.E. used for processing cottage cheese.
— Calculated on the basis of indicated number of operating days: Total
yearly M.E. input -^- no. operating days x Ib. BOD5/1, 000 Ib. M.E.
into plant.
V-8
-------
— The Development Document figures, indicating BOD^ levels achievable
by the best industry practices demonstrated in 1973 "with use of reason-
able modern equipment and careful operation" (July 3, 1973). Base
figures from which 96. 0 percent (1977) and 98. 4 percent (1983) reduc-
tion are to be attained, i.e. , BPT guideline and BAT and NSPS guide-
lines. Higher than USDA reported figures in certain cases, when plant
inputs other than fluid milk are assumed.
Many large plants are achieving or exceeding these levels today. It is
doubtful that the small model plants can ever reach them, but they can
approach these levels. Therefore, the same levels of BOD,- output are
assigned to all sizes of model plants.
14/
— ' According to the Development Document the expression of BODs output
per 100 Ibs. of BOD5 is essentially the same as BOD5 out per 1, 000 Ibs.
of milk equivalent in, but is more accurate because it takes into account
the non- fluid milk inputs that contain BOD^, e. g. ice cream mix, cream.
' Total yearly BOD5 input -r no. operating days x Ibs. BOD5/100 Ibs.
received.
16/
Activated sludge chosen for cost calculations of secondary treatment
because it provides most consistent operation and is highest-price.
Source: Development Document.
— Sand filter chosen for cost calculations of partial tertiary treatment
because of effectiveness and cost. Source: Development Document.
18/
— Theoretical values equal to 10 percent of BOD5 achievable with in- plant
control.
19/
— Land requirement, 3 acres, is the same, regardless of flow and amount
of BOD5 in influent. Land charged at $1,000 per acre. In the case of
plants smaller than 50,000 GPD, land cost may be slightly less, but
difference can be applied to sand bed construction. Source: Develop-
ment Document.
20/
— Taken from the Development Document, adapted to 1972 costs by
Sewage Treatment Plant Construction Cost Index from EPA. Includes
basins, settling tanks, laboratory and garage, all stated as equipment,
as the latter are part of the dairy processing plant and no new buildings
are needed. Includes engineering costs. Cost for a "package activated
sludge system" is applied to model plants of less than 100, 000 GPD
wastewater capacity.
21/
— Does not include depreciation.
V-9
-------
22/
— Theoretical values equal to 40 percent of BODg remaining after sand
filtration treatment and equal to calculated values of model plants.
These are the proposed (BPT) levels of BOD5 in effluent.
23/
From the Development Document updated to 1972 costs by Sewage
Treatment Plant Construction Cost Index from EPA. No buildings
required.
24/
No additional capital cost assumed to be needed to achieve proposed
BOD5 BAT and NSPS. (From the Development Document. )
From the Development Document.
26/
— Calculated as Ibs. BOD5 per 100 Ibs. BOD5 received x 100 Ibs.
input BODc per day.
27/
Theoretical values equal to 4 percent of BOD,- input as Ibs. /100 Ibs.
BODr received; equal to calculated values within limits of rounding
error.
28 /
—' These are the proposed achievable 1983 (BAT and NSPS) levels of BOD5
in effluent. They are theoretical values equal to 40 percent of BODr
remaining after sand filtration treatment, and equal to calculated values
of model plants.
V-10
-------
M
X
Capital Investment - Total ($000)
o
o
o
o
0) fu
o
o
o
o
o
V
O
o
o
o
o
o
-------
400-
100
o
o
o
5,000
10,000
Flow (GPD)
50,000
Exhibit V-2. Capital costs (depreciation over 10 years) and operating (variable) costs of
package activated sludge system, 1972. Cost data from Development
Document.
V-12
-------
o
o
o
•w-
n)
4-»
• i-t
a
u
100.0
10.0
1.0
, I
1,000
10,000
100,000
1,000,000
Flow (GPD)
Exhibit V-3. Capital costs (depreciation over 10 years) and operating (variable) costs of
sand filtration system, 1972. Based on cost data from Development
Document.
V-13
-------
VI. IMPACT ANALYSIS
A number of primary and secondary effects can result from the impo-
sition of pollution controls and their related investment. Although many
of the effects can be quantified, especially financial and production
effects, others can only be estimated. Given more accurate information
relating to the status of the dairy processing industry today, employment
and community effects could be stated in more definite terms. In spite
of certain limitations, however, the effects stated in this chapter are
considered to be logical and reasonable. They include effects on price,
plant finances, production, employment, communities and international
trade.
A. Price Effects
The primary effect of increased cost resulting from pollution control
expenditures is higher product price. There can also be secondary
effects such as slight decreases in per capita consumption. These effects
are discussed below.
1. Price Increase
The annual costs of investing in and operating pollution control equipment
were calculated and expressed as net present value, with investment dis-
counted over 10 years. The method of calculation was stated in Chapter
IV. The 10-year depreciation is considered normal within the industry,
although some companies are writing off pollution control investments in
five years. It was assumed that added costs of pollution control would
not be passed back to the producer (the farmer) for the following reasons:
Dairy farmers generally have a low profit margin without
an added burden such as a lower price for milk.
. Large farmer producer cooperatives and political factors
would make it difficult for the administration of the Federal
Market Orders to pass the increased cost back to the farmer.
VI-1
-------
Since it is highly unlikely that the producers would absorb lower prices
(farmers may, in fact, choose to accept lower prices for milk in the
isolated situation rather than shut down, assuming no alternative market
for milk; this would be an unusual situation, however), higher cost re-
sulting from pollution control will have to be absorbed by processor
or passed forward to the consumer. As discussed in Chapter III,
it is assumed because of the structure of the industry that the potential
price pass through will approximate the additional cost incurred by the
large processors who account for approximately 60 percent of total pro-
duction. The market will then reach a new equilibrium price at this
point. The small and medium size plants will be able to pass forward
the portion of their increased cost equal to the new price equilibrium but
have to absorb the cost differential exceeding the new equilibrium price.
The annual before-tax increase in cash earnings required by each model
plant to pay for the added investment was the basis for calculating possible
price increases (Table VI-1). To make a simplified calculation, the
secondary products sold from the processing plants were not included.
These include nonfat dry milk from the butter plant and whey from the
cheese and fluid milk/cottage cheese plants. If a price increase were
to be spread over all products sold, the added cost to the consumer of
the primary products would be slightly less.
The basic wholesale prices from which the increases were calculated
were the selling prices stated in the descriptions of the model plants
(Chapter II).
The required pollution control cost for the package activated sludge
control system for plants discharging up to 100,000 GPD as provided
by EPA is less on a per unit basis than the system costed out for
larger plants. As a result some large model plants show a greater
increase in wholesale price required than for small and medium plants.
This is especially true for butter, evaporated milk and ice cream.
Depending on the relative market position of the small and medium
size firm, the new equilibrium price will, in all likelihood, be
established somewhere between the large firm requirement and
the requirement of the medium and small firms.
VI-2
-------
Table VI-1. Estimated increases in product prices required to pay for
costs of pollution control equipment
Industry
segment
Butter
Cheese
Evaporated
Ice Cream
Fluid Milk
Fluid Milk/
Cottage Cheese
Plant
size
Small
Medium
Large
X-Small
Small
Medium
Large
Medium
Large
Small
Medium
Large
X-Small
Small
Medium
Large
Medium
After
tax increase in
cash earnings
needed to pay
for investment
35.0
41.8
108.7
26.7
28.7
34.2
101.9
41.2
108.5
28.5
40.9
108.1
23.5
38.8
142. 1
216.3
157.1
243,4
Number of units
manufactured
per year
1,355,000 Ib
2,816,000 Ib
5,774,000 Ib
758,000 11
1,616, 000 Ib
5,366,000 Ib
22,727,000 Ib
400, 000 cases
800, 000 cases
375, 000 gal.
3,200,000 gal
6,560, 000 gal
2,697, 000 Ib
45,048, 000 Ib
180,557,000 Ib
305, 000, 000 Ib
152,500, 000 Ib
305,000, 000 Ib
Increased wholesale price
$ Per unit
$/ unit
.0257
.0144/lb
.0186/lb
.0352
.0177
.0064/lb
.0044/lb
.102/case (24)
.135/case (24)
,076/gal
.0128/gal
.0164/gal
. 00964 /Ib
,00085/lb
.00078/lb
.00070/lb
.0010/lb
.0008/lb
Percent
(%)
3.038
2.149
2.776
5.055
2.777
1.003
.689
1.175
1.544
5.846
.969
1.254
.870
.076
.069
.061
.896
.717
Approximate
retail price
increasej;/
$/unit
.027/lb
.019/lb
.025/lb
.044/lb
,022/lb
.008/lb
.006/lb
.006/can
.007/can
.047/ 1/2 gal
.008/ 1/2 gal
.Oil/ 1/2 gal
.0550/ 1/2 gal
.0049/ 1/2 gal
.0044/ 1/2 gal
.0039/ 1/2 gal
.006/ 1/2 gal
.004/ 1/2 gal
— Assuming mark-up of 25 percent on the retail price as the difference between retail and wholesale.
-------
It was further assumed that the costs incurred in disposing of effluent
to municipal facilities and that incurred for present controls in place
is already reflected in the wholesale prices for manufactured products.
Thus, the projected price increases are based on the estimated amount
of facilities that must be installed to meet the BPT and BAT Standards
imposed. For plants not presently linked to municipal systems it was
assumed that they will not be able to link into a system in the future,
or if they do, the cost would be equal to the cost of their own end-of-
pipe treatment.
Estimated price increases required for plants to keep their NPV constant
following the installation of control facilities are shown in Table VI- 1.
Estimates range from < 0. 1 to 2 percent for the large and medium size
plants. For small and extra small plant producing butter, cheese and
ice cream price increases range from 2.0 to 6.0 percent with the greatest
price increase required by the small ice cream and X small cheese
plant.
As discussed earlier, we expect the potential price pass through will
approximate the additional cost incurred by the large processors de-
pending upon the relative market power of the respective group. This
assumes that plants presently on municipal systems will not incur
additional cost increases to meet the BPT and BAT Standards; therefore,
this must be considered when calculating the-expected price increases.
The expected price increase and corresponding effect on consumption is
very slight. The impact is summarized for each of the segments below:
Butter. The expected price increase at the wholesale level is estimated
at 1. 1 percent. This would represent a price increase at the retail level
approximately .8-percent or . 7£ per pound. Per capita consumption of
butter has been decreasing gradually over the past decade and the expected
price increase would result in a further reduction in consumption of . 5
percent based on a retail price elasticity of -.65.
Cheese. The expected price increase at the wholesale level is estimated
at .4 percent. This would represent a price increase at the retail level
of .3 percent or . 3£ per pound. An increase of . 3£ per pound at the retail
level would tend to reduce consumption by . 1 to . 2 percent.
VI-4
-------
Canned Milk. Consumption of canned milk has decreased significantly
in recent years. The expected price increase at the wholesale level is
estimated at .6 percent. This translates to an expected retail price of
.5 percent or . l£ per 20£ can. On this basis, we would expect per
capita consumption to decrease by .1 to .2 percent based on a retail
price elasticity of -.32.
Ice Cream. An estimated 90 percent of the large ice cream plants are
linked to municipal systems. For the remaining large plants that are
direct dischargers, it would require a price increase of only approxi-
mately .9 to 1.2 percent for a plant to move from 0 level of control to
the BPT and BAT Standards. Therefore, we expect the price increase to
to be negligible.
Fluid Milk. An estimated 90 percent of the large fluid milk processors
are linked to municipal systems. For the remaining large plants that
are direct dischargers it would require a price increase of only . 1
percent for a plant to move from 0 level of control to the BPT and BAT
Standards. Therefore, we expect the price increase to be negligible.
B. Financial Effects
Increased costs of dairy product production will affect the profitability
of individual plants in varying magnitude. This also will bear a direct
relationship with the availability of capital to the individual plants as well
as the entire industry. These two effects, profitability and capital avail-
ability, are discussed in this section.
1. Profitability
As stated earlier, there are several measures of plant or industry profit-
ability. These will be discussed both from the point of view of the existing
as well as the potential profitability due to imposition of pollution control
guidelines and the costs associated with the compliance thereto.
VI-5
-------
Generally speaking, many small plants in all segments are currently in
financial difficulties. In addition to those operating on their depreciation,
a few have a negative cash flow. Many owner-operators are taking a less-
than-adequate salary or in the case of a cooperative, farmers may be
accepting less for their milk than what would be available through other
markets. The representative models described early indicate the financial
problems in small plants. In some cases, the existing situation stated in
medium and large plants may be overly optimistic. It should be empha-
sized, however, that these are representative models and that each dairy
processing plant in the country must take a long, hard look at the feasi-
bility of capitalizing and operating pollution control equipment or, altern-
atively, of costing its hook-up to and charges for a municipal sewage
system.
The costs of drying whey are included in the cheese and fluid milk/cottage
cheese model plants as part of the normal operation. Therefore, the invest-
ment in pollution control equipment in those models is considered sufficient
to lower the wastewater BOD5 content after whey is removed from the production
line and dried. However, this understates the magnitude of the problem
with respect to whey. Industry sources now report that between 30-50
percent of the whey is now directly disposed and not processed. It is
only recently that the drying of whey has become an economically viable
operation. However, where small cheese plants are located over a large
area and it is necessary to haul the whey to a central dryer, it is not
economical to do so. Nor is it economical for a small plant to install
a dryer. As a result, many small and medium size plants are simply
disposing of their whey by spreading it on the land or disposing of it as
they would handle their effluent.
One measure of the impact of pollution controls on the dairy industry is
the change in net' profit (after tax) as a percent of sales. This is shown
in Table VI-2. These profit levels were first calculated on the basis of
profit levels of model plants with no pollution controls. It may be well
to state that some of the industry representatives who reviewed the
model plant data felt the profit levels as a percent of sales were on
the high side. The industry average based on the latest IRS data indicate
an average net profit on sales (before tax) as 2.3 and 1. 2-for 1969 and
1970 respectively. The IRS data indicated the large firms were gener-
ally more profitable than small.
VI-6
-------
Table VI-2. Net profit as a percent of sales in the dairy processing industry
with and without pollution controls
Type and size of plant
Butter
Small
Medium
Large
Cheese
Extra Small
Small
Medium
Large
Condensed and Evaporated
Milk
Medium
Large
Ice Cream
Small
Medium
Large
Fluid Milk
Extra Small.
Small
Medium
Large
Fluid Milk -Cottage Cheese
Medium
Large
Level of
sales
(000)
1,876
3,899
7,993
524
1, 117
3,709
15,711
3,472
6,944
488
4, 100
8,528
295
4,924
19,735
39, 942
18,919
37,839
Without
controls
< 0
1.8
2.4
< 0
.9
2.5
3.2
1.1
1.7
< 0
2.4
4.0
< 0
2.7
3.0
3.6
2.4
3.0
With
No price
increase
< 0
1.3
1.8
< 0
< 0
2. 1
2.6
.7
1. 1
< 0
1.9
3.4
< 0
2.3
2.6
3.3
2.0
2.6
Controls
Projected
price increase
< 0
1.5
2.1
< 0
.1
2.2
2.9
.9
1.4
< 0
1.9
3.4
< 0
2.3
2.6
3.3
2.0
2.6
VI-7
-------
Butter. Our model plants show the small butter plant operating at a loss
and the medium and large at 1.8 and 2.4 percent of sales respectively.
This is expected to be reduced to 1.3 and 1.8 percent of sales with controls,
"With expected price increases of approximately 0.7 cents per pound at the
wholesale level, profit levels should improve slightly, however not back
to their original position. The small plant, however, will be worse off
and operating at a loss position greater than before controls or not be
able to cover the increase cost of 2. 5 cents per pound unless they are
selling at a local market price or with a distinctive product differentiation.
Cheese. Cheese plants follow a pattern similar to butter; however, the
extra small and small plant.are both smaller in terms of annual sales
than the small butter plant but cheese plants generally operate on a
slightly higher level of profit than butter plants. The extra small plants
are now in serious trouble and the added burden of pollution control cost
will tend to eliminate them unless a lower cost alternative or local mar-
kets can be exploited. The small plant is projected to experience a de-
crease in net profits from . 9 to .1 after the expected price increases
take place. Medium and large plants will operate at a slightly lower
level of profitability.
Condensed and Evaporated Milk. No serious decrease in net profits is
projected for the medium or large condensed and evaporated milk plants.
Ice Cream. As with butter and cheese, the small plants are currently in
trouble and if required to construct control facilities their cost of pro-
duction will increase by 7.6 cents per gallon of which none will be re-
coverable with no expected price increases. If small ice cream plants
are required to construct new facilities they will be in serious trouble.
Fluid Milk. Again, the extra small plants are in serious trouble and
pollution controls will tend to aggravate their situation. Chances for any
increased cost for X-small plants are slight and control costs will amount
to about 1 cent per pound. Small-large plants will not be adversely
affected. (Note: sales of X-small plant is $295 thousand vs. $4.9 million
of a small plant.)
Fluid Milk-Cottage Cheese. Because of the existing size of fluid milk-
cottage cheese plants only medium and large model plants were developed.
As with the other types of plants, the impact on profitability for these size
categories is very slight.
VI-8
-------
Another measure of the financial capacity of a plant is the Net Present
Value (NPV) of its future streams of costs and revenues. By discounting
at the cost of capital rate, then positive NPV's would indicate the likeli-
hood of continued plant operation versus closure. To complete this
analysis, the following assumptions were made:
1. The existing plants have sunk investments but they could be
disposed of today for a salvage value and reinvested else-
where if the dairy processing function were discontinued.
However, only 10 percent of the estimated replacement cost
of the facility and equipment is assumed recoverable for this
industry. This relatively low value represents a concensus of
industry opinion based on the fact that dairy manufacturing
equipment has little value outside the dairy industry and is
seldom used for replacement within the industry. Because
of the technological innovations and an increase in size of
plants, salvaged equipment is seldom utilized.
2. Revenues and expenses are assumed to remain constant over
time, i.e., 20 years of operation.
3. The estimated after tax cost of capital for the industry is 7.5
percent. (See Chapter IV-B-3.)
The Net Present Values were calculated for the model plants, both with
and without pollution controls and are shown in Table -VI-3.
VI-9
-------
Table VI-3. Estimated after tax increase in cash earnings required to pay for investment in
pollution control facilities ,
NPV-^
Pollution Investment
Obtainable
Industry Plant
Segment Size
Butter Small
Medium
Large
Cheese X- small
Small
Medium
Large
Evaporated Medium
Milk Large
Ice Cream Small
Medium
Large
Fluid. X- small
Milk Small
Medium
Large
Fluid Milk/ Medium
Cottage Cheese Large
L^ Cost of capital = 7.5%
— Difference (column 3) H
— After tax cash earnings
i
0
Before
-311
971
2,454
-133
153
1,087
6,376
2,382
5,345
-138
1,639
4,457
7
1,726
7,871
18, 181
6,461
10,548
r- 10. 19449
(column 4
After
-497
754
1,878
-275
1
906
5,836
2, 164
4,770
-289
1,422
3,884
-131
1,520
7, 117
17,034
5,628
9,257
(Discount
-r 0.52)
Difference
.' ti
186
217
576
142
152
181
540
218
575
151
217
573
138
206'
754
1,147
833
1,291
factor: P. V.
with price
increase
ooo
47
87
201
7
15
50
216
87
200
0
0
0
0
0
0
0
0
0
of 20 year
Annual after tax in-
Annual before tax in-
crease in cash earn- crease by cash earn-
ings needed to pay
for investment-
is. 2
21.3
56.5
13.9
14.9
17.8
53.0
21.4
56.4
14.8
21.3
56.2
13.5
20.2
73.9
112.5
81.7
126.6
annuity)
ings needed to pay
for investment.'
18.2
41.0
108.7
13.9
.28.7
34.2
101.9
41.2
108.5
14.8
40,9
108.1
13.5
38.8
142.1
216.3
157. 1
243.4
-------
The results of this analysis are comparable to the results obtained
from the analysis of net profit on sales. Plants with a negative net
profit on sales also demonstrate a negative NPV with the exception of
the X small fluid milk plant which changes from a positive NPV of 7 to
-131. Those plants that are presently operating at a positive return
on sales all show positive NPV both before and after controls. The
low salvage values utilized contributes to the positive NPV's and con-
tributes toward existing plants being locked in the industry.
A comparison of differences required in NPV to achieve the pre-controls
results and the NPV obtainable with price increases demonstrate that
plants with negative NPV are unable to recover their costs with the ex-
pected price increases. For example, a X small cheese plant requires a
NPV of $140 thousand to allow it to operate at the before controls rate but
it is able to recover only $17 thousand. Even if the small cheese plant
was operating profitably now, the added cost of pollution controls could not
be recovered under the expected price rise. In summary, it appears
that the X small and small plants are currently in difficulty and the
added cost of pollution control greatly aggravates the problem. Medium
and large plants appear to be able to recover from added pollution costs
through the expected price increases.
Capital Availability. The ability of a firm to finance new investment
for pollution abatement 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 capacity capital through the sale of common or preferred stock,
(3) internally generated funds--retained earnings and the a tream of funds
attributed to depreciation of fixed assets.
The availability of capital to the dairy industry is discussed in Chapter II - C
and some of the relevant conclusions are discussed again here.
1. The large firms appear to realize substantially higher
profits.
2. The large firms are not experiencing a significant erosion
of profits.
3. The large firms are likely to possess capital structures
substantially different from those exhibited by the small
companies.
VI-11
-------
4. Through diversification, the large firms have a better
ability to
a. withstand the impact of adverse conditions in
one industry segment
b. readily and profitably invest capital in alternative
fields when such operations cease to be lucrative
in any given industry segment.
Furthermore t by removing the influence of the large firms from the
industry averages, the following seem to be logical conclusions which
generally hold:
1. Small firms experience net profits on total fixed investment
which are less than the industry average.
2. Profits for small firms are decreasing faster than the in-
dustry average.
3. The ratio of debt to total assets is larger for small firms
than for large firms.
4. Retained earnings are smaller in relation to total assets
for the smaller firms.
Given the added flexibility of large corporations in securing capital and
the above conclusions, it would seem the large firms in the dairy processing
industry should have little trouble in obtaining the requisite capital for
meeting pollution control standards. If the costs were of such large magni-
tude that financing posed serious problems, the large firms would probably
divest their operations in that industry segment(s) due to their relatively
high opportunity cost for capital.
The small firms, however, pose a far more serious problem. Profits
are generally low and the trend has been for even lower profits. Debt
levels are already fairly high in proportion to total assets (e.g., in
1969-70 IRS data reveals 1,485 firms in small to medium size classes
where current liabilities exceed net worth). It is anticipated that the
capital required for sizeable pollution abatement investments would be
most difficult to secure for many of the small and medium sized firms.
And, if secured as borrowed capital, the requirements for retiring
the added debt might be beyond the financial capabilities of the firm.
VI- 12
-------
Under these circumstances, it also seems appropriate to recognize
that the cost of borrowed capital for the small and medium companies
would probably be higher than for the large companies. This added
cost would further reduce the ability of the small and medium firms
to pay the cost of pollution control.
If the small and medium firms utilized the depreciation component of
their after tax cash flow to pay for pollution abatement, the result
would probably be basically the same. Rapidly escalating costs of new
plants and increasing profit pressure on small firms resulting from the
economies of scale being realized in the new, extra-large plants would
eventually, in the long run, force the small plants into a shutdown situ-
ation.
C. Production Effects
The dairy processing industry has operated for the past decade to pro-
cess approximately the same amount of milk in a declining number of
plants. The industry is still characterized by a large number of small
plants, particularly those processing butter, cheese and fluid milk.
Small plants make up a low of 46 percent of the plants in the fluid
milk sector and up to 75 percent of the butter plants. A total of 53
percent of the plants in the industry are classified as small. This
group processes only 4. 5 percent of the total value of product.
Medium size plants account for 36 percent of all the plants in the industry
and account for 37 percent of the production. Large plants, on the other
hand, account for 10 percent of the total number of plants, but account
for 58. 5 percent .of the total production.
It is clear that the continued trend in the industry will be a disappearance
of the small and medium size plants with a gradual increase in the number
of plants in the large category. Reasons for this expected baseline pro-
jection for small and medium sized plants are summarized as follows.
higher per-unit cost of production
lower per-unit profit
difficulty in replacing worn-out equipment with small-size, new
equipment
shrinking milk supply and higher costs of supply assembly
product marketing problems as an independent
difficulty in maintaining sanitary standards
inadequate owner income.
Present owner reaching retirement age
-------
"Baseline" closures developed through trend analysis are shown in Table
VI-4, for 1972-1977 and 1972-1983. A range and average number are
given for each of the plant segments. Of the existing 4,870 plants, a
range of 917 to 1,449 with an average of 1, 179 or 24 percent may be
expected.to closure through natural attrition by 1977. When the current
trends are projected to 1983, closures may be expected to range from
1, 560 to 2,515 plants with an average of 2, 031 or 42 percent of the present
number of plants.
1. Plant Shutdowns Resulting from Pollution Control Guidelines
The estimation of the number of plant closings due to imposition of
effluent standards and associated costs was based on such factors as:
historical production trends
current production trends
per capita consumption trends by segment
existing financial situation
potential financial situation with additional investment
industry trends (e.g. ownership, cost of capital, use of capital)
cost of controls per unit of production
expected price increases from controls
The plants ability to finance and install new pollution control equipment
was viewed primarily from two analysis. Net profit as a percent of
sales with and without projected price increases was viewed as a firm's
ability to recover expenditures in pollution control equipment and oper-
ation. The NPV analysis was used to view the future earnings of the
company with the imposition of controls compared to the salvage value
of the firm.
The NPV analysis was expanded to take into consideration the "distribution"
of the plants performance in terms of net profits as a percent of sales in
each of the segments (by product and size of plant). This distribution
was derived f^om information based upon most recent data from Dun and
Bradstreet.
As a starting point, it was noted that the 1.0 standard deviation of net
profits as a percent of sales would equal . 17 if multiplied by the 7. 5 percent
annuity factor for 20 years. Of course annual profits for an actual plant vary
temporarily and a large part of the variation is due to plant type and size var-
iations. Based on published data and data in the contractor's files we esti-
mate the standard deviation of net present value as a percent of sales for the
distribution represented by the model plant to be . 34. Furthermore, it is
assumed that results for each model plant represents the median for the
appropriate distribution function. By using these median and standard de-
viation values, one can readily estimate the percentage of firms with nega-
tive net present values through accepted statistical techniques. The analysis
VI-14
-------
Table VI-4. Estimated "Baseline" closures in dairy processing plants (no pollution controls) 1972-1977 and 1972-1983
Industry
Segment
Butter/NFDM
Cheese
Cond. /Eva p.
Milk
Ice Cream
Fluid Products
Plant
Size
Small
Medium
Large
Subtotal
Small LI
Medium
Large
Subtota 1
Small
Medium
Large
Subtotal
Small
Medium
Large
Subtotal
Small LI
Medium
Large
Subtotal
Total Dairy Processing
Existing 1972
No.
270
80
10
360
530
230
40
800
90
115
35
240
370
210
70
650
1,300
1, 100
420
2,820
4,870
%
75.0
22.2
2.8
100.0
66.2
28.
5.0
100.0
66.2
28.8
5.0
100.0
37.5
47.9
14.6
100.0
46.1
39.0
14.9
100.0
100.0
Baseline Closures
Number
Low High
75 93
30 43
0 0
105 136
205 335
13 23
0 0
218 358
34 52
22 31
0 0
56 83
100 127
38 55
•0 0
138 182
340 450
60 180
0 60
400 690
917 1,449
Average
82
36
0
118
270
18
0
288
43
26
0
69
113
46
0
159
395
120
30
545
1,179
1972-1977
Percent of
Segment
31
45
0
33
51
8
0
36
i
48
23
0
Z9
31
22
0
24
30
11
7
19
24
Plants
remaining
1977
188
44
10
242
260
212
40
512
*
47
89
35
171
257
164
70
491
905
980
390
2,275
3,691
Baseline Closures
Number
Low
120
40
0
160
330
0
0
330
58
42
0
100
147
63
0
210
560
200
0
760
1,560
High
166
52
0
218
410
49
0
459
75
55
4
134
205
95
4
304
810
460
130
1,400
2,515
Average
143
46
0
189
370
24
0
394
66
48
2
116
176
79
2
257
685
330
65
1,075
2,031
1972-1983
Percent of
Segment
53
58
0
53
70
10
0
49
73
42
6
48
48
38
3
40
52
30
15
38
42
Plants
remaining
1983
127
22
10
159
160
206
40
406
24
67
33
124
194
131
67
292
615
770
355
1,740
2,721
L' Assumes 50 percent of small plants fall into X small category
VI- 15
-------
showed a remarkable consistency by segment, that is, either the entire size
segment would stay in or drop out. This was tested both before and after the
expected price rises. With the exception of the small cheese plants, the ex-
pected price increase would have little effect on plant closures.
Projected closures over and above the "baseline" closures are shown
in Table VI-5. Plant closures resulting from the 1977 guidelines are
projected to range from 514 to 659 plants with an average of 573.
Basically the most heavily impacted segments are:
. small butter plants
x small and small cheese plants
small condensed and evaporated milk
small ice cream plants
x small fluid milk plants
We first assumed that all plants on municipal systems would not be
subject to closure because of the proposed BPT and BAT standards.
For the remaining plants in the above named segments, our statistical
analysis demonstrated a 100 percent closure over and above the "base-
line". The exception was small cheese plants which showed a 19 percent
shutdown rate. There are, however, certain conditions which lead us
to believe the closure rate will not be that extensive. Many x small and
small plants may market on a local basis and at a price higher than the
national averages used in the analysis. A good example would be the
small cheese plant which markets specialty cheeses locally--an increas-
ing number also have an associated retail store. This would apply more
to cheese than other segments. If a plant is cooperatively owned by the
producers, they may choose to accept a lower price for their milk to
maintain the processing operation. Also some plants may have lower
cost control facilities (discussed in Chapter V).
As a result, where the statistical analysis indicated a 100 percent closure
for the plants not on municipal systems we modified it to reflect a 90 per-
cent average closure rate for the small butter, small condensed and
evaporated, small ice cream and x-small fluid milk. The exception was
x-small cheese plant where we modified the shutdown rate to reflect an
average closure rate of 80 percent.
Additional plant closings may be expected to occur between 1977 and 1983
because of the control standards. However, because the sand filtration
system was recommended in the Development Document for the 1977
Control Standards, no additional capital investment was projected for
BAT Standards. However, it is understood that in certain cases the
installation of the sand filtration system may be delayed until the BAT
Standards are imposed. As a result, further shutdown for economic
reasons were not projected. It is reasonable to assume more plants
would close by 1983 for the following reasons;
VI-16
-------
Table VI-5. Estimated plant closures in the dairy processing industry resulting from pollution
control guidelines
Industry
Segment
Butter /NFDM
Cheese
Cond. & Evap.
Milk
Ice Cream
Fluid Products
Plant
Size
Small
Medium
Large
Total
X-Small y
Small
Medium
Large
Total
Small
Medium
Large
Total
Small
Medium
Large
Total
X -Small y
Small
Medium
Large
Total
Total Dairy Processing Industry
1977 "Baseline Percent of
Projection" plants on
(plants municipal Projected closures from pollution
remaining) system— control guidelines -- 1977
188
44
10
242
130
130
212
40
512
47
89
35
171
257
164
70
491
453
452
980
390
2,275
3,691
20
40
60
20
20
40
60
20
40
60
60
80
90
60
60
80
90
Low
120
0
0
120
73
10
0
0
83
30
0
0
30
82
0
0
82
145
27
0
0
172
514
High
150
0
0
150
94
30
0
0
124
38
0
0
38
103
0
0
103
181
63
0
0
244
659
Ave.
135
0
0
135
83
20
0
0
103
34
0
0
34
93
0
0
93
163
45
0
0
208
573
Ave. %
Closure
71.8
0
0
44.2
63.8
15.3
0
0
20. 1
72.3
0
0
19.9
36.2
0
0
18.9
36.0
10.0
0
0
9. 1
15.5
Plants remaining
after controls - 1977
53
44
10
107
47
110
212
40
409
13
89
35
137
164
164
70
398
290
407
980
390
2,067
3, 118
I/ Assumes 50 percent of small plants fall into X-small category. 2j Source: EPA
-------
failure to meet standards due to impossibility of improving
in-plant controls
. ' lowered throughput causing insufficient cash flow to pay for
in-plant or municipal pollution control costs
non-construction of adequate municipal plants to handle dairy
plant discharge
unreasonably high municipal charges for processing dairy
plant wastes.
2. Production Trends
Unlike many industries, the supply of raw product for dairy processing
is predictable and relatively constant. Cows will continue to give milk,
which is perishable; if it is not processed, it must be dumped. A
gradual reduction in the number of cows through the years has been
balanced by an increase in per-cow production.
Because the milk supply is predictable the tonnage production of processed
dairy products is predictable. Variations can be expected between segments,
depending on prices and demand. Most medium and large (and some small)
plants vary their production mix when they can to take advantage of better
prices. This cannot always be done, however, because there is a basic
demand for a certain tonnage of some items.
Within segments of the industry, production depends chiefly on demand,
which is relatively stable. If surpluses are produced of a storable product
such as butter, canned milk or N.F.D.M. , the government has often
purchased sufficient amounts to maintain the price. Production of some
items has decreased because per capita consumption has decreased.
The industry has'excess production capacity. Most plants, regardless of
size, operate between 10 and 20 hours. Of this, from 2 to 4 hours is
clean-up time. A few large plants operate for 24 hours with 4-5 hours
being devoted to clean-up. Plants that have continuous process machinery
to manufacture, for example, butter and cheese, are better able to extend
their processing hours than plants (usually older, smaller ones) which oper-
ate on a batch process. Also plants have excess production capacity during
certain periods of the year. Facilities are often built to handle maximum
production during the "spring flush," however, during the remainder of the
year production does not approach maximum.
VI-18
-------
There have been no definite studies to determine the present unused
production capacity. If total production capacity was based on 24 hour
operation (minus cleanup time and scheduled maintenance), some sources
of the industry may be operating at 33 to 50 percent of total theoretical
capacity. If "normal" schedules were maintained, the current rate of
capacity would be closer to 80 percent. Most of this capacity is in the
medium and large plants.
Even though relatively few plants are being built, the new ones are large ,
efficient and geared to high rates of throughput.
Production Lost Due to Guidelines. Total production lost due to the
impact of plant shutdown from pollution control is relatively insigni-
ficant compared with total production. The estimated quantities by
segment are shown in Table VI-6 and amount to approximately only . 8
percent of total 1972 production -- even though 573 plants are involved.
With the advent of long range hauling of raw milk, it is doubtful if serious
local and long range production and marketing problems would be en-
countered with the projected plant closure. The dairy industry is a very
dynamic industry in regard to changing production pattern and market
areas. Thus, as an industry, it is believed that adjustments to the
plant closures will be made without serious overall impact. Local
impacts, however, maybe serious.
D. Employment Effects
The estimated impact on employment in the dairy industry is shown
in Table VI-7. . The declining number of plants due to "baseline"
conditions and from the imposition of "guidelines" will result in an
estimated loss of 24, 820 jobs. Of this number 3,250 are due to pollu-
tion control shutdowns. The total number of employees will be reduced
from the current 198,200 to an estimated 173,480.
Many of the plants that will be shut down from the imposition of pollution
standards will be small, isolated plants located in small towns and rural
areas. Little or no opportunity will be available for these people to se-
cure additional employment in the dairy industry in the immediate area.
VI- 19
-------
Table VI-6. Estimated theoretical value of production lost, by segment and size of plant, through attrition of plants
due to normal conditions and additional pollution control investment, 1977
1977 "Baseline"
Estimated Percent of total Percent of total
Industry Value of Plant plants in production in 1972
Segment Production Size segment segment— production
(million $)
B/NFDM
Cheese
Evap. /Cond.
Milk
Ice Cream
Fluid Milk
900 Small
Medium
Large
Total
% of Total Segment
2,350 Small
Medium
Large
Total
% of Total Segment
1,390 Small
Medium
Large
Total
% of Total Segment
1,150 Small
Medium
Large
Total
% of Total Segment
8,360 Small
Medium
Large
Total
% of Total Segment
Total
% of Total Industry
75.0
22.2
2.8
.
100.0
66.2
28.8
5.0
-
100.0
37.5
47.9
14.6
-
100.0
56.9
32.3
10.8
-
100.0
46. 1
39.0
14.9
*
100.0
4.5
37.0
58.5
-
, 100.0
4.5
37.0
58.5
-
100.0
4.5
37.0
58.5
-
100.0
4.5
37.0
58.5
-
100.0
4.5
37.0
58.5
-
100.0
(million $)
40.5
333.0
526.5
900.0
100.0
105.8
869.5
1,374.8
2,350. 1
100.0
62.6
514.3
813.2
1,390. 1
100. 0
51.8
425.5
672.7
1, 150.0
100.0
376.2
3,093.2
4,890.6
8,360.0
100.0
14, 150. 0
100.0
Plants lost
"normally"
(%)
31.0
45.0
0
-
33.3
51.0
8.0
-
-
36.0
48.0
23.0
-
-
28.7
31.0
22.0
-
-
24.0
30.0
11.0
7.0
-
19.3
_
24.2
Value of
production
lost
(million $)
12.6
149.8
-
162.4
18.0
53.9
69.6
-
123.5
5.3
30.0
118.3
-
148.3
10.7
16.1
93.6
.
109.7
9.5
112.9
340.3
342.3
795.5
9.5
1,339.4
9.5
1977 Guidelines
Percent of
production
lost
50.0
-
-
2.2
19.4
-
-
0.9
37.7
-
.
2.7
25.1
-
-
3.6
12.5
-
-
-
0. 1
-
0.8
Value of
production
lost
(million $)
20.3
-
-
20.3
20.5
-
-
20.5
23.6
-
-
23.6
7>.8
-
-
7.8
47.0
-
-
47.0
119.2
-
L' Based on industry wide data and may vary by segment.
VI-20
-------
Table VI-7. Estimated number of employees lost, by segment and size of plant, through "normal" attrition of plants
and additional investment in pollution controls: 1977, based on 1972
1977 "Baseline" 1977 "Guidelines"
Industry
Segment
B/NFDM
Cheese
Evap. /Cond.
Milk
Ice Cream
Fluid Milk
Estimated Industry Average 1972
Number of Plant Employemnt by Number of
Employees Size Plant Size Employees
6,200 Small
Medium
Large
Total
% of Total Segment
20,000 Small
Medium
Large
Total
% of Total Segment
13,000 Small
Medium
Large
Total
% of Total Segment
23,000 Small
Medium
Large
Total
% of Total Segment
136,000 Small
Medium
Large
Total
% of Total Segment
Total
198,200 % of Total Industry
28.2
52.4
19.4
28.2
52.4
19.4
28.2
52.4
19.4
28.2
52.4
19.4
28.2
52.4
19.4
1,750
3,250
1,200
6,200
2,200
9,000
8,800
20,000
850
6,200
5,950
13,000
2,600
8,500
11,900
23,000
7,800
47,500
80.800
136, 100
198,300
Plants lost
"Normally"
31.0
45
0
51
8
0
48
23
0
31
22
0
30
11
7
Estimated
Remaining Number of
Number of Plants' Lost Employees Total Number of
Employees Due to lost due to Employees
Lost Guidelines Guidelines Lost
543 72
1,463
0
2,006
32.4
1,122 40
720
0
1,842
9.2
408 72
1,426
0
1,834
14. 1
806 36
1,870
0
2,676
11.6
2,340 23
5,225
5,649
13,214
9.7
21,572
10.9
875
0
0
875
14. 1
427
0
0
427
2. 1
320
0
0
320
2.4
652
0
0
652
2.8
975
0
0
975
0.7
3,249
1.6
2,881
46.4
2,269.
11.3
2, 154
16.5
3,328
14.4
14, 189
10.4
24,821
12.4
Remaining
3,319
53.6
17,731
88.7
10,846
83.5
19,672
85.3
121,911
89.6
173,479
86.7
VI- 21
-------
1. Changes in Industry Growth
As has already been stated, we do not expect the industry to grow in
terms of tonnage of milk processed. Rather, there is likely to be a de-
cline in milk production and overall decline in dairy product consumption.
The industry is converting to larger plants and closing obsolete ones.
The larger plants are more automated and use less labor per unit of
production. The overall result will be lower employment in the industry.
Since new plants in the industry will be large and engineered to keep ef-
fluent to a minimum, the imposition of standards will have little impact
on the decision to build or not to build.
E. Community Effects
A direct effect of unmanageable higher costs of operation is plant shut-
down and unemployed •workers. The indirect effects relate to the com-
munity, particularly if it is a small one. In this section, the effects on
communities will be discussed in qualitative terms. No data are avail-
able to indicate 4,870 plant locations within the U.S. in relation to size
of plant and size of community. However, we have made some judgments
based on trend information.
1. Location of Plant Closings
Generally, smaller plants are in smaller communities, semi-rural or
rural areas and a fewer number of these plants will be linked to municipal
system. Many plants in such locations have closed in the past few years
for several reasons, chiefly financial. The expected closings estimated in
Section C of this chapter will continue the trend. Medium and large plants
are generally in larger communities. We have no data to quantify these
conclusions.
2. Impacted Communities
Generally, small communities have only one milk processing plant,. For
that reason, the number of communities impacted is expected to be in a
range of 75 to 95 percent (average, 85 percent) of the total number of
plants lost. This estimate is summarized in Table VI-8.
The states most affected will be New York, Pennsylvania, Ohio, Michigan,
Indiana, Illinois, Wisconsin, Minnesota, Iowa, Missouri, and California.
VI-22
-------
Table VI-8. Estimated number of communities impacted under "normal"
and guidelines imposition conditions, 1977 and 1983
Numbers by
1977 1983 J/
Plants Lost
"Normal" Attrition
Due to Guidelines
Total
Communities Impacted
"Normal" Attrition
Due to Guidelines
Total
1, 181
573
1,754
1,004
478
1,482
2,044
573
2,617
1,737
478
2.215
— 1977 numbers are included in 1983 numbers.
VI-23
-------
3. New Plants in Impacted Communities
New plants are now being built in industrially-zoned urban and suburban
areas of cities. There are several reasons for this trend, which will
continue:
Availability of labor
Accessibility from several milksheds
Ease of distribution
Proximity to large market(s)
Accessibility to municipal sewage processing plant
We expect that new plants, if built, will be built in or near fewer than
2 percent of the communities where plants are expected to close.
4. Dislocated Employees
Because of the many changes in semi-rural America, it is difficult to
predict what will happen to employees who lost their positions as a
result of plant closings. If the plant is a small independent, in a
village there will be no possibility of a transfer offer, no other dairy
processing plant in the immediate vicinity and little or no other local
possibility of employment.
If a large company decides to shut down a plant, it usually gives the
employees an opportunity to move to a larger community where they
can work in a larger processing plant. No figures are available as
to the number of employees who avail themselves of such a change, but
it is estimated from industry discussion to be between 10 and 50 percent,
with an average of about 20-25 percent. Those who remain may be at or
near retirement age or want a change, but some will literally be "out of
work" and will have difficulty in being absorbed into a limited local work
force.
The smaller number of medium and large plants closing is in larger
communities, with greater opportunities existing in the local work force.
The net effect will be an out-migration of a relatively small number of
people from small communities to larger communities, either to work
or to live or both.
VI-24
-------
5. Secondary Effects
The closure of a plant may, in some cases, result in the loss of a market
for raw milk for the producer. This would occur only in the isolated
community, however, or when a farmer is selling manufacturing grade
milk to a cheese plant, for example. If there are no other markets for
manufacture grade milk then he would be forced to upgrade his production
and sell to a fluid milk plant (Grade A). Rather than going this route the
farmer may cease production. In most cases, however, a farmer is
a member of a producer cooperative (80 percent of the milk is produced
under this arrangement) where alternative markets for milk would be
available.
F. International Trade
The estimated impact from the application of BPT and BAT standards
on the dairy processing industry are expected to have only very slight
impact on our international trade. Total production loss is estimated
at about 1 percent, which can easily be made up by the existing facili-
ties. Price increase will also range from 0 to 1 percent which should
not make an appreciable shift in our trading position.
It is further understood that all impacts except casein are under a quota
system and present exports are primarily under the Food for Peace
program.
VI-25
-------
VII. LIMITS OF THE ANALYSIS
Although there is a great deal of information regarding the dairy industry
some of the descriptive industry data needed for this analysis do not exist
in published form. As a result, some basic assumptions had to be made.
This chapter discusses the general accuracy of the report and some of the
key assumptions.
A. Accuracy
The analysis was done under very tight time constraints (two months) and
time did not permit the development of all aspects of the project in the
detail which would be desirable . A great deal of information, particularly
that relating to the locations, sizes and wastewater disposal situations of
the industry's plants, is not available and could not be generated without
an in-depth national survey or census.
We depended largely on previously published studies by university researchers,
secondary data, and a number of informal discussions (telephone and personal)
with knowledgable individuals in management, trade associations, or uni-
versities. In many cases, data relating to the development of the model
plants was fragmentary and numerous extrapolations and assumptions
were made.
Throughout the study, an effort was made to evaluate available data and
other information used and to update it. Many checks were made with in-
formed sources in industry to help ensure that data and information used
were as reliable and representative as possible.
It is believed that the results are of an order of magnitude that usefully
evaluates the impact of wastewater quality guidelines on the dairy process-
ing industry. In the final analysis it will be up to each existing plant to
make its own decision relating to cost impact.
B. Range of Error
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:
VII-1
-------
Error Range
Number of facilities + 5
"Baseline" projections ~+4Q
Employment T 10
Price information for products & raw materials "+ 5
Cost information for plant investment "+ 25
Processing costs ~£ \Q
Plant closures due to water pollution ~~
control costs + 3Q
C. Critical Assumptions
In order to establish models of representative plants and relate water
pollution control costs thereto, several key assumptions had to be made:
1. Plant location - Small plants are in small communities; large
plants in large communities. There may be geographic variables, but
because of the concentration in the Lake States area, that was assumed
as the location.
2. Plant size - The sizes of the model plants were approximated
from existing industry production sizes.
3. Milk input - The standard rates of conversion of milk input to
manufactured products were used. The costs of milk pickup were assumed
to be taken into account by the milk price paid to the farmer; the latter
would pay for trucking out of his milk check.
4. Complexes - Insofar as possible, plants within each segment
were assumed to manufacture one or two products. This is seldom true,
but the average should be valid because some products are more profitable
than others. Integrated operations such as retail stores were not Incorpor-
ated into the analysis.
5. Capacity, utilisation, efficiency - These characteristics were
defined. Each plant has a maximum theoretical capacity for the stated
hours of work. If it stays open for more hours each day, its efficiency
does not increase but its percent of maximum capacity or utilization does
increase.
VII-2
-------
6. Prices - Prices of products were generally assumed to be
f. o.b. plant and to be the same for all plant sizes within a segment. A
small plant might get a higher price for milk because of a retail delivery
route, but this possibility was not included.
7. Pollution control - It was assumed that a combination of acti-
vated sludge and sand filter plants would remove 96 percent (by 1983)
and 60 percent (of the remaining 4 percent) of BOD,- and suspended solids
from the wastewater stream.
D. Remaining Issues
Forecasts of industry performance were based on historical trends and
expected occurrences. Such possible modifying circumstances as divest-
ment of dairy divisions by large companies, a significant increase in the
price of milk paid to producers or a technological breakthrough in, process-
ing were not taken into account. Neither were possible new trends such as
significantly lower milk supply or higher-priced protein sources. Generally,
there have not been many surprises in the industry, and it is expected that
past trends will continue.
The Development Document provides cost data for BPT treatment and
makes the assumption that costs for BAT and NSCS are similar. These
data were used to estimate the impact of pollution control based on the
estimate developed by EPA regarding the amount of plants by segment
and size category that dump into municipal treatment system. The esti-
mate of plant number disposing of water into municipal systems appear
reasonable based on fragmentary information but the numbers are not
based on a reliable nationwide survey or census.
It was assumed that municipal treatment costs have been reflected in
current industry prices and that no further increases in treatment costs
will occur. This may or may not be the case and some evidence points
to some municipal systems charging higher user costs to defray expanded
or improved facilities. Increased municipal charges may in isolated cases
cause severe impact on user plants but this possibility was not considered
in the analysis.
The problem of whey disposal was handled in this report by adding the
cost of a. dryer to each of the plants producing whey with the related
assumption that the revenue for the dried whey would offset the cost of
drying. This may be true in some cases, but the problem of whey disposal
VII-3
-------
is one which the industry has only seriously considered in the past few
years. It is reported that 30-50 percent of the whey is disposed of in
some manner such as spreading on the land or direct disposal. In sum-
mary, because of a lack of time and budget, the magnitude of the whey
problem was oversimplified.
Many large plants are versatile and can change their production line:s to
make more profitable items meet demand and supply changes. Also,
many plants manufacture a number of product lines and many of the
minor products not included in the analysis. The complex plants were
not evaluated because of the extremely limited amount of information
and time available. However, they are in all likelihood more profitable
than the single line product plants we considered in the study. Therefore,
they may experience a lesser impact than the plants studied.
VII-4
-------
APPENDIX
-------
Table A- 1. Operating and capital costs of package activated sludge
system, 1972
Variable Costs
Fixed Cost
Depreciation dollars
yearly (10% of capital)
Total Cost
£/1000 gal/day
15, 000
12,880
12,051
24,931
455
Flow (GPD)
30, 000
13, 395
14, 418
27, 813
254
50,000
13,601
15,602
29,203
160
Source: Development Document
-------
Table A-2. Operating and capital costs of sand filtration system, 1972
Flow (GPD)
30,000 60,OOP 100,OOP 500,OOP 1,OOP,OOP
Variable Costs
Dollars 613 2,431 4,6PP 21,759 38,269
£/1000 gal/day 5.6 11.1 12.6 11.9 10.5
Fixed Cost 19,368 23,672 30,128 85.P04 134,500
Dollars yearly (Depre-
ciation @ 10% of capital 1,937 <:., 367 3,013 8,500 13,450
-------
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USDA, Crop Reporting Board, Production of Manufactured Dairy Products
1971, Washington, D. c7~, Da 2-1, July 7 1972.
Mengel, John, Gary Devino, and Alec Bradfield, Specifications and Costs
for a 100, OOP Quarts Per-Day Fluid Milk Processing Plant,
Rutgers Exp. Sta. Bull. 825, Nov., 1969.
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Sharratt, W. J. , A. E. Peterson, and H. E. Calbert, Whey as a Source
of Plant Nutrients and Its effect on the Soil, Reprint from Jovrnal
of Dairy Science, July, 1959, Vol. XLII, No. 7, pp. 1126-1131.
Federal Trade Commission, Quarterly Financial Report for Manufacturing
Corporations, Fourth Quarter, 1972. U.S. Govt. Printing Office,
Wash. , D. C.
U.S. Department of Commerce, Annual Survey of Manufactures, 1970,
Excerpt from M70(AS)-10.
Crop Reporting Board, USDA, M:lk , Bull No. 509, January, 1973.
Kloth, Donald W. and Leo V. Blakley, Excerpt from American Journal
of Agricultural Economics, Vol. 53, No. 3, Aug., 1971.
Williams, Sheldon W. and David A. Vose, Organization and Competition
in the Midwest Dairy Industries, Iowa State Univ. Press, Ames,
''
Goepp, R. Maximilian, III, Productivity in the Fluid Milk Industry ,
Special study prepared for Milk Industry Foundation, Jan. , 1973.
Moede, Herbert H. , Cost of Instantizing Nonfat Dry Milk, USDA, ERS,
Mktg. Research Report No. 949, March, 1972.
Fitzpatrick, John M. and Charles E. French, Ifrnpact of Seasonality of
Milk Supplies, Purdue Univ. , Lafayette, Agr. Exp. Sta. Research
Bulletin No, 774, March 1964.
Kelley, Paul L. , Cost Functions for Bulk Milk Assembly in the Wichita
Market, Agr. Exp. St'a. , Kansas State Univ. , Manhattan,
Tech. Bull. No. 96, May, 1958.
Townsend, T. W. , Paul L. Kelley, and Arlin Feyerherm, Labor Coefficients
for a Surplus Milk Plant as Determined by Work Sampling,
Agr. Exp. Sta., Kansas State Univ., Manhattan, Tech. Bull. 122,
May 1962.
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SELECTED REFERENCES
1. Williams, S. W. et al. 1970. Organisation and Competition in
the Midwest Dairy Industries. Iowa State University Press.
2. Wisconsin Dairy Facts, 1972. Wisconsin Department of
Agriculture, Madison.
3. Dairy Situation, May 1973. ERS, USDA, Washington, D. C.
4. George, P. S. and G. A. King, 1971. Consumer Demand for
Food Commodities in the United States with Projections for
1980. Giannini Foundation Monograph Number 26, University of
California, Berkeley.
5. Almanac of Business and Industrial Financial Ratios, 1971 Edition.
Troy Almanac.
6. Market Structure of the Food Industries, 1972 Marketing Research
Report No. 971. Economic Research Service, USDA.
June 1973. Time, Inc. Chicago.
8. Organization and Competition in the Dairy Industry. 1966.
Technical Study No. 3, National Commission on Food Marketing.
9. Production of Manufactured Dairy Products,1971. Crop Reporting
Board, Statistical Reporting Service, USDA, Washington.
10. Milk. Revised Estimates 1965-69. Stat. Bull. No. 509 SRS, USDA,
Washington.
11. Quarterly Financial Report for Manufacturing Corporations,
Fourth Quarter 1972. Federal Trade Commission. Washington.
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BIBLIOGRAPHIC DATA
SHEET
Kcporl No.
EPA-230/1-73-005
3. Recipient's Accession No.
4. Ti.lc and ^ubmle
Economic Analysis of Proposed Effluent Guidelines - Dairy
Processing Industry
5- Report Dace
November, 1973
7. Authorfs)
Donald J. Wissman, S. MacCallum King
&• Per/orming Organization Kept.
No.
'• Performing Organization, Name and Address
Development Planning and Research Associates, Inx.
P. O. Box 727, 200 Research Drive
Manhattan, Kansas 66502
10. Project/Task/Uork Unit No.
Task Order No. 7
11. Contract/Grant No.
Contract No. 68-01-1533
12. Sponsoring Organization Name and Address
Environmental Protection Agency
Waterside Mall
4th & M Streets, S.W.
Washington. D. C. 20460
13. Type ol Report tt Period
Covered
Final Report
14.
IS. Supplementary Notes
stracts ^g economic impacts of proposed effluent guidelines on the dairy processing
industry were assessed. The following industry segments were included: creamery
butter (SIC 2021); cheese, (2022); condensed and evaporated milk (2023); ice cream
and frozen desserts (2024); and fluid milk (2026). The analysis included classification
and description of types of firms and plants, evaluation of pricing mechanisms and
price relationships; and description of analytical procedures employed. The financial
impact of proposed effluent treatment technology was assessed in terms of prices,
industry returns, volume of production, employment, community impacts and inter-
national trade. Limits of the analysis were stated.
Imposition of the BPT level controls (1977) will have serious impact on cer-
tain portions of the processing segments, primarily small plants not disposing into
municipal treatment systems if control costs are as stated by EPA. After normal
17. Key M'ords and Document Analysis. 17o. Descriptors
Water pollution, economic analysis, economics, butter, cheese, condensed and
evaporated rnilk, fluid milk, ice cream, dairy processing, pollution, industrial
wastes, economic demand, supply prices, variable costs, fixed costs, fixed invest-
ment discounted cash flow
I7b. identifiers/Open-Ended Terms 02 Agriculture, B-Agriculture economics
05 Behavioral and Social Sciences, C - economics
7e. CO
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16. Abstract (continued)
attrition, it is projected that between 514 and 573 dairy processing plants
will be forced to shut down because of their financial inability to meet the
BPT standards. This amounts to 10-12 percent of the total number of
plants in existence today. The total production loss, however, will
amount to only 1'percent of the industry total because of the size structure
of the industry and the size of plants projected to shut down.
Projected price increases resulting from the imposition of controls
will be relatively small, ranging from 0 to 1 percent at the wholesale level.
Employment lost will amount to approximately 25,000 jobs, the vast
majority of which will be in small rural towns in the Lake States, New
York, Pennsylvania, Ohio, Iowa and Illinois. It is projected that nearly
500 communities will be impacted. The imposition of control standards
will have little impact on international trade.
Compliance with BAT (1983) level controls will have a negligible
impact on the industry if control costs are as stated by EPA.
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