EPA-230/1-73-014
AUGUST 1973
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
GRAIN MILLING 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 A gency,
Information Center, Room W-327 Waterside Mall,
Washington, B.C. 20460
The document will subsequently be available
through the National Technical Information Service,
Springfield, Virginia 22151
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EPA - 230/1-73-014
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
GRAIN MILLING INDUSTRY
Samuel G. Unger
Michael W. Woolverton
r-.v---- : ' •": Protection
,;;:om Street
August, 1973
Prepa red for
Office of Planning and Evaluation
Environmental Protection Agency
Washington, D. C. 20460
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This report has beer, reviewed bv the Office of Planning
and Evaluation, EPA. ar.d approved for publication.
Approval does r.ot si^r.ifv tha: the contents necessarily
reflect the views ar.d policies c: the Environmental
Protection Ager.cv. nor does mention of trade narr.es or
corr.rr.ercial 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. 2 by Development
Planning and Research Associates, Inc. Work was completed as of
August, 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 INTRODUCTION 1-1
II SIC Z041: FLOUR AND OTHER GRAIN MILL
PRODUCTS II-1
Bulgur Industry Segments II-2
Types of Firms II-4
Types of Plants II-4
Number of Plants and Employment by
Segment II-7
Selection of Segments to Total Industry II-7
Likely Impacted Segments II-7
Bulgur Financial Profile II-9
Plants by Segment II-9
Distribution of Model Plant Financial Data 11-15
Ability to Finance New Investment 11-18
Bulgur Pricing 11-21
Price Determination 11-21
Expected Price Changes 11-25
Corn Dry Milling Industry Segments 11-26
Types of Firms 11-26
Types of Plants 11-26
Number of Plants and Employment by
Segment 11-29
Selection of Segments to Total Industry 11-29
Likely Impacted Segments 11-29
Corn Dry Milling Financial Profile 11-31
Plants by Segment 11-31
Capital Structure 11-33
Cost Structure 11-35
Distribution of Model Plant Financial Data 11-38
Ability to Finance New Investment 11-38
Corn Dry Milling Pricing 11-40
Price Determination 11-40
III SIC 2044: RICE MILLING III-1
Industry Segments III-l
Types of Firms III-l
Types of Plants III-3
Number of Plants and Employment by
Segment III-5
Selection of Segments to Total Industry III-5
Likely Impacted Segments III-5
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CONTENTS (continued)
Page
Financial Profile III-6
Plants by Segment III-6
Distribution of Model Plant Financial Data III- 12
Ability to Finance New Investment III-16
Pricing III-17
Price Determination III-19
IV SIC 2046: WET CORN MILLING IV-1
Industry Segments IV- 1
Types of Firms IV- 1
Types of Plants IV-3
Number of Plants and Employment by
Segment IV-4
Selection of Segments to Total Industry IV-6
Likely Impacted Segments 1V-6
Financial Profile IV-7
Plants by Segment IV-7
Distribution of Model Plant Financial Data IV - 1 5
Ability to Finance New Investment IV-17
Pricing IV-20
Price Determination IV-20
V ECONOMIC IMPACT METHODOLOGY V-l
Proposed Standards V-l
General Methodology V-2
Benefits V-5
Investment V-6
Cost of Capital - After Tax V-7
Construction of the Cash Flow V-9
Price Effects V-9
Financial Effects V- 1 1
Production Effects V- 1 1
Employment Effects V-12
Community Effects V-12
Other Effects V-l3
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CONTENTS (continued)
Page
VI POLLUTION CONTROL REQUIREMENTS AND COSTS VI-1
Pollution Control Requirements VI-1
Corn Wet Milling VI-4
Corn Dry Milling VI-6
Bulgur Processing VI-7
Parboiled Rice Milling VI-8
Pollution Control Costs VI-9
Status of Wastewater Treatment VI-11
Corn Wet Milling VI-11
Corn Dry Milling VI-12
Bulgur Processing VI-12
Parboiled Rice Milling VI-12
VII IMPACT ANALYSIS VII-1
Corn Wet Milling VII-2
Corn Dry Milling VII-10
Bulgur Processing VII-17
Parboiled Rice Milling VII-21
VIII LIMITS OF THE ANALYSIS VIII-1
General Accuracy VIII-1
Range of Error VIII-2
Critical Assumptions VIII-3
Remaining Questions VIII-5
SELECTED REFERENCES
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ECONOMIC IMPACT OF
COSTS OF PROPOSED EFFLUENT LIMITATION GUIDELINES
FOR THE GRAIN MILLING INDUSTRY
PHASE I - INDUSTRY DATA AND ANALYTICAL FRAMEWORK
I. INTRODUCTION
The total grain mill products (SIC204) industry is currently comprised of
seven four-digit industries . This study considers three of the seven:
SIC 2041 Flour and Other Grain Mill Products (Flour only)
SIC 2044 Rice Milling
SIC 2046 Wet Corn Milling
In 1967, the three selected four-digit industries accounted for 20.4
percent of the establishments and 34.7 percent of the employees of the
total grain mill products industry. (The other four-digit industries in
grain milling which are excluded from this study are SIC 2043 - Cereal
Breakfast Foods, SIC 2045 - Blended and Prepared Flour, SIC 2047 -
Pet Food, and SIC 2048 - Prepared Feeds.)
A brief description of each industry included is as follows:
SIC 2041 -- Flour and Other Grain Mill Products
This industry comprises establishments primarily enga ged in
milling flour from grain, particularly wheat. Products are sold
to the baker for manufacture into bread and cake products, or to
grocery stores for sale to the consumer in packaged form. Durum
products are sold to macaroni and spaghetti manufacturers. Flour
is also sold or used in prepared mixes. A specialty wheat product
called bulgur is also produced in this industry. Bulgur manufacture
requires water for processing and is therefore noted. Corn dry
milling is also included in this industry. Major products of corn
dry milling are corn grits, corn meal and corn flour.
SIC 2044 -- Rice Milling
This industry comprises establishments primarily engaged in
cleaning and polishing of rice, and in the manufacture of rice
flour or meal. Important products of the industry include milled
rice, brown rice, rice polish, rice bran, and rice flour. Con-
ventional rice milling is a dry process, but parboiling operations
are an important segment of the industr/ which utilizes water for
processing.
1-1
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SIC 2046 -- Wet Corn Milling
This industry is mainly comprised of establishments engaged
in milling corn or grain sorghum (milo) by the wet process.
Products include starch, syrup, sugar, oil and byproducts ,
such as gluten feed and meal. Establishments manufacturing
starch from other sources such as wheat, rice and potatoes
are also included in this industry.
Each of th _> above industries involves unique products, production pro-
cesses and other specialized characteristics. Hence, each industry
ivill be considered separately insofar as determining the economic impact
of the'' .'o^ts o4 alternative levels of pollution abatement. As an overview
t>*~ the u.'ri'ral size of each industry, the following numbers of establish-
rnent* in -ach >f the three selected industries, as reported by the U.S.
Ccii.-u-i o' Manufactures, were as follows in 1963 and 1967.
No. of
Plants
Mill Products
1963
618
74
60
1967
541
68
45
No. of
Companies
1963 'T9~6T
510
62
49
438
54
32
In dust ry
/,041 Flour and Other Gr
-'04 1 Rice Milling
ZCH6 Wet Corn Milling
Klo'i- an 1 Other Grain Mill Products plants have been steadily declining
in number for many years' whereas, Rice Milling and Wet Corn Milling
,;!ant-- rearht-d a pvik in 1963 and have subsequently declined in numbers
I he plan of thi-. report i:- to discuss eac'h of the above industries separately
liei au^e ol raiher marked differences in the types of processes involved,
•liilereiue> in produ< t> produced, and different effluent characteristics.
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II. SIC 2041: FLOUR AND OTHER GRAIN MILL PRODUCTS
Establishments in SIC 2041 tend to further group into four separate
subindustries on the basis of primary products produced. These
four groupings, representing different product classes, are as follows:
SIC Description
20411 Wheat flour, except flour mixes
20413 Corn mill products
20415 Flour mixes, refrigerated doughs made
in flour mills
20416 Other grain mill products
The most dominant of these subindustries is SIC 20411, which represents
approximately 75 percent of the total industry shipments.
Based upon industry contacts and discussions, only very limited portion-
of this industry have any water pollution control problems, In particular.
only two portions of the overall industry have potential water pollution
problems associated with milling per se:
(1) Bulgur (wheat) processors - wa shwate r and/o r " bteepo/.i ir
d ra ina ge
(2) Dry Corn Millers - wa shwate r
Most of the corn dry millers using the te'npering-degt- rmmat .no pr s
Smaller mills producing ground whole < orn art- believed to ;M>( wash c orn
before grinding. The smaller mills are excluded from this study s:n r tin
larger mills that wash corn are of primary concern.
Wheat flour millers, the largest single category of SIC 2041, are not
generally concerned with water pollution problems. In < orrcspundciK >•
•with the Miller's National Federation, a national as sor iat mn ol the
flour milling industry, it was indicated that—". . most oi the mills cer-
tainly do not feel that they have any real effluent problem in their flour
milling operations..." This confirmation of the absence of water pollution
problems in flour milling suggests that no further study is probably needed-
As a further check, the results of an informal survey by the Technical
Committee of the Association of Operative Millers was made available to
DPRA. This committee is mostly comprised of superintendents of
II-l
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cram mills from companies dispersed throughout the U.S. Represen-
tatives of wheat. d ry co rn and buLgu r mills were included. In the infor-
mal survey, 17 of the committee's membe rs we re polled concerning wate r
pollution problems being encountered or anticipated by their respective
lompames. In this case, 7 said they did have some water pollution prob-
lems in wheat milling and 10 said they did not. The major problem with
water wa s not in milling per se, but because of bulk rail car washing.
A summary of the results of this 'survey' are presented in Table II-1.
Also noted is that three companies had one or more mills in which some
wheat was washed, although from only 5 to 7 percent of milled wheat was
wa shed.
Regarding dry corn milling (note only four members represented corn
mills), four indicated that all corn milled for human consumption was
washed, involving from 5 to 7 gallons of water per bushel. The extent
that this creates a problem was not certain, although three discharge
into municipal sewer systems.
Three members were from companies which had bulgur mills. In this
case, no respondent indicated that they had a special waste water dis-
posal problem with bulgur. This response is not conclusive, however,
since different processes exist in bulgur production.
With respect to SIC 2041, two subindustries will be studied further:
Bulgur processing and corn dry milling. Wheat flour millers may
have some problems with rail bulk car washing wastes, but no further
assessment is planned herein.
Bulgur Industry Segments
Bulgur production was established in the U.S. on a commercial basis
in the mid-to-late 1950's. The original producers marketed primarily
to ethnic oriented outlets, e.g., Armenian. However, since that time,
domestic use has been eclipsed by export sales via U.S. export trade
programs, especially under USDA relief programs and Title I of PL 480.
II-Z
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Table II-1. Responses from 17 members of the Technical Committee of
the Association of Operative Millers concerning water
pollution problems in grain milling
Wheat Milling
Do you have a water pollution problem?
If
If
you do, is it because of wheat washing?
- bulk car washing?
- bulk truck washing?
- wet scrubber dust collecting?
- othe r
other - what?
Yes
7
3
7
2
0
0
No
10
5
1
2
4
0
No
Re sponso
0
9
9
13
13
17
Wheat Washing
If you wash wheat, what % is washed? (5-7%)
How many gallons of water per bushel are used? (4 gallons)
Does the water go straight to the sewer? 10 1
Bulk Car and Truck Washing
If you use water to clean bulk cars or trucks, about
how many gallons per car are used?
Does it go straight to the municipal sewer?
Is there a special charge for this?
Do you expect to be required to treat this water?
Bulgur (Note: Only 3 had bulgur mills)
If you make bulgur, is there a special waste water
disposal problem?
Dry Corn Milling (Note: Only 4 had corn mills)
Do you wash all corn to be milled for human
c on s umpti on ?
How many gallons of water per bushel?
Does the water go straight to the sewer?
Water Treatment
(J.500 gallons)
11 1 5
737
449
16
4 0
(5-7 gallons)
3 1
Do you have a water treatment system? 1 11
Do you use strainers? 8 3
Do you use settling tanks? 5 5
- other?
What other? Starch/gluten a big problem -
recover solids for resale but
quite expensive
13
13
5
6
7
H-3
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Types of Firms
Six U.S. milling firms are now actively engaged in the production of
bulgur on a commercial basis. Since the late 1950' s there have been
at least 17 processors who have entered into bulgur production, but
now only six firms remain active. The most recently closed mill,
which is presently being dismantled, is one owned by Far-Mar-Co. ,
Inc. in Hutchinson, Kansas. This plant was a 'medium'size plant
relative to the rest of the industry.
The six firms each have but one bulgur mill (see TableII-Z below). In
every case, the firms have other milling units and bulgur would gen-
erally be considered a relatively small part of the overall firms oper-
ations. For example, three of the firms are among the top twenty
wheat flour millers in the U.S.
Types of Plants
The six remaining bulgur plants in the industry are as shown in Table
II-2. Also shown are the plant locations and the estimated capacities
per day for each plant. Bulgur mills are dispersed throughout the mid-
western and western states. One plant each is in Kansas, Nebraska,
Oklahoma, Texas, California and Washington. The Fisher mill in
Seattle, Washington is the dominant plant in the industry.
Capacities range from 2,500 cwt. to 9,000 cwt. per day; and an average
capacity is approximately 5, 000 cwt. per day. The composite annual
capacity of the industry is slightly over ten million hundredweight. In
1971 and 1972. bulgur production totaled about five million hundredweight.
Hence, utilization of capacity is about one-half of capacity (based on 330
days, 24 hours per day).
Because of the young age of the industry, the level of technologies is
reasonably mode rn. However, there are a variety of processes for
bulgur production and each requires different equipment.
Four processes for gelatinizing wheat to produce bulgur are illustrated
in Figure II-1. These are referred to as: (1) Albany process , (2)
Robbins process. (3) second generation Robbins process, and (4) third
generation Robbins process. Only the Albany process involves any
wastewater drainage from the hydration procedure. Otherwise, all
process water is eventually vaporized in driers. (Another water-use
step may be wheat washing prior processing, but none are known to now
wash wheat.)
II-4
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Table II-2. Listing of bulgur mills and their plant locations
Bulgur Plants and Location Estimated Capacity
(cwt/day)
Archer Daniels Midland Co. 5,000
Shawnee Mission, Kansas 66207
Plant: Abilene, Kansas
Burrus Mills, Inc. 3,200
Dallas, Texas 75201
Plant: Dallas, Texas
California Milling Corp. 4,500
Los Angeles, Cal. 90058
Plant: Los Angeles, California
Fisher Mills, Inc. 9,000
Seattle, Washington 98134
Plant: Seattle, Washington
Lauhoff Grain Co. 6,500
Crete, Nebraska
Plant: Crete, Nebraska
Leger Mill Co. 2, 500
Altus, Oklahoma 73521
Plant: Altus, Oklahoma
Sources: " Bulgur Mills," The Northwestern Miller, Vol. 278, No. 9,
September, 1971~
Fisher, Glen W- , The Technology of Bulgur Production, Association
of Operative Millers, Bulletin, May, 1972.
II-5
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wheat
20% norsl \
PENETRATION
B^T CONVEYOP
I70 -ISO0"
mois' steom
OELATINIZED
WHEA"
T0 DRIEF
ALBANY
PROCESS
rrr.
^EANED *HE4T
i ,—WATER
25-/. I
•SOT ;
4 hr
35'A
llSO'
i 2 H,
^
"1
ROBBINS PROCESS
18L4NCH£fi
M5%
\za-f
GCLATINI^ED
WHEAT TO
DRIER
ROBBINS
PROCESS
PROCESS
GELATINIZED
WHEAT
TO DRIER
1
j
"SB"
I 1
1 1
> "
1
1
1
Figure II-l. Illustration of modern bulgur gelatinization processes.
II-6
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Number of Plants and Employment by Segment
Of the six remaining plants in the industry, two each might be classed
as small, medium and large. Employment data is not published, but
estimated employee requirements (assuming each mill only processed
bulgur) range from about ZO to 45 per mill based on size. Total em*
ployment is estimated at approximately 180 to 210 as follows:
Plants Range No. Mills Total
Small 20-25 2 40-50
Medium 30-35 2 60-70
Large 40-45 2_ 80-90
Total ~6 180-210
Selection of Segments to Total Industry
All plants with drainage and/or other wastewaters, e. g. , wheat washing,
will be affected substantially if waste treatment facilities must be installed
at the plant level. The plants by size class are estimated to have the
following distributions regarding production and employment.
Plants % of Production % of Employment
Small 19 23
Medium 31 33
Large 50 44
Total 100 100
Again, only six plants are involved.
Likely Impacted Segments
Within the size range of plants involved, all would likely be affected sub-
stantially with increased costs associated with pollution control facilities
if required. Thus, no plants are eliminated due to size. However, as
noted above, if no washing occurs, and if a Robbins process is used,
then no wastes of consequence are believed involved. These plants may
be eliminated. (Steam generation water wastes and sanitary wastes
are excluded.)
U-7
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To determine how much the study scope might be narrowed on the basis
of type-of-process used, a poll was made concerning all the bulgur
plants. The results were as follows:
1. No wheat washing (except "steeping") is practiced.
2. No plant indicated that water wasteflows were a problem.
3. Only minor overflows (excess water drainage) were experienced
in "steeping" wheat. The objective is to add water only to the
level which can be retained by the wheat mix.
From all indications the bulgur plants do not have a significant water
pollution control problem. Only minor volumes of wasteflow are indicated
and these are apparently being discharged for adequate treatment-
II-8
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Bulgur Financial Profile
Financial data on the bulgur industry per se are not available. Bulgur
operations comprise a portion of larger more complex milling organizations,
primarily wheat flour milling. To assess this industry, it was necessary
to resort to model plant data representing the industry. Within the time
frame available, attention was focused on a ' medium' sized operation to
reflect industry averages.
Plants by Segment
Bulgur processing is a rather straight forward milling process with only
bulgur as the primary product (a small amount of millfeed byproduct is
also produced). Sizes of units range from about 2,500 to 9,000 cwt- per
day. The medium plant modeled herein is rated at 5,000 cwt- per day.
Small, medium and large categories of plants would be defined as:
Small 2,500 - 4,000 cwt. /day
Medium 4 , 000 - 6 , 000 cwt. /day
Large 6,000 - 9,000 cwt. /day
As stated, only a medium sized plant was modeled to reflect average con-
ditions in the industry at this time. A characteristic of the industry is
that only about one-half of the maximum machine capacity is being utilized
to meet demand requirements. For example, the medium 5,000 cwt./day
plant has a rated annual capacity of about 1-65 million cwt. (7,920 produc-
tion hours), but throughput volume estimated is 0. 832 million cwt. (4,000
production hours) or approximately 50 percent of the maximum.
Annual Profit before Taxes
Based upon the model plant concept and the operating assumptions employed,
estimated annual pre-tax income and selected rates of return on average
fixed investment are as shown in Table II-3. After tax RO1 is estimated
as ?• 0% and after tax earnings on sales are a relatively low 1-7 %- Earnings
are sensitive to changes in sales prices, e.g. a 1% change in price down-
ward would reduce after tax ROI to 4. 4%
II-9
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Tn! ic 11-•> !"!»: .mated pr«--^ax net income and rate of return on average
iivi-sicd i ip tal and after-tax ret >rn on sales for a medium
!,-ulgu.r pror t-ss :ng plant
Fi.aiu .a I Measure Value
Pre-tax tu-t income ($000) 171
Pre-tax ROI:;: <%) 12. 6
After-tax ROI':' (%) 7- 0
After-tax return on sales {%) 1. 7
n-io
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No bulgur processing plants are believed to have maintained high profit
levels because of the generally low utilization rates (and limited bulgur
demand) in the industry. The recent closure of the Fa r-Ma r-C o. plant
at Hutchinson, Kansas, which was a medium sized plant, suggests also
the questionable profitability of bulgur processing.
Average fixed investment, on which the rates of return were calculated,
was derived by dividing replacement costs by two (an estimate of average
fixed assets) plus total working capital (current assets) less current
liabilities (based on grain milling industry averages). The average
fixed or invested capital estimate is intended to approximate invested
capital in reported financial data. After tax income was based on a 48%
tax rate without either carry forward or back tax provisions.
Annual Cashflow
Estimated annual cashflow (after tax income plus depreciation) and return
on average fixed investment are as shown in Table II-4 for the selected
model plant. Depreciation for the plant was based on an expected 25
year life for buildings and 15 years for equipment.
The cashflow data are considered nominal for grain milling firms. It is
expected that pollution control cost impacts can be assessed adequately
given conditions reflected in the cashflow data shown plus subsequent
scale adjustments.
Market (Salvage) Value of Assets
No data is generally available concerning salvage values of bulgur plants
per se. Bulgur plants appear to have little value to others in the industry
under the present condition of major underutilization of maximum plant
capacities. However, some components of bulgur operations (e.g. aspirators,
elevators, dryers, etc. ) are common to the grain milling industry and
salvage values might be estimated on a dismantled plant basis.
Capital Structure - Agricultural processing industries generally require
a relatively low investment per dollar of sales. This is true of bulgur
processing where an investment of $1. 00 results in sales of $4. 22 based
on the model plant data developed.
The capital required to generate such sales for the model bulgur plant
is indicated in Table II-5. The estimated replacement value of fixed
investments as shown includes land, buildings, equipment and associated
installation costs. Excluding land, the total plant investment cost was
n-ii
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Table II-4. Estimated cash flow for a. medium bulgur processing plant
Financial Measure Value
Annual cash flow ($000) 143
Cash flow on average fixed
investment (%) 11.0
11-12
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65% for buildings and 35% for equipment based on an engineering synthesis
of model plant data by DPRA.
Total working capital requirements of $1. 36 million, as also presented in
Table II-5, exceed the $1.089 million in plant and equipment. This working
capital requirement equals about 25% of annual operating costs. Thus,
while bulgur processing is not particularly capital intensive, it does have
substantial working capital requirements. As a part of salvage value that
would be recoverable in case of plant closure, the working capital compo-
nent is significant, i. e. 55% of replacement value of total assets.
Cost Structure - Model plant data and budgets were prepared to estimate
the cost structure of representative operations.
Fixed or plant related expenses were defined as those which do not directly
vary as a function of throughput. These expenses include:
maintenance and supplies
taxes and insurance
plant and labor overhead
sales, general and administrative
Additionally cost estimates were made for depreciation and interest costs.
Variable or production related expenses were defined as those which wi.il
generally vary proportionately with throughput -- in other words, a ;,xed
amount per unit processed. They include:
raw materials
power
• water
process supplies, chemicals, etc.
operating labor
plant supervision and fringe benefits
Fixed costs -As shown in Table II-6, the indirect operating costs for the
budgeted medium bulgur processing plant represent only 3 percent of sales-
This is due to the dominance of raw grain purchases as input and the
relatively low value added process that is involved. Presumably, smaller
plants would have relatively higher fixed costs and larger plants relatively
lower.
Depreciation is also a small percent of sales, 0-9%, as shown. This again
reflects the low fixed asset capital requirements of bulgur productior relative
to other inputs.
Interest costs are shown as equal to 1-0% of sales for the model plant.
11-13
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Table 11-5. Estimated re p lac-erne nt value and working capital requirements
for a medium bufgur processing plant
Capital component
Requirement
Replacement value of plant,
equipment 8t site
Total working capital
Replacement value of total
assets
($000}
1,089
1,360
2,449
11-14
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Variable costs - Variable costs are also shewn in Table Il-o fcr two
major components; raw materials, and other direct operating costs.
Raw materials costs represent almost 80% of sales and is overwhel-
mingly the most dominant production cost component. This is expected,
however, in processes like bulgur production where the processing
is rather simple and straight forward.
Direct operating costs are second in importance relative to sales; and
the model plant direct costs were estimated as equal to 12. 1% of sales.
This percentage is expected to vary among plant sizes as is to be determined
in subsequent study.
Distribution of Model Plant Financial Data
There was no known individual plant financial data concerning bulgur
operations in published sources. Consequently, the contractors had
to rely upon model plant cost and returns data which were generated
specifically for this study. Because bulgur processing is generally
straight-forward and not overly complex, it was possible to design
and simulate engineering cost estimates for the model plant specified
within the time constraint of this study. Unfortunately, alternative
mill sizes could not be developed for comparative purposes. However,
the "medium" size plant was chosen to best reflect what might be
termed average conditions in the industry.
Most of the financial data generated has been summarized above. How-
ever, a composite summary plus key assumptions and some selected
additional data are presented in Table II-7.
The Protein Cereals Products Institute, an industry association,
represents the bulgur producers. The institute does not collect or
analyze data relating to plant production costs, productivity and
profitability. Thus, this source was not asked to verify production
data. Also, time did not permit verification •with producers.
•
Wherever data were missing it was necessary to make personal judgments
and approximations. Selected financial data and ratios, such as from IRS
business statistics, Dun & Bradstreet, Standard fk Poors, Fortune and
other sources were used as guides and indicators of likely plant charac-
teristics. Census of Manufacturers data was also used concerning the
grain mill products industry in general and also for selected four-
digit industries such as SIC 2041.
Current industry prices and costs were used for the bulgur plant oper-
ation, i.e., first quarter, 1973. Investment requirements reflect recent
costs including adjustments for inflation based on judgment.
11-15
-------
Table II-6. Estimated costs for a medium bulgur processing plant
Item $000 Percent
Sales 5,724 100.0
Raw materials 4,576 79-9
Direct operating costs 692 12. 1
IrdiT-t-ct operating costs 173 3.0
rvpr<-r-at ion 54 0.9
lot-rv-st 58 1.0
T.'ta' b- u.rr-tax cost 5,553 97.0
- lb
-------
Table II- 7. Summary of financial data pertaining to the
bulgur processing model plant
Item
Units
Value
Remarks
Utilization
Annual Thruput
Sales $
Raw Product Cost
Variable Costs
Fixed Costs
Cash earnings
Depreciation
Interest
Pre-tax income
Net income
After-tax cash flow
Replacement Cost
Working Capital
Current Liabilities
Ave. Fixed Invest. (AFI)
Pre-tax income/AFI
Net Income/AFI
Cash Flow/AFI
Net Income/Sales
%
1,000 cwt
1,000
I t
1 1
1 1
11
1 1
t t
f t
1 1
11
T 1
1 t
1 1
M
Ratio
1 1
1 1
1 1
50
832
5,724
4,576
692
173
283
54
58
171
95
149
1,089
1,360
544
1,361
„ 126
.070
- 110
. 017
4, 000 production hours
50# bags
$7.40-. 52 (transport) =
$6. 88 FOB Mill
1. 1 (Thruput) ($5.00)
4% Bldg, 6.7% Equip.
$.07 /cwt
Engineering synthesis
25% Operating Costs
40% Total Working Capital
11-17
-------
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
scmrvfs; (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 deprecia-
tion of fixed assets.
For each of the three major sources of new investment, the most critical
set of fat tors 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 conside rations., 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, stock-
holders 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 relationships, trends in
production and consumption, the state of technology, impact of government
regulation, foreign trade and other significant variables. Declining or
depressed industries are not good prospects for attracting new capital. At
the same time, the overall condition of the domestic and international
economy can influence capital markets. A firm is more likely to attract
new capital during a boom period than during a recession. On the other
hand, the cost of new capital will usually be higher during an expansionary
period. Furthermore, the money markets play a determining role in new
financing; the 1973 year has been viewed as especially difficult for new
equity issues,
These general guidelines can be applied to the milling industry by looking
at general economic data, industry performance and available corporate
records.
11-18
-------
There are no available financial data on firms operating bulgur plants,
One must look at grain mill products as a whole in order to gain im-
pressions about the profitability of the industry and the ability to attract
capital.
Table II- 8 presents selected financial data on grain milling as a broad
industry category for the years 1967-68 through 1971. The industry is
below average in profitability, both as a percentage of sales and of net
worth. Net profit on sales of 1. 75 to 3. 6 percent compares to Standard
and Poor's 425 industrial companies' return on sales of 5.0 to 6. 1 percent
during those same years. Only in 1968-69, when return on net worth
averaged 11.9 percent, did grain milling achieve the manufacturing aver-
age of approximately 12 percent. Returns were down in 1971, owing largely
to higher corn prices and reduced profit margins.
The grain milling industry debt situation appears generally sound. Long-
term debt averaged 2 1 to 36 percent of net worth, compared to a general
range of 35 to 50 percent for most manufacturing industry groups. Current
debt levels appear normal with ratios of 1. 8 to 2. 2. Assuming continued
profitable operations, the industry should have adequate borrowing capa-
bilities.
Cash flows, estimated as a percent of total assets, ranged from 7. 3 to 9. 3
percent in the thre-year period from 1967-68 through 1969-70, with the
last year at 7.8 percent. Indications are that 1971 was even lower. Fur-
ther analysis of grain mill products firms by asset size indicate that the
cash flow may be somewhat higher for the largest firms (over $100, 000, 000
in assets); beyond that, asset-size appears to have little relationship to
cash flow.
Profit margins in the milling industry in general tend to fluctuate from
product to product and from year to year. Millers have little control over
raw product costs, which usually reflect production changes and prices of
related products. Thus, there is an instability of earnings in the industry
which makes it somewhat less attractive for equity capital and usually
requires lower debt/equity ratios than for manufacturing in general. Even
so, there is no evidence that the milling industry cannot attract sufficient
capital to finance new investment.
11-19
-------
Table II- 8 . Selected financial ratios for grain mill products firms,
1967-68 through 1971
1967-68L/
Net profits as % of sales 2.7
Net profits as % of net worth 9. 9
Net sales times net worth 3.7
Net sales times net working
capital 8. 3
Net sales times total assets 2. 1
Total debt as % of net worth 80
Fixed debt as % of net worth 31
Current ratio • 1=9
Cash flow as % of total assets 7s 3
— Troy, Leo, Almanac of Business and
1968-69-
3.6
11.9
3.3
7.8
2. 1
60
21
2.0
9.3
Industrial
! 1969-70
3.3
11. 1
3.4
8.7
1.9
80
36
1.8
7.8
Financial
L/ 19712-/
1.75
8. 3
5. 1
8. 7
N. A.
98
N. A.
2.2
N. A.
Ratios in 1971
1972 and 1973 editions, Prentice-Hall, Inc., Englewood Cliffs, N. J.
_' Dunn and Bradstreet, 1971 Key Business Ratios--industry median; each
ratio is for a different firm (73 companies).
11-20
-------
Bulgur Pricing
Price Determination
Price determination for bulgur is somewhat unique in that most sales
are to the U.S. government on the basis of tenders for bid from U. S,
bulgur producers. Contracts are awarded to lowest bidders for speci-
fied quantities of bulgur which are packed to specification.
A summary of demand and supply relationships in the industry is pre-
sented to explain major factors affecting bulgur sales and prices.
Demand
Only a small portion of the yearly production of bulgur is sold in retail
packages in the United States. Over 99 percent of the bulgur produced
is bought under contract by the United States Department of Agriculture,
and, approximately 99 percent of this amount is exported under various
foreign aid programs, such as the P.L. 480 - Food for Peace program.
A small portion about 3 million pounds of bulgur per year is distributed
within the United States in federal school lunch and domestic feeding
programs.
Four-fifths of the U. S. produced bulgur is shipped to Southeast Asia,,
About one-third of that goes to Indonesia. The USDA and the association
of bulgur producers has concentrated its market promotion and education-
al efforts in that part of the world. Other areas which offer opportunities
for future bulgur sales include other Asian countries, the Middle East,
and the new African nations.
Bulgur is gaining acceptance in developing nations as a high-protein,
high quality food. In response to the nutritional value of food, bulgur
producers are increasing the protein value of bulgur by adding soy grits,,
This product, called soy fortified bulgur, is a fairly recent development
and consists of 85 percent bulgur and 15 percent soy grits. The USDA
has sharply increased its purchases of this product in the past two years
due to the great interest shown by the developing nations.
Total sales of bulgur have grown rather slowly to a level of about 5 mil-
lion hundredweight in 1972. The trend in exports, representing approx-
imately 99 percent of sales, is as shown in Figure II-2. Also shown is
the distribution of sales to major export markets. The total volume of
bulgur produced in the U. S. is equivalent to about one-half of one per-
cent of the nation's annual wheat production.
11-21
-------
BULGUR F. XPCR7 MA^Kf IS
I /I *~ 1 "J I * L
PRODUCTION CAPACITY COMPARED TO EXPORT SALES - BULGUR
*vc c»' Pt« MC\TN flr rpca, iE/>»s
rh r-
•OTAI
CAPACITY
TOTAl.
SAUS
1962 1963
Figure II-Z. Bulgur export sales and sales by market, 1962-1970.
Source: Fisher, GlenW., "The Technology of Bulgur Production, "
Bulletin, A ssociation of Ope rative Millers, May, 1972, p. 3301.
11-22
-------
Supply
Bulgur supplies are effectively equal to the USDA (ASCS) purchases for
export programs and to a minor extent U. S. domestic donation programs.
Less than one percent of the bulgur produced is distributed through regular
commercial market channels. A summary of bulgur purchases by USDA
since 1968 is shown in Table II- 9 .
Bulgur is produced according to rather stringent government standards
and packaged in high quality bags (normally 50 pounds per bag) for export
(and other) shipment. Also, since 1971, soy fortified bulgur has been
produced and it is rapidly replacing stright bulgur production. This new
product is still primarily bulgur (85 percent), but as government tenders
for bid are changed, the industry firms have quickly added soy grits
blending capability.
Prices
Bulgur prices of concern are essentially only those at the plant level.
Domestic sales are of minor consequence relative to total sales; and no
attempt has been made to trace domestic sales beyond first the ethnic
orientation of some markets, and second, some apparent increase in
bulgur sales among health food stores.
Competitive bidding for bulgur (and soy fortified bulgur) production
contracts effectively determines the mill price of bulgur. Presumably,
bid prices reflect costs of production including wheat purchases and
nominal rates of return. Also, however, most bid requests are for
delivered port prices at specified sea coast and Great Lakes destinations,
e.g. , Gulf, West Coast, East Coast and Lakes. Availability of wheat
supplies and the plant location could result in comparative advantages for
individual mills or groups of mills when bidding for specific location-
dependent contracts.
Bulgur prices vary directly and proportionally with wheat prices as
expected (and now with soybean prices also). For example, bulgur prices
in June, 1972 were $5. 64 per cwt. f. a. s. at Gulf ports but rose to $7. 83
in December, 1972. During this period, wheat prices also rose from
about $1.52 per bushel to $2. 62 or by $1.83 per cwt. After accounting
for processing wheat losses (10 percent including moisture differential),
the change in wheat costs accounts for almost all the change in bulgur
prices.
In the first quarter of 1973, bulgur prices averaged about $7. 40 per cwt.
at Gulf ports. Wheat prices, delivered to mills, averaged $3. 00 per
bushel (or $5. 00 per cwt. ) during the same period.
11-23
-------
Table II- 9 , USDA purchases of bulgur for export and donation programs,
1968-1972
Soy Fortified Bulgur for
Year Bulgur Bulgur Total Exports Domestic Donation
Unon r^\t/f ^
1968 3,749 - 3,749
1969 4,165 - 4,165
1970 5,452 - 5,452
1971 4,070 980 5,050
1972 2,030 2,920 4,950
51
47
43
35
30
Source: National Food Situation, ERS, USDA, May, 1973.
11-24
-------
Expected Price Changes
Because of the peculiar structure of the bulgur industry, i. e. , 99 percent
sales to the government for export under food-for-peace type programs
and the contracting purchase system, it is first anticipated that any
change in costs for pollution control would be reflected in contract bid
"prices". Hence, costs would be passed-through just as is an increase
in the cost of wheat input.
Second, however, can prices be passed to consumer (foreign countries)
without a change in the quantity demanded? In this regard it is estimated
that the demand for bulgur is price elastic (elasticity less than -1.0)
where local currency sales are made; and, quantity demand would there-
fore be reduced noticeably given only small percentage changes in price.
Thus, export requirements would be lowered and average utilization of
plant capacity in the U. S. would be less. The least efficient plants
would then have difficulty competing.
The smaller bulgur plants are expected to be impacted relatively more
than the larger plants in terms of per unit costs of pollution abatement.
These plants will first have trouble competing for contracts because of
costs and subsequently they will also 4e further lisadvantaged if aggregate
demand falls in foreign markets.
11-25
-------
Corn Dry Milling Industry Segments
This industry manufactures corn meal for human and animal consumption-
products ior human consumption include whole corn meal, degermed
turn meal, corn grits, and hominy. The industry also ma,
-------
Figure II-3. Distribution of corn dry milling plants among states in the U.S.
Source: Northwestern Miller, Vol. 278, No. 9, September, 1971.
1971.
-------
Table 11-10. Number and distribution of corn mills by state, 1971
State
No. Mills
.Alabama
California
Delaware
District of Columbia
Florida
3
2
2
1
2
Georgia
Illinois
Indiana
Iowa
Kansas
5
4
4
1
2
Kentucky
Mississippi
Missouri
Nebraska
North Carolina
13
3
3
3
23
New York
Ohio
Oklahoma
Pennsylvania
1
3
1
4
South Carolina
Tennessee
Texas
Virginia
West Virginia
Wisconsin
4
19
6
12
1
Total
124
Source: Northwestern Miller, Vol. 278, No. 9, September, 1971.
11-28
-------
Corn dry millers purchase grain competitively in commodity markets.
They generally buy corn of U.S. Grade No. 2 or better, except for
moisture content. In 1972, the industry utilized 139 million bushels
of which 23 million bushels were converted into breakfast foods. _'
This amounts to only about 3 percent of the total domestic use of
corn in the United States each year. Corn prices, therefore, are
not substantially affected by corn dry miller's purchases.
Number of Plants and Employment by Segment
Zl
Employment data for 70 — of the 124 corn dry milling firms indicate
that employment averages about 50 per mill. Employee requirements
would vary according to the size of the mill. Total employment in the
70 firms was 3,300 in 1967 as indicated in Table 11-11.
Selection of Segments to Total Industry
There are two basic types of corn dry mills in the United States,
smaller plants that produce only ground whole corn and larger corn
mills that produce a variety of products. The smaller plants dry clean
grain before grinding and no process wastewaters are generated. The
larger corn dry millers wash the corn prior to tempering and milling
to remove surface dirt and microorganisms. During the cleaning pro-
cess the moisture content of the corn increases constituting the first
step in the tempering process. The spent wash water represents the
bulk of the wastewater from this segment of the grain milling industry.
The larger corn dry millers process 80 to 90 percent of corn dry milled
in the United States. Since the smaller corn dry mills generate no waste -
waters, they should not be affected by water pollution abatement programs
and can be eliminated from consideration.
Likely Impacted Segments
Corn dry mills using the tempe ring-de ge rmmating process are likely
to be significantly impacted by water pollution control requirements,,
These mills produce a high percentage of the total corn dry mill products
in the United States. They tend to be the larger mills in the industry and
most are located in the midwe stern part of the country.
\J Source: Feed Situation, ERS, USDA, May 1973.
— Source: Census of Manufactures, U. S. Department of Commerce,
1967. Based on establishments with 75 percent or greater product
specialization.
11-29
-------
11-11. Selected employment, production and financial characteristics of the corn dry milling
industry in the United States, 1967
All Employees Production Workers Value added Capital
Corn Mill Establish- Man- by manu- Cost of Value of expenditures
Products ments No. Payroll No. hours Wages facture materials shipments nev
(No.) (OOO's) (million (OOO's) (million,) Million dolla rs -------- ."777177".
$)
Primary product
Class of establish-
ment (90% or more
?pec.) 43 2.1 15.2 1.5 3.4 9.5 53.2 159.6 212.3 4.J
Establishments
with 75% or more
specialization
(75-89% spec) 27 1.2 9.4 .9 2.0 5.8 21.4 89.8 110.7 2,2
Source: Census of Manufacturers, U. S. Department of Commerce, 1967
-------
It is not known how many of the larger corn dry mills currently dis-
charge into municipal treatment systems or directly into surface
waters. Treatment strategy will vary from plant to plant depending
upon the quantity and quality of corn processed and access to a munic-
ipal treatment system*
Corn Dry Milling Financial Profile
Published financial data on the corn dry milling industry are not available.
All but a few corn dry millers are too small for company statistics to be
reported in Standard and Poor's Industry Survey or Moody1 s Industrial
Manual. Those companies large enough to be reported are conglomerate-
type companies so that reported data does not accurately reflect corn dry
milling financial data. To assess this industry fairly and complete the
subsequent plant impact analyses procedure used was to construct a
model plant situation.
Plants by Segment
Of the two basic types of corn dry mills in the United States, only the
larger mills using the tempering-de ge rminating process are of concern
in this study. The smaller plants, producing only ground whole corn,
dry clean the grain before grinding and generate no process wastewaters.
The larger mills using the tempering-degermmating process range in
size from about 2, 500 to Z0,000 cwt per day capacity of meal production.
A model plant of 12, 000 cwt per day capacity was chosen to represent
the industry. A plant this size would process 30,000 bushels of corn
per day to produce 12,000 pounds of finished corn meal products and
should represent the general condition of the industry.
The model plant is assumed to operate at 100 percent of capacity where
100 percent is defined as 6,240 production hours or 260 days x 24 hours
per day. The level of production may exceed the 100 percent utilization
standard in the milling industry so that 100 percent of capacity is not
an unrealistic level of production and represents current industry ex-
perience.
Annual Profit Before Taxes
Using the model plant concept and the operating assumptions, the esti-
mated pre-tax income and selected rates of return on investment are as
reported in Table 11-12. After-tax ROI is estimated as 8. 8 percent and
after-tax earnings on sales is 2.6 percent. These values were computed
using 1967-1971 average costs of inputs and prices of products. In light
of the unusual recent prices and the present unsettled market conditions,
this should improve the chance of reflecting "normal margins" between
prices paid and prices received for corn dry milling products.
11-31
-------
Table II-12. Estimated pre-tax income and rate of return on average
invested capital and after-tax return on sales
for a moderately large corn dry mill
(30,000 bushels per day)
Financial Measure Value
Pre-tax net income ($000) 843
Pro-tax ROI - (%) 17.0
Alu-r-tax ROI -I (%) 8.8
After-tax return on sales (%) 2.6
-- Average return on fixed in\ e stinent calculated by financial statement
method.
II-3Z
-------
Average fixed investment, on which the rates of return were calculated,
was derived by dividing replacement costs by two (an estimate of average
fixed assets) plus total working capital (current assets) less current
liabilities (based on grain milling industry averages). The average
fixed or invested capital estimate is intended to approximate invested
capital in reported financial data. After-tax income was based on a 48
percent tax rate without either carry-forward or back tax provisions.
Annual Cashflow
Estimated annual cashflow (after-tax income plus depreciation) and
the ratio of cash flow to average fixed investment are as shown in
Table 11-13. Annual depreciation is assumed to equal 6 percent on
equipment and 4 percent on buildings. Buildings are estimated to
equal 70 percent of the total plant investment and equipment is equal
to 30 percent of the total.
The annual cash flow of $724,000 is also 4.2 percent of sales. This is
comparable to other milling industry ratios.
Market (Salvage) Value of Assets
Data concerning the salvage value of corn dry mills is generally not
available. A small corn dry mill producing whole corn meal would
have very little value, even to another corn dry miller, because of
its small size and because whole corn meal has been a declining per-
centage of total corn dry milling production indicating declining demand.
A large corn dry mill using the tempering-de germinating process would
be of little value to anyone other than another corn dry miller. The
equipment, •which is universally used in the milling industry, could be
sold but approximately 70 percent of the value of a mill is attributed to
buildings which are potentially suited for general grain milling uses.
Since the model plant is assumed to be a moderately large sized
tempering-de germinating mill, it should have value to other grain
milling industry segments and is assumed to have a positive salvage
value. For purposes of analysis, a salvage value of 50 percent of the
estimated replacement value was used.
Capital Structure
The average fixed investment in a corn dry mill "was estimated as
$4.971 million for the moderately large sized model plant. Sales were
estimated as $17. 160 million per year. This yields average sales of
$3.45 for each dollar of investment. This yield is comparable to other
11-33
-------
Table 11- 13. Estimated cash flow for a moderately large
( orn dry mill
Financial Measure Value
Annual cash flow ($000) 724
Cash flow on average fixed investment (%) 14.6
11-34
-------
agricultural processing industries which, in general, require a low
investment per dollar of sales.
The capital requirements estimated for the model plant are presented
in Table 11-14. The replacement value of $6, 198 million assumes a
breakdown of 70 percent for buildings and 30 percent for equipment.
Total annual working capital of $3, 120 million is estimated to equal
approximately 20 percent of total operating costs, including raw
product (corn) costs .
Cost Structure
Model plant data and budgets were prepared to estimate the cost structure
of representative operations.
Fixed or plant related expenses were defined as those which do not
directly vary as a function of throughput. These expenses include:
maintenance and supplies
taxes and insurance
plant and labor overhead
sales, general and administrative
Additionally cost estimates were made for depreciation and interest
costs. Variable or production related expenses were defined as those
which will generally vary proportionately with throughput--in other
words, a fixed amount per unit processed. They include:
raw materials
power
water
process supplies, chemicals, etc.
operating labor
plant supervision and fringe benefits.
Fixed Costs - Indirect operating costs, as shown in Table 11-15, repre-
sents 7.3 of sales in the model plant. This is higher than some of the
other grain milling industries and is due primarily to large selling and
related costs. Corn dry millers typically spend large amounts on
product promotion in retail markets trying to differentiate their rela-
tively homogeneous products in the mind of the consumer.
Depreciation is a small percent of sales, 1.7 percent, as shown. This
reflects the fixed asset capital requirements of corn dry milling which
are relatively low compared to other input costs.
11-35
-------
Table II-14. Estimated replacement value and working capital require-
ments for a moderately large corn dry mill
Capital Component
Requirement
Replacement value of plant, equipment
and site
Total working capital
Replacement value of total assets
($000)
6,198.6
3,120.0
9,318.6
11-36
-------
Table 11-15. Estimated costs for a moderately large dry corn mill
Item $000 Percent
Sales 17,160 100.0
Raw materials 10,374 60.4
Direct operating costs 4,287 25.0
Indirect operating costs 1,251 7.3
Depreciation 285 1.7
Interest 120 .7
Total before-tax cost 16,317 95.1
11-37
-------
Interest costs are shown to be equal to .7 percent of sales for the
model plant.
Variable Costs - Variable costs for the corn wet milling industry
are also shown in Table II- 1 ^ for two major components: raw materials
(corn) and direct operating costs. Raw materials costs were estimated
to be 60.4 percent of sales and are the most dominant production cost
component.
Direct operating costs, representing 25 percent of sales, are the second
largest cost component. While not extremely high in comparison to
other grain milling industries, direct operating costs at this level indi-
cate that dry corn milling is a moderately complicated production process.
Distribution of Model Plant Financial Data
There was no known individual plant financial data concerning corn dry
milling in published sources. A variety of engineering and financial
guidelines were used to construct the financial characteristics of the
model plant. A summary of the corn dry mill financial characteristics
plus additional values and assumptions are presented in Table 11-16.
Selected financial data and ratios, such as from IRS business statistics,
Dun and Bradstreet, Standard and Poors, Fortune and other Sources
were used as guides and indicators of likely plant characteristics. The
1967 Census of Manufactures volume and value of shipment data was
used to estimate an average mix of end products and their relative
values. The result is a model of a moderately large size tempering-
degerminating corn dry mill.
Because the model plant is intended to reflect 'normal1 financial con-
ditions in the industry, average cost and price data for the 1967-1971
period were used. The current unsettled market conditions and recent
prices are not considered representative of normal conditions.
Ability to Finance New Investment
It is estimated that the corn dry millers' ability to finance new invest-
ment is comparable to the grain milling industry in general. No spec-
ific data are available to suggest either a better or worse ability. The
financial characteristics of the grain milling industry in general were
presented previously in the section on bulgur processing. Summary data
are presented in Table II-8 above.
11-38
-------
Table 11-16. Summary of financial data pertaining to the corn dry milling model plants
Values
Item
Utilization
Annual throughput
Sales
Raw Product Costs
Variable costs
Fixed costs
Cash earnings
Depreciation
Interest
Pre-tax income
Net income
After-tax cash flow
Replacement costs
Working capital
Current liabilities
Average Fixed Investment (AFI)
Pre-tax income /AFI
Net income /AFI
Cash flow/AFI
Net income/ sales
Units
%
1,000 bu
$1,000
$1,000
11
it
* 1
1 1
it
1 1
it
it
it
1 1
it
it
Ratio
ii
1 1
ti
15,000 bu/day
100%
3,900
8,580
5, 187
2,340
585
468
142.6
60
265.4
138
280.6
3, 100
1,716
686.4
2,579.6
. 103
.053
. 109
.016
30,000 bu/day
100%
7,800
17, 160
10,374
4,287
1,251
1,248
285
120
843
439
724
6, 199
3, 120
1,248
4,971
. 170
.088
. 146
.026
Remarks
260 days = 52 wks x 5 - 24 hr. days
260 days x 30, 000 bu x 100%
$2.20/bu. value, f.o.b., mill
$1.33/bu. No. 2, yellow corn,
Chicago, 1967-71 ave.
77% of operating cost, excluding corn
23% of operating cost, excluding corn
6% equipment; 4% buildings
.7% sales
30% equipment; 70% buildings
20% sales
40% total working capital
Note: Financial data for the 30,000 bu/day plant (moderately large) are presented in the text. Data for the
15, 000 bu/day plant are subsequently used in the Impact Analysis section below.
-------
Corn Dry Milling Pricing
Prices in the corn dry milling industry involve three principal products:
corn grits, corn meal and corn flour. These products comprise approxi-
mately 70 percent of the total weight of the corn milled. A small per-
centage of the remainder is processed into corn oil. The rest is sold
as hominy feed for animals.
Mills are highly flexible and can vary the percentages of the principal
products according to consumer demand. Typical yields in estimated
pounds per bushel processed are shown in Table II-17 . The product
mix can and does vary from day to day depending upon the quality of
corn being milled, the type of milling equipment used and the product
specifications sought.
Price Determination
Demand
A majority of the products of the corn dry milling industry are used
for human consumption. The byproducts are utilized as livestock
feed. Some products have limited uses in non-food industrial production.
The primary products: Corn meal, corn grits and corn flour are used
directly in home meal preparation. They are also used widely in the
food processing industry as ingredients in prepared mixes and other
food products. Besides being used as a food ingredient, corn flour
that has been specially processed is used in industry as a binder and
bonding agent. With the exception of corn oil, the fractions remaining
after the removal of the primary products are mixed together and sold
as hominy feed which is an ingredient with exceptional nutritional value
for many types of livestock feeds.
Table II-1? shows the per capita consumption of corn dry milling
primary pi oducts for the years 1950 to 1972. After many years of
decline, corn meal and flour show a slight increase in per capita
consumption,, Prepared cereal consumption has increased over the
years as consumer demand responded to the heavy use of advertising
by the industry. The per capita consumption of hominy and grits has
declined slightly after reaching a high point in the early 1960's.
There are two general classes of corn meal, whole corn meal and de-
germed corn meal. Whole corn meal is produced by grinding the whole
corn kernel. The resulting meal is packaged into small, consumer
sized packages. The whole corn meal may be sifted or bolted to remove
11-40
-------
Table II-17. Corn dry milling, products by percent and weight of
bushel of corn processed
(degerming system) _'
Yield as percent Estimated pounds
Final Products of bushel processed perjjushel processed
Corn grits
Corn meal
Corn flour
Hominy Feed
Corn oil
Shrinkage
Total
35.0
30.0
5.0
25.0
1.0
4.0
100.0
19.6
16.8
2.8
14.0
.6
2.2
56.0
— Brekke, O. L. , "Corn Dry Milling Industry, " in Corn: Culture,
Processing, Products. G. E. Inglett, editor, Westport, Connecticut:
The Avi Publishing Co. , 1970.
11-41
-------
Table II-18. Per capita consumption of selected corn
dry milling products , 1950-197 1
Year
1950
1955
1960
1965
1966
1967
1968
1969
1970
1971
Cornmeal
and
flour
11.8
8.7
6.6
6.5
6.9
7.2
7.3
7.4
7.4
7.4
Hominy
and
grits
2.6
2.7
4.0
4,5
4.4
4.2
4.2
4.2
4.2
4.2
Prepared
ce reals
1.5
1.7
1.9
2.2
2.2
2.3
2.3
2.3
2.3
2.3
Source: National Food Situation, U.S.D.A,
11-42
-------
particles of hull and some of the germ to improve the color and texture
of the final product. "Whole or bolted meal has a short shelf life because
of its high fat content, large surface area, and the action of naturally
occurring enzymes. Small mills located primarily in the South continue
to market whole corn meal to the local trade. Because it must be con-
sumed in a relatively short time after grinding, whole corn meal does
not lend itself to large corn dry milling operations or long channels of
distribution.
Degermed corn meal is produced in larger, more modern mills and has
improved color and shelf life because the oil containing germ is removed
before milling. Consumers prefer degermed corn meal in comparison
to whole corn meal for most uses because of its improved appearance. —'
Degermed corn meal is preferred by food processors for use in prepared
mixes and as an ingredient in other foods because of its appearance and
also because of its greater storage life. Table II- 19 shows the amounts
of both types of corn meal shipped. Although both whole corn meal and
degermed corn meal are declining as percentages of total corn meal
production, degermed corn meal is declining less rapidly. Most of the
decline in production of degermed corn meal can be attributed to the in-
creased production of corn flour.
The demand for corn flour has increased dramatically in the past few
years as the demand for snack foods and breakfast cereals has increased.
This increase in demand has shifted corn flour's role from that of a
byproduct to primary product. Some dry corn millers have found it
profitable at times to make 100 percent runs of corn flour at the expense
of meal and grits. Corn flour that has been gelatinized is also used in
non-food industrial applications such as a binder for sand cores for metal
casting and as a bonding agent in pelletizing ores.
Corn grits, sometimes called hominy grits, are the largest particle
size product from the corn dry milling process. When used directly
as a human food they are simply cooked in boiling water until the tex-
ture has a pleasing balance of soft grittiness and smoothness. The
greatest demand for corn grits has traditionally been in the South,
although the use of corn grits has been increasing in other parts of the
country.
As shown in Table II*!?, the use of grits for direct human consumption
as a percentage of total corn grit production has dropped substantially
because the demand for brewer's grits and flaking grits has increased
greatly in the past few years. Corn grits and flakes are used by brewer's
JL' Brockington, S. F. "Corn Dry Milled Products" in Corn: Culture,
Processing, Products. Editor, G. E. Inglett. Westport, Conn:
The Avi Publishing Co. , 1970, pp. 292-306.
11-43
-------
Table 11-19. Corn dry milling - shipments of products —
Amount Shipped
1958 1963 1967
1,000 1,000 1,000
Corn Product cwt % cwt % cwt %
Corn meal for human consumption:
Whole corn meal 4,900 31 5,042 27 6,543 25
Degermed corn meal 6,822 43 7,529 41 9,863 38
Cornflour 1,675 11 1,652 9 4,003 15
Corn meal for animal feed: 2,314 15 4,281 23 5,700 22
Total 15,711 100 18,504 100 26,109 100
Grits and hominy for human
consumption: 3,976 33 12,807 54 7,454 36
Brewer's grits and flakes 8, 112 67 10,813 46 13,028 64
Total 12,088 100 23,620 100 20,482 100
I/
— Does not include hominy feed and other byproducts or corn oil.
Source: Bureau of the Census, Census of Manufacters , U. S. Department
of Commerce, 1967.
11-44
-------
as a source of carbohydrate. Brewer's generally specify requirements
for moisture, fat content, crude carbohydrate extract, and granulation
when ordering corn grits from millers. In order to increase brewing
capacity, some brewers call for specially processed grit flakes with
varying degrees of sta rch modification to increase the rate of fermen-
tation. Flaking grits are also used in the manufacture of corn flakes and
snack type ready-to-eat foods. The demand for Brewer's grits and
flakes is directly influenced by the demand for the end food products
and according to all indicators the increase in demand should continue.
The corn kernel contains only about 5 percent oil and it is not economically
feasible to process corn just for the oil. Corn oil is a byproduct of corn
dry milling and the demand for corn oil has little if any effect on the
amount of corn processed. Due to the increasing awareness of the im-
portance of polyunsaturated fatty acids in the diet, the use of corn oil
in margarines and as- a salad and cooking oil has increased substantially
in the past few years. Because of the strong demand and relatively in-
flexible supply, the price of crude corn oil fluctuates erratically.
Besides the special uses for corn oil, demand and price is influenced
by competition from other grain and vegetable oil sources such as soy-
bean, cottonseed, peanut, palm and safflower oils.
Hominy feed is a manufactured product which includes corn bran,
corn germ from whit h oil has been expelled and part of the starchy
portion remaining a fler grits, meal, and flour have been removed.
It is a low protein, 1 i gh energy product that is a more economical
source of protein an-! energy than available feed grains for certain
livestock operations . Hominy feed prices are regularly reported
along with other feed ingredients competing in the same market. Some
of the competing feedstuffs include wheat millfeeds, rice bran, alfalfa
meal and feeding quality molasses.
Table II- 20 summarizes the level 01" •* for all corn dry milling
products by quantity and value of shipi^ as reported by the Census
of Manufactures. The total value of shipments for 1967 was $270.6 million
when 117 million bushels of corn were milled. In 1972 about 116 million
bushels of corn were milled, a slight decrease from 1967. The total
dollar value of shipments will be higher because of inflation but more
important are the shifts that have occurred in product mix. When
production figures become available for 1972 they will probably show
the trends continuing toward corn flour and Brewer's grits and away
from whole corn meal and grits other than for brewer's use.
11-45
-------
Table 11-20. Quantity and value of shipments by all producers in SIC 20413: Corn Dry Milling, 1963 and 1967
Proo.'-t
Corn Mill Products, Totali'
Total
Quantity
1963 1967
(million
_
pounds)
_
Shipments Including Interplant Transfers
Value
1963 1967
(million
201.6
pounds)
270. 6
Imputed Price per Pound
1963 1967
(cents per pound)
•• *.
Corn Products -Human Consumption
Whole Cornmeal
Degermed Cornmeal
Corn Grita and Hominy
except for Brewer's use
Corn Grits and Hominy
for Brewer's use
Corn Flour
Feed Products
Cornmeal for animal feed
Hominy Feed and other by-
products
Corn Oili/
Misc. Corn Mill Products
504. 2
752.9
1,280.7
1,081.3
-
428. 1
1,396.0
71.0
165.2
654. 3
986. 7
745.4
1,302. 8
400. 3
570. 0
1,896.0
71.0
-
22. 8
33. 8
48.0
38. 5
-
11. 8
31.4
8.6
6.7
36. 1
49-9
40. 0
53. 1
23.6
16.0
42.2
8. 8
• 9
.045 .055
.045 .051
.037 .054
.035 .041
.059
. 027 . 028
.022 .022
.121 .124
. 041
_'Adjusted to include the value of corn oil.
£/U.S. Fats and Oils Statistics 1950-71, ERS, USDA, Statistical Bulletin No. 489-
Source: Bureau of the Census, Census of Manufacturers , U.S. Department of Commerce, 1967.
-------
Supply
Supply of corn dry milling products in total has remained fairly con-
stant over the past few years. Use of corn dry milling products in direct
food use has declined significantly over the past twenty years but has
been offset by the growing use of the products as ingredients in pro-
cessed foods.
The supply of corn dry milling products is in direct relationship to
the amount of corn milled by the industry. The annual volumes milled
and the volumes as a percentage of the utilization of the total U.S. corn
crop are shown in Table 11-21 . The annual volume of corn processed,
although fluctuating slightly, has remained relatively constant during the
1967- 1972 period. The annual volume is generally a declining percentage
of the total U.S. corn crop.
Since the corn dry milling industry utilizes only a small and declining
portion of the total corn supply, the availability of corn as an input
does not constitute a limiting factor of production. Corn dry millers
do purchase shelled corn competitively in a market largely dominated
by feed manufactures and are affected by the same factors that influence
the feed market.
Prices
Prices for the end products of the corn dry milling industry are deter-
mined in four basic markets: (1) the market for home use of cereal
products, (2) the food processing ingredient market, (3) the fats and
oils market, and (4) the livestock feed ingredient market. These
separate markets are closely related because the same grains with
a few exceptions, compete in all four markets. Table II-?2 Compares
the price of corn to the prices for various end products of the corn dry
milling industry. In 1972 and 1973, livestock feed demands and unusual
increases in exports of U.S. grain commodities seriously disrupted
livestock feed markets causing similar disruptions in the other three
markets in which corn dry milling products were sold. The result was
a sharp increase in the price of corn, the basic input and in the prices
of the products.
Due to the present unsettled condition of the markets in which corn dry
milled products are sold, the unusual recent prices, and the need for
price data to assess the financial impacts of anticipated water pollution
control costs, average 1967-1971 prices were developed for the model
plant analysis. The estimated values used in this study are shown in
Table 11-23 along with the representative gross margin developed from
the data.
11-47
-------
Table 11-21. Total use of corn by the corn dry milling industry
1967-1972
Use, Dry Milling Percent of Total U. S.
Year Mill. Bu. Corn Utilization
1967 117 2.6
1968 114 2.5
1969 116 2.4
1970 119 2.6
1971 115 2.2
1972 116 2.0
Source: Feed Situation, ERS, USDA, 1967-1972
11-48
-------
Table 11-22. Corn Dry Milling - prices of input and products
Corn No. 2 Grits
Yellow Bulk
Chicago N.Y.
1967-71 ave.
1972 ave.
1973
Jan. 15
Feb. 15
Mar. 15
April 15
May 15
June 15
$/bu
1.33
1.36
1.74
1.66
1.69
1.74
1.80
2. 12
$/cwt
4.29
4.23
4.64
4.85
4.80
5.01
5.69
6.40
Meal
Yellow
N.Y.
$/cwt
4.79
5.49
6.00
6. 15
6.37
6.05
6.75
7.45
Hominy
Feed
Chicago
$/ton
41.64
54.50
60.50
58.50
59.00
54.00
60. 00
74.00
Corn Oil
Crude
Midwest Mills
f/lb
. 156
. 165
. 178
. 173
Source: Milling and Baking News
11-49
-------
Table II-2J. Corn dry milling, gross margin per bushel of corn
processed (degermining system)
Estimated Pounds
per bu. processed
Final Products
Corn Grits
Corn Meal
Corn Flour
Hominy Feed
Corn Oil
Shrinkage
Total
Cost of Raw Material —
Gross Margin
19.6
16.8
2.8
14.0
.6
2.2
56.0
Price per
pound —
.043
.048
.056
.OZ1
. 156
--
Value per
bu. Ground
.843
.806
. 157
.294
.094
--
2. 194
1.330
.864
— Brekke, O. L. , "Corn Dry Milling Industry, " in Corn: Culture, Processing
Products. G. E. Inglett, editor, Westport, Connecticut: The Avi Publishing
Co., 1970.
—' 1967-71 average prices. Source: Milling and Baking News, 1967-1971.
— Average price of corn grits and hominy for human consumption as well as
brewer1 s use.
—' 1967-71 average price No. 2 yellow, Chicago.
11-50
-------
III. SIC 2044: RICE MILLING
Rough or hulled rice is milled by one of two processes: (1) conventional
or regular milling (a dry process), (2) parboiled rice milling (a wet
steeping process). Only the latter is of concern from the standpoint
of water pollution control. The following discussion will therefore
be concentrated on parboiling plants in the Industry.
Industry Segments
At the beginning of 1973, there were a total of 42 rice mills in the U.S.
which were operated by 36 firms. Of this total, only 6 mills included
parboiling operations. Only one mill was strictly a parboiling plant and
the others had mixed operations, i.e., part of the production was dry-
milled and part was parboiled.
Two firms in the industry also produce precooked rice for distribution.
This is a post-milling process but waste water is generated and wastes
maybe a problem. No further analysis of precooked rice operations is
planned herein but these operations may warrant further study.
Types of Firms
The six parboiling mills are owned and operated by six separate firms.
Four of the firms are single-plant firms; and two have two mills each,
although only one mill in each firm is involved in parboiling. The five
parboiling mills are identified in Table III-l.
Precise estimates of mill size are not yet known, but relative to the
rest of the industry, the parboiling mills are all large operations. The
firms are consequently also considered large firms in the industry.
Regular rice mills in Arkansas and California are frequently cooperatively
owned b/ farmers and thereby integrated backward to the farm level. How-
ever, all parboiling mills but one are privately held and rice is competitively
purchased on a sealed-bid basis. Thus, the firms of concern are not inte-
grated backward to the farm level. On the other hand, the parboiling firms
tend to be integrated forward in terms of packaging sales and distributing
functions to retail markets or other outlets.
III-l
-------
Table III- 1. Listing of parboiling rice mills (and precooked rice
producers) and their plant locations
Number of Total Mills
Parboiling Plants and Location Operated by Firm
Blue Ribbon Rice Mills, Inc.
Box 2587
Houston, Texas 77001 1
P &L S Rice Mills, Inc.
Box 55040
Houston, Texas 77055 1
Comet Rice Mills, Inc.
(Subsidiary of Early California Industries, Inc.)
Box 1681
Houston, Texas 77001 2
Uncle Ben's, Inc.
Box 1752
Houston, Texas 77001 1
Riceland Foods
Box 927
Stuttgart, Arkansas 72160 2
Rice Grower Association of California 1
111 Sutler Street
San Francisco, California 94104
Plant: Sacramento, California
Precooked Rice Producers
Riviana Foods
Box 2636
Houston, Texas 77001 3
Uncle Ben's, Inc.
Box 1752
Houston, Texas 77001 1
Source: Rice Millers Association
III-2
-------
Four of the six firms are involved with milling only rice products,
one firm produces limited other food products, and one firm produces
both rice and soybean food products plus associated milling byproducts.
The level of diversification of the firms involved in parboiling is con-
sidered limited on the basis of the above descriptions.
A general indication of the relative importance and dominance of the
largest rice milling firms is shown in Table III-Z for the 4, 8, ZO and
50 largest companies as of 1967. Since that time about 18 companies
(with mostly small mills) have left the industry, but the data shown are
still reflective of the relative importance of the larger rice milling com-
panies .
Types of Plants
Most plants in the rice milling industry are said to range in capacity
from 150 to 800 cwt. per hour. The parboiling operations are believed
to involve plants with 500 cwt. per hour or more capacities, although
only in one plant is all rice parboiled prior to milling. Hence, par-
boiling must generally be considered in conjunction with regular milling
ope rations.
Only seven rice mills are known to have been built in the last 15 years,
•with the vast majority having been built more than 15 years ago. All
of the parboiling plants are older mills, although all but one has 'cur-
rent1 or modern equipment. Plant buildings are reported to be in good
shape. The age of the plant, per se, does not indicate the level of
technology employed in that worn equipment is typically replaced as
required •with modern equipment.
Rice mills are typically located in or near the areas of rice production.
Four Southern states (Texas, Louisiana, Arkansas and Mississippi)
plus California are the major rice producing states and also contain
almost all rice mills. Parboiling plants are also concentrated with
four in Texas (all in Houston) , one in Arkansas (in Stuttgart), and
one in California (in Sacramento).
The milling yield of head rice (efficiency) tends to be fairly uniform in
the industry. One characteristic of parboiling is to improve the head
rice yield somewhat with fewer broken heads because of the hardening
effect of parboiling on the rice kernel. Some sources have indicated
that the higher head rice yield due to parboiling is sufficient to essentially
offset the higher processing cost of parboiling.
Ill-3
-------
Table HI-2. Percent of selected statistics accounted for by the 4, 8,
and 50 largest companies ranked on value of shipments in
Indastry 2041: Flour and Other Grain Mill Products, 1967
20
Percent Accounted for by Largest Companies
Total -
No. companies 438
No. establishments 541
Value of shipments $2,457.4
All employees:
Number (1,000) 20.5
Payroll $142.9
Production workers:
Number (1,000) 14.8
Man-hours 33.2
Wages $ 95.5
Value added by manu-
facture $491.3
Capital expenditures , new:
Total $ 26.3
Structures and additions
to plant $ 6.3
Machinery £z equipment $ 20.0
Cost of materials $1,966.0
i' 4
X
7
30
23
27
24
25
30
30
19
24
18
30
8
X
12
46
36
41
37
37
44
54
42
56
38
44
20
X
19
70
56
61
57
57
65
70
68
68
68
70
50
X
27
89
76
81
77
77
83
87
84
84
84
89
— Values in millions except as indicated
Source: Concentration Ratios in Manufacturing,
Concentration Ratios , U.
Part 2,
S. Dept. Commerce,
Product
1971.
Class
IH-4
-------
Number of Plants and Employment by Segment
As indicated, only six parboiling rice mills are in operation in the
rice milling industry. Also, all are considered to be large mills rela-
tive to the remainder of the industry. Consequently, only a single
category of plants is required to characterize the types of plants which
will be impacted by water pollution controls, i.e. , large parboiling
rice mills.
Based on secondary data, employment in each parboiling mill is esti-
mated to average between 1Z5 and 175 employees. In 1967, based on
Census of Manufacturer's data, the thirteen plants associated with the
four largest companies had an average employment of 139 employees
per plant. Since 1967, the number of mills has continued to fall, but
the average mill size has increased.
Selection of Segments to Total Industry
Parboiling rice mills represent only 14 percent of the mills in the in-
dustry, i.e., 6 out of 42 mills . Inl971/7Z, these mills produced 11. 9
million hundredweight of parboiled rice out of a total milled volume of
86.0 million hundredweight. On a percentage basis, this represents
13.8 percent of the total volume milled. Comparison of the 13.8 percent
of volume milled with the 14 percent of parboiling plants in the industry
suggests that parboiling operations are only average in size. However,
five of the six parboilers also produce regular milled rice which would
add to the relative size of the overall plant operations-
Total industry employment is currently estimated as 4,000 employees.
The estimated employment in parboiling plants is 900 or 22. 5 percent of
the total (est. 150 employees per plant). Hence, approximately one-fifth
of the industry employment could be affected as a result of water pollution
abatement programs.
Likely Impacted Segments
As noted above, all six parboiling plants are considered to belong in a
single category of large mills with parboiling operations. The impacts
of water pollution controls are therefore expected to be relatively com-
parable among all parboiling plants.
Ill-5
-------
Wastewater is produced as drainage from the parboiling process and
also as waste from steam production. The former wastewater contains
considerable BOD, COD and dissolved solids loadings. Consequently,
treatment requirements are expected to be significant for the parboiling
plants.
The scope of study for the rice milling industry has been narrowed to
only 6 of 42 mills which have parboiling operations. The remaining
mills are conventional or regular rice mills (dry processing only) which
do not require water in their milling processes.
Financial Profile
Limited financial data on regular rice milling (dry process) were found
in the literature. _' However, no financial data on parboiled rice milling
operations, per se, were found. The former data have much applicability,
though, because the milling operations are similar once rough rice has
been parboiled and dried prior to milling.
Parboiled rice mills are known to be large in general ranging from
about 500 to 800 cwt. /hour capacities. Because plant financial data
were unavailable, the procedure was to synthesize a model plant situ-
ation. Only one size plant (large) is considered adequate to measure
the relative water pollution control impacts on parboiled rice operations.
Plants by Segment
Only large parboiled rice mills are of concern in this study. There are
6 such mills in the U.S.--4 in Houston, Texas, 1 in Stuttgart, Arkansas, and
one in Sacramento, California as previously identified. A model plant with a
500 cwt/hour capacity was chosen. This plant was on the lower end of the
large-size category, and the impacts expected in this situation should be as
great as expected for any larger size plant.
The model plant is said to operate at "100%" of capacity where 100%
is defined as 4,000 production hours (or 250 days x 16 hrs per day).
The level of production is often termed ' 100%' of capacity in the milling
industry with the understanding that a mill may exceed the 100% utilization
standard. Thus, 100% utilization is not unrealistic and it represents re-
cent milling experiences in the industry.
- Wilson Dale W. and David Volkin, "A Plan for Integrated Rice
Marketing in Louisiana," Service Report 130, Farmer Coop. Service,
USDA, Feb., 1973; and Eiland, J. C. and Theo. F. Moriak, Rice
Milling Costs in the United States, 1971/72,", ERS, USDA, Mar., 1973.
Ill-6
-------
Annual Profit Before Taxes
According to the model plant procedures and operating assumptions imple-
mented, the estimated annual pre-tax income and selected rates of return
on average fixed investment are as shown in Table III-3. After tax ROI
O
is estimated as 6. 0 percent and after-tax earnings on sales is 1.6 percent.
Average fixed investment, on which the above rates of return were
calculated, was derived by dividing replacements costs by two (an
estimate of average fixed investment) plus total working capital (current
assets) minus current liabilities (based on grain milling averages). This
average fixed investment value is intended to approximate invested capital
in reported financial data. After tax income was based on a. 48% tax rate
without either carry forward or back tax provisions.
The profitability of rice mill operations has varied in the past, most
often as a result of world rice market situations rather than changes in
domestic market conditions. There is currently a world rice shortage
and exports have increased sharply with reduced and below average
carryover stocks available for future distnbution.
Annual Cash flow
Estimated annual cashflow (after tax income plus depreciation) and the
ratio of cash flow to average fixed investment are as shown in Table
III-4 for the selected model plant. Depreciation for the mill was based
on a composite discount rate uf S. 9% (reported by Eiland and Moriak,
see above) for both buildings and equipment Also, buildings arc esti-
mated to equal about 40 percent of the plant investment, and equipment
about 60 percent.
The annual cashflow of $466,000 is also J.2% of sales. The percentages
shown appear comparable to other milling industry ratios.
Market (Salvage) Value of Assets
Large rice mills with modern equipment would have a reasonable salvage
value to other rice mill operators in the industry. Small mills would
have little value, as most small millers have generally sought to
consolidate operations to gain throughput economies of operation,, _'
Since this study is concerned only with larger operations, then there is
presumably a positive salvage value. This is confirmed by industry
sources, although no precise estimates were given. As a rough estimate,
salvage values of about 50 percent of book value for well-located and good
condition mills might be expected.
— Wilson and Volkin, op. cit. This analysis sought an integrated oper-
ation plan to improve the economic viability of rice milling in Louisiana.
Ill-7
-------
Table lli-3 .Estimated pre-tax income and rate of return on average
invested capital and after-tax return on sales for a large
parboiled rice mill
Financial measure Value
Pre-tax net income ($000) 463
Pre-tax ROI* (%) 11.6
After-tax ROI* (%) 6.0
After-tax return on sales (%) 1.6
*/ Average return on fixed investment calculated by financial statement
method.
Ill-8
-------
Table III-4.Estimated cash flow for a large parboiled rice mill
Financial measure Value
Annual cash flow ($000) 466
Cash flow on average fixed
investment (%) 11.7
III-9
-------
Capital Structure - The average fixed investment in parboiled rice
milling was estimated as $3. 994 million for the model plant described,
and sales were estimated as $14,760 million per year. This yields
sales of $3.70 for each $1.00 of investment. This level is rather
typical of agricultural processing industries where value added is
not especially high.
The capital required to generate such a ratio for the model parboiled
rice mill are as shown in Table III-5. The replacement value of $3.813
million assumes a breakdown of 60% equipment and 40% for buildings
and site. Total working capital of $3. 480 million is estimated to equal
25% of fixed and variable operating costs, including raw product (rough
rice) costs.
As shown, working capital requirements are comparable in magnitude
to the plant investment capital requirements. This occurs because
relatively expensive inventories of grain must be purchased and stored
prior to processing, and sales may remain as accounts receivables for
30-60 days following delivery.
Cost Structure - Model plant data and budgets were prepared to estimate
the cost structure of representative operations.
Fixed or plant related expenses were defined as those which do not directly
vary as a function of throughput. These expenses include:
maintenance and supplies
taxes and insurance
plant and labor overhead
sales, general and administrative
Additionally cost estimates were made for depreciation and interest costs.
Variable or production related expenses were defined as those which will
generally vary proportionately with throughput --in other words, a fixed
amount per unit processed. They include:
raw materials
powe r
wa te r
process supplies, chemicals, etc.
operating labor
plant supervision and fringe benefits.
Ill-10
-------
Table III-5. Estimated replacement value and working capital requirements
for a large parboiled rice mill
Capital component Requirement
($000)
Replacement value of plant, 3,813
equipment & site
Total working capital 3, 480
Replacement value of 7, 293
total assets
III-11
-------
Fixed Costs - Indirect operating costs, as shown in Table I1I-6, for
the budgeted parboiled rice mill represent 3.8 percent of sales. The
dominance of rough rice purchase costs (75, 1% of sales) accounts for
this relatively low cost component. Again, this type of cost structure
is common among agricultural processing industries.
Depreciation is also a small percent of sales, i.e. , 1. 5% of sales
as shown. Accordingly, fixed asset capital requirements of rice
milling, as reflected in annual depreciation estimates, are relatively
low relative to other input costs.
Interest costs as estimated are equal to 1.0% of sales. The basis for
the interest cost was $.,076 per cwt. of rough rice milled. This cost
reflects interest allowances both for fixed assets and borrowed working
capital.
Variable Costs - Variable costs for rice milling are also shown in
Table III-6 for two major components: raw materials (rough rice)
and direct operating costs. Raw materials costs, as noted, were
estimated to equal 75. 1% of sales. This percentage for parboiled rice
is lower than in regular rice milling, however, because processing
requirements and costs are greater due to parboiling.
Direct operating costs, representing 15.4% of sales, are the second
largest cost component of rice milling. In general, direct costs in the
large-scale plant model are expected to be relatively (as well as absolutely)
lower than would be the case in smaller plants. In subsequent study,
further consideration will be given to scale economies even among the
larger mills, e.g., 500 cwt. /hour and up.
Distribution of Model Plant Financial Data
The most useful individual rice milling plant financial data were limited
to the two sources cited. These data were partially but not completely
applicable since the studies involved only regular rice mill operations.
Even so, they did serve as a basis for constructing the representative
plant model for a large-scale parboiled rice mill.
It was intended that only one model plant be constructed since all par-
boiled rice mills are large. However, one would still like to complete
some sensitivity analyses to assess critical variables in the parboiling
operations. In the impact analysis phase, such analyses are expected.
Ill-12
-------
Table III-6. Estimated costs for a large parboiled rice mill
Item $000 Percent
Sales 14,760 100.0
Raw materials 11,080 75.1
Direct operating costs 2,272 15.4
Indirect operating costs 568 3. 8
Depreciation 225 1.5
Interest 152 1.0
Total before-tax cost 14,297 96.9
III-13
-------
To further illustrate the financial characteristics pertaining to the par-
boiled rice milling model plant, a summary of key financial data are as
shown in Table III-7.
The Rice Millers Association, an industry association, represents
most rice millers, especially in the southern states. This Association
was quite cooperative in supplying general industry information for this
study to the extent possible. Two limitations were: (1) the association
does not collect or analyze financial data of individual plants, and (2)
disclosure guidelines prohibit release of individual plant production
and distribution reports. Aggregate production and distribution data
are published by the association and this information is publicly available.
Under the time constraints of this study it has not yet been possible to
verify the production and financial data presented for the model plant.
Wherever data were missing, it was necessary to make personal judg-
ments and approximations. A variety of selected financial data and
ratios, such as from IRS business statistics, Dun & Bradstreet, Fortune
and other sources were used as guides and indicators of likely plant char-
acteristics. Census of Manufactures reports (of SIC 2044 in particular)
were also helpful.
Because the model plant is intended to reflect 'normal1 financial con-
ditions in the industry, average cost and price data (prices for 1968-71)
were used. This was especially critical in that only very recently have
rice prices increased dramatically to record highs in face of world rice
supply shortages. Current and/or near term market conditions are
simply not considered representative of normal conditions.
Ill-14
-------
Table III-7. Summary of financial data pertainin > to the
parbo led rice nilling node! plant
Item
Unils
R
-rks
Utilization
Annual throughput
Sales
Raw product costs
Variable costs
Fixed costs
Cash earnings
Depreciation
Interest
Pre-tax income
After tax cash flow
Net income
Replacement cost
Working capital
Current liabilities
Ave. -fixed investment
Pre-tax income/AFI
Net income/AFI
Cash flow/AFI
Net income/sales
%
. , ' 00 cwt.
; ] ,'100
! 1
! 1
1!
1 I
1 !
! t
I t
1 1
"
I 1
1 t
I |
(AFI)
Ratio
! f
1 f
ft
00%
2 iOO
'4, ,'60
11 ,1180
2, 272
^68
£40
225
152
463
466
241
3,813
3;480
1,392
3,994
. 1159
. 0603
. 1167
. 0163
250 -lays x In rs - 100^
R o u . h r i c r , e cl ba s i s
$7. -18/cwt. value (rou^h)
$5. ^47 cwt t . b. mill
H0% jpf-rat. ie "ost excl. r. rice
20% operating cost excl. r. rice
5. 9% replai e.nent cost
$. 076 per cwt
25% operating costs
40% total working capital
III-15
-------
Ability to Finance New Investment
General requirements for financing new investment were set forth in the
earlier section on bulgur, along with general financial data for the mill-
ing industry in general (see Table II-8 ).
The only financial data currently available on rice milling plants is in a
study entitled, A Plan for Integrated Rice Marketing in Louisiana. LJ
The report analyzes six mills, with no company identification, and presents
condensed operating statements and balance sheets. Data are for 1969,
1970 and 1971 and permit an evaluation of the financial structure and
strength of this particular group of mills,, Since these mills are not en-
gaged in parboiling, they are not strictly comparable to mills which would
be impacted by pollution control requirements.
The combined mills had net sales of $35. 7 million to $41. 7 million during
each of the three years, 1969-1971. The gross margin on sales ranged
from 12.9 percent in 1970 to 14.8 percent in 1969. Three of the six mills
lost money in 1969, with the composite loss amounting to $79,000. Four
mills showed losses in 1970 with a composite loss of $195, 000. All six
showed a pre-tax profit in 1971 totalling $485, 000 or 1.2 percent on sales.
Because of prior years' losses, after-tax income is unknown.
The six mills had a total investment of $7. 1 million at the end of 1971,
with $4. 4 million in net worth. Total debt amounted to $2.7 million or
61 percent of net worth. Long-term debt was only 7 percent of net worth,
an extremely low ratio in comparison to other manufacturing industries.
The $485, 000 before-tax profit in 1971 amounted to 11 percent of net worth.
In terms of cash flow, the mills reported $342, 000 to $371, 000 in deprecia-
tion, or 4.4 to 5. 3 percent of total assets. If the 1971 level of profits can
be maintained, the mills will be in a relatively strong cash flow position.
Continued profits combined with the extremely low debt situation, would
place these mills in an excellent position to finance new investment.
It must be recognized, however, that the 1971 turn-around in operations
from losses to profitability does not constitute a trend. Obviously, if
operating losses reoccur in the near future, this group of mills could not
finance new investment. Data are not available for these mills for 1972,
but the strength of world rice prices and U. S. exports indicate that the
industry should be in a stronger position than in 1971.
U Dale W. Wilson and David Volkin, A Plan for Integrated Rice Marketing
in Louisiana, Farmer Cooperative Service, USDA, Service Report No.
130, February, 1973.
Ill-16
-------
As noted previously, these six mills are not strictly comparable to mills
which parboil rice. The value of any comparison depends upon the relative
financial condition of other mills. It seems reasonable to assume that the
parboiling mills are larger and more profitable than the six Louisiana
mills. They are better located for export markets. If they are earning at
or above the level of the six mills in 1971, they should have no difficulty
in financing new investment for pollution abatement. Internally generated
funds (net profits and depreciation) and borrowing capability would appear
adequate. Since no financial data are available on the other firms, however,
any conclusions as to financial condition remains pure conjecture. Under
the present time limitations, no valid estimate of ability to finance new
investment is possible. The contractor intends to seek additional financial
data on rice milling for inclusion in the Phase II report.
Pricing
Price determination and expected price changes in the rice milling in-
dustry are related first to various end products and byproducts of rice
milling and their respective markets. As illustrated in Figure III-l,
the main milled rice components are hulls, head rice, brokens (second
heads, screenings and brewers), bran and polish. A growing export
demand for brown rice (dehulled only) also exists. Each component of
total supply maybe influenced differently in its respective markets given
a change in supply of total milled rice (and associated byproducts).
Price Determination
Both demand and supply conditions are summarized below to gain an
understanding of how prices are determined for rice.
Demand
In recent years total shipments of U.S. milled rice (excluding only
hulls, bran and polish) have been broadly: 60 percent to exports and
40 percent to domestic trade. Foreign markets are quite important
in rice marketing as suggested by the high proportion of export ship-
ments. A major factor in the export market has been that approximately
two-thirds of total exports have been financed under Title I of P.L. 480.
The balance has been dollar exports including shipments to U.S. terri-
tories. In addition, until recently (December, 1972), export sales were
elgible for export payments equal to the difference between U.S. and
world prices for rice. Since December, 1972, world prices have risen
above U.S. prices (due to world supply shortages in general) and export
payments have been discontinued until further notice.
Ill-17
-------
m-1. RICE MILLING PROCESS,
APPROXIMATE PRODUCT PROPORTIONS, A^D MAIN USES
ROUGH RICE 100 IBS
MILLING
PLANTING SEED
WHITE RICE^ 70 LBS
BROWN RICE 80 LBS
EXPORTED BULK
MILLING COMPLETED BY
IMPORTING COUNTRY
HUMAN FOOD
DOMESTIC
EXPORT
TERRITORIES
BYPRODUCTS 10 LBS
DOMESTIC LIVESTOCK FEED
EXPORT LIVESTOCK FEED
HULLS
LITTLE VALUE - MOSTLY BURNED
• HEAD RICE
DOMESTIC CONSUMER PACKAGED
EXPORT CONSUMER PACKAGED
EXPORT BAGGED
CfcREAL PROCESSORS' BULK
SOUP PROCESSORS
r LARGE
SECOND HEAD
& SCREENINGS
BROKEN 15 LBS
DOMESTIC PROCESSORS
EXPORT BLENDS
BEER
CEREAL
EXPORTS
BABY FOOD
CANNED RICE
PRODUCTS
- BREWERS
BEER
• BRAN
LIVESTOCK
FEED
POLISH
LIVESTOCK
FEED
BABY FOOD
20 LBS
55 LBS
10 LBS
5 LBS
7 LBS
3 LBS
TOTAL 100 LBS
I/ WHITE RICE IS COMMONLY REFERRED TO AS TOTAL MILLED PRODUCT.
-------
A characteristic of the export demand for U.S. rice is that it is an
elastic demand (-1.57), whereas, in contrast, the domestic demand is
inelastic (-. 14 in 1970). .!/ Under these conditions it is generally de-
sirable for U.S. producers and millers to export any increases in supply.
Any increase in domestic supplies would result in lower returns to the
industry.
U.S. milled rice exports have been shipped to numerous countries
throughout the world. Since 1970, major markets have included
South Vietnam, Korea, Indonesia, EEC, and South Africa. Most ex-
ported rice is either long grain or medium grain; and, further, almost
a third of the exports in recent years was specialty rice, i.e. , parboiled,
precooked, brown and flavored rice.
Rice distribution within the U.S. involves three broad use categories:
(1) direct food use, (2) processed food use, and (3) use by brewers-
Rice millers distribute the bulk of the rice, but repackagers (17 in 1971)
and government agencies are also involved in marketing and distribution
of rice for use by the civilian population within the United States. A
summary of the amount distributed by use and distributor for the 1969-70
marketing year (the most recent data available) was as follows (see
Table III-8).
Most of the rice distributed to food processors was shipped directly
from mills and thus mills are the dominant distributors of milled rice
within the U.S.
Within the processed food use category, the types of main products pro-
cessed are (1) cereal - 10.2%, (2) soup - 1.0%, (3) babyfood - 0.7%,
(4) package mixes - 1.4%, and (5) other - 1.2%. (The percentages apply
to the 1969-70 marketing yea r and total to 14. 5% as indicated above.)
Byproducts of the rice milling industry include rice bran, rice polish..
and hulls. They are most often sold as rice millfeed which consists of
all byproducts from rice milling combined in the proportions produced..
normally 61% hulls, 35% bran, and 4% polish. Rice bran is also sold
separately for use as a livestock feed ingredient, as a source of vitamins
by the pharmaceutical industry or as a source of extractible oil. Rice
polish is used by the food industry in preparation of infant foods and
special dietary foods. Rice hulls have few uses other than as a livestock
feed ingredient. Nearly half of the hulls resulting from rice milling are
not used and represent a disposal problem for the industry.
— Grant, W. R. and D., So Moore, Alternative Gove rnment Rice jPrograms,
An Economic Evaluation, ERS, USDA, AER No. 187. June'l970.
Ill-19
-------
T'ablt- 111-8. Distribution of rice within the U.S. by major use
and distributor, 1969-70
Amount
Use and Distributor
1, 000 cwt
Percent
Di reel food
Mills
Repackagers
Gove rnment
13,012.8
10,538.7
1,643. 1
831.0
63. 1
51. 1
8.0
4.0
Processed food
Mills and repackagers
Beer
Mills
2,994.9
4,631.2
14.5
22.4
Total
20,638.9
100.0
Source: Eiland, J.C. and Theo. F. Moriak, Distribution Patterns for
U.S. Rice, 1969-70, USDA, ERS-484, May 1972.
111-20
-------
The total demand (both domestic and export) for parboiled rice has
been increasing in recent years. In 1971-72, about 73 percent of all
parboiled rice was exported. This percentage is greater than the per-
cent of all rice exported which reflects an increasing preference for
parboiled rice in export markets. A summary of the relative importance
of parboiled rice in both domestic and export markets is shown in
Table III-9 . These data represent shipments of milled rice from
all southern states in 1971-72.
Also shown in Table III-9 are brown rice and regular milled rice
shipments. The export demand for brown rice is also growing due to
the availability of mills in the importing counties plus the general waiver
of import taxes or levees on brown rice which favors final milling in the
importing country.
Supply
The supply of rice produced in the U.S. is largely controlled via an
acreage allotment and price support rice program administered by the
USDA. Under this program rice growers are limited to an annually
specified acreage which in aggregate effectively controls production.
In conjunction with the allotments, prices are indirectly supported
through establishment of a Commodity Credit Corporation support
price and loan rate program. Rice producers may place part or all
of their crop under loan with the subsequent option to either redeem the
loan (given rice prices above the support level) or make actual deliveries
to CCC and receive the full support price.
For the 1970-72 period, total acreage allotments in the U.S. were
about 1.8 million acres and the national average support price has
ranged from $4. 86 to $5. 27 per cwt. Because of a growing world
shortage of rice, the U.S. acreage allotment was increased in 1973
by 10 percent to about 2.0 million acres. Also, the 1973 support price
(based on 65% of parity) is expected to average $5.63 per cwt.
Rice production in the United States is heavily concentrated in four
southern states (Arkansas, Louisiana, Mississippi and Texas) and
in California. Reported harvested acreage and production of rough
rice by major states is shown for 1971 and 1972 in Table III-10
Also shown is the percentage of total production in each state.
The percentage production of rice by class for the 1969-72 period has
averaged as follows:
Class Percent of Production
Long grain
Medium grain
Short grain
Total U.S.
Ill-21
-------
Table III-9. Percentage distribution of shipments of brown rice,
parboiled rice and regular milled rice
from Southern States, 1971-72
Type
B rown Rice
Parboiled Rice
B rown
Regula r
Regular Milled Rice
Total -
Percent of
Total
Shipments
16.0
4.0
13.9
66. 1
100.0
Domestic
Domestic
0.7
1.3
27.4
44.6
33,4
-Export
Export
99.3
98.7
72.6
55.4
66.6
Percent
Total
100.0
100.0
100.0
100.0
100.0
- Total volume shipped in 1971-72 was 52, 189,379 cwt.
Source: Statistical Statement, Rice Millers Association, July, 1972.
111-22
-------
Table III-10. Rough rice production and harvested acreages, by States, 1971 and 1972
Harvested acreage
State
1971
1972 I/
--1,000 acres--
Southern States
Arkansas
Louisiana
Mississippi
Texas
Missouri
Total Southern
h- 1
^ California
u>
Total United States ?_7
441
522
51
468
5
1,487
331
1,818
441
522
51
468
5
1,487
331
1,818
197:
1, 000 cwt
22,
19,
2,
23,
68,
17,
85,
271
836
346
868
235
556
212
768
Production
!
% of total
25.
23.
2.
27.
.
79.
20.
9
1
7
8
3
8
1
197
1,000 cwt.
21,
19,
2,
22,
66,
18,
85,
939
967
325
122
218
571
583
154
2 I/
% of total
25.
23.
2.
25.
.
78.
21.
8
4
7
9
3
1
8
— Preliminary
—'Total U. S= acreage and production reported by SRS, Exc hides acreage and production in minor
Southern States.
Source: Rice Situation. ERS, USDA. March, 1973.
-------
There is considerable variation among states, however, in the percent
of each class of rice produced. The 1969-72 average percentages of
each class of rice by state are as shown in Table III-11 . Texas and
Arkansas produce the major portions of long grain rice; Louisiana and
California are the major producers of medium grain rice, and California
is almost solely responsible for the production of short grain rice.
The supply and distribution of milled rice in the U.S. since 1965 is as
shown in Table 111-12 „ The main use of milled rice is for exports,
ranging from 56. 5 to 61.4 percent of the total supply for the periods
shown. Civilian consumption is the next largest use-category •which
accounted for 21.3 to 25.8 percent of the annual supplies (civilian con-
sumption on a per capita basis was 7.0 pounds in 1971, but it has ranged
from 6.7 to 7.7 pounds in recent years). Other distribution outlets for
milled rice on a percentage basis are also shown.
Prices
Approximately 60 percent of the rice produced in the United States
is exported. The price of exported rice is therefore directly in-
fluenced by the world import demand for rice, which is elastic. Until
December 21, 1972 the world price of rice was lower than the United
States domestic price; however, U.S. rice exporters were compensated
(via an export payment) for the price differential. For example, in
1969 the U.S. export payment was $. 93 per cwt. for long grain rice.
In 1970 the payment was $1.21 per cwt and in 197 1, $2.35 pe r cwt.
Late in 1972 the world price of rice moved up sharply due to the normal
2. 5% annual growth in consumption, adverse weather in major rice
producing countries, and disruptions from military conflicts. This
condition of tight supply is expected to continue into 1974, creating a
favorable atmosphere for the export sales of the increased 1973 milled
rice production. —'
The larger U.S. rice millers often negotiate their own export sales
directly with the importing nations. The medium sized and small
rice millers generally sell to established internal exporters, such as
Continental Grain Company or Connell Rice and Sugar Company, who
then perform the exporting functions.
- Rice Situation, ERS, USDA, March, 1973.
Ill-24
-------
Table III-11.Percent of rice production by class by state.
1969-72 averages
State
Arkansas
Louisiana
Mississippi
Texas
Minor States
California
Total
Source: Rice Situation,
Long grain
38.0
12.7
5.5
43.5
. 3
--
100.0
USDA, ERS, Ma
Percent by Class
Medium grain
16.7
43.6
0. i
8.7
.2
30.7
100.0
rch 1973
of Rice
Short grain
2.6
--
—
0. J
97. 3
100.0
m-25
-------
Table III-12. Supply and distribation of milled rice, United States, average 1965-70, 1970 and 1971.
i
[NJ
Item
Beginning carryover
Mill production
Imports
Supply
Food
Shipments to territories
Used by military
Civilian consumption
Total food
Used by brewers
Exports
Total disappearance
Ending carryover
Year
Average
1965-70
2, 190
59,644
287
62, 121
2,867
159
14,917
17,943
4,246
37,616
59,805
2,316
beginning
1970
2,328
56,870
1,064
60,262
2,630
227
15,557
18,414
5,000
34,096
57,510
2,752
August
1971
2,752
64, 148
803
67,7-03
3,962
183
14,433
18,578
5,407
41,522
65,507
2,196
Percent
Average
1965-70
3.5
96.0
.5
100.0
4.6
.3
24.0
28.9
6.8
60.6
96.3
3.7
of total
1970
4.0
94.3
1.7
100.0
4.4
.4
25.8
30.6
8.3
56.5
95.4
4.6
supply
1971
4. 1
94.7
1.2
100.0
5.8
..3
21.3
27.4
8.0
61.4
96.8
3.2
Source: Rice Situation, ERS, USDA, March, 1973.
-------
The domestic demand for milled rice is inelastic but total demand is
also affected by the prices of substitute foods such as potatoes, dry
beans and peas, macaroni and other cereal products. Although rice
is considered a staple food item in the United States, it is not a staple
in the same sense as in Asia or other countries around the world.
Per capita consumption of milled rice in the United States declined
9 percent in 1972 to 7 pounds per person. This still represents an
upward trend, however, from I960, 6.1 Ibs/person, and 1970, 6.7
Ibs/person.
The larger rice mills generally have the necessary facilities to package
milled rice in consumer sized packages. Most package their own labeled
brands and distribute both regionally and throughout the United States.
The larger mills also package under various private labels for wholesale
and retail sale.
The medium and small rice millers tend to export most of their milled
rice production or sell to repackagers to avoid the high cost of packaging.
The rest of the products of rice milling are treated virtually as byproducts.
Large second heads and screenings are generally sold to food processors.
Brewers rice is a grade of smaller broken rice used in making beer.
Bran, polish and hulls must compete as a millfeed. No attempt will be
made here to review price trends of all rice milling products and by-
products. However, estimated values for all products f.o.b. mills,
as used for the model plant are as shown in Table III-13. These are
estimated 1968-72 averages. Also shown are the average percentage
yields of end products from rice milling (parboiled, which has a higher
head rice yield). As previously mentioned, brown rice is also produced,
primarily for export. However, no allowance for this -was included
in the plant analysis.
As a final overview summary of general conditions now prevailing in the
U.S. rice industry, Figure III-2 is noted. This shows average rough
rice prices received by farmers since 1965/66. Since the fall of 1972
a dramatic change in prices occurred. The reasons were explained
above. -Similar price changes have occurred from the farm to the con-
sumer level.
111-27
-------
Table III-13. Rice Milling. Gross margin on parboiled rice
Estimated values
Percent breakdown Derived value Per cwt
Product Initial Intermediate Finals/ per poundJL/ Rough rice
Hulls 20 20 20 . 0036!/ . 07
Brown Rice 80
White rice 70
Head 6o£/ . 1095 6. 57
Broken
Large second ?£' .058 .41
head and
screenings
Brewers . s!/ . 047 . 14
Byproducts 10
Bran 7 .019 -13
Polish 3 . 0191/ -06
100 100 100
Total sales (estimated value per cwt. rough rice milled)
Cost of raw materials plus freight cost£/
Gross Margin
_' Values are estimated f. o.b. mill averages for 1968-72
J*/ End products
3/ Estimated milling averages for parboiled rice. Head rice percentage is
higher than regular milled rice due to decreased breakage of the harder
parboiled rice. Normal rice milling percentages are 55% head, 10%
large second head and screenings, and 5% brewers.
_' Price of hulls imputed from price of rice millfeed. Millfeed composition is
61% hulls, 35% bran, and 4% polish.
— Polish price assumed equal to bran price
_' Based on 1968-72 average price of rough rice of $5.42 per cwt. plus $. 12
cwt. freight cost for rough rice as estimated by Eiland, J.C. and T. F. Moriak,
"Rice Milling Costs in the United States, 1971/72", ERS, USDA, March, 1973.
111-28
-------
Figure III-2
$ PER
6.90
5.70
4.50
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5.70
4.50
4
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ROUGH RICE PRICES RECEIVED BY FARMERS
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III-2 9
-------
-------
IV. SIC 2046: WET CORN MILLING
The corn wet milling industry is principally made up of firms engaged
in milling and refining corn (or milo) by the wet process. This study
is limited to those firms. Establishments which manufacture starch
from other sources (wheat, potatoes, etc.) which are included in
SIC2046 have been excluded from this analysis.
Industry Segments
Currently there are seventeen plants operated by twelve companies
which comprise the corn wet milling industry. There is a wide range
in the size of operations among plants and a broad range of final products
produced. However, all plants have wastewater emissions and none can
therefore be excluded from this study.
Types of Firms
A listing of the twelve companies or firms in the corn wet milling industry
is as shown in Table IV-1. Three firms, i. e. , CPC International, A. E.
Staley Manufacturing and Clinton Corn Processing (a Division of Standard
Brands) are dominant firms in the industry. Other major producers are
American Maize -Products , Anheuser-Busch, Hubinger, National Starch
and Chemical and Penick and Ford- Most of the major firms have diversi-
fied operations primarily involving other food and kindred products.
On an industry wide basis, the corn wet-millers produce over 500 end-
use products, ranging from corn starch to antibiotics made from steepwater
concentrate. The product mix is varied among companies dependent on
product finishing department configurations within each plant.
IV-1
-------
Table IV-1. Listing of corn wet milling firms and plant locations, 1973
American Maize-Products Company
250 Park Avenue
New York, New York 10017
Plant: Hammond, Indiana 46326
Anheuser-Busch, Inc.
P.O. Box 1810 Bechtold Station
St. Louis, Missouri 63118
Plant: Lafayette, Indiana 47902
Cargill, Incorporated
Cargill Building
Minneapolis, Minnesota 55402
Plant: Cedar Rapids, Iowa 52401
Dayton, Ohio 45400
Clinton Corn Processing' Company
(A Division of Standard Brands Inc.)
Clinton, Iowa 52732
The Hubinger Company
Keokuk, Iowa 52632
Plant: Keokuk, Iowa 52632
National Starch and Chemical Corp.
750 Third Avenue
New York, New York 10017
Plant: Indianapolis, Indiana 46206
Penick and Ford, Limited
(A subsidiary of VWR United Corp }
Cedar Rapids, Iowa 52406
Plant: Cedar Rapids, Iowa 52406
A.E. Staley Manufacturing Compa-.
Decatur, Illinois 62525
Plants: Deratur, Illinois 62525
Mornsville, Penn. 19067
Corn Sweeteners, Inc.
P.O. Box 1445
Cedar Rapids, Iowa 52406
Plant: Cedar Rapids, Iowa
52404
CPC International Inc.
International Plaza
Englewood Cliffs, New Jersey 07632
Plants: Argo, Illinois 60501
Pekin, Illinois 61555
North Kansas City, Missouri 64116
Corpus Christi, Texas 78408
Grain Processing Corp.
Muscatine, Iowa
Plant: Muscatine, lo .va.
Dimmitt Corn Division
Amstar Corporation
Dimmitt, Texas 79027
Plant: Ditmmitt, Texas
79027
Source: Corn Refiners Association
IV-2
-------
The major products produced by the corn wet millers are categorized
a s foil o\v s:
Corn Oil
• Expellfcr
• Extracted
Corn gluten feed and meal
Corn germ
Cake meal
Steepwater Concentrate
V ita m i n s
Antibiotics
Chemical manufacture
Corn Starch
Regular
' Modified
• Dextrin
Corn Syrup
• Regular
• Carbon treated
Ion exchange treated
Corn Sugar
- Dextrose
• Sugar solids
Lactic acids
Enzymes
Alcohol
Distilled grains
Types of Plants
Also shown in Table IV-1 are the seventeen plant locations of the twelve
corn wet milling firms. A summary of plant locations by state is as
follows:
No. Plants
State
Iowa
Indiana
Illinois
Missouri
Texas
Pennsylvania
Ohio
As indicated, most corn wet mills are located in the midwest. The sizes
of plants range from 15,000 to 115,000 bushels capacity'per day. At this
time, most individual plant capacities are not known.
IV-3
-------
Nine of the operating mills were built in the early part of the century
and have an average age of more than 60 years. One (1) mill was built
in the late 1940's, one in the early 1950's and six were built in the
1960's. The older plants are the largest and they comprise over 77
percent of the total capacity in the industry.
The level of technology used within plants is rather constantly changing
as machinery and equipment is replaced. New capital expenditures in
the industry were reported is $18. 1 million in 1958, $26. 1 million in
1963 and $40. 5 million in 1967. In 1967, $30. 8 million of the total
capital expenditures was for machinery and equipment, and $9- 7 million
was for structures and additions to plants. Hence, substantial improve-
ments and modernization of plants is generally indicated.
Corn wet millers are not integrated backward to the farm level. Grain
corn (No. 3 Grade or better) is purchased competitively in commodity
markets by the millers. In total, corn wet millers purchase about 5%
of the U.S. corn crop each year for processing. As such, corn prices
are determined principally by other factors, e.g. livestock feed demand
and corn supply levels, rather than being materially affected by corn
wet milling demands. In 1972, the corn wet millers processed a total
of about 250,000,000 bushels of corn.
Number of Plants and Employment by Segment
j .
It is anticipated that differential economic impacts of water pollution
control might occur among various plants on the basis of size of operation.
For this reason, three size classes are tentatively proposed:
Bushels Capacity/Day
15,000 - 50,000
51,000 - 80,000
81,000 - 115,000
Depending upon the subsequent availability of sufficient data, analyses of
economic impacts are planned for each size class of plants.
Total employment in the wet corn milling industry (SIC2046) was estimated
as 14, 100 in 1967 and 13, 500 in 1970 by the Census of Manufactures. A
further indication of employment by individual establishments is shown
in Table IV-2. These data are for 1967 and as shown a total of 45 establish- .
ments is indicated- Industry sources indicate that the smaller establishments
IV-4
-------
Table IV-Z. Number of establishments by size. SIC2046: Wet Corn Milling
Size Class by
Number of
Employees
1-4
5-9
10-19
20-49
50-99
100-249
250-499
500-999
1,000-2,499
2, 500 or more
Total
Industry
Number of
establishments
9
4
9
4
5
2
1
5
5
1
45
2046
Percent of
total
20. 0
8.9
20.0
8.9
11. 1
4. 5
2. 2
11. 1
11. 1
2. 2
100. 0
Source: Bureau of the Census, Census of Manufacturers, 1967, U.S.
Department of Commerce.
IV-5
-------
shown are primarily wheat starch and potato starch operations which
are included in SIC2046. Actual corn wet millers would typically have
more than fifty employees.
Selection of Segments to Total Industry
All corn wet millers are proposed for inclusion in a representative
segment (small, medium or large) of the industry. It is believed that
no plant should be excluded because of the absence of water pollution
problems. That is, water pollution control is a concern for all corn
wet milling operations.
It is noted again, however, that a portion of SIC2046 is excluded from
this initial study. In particular, wheat starch and potato starch plants
are excluded because of their limited operations. For example, it is
estimated that over 93 percent of the total U.S. production of starch
comes from corn. The relatively small balance is produced by wheat
and potato starch operators. Wheat starch plants utilize low grade
wheat flour (clears) in their plants to produce both starch and gluten.
Potato starch plants utilize low grade or cull potatoes and often these
plants only operate seasonally when cull potatoes are available.
Likely Impacted Segments
Each size class of the corn wet milling industry is expected to be
significantly impacted due to increased expenditures for water pollution
control. While there may be economies of scale in treatment costs for
large mills it is noted ;hat the largest corn wet mills are also the
oldest. Both additional land and building space are problems for these
plants. Thus, the largest mills may have offsetting factors whic h w ould
increase their per unit treatment costs.
Among the seventeen corn wet milling plants, twelve currently discharge
into municipal treatment works. The five remaining plants discharge
directly into surface water receptors. The treatment strategy to be
developed may differ substantially among plants with and without tie-in
to a municipal treatment system.
IV-6
-------
Financial Profile
Financial data for the corn wet milling (or, also, corn refining) industry
is essentially limited to selected company statistics such as reported in
Standard and Poor's Industry Survey and Moody's Industrial Manual.
(See section "Ability to Finance New Investment" below for a summary
of key financial ratios for four main companies in corn wet milling,, )
Further, corporate annual reports were screened with only partial suc-
cess in isolating corn refining division statistics of the corporations in
the industry. In general, corn refiners are conglomerate-type companies
such that reported data may not accurately reflect corn refining financial
data. Except for one case, no individual plant financial data or studies
were found. In order to complete the type of plant impact analyses planned
and relate the financial characteristics of the industry as fairly as possible
it was necessary to construct representative model plants. Time was
available to complete only one such model plant for this report.
Plants by Segment
Corn wet milling plants are complex and very capital intensive in structure.
These plants are effectively refineries. After corn is milled to produce
basic starch, then finishing or refining of starch is continued to produce
many possible products. The most common products derived from starch
are corn syrup and corn sugar (dextrose), plus, of course, starch itself
(including modified starches such as dextrin). However, further process-
ing of each of these products is completed in many plants.
Each plant in the industry is considered unique beyond the starch (or
starch slurry) production stage, but all are believed to produce some
starch (including dextrin), corn syrup and corn sugar. By-products of
corn oil, corn gluten feed and meal, and steepwater concentrate are also
normally produced. A 'basic' model plant to reflect these major products
is proposed. The proportions of each product are assumed to be the same
as was reported for the industry as a whole by the Census of Manufacturers
in 1967 (the latest reported shipment data).
Attention was given to the synthesis of a "medium1 (60,000 bushels)
per day capacity) plant model. This size of plant falls well within the
proposed size categories of the industry which have been tentatively
defined as follows:
Bushels Capacity/Day Class
15,000 - 50,000 Small
51,000 - 80,000 Medium
81, 000 -115,000 Large
IV-7
-------
In subsequent study the 60,000 bu. per day plant was scaled up to
90,000 bu. per day to assess the impact of water pollution controls
on a large plant and scaled down to 30, 000 bu. per day to consider
the impact upon a small plant. Only the 'medium' sized plant is
described in this section, although comparative data for three plant
sizes are presented in Table IV-7 below.
Annual Profit Before Taxes
Based on the selected financial data reported below, net profit as a per-
cent of sales ranged from 2. 7 to 4,9 in 1970 and from 1. 6 to 3. 8 in 1971
for four corn refiners. These data are probably indicative of corn re-
fining profits even though the data are lor the companies' total operations.
According to the model plant concept, procedures, and operating assump-
tions implemented, the estimated pre-tax income and selected rates of
return on investment are as reported in Table IV-3. After-tax ROI is
estimated as 5. 1 percent and after-tax earnings on sales is 3,. 7 percent.
The latter value is comparable to those reported above for the four com-
panies in 1970 and 1971.
One qualification of the model plant data is that costs and prices of products
were estimated 1967-1971 averages,. The main reason for this is to
improve the chance of reflecting normal 'margins' between prices paid
and prices received for corn wet milling products.
Average fixed investment, on which the rates of return were calcukited,
was derived by dividing replacement costs by two (an estimate of average
fixed assets) plus total working capital (current assets) less current
liabilities (based on grain milling industry averages). The average fixed
or invested capital estimate is intended to approximate invested capital
in reported financial data. After-tax income was based on a 48 percent
tax rate without either carry-forward or back tax provisions.
Annual Cashflow
Estimated annual cashflow (after-tax income plus depreciation) and the
ratio of cash flow to average fixed investment are as shown in Table IV-4
for the selected corn wet mill model plant. Annual depreciation is
assumed to equal 5 percent on equipment and 4 percent on buildings,
Also, equipment is estimated as equal to 75 percent of the total plant in-
vestment and buildings as equal to 25 percent of the total. (Note the
capital intensive ratio. )
IV-8
-------
Table IV-3. Estimated pre-tax net income and rate of return on average
invested capital and after tax return on sales for a medium
corn wet milling plant
Financial Measure Value
Pre-tax net income ($000) 3,615
Pre-tax ROI* (%) 9- 8
After-tax ROI* (%) 5. 1
After-tax return on sales (%) 3.7
Average return on fixed investment calculated by financial statement
method.
IV-9
-------
Table IV-4. Estimated cash flow for a medium corn wet milling plant
Financial Measure Value
Annual cash flow ($000) 4, 742
Cash flow on average fixed
investment (%) 12. 9
1V-10
-------
The annual cashflow of $4. 742 million is also 9. 3 percent of sales.
Unlike most other agricultural processing industries, the cashflow
percentage to sales is relatively high for the corn wet milling industry.
Market (Salvage) Value of .Assets
Fixed assets of a corn wet mill would have little value to any producer
other than another corn wet miller. However, due to general growth
in demand for corn refining products, one would expect that a well
located plant in generally good condition would have a significant salvage
value.
There is a recent known case where a corn wet mill was closed and
subsequently sold to another corn refining company (i. e. , Corn Sweetners,
Inc. bought the Union Starch Refining Company plant at Granite City
Illinois after it was closed. Union Starch was a subsidiary of Miles
Laboratories, Inc.). This plant was reported to have been operated for
about six months but then reclosed. Apparently old and worn equipment
resulted in inefficient operation of the plant.
Capital Structure - The average fixed investment in a corn refinery was
estimated as $36.735 million for the medium sized model plant as des-
cribed, and sales were estimated as $50.949 million per year. This
yields an average sale:; of $1. 39 for each dollar of investment. Compared
with other agricultural processing industries, this level of sales to in-
vestment is low. A major difference in corn refining is its high capital-
ization requirements. Also, corn refining is a high value added process-
ing industry compared to most other agricultural processors.
The capital requirements estimated for the medium model plant are presented in
Table IV-5. The replacement value of $60. 25 million assumes a break-
down of 75 percent equipment and 25 percent for buildings and site.
Total annual working capital is estimated as $11.016 million which is
equal to 25 percent of total operating costs, including raw material (corn)
costs. Corn refiners maintain inventories of both raw materials and
finished goods as well as normal accounts receivables.
Cost Structure - Model plant data and budgets were prepared to estimate
the cost structure of representative operations.
Fixed or plant related expenses were defined as those which do not direct-
ly vary as a function of throughput. These expenses include:
IV-11
-------
Table IV-5. Estimated replacement value and working capital requi re n
-------
maintenance and supplies
taxes and insurance
plant and labor overhead
sales, general and administrative
Additionally cost estimates were made for depreciation and interest costs.
Variable or production related expenses were defined as those which will
generally vary proportionately with throughput--in other words, a fixed
amount per unit processed. They include:
raw materials
power
. water
process supplies, chemicals, etc.
operating labor
plant supervision and fringe benefits
Fixed costs - Indirect operating costs, as shown in Table IV-6, represent
7.4 percent of sales in the budgeted plant. This is higher than the other
grain milling industries and is primarily due to the typically large selling
and related costs involved. Sales offices and distribution centers are
common in the industry since many sales are to industrial outlets.
Deprei lation, at 50 6 percent of sales is relatively high compared with
other agricultural processors. The capital intensive nature of corn
refining is the principal c;»use.
Interest costs are nominal at 0.8 percent of sales.
Variable costs - Variable costs for the corn wet milling industry are also
shown in Table IV-6 for two major components: raw materials (corn),
and direct operating costs. Of special note is the relatively high direct
operating cost component representing 42. 1 percent of sales. Also, the
raw materials costs (for corn) are relatively low as compared to other
agricultural processors,, Both of these relative values reflect that corn
refining is indeed a high value added industry.
In the event thai additional model plants can be constructed, it will be
important how the variable costs — which are dominant, can be controlled.
Efficiency criteria seem especially relevant.
IV-13
-------
Table IV-6. Estimated costs for a medium corn wet milling plant
Item $000 Percent
Sales 50,949 100.0
Raw materials 18,819 36.9
Direct operating costs 21,458 42. 1
Indirect operating costs 3,787 7.4
Depreciation 2,862 5.6
Interest 408 0. 8
Total before-tax cost 47,334 92-9
IV-14
-------
Distribution of Model Plant Financial Data
The financial data base on which the model plant characteristics were
based were extremely limited for the corn wet milling industry. A
variety of engineering and financial guidelines were used to construct
the financial characteristics of the model plant. A summary of the
financial characteristics, plus various additional values and assumptions
are presented in Table IV-7. It is felt that the model reflects the basic
conditions and characteristics of this industry.
Considerable reliance- was placed on common financial data sources as
stated previously for Imlgur and rice. Also, particular use was made of
the 1967 Census of M.I nufactures volume and value of shipment data to
estimate an average mix of end products (and by-products) produced by
corn refiners.
Finally, a concern ON • ts over appropriate commodity prices and product
values to use in subsequent analysis. Current commodity prices are at all
time highs. Corn re I. :ers will be dramatically affected and problems will
be faced in markets ul.ere substitutes for corn products exist, e.g. cane
and beet sugar vs. corn sweeteners.
IV-15
-------
Table IV-7. Summary of financial data pertaining to the corn wet milling model plants
Values
Item Units
Utilization %
Annual throughput 1 , 000 bu.
Sales $1,000
Raw product costs "
Variable costs "
Fixed costs ''
Cash earnings "
Depreciation "
Interest "
Pre-tax income "
Net income "
After-tax cash flow "
Replacement costs "
Working capital "
Current liabilities "
Average fixed investment (A FI) "
Pre-tax income/AFI Ratio
Net iricome/AFI "
Cash flow/AFI "
Net income/sales "
Financial data for the 60,000 bu/day
M bu/day plants are subsequently used
i
o
30,000 bu./day 60
7,650
25,475
9,410
11,054
1,951
3,060
1,722
204
1, 134
590
2,312
36,250
5,604
2,242
21,487
. 053
. 027
. 108
. 025
,000 bu. /day
15,300
50,949
18,819
21,458
3,787
6,885
2,862
408
3,615
1,880
4,742
60,250
11,016
4,406
36,735
. 098
. 051
. 129
. 037
plant (medium) are presented in the
in the Impact Analysis
section below
90, 000 bu. /day
22,950
76,424
28,229
31,602
5, 577
11,016
3,860
611
6,545
3,403
7,263
81, 250
16,352
6,541
50,436
. 130
. 067
. 144
. 045
text. Data for the
.
Remarks
300 days x 60,000 bu x
85%
Bu. processed basis. Many
products .
$3. 33/bu. value, f. o. b.
$1. 23/bu. , f. o.b, mill
(19o8-71)
85% of operating costs,
c luding corn
15% of operating costs,
eluding corn
5% equipment; 4% bldg.
mill
ex -
ex-
75% equipment, 25% bldg.
25% operating cost
40% total working capita
30, 000 and VO , 000
1
-------
Ability to Finance New Investment
In the earlier section on bulgur, general requirements for financing
new investment were set forth, along with the general conditions in
the milling industry. Table II-8 presented selected financial data
for all grain milling firms.
It is extremely difficult to segregate financial data for wet corn milling
operations. Standard and Poor's Industry Survey has a ten-year (1967-71)
series for a group of corn refiners, including three companies which
operate a total of seven wet corn mills (of a total of 17). Although wet
corn milling does not constitute the entire operations of these three
companies, their financial data provide useful insights into the industry.
A fourth company, Hubinger, which operates one plant has financial
data available for 1970 and 1971.
The three companies from Standard and Poor's Industry Survey are
summarized in Table IV-8 from 1962 through 1971; Hubinger Co, is
included as data are available. CPC International experienced a steady
decline in net profit on sa les from 5. 9 pe rcent in 1963 to 3.6 percent in
1971; Staley had an irregular pattern of profits on sales which peaked at
4.3 percent in 1966, fell to 2.3 percent in 1968, rose to 2.8 percent in
1969 and fell to 1.6 percent in 1971; American Maize peaked in 1965 at
6. 7 percent and declined irregularly to 3. 3 percent in 1969 and to 3. 8
percent in 1971. Hubinger experienced a general decline from 6.3 percent
in 1964 to 2.2 percent in 1971. Corn refiners as a group experienced a
general decline from 5.9 percent in 1962 to 3.3 percent in 1971.
These same companies have demonstrated quite different performances
in profit as a percent of net worth. CPC has had a remarkably steady
return ranging from 16.4 percent in 1963 to 13.3 percent in 1971; Staley
has fluctuated from 12. 1 percent in 1966 to 5.2 percent in 1971; American
Maize has bounced from 5.2 percent in 1967 to 12. 5 percent in 1968, with
a 1971 return of 11. 5 percent. Hubinger earned 13. 0 pe rcent on net worth
in 1970 but dropped to 5. 5 pe rcent in 197 1.
At the same time, except for Hubinger, the companies had a fairly high
debt-equity ratio in 1971 -- CPC at 50 percent, Staley at 44 percent and
American Maize at 44 percent Hubinger had only 10.6 percent. This places
the three at the upper part of the range for manufacturing companies and
considerably higher than the 36 percent average of all firms in 1970. When
combined with the earnings picture, the debt ratio indicates that there may
be some serious limitations on the ability of firms with low earnings to
finance pollution abatement installations with borrowed funds.
IV-17
-------
I/
Table IV-8. Selected financial data for four wet corn milling firms, 1962-1971 —'
1962
1963 1964
1965 1966
Net Profit as a
CPC International 5.8
A. E. Staley 2.7
American Maize-Prod. 4.4
Hubinger
CPC International 15,6
A. E. S taley 6. 4
Am. Maize-Prod. 7.0
Hubinger
<^
i
oo
CPC International
A. E. Staley
Am. Maize-Prod.
Hubinger
5.9 5.5
3.0 2.4
4.1 5.4
6.3
Net
16.4 15.4
7.0 6.9
6.7 9.1
--
5.6
3.8
6.7
5.8
5.6
4.3
5.6
5.2 .
Profit as a Percent
16.2
10.2
7,5
--
Current Ratio
__
--
__
— — _ _
--
--
--
_ _
16.3
12. 1
7.3
--
1967
1968 1969
1970
1971
Percent of Sales
4.7
2.5
2.8
3.4
of Net
13.8
7.3
5.2
--
(Current Assets to
--
--
--
— ~
--
--
--
—
4.7
2.3
4.6
4.7
4. 5
2.8
3.3
4.0
4.4
2.7
3.8
4.9
3.6
1.6
3.8
2.2
Worth (Estimated)
14.3
7.0
12.5
--
Current
--
--
--
- -
15.0
8.5
9. 1
--
Liabilities)
- -
--
--
- —
15. 1
8.3
10.6
13.0
1.8
1.9
4. 1
2.5
13.3
5.2
11.5
5.5
1.7
1.9
4.2
2.8
I/
— Source: Standard and Poor's Industry Survey, Nov. 23, 1972 and Moody's Industrial Manual, 1972.
-------
The short-term debt situation appears marginal. Only brief data are
available, but it indicates that the ratio of current assets to current
liabilities for grain milling in general was 1.9 to 2.2 in 1971. CPC had
a current ratio 1.7, Staley of 1.9, American Maize of 4.2 and Hubinger
of 2.8.
The corn refiners have traditionally been subject to widely varying
earnings. Profits are affected by corn production, corn costs and
the production and prices of related products. Margins may vary
from product to product and from year to year since the refiner has
little control over the factors affecting his profit margins. This makes
equity offerings less attractive than for industry in general.
As evidence of this, corn refiners stock prices have declined by about
45 percent from 1964 to 1972 while Standard and Poor's 425 industrial
stock index rose approximately 60 percent. The price earnings ratio
for corn refiner stocks have also declined from a high-low range of
28-20 in 1962 to 17-12 in 1971. These facts indicate that equity financing
has become less attractive for corn refiners.
On balance, however, the. foregoing data indicate that the wet corn
milling group has adequate financial strength to finance pollution abate-
ment from both internal and external sources. At the same time, any
further deterioration in earnings will diminish the industry's ability to
meet future obligations. A fall in corn prices would help restore profit
margins and strengthen the financial position of the group.
IV-19
-------
Pricing
Prices in the corn wet milling industry involve a multitude of end products
and byproducts from corn refining. The "basic" products of the industry
are said to be four in number: (1) corn starch, (2) dextrin (a "cooked" or
"roasted" starch for industrial uses, especially in adhesives), (3) corn
syrup and (4) corn sugar (dextrose). However, many other products may
be produced by further processing. Also, byproducts such as corn oil,
corn gluten feeds and meal, steepwater concentrate and others serve
additional markets.
Because so many products are produced and different markets are involved,
pricing is a complex question. In this brief description only some of the
major factors involved are described.
Price Determination
Demand
Products of the corn refining industry are utilized in the home, by industry
for food and industrial purposes, and in feeding livestock. Uses in the home
include corn syrup for table use, corn starch for home cooking and laun-
dering, and corn oil for qooking. Much greater volumes, however, are
utilized by manufacturing plants of all kinds: textile mills, paper mills,
commercial laundries, foundries, tobacco and cigarette plants, rubber
factories, chemical and drug manufacturers, feed mixers, soap makers
and many food processors -- such as bakers, confectioners, brewers,
soft-drink bottlers, canners and frozen food packers. These industries
use the refined corn products as raw material input for further processing.
Products for the home are packed in consumer-sized containers and. shipped
to wholesale or retail outlets for distribution. Industrial markets and
users generally require deliveries in commercial containers or in bulk lots.
For example, corn syrups are usually shipped in steel cans, drums, tank
trucks of various sizes, and in 8, 000 gallon or more railroad tank cars.
The dry sweetners (dextrose and corn syrup solids) are shipped mostly
in 100-pound multiwall paper bags. Closed hopper cars are sometimes
used for bulk shipments of dextrose.
IV-20
-------
Corn starch is either packaged or shipped in bulk to major users, such
as in the paper and textile industries. Corn oil for home consumers and
small industrial users is packed in bottles, cans and drums of various
sizes. To large users, shipments are usually made in tank trucks and
railroad tank cars.
Each of the end-products or byproducts of the corn refining industry
effectively enters different markets with varied demand conditions.
Many sales are made via individual customer negotiation and often in
advance of production. Refining operations might then be scheduled and
the product mix modified to meet sales demands. However, certain
end products such as corn oil, corn syrup and dextrose have established
wholesale markets (New York and Chicago) where bulk rate competitive
prices are determined- Wholesale prices for corn gluten feed (Chicago
and Tri-cities) and corn gluten meal (Tri-cities) are also regularly
reported. Average vlaues of other end products are not generally
reported for the industry -- although value of shipment data by product
class is included in periodic Census of Manufactures reports.
Despite the lack of formal markets for ma ny corn refining products,
the industry is considered to be very competitively structured- Firms
compete with each other for industrial and consumer sales. Also, some
of the main products (corn syrup, dextrose and oil) compete with other
commodity sources ot sweetners and food oils. For example, corn
sweetners compete with cane and beet sugar sources -which are dominant
in the sweetner market- Corn oil competes vwith various other grain and
vegetable oil sources such as cottonseed, palm, peanut, soybean and
safflower oils-
An overall summary of the level of demand for wet corn milling product s
(primary only) is indicated in quantity and value of shipment data reported
by the Census of Manufactures. The most recent data available are for
1967 as shown in Table IV-9 - The value of total shipments for 1967
was $646. 6 million when 207 million bushels of corn were milled by the
wet process. For comparison, about 250 million bushels of corn were
processed in 1972 which is a 21 percent increase. Value of shipments
have increased proportionately more which is indicative of a growing
demand for corn refining products.
As indicated above, refined corn products have a wide variety of both
food and non-food (industrial) uses- About 60 percent of the primary
products are said to go into food products, but the proportions of each
into food/nonfood uses differs approximately as follows:
IV-21
-------
Table IV-9- Quantity and Value of Shipments by All Producers in SIC 2046: Wet Corn Milling,
1963 and 1967
Product
1963
Total shipments including
Quantity
1967
-- (million pounds) --
Wet corn milling products, total
Corn syrup, unmixed .
Low (28 to 37 D.E.)-
Regular (38-47 D.E.)
Intermediate (48-57 D.E.)
High (58-67 D.E.)
Extra High (68 and over D.E.)
Corn sugar
Corn syrup solids
Cornstarch, including milo
Dextrin
Corn Oil (crude and refined)
Wet Process corn byproducts
Steepwater concentrates (50%)
Corn gluten feed
Corn gluten meal
Other byproducts
__
89.4
1,200. 5
128.4
843.0
1,093.6
110.4
2,565. 1
118.9
42,7
1,316.8
1,078.2
N,A.
—
210. 5
1,423.0
175.0
871.4
60.6
1,227.9
127. 1
3, 119.0
168.7
--
78.0
2,365.9
875.2
341.4
inte rplant
1963
transfers
Value
1967
--(million dollars)--
547.2
4. 5
60. 1
6.4
42. 5
71. 5
8. 8
177.3
9.9
60.9
1.0
27.4
33.3
25.8
646.6
10. 5
66.6
8.3
43.2
2.8
81.6
10.4
199.5
16.0
76.4
1.5
55. 1
36.6
27. 1
— D. E. = dextrose equivqlent
Source: Bureau of the Census, Census of Manufacturers, U. S. Department of Commerce, 1967.
-------
Percent into
Product Percent into Food non-food uses
Corn starch 12% 88%
Corn syrup 94% 6%
Corn sugar (Dextrose) 85% 15%
Corn oil, a byproduct of the refining process, is also primarily used in
food products.
An effective measure of the relative demand for corn products used in
foods is per capita consumption over time as shown in Table IV-10.
Corn sweetners (corn syrup and dextrose) have grown in importance
in the caloric sweetner market which is suggested by the increased
per capita data shown. Corn starch for food purposes has remained
relatively constant on a per capita basis for the past twenty years although
total demand has increased with f-.he growth in population. Again,
corn starch in food uses is a relatively minor portion of the total
demand for starch, however. Corn oil consumption has also remained
relatively constant on a per capita basis for many years.
Non-food uses account for an increasing percentage of the steadily
growing total demand for corn starch. Most of the starch used indus-
trially goes into the paper and textile industries. Estimated average
annual use of corn starch by these industries and in total for all indus-
tries is shown in Figure IV-1 • Of the total 2,470 million Ib. estimated
for 19S9, 1,600 million Ibs. (65%) was used for paper and paper products,
350 million Ib. (14%) was used in the textile industry, and 520 million
Ib. (21%) was used for a wide variety of other industrial purposes. Other
industrial uses include applications in adhesives, building materials,
foundry binders, laundry starches, explosives, oil-well muds and other
mining applications. (Dextrin, a roasted starch, is included with the
above. It is used almost enitrely for industrial purposes, primarily in
the manufacture of adhesives. Dextrin is considered a basic product
of the industry along with regular starch, syrup and sugar.)
Non-food uses of corn syrup and corn sugar also include a wide range
of industrial applications. Examples of applications of each are as
follows:
IV-23
-------
Table IV-10. Per capita consumption of selected corn milling
products, "960-1971
Year
I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
— Food use only.
Sources: National Food
Corn Corn Corn
Sugar Syrup Starch —
3. 7
3. 7
3.9
4.5
4,4
4.5
4.6
• 4.6
4. 7
4.9
4.9
5.2
Situation, ERS,
U. S. Fats and Oils Statistics
Statistical
Bulletin No. 489
10. 1
10.6
11.5
12.3
13.6
13.7
14.0
14. 1
14.8
15.4
16.0
16.2
USDA, Feb.,
1950-71, ERS
.
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.9
1.9
1.9
1.9
1973.
, USDA,
Senti, F. R. and W. C. Schaefer, "Corn--Its Importance
Feed, and
Corn
Oil
1.9
2. 0
2.0
2.0
2.3
2.4
2.2
2.2
2.2
2. 1
2.2
2. 1
in Food
Industrial Uses, " Cereal Science Today,
17:352-356, November, 1972.
IV-24
-------
Millions Pounds 2 470
2.400
2,000
1.600
1200
800
400
3
Qothei Industnes
,_ imHPaPe' ini Papei'oard
I^Uilile 1
_
1
-
654
537
- 323 [JIT
fm •! |
rvj *•*•'
D054 X1!
*~*~
I
1 ''
V*1!
v!^
117
1
i
w
.vi
39
TTT
i
1]
|i|
\\f
Ll1^
'Jv
733
TTT
1
i
i
V \
''•>
^_Jii
i
193539 194044 194549 195054 195559 196064 196S
Penofls
Figure IV- 1 . Estimated industrial use of corn starch in
the U.S., expressed as annual averages
for the periods shown. (From Moore and
Dwoskin )
IV -25
-------
Corn Syrup Applications Corn Sugar Applications
Adhesives Acid production
Chemicals Adhesives
Dygs and inks Organic chemicals
Explosives Dyes
Leather tanning Enzymes
Metal plating Explosives
Glassive and parchment paper Fermentation products
Shoe polish Leather tanning
Textile finishing Textile dying and finishing
Tobacco products
Corn oil also has some non-food uses such as in pharmaceuticals, in
leather dressings and as a carrier for insecticides. Also, and most
importantly, crude corn oil {and its derivative, soap stock) is used
in soap making.
Other corn wet milling products and byproducts are produced and marketed.
Corn gluten feed and meal, and corn oil meal are important byproducts
which are sold as livestock feeds primarily to the dairy, poultry and hog
industries. Steepwater concentrate is also utilized either in corn gluten
feed or for use in the pharmaceutical industry to produce antibiotics,
such as penicillin, and certain vitamins. Other products such as lactic
acids, enzymes, alcohol and distilled grains are produced and marketed
by some firms in the industry.
Supply
Supply of corn wet milling and refining products for the past twenty years
has steadily increased with high correlations to growth in population,
GNP, and total food production. Corn refining products have either
maintained or increased their relative importance in food and industrial
uses and the industry has grown in volume of products supplied as a
consequence.
The supply of corn wet milling products is indirectly reflected given the
amount of grain corn milled by the wet milling industry. The annual
volumes milled for 1968 to 1972 are shown in Table IV-11 . In 1972
an estimated 250 million bushels was processed and this represented
about 4. 3 percent of the total corn utilized.
IV-26
-------
Table IV- 11 U.S. Corn Utilization, 1968-1972
1968
Use
Feed
Export
Wet Milling
Dry Milling
Alcohol
Breakfast Foods
Seed
Total Utilization
Mill. Bu.
3,580
520
221
114
33
22
12
4,502
Percent
79.5
11.6
4.9
2. 5
. 7
. 5
. 3
100. 0
Mill. Bu
3,795
598
226
116
31
22
13
4,801
1969
. Percent
79. o
12. 5
4. 1
2.4
. 6
. 5
. 3
100. 0
1970
Mill. Bu.
3,581
502
229
119
24
22
17
4,494
Percent
79- 7
11.2
5. 1
2. 6
. 5
. 5
. 4
100. 0
1971
Mill Bu.
3,978
786
242
115
25
22
15
5, 183
Percent
76. 8
15, 1
4. 7
2 2
, 5
, 4
. 3
100, 0
1972
MAI Bu
4, 365
984
250
116
26
23
16
5,780
Perc t-:v
75 5
17 1
4, 3
2 0
4
4
3
100 0
Source: Feed Situation, ERS, USDA, 1968-1972.
-------
Since the corn wet milling industry utili/.es only a relatively small part
of the total corn supply, the availability of grain corn is not regarded ;> s
a physically limiting factor of production. Corn wet millers do, how-
ever, purchase shelled corn competitively in a market dominated by
livestock feed manufacturers; and, corn prices are effectively exogenously
determined as viewed by the torn wet millers. It is also noted that corn
wet millers typically do 71 ot maintain large storage reserves of grain.
They tend to buy currently, although the commodity futures market is
often used to hedge corn purchases, especially during periods of uncer-
tainty about the size of the upcoming corn crop.
Pric es
Prices for each of the numerous end products of the corn refining industry
are effectively determined in separate and often unrelated markets. Prices
are not reported for all products, so tracing market trends is difficult
without first-hand knowledge of industry sales and pricing procedures.
As a brief overview of prices and price trends in the corn wet milling
industry, selected data from Wholesale Prices and Price Indexes (published
monthly by Bureau of Labor Statistics, U.S. Department of Labor) are
presented in Table IV-12. First, it is noted that all but corn syrup
and corn gluten feed were priced considerably higher in 1972 than in
1967 based on the index values. However, the gluten feed prices almost
doubled between July, 1972 and February, 1973. Corn syrup also began
to recover, and other items, except crude corn oil were generally stable.
Several factors are pertinent to the specific changes involved, e.g., an
unprecedented "price war" for corn syrup began in December, 1971 but
prices were beginning to return to normal by February 1973; and live-
stock feed demand increases plus unusual export demands for U.S. grain
commodities has seriously disrupted livestock feed markets. However,
more generally, the price indexes shown illustrate the independence of
various markets for different end products of the corn wet milling industry.
Corn wet millers often have little control over product prices in markets
where there are close substitutes. As was mentioned previously, corn
sweetners compete with sugar (cane and beet) and thus changes in produc-
tion costs cannot necessarily be passed through to consumers. This will
be true rega-rding the effects of pollution control costs (just as current
increased corn costs will likely severely effect industry relative to current
market prices).
IV-28
-------
Table IV-12. Selected prices and price indexes for corn wet milling
industry end products.
Product
Corn syrup,
Unit
100 lb.
July,
Price
$ (
3.675
1972
Index
1967=100)
78.4
Februa
Price
$
4. 214
ry, 1973
Index
(1967 = 100)
89.9
confectioners
Crude corn oil
Refined corn oil
Corn gluten feed
Dextrin Canary Da
\Vhite
Source: Wholesale
lb.
lb.
Ton
rk!00 lb.
Prices and
. 150
.203
44. 00
11.080
10.820
Pri ce Indexes
120.8
127.9
91.0
127.5
126.8
, Bur.
. 173
. 198
80.000
11.080
10.820
138.7
125.3
165.5
127.5
126.8
Labor Statistics, USDL,
for Feb. 1973, (April 1973), and for July, 1972, (November 1972).
IV-29
-------
Corn oil, gluten feed and meal, and steepwater concentrates also are
sold in markets with relatively close substitutes even though the markets
are different.
Of the basic products, starch and dextrin are the least affected by substitute
products. Corn starch comprises about 93% of the starch market and most
price increases could likely be passed through to consumers (mostly
industrial). Dextrin is even more unique and free from major competition.
Despite the complexity in arriving at "representative" prices for this
industry, price data is needed to assess the financial impacts of anticipated
water pollution control costs. Because of peculiarities which may exist
from year-to-year, estimated average 1967-1971 prices (and imputed values)
were developed for the model plant analysis.
For reference, and as a guide to the product mix assumed, the estimated
values used in this study are as shown in Table IV-13. It is believed that
representative gross margin data is best reflected in the manner shown.
IV-30
-------
Table IV-13. Corn wet milling, gross margin per bushel
of corn processed
Estimated Pounds I/ 1967-7 1 Ave. £/ Value Per
Final Products per Bu. Processed Price Per Pound Bu. Ground
Starch
Cornstarch
Dextrin
Sweeteners
Corn Syrup
Corn Syrup Solids
Corn Sugar
Oil
Byproducts
Corn Gluten Feed
Corn Gluten Meal
Steepwater
Other byproducts
Total Sales (estimated
Cost of Raw materials
Gross Margin
15. 1
.8
13.2
.6
5.9
1.9
11.4
4.2
.4
1.6
55. 1
value per
4/
.072
. 107
.067
.081
.090
.169
.024
.043
.020
.082
Total
Transportation Differential J./
bushel processed f. o.b. mill)
1.09
.09
.88
.05
.53
.32
.27
. 18
.01
. 13
3.55
-.22
3.33
1.23
2. 10
—' Estimates based on actual quantity of each end product produced in 1967
compared to total bushels of corn ground by the wet milling industry in 1967.
_' Average prices are determined by multiplying the 1967 Census of Manufactures
price by the 1967-71 average wholesale price index for each product or group
of products.
— Prices on corn sweeteners are quoted on New York basis. Prices on corn
gluten feed and meal are quoted on Chicago bases. Transportation allowance
reflects shipment from plant to market of these products to give FOB mill
values.
4 /
— 1967-71 average price of corn per bushel, No. 3 yellow, Chicago. Source:
Statistical Bulletin No. 410, ERS, USDA, July 1972.
IV-31
-------
V. ECONOMIC IMPACT METHODOLOGY
The remaining portion of this grain milling industry study is devoted
to analyzing the economic impact of pollution abatement requirements
under the Federal Water Pollution Control Amendments of 1972. The
preceding findings, plus the addition of estimated pollution control
requirements and costs, will serve as the basis for the impact analysis.
Proposed Standards
For the purposes of th : impact analysis, three levels of wastewater
treatment will be cone dered for each applicable segment of the grain
milling industry:
Level I: Be t practicable control technology currently
(BPT) av< Liable - to be met by 1977.
Level II: Br t available technology economically achievable -
(BAT) to e met by 1983.
Level III: N< ' source performance standards - to be applied to
(NSPS) all new facilities that discharge directly to na\igable
wr, ers - to be met by approximately January 1, 1974.
A fourth level - new s jurce pretrea tment standards - which would be
applied to all facilities that use municipal systems constructed after
promulgation of the pi oposed guidelines is not considered further in
this report. No cost i ata are provided for these standards. It is noted,
however, that grain n tiling wa stewate rs are generally considered com-
patible for treatment ,n normal municipal treatment systems.
It is further noted that the new source performance standards (NSPS)
above are taken as equal to the best available technology (BAT)
standards. The treatment requirements and costs are also assumed
to be equal for purposes of this analysis.
Specifications and costs of each treatment level as described below
were supplied by EPA. These data are comparable with limited alter-
native sources of cost data, and thus no additional cases were examined.
However, to assess the sensitivity of impacts to the estimated pollution
control costs, a range of estimated costs of plus or minus thirty percent
(+ 30%) were also analyzed.
V-l
-------
The specific impacts to be examined include:
1. Price effects
2. Financial effects
3. Production effects
4. Employment effects
5. Community effects
6. Other effects
The types of analysis planned for each of these effects is outlined
following a brief summary of the general methodology used.
General Methodology
The basic approach taken in the impact analysis is similar to the nor-
mally done for any feasibility capital budgeting study of new investments.
The problem is essentially one of deciding whether a commitment of
time and money to a project (in this case, adding pollution control
facilities) is worthwhile in terms of net benefits derived. The problem
is complicated in that benefits accrue over time and generally simplifying
assumptions are required to project into the future. Also, many unique
factors of individual operations within an industry cannot be explored.
The core analysis for this study is based upon synthesizing physical and
financial characteristics of the various industry segments through model
or representative plants. Incremental impacts of pollution control require-
ments are then assessed in terms of the same model plants. The estimated
cash flows for selected model plants are as summarized in Chapters II-IV.
The primary factors involved in assessing the financial and production
impacts of pollution control are profitability changes, which are a function
of the cost of pollution control and the ability of firms to pass along these
costs in higher prices. Other factors, of course, influence production and
closure decisions -- such as personal values, ability to finance new in-
vestments, relationship of the plant in the total corporate structure, and
many others.
While these and other factors are relevant in business decisions, emphasis
is given herein to economic analysis to provide insight into potential business
responses to new investment decisions as represented by required invest-
ment in pollution control facilities. Given expected pricing conditions, the
V-2
-------
impact on profitability (and possible plant closure) can be determined
by simply computing the ROI (or other profitability measures) under
conditions of the new price (if changed) and the incremental investment
in pollution control. The main consequence of profit changes is the
probable impact on the plant in terms of plant shutdown or making the
required investment to meet 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
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.
V-3
-------
Identification of plants where TCc R, but Vc R leads to an estimate
of plants that should be closed over some period of time if revenues do
not increase. However, the timing of such closures is difficult to predict.
The next level of analysis, where TCc / R, involves estimating the
earnings before and after investment in pollution abatement. So long
as TCc R it seems likely that investment in pollution control will be
made and plant operations continued so long as the capitalized value
of earnings (CV), at the firms (industry) cost of capital, is greater
than the scrap or salvage value (S) of the sunk plant investment. If
S CV, the firm could realize S in cash and reinvest and be financially
better off. This presumes reinvesting at least at the firms (industry)
cost of capital.
Computation of CV involves discounting the future earnings flow to
present worth through the general discounting function:
t
V = V A (l+i)-n
i n
n=l
where
V = present value
An = a future value in n^*1 year
i = discount rate as target ROI rate
n = number of conversion products, i.e. ,
1 yea r, 2 yea rs, etc.
It should be noted that a more common measure of rate of return is
the book rate, which mea sures 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.
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
y.eld is the highest rate of interest the investor could pay if all funds
V-4
-------
were borrowed and the loan was returned i rom cash proceeds of the
investment. The second DCF measure is ihe net ore-em value concept.
Rather than solve for the yield, a discount rate ecu.-/alem to the :'ir:r.s
cost of capital is used. Independent investments with net present values
of above zero are accepted; those below zero are rejected. The concept
of comparing capitalized earnings with the sunk investment value is
a variation of the net 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 aftar-tax incoine and for the DCF analysis after-tax cash proceeds.
The computation of each is shown below:
After tax income = (l-T)x(R-E-I-D)
After tax cash proceeds = (1 - T)x(R - E - D) + D
where
T = tax rate
R = revenues
E = expenses other than depreciation and interest
I = = interest expense
D = depreciation charges
Interest in the cash proceeds computation is omitted since it is reflected
in the discount rate, which is the after-tax cost of capital, 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.
V-5
-------
A tax rate of 48 percent was used throughout the analysis. Accelerated
depreciation methods, investment credits, carry forward and carry back
provisions were riot used due to their complexity and special limitations.
It is recognized that in some instances the effective tax rate may je lower
in a single plant situation, but with the dominance of multiplant firms, the
firm's tax rate will be close to the 48 percent rate.
Revenue, expenses, interest and depreciation charges used were those
discussed in Chapters II-IV and Chapter VI tor pollution control facilities.
These items were assximed to constant over the period of analysis.
Z. 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, This same amount wa s taken as a nega-
tive investment in the terminal year. Replacement inve stment 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 ongoing business.
Investment in pollution control facilities was taken as the estimates
provided by EPA and shown in Chapter VI. The cost data provided
represent estimated total facilities and operating costs for water
pollution control, although at least some plants have partially com-
pleted construction of required facilities. The average increments.1
costs requi reel may therefore be less than shown; however, the model
plant data assumed no pollution control. The overall affects of pollu-
tion control are projected for the model plant cases. To reflect the
effect of in-place facilities , pollution control costs of -30% of the total
are also shown. In this manner, the impact of lower incremental
costs can be judged.
The above discussion refers primarily to the DCF analysis. Investment
used in estimating book rates was taken as invested capital - book value
of assets plus net working capital. In the case of new investment, its
book rate was estimated as 50 percent of the original value.
_' This should not be confused with a simple buy sell situation which
merely involves a transfer of ownership from one firm to another.
. n this instance, the opportunity cost (shadow price) of the invest-
ment may take on a different \aluc.
V-6
-------
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 -vei'/nted avjracie of
the cost of each type of capital employed by the firm, in general terms
equities and inte rest bearing liabilities. There is no methodolo 2v that
yields the precise cost of capital, but it can be approximated within
reasonable bounds.
The cost of equities was estimated by two methods -- the dividend v.eld
method and the earnings stock price (E/P ratic'i method. Both are
simplifications of the more complex DCF methodology. The dividend
method is:
k = -r + g
where
k = cost of capital
D = dividend yield
P = stock price
g = growth
and the E/P method is simply
k - E/P
where
E = earnings
P = stock price
and is a further simplication of the first. The latter assumes future
earnings as a level, perpetual stream.
The above methods for estimating the cost equity capital were
explored f&r this industry.
The after tax cost of debt capital was estimated by using estimated 7. 5
percent cost of debt and multiplying by . 52 -- assuming a 48 percent
tax rate. These values were weighted by the respective equity to total
asset and total liabilities _' to total asset ratios.
_' It is recognized that liabilities contain non interest bearing liabilities,
but its weight is believed to be an adequate proxy for the weight of debt
V-7
-------
The average cost of capital for the grain milling industry was estimated
as follows:
Weighted Average _ (1-t) (B) (A) + (1/PE) (100)
Cost of Capital (CC) (1 + A)
where
Debt
A
Equity
B = Cost of debt (before tax)
PE = Price/Earnings ratio
t = Tax rate (.48)
Based upon industry data that was available, the following ranges
and averages for the above components were:
Item Range Average
A .333 to 1.0 .667
B 6% to 9% 7.5%
P.E. 9.69 to 11. 16 10. 10
and,
CC 6.8 to 8.Z 7.5%
In subsequent analyses, the 7. 5% cost of capital estimate will be used
to estimate various financial effects in the grain milling industry.
V-8
-------
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 (selvage market value of fixed assets plus
net working capital) taken in year tQ.
2. After tax cash proceeds taken for years t} to t2Q.
3. Annual replacement investment, equal to annual current
depreciation taken for years tj to t£Q.
4. Terminal value equal to sunk investment taken in year t-,^
5. Incremental pollution control investment taken in year tQ
for 1977 standards and year t^ for 1983 standards.
6. Incremental pollution expenses taken for years tj to t2Q
for 1977 standards and years tj to t2Q for 1983 standards,
if additive to the 1977 standards.
7. No replacement investment taken on incremental pollution
investment on assumption of a 20 year life as provided by EPA.
8. Terminal value of pollution facilities are assumed equal to
zero in year t-> i No estimate of land values were given, but
land is not believed a major factor in this industry.
B. Price Effects
At the outset, it must be recognized that price effects and production
effects are intertwined with one effect having an impact upon the other.
In fact, the very basis of price analysis is the premise that prices and
supplies (production) are functionally related variables which are simul-
taneously resolved.
Solution of this requires knowledge of demand growth, price elasticities,
supply elasticities, the decree to which regional markets exist, the degree
V-9
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of dominance experienced by large firms in the industry, market concen-
tration exhibited by both the industry's suppliers of inputs and purchasers
of outputs, organization and coordination within the industry, relation-
ship of domestic output with the world market, existence and nature of
complementary goods, cyclical trends in the industry, current utilization
of capacity and, exogenous influences upon price determination (e. 'g. ,
governmental regulation).
In view of the complexity and diversity of factors involved in determin-
ation of the market price, a purely quantitative approach to the problem
of price effects is not feasible. Hence, the simultaneous considerations
suggested above will be made. The judgment factor will be heavily em-
ployed in determining the supply response to a price change and altern-
ative price changes to be employed.
Asa guide to the analysis of price effects, the estimated price required
to leave the model plant segment as well off will be computed. The re-
quired price increase at the firm level will be evaluated in light of the
relationship of the model plant to the industry and the understanding of
the competitive position of the industry. The required price increase can
be readily computed using the DCF analysis described above, but dealing
only with the incremental pollution investment and cash proceeds.
Application of the above DCF procedure to these costs will yield the present
value of pollution control costs (i.e. , investment plus operating cost less
tax savings). If this is known, the price increase required to pay for
pollution control can readily be calculated by the formula
_ JPVP) (100)
XX —
(1-T) (PVR)
whe re:
X - required percentage increase in price
PVP = present value of pollution control costs
PVR = present value of gross revenue starting in the year
pollution control is imposed
Note that this formula implies that incremental profits resulting from
the price increase will be taxed at a rate of 48 percent.
V-10
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C. Financial Effects
In Chapters II-IV, the financial characteristics of model plants were pre-
sented. 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
profitability 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 fi-
nance 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 profit-
ability will also be examined: (1) capitalized value of earnings and (2)
present values estimated by the procedures described. 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 Chapters
II-IV. This ability will vary from one industry subsector to another
due to differential financial structures, profitability and abatement
requirements.
D. Production Effects
Potential production effects include reductions of capacity utilization
rates, plant closures and stagnation of industry growth. It is antici-
pated that reductions in capacity utilization will be estimated via quali-
tative techniques given the analysts' knowledge of the industry. The
same is true for assessing the extent to which plant closures may be
offset by increases in capacity utilization on the part of plants remaining
in operation. Data limitations and time constraints are expected to re-
quire that the impact of pollution control standards upon future growth
of the industry also be estimated via qualitative methods.
V-ll
-------
The remaining effect, plant closures, is very difficult to measure
realistically. 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 models to represent an industry is
imperfect and that not all of the relevant values or factors can be
included in the models. Other factors are considered as necessary
in the subsequent analysis.
The above analysis will be done under a without pollution control con-
dition and a with pollution control condition. The former will establish
a baseline against which after pollution control impacts will be assessed.
E. Employment Effects
Given the production effects of estimated production curtailments, plant
closings and changes in industry growth, a major consideration arises
in the implications of these factors upon employment in the industry.
The employment effects stemming from each of these production impacts
will be estimated. To the extent possible, the major employee classifi-
cations involved will be examined as will the potential for re-employment.
F. Community Effects
The direct impacts of job losses upon a community are immediately
apparent. 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 positive
net community effect (e. g. , a small plant with a high effluent load in an
area with a labor shortage).
These impact factors will be qualitively analyzed as appropriate.
V-12
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G. Other Effects
Other impacts such as direct balance of payments effects will also be
included in the analysis. This too will involve qualitative analyses.
V-13
-------
VI. POLLUTION CONTROL REQUIREMENTS AND COSTS
The water pollution control standards, technology and costs used in this
analysis were provided by the Environmental Protection Agency. _'
Alternative standards were set for different segments of the grain milling
industry. This information is summarized briefly below for reference.
Estimated pollution control costs are also summarized for selected model
plants in each segment of the industry.
Although cost data were not provided for alternative plant sizes within
es.ch segment of the grain milling industry, it is believed that repre-
sentative plant data, as provided, are adequate to project the overall
expected impacts. The main reason for this judgment is that most grain
milling plants currently discharge into municipal systems. Consequently,
only limited numbers of plants will be directly affected by the proposed
guidelines. Those which are affected may be characterized by the model
plant data presented. Also, in all segments studied, that portion of the
industry which discharges to municipal treatment systems will effectively
determine levels of output and prices in the industry.
Pollution Control Requirements
The Best Practicable Control Technology (BPT) and the Best Available
Technology (BAT) tentative guidelines proposed for the corn wet milling,
corn dry milling, parboiled rice milling and bulgur processing segments
of the grain milling industry are as summarized in Tables VI-1 and VI-2,
respectively.
To achieve the BPT and BAT proposed guidelines, each segment of the
grain milling industry would be required to apply suitable treatment
practices. In the information provided by EPA, specific possible water
treatment practices were identified for each segment of the grain milling
industry to achieve effluent reductions corresponding to both levels. In
all cases, the BAT proposed practices assumed compliance with the BPT
practices followed by additional treatment to attain the higher standards.
— Based upon materials prepared for EPA in "Development Document
for Effluent Limitations Guidelines and Standards of Performance,
Grain Milling," by Sverdrup and Parcel and As sociates , Contract
No. 68-01-1503, June, 1973.
VI-1
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Table VI-1. BPT Pollution Control: Effluent reduction attainable
through the application of best practicable control
technology currently available
Industry Segment
Corn wet milling
Corn dry milling
Bulgur
Parboiled rice milling
BOD
(lbs/MSBu)L/
50.0
4.0
0.5
(Ibs/cwt)
0.014
BPT Proposed Standard
Suspended
solids
(Ibs/MSBu)
35.0
3.5
0. 5
(Ibs/cwt)
0.008
pH
6-9
6-9
6-9
6-9
Source: EPA and Sverdrup & Parcel and Associates
— MS Bu equals thousand standard bushels.
VI-2
-------
Table VI-2. BAT Pollution Control: Effluent reduction attainable
through the application of best available technology
economically achievable
BAT Proposed Standard
Industry Segment
Corn wet milling
Corn dry milling
Bulgur
Parboiled rice
BOD
(Ibs/MSBu) If
20.0
2.0
0.3
(Ibs/cwt)
0.007
Suspended
solids
(Ibs/MSBu)
10.0
1.0
0.2
(Ibs/cwt)
0.003
PH
6-9
6-9
6-9
6-9
Source: EPA and Sverdrup & Parcel and Associates
— MS Bu equals thousand standard bushels.
VI-3
-------
For each segment of the grain milling industry, a brief summary of
indicated treatment practices proposed to meet the tentative guidelines
is presented below. In general terms, application of the "best practi-
cable control technology currently available" (BPT) in the grain
milling industry results in a high level of waste treatment together with,
in some instances, requisite iu-plant modifications. Application of the
"best available technology economically achievable" (BAT) generally
requires improved solids separation following activated sludge or com-
parable biological treatment.
The specific types of treatment and technological assumptions used to
achieve the proposed guidelines are briefly as follows for each segment
of the grain milling industry included in this study.
Corn Wet Milling
General Requirements
Plants in the corn wet milling industry discharging directly to surface
waters must undertake major pollution abatement activities to meet
effluent limitations. These activities cpnsist of in-plant modifications
and biological wastewater treatment. Plants discharging to municipalities
will be under increasing pressure from the municipalities to make in-
plant modifications to reduce the waste levels 'of the if Waste -flaw's:'- 5ru- '
plant modifications include the following:
(1) Isolate and collect polluting wasteflows.
(2) Recirculate cooling waters by using cooling tower systems
or surface condensers to eliminate once-through barometric
cooling waters.
(3) Isolate once-through non-contact cooling-waters for direct
discharge.
(4) Dike all process areas to contain accidental spills.
(5) Install entrainment separators in steepwater and syrup
evaporators.
(6) Monitor waste streams to control heavy product losses.
Corn wet mills discharging directly to surface waters must provide exten-
sive waste treatment for process waste vaters, after careful efforts to
keep wasteloads to a minimum, in order to meet effluent limitations.
Treatment processes necessary to meet effluent limitation levels are
as follows:
VI-4
-------
(I) BPT: Equalization and Activated Sludge - The treatment
process at this level consists of grit removal, ph adjustment,
nutrient addition, 12 to 18 hours of aerated equalization,
complete-mix a ctiva ted sludge processing, secondary sedi-
mentation, and sludge dewatering.
(II) BAT: Equalization, Activated Sludge, and Deep Bed
Filtration - Includes the Level I treatment process plus deep
bed filtration.
Industry Experience
The effluent limitation levels can be met by applying current technology
since each of the in-plant modifications and treatment control processes
is currently being used by one or more corn wet mills. The practices
have been in effect in a number of mills for several years and reduce
waste loads by 25 to 50 percent in some plants. The treatment of corn
wet milling wastes with activated sludge and other biological systems
is practiced at seven mills. One mill presently meets effluent limitations
by using an activated sludge system followed by aerated lagoons.
VI-5
-------
Corn Dry Milling
General Requirements
The waste-waters of concern in the corn dry milling industry are gener-
ated by corn washing. Little can be done to reduce the wasteload with
in-plant controls as long as corn washing is practiced. Treatment of
the entire waste stream is necessary to meet the proposed effluent
guidelines and consists of the following practices:
(1) Collect wastewaters including those from car washing.
(2) Primary solids separation by sedimentation.
(3) Biological treatment
(4) Final separation of solids by sedimentation.
The waste treatment practices proposed to meet the proposed guidelines
are as follows:
(I) BPT: Primary Sedimentation and Activated Sludge - Treatment
consists of primary sedimentation, nutrient addition, complete-
mix activated sludge, secondary sedimentation, and sludge de -
watering.
(II) BAT: Primary Sedimentation, Activated Sludge, and Deep
Bed Filtration - Includes BPT treatment plus deep bed
filtration.
Industry Experiences
Treatment of wastewater discharges is limited in the Corn Dry Milling
industry. Most mills discharge to municipal systems. An unknown
number discharge directly to receiving waters. The level of treatment
practiced by those discharging directly to receiving waters is also
unknown. One plant is known to pretreat. While the level of treatment provided
is not consistent with the proposed effluent guidelines, it does show that waste-
flows from corn dry mills are amenable to conventional biological treatment.
The corn dry milling industry can reach the BPT and BAT guidelines by
transferring proposed treatments from other food processing industries.
VI-6
-------
Bulgur Processing
General Requirements
The only wastewater of concern in the -wheat flour milling industry re-
sults from bulgur processing. All of the mills producing bulgur at the
present time discharge directly to municipal systems. For those plants
that would be concerned with meeting new source performance standards,
the treatment required includes:
(1) Primary solids separation
(2) Biological treatment
(3) Final separation of solids by sedimentation
To meet the proposed effluent guidelines, the treatment practices pro-
posed are as follows:
(I) BPT: Activated Sludge - This process includes an activated
sludge system with nutrient addition and secondary sedimen-
tation. Primary sedimentation is not included because of low
flows.
(II) BAT: Activated Sludge and Deep Bed Filtration - Deep bed
filtration system is added to the BPT activated sludge system
Industry Experience
None of the bulgur mills provides wastewater treatment at the present
time. The proposed treatment practices represent currently applied
technology in related areas of food processing. The solids separation
.and biological treatment processes in use should also be applicable to
the treatment of wastewater from bulgur processing.
VI-7
-------
Parboiled Rice Milling
General Requirements
The milling of rice involves no process water and no wastewater dis-
charge. The exceptions are those mills producing pa rboiled rice. The
wastewater from parboiling rice comes from the steeping operation.
In-plant controls generally have no influence on the quantity or quality
of wastewater. None of the six mills parboiling rice are known to treat
their discharges which go to municipal systems. For those plants
who cease to discharge to municipal systems or for new sources, the
treatment required to meet effluent standards includes:
(1) Biological treatment
(2) Final separation of solids by sedimentation.
The following treatment practices are proposed to meet the effluent
limitation guidelines if required:
(I) BPT: Activated Sludge - Treatment includes nutrient addition
a complete-mix activated sludge process, and secondary sedimen-
tation. The activated sludge wastes could possibly be dewatered
by a centrifuge and added to the animal feed byproduct stream.
(II) BAT: Activated Sludge and Deep Bed Filtration - This
treatment includes the BPT activated sludge system followed
by deep bed filtration.
Industry Experience
None of the six rice parboilers in the United States is known to be
treating discharges-at the present time. The general nature of the
wastewater indicates it can be treated by biological processes similar
to those used in other food processing industries.
VI-8
-------
Pollution Control Costs
Both the BPT and BAT estimated costs for pollution control for each
applicable segment of the grain milling industry are as summarized in
Table VI-3. The cost data provided are for selected model plants within
each segment of the industry. Cost data for alternative sized waste
treatment operations were not provided; however, the model plants were
selected to represent the most representative impacted size category of
plants.
The plant sizes represented in Table VI-3 correspond identically or close-
ly with the primary model plants of this study. Thus, the cost data can be
used directly for comparable plants. However, in two segments, DPRA
generated alternative sized plants for the impact analysis as summarized
below. In the absence of scale factors for adjusting the waste treatment
costs, the following relative estimates were used:
Industry
Corn wet milling
Corn dry milling
Bulgur
Parboiled rice milling
EPA (S&P)
Plant Size
60, 000 bu/day
DPRA Plant
Sizes
60, 000 bu/day
30, 000 bu/day
90,000 bu/day
Cost
Factor
1.0
0. 75
1.5
30,000 bu/day
8, 000 bu/day
8, 000 cwt/day
30, 000 bu/day
15, 000 bu/day
5, 000 cwt/day
(8, 350 bu/day)
8, 000 cwt/day
th r uput
(500 cwt/hr max)
1.0
0.75
1. 0
1.0
The scaled estimates were made to approximate costs of pollution control
in alternative sized plants based on economies-of-scale relationships
found in other industries. In this way, it is possible to provide at least
some insight into the relative financial effects of pollution control costs
among plants within a given segment of the grain milling industry. The
assumed data are subject to verification, however, it is noted that a
procedure was adopted to v^ry the estimated pollution control costs by
f 30 percent for all cases studied. This procedure provides sensitivity
information which aids in the impact assessment.
VI-9
-------
Table VI-3. Estimated "BPT" and "BAT" wastewater effluent treatment costs for selected segments
of the Grain Milling Industry
BPT
Industry Segment
Wet Corn
Dry Corn
Bulgur
Parboiled Rice
Type Plant
60,000 bu/day
(medium)
30,000 bu/day
(moderately
large)
8,000 bu/day
(medium)
8,000 cwt/day
(moderately
large)
— Appendix A supplement to source
Source: Sverdrup and Parcel and
Best Practicable Control Technology
Currently Available
Investment
$2,544,000
$ 291,000
$ 24,000
$ 313,000
O&M */
$230', 000
$ 52,800
$ 9,200
$ 57,300
BAT
Best Available
Economically
Investment
$2,832,000
$ 323,000
$ 93,000
$ 347,000
Technology
Achievable
O&M I/
$278,000
$ 62,200
$ 15,700
$ 66, 100
cited. Operating and maintenance annual costs including energy and power costs.
Associates, Development Document for Effluent Limitations Guidelines and
Standards of Performance, Grain Milling, Draft report to EPA, June 1973.
-------
Status of Wastewater Treatment
A major consideration in assessing the expected impacts of improved
pollution controls on a given industry is the current state-of-art of pollu-
tion control and the consequent incremental requirements to achieve the
proposed new abatement guidelines. In the case of grain milling, and
especially for selected segments, it was found that most plants, if not
all plants within a segment, are presently discharging to municipal
treatment systems so that individual plant treatment facilities will not
be required. Consequently, only limited numbers of plants are ex-
pected to be impacted by the proposed effluent limitation guidelines.
Four grain milling industry segments have been identified as having sig-
nificant volumes of wastewater effluents irrespective of their current
treatment status: Corn wet milling, corn dry milling, bulgur processing,
and parboiled rice milling. Effluent limitation guidelines and proposed
treatment strategies to meet the guidelines have also been established
(as described above). Next, a brief summary of the state-of-art of
pollution control in each of the four industry segments is presented.
Corn Wet Milling
There are currently 17 plants in this segment of the grain milling in-
dustry. Major sources of wasteflows in the corn wet milling industry
are those from steepwater evaporation, modified starch production,
and syrup refining. The quantity and character of the wasteflows can
vary greatly, depending upon the type of cooling system and the products
being manufactured. Total water use by plants in the corn wet milling
industry can vary from 1 mgel to 50 mgd depending upon the types of
cooling systems employed. —
In general, the wastewater discharges from the corn wet milling plants
can be classified as high in wasteloads. The BOD varies from 255 to
4, 450 mg/1. Suspended solid levels vary from 81 to 2,458 mg/1.
Of the 17 plants in the industry, only five discharge directly into re-
ceiving waters. The other plants discharge into municipal systems.
Of the five, three process wastewater in their own treatment facilities.
One plant is constructing treatment facilities at the present time and
the last plant plans to discharge into a municipal system now under
construction.
_L' The wide variance in water requirements is primarily due to differ-
ences in types of cooling systems employed. Those plants using a
once through cooling water system will have a total water use substantially
greater than plants using recirculating cooling water systems.
VI-11
-------
Corn Dry Milling
There were 124 corn dry mills in operation in 1971. Many of these
mills are small and located in the Southeastern United States. The
larger plants are located primarily in the Corn Belt states. The major
source of wastewater from corn dry milling is from corn washing, be-
fore milling. Generally, small mills to not wash corn before milling
and large mills do wash. Since approximately 90 percent of the industry
production occurs in large mills, small dry corn mills can be eliminated
from consideration.
Wastewater discharges from corn dry mills vary from 3.2 to 6 gal per
bu of corn processed or a total wastewater flow of up to 240,000 gpd. The
waste waters are characterized by high BOD and suspended solids con-
centrations. BOD varies from 900 to 2,700 mg/1. Suspended solids
concentrations vary from 1,500 to 3, 500 mg/1.
Most corn dry mills generating wasteflows discharge into municipal
systems but a complete inventory of wasteflow disposal methods is not
available.
Bulgur Processing
Of the normal wheat flour milling operations, only those plants engaged
in bulgur production discharge significant amounts of wastewater. At
the present time six plants in the United States are processing bulgur.
The major source of process wastewater is from the steaming and cooking
of bulgur.
The water requirements of bulgur plants are from 30,000 to 65,000 gpd
depending upon the daily capacity of bulgur production. Of this total
water requirement, about 10,000 to 30,000 gpd is discharged as waste-
water. The wasteload of bulgur wastewater is moderately high. BOD
varies from 238 to 521 mg/1. Suspended solids levels vary from 294 to
414 mg/1.
All six plants processing bulgur are reported to be discharging into
municipal systems.
Parboiled Rice Milling
Rice milling ordinarily involves no process waters and no wastewaters.
The exceptions are those plants producing parboiled rice. Of the 42
rice mills in the United States, only six plants produce parboiled rice.
VI-12
-------
The major source of wastewater in the parboiling plants is the steeping
and cooking process. Water use varies from 17 to 25 gal/cwt of rough
rice processed. Total waste wate r volume va ries from 70,000 to 200,000 gpd.
The waste loads from the parboiling of rice can be characterized as having
a high soluble BOD content and a low suspended solids level. BOD levels
va ry from 1,280 to 1,305 mg/1. Suspended solids va ry from 33 to 77 mg/L
All six rice mills that parboil rice are reported to discharge their waste
water into municipal systems.
VI-13
-------
VII. IMPACT ANALYSIS
The impacts of direct discharge effluent guidelines on the grain milling
industry as described herein will not likely be severe. The main reason
for this is that most grain milling plants currently discharge into munic-
ipal treatment systems where adequate treatment can be performed.
Grain milling wastewaters, which are typically high in BOD and suspended
solids concentrations, are generally well suited for biological treatment
as performed by municipal works.
As indicated in the preceding chapter, only limited numbers of corn
wet milling and corn dry milling plants currently discharge directly
into surface waters. The proposed "BPT" and "BAT" standards
will therefore only apply to these subindustnes of the grain milling
industry. All bulgur and parboiled rice mills discharge effluents into
municipal treatment systems and no BPT or BAT standards are appli-
cable. However, consideration is given to the potential impact of new
source performance standards (NSPS) which would apply to any new
firms entering these industries.
The NSPS standards are assumed equal to the BAT standards pro-
vided, and the estimated costs for BAT are subsequently used for
assessing the new source potential impacts. No new source pre-
treatment standards were provided for any subindustry and thus no
such impact analysis is included.
The following discussion is presented on a subindustry basis: corn wet
milling, corn dry milling, bulgur processing and parboiled rice milling.
For each subindustry, the impacts considered in the analysis include
the following:
Price effects
Financial effects
Production, effects
Employment effects
Community effects
Other effects, e.g., balance of payments.
Because of the limited applicability of the proposed effluent limitation
guidelines, many of the above effects are expected to be minimal. The
greatest attention is therefore given to the model plant financial analyses
and expected individual plant effects. In general,, only individual plants
rather than the industry (or subindustry) as a whole will likely be adversely
impacted by the proposed standards and associated treatment requirements.
VII-1
-------
Corn Wet Milling
As an overview, the following factors regarding the corn wet milling
industry are pertinent to this analysis:
Only 5 of 17 existing plants currently discharge directly
into surface waters.
Three of the 5 plants have some biological treatment facil-
ities in place; 1 is constructing a treatment system; and 1
will soon discharge into a municipal system under con-
struction,
A broad range of plant sizes, from about 24,000 to 120,000
bushels per day capacity, are involved.
The 5 plants represent about 30 percent of the industry
capacity. (The 4 plants to continue direct discharge
represent about 23 percent of the total.)
Treatment facilities for this industry are quite costly, but
all plants affected have taken positive steps toward meeting
prospective effluent guidelines.
The primary concern of this analysis is regarding the 5 (or soon only 4)
plants which directly discharge to surface waters. However, as a con-
sequence of the developments indicated, the BPT (1977) and BAT
(1983) guidelines are not expected to severely alter the structure of the
corn wet milling industry as a whole. Much of the expected impact will
have occurred via treatment practices in place prior to the enforcement
of the proposed effluent guidelines. This does not reduce, however, the
treatment cost burden of the impacted plants either individually or rela-
tive to the remainder of the industry.
Price effects. Based upon individual model plant analysis, it is esti-
mated that prices of corn wet milling products would have to increase
from about 1.2 to 1.9 percent in order to cover the costs of pollution
control (as provided) -- assuming no prior treatment. However, can
the few firms which must treat their own wastes pass-through their
higher treatment costs relative to the remainder of the industry?
VII-2
-------
Because of the competitiveness of the corn wet milling industry, it is
not expected that the few impacted firms will be able to pass-through
their full additional costs for pollution control. Perhaps location or
product mix factors could influence some prices, but on an industry-
wide basis price effects should be well below the levels indicated.
For example, even if the plants affected could pass through their costs,
the industry average prices would increase only from about . 3 to .5
percent. Competitive factors should result in changes of less than
these levels.
A related factor is the possibility of generally higher municipal treat-
ment charges (coupled with pretreatment practices which may be needed)
that would affect the remainder of the industry. In this case industry
prices would likely be affected and increased throughout the industry.
However, this would not result directly from the guidelines of this
study.
Financial effects. The profitability of those plants required to add pollu-
tion control facilities will be adversely affected. As an indication of the
level of impact which is expected (assuming no change in prices received),
net profit as a percent of sales was calculated for a series of model plant
situations (Table VII-1).
Three different sizes of corn wet milling model plants , i.e., 30, 60 and
90 thousand bushels per day capacity, were examined. Both BPT and
BAT pollution control costs were imposed and compared with the base
case without pollution controls. Further, to assess the sensitivity of the
impacts relative to the pollution control costs provided, these costs were
arbitrarily varied by + 30 percent.
As shown in Table VII-1, only the 30, 000 bu/day plant is subject to a
serious decline in profitability. Given the "target" pollution control
costs _', the smallest plant showed a decline of . 8% in net profit on
sales (from 2.5% to 1.7%). The 60,000 and 90,000 bu/day plants showed
a decline of .4%. These effects were only marginally different with the
+ 30 percent in estimated pollution control costs.
— Estimated pollution control costs were provided only for the 60, 000
bu/day plant. This data was scaled by DPRA for the 30,000 (.75 times
the 60,000 bu/day plant costs) and the 90,000 (1.5 times the costs given)
bu/day model plants.
VII-3
-------
Table VII-1. Net profit as a percent of sales in the corn wet milling
industry with and without pollution controls
I/
Level of Pollution Control
Size and Cost _' None BPT BAT
30,OOP bu/day
Target cost plus 30% -- 1.6 1.5
Target pollution cost -' 2.5 1.8 1.7
Target cost less 30% -- 1.9 1.9
60,OOP bu/day
Target cost plus 30% -- 3.2 3.2
Target pollution cost 3.7 3.3 3.3
Target cost less 30% -- 3.4 3.4
90,000 bu/day
Target cost plus 30%
Target pollution cost 4. 5
Target cost less 30%
4.0
4. 1
4.2
3.9
4.0
4. 1
_' No provision made for cost recovery by sale of recovered wastes.
— Target pollution cost estimates are those estimated by EPA for the
60, 000 bu/day plant. Other data estimated by DPRA.
VII-4
-------
Alsonoted is that while the profitability declined in all cases, no model
plant was shown to become unprofitable. Although faced with declining
profitability, it does not appear that plants would close solely as a re-
sult of pollution controls.
Further measures of the financial effects of the proposed pollution con-
trols on the corn wet milling industry are the estimated model plant
financial ratios shown in Table VII-2. Both pre-tax and after-tax
Return on Investment (ROI) ratios are shown for each model plant
situation previously described. As explained in Chapter IV, the average
invested capital is estimated as equal to one-half of the replacement cost
(including pollution control costs if applicable) plus net working capital.
For the Level II target pollution control cost situation the after-tax ROI
drop from 2.7 to 1. 9% for the small model plant, from 5. 1 to 4. 4% for
the medium plant, and from 6.7 to 5.8% for the large plant. These data
reflect the negative impact on profitability, but do not indicate that plant
closures are expected.
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
elsewhere if the corn wet milling function were discon-
tinued. However, only 10 percent of the estimated replace-
ment cost is assumed recoverable for this industry. This
relatively low value is estimated because corn wet mills
are capital intensive and equipment would have little salvage
value in alternative uses outside the wet milling industry.
2. Revenues and expenses are assumed to remain constant
over time, i.e. , 20 years of operation.
3. The estimated cost of capital for the industry is 7. 5 percent.
The Net Present Values, calculated for the model plants, both with
and without pollution controls -- and with a + 30 percent change in the
target pollution control costs, are as shown in Table VII-3. As indicated,
all plant cases examined had positive NPV's which indicates that the plants
VII-5
-------
Table VII-2. Estimated pre-tax net income and rates of return on average invested capital
in the corn wet milling industry with and without pollution controls
I
0s-
Size and Level
of Pollution Control
Without Pollution Control
30,000
60,000
90,000
With BPT
30,000
60,000
90,000
With BAT
30,000
60,000
90,000
bu/day
bu/day
bu/day
Control
bu/day
bu/day
bu/day
Control
bu/day
bu/day
bu/day
Pre-tax income
T+30%
786
3, 151
5,849
738
3,063
5,717
rp I/
- ($000) -
1, 134
3,615
6,545
866
3,258
6,009
816
3, 191
5,908
T-30%
3
6
3
6
946
,365
, 170
911
,318
,099
Pre-tax ROI
T+30%
•
3.5
8.Z
11. 1
3.3
7.9
10.7
T
_ _ (o?,\ _
\ fa)
5.3
9.8
13.0
3.9
8.6
11.5
3.6
8.4
11.2
T-30%
4.3
8.9
11.9
4. 1
8.8
11.7
After -tax ROI
T+30%
1.8
4.3
5.7
1.7
4. 1
5.6
T
lot \
- - 1 73) -
2.7
5. 1
6.7
2.0
4.5
6.0
1.9
4.4
5.8
T-30%
2.2
4.7
6.2
2. 1
4.6
6. 1
— T = Target pollution cost as estimated by EPA for the 60, 000 bu/day plant.
Other data estimated by DPRA.
-------
Table VII-3. Net present values of corn wet milling model plant cash flows with and without pollution controls —
($000)
I/
Level of Pollution
Control and Cost
Without Pollution Control
With BPT Control
Target cost + 30%
Target pollution cost —
Target cost - 30%
With BAT Control
Target cost + 30%
Target pollution cost
Target cost - 30%
30,000 bu/day
($000)
6,334
3,277
3,983
4,688
2,978
3,753
4,527
Net Present Values of Cash Flows
60,000 bu/day
($000)
19,604
15,528
16,469
17,409
15,317
16,307
17,296
by Plant Size
90,000 bu/day
($000)
35,202
29,088
30,499
31,910
28,490
30,039
31,588
— Assuming 20 year operating cash flow at 7. 5% cost of capital and a salvage value of 10% of original value
of investment.
-I Target pollution cost as estimated by EPA for the 60, 000 bu/day plant.
Other data estimated by DPRA.
-------
are not likely to shutdown. The low salvage values utilized contributes
to the positive NPV's and contributes toward existing plants being locked-
in. the wet milling industry.
The fact that all existing mills which discharge into streams are already
taking positive steps to establish water treatment systems is a direct
indication that no plants are likely to shutdown due to pollution control
requirements per se. The financial characteristics displayed provide a
basic rationale for the behavior being observed in this industry.
Capital availability in the corn wet milling industry for pollution control,
is not regarded as a major limiting factor even though capital require- -
ments will be extensive. Both internal and external sources of capital '•'
are believed available. The conglomerate type structure of many firms ^
in the industry broadens the base on which to generate internal capital. .T
Also, the plants themselves generate sizeable after-tax cash flows which
might be retained. Further, the industry as a •whole has developed a
generally stable growth pattern with favorable prospects for continued
growth in demand. These latter factors strengthen the ability of firms
in the industry to acquire funds from external sources.
Production effects. No curtailment in production is projected for corn
\vet milling industry as a whole, nor are any plant closings expected.
As indicated above, all plants involved in direct discharges of waste- - :
waters have already taken positive steps to treat their own wastes or
have them treated. Current production levels are expected to be main-
tained.
'!
The most serious concern regarding production involves the industry.
capacity for growth. Wastewater flows are substantial per 1000 bushels
processed, and the capacity for waste treatment (including wastef low's
into municipal systems) may be limiting in the future. Effluent over-
loads and periodic spills have been a reoccurring problem in the corn,
wet milling industry based on experience to date. Before the industry,
can expand output significantly, improvements will need to be made in
controlling overloads and spills.
Another related concern in the corn •wet milling industry is the potential
for new plants in the industry and growth through time. NSPS, new
source treatment standards, inapplicable, would be a partial deterrent -
to entry. However, the relative effect of these standards and associated
costs should be comparable .to those shown above for the BAT cases.
In essence, if a new plant is sufficiently viable without pollution controls,
then the imposition of the estimated pollution control costs is not likely
to prohibit entry. The incremental costs of pollution control represent
less than 5 percent of the remainder of the capital investment required in
corn wet milling.
VII-8
-------
Employment effects. Because neither production cu vta ; Iments nor plant
closings are projected, then no associated employment losses are ex-
pected. In the recent past, total employment in the industry has trended
downward, e. g. , 14, 100 in 1967 and 13, 500 in 1970. This has occurred
even though industry output has increased. Newer plants and modernized
plants tend to be less labor and more capital intensive. These trends
may continue, but such changes would not necessarily be linked to pollu-
tion control changes.
Those plants which install treatment systems would require some addi-
tional labor for waste treatment control. Hence, the general effect
would be to increase employment somewhat in the industry.
In contrast, the plants which must install treatment systems, without
apparent increases in prices to cover pollution control costs, will be
under greater pressure to improve in-plant efficiency. The employment
consequences of such actions, which would be induced by the pollution
control may be a factor.
Community effects. No significant community effects are projected
as a result of the proposed pollution controls on the corn wet milling
industry. This follows in that no plant closures nor production cur-
tailments are expected in the industry.
Other effects. Corn wet milling products are numerous and many
different markets are involved. Competitive relationships could change
in some of these markets due to pollution controls in general, e. g. ,
pollution control impacts on the beet and cane sugar industries, with
relative advantages or disadvantages occurring to the corn wet milling
industry. However, major disruptions originating from the corn wet
milling industry are not expected.
Some products are exported, but little change is expected in general.
Consequently, no major changes in balance of trade relationships are
indicated.
Power and energy needs for pollution control are not estimated to be
excessive, thus this requirement is not expected to be a major problem
area for the industry.
VII-9
-------
Corn Dry Milling
The corn dry milling industry is distinctly different from the corn wet
milling industry in that milled products (corn grits, meal and flour)
rather than "refined" products are the primary end-use products.
Process wastewaters primarily involve water used for washing corn
prior to milling (plus limited rail car washing water which can be
eliminated using dry vacuum cleaning techniques). The effluents of
this industry are quite amenable to biological waste treatment.
As background for assessing the expected economic impacts of water
pollution controls on this industry, the following items are highlighted:
Approximately 124 corn dry mills were recently in operation.
The larger mills, primarily located in the Corn Belt States
generally wash their corn prior to milling.
The smaller mills, which grind whole corn and are concen-
trated in the Southeastern United States, typically do not
wash corn.
Approximately 90 percent of the industry production is
milled in the larger plants.
Rather limited volumes of wastewater are generated by
plants and consequently the estimated costs for waste
treatment are not excessive relative to other milling
investments and costs.
Most (if not all) dry corn mills with process wastewaters
are said to discharge into municipal treatment systems
(a complete inventory is not available), and thus the pro-
posed guidelines will directly impact only a relatively
small portion of the industry.
No known separate treatment systems exist.
The main concern of this impact analysis is directed toward a rela-
tively few of the larger corn dry milling operations which are believed
to discharge into surface waters. As is later shown, the expected
impacts are not severe for the model plant cases studied. Thus, while
specific plants that discharge directly and their locations have not
VII-10
-------
been pinpointed, such additional information is not expected to alter
the conclusions reached.
Price effects. Based upon individual model plant analysis for both a
medium plant (15,000 bu/day} and a moderately large plant (30,000 bu/day)
in the corn dry milling industry, it is estimated that prices of milled
products would have to increase from about „ 6 to 1. 1% to recover the
estimated costs of pollution control. The upper value was based on
the impact to the medium sized plant.
In that only relatively few firms are estimated to be impacted, it is
not likely that prices in the industry as a whole will be increased.
The impacted firms, operating in a competitive industry, will not
be able to pass-through the additional costs for pollution control.
Financial effects. The profitability of the plants impacted will be lower
due to pollution control costs, but the impact as indicated in terms of
net profit as a percent of sales is not substantial. As shown in Table
VII-4, the medium plant had a decline of .4% in net profit on sales
(from 1.6 to 1.2%) at the target rate —' , and the larger plant had a
decline of .3% (from 2. 6-to 2.3%).
A further indication that the impacts are not expected to be overly
severe is the stability of the overall impacts within a _j- 30 percent
range in the estimated pollution control costs (as are also presented
in Table VII-4). Both the BPT and BAT cases were assessed
in relation to the base case without pollution controls.
It is noted that the 15,000 bu/day plant had a relatively low net profit
on sales value in the base case, yet the estimated pollution control
costs did not result in an unprofitable situation. Neither model plant
was shown to become unprofitable, and although faced with declining
profitability, it does not appear that the types of plants which might
be impacted would likely close solely as a. result of pollution control
impacts.
Additional financial measures of the corn dry milling model plants
both with and without pollution controls are presented in Table VII-5.
The measures shown were developed as shown for the base case in
Chapter II. For the BAT (1983) treatment cases, the after-tax ROI
Estimated pollution control costs were provided only for the 30,000
bu/day model plant. DPRA estimated that the 15,000 bu/day plant
would incur costs equal to .75 times the costs given.
VII- 11
-------
Table VI1-4. Net profit as a percent of sales in the corn dry milling
industry with and without pollution controls
Level of Pollution Control
Size and Cost _' None BPT BAT
15,000 bu/day
Target cost plus 30%
Target pollution cost .£' 1.6
Target cost less 30%
30,000 bu/day
Target cost plus 30%
Ta rget pollution cost 2.6
Target cost less 30%
1.2
1.3
1.4
2.3
2.4
2.4
1.0
1. 2
1.3
2.2
2.3
2.4
— No provision made for cost recovery by sale of recovered wastes.
— Target pollution costs, estimated by EPA for the 30, 000 bu/day plant.
Other data estimated by DPRA.
VII-12
-------
Table VII-5. Estimated pre-tax net income and rates of return on average invested capital
in the corn dry milling industry with and without pollution controls
Size and Level
of Pollution Control
Without Pollution Control
15
30
With
15
30
With
15
30
,000
,000
BPT
,000
,000
BAT
,000
,000
bu/day
bu/day
Control
bu/day
bu/day
Control
bu/day
bu/day
Pre-tax net income
T+30% T y T-30%
( *ton n\
265
843
200 215 230
755 776 796
170 192 214
741 764 788
Pre-tax ROI After-tax
T+30% T
10.
17.
7.3 8.
14.6 15.
6.2 7.
14.3 14.
T-30% T+30%
\______ ____
j ----- -
3
0
0 8.7 3.8
2 15.7 7.6
1 8.0 3.2
9 15.5 7.4
T
- - t°i
\ 1
5.
8.
4.
7.
3.
7.
3
8
2
9
7
7
ROI
T-30%
4.5
8.2
4.2
8. 1
I/
-• T - Target pollution cost as estimated by EPA for the 30, 000 bu/day plant.
Other data estimated by DPRA.
-------
dropped from 5.3 to 3.7% for the 15, 000 bu/day mill, and from 8.8 to
7. 7% for the 30, 000 bu/day mill. The smaller plant is impacted more
severely, but again neither model plant situation would indicate that
plant closures are expected.
A final type of financial analysis completed is a "shutdown" analysis
based on calculation of a plant's Net Present Value (NPV) of projected
costs and revenues. With this measure it is possible to assess the
likelihood of continued plant operation versus closure. Under the
assumptions explained below, a positive NPV indicates that a plant
(given sunk investments) will probably continue to operate rather than
shutdown. The calculation of NPV is based upon the following assumptions
for the corn dry milling plants studied:
1. Existing plants have sunk investments but presumably they
could be scrapped or salvaged and the salvage value re-
invested elsewhere if the corn dry milling function were
discontinued. It is estimated that the larger mill (30,000
bu/day), which is comprised largely of buildings and eleva-
tors that could be used for other milling functions, would
have a salvage value equal to 50 percent of the replacement
cost. However, the smaller mill (15,000 bu/day) is esti-
mated to have only a 30 percent recovery value because the
smaller facilities would be less attractive for alternative
uses.
2. Revenues and expenses are assumed to remain constant
over time, i.e., 20 years of operation.
3. The estimated cost of capital, used in calculating the NPV,
for the industry is 7. 5 percent.
The Net Present Values for the model plants, both with and without pollu-
tion controls -- and with a +_ 30 percent change in the target pollution
control costs, are presented in Table VII-6. In all the situations studied,
the NPV's were positive and significantly above zero. This indicates
that existing plants are not likely to shutdown due solely to the imposition
of pollution controls.
The estimated pollution control costs for the corn dry milling are sub-
stantial but not excessive. Consequently, capital availability for pollu-
tion control in the corn dry milling industry would not appear to be a
major problem. The profitability of plant operations is not expected to
be severely impacted and external sources of capital should generally
remain available.
VII-14
-------
Table VII-6. Net present values of corn dry milling model plant cash
flows with and without pollution controls _'
Level of Pollution
Control and Cost
Net Present Values of Cash Flows by
Plant Size
15,000 bu/day
30,000bu/day
Without Pollution Control
($000)
993.7
($000)
2,825
With BPT Control
Target cost + 30%
Target pollution cost _'
Target cost - 30%
With BAT Control
Target cost + 30%
Target pollution cost
Target cost - 30%
416. 1
549.4
682.7
361.5
507.4
653.3
2,054
2,231.9
2,409.8
1,981.2
2, 175.9
2,370.6
I/
2/
Assuming 20 year operating cash flow at 7. 5% cost of capital and a salvage
value of 50% of original value of investment for the larger mill and 30%
for the smaller mill.
Target pollution cost as estimated by EPA for the 30, 000 bu/day plant.
Other data estimated by DPRA.
VII-15
-------
Production effects. No curtailment in production is projected for the corn
dry milling as a whole due to pollution controls. No plant closings are
expected.
Very few firms are potentially affected by the direct discharge effluent
limitation guidelines and these firms are not expected to close. Hov/ever,
even if a small number of plants were to close, there is excess capacity
for production in the industry. Industry-wide production should not be
curtailed regardless of the impact of the proposed direct discharge
guideline s.
The volume of corn processed by the corn dry milling industry has remained
rather stable since 196V. ranging from only 114 to 119 million bushels per
year from 1967 through 1972. These levels of production have been milled
by a steadily declining number of plants, e.g. , 152 in 1965 and 124 in 1971.
In light of the rather static demand situation for corn dry milling products
and the general excess milling capacity, the "trends" of industry growth
should not be affected by the imposition of the pollution controls indicated
in this study.
The NSPS, new source performance standards, would have the same
relative effects on new plants as the indicated BAT effects above. As
Imc h, the s e effects would present only a limited deterrent to entry. The
pollution control investment costs represent about 5 percent of the original
investment costs. This incremental investment requirement should not
prohibit entry if a new plant is otherwise sufficiently viable.
Employment effects. Employment losses are not expected because neither
production curtailment nor plant closings are projected due to the pollution
controls involved. Increased production costs resulting from pollution
controls, without expected price increases to offset these costs, may induce
other inplant changes to improve plant performance. Such changes cannot
be predicted, however, an offsetting factor would be the need for additional
labor for operating the treatment system. On balance, no change in employ-
ment is projected.
Community effects- With no plant closures or production curtailments
expected in the corn dry milling industry, then no significant community
effects are projected.
Other effects. No balance of trade or other detrimental direct effects are
forseen as a result of the imposition of the proposed effluent limitation
guidelines on the corn dry milling industry. The direct effects of the pollution
controls should not result in major disruptions in markets served by this
industry.
Power and energy needs are estimated to increase only by a small incre-
ment relative to existing requirements. Therefore, no problems due to
excessive increases in the demand for power and energy are expected.
VII-16
-------
Bulgur Processing
The bulgur industry has a variety of characteristics which, in summary,
preclude its having detrimental economic impacts from the pollution
controls proposed in this study. In brief, key characteristics of the
bulgur industry affecting this analysis are as follows:
Only 6 plants currently commercially produce bulgur in the
U.S. Total production is relatively minor in comparison with
other milling industries.
Only small volumes of wastewater are generated and this flow
contains moderate wasteloads.
All existing plants are reported to discharge into municipal
systems for treatment. No independent treatment systems
exist and none are expected to be required.
The proposed treatment practices, if required, are relatively
inexpensive to construct and operate.
In effect, the proposed BPT and BAT standards will not apply to
any existing plants in the bulgur industry. Consequently, there is no
expected economic impact from the direct discharge pollution control
guidelines in this industry.
In terms of the various effects to be evaluated it is concluded:
Type of Effect Expected Impact
Prices No change
Financial Controls not applicable
Production No change
Employment No change
Community None
Other None
The proposed NSPS standards (new source treatment) could, however,
provide a deterrent to entry into the bulgur industry. As a basis for
judging the potential impact of the NSPS standards, it is possible to
utilize the model plant data generated for bulgur industry.
VII-17
-------
Assuming that the NSPS impacts would equal the BAT impacts as
previously defined, then it is convenient to repeat the type of model
plant analysis shown above where the BAT and NSPS effects are con-
sidered equal. Only one model plant -- a medium sized, 5,000 cwt/day
plant, is evaluated as representative of the industry.
In terms of price effects , it was estimated that prices would have to
increase only by about . 5% to cover the estimated BAT pollution
control costs. Hence the proposed treatment requirements would not
seriously affect plant operations.
The level of profitability would also be affected only slightly as shown in
Table VII-7, where net profit on sales declined from 1. 7 to 1. 5% at the
target pollution control cost level. Change in control costs of +30 percent
resulted in less than . 1% additional change in net profit on sales. This
rather tight pattern indicates rather modest impacts within the range
of costs considered. If a new plant were considered viable prior to
pollution controls, then the proposed control costs would not likely be
a deterrent to entry.
Some additional financial measures are indicated in Table VII-8 for the
medium sized bulgur plant. In this case, for example, the estimated
after-tax ROI is estimated to decline from 7. 0 to 6. 0% at the target
rate. A . 3% additional change is indicated for either a t 30 change
in estimated pollution control costs. Again, these data suggest that
pollution control cost impacts on the bulgur industry are not severe.
The Net Present Value calculations for the shutdown analysis are not
strictly applicable for a new source situation. However, these calcula-
tions were made as if an existing plant were required to treat its wastes.
Relatively large positive NPV's were obtained at a cost of capital discount
rate of 7. 5%. This is a further indication that the proposed controls
should not cause economic dislocations in the bulgur industry.
In summary, the proposed pollution control costs are not a serious
deterrent to potential new source bulgur processors. Also, even if
existing plants were required to provide their own treatment systems,
the estimated impacts would be nominal.
VII-18
-------
Table VII-7. Met profit as a percent of sales in the bulgur processing
industry with and without pollution
Size and Cost
I/
Level of Pollution Control
NSPS LI
None
Medium Bulgur Plant
Target cost plus
Target pollution cost±.'
Target cost less 30 To
1. 7
1.4
1. 5
1. 5
I/
— No provision made for cost recovery by sale of recovered wastes.
_' Target pollution cost as estimated by EPA.
3_/ The NSPS (New Source) pollution control requirements are assumed
equal to the BAT (1983) requirements as provided.
VII-19
-------
Table VII-8. Estimated pre-tax net income and rates of return on average invested capital
in the bulgur processing industry with and without pollution controls
Size and Level
of Pollution Control
Without Pollution Control
Medium bulgur plant
With NSPS Control -^
Medium bulgur plant
Pre-tax net income
T+30% T -' T-30%
_ _ . _ f
-------
Parboiled Rice Milling
Parboiled rice milling is also a rather small segment of the overall
grain milling industry; but it is an economically important industry
and a concern exists regarding the potential impacts of water pollution
controls. However, as indicated briefly below, some key factors
regarding the industry indicate that the proposed direct discharge
pollution controls will not directly affect this industry:
• Only 6 of 42 rice mills in the U.S. currently produce
parboiled rice.
' Moderate wasteflows are generated and they are amenable to
biological treatment.
• All existing parboiled rice mills discharge wastes into
municipal treatment systems ( regular mills have no process
wa stewater s).
• No independent waste treatment systems are expected to be
required in the industry.
Because of waste discharges into municipal systems, the parboiled rice
mills will not be affected by the proposed BPT and BAT standards of
this study. Consequently) there is no expected economic impact from the
direct discharge pollution control guidelines on this industry.
Regarding each of the various effects for which an impact assessment is
desired, the following brief conclusions are made:
Type of Effect Expected Impact
Prices No effect
Financial Controls not applicable
Production No change
Employment No change
Community No effect
Other None
A related concern, however, is the potential impact of the proposed
NSPS standards (new source treatment) which could affect the entry of
new firms into the parboiled rice milling industry. By utilizing the
model plant data generated for this study, the potential impact of the
NSPS standards can be judged.
VII-21
-------
In this case it is assumed that the NSPS guidelines and control costs
are equal to the BAT data provided. Further, the impacts are ex-
pected to be equal for purposes of this analysis and the type of model
plant analysis used above is repeated to assess the NSPS impacts. A
moderately large (8,000 rwt/day) mill is evaluated as a prepresen-
tative mill in the industry.
It is estimated that the model plant would require a price increase of
about .8% on its final products if it were to fully recover the estimated
NSPS costs of pollution control. Since existing plants would not have
comparable incremental costs, it-is not expected that a new plant could
pass-through such costs. Thus, the profitability of a new source1 plant
would be reduced relatively.
As shown in Table VII-9, net profits as a percent of sales would be re-
duced by about . 2%, or a decline from 1. 6 to 1. 38% as shown for tre
model plant. A new plant may have different financial characteristics
than estimated herein, however, the relative impacts should be comparable
to that shown. The net profit on sales ratio did not change substantially within
a + 30 percent variance in the estimated pollution control cost target. This
reaffirms that the effects on profitability would be approximately as shown
within a reasonable range of the target costs used.
Additional financial measures, as shown in Table VII-10, are further
indication of the generally limited impact of estimated pollution control
costs on the profitability of the model plant. The after-tax ROI as reported
is shown to decrease from 11. 7 to 10. 7% for the target level case, or b /
1. 0%. This general level of impact would probably not deter a new plant
from entry into the industry if it were otherwise economically viable.
The above data suggest that an existing mill, if it had to provide waste-
water treatment, would probably do so. Although not strictly applicable
for the new source NSPS case, it is also noted that the Net Present
Values for existing plants as calculated for the shutdown analysis (dis-
cussed above) were positive and relatively large for this industry. This
further supports the belief that the proposed controls should not cause
serious economic dislocations in the parboiled rice milling industry.
In conclusion, the proposed pollution control costs are not believed to
be a major deterrent to potential new source parboiled rice milling
operations. Further, in the event that an existing plant were required
to provide its own treatment system, the estimated impacts would be
marginal. Based on a representative model plant case, existing plants
would not be expected to close given the target pollution control costs.
VII-22
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Table VII-9. Net profit as a percent of sales in the parboiled nee
milling industry with and without pollution controls
Level of Pollution Control
Size and Cost— None NSPS —
Moderately Large Parboiled
Rice Plant
Target cost plus 30% 1.25
Target pollution cost— 1.6 1.38
Target cost less 30% 1.42
J7
No provision made for cost recovery by sale of recovered wastes.
— The NSPS (New Source) pollution control requirements are assumed
equal to the BAT (1983) requirements as provided.
— Target pollution cost as estimated by EPA.
VII-23
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Table VII- 10. Estimated pre-tax net income and rates of return on average invested capital
in the parboiled rice milling industry with and without pollution controls
Size and Level
of Pollution Control
Pre-tax net income
Pre-tax ROI
After-tax ROI
T+30%
T-30%
T+30% T T-30% T+30% T
T-30%
Without Pollution Control
Moderately large parboiled
rice plant
With NSPS Control —'
Moderately large parboiled
rice plant
($000)-
404
463
379 354
8. 4
11.6
9. 1 9.
11.7
10.2 10.7 10.9
Target pollution cost as estimated by EPA.
_ '
— The NSPS (New Source) pollution control requirements are assumed equal to the BAT (1983) requirements
as provided.
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VIII. LIMTi;, OF THE ANALYSIS
The foregoing impact analysis was based upon data and information
from industry sources, from published secondary data sources, and
from subjective judgment. At various stages, the data utilized are
subject to error.
The nature and scope of possible errors should be identified and limits
placed on the analysis accordingly. The purpose of this final section
is to present limits of the analysis in terms of accuracy, range of
error, critical assumptions and questions remaining to be answered.
General Accuracy
Financial information concerned with investments, operating costs and
revenues was in general not available for individual plants or firms in
the grain milling industry. Consequently, the financial aspects of the
impact analysis were, of necessity, based upon synthesized costs and
returns for "representative" model plants within each subindust ry
studied. The accuracy of the financial data used is difficult to measure,
however it is believed that the data used are representa ti ve. Various
checks were made to establish the reasonableness of the data used.
The requisite data were developed by DPRA from a variety of sources
including published materials from universities and government agencies,
previous studies done by DPRA, information obtained from industry
sources including trade associations, published financial performance
data sources, and from private individuals knowledgeable of the industry.
A variety of crosschecks were made using published information from
the Internal Revenue Service, Standard and Poors, Dun and Bradstreet
and other financial data sources to ascertain whether the simulated per-
formance of the model plants were representative of the financial per-
formance experienced in the respective grain milling subindust ries.
Based on these crosschecks, it is believed that the model plants are
representative and suitable for assessing the incremental impacts of
pollution controls.
It is noted that in the recent past the grain commodity markets in general
(including corn, wheat and rice) have been exceptionally volatile and
VIII-1
-------
record high prices have been estabii shed. These prices directly affect
the grain m lling industry and the full repercussions on the milling
industry are not yet known. Therefore, in order to best reflect normal
milling conditions. DPRA ejected to base gross margin estimates on
1967-1971 average price conditions. While this procedure does not
accurately represent current prices, it was felt that average gross
margins would better reflect expected conditions in the industry.
Water pollution control costs were provided by EPA (and Sverdrup
&j Parcel and Associates). These data were developed for a typical
plant within each subindustry studied. It was necessary to adapt these
data in some cases for alternative sized plants. DPRA adjusted or
scaled these data as described above to reflect the general type of
change required, but there may be considerable inaccuracy involved.
Another concern involving the water pollution control costs is that no
costs were provided or assumed for in-plant modifications which may
also be required to achieve the effluent guidelines. As a partial com-
pensation for this potential cost, the control costs given were varied by
+ 30 percent. The higher level could serve as a surrogate for associ-
ated in-plant modifications.
Range of Error
Different data series and different portions of the analysis will have
various possible ranges of error. Subjective estimates of error ranges
for the grain milling industry as a whole (or subindustries if indicated)
are as follows:
Error Range
1. Number, location, size or other
organization and structure in-
formation
a. Corn wet milling
b. Corn dry milling _+ 10 %
c. Bulgur
d. Parboiled rice milling
2. Price information for products
and raw materials + 5 %
VIII-2
-------
3. Cost information for plant
investments and operating costs _+ 10 %
4. Financial performance information J^ 10 %
5. Salvage values of plants and
equipment j-20 %
6. Water pollution control costs Unknown
Critical Assumptions
In order to complete this analysis of the grain milling industry within
the scope of study established, a variety of assumptions were required.
Some critical assumptions were applicable to all segments studied,
while others were specific to a given subindustry. The main assumptions
deserving further comment are described below.
Representativeness of Model Plants. It is difficult to represent an industry
or subindustry with only 1 to 3 model plant situations when there are
actually many sizes and types of plants in the industry. In the four sub-
industries studied, the most difficult one to simply represent was corn
wet milling. No two plants in this industry are alike because numerous
end-products and product mixes can be produced.
The corn wet milling model plants were assumed to produce an overall
industry "average" mix of products. This approach seemed reasonable
within the limits of this study, but additional cases would be required
to simulate various actual operations.
The other subindustries are less subject to wide variation although pro-
duct mixes can differ from the assumed conditions, especially in corn
dry milling.
Model Plant Cost Data. Secondary or published investment and operating
cost data are minimal in the grain milling industry. Engineering synthe-
sis techniques had to be relied upon as a basis for constructing most of
the model plant cost data. Piecemeal published data and information
provided by knowledgeable industry sources were correlated with the
engineering data. The resulting model plant data are believed reason-
able and representative, but it remains that the data are not based on
reported "book value" statistics.
VIII-3
-------
Prices and Inflation. Current prices in the grain milling industry are
presently distorted and not believed representative of future expectations.
Prices and margins used in the model plant cases are typically 1967-
1971 averages. This price data is assumed to better represent the grain
milling industry.
Regarding the impact of inflation on the model plant analyses, it is
commonly assumed that both costs and returns will be proportionately
affected by inflation such that the impact is offsetting. However, it is
noted that pollution control costs are increasing relatively faster thain
other segments of the economy. Thus, one might question the accuracy
of the estimated 1977 and 1983 waste treatment costs relative to other
costs and prices.
Status of Current Effluent Controls. Within the corn dry milling sub-
industry it is assumed that only "very few" of the plants currently dis-
charge into surface waters and that these mills are large plants.
Further verification of this assumption is needed. Contacts with in-
dustry association sources indicated that no plant by plant survey had
been completed, although the general statements used in this report
were verified.
Salvage Values. The alternative salvage values presented for the shut-
down analysis above are subject to wide variation based on plant lo-
cation, size, prospective alternative uses, etc. The smaller model
plants, if higher salvage values were possible, would more likely shut-
down since profits were generally low (although not negative) for these
cases.
Water Pollution Controls. In assessing the impacts of the wafer pollution
control costs provided, no allowance was assumed for in-plant modifi-
cation cos's. Further assessment of this source of costs may be
warranted. As previously noted, a j 30 percent change in pollution con-
trol costs V.A.- analyzed to indicate sensitivity of financial measures to
the estimated costs.
Most of these and other less critical assumptions have been discussed
previously in this report. Such assumptions are based upon best judg-
ments given prevailing conditions in the grain milling industry.
VIII-4
-------
Remaining Questions
One of the main questions remaining concerns a more precise know-
ledge of the number, size and location of corn dry milling plants which
discharge directly into surface waters. Smaller plants would be ad-
versely affected and might close. This should have little effect on the
industry as a whole, however.
The availability of land for installing the type of waste treatment fa-
cilities proposed is also a remaining question. Since the corn wet
millers have or are building waste treatment systems they have some
additional land, but is it adequate for additional treatment require-
ments, e.g., deep bed filtration? Land availability by any affected
corn dry millers is also of concern.
VIII-5
-------
SELECTED REFERENCES
Sensing, H. O. and D. R. Brown, "Process Design for Treatment of
Corn Wet Milling Wastes, " in Proceedings Third National
Symposium on Food Processing Wastes, Corvallis, Oregon,
U. S. Environmental Protection Agency, November, 1972,
pp. 277-291.
Sensing, H. O. , D. R. Brown and S. A. Watson, "Waste Utilization
and Pollution Control in Wet Milling," Cereal Science Today,
October, 1972, pp. 304-307.
"The Corn Refining Industry, " by the Corn Refiners Association, Inc. ,
(1967).
Eiland, J. C. and Theo. F. Moriak, Distribution Patterns for U. S.
RJ£e_LJ_969r_7_0_, ERS-484, ERS, USDA7~Mayrrr"i"97"2^
Eiland, J. C. and Theo. F. Moriak, "Rice Milling Costs in the United
States, 1971-72, " Marketing Economic Division, ERS, US DA,
March, 1973.
Fisher, Glen W. , "The Technology of Bulgur Production," Bulletin,
Association of Operative Millers, May, 1972, pp. 3300-3304.
Glade, Edward H. , and Whitman M. Chandler, An Interindustry Analysis
of Grain Production and Processing, Mktg. Res. Rpt. No. 962,
ERS, USDA, June, 1972.
Grant, Warren R. and D. S. Moore, Alternative Government Rice Programs,
An Economic Evaluation, AER No. 187, ERS, USDA, June, 1970~
Holder, Shelby H. , et al. , A Systems Model of the U. S. Rice Industry,
Tech. Bull. No. 1453, ERS, USDA, November, 1971".
Houston, D. F. (ed. ), Rice, Chemistry and Technology, American Assoc.
of Cereal Chemists, St. Paul, Minn., 1972.
Inglett, G. E. (ed. ), Corn: Culture, Processing, Products, Avi Publish-
ing Co. , Westport, Conn. , 1970.
Joslyn, Maynard A. and J. L. Heid, Food Processing Operations, Their
Management, Machines, Materials, and Methods, Avi Publishing
Co., Westport, Conn., 1964.
-------
Junk, W. Ray and Harry M. Pancast, Handbook of Sugars for Processors,
Chemists and Technologists, Avi Publishing Co. , Westport, Conn. ,
__.-
Larkin, L. C. , Economics of Sweetner Marketing, An Annotated Biblio-
~'~ ~~~~~~
gi-aphy oelectedRefereme's~ ERS-474,
1972.
Liebenovv, Robert C, , "Statement on Regulations ^: nd Guidelines for
Effluent Limitations (for the Corn Wet Milling Industry), "
presented to the Effluent Standards and Water Quality Aclviiury
Committee, West Lafayett, Indiana, April 30, 1973.
"List of Flour Mills in the United States and Canada with Other Ct rc.ti
Processing Units," The Northwestern Miller, Vol. 278, No. 9,
September, 1971.
Market Structure of the Food Industries, Marketing Research Report
1^7T7l7"E"RS7"MED, USDA, September, 1972.
Maty, Samuel A. (ed.), The Chemistry and Technology of Cereals as
Food and Feed; Avi Publishing Co. , Westport, Conn . , 19-9.
National Commission on Food Marketing, Organization and Competition
in the Milling and Baking Industries, Tech. Study No. 5,
June, 1966.
Senti, F. R. and W. C. Schaefer, "Com--Its Importance in Food, Feed,
and Industrial Uses, " Cereal Science Today, November, 1972,
pp. 352-357.
''The Story of Corn and Its Products, " by the Corn Industries Research
Foundation, Inc. , 1952.
Sverdup & Parcel and Associates, Inc. , Development Document for Effluent
Limitations Guidelines and Standards of Performance, Grain Milling
(Draft), for U, S. Invironmental Protection Agency, (Contract No.
6^-01-1503), June, 1973.
Sverdrup & Parcel and Associates, Inc. , Industrial Waste Study Report,
Grain Milling Industry (Draft), submitted to EPA, Washington, D. C. ,
August, ~1971~
Thuroczy, 'Nicholas M. and Woodrow A. Schlegel, Costs of Operating
Southern Rice Mills, Mktg. Res. Rpt. No. 330, MED, AMS~
USDA, June, 1959.
-------
Whistler, Roy L. and Eugene F. Paschall (ed.), Starch: Chemistry and
Technology, Academic Press, New York, 1967.
Wilson, Dale W. and David Volkin, A Plan for Integrated Rice Marketing
in Louisiana, Farmer Cooperative Service Report 130, FCS,
USDA~F?b7uary, 1973.
Witte, George C. , Jr. , "Rice Milling in the United States, " Bulletin,
Association of Operative Millers, February, 1970, pp. 3147-3159.
-------
BIBLIOGRAPHIC DATA
SHEET
I. Report No.
EPA-230/1-73-014
3. Recipient's Accession No.
4. Ti.U- and Subtitle
Economic Analysis of Proposed Effluent Guidelines
Grain Milling Industry
5. Report Date August, 1973
(Date of completion)
6.
7. Author(s)
Samuel G. Unger, Michael W. Woolverton
8. Performing Organization Kept.
9. Performing Organization, Name and Address
Development Planning and Resea rch A ssociates , Inc.
P. O. Box 727
Manhattan, Kansas 66502
10. Project/Task, ttork Unit No.
Task Order No. 2
11. Contract/Grant No.
Contract No.
68-01-1533
12. Sponsoring Organization Name and Address
Environmental Protection Agency
Waterside Mall
4th and M Street, S. W.
Washington, D. C. 20460
13. Type ot Report & Period
Covered
Final Report
14.
15. Supplementary Notes
16. Abstracts
The economic impacts of proposed effluent limitation guidelines on four sub-
industries of the grain milling industry are assessed: corn wet milling, corn dry
milling, rice milling and bulgur (wheat) processing. The analysis includes classifi-
cation and description of types of firms and plants, financial profiles of selected model
plants, and prices and pricing practices within each subindustry studied. The financial
impacts of water pollution control costs on model plants were assessed using discounter.
cash flow analysis and industry-wide impacts were projected.
Grain milling was tewate rs are generally amenable to biological treatment systems,
Consequently, many milling plants can and have tied into municipal treatment systems.
All rice mills (parboiled only), bulgur processors and most corn dry mills discharge
into municipal systems. Industry-wide impacts should therefore be minimal.
17. Key U'ords and Document Analysis. 17a. Descriptors
Water pollution, economic analysis, milling, grains (food), food industry, corn,
rice, wheat, pollution, industrial wa stes , economic, demand, supply, prices,
variable costs, fixed costs, fixed investment, discounted cashflow, mills, wet
mills , flour mills
17b. Idcntifiers/Open-Ended Terms
05 Behavioral and social sciences, C-economics
17c. Co ATI Fieid/r,r,,Up 06 Biological and medical sciences, H-food
18. Availability otatt-r.icnt
National Technical Information Service
Springfield, Virginia 22151
20. ,S(.^ urity k i.iss ( l ins,
Pif.v
r\ri \ :MHI n
22. i ru
-------
16. Abstracts (continued)
Corn wet mills have the most serious effluent problems. However,
only 5 of 17 plants discharge directly into surface waters. These plants
will be impacted severely relative to the remainder of the industry, but
none are expected to shut down.
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