Economic Analysis Of Proposed Effluent Guidelines Poultry Meat Processing Industry

EPA-230/1 -74-040
OCTOBER, 1974
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
THE POULTRY MEAT PROCESSING INDUSTRY
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
\
ul

-------
This document is presently available in limited
quantities through the U.S. Environmental Protection
Agency, Information Center, Ruth Brown, Room W-327
Waterside Mall, Washington, D.C. 20460.
The document will subsequently be available through
the National Technical Information Service, Springfield,
Virginia 22151.
-------
ANALYSIS OF THE ECONOMIC IMPACT OF
PROPOSED EFFLUENT LIMITATION GUIDELINES FOR
THE POULTRY MEAT PROCESSING INDUSTRY
Prepared for

Office of Planning and Evaluation
Environmental Protection Agency
Washington, D. C. 20460
by
James K. Allwood
Raymond J. Coleman
Development Planning and Research Associates, Inc.
Manhattan, Kansas 66502
Task Order No. 15
BOA 68-01-1533
October, 1974
South Dearbow we
Chicago, minala JJjJJ
-------
PREFACE
The attached document is a contractor's study prepared with the super-
vision and review of the Office of Planning and Evaluation of the U.S.
Environmental Protection Agency (EPA). Its purpose is to provide a
basis for evaluating the potential economic impact of effluent limitations
guidelines and standards of performance established by EPA pursuant to
section 304(b) and 306 of the Federal Water Pollution Control Act.

The study supplements an EPA technical Deyelopmenj Document issued in
conjunction with the promulgation of guidelines and standards for point
sources within this industry category. The Development Document sur-
veys existing and potential waste treatment and contiol methods and
technologies within this category and presents the investment and oper-
ating costs associated with various control technologies . This study
supplements that analysis by estimating the broader economic effects
(including product price increases, continued viability of affected plants,
employment, industry growth and foreign trade) of the required application
of certain of these control technologies.

The study has been prepared with the supervision and review of the
Office of Planning and Evaluation of EPA. -This report was submitted in
fulfillment of Contract No. 68-01-1533, Task Order No. 15 by Development
Planning and Research Associates , Inc. Work was completed as of
October, 1974.

This report is being released and circulated at approximately thfj 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.

This report represents the conclusions of the contractor. It has been
reviewed by the Office of Planning and Evaluation and approved for.-pub-
lication. Approval does- not signify that the contents necessarily reflect
the views of the Environmental Protection Agency, The study has been
considered, together with the Development Document, information
received in the form o£ public comments on the proposed regulation,
and other materials in the establishment of final effluent limitations,
guidelines and standards of performance.
-------
CONTENTS
Page Pa{

INDUSTRY SEGMENTS 1-1
A. General Description of the Industry 1-1
B. Industry Segments 1-1
C. Number and Characteristics of Plants 1-2
Number of Plants 1-2
Manufacturing Processes 1-3
Size and Capacity Utilization 1-5
Product Mix I-10
Seasonality 1-23
Age 1-23
Location 1-23
D. Concentration and Integration 1-28
E. Employment 1-33
II. FINANCIAL PROFILE OF THE INDUSTRY II- 1
A. Sales . II- 1
B. Distribution of Total Sales Dollar II-5
C. Earnings II-6
^ D. Industry Cash Flow H-9
E. Ability to Finance New Investment II-9
^ III. MODEL PLANTS III-l
<-k A. Type of Plants III-l
i B. Sizes of Plants III-l
r-s, C. Investment III-3
^ Replacement Values III -3
Book Value of Investment • ' III- 3
Salvage Value III-4
Operating Capital III- 8
D. Model Plant Capacity and Utilization III-8
E. Annual Profits III- 12
F. Annual Cash Flows 111-14
G. Cost Structure of Model Plants 111-14
Raw Product Costs III- 14
Operating Costs 111-23
Non-operating Costs 111-24
Summary 111-25
References 111-26
-------
CONTENTS (Continued)
IV. PRICE PATTERNS
A. Pricing Processes
B. Historic Prices

V. ECONOMIC IMPACT ANALYSIS METHODOLOGY
A. Fundamental Methodology
Benefits
Investment
Cost of Capital - After Tax
Construction of the Cash Flow
B. Price Effects
C. Financial Effects
D. Production Effects
E. Employment Effects
F. Community Effects
G. Other Effects

VI. EFFLUENT CONTROL COSTS
*
VII. IMPACT ANALYSIS
A. Price Effects
B. Financial Effects
Pre-tax Net Income
Pre-tax Return on Invested Capital
After-tax Return on Invested Capital
After-tax Return on Sales
Annual Cash Flow
Cash Flow on Invested Capital
Pollution Abatement Cash Flow Requirements
Net Present Values
Special Considerations for Multi-Class Plants
C. Production Effects
Plant Closures
Production Curtailment
Impact of New Source Performance Standards
D. Employment Effects
E. Community Effects
F. Balance of Trade Effects
V-l
V-5
V-6
V-7
V-9
V-9
V-il
V-il
V-12
V-12
V-12

VI -1

VIM
VII-1
VII-4
VII -5
VII -5
VII.-5
VII-9
VII-9
VII-9
VII-9
VII -14
VII-22
VII-23
VII-23
VII-27
VII-30
VII-30
VII-34
VII-34
-------
CONTENTS (Continued)
VIII. LIMITS OF THE ANALYSIS VIII-1
A. General Accuracy VIII-1
B. Range of Error VIII-2
1. Errors in Data VIII-2
2. Errors in Plant Closure Estimates VIII-2
C. Critical Assumptions VIII-4
1. Industry structure VIII-4
2. Price assumptions VIII-4
3. "Representative11 model plants VIII-4
4. Water pollution control costs VIII-5
5. Municipal wastewater treatment charges VIII-6
6. Salvage values VIII-6
7. "Shutdown" decisions VIII-6

REFERENCES

BIBLIOGRAPHY

APPENDIX A- Cost of Effluent Treatment Data Provided
by the Environmental Protection Agency

APPENDIX B - Calculations of Cash Flows Used in Dis-
counted Cash Flow (DCF) Analysis.
-------
ANALYSIS OF THE ECONOMIC IMPACT OF
PROPOSED EFFLUENT LIMITATION GUIDELINES FOR
THE POULTRY MEAT PROCESSING INDUSTRY
I. INDUSTRY SEGMENTS

A. General Description of the Industry
As defined herein, the poultry meat processing industry comprises those
establishments primarily engaged in slaughtering, dressing, cooking,
smoking, rawboning, canning, freezing and dehydrating chickens, turkeys.,
and ducks for their own account or on a contract basis for the trade.
Those plants primarily engaged in slaughtering and dressing poultry are
classified under SIC Code 2016 while those primarily engaged in the
preparation of processed poultry products from purchased carcasses
are classified under SIC Code 2017. Establishments primarily engaged
in the following SIC 2016 and 2017 activities are specifically excluded
from this analysis: (1) killing, dressing, packing and further process-
ing miscellaneous poultry (i.e. , other than chickens, turkeys and ducks),
rabbits and other small game and (2) drying, freezing and breaking of
eggs. To avoid possible confusion, it is noted that establishments
primarily engaged in the cutting-up and resale of purchased fresh poultry
carcasses are classified in the trade industries and, therefore, are
excluded from the analysis. Plants primarily engaged in the manufacture
of soups, frozen dinners, frozen poultry pies and related specialty items
are also excluded.
B. Industry Segments
As recognized in the 1972 SIC definitions, there are substantial differences
between those plants which primarily slaughter poultry and those which are
primarily engaged in further processing. These differences are exempli-
fied in both the economic and effluent characteristics of the plants.
In addition, the class of poultry slaughtered (i.e., young chicken,
1-1
-------
fowl or mature chickens, turkeys and ducks) also affects the establish-
ment's waste water treatment requirements and the firm's economic
viability. In view of these factors, the following industry segments and
subsegments were delineated to more realistically reflect the impact of
pollution abatement requirements:
1. Establishments primarily engaged in slaughtering and
dressing poultry as follows:

a. Primarily young chickens
b. Primarily fowl
c. Primarily turkey
d. Primarily ducks

2. Establishments engaged only in further processing of
purchased carcasses.

3. Establishments primarily engaged in further processing
but also engaged in slaughter activities.
The first major segment represents that portion of SIC 2016 covered by
this analysis while the last two segments collectively represent the
poultry meat processing plants in SIC 2017.
C. Number and Characteristics of Plants
Number of Plants

The preliminary 1972 Census of Manufactures report for SIC's 2016 and
2017 includes a total of 523 plants in the primarily slaughter segment
(SIC 2016). Since SIC 2016 includes some plants primarily engaged in
the slaughter of rabbits and other small game, the primarily poultry
slaughter plants covered by this analysis is somewhat less than 523.
On the basis of data available from the Census Bureau and U. S. Depart-
ment of Agriculture, an estimate of 517 plants primarily engaged in
chicken, turkey and duck slaughter was used in the analysis. In terms
of the slaughter sub-segments, the following plant number estimates »
apply:
1-2
-------
Primary Class of Slaughter Number of Plants

Young chicken 306
Fowl 50
Turkey 144
Ducks 17

Establishments covered by SIC 2017 numbered 118 in 1972. However,
the 118 include egg processing plants. The proportion of SIC 2017
establishments primarily engaged in poultry meat processing is not
reported in the Census data currently available. Data relating to further
processing plants inspected by the U. S. Department of Agriculture
cannot be used to estimate the number of plants in these segments since
those data include wholesalers, soup plants, meat and poultry pie plants,
etc. Given the available published data, North Star's findings as reported
in the EPA draft effluent guideline development document and data in the author's
file, the following estimates were developed for this analysis: (1) further
processing only--20 plants and (2) primarily further processing with
slaughter--20 plants. For those further processors slaughtering, the
following delineation of slaughter activities was used:

Primary Class of Slaughter Number of Plants

Young chicken 2
Fowl 9
Turkey 9

Manufacturing Processes

The major manufacturing processes employed in a poultry slaughter plant
are receiving, killing, defeathering, eviscerating, chilling, packing and
shipping (Figure 1-1). Additional processes such as freezing, cut-up,
and storage are commonly employed in many plants. Killing is accomplished
by manual or mechanical severance of the jugular vein. After killing, the
birds are either tank or spray scalded and then mechanically picked. The
remaining pin feathers are usually removed by hand or, in the case of
ducks, a wax dip which is peeled off after it solidifies. After defeathering,
the birds move to the evisceration room.

Upon entering the evisceration area, the feet are removed, the oil gland
removed, and the peritoneal cavity opened. The viscera are then exposed
and the carcass and entrails are inspected. The giblets are removed,
trimmed, and washed while the inedible viscera is recovered for render-
ing or disposal. Finally, the lungs, head and neck are removed and the
carcass is subjected to a final wash prior to chilling.
1-3
-------
Figure 1-1. Flow chart of poultry slaughter plant.
Potoble wotei
1 Truck borne coops
Empty ,
coops , I
1

o Receiv
!
J
1

b. Knlin

!
X

station r " •*• c. blood recovery ~ ~*j
4 *
J <: u Blootl »
d. Scolding 1 X
i

e. Defec

g Who
was

h. Evis

i. Final
1 , „. '

. 1 realher flow oway f. feather j .
tnermg TT | recovery r^ ^^
1 " - L , J v
1 1 i *
!« bird ._) | Feathers x
ning j {
~j i
I offo1 flow aw°y i. offoi : i i
I \ recovery
x
^T^ i
1 V '
washing - J Offol ?
[ |
k Ch
' , r. , . . »«J

... x
1. Grading
. weighing, ,
pocking I
i
J m. Fino! woste water
D / • , j „ , | collection and control
Refrigerated -——«- Product
dc'iivery Uucks K. „ . . j
' CT~ J Byproduct 1
1
<~ Potoble woier X
~~ -*• Process water }
— X~»- Woste water Sewer
rce; Vertrees , James G. , The Poultry Processing Industry: A Study of
the Impact
of Water Pollution Control Costs, Marketing Research
Report No. 965, Economic Research Service, U.S. Dept. of
Agriculture, Washington, D. C- , June, 1972.

1-4
-------
Manufacturing processes employed in further processing vary depending
on the form of raw and finished products. Some items such as smoked
chicken or turkey, cooked chicken and canned whole chicken involve a
minimum of processing and no boning. Rolls and roasts require relatively
few steps beyond the boning operation. Some of the more common
processes employed include cooking, smoking, boning, dicing, forming,
canning, freezing, packaging and shipping.

Size and Capacity Utilization

Published data concerning plant capacities and utilization are not readily
available. However, industry data from our files were used to estimate
plant capacities. The^e were then compared to annual throughput to
obtain capacity utilization estimates.

Estimated 1972 capacity for primarily young chicken federally inspected
slaughter plants totals 3,423 million birds per year assuming 8 hours per
day, 250 operating days per year and 100 percent of capacity devoted to
young chicken slaughter for all plants. That level of capacity implies an
average plant utilization factor of 86 percent in 1972 and 85 percent in
1973. It is assumed that the non-federally inspected plants are small
and thus, would not significantly add to the total national capacity. Also,
it is assumed that the non-federally inspected plants operate at utilization
levels similar to those for federally inspected plants.
. . ,- .
As shown in Table 1-1, 6, 000 birds per hour is the most popular size for
primarily young chicken slaughter plants. The next most popular sizes
are 4,800 and 9,600 birds per hour. These three plant sizes collectively
represent 61 percent of the federally inspected plants and 58 percent of the
capacity. The smallest size represents 30 percent of the federally inspected
plants, but accounts for only 16 percent of the capacity. This latter factor
becomes even more significant given the small size of the non-federally in-
spected plants (18 percent of all young chicken plants are not federally in-
spected).

Estimated 1972 capacity for federally inspected primarily turkey slaughter
plants totals 426 million birds per year assuming 8 hours per day, 250
operating days per year and 100 percent of capacity devoted to turkey
slaughter. That level of capacity implies an average plant utilization
factor of 28 percent in 1972 and 29 percent in 1973. In recognition of the
fact that turkey slaughter is highly seasonal, if the above operating assump-
tions are modified to reflect 140 operating days, the total capacity is 239
million birds per year and average plant utilization is 50 and 51 percent
for 1972 and 1973, respectively. As with young chickens, it is assumed
that non-federally inspected plants are small and operate at capacities
similar to those reported for federally inspected plants.
1-5
-------
Table 1-1 Distribution of federally inspected young chicken slaughter
plants by plant size , 1972
Plant Size
(Birds/hour)
< 1,200
1,500
2,400
3,000
3,600
4,000
4,800
5,400
6,000
6,400
6,500
6,600
7,200
8,400
8,600
9,000
9,600
10,800
12,000
13,500
14,400
15,500
18,000
24,000
> 27,000
Percent of
Plants
1
2
4
4
3
1
13
1
35
0
4
1
5
1
1
1
13
1
5
1
2
I
I
1
1
Cumulative
Percent of
Plants
1
•2
**>
8
12
15
15
28
30
64
64
69
69
74
76
76
77
90
90
95
96
98
99
99
100
100
Percent of
Industry's
Capacity
<1
1
2
2
2
>l
9
1
31
0
4
1
6
2
1
1
18
1
9
2
4
1
1
2
2
Cumulative
Percent of
Capacity
<1
I
2
4
6
6
15
16
47
47
51
5J
57
59
59
6 1-
78
79
88
90
94
95
97
98
100
Source: Developed fjom unpublished data obtained from industry and
USDA sources.
1-6
-------
The distribution of federally inspected turkey plants and capacities is
shown in Table 1-2. Plants of 1, 800 birds per hour capacity are by far
the most common and collectively represent 46 percent of the plants and
66 percent of total capacity. Over 30 percent of the plants are smaller
than 1, 800 birds per hour but they account for only ZO percent of total
capacity. When state inspected plants are included, the proportion of
small plants becomes much larger since 18 percent of the plants are not
federally inspected.

For federally inspected fowl plants, estimated total capacity is 330 million
birds per year under the assumptions of 8 hours per day, 250 days per year
and 100 percent of capacity devoted to fowl slaughter. The resultant aver-
age utilization of capacity for 1972 and 1973 is then estimated at 56 and 57
percent, respectively. As before, it is assumed that 18 percent of all
fowl plants are not federally inspected and that those plants are small.

As shown in Table 1-3, federally inspected plants with fowl capacities
of 4,800 birds per hour are most common, closely followed by 3,000
birds per hour plants. The two sizes together account for 57 percent of
the plants and 58 percent of total federally inspected capacity. Plants
smaller than the 3, 000 birds per hour represent 19 percent of the plants
but only 10 percent of total capacity.

Estimated 1972 capacity for federally inspected primarily duck slaughter
plants totals roughly 21 million birds per year assuming 8 hours per day,
250 operating days per year and 100 percent of capacity devoted to duck
slaughter for all plants. That level of capacity implies an average plant
utilization factor of 53 percent in 1972 and 52 percent in 1973. It is
again assumed that non-federally inspected plants are small and operate at
utilization levels similar to those for federally inspected plants.

Capacities of duck slaughter plants range from 350 birds per hour to nearly
2,500 per hour. The average capacity for federally inspected plants is
about 1,600 birds per hour. Each plant seems to be rather unique with
respect to plant design and no one plant size or group of plant sizes can
be singled out as being more common than others.

Before entering a discussion on sizes of plants in the further processing
segments, a few comments concerning the above slaughter plant data are
in order. Since roughly 1 percent of the young chickens, 24 percent of
the fowl and 10 percent of the turkeys slaughtered by poultry meat
processing plants are slaughtered in further processing plants, the
utilization figures maybe overstated. However, few, if any, ducks are
slaughtered by further processors. The fact that a substantial number
of plants slaughter more than one class of poultry (see Product Mix dis-
cussion below) implies that utilization of capacity calculated on the assump-
tion of 100 percent specialization (i.e. , entirely single class slaughter)
1-7
-------
Table I-E. Distribution of federally inspected turkey slaughter plants,
by plant size» 1972
Plant Size
(Birds/hour)
< 500
720
900
1,200
1,400
1,800
2,400
3,000
> 5,400
Percent of
Total
Plants
2
2
8
10
11
46
14
6
2
Cumulative
Percent
of Plants
2
3
11
21
32
78
92
98
100
Percent of
Total
Capacity
-------
Table 1-3. Distribution of federally inspected fowl slaughter plants,
by plant size, 1972
Plant Size
(Birds /hour)
< 1,000
2,400
3,000
3,600
4,800
5,400
_> 9,600
Percent of Cumulative Percent Percent of
Plants of Plants Capacity
5
14
24
10
33
10
5
5
19
43
53
87
96
100
1
9
18
9
40
13
11
Cumulative
Percent of
Capacity
1
10
27
36
76
89
100
Source: Developed from unpublished data obtained from industry and
USDA sources.
1-9
-------
may overstate utilization for some subsegments and urderstal >-. it tor
other subsegments. Finally, there is fairly strong evidence suggesting
that some federally inspected slaughter plants do not fall within any of
the categories covered by SIC's 2016 and 2017. Some may be classified
as wholesalers, other manufacturers or maybe even farms (e.g. duck
farms which slaughter). The extent to which this factor affects average
capacity of the plants included in this study is unknown, but the direction
would be toward smaller plant capacities.

Further processing plants that slaughter tend to have larger capacities
on the average than do their primarily slaughter counterparts. In terms
of actual annual throughput, it appears the slaughter lines in the primarily
further processing plants average about .1. 5 times at much young ch.ckc-n
as the average primarily slaughter p]ant, 1.7 times at, rruc!; fowl, and
1.8 times as much turkey (further processors seldom slaughter ducks).
A portion of the larger throughput seems to be cme to higher levels of
utilization in the turkey and fowl plants. Alter a.dpi sting foi utilization
differentials, we estimate the above capacity factors to '. r- about 1. b
for young chicken plants, 1. 2 for fowl plants and 1. 1 for Turkey plants,
The distributions of plant sizes about the mean are feit to closely approx-
imate those for primarily slaughter plants. Further processing capacity
for these plants exceeds the slaughter capacity.

On the average, further processing only plants are smaller than plantr,
in the other two segments. In terms of purchased carcasses, the pou-ids
of raw product throughput capacity for these plants appear to average
about 50 percent of the output capacity of prin.-arily slaughter plants.
Again, substantial variance in size is found from pl;v:t to plant. Uli'isa-
tion of capacity in these plants is Mgh--probaMy ever 80 percent-

Product Mix

Although, the majority of primarily slaughter plants specialize in one class
of poultry, a sizeable number run mixed classes. The prevalence and
degree of mixed class slaughter is shown, by subsegmenf:, in Table 1-4.
Similar data for specific combinations of classes by plant size (for young
chickens and turkeys) are shown in Tables I~5 through 1-13. A separate
table is not presented ror duck plants, however, since all but one plant
have specializalioas of 100 percent. It appears that the slaughter activities
of further processing pL.nirs parallel those of primarily slaughter plants
in terms of raw product mix.

Generally, primarily slaughter plants process only poultry meat products.
For the group as a whole, they have a very high specialization ratio--
96 percent. The major non-poultry meat item is eggs of which 14. 8 million
cases were purchased in 1972. As of November of 1973, only 37 plants
which slaughtered poultry in federally inspected plants also held permits
for processing red meat (T'tble 1-14). Many of the plants are involved in

1-10
-------
cut-up and further processing of poultry carcasses. A high percentage
of the plants cut-up the lower quality birds. Over 25 percent of the young
chickens slaughtered are cut up while about 17 percent of the turkeys are
cut up. These data exclude cut-up activities of wholesalers and retailers.
About 10 percent of the young chicken and 78 percent of the turkeys are
frozen.

About 99 percent of the young chickens are sold as broilers and fryers
with the remainder being primarily roasters and capons. Of the broilers
and fryers sold in fresh form (i. e. , not frozen), 75 percent are wet
ice packed, 11 percent and 14 percent as chilled consumer packaged.
Of the turkeys, 94 percent are young mature birds, 5 percent fryer-
roasters and 1 percent old mature birds.

The major products produced in further processing plants, in order of
relative importance, includes cooked or smoked turkey, cooked or smoked
chicken and canned poultry. These products collectively represent nearly
99 percent of poultry meat items classified in SIC 2017. The specialization
ratio of 90 percent for these plants (which includes egg processing) suggests
some plants also produce other poultry rneat items such as soups and
pies. Within the general product categories listed above, a vast array
of specific products are produced.

The bulk of further processed turkey is sold in the form of roasts, 4-5
pound packages of raw meat for the reta.il trade, 10-12 pound packages
of cooked rolls for the institutional trade, bulk meat and parts, and
frozen turkey dinners and pies. Turkey rolls were introduced in the
early 1960's and, during recent years, have been the largest volume
further processed turkey product.

The most popular further processed young chicken and fowl products include
canned whole chicken, canned meat, bulk meat and parts, soup, frozen
chicken dinners, pies, and specialty items such as chicken sticks,
croquettes, franks, and bologna.
1-11
-------
Table 1-4. Number of slaughter plants, by subsegment, by degree of
specialization, 1972
Primary Class
as Percent of
Total Slaughter

20-30
31-40
41-50
51-60
61-70
71-80
81-90
91-95
96-99
99- 1-100
Total
Subsegment
Primarily
Young
Chicken
Primarily
Fowl
Primarily
Turkey
Primarily
Ducks
Total
(Number of plants)

4
0
10
15
13
21
37
206
306

0
2
6
3
4
2
10
23
50

J
0
3
4
4
7
6
119
144

0
0
0
0
0
1
0
16
17

5
2
19
22
21
31
53
364
517
Source: Developed from unpublished data provided by industry and USDA
sources.
I-]?-
-------
Table 1-5. Number of all young chicken plants by degree of specialization and classes slaughtered,
1972.
Classes
Slaughtered

C (chickens) only
C + F (fowl)
C + T (turkeys)
C + O (other)
C + F + T
C + F + O
C + T + O
C + F -f T + O
Total
Percent
41-50 51-60 61-70

1
1
2
3 4

1 2
4 10
of Total Annual Slaughter as Young Chickens
71-80 81-90 91-95 96-98 99.1-100
(Number of plants)
155
3 5 11 28 48
1332 3

8575
2
2
1
15 13 21 37 206

Total

155
96
13
2
32
2
2
4
306
Source: Developed from unpublished data provided by industry and USDA sources.
-------
Table 1-6. Number of small young chicken plants by degree of specialization and classes slaughtered,
1972 \1.
Classes
Slaughtered

C (chickens) only
C + F (fowl)
C + T (turkeys)
C + O (other)
C + F + T
C + F + O
C + T + O
C + F + T + O
Total
Percent of Total Annual Slaughter as Young Chickens
41-50 51-60 61-70 71-80 81-90 91-95 96-99 99.1-100 Total
(Number of plants)
70 70
3 5 6 13 19 46
1 3 2 2 2 10
2 2
3 46433 23
2 2
2 2
2 2
3 9 11 12 11 £0 91 157
I/
Small plants defined as those with annual volumes of less than 35,435, 000 pounds of young
chickens slaughtered.
Source: Developed from unpublished data provided by industry and USDA sources.
-------
Table 1-7. Number of medium young chicken plants by degree of specialization and classes slaughtered,
1972L/.
Classes Percent of Total Annual Slaughter as Young Chickens
Slaughtered 41-50 51-60 61-70 71-80 81-90 91-95 96-99 99.1-100
(Number of plants)
C (chickens) only 40
C + F (fowl) 1 1716
C + T (turkeys) 1
C + O (other)
C + F + T . 11 3 1
C + F + O
A
C + T + O
C+F+T+O 1
Total 1 1 2 1 4 8 56
Total
40
25
1
0
6
0
0
1
73
I/
— Medium plants defined as those with annual volumes of 35, 435, 000 to 56, 696, 000 pounds of young
chickens slaughtered.

Source: Developed from unpublished data provided by industry and USDA sources.
-------
Table 1-8. Number of large young chicken plants by degree of specialization and classes slaughtered,
1972L/.
Classes Percent of Total Annual Slaughter as Young Chickens
Slaughtered 41-50 51-60 61-70 71-80 81-90 91-95 96-99 99. 1-100
(Number of plants)
C (chickens) only 18
C+F (fowl) 468
C -f T (turkeys) 1
C + O (other)
C + F + T 11
C + F + O
C + T + O
C + F + T + O 1
Total 1 6 7 26
Total

18
18
1
0
2
0
0
1
40
— Large plants defined as those with annual volumes of 56, 696, 000 to 73, 854, 000 pounds of young
chickens slaughtered.

Source: Developed from unpubJished riata provided by industry and USDA sources.
-------
Table 1-9. Number of very large young chicken plants by degree of specialization and classes
slaughtered, 1972 U.
Classes
Slaughtered

C (chickens) only
C + F (fowl)
C + T (turkeys)
C + O (other)
C + F + T
C + F -1- O
C + T + O
C + F + T + O
Total
Percent of Total Annual Slaughter as Young Chickens
41-50 51-60 61-70 71-80 81-90 91-95 96-99 99.1-100 Total
(Number of plants)
27 27
25 7
1 1
0
1 1
0
•
0
0
1 Z 33 36
— Very large plants defined as those with annual volumes of over 73, 854, 000 pounds of young chickens
slaughtered.
Source: Developed from unpublished data provided by industry and USDA sources.
-------
Table 1-10. Number of total turkey plants by degree of specialization and classes slaughtered, 1972 —
Classes

Slaughtered
Percent of total annual slaughter as turkeys
41-50
51-60 61-70 71-80 81-90 91-95 96-99 99.1-100
Total
t
»—»
00
T (turkeys) only

T 4- F (fowl)

T + C (chickens)

T + O (other)

T + F + C

T + F + O

T + C + O

T + F + C + O

Total
(Number of plants)
4
4
1

1
3

1
111

3
119
111

8
3

144
Source: Developed from unpublished data provided by industry and USDA sources.
-------
II
Table 1-11- Number of small turkey plants by degree of specialization and classes slaughtered, 1972 —
Classes Percent of total annual slaughter as turkeys
Slaughtered 41-50 51-60 61-70 71-80 81-90 91-95 96-99 99.1-100
(Number of plants)
T (turkeys) only 69
T + F (fowl) 2 13
T + C (chickens) 1 41
T + O (other) 1 1
T+F+C 3 2 1 1
T + F + O
T + C + O
T+F+C+O1 2
Total 1 3 3 4 6 4 72
Total
69
6
6
2
7

3
93
— Small plants defined as those with annual volumes of less than 17, 317,000 pounds of turkeys slaughtered.

Source: Developed from unpublished data provided by industry and USDA sources.
-------
Table I-1Z. Number of medium and large turkey plants by degree of specialisation and claar>f-s

slaughtered, 1972 i/ 2-.
Percent of tota 1 annual slaughter as turkeys
- -- - - - "- - -" ___ __ _____ __ ------ — ^ ----------- _ll_ mil ------------ — ~T --- —._.„
_ _ . ___ _______

Slaughtered 41-50 51-60 61-70 71-80 81-90 91-95 96-99 99.1-100 Total
O
(Number of plants)

T (turkeys) only 33 33

T + F (fowl) 12 1 4

T J- C (chickens) 3 3

T -I- O (other)
tv
o T + F + C
T + F 4- O

T 1- C + O

T + F + C r O

Total 1 1 2 3? 41
_
Medium and large plants defined as those with annual volumes •"•r 17,317,000 - 46,620,000 and over

46,620,000 pounds of turkeys slaughtered, respectively

2/
— All 10 Jarge turkey plants have in •=•:•:ccs3 of 99 pe'rcent of the annual slaughter as turkeys.

Source: Developed from u.r^ACJis'ied data provided by industry and USDA sources.
-------
Table 1-13. Distribution of all fowl plants by degree of specialization and classes slaughtered, 19*72.
r-io^o^o Percent of total annual slaughter as fowl
Slaughtered 41-50 51-60 61-70 71-80 81-90 91-95 96-99 99-1-100
(Number of plants)
F (fowl) only 13
F + C (chickens) 41 429 10
F + T (turkeys) 1
F + O (other)
F + C + T 112 1
F -1- C + O
F + T + O
F+C+T+O 1
Total 2 6 3 4 2 10 23
Total

13
30
1
0
5
0
0
1
50
Source: Developed from unpublished data provided by industry and USDA sources.
-------
Table 1-14. Number of federally inspected poultry slaughter plants
with red meat inspection permits, by type of plant, 1973
Type of Red Meat Number of
Operations Plants

Slaughter only 1

Slaughter, process 3

Slaughter, process, bone 10

Process only 20

Process, bone 3

Total 3?

Source: Unpublished data provided by USDA.
1-22
-------
Seasonally

Seasonal variations in production are one of the factors causing rather
low utilization of capacity in some of the subsegments of the poultry
meat processing industry. In the slaughter segment, young chickens
show only modest seasonal variation with the low and high monthly
slaughter ranging from 89 to 113 percent of the average monthly volume
(Table 1-15). Fowl slaughter is only slightly more seasonal with monthly
totals ranging from 77 to 114 percent of the average. Ducks show sub-
stantial seasonal variations with the monthly totals ranging from 47 to
146 percent of the average. Turkey slaughter is the most seasonal with
the low and high months equalling 30 and 188 percent of the average
monthly volume, respectively.

As shown in Table 1-16, further processing is more stable than is slaughter.
Young chicken meat further processing is rather stable, fowl meat more
seasonal and turkey meat very seasonal. The degree of seasonality in
turkey slaughter and processing has concerned the industry for a long
time but efforts to level out consumer demand have met with only modest
success.
Ag£
Published data concerning the age of poultry meat processing plants is not
readily available. It is known that large numbers of both old and relatively
new plants are currently operating. However, a useful indicator of plant
age is the fact that most plants in operation prior to I960 had to be re-
placed or substantially rejuvenated in the early 1960's due to federal inspeC'
tion requirements. Another period of rapid, plant construction occurred
in the mid to late 1960's. Construction of new plants since 1970 has been
minimal. As a result, an average plant age of 1 2 years has been assumed
for all segments in this analysis.

.Location

For plants in the slaughter segment, there is a high correlation between
location of live bird production and location of plants. The Southern
region has the largest numbers of young chicken plants (Table 1-16).
The largest concentration of fowl and turkey plants is in the North Central
region. Duck plants are split between the Northeastern and North Central
regions.

Plants in the further processing segments tend to be located in roughly
the same fashion as are turkey slaughter plants. The North Central
"gion has the largest concentration of further processing plants.

1-23
-------
Table 1-15. Monthly distribution of federally inspected
poultry slaughter, 1972
Month
January
February
Ma r ch
April
May
June
July
August
September
October
November
December
1 / Total

Young
chicken
7.9
7.6
8. 3
8.0
9. 1
9. 1
8. 1
9.4
8. 1
8.9
7.9
7.4
100
Total percent
fowl
9.5
9.2
9. 1
8.8
8. 1
8. 6
6.4
8.2 ,
7.4
8.6
8.5
7. 5
100
of annual slaughter
turkeys
3.2
2.5
2.5
2.5
4.2
8.3
10.4
14.2
13.5
15.7
14.5
8.5
100

ducks
4. 1
3.9
4.7
8.4
U.2
12.2
10.2
11.4
9,6
9.6
R.6
6.3
100
— May not total 100 due to rounding error.
Source: Poultry and Egg Situation, April, 1974.
1-24
-------
Table 1-16. Monthly distribution of poultry further processing
in federally inspected plants, 1972

Month
January
February
March
April
May
June
July
August
September
October
November
December
Total -1
— May not total
Source: Poultry
Percent of
Young chicken
meat
7.8
8.2
8.7
7.8
8.5
8.6
7.6
8.8
8.2
9.0
8.4
8.5
100.0
100 due to rounding.
& Egg Situation, April,
total annual volume
Fowl meat
8. 1
8.9
10.0
9.3
10.0
8.9
6.8
8.2
6.9
7.8
7.9
7.4
100.0
1973.
j. .-, . ...
Turkey
meat
5.3
5.6
6.2
5-4
6.1
9.0
9.8
11.6
11.0
12.5
10.8
7.5
100.0

1-25
-------
Table 1-17.
Location of poultry slaughter plants by regions,
divisions and states, 1972
Number of plants
Region/Division/State
U. S. Total
Northeast Region
New England Division
Maine
New Hampshire
Vermont
Massachusetts
Rhode Island
Connecticut
Middle Atlantic Division
New York
New Jersey
Pennsylvania
North Central Region
East North Central Division
Ohio
Indiana
Illinois
Michigan
Wis consin
West North Central Division
Minnesota
Iowa
Missouri
North Dakota
South Dakota
Nebraska
Kansas
Total
517
55
12
5
1
1
3
1
1
43
10
6
27
132
70
19
20
13
6
12
62
19
12
22
0
1
5
3
Young
chickens
306
23
7
5
0
0
0
1
1
16
0
2
14
43
28
6
9
5
3
5
15
2
2
10
0
0
0
1
by prima ry
Fowl
50
7
2
0
0
1
1
0
0
5
2
3
0
19
8
4
1
2
0
1
11
4
1
3
0
0
3
0
class of s
Turkey
144
16
Z
0
j,
0
1
0
0
14
1
0
13
64
28
8
8
5
3
4
36
13
9
9
0
1
2
2
la u g h i e r
Du< ks
17
9
1
0
0
0
1
0
0
8
7
1
0
6
6
Tt
s
2.
}
0
2
0
0
0
0
0
0
0
0
1-26
-------
Table 1-17 (continued)
Number of plants
Region/ Division /State
Scnith Recrion
c1

South Atlantic Division
D e lawa r e
Maryland
District of Columbia
Virginia
West Virginia
North Carolina
South Carolina
Georgia
Florida
East South Central Division
Kentucky
Tennessee
A labama
Miss issippi
Puerto Rico
West South Central Division
A rkansas
Louisiana
Oklahoma
Texas
West Region

Mountain Division
M onta na
Idaho
Wyoming
Colorado
New Mexico
A rizona
Utah
Nevada
Pacific Division
Washington
Oregon
California
A la s ka
Hawaii
Total
250
105
6
12
0
12
4
31
7
28
5
60
1
8
27
19
5
85
33
11
6
35

80
18
0
4
1
7
0
0
6
0
62
7
9
46
0
0
Young
chickens
210
87
6
10
0
8
4
25
5
25
5
55
1
7
27
15
5
67
30
9
4
24

30
4
0
3
0
1
0
0
0
0
26
5
8
13
0
0
by primary
Fowl
13
5
0
1
0
0
0
1
0
3
0
4
0
1
0
3
0
4
1
1
0
2

11
4
0
1
1
1
0
0
1
0
7
0
0
7
0
0
class of slaughto
Turkey
26
12
0
1
0
3
0
5
2
0
0
1
0
0
0
1
0
14
2
1
2
9

38
10
0
0
0
5
0
0
5
0
28
2
1
25
0
0
r
Ducks
1
1
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

1
0
0
0
0
0
0
0
0
0
1
0
0
1
0
0
1-27
-------
Data published by USDA indicate that over 70 percent of .:ii federally
inspected poultry slaughter plants are located within municipalities
(Table 1-18). However, substantial regional variation exists ranging
from 52 percent in the East North Central Region to 96 percent in the
West North Central Region. Variations by plant size also exist.

The location of federally inspected poultry slaughter plants with respect
to size of population center is also available from USDA data, in J970,
nearly 50 percent of the plants were located in centers of less than
5,000 population. Over 75 percent vsre located in centers of less ir.^.n
20,000 population. As shown in Table 1-19, substantial regional variations
are again prevalent as are variations by plant size.
D. Concentration and Integration
The poultry meat processing industry exhibits the rather unique ror jbination
of low market concentration and high vertical integration. The market
shares of the 4, 8, 20 and 50 largest firms in 1967 and earlier years are
shown in Table 1-20. The trend toward increased concentration is
continuing. For example, USDA data reported the -I, 8, and 20 largest
firms accounted for 32, 46, and 72 percent of the total federally inspected
turkey slaughters in 1972.

The high level integration on the part of some firms in the industry cr,.r;
be seen by examining Figure 1-2. The typical broiler firm ofren aa» lif
own hatchery, feed mill, processing plant and control of pro'iuc ti^n or
company farms and/or contract producers' farms. Although rn? ny iirrr-
are not fully integrated, virtually all young chicken plants com bine tv.-j j»-
more major functions. More than 95 percent oCy.ll conv,-iT< L?.i broilers
are grown under contract or b\ company owned farms. The firm may
be independent, a subsidiary c'a national feed compa^-; or meatpacker.
or part of a large conglomerate corporation.

Vertical integration is important in the turkey slaughter sul-segment "out
is of a different nature than in the young chicken subsegrru'iit. Processors
have been the major coordinators in the turkey industry whilo feed firms
have been the most important coordinators in the young chicken industry.
Also, grower cooperatives have been more important in the turkey
industry. In 1972 USDA data shows 4^ percent of the Hit-key's were
produced under contract, 12 percent by ta ms owned by integrated enter-
prises and 18 percent through markc-Upg agreements between cooperatives
and processors. The total of 1',' oe rent of the prod-action being coordinated
is indeed high by most standards but figr.ificantly Jovve^ than is true for
young chickens.
1-28
-------
Table 1-18. Location of USDA surveyed federally inspected poultry
slaughtering plants relative to municipal limits, by size
of plant and region, 1970.
•
Plant size
and location

Small :
Within. . . .
Outside. . .
Total . . .
Medium :
Within. . . .
Outside . . .
Total. . .
Large :
Within. . . .
Outside . . .
Total. . .
All

North
Atlantic

10
9
19
5
8
13
5
1
6
38

: Eas t
:. North
: Central

12
11
,1/24
9
8
1/18

—
— —
42

: Wes
: Nor
: Cent

— N umb
12
1
13
34
1
35

—
—
48

Region
, ' South
rai;Atlantic

e r of p Ian ts
2
4
6
29
20
1/51
22
11
.1/34
9 1

\ South
[Central

11
2
13
59
11
70
29
5
JL/35
118

:Wes t

14
5
19
20
6
JL/30

—
—
49

*
•
: All
•
•

61
32
i/94
156
54
1/217
56
17
J./75
386

I/ Differences in total and components exist because some
plants did not indicate location.
Source: Vertrees, James G. , The Poultry Processing Industry: A Study
of the Impact of Water Pollution Control Costs, Marketing Research
Report No. 965, Economic Research Service, U. S. Department of
Agriculture in cooperation with the Environmental Protection Agency,
Washington, D. C. , June, 1972.
1-29
-------
Table 1-19. Location of USDA surveyed federally Inspected poukr,
slaughtering plants, by size of population center and by
region and size of plant, 1970.
Region and
plant size
North Atlantic:
Sma 11

Large
Total
East North
Central :
Snial 1

Lar ge
Total
Wes t North
Centra 1 :

Large
Total..
South Atlantic:
Small
Medium
Large
To t al
South Central:

Large
Total...,..,.
West :
Sma 11

Large
To t a 1
Total

: o- ; i
• 999 \i

: 9
: i
: 14

: 7
: 5

: 12

: 2
I

: 3

: 2
: 11
: 6
: 19

: 3
8

: 1
: 3

: 60

,000-
,499

5
j ?
4
5
9
11
11
1
11
10
22
13
7
20
2
2
-*
78
Source: Vertrees, James
of the Impact of Vv
Siz
\2 ,500- ;b
14,999 |9

1
1
2
5
4
9
3
3
6
1
5
2
8
11
7
18
2
1
3
46
G, . The
e of ropul.'itio
,000-
,999
- N u m b e
1
3
2
2
4
4
9
13
7
3
10
3
8
5
16
5
5
1 Q
56
10,000- ;
19,999 '.
r of p 1 %
I
2
^
2
I
3
1
5
6
9
-T
16
3
13
5
21
5
3
54
n c f n i »• r
20 ,000- ; 30 ,000 -• ] AO ,000 \ A, l
29 ,999 ; 39 ,999 > ovei ;

1 19
1 JL3
1 -- 1 6
i -- : 38
2 1" 1 24
2 1 2 / 1
3 13
3 2 1 35
324 Art
2 ... __ 6
i -- 7 j-,
1 --- 5 3'.
4 -- 12 91
, £ ' '\
3 4 X- "0
4 4 3j
7 4 i'~ 11 3
.' 1 7 19
2 -- 12 30
j 1 19 49
20 8 6A 386
Poultry Processing Industry: A Study
ater Pollution
Control Costs , Marketing Researc
Report No. 965, Economic Research Service, U. S. Dept. of
Agriculture in cooperation with the Environmental Protection Agency,
Washington, D. C. , June, 1972.
1-30
-------
Table 1-20.
Percent of value of shipments of each class or products accounted for by the

largest companies: 1967 compared with 1963, 1958, and 1954
Value of shipments
Percent accounted for by
Code — Class of products and year
2015 Poultry dressing plant products

20151 Hens (or fowl) and chickens

20153 Turkeys

20154 Processed poultry, except soups

20155 Other poultry and small game
-------
Figure 1-2. Functions of a fully integrated broiler firm.

Keady-To-Cook
Broilers
Broiler Feed and
Flock Service
Processing
Plant
Live Broilers
Broiler Growout:
(1) Contract Growers
(2) Company Fotms
Breeders
Hakri:ng-Egg
Farms:
(1) Contract
(2) Company
Broiler Chicks
Source: Faber, Fred L- » and Ruth J. Irvin, The Chicken Broiler Industry:
Structure, Practices, and Costs, Marketing Research Report No. 930,
Economic Research Service, U. S. Dept. of Agriculture, Washington,
D. C. , May, 1971.
1-32
-------
Like the young chicken and turkey subsegments, duck and fowl operations
are also subject to integration. Most ducks are slaughtered by firms
controlling production through company farms and contracts or by cooper-
atives. Fowl is less subject to integration than the other subsegments due
to its relationship with egg layer operations.

Many further processors are also integrated. Indications are that these
segments probably parallel the slaughter subsegments in this regard.
E. Employment
Employment in SIC's 20 16 (poultry slaughter) and 2017 (poultry further
processing and egg processing) appear in Table 1-21 (note that prior to
1972, SIC's 2016 and 2017 were combined in SIC 2015). Published data for
only the further processing portions SIC 2017 are not available. However,
our estimates for 1972 employment in the two further processing segments
are 9, 600 with 8, 500 of these being production workers.

Hourly earnings of production workers in poultry and egg processing
plants appear in Table 1-22. Relative earnings by plant type appear in
Table 1-23. The earnings are low for all types of plants when compared
to other industries. By comparing Tables 1-22 and 1-24, it can be seen
that hourly earnings in poultry and egg processing plants were only 67 percent
of the average for all food manufactures in 1972. This fact coupled with
the geographic location of poultry meat processing plants suggests that the
employees probably have few alternative sources of employment.

In terms of labor productivity published data suggest few significant gains
have been made in recent years. In fact, it appears that productivity has re-
mained constant or, perhaps, has declined slightly in the industry since 1967
(Table 1-25). At the same time, however, value added per manhour of
production labor has been rising (Table 1-26). Payrolls as a percent of
value added in 1972 was roughly at the same level as in 1967. As should
be expected, payrolls represent a larger share of value added in slaughter
plants than in further processing plants.

Employment and financial data for establishments in different employment
size classes are shown in Table 1-27.
1-33
-------
Table 1-21. Number of total employees and production vvorkers
in the poultry and egg processing industries (SIC 2016 and 2017)
Year
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
SIC 2016
SIC 2017
All Employees
(1,000)
66.9
70. 1
71.3
72.2
75.2
85.2
87.6
91.9
92.9
90. 1
93.0
79.3
13.7
Production Workers
(1,000)
61.9
63.8
64.8
65,4
68, 2
77. 2
79.4
83.5
84. 4
81.5
85, 0
72. 7
12, 3
Source: 1972 Census of Manufactures
1-34
-------
Table 1-22. Hourly earnings of production workers in poultry and egg
processing plants, 1958-72

Year

1958
1959
I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
SIC
2015 2016 2017
*t /Vi v
1.27
1.27
1.31
1.31
1.36
1.41
1.47
1.51
1.62
1.76 1.74 I/ 1.85 I/
1.87
1.98
2.14
2.26
2.42 2.41 2.50
— Estimated by Development Planning and Research Associates , Inc.

Source: 1972 Census of Manufactures
1-35
-------
Table 1-23. Index of hourly earnings of production workers in pouit ry

meat processing plants, by type of plan',, 1967
Plant type Index
._____.

All poultry and egg processors 100. 0

Young chicken and fowl 0. 97

Turkey 1.06

Other poultry and small game 1. 14

Further processing 1.09

Source: 1967 Census of Manufactures
1-36
-------
Table 1-24. Hourly earnings of employees of firms marketing food, annual 1958-72, monthly 1972-73
i
oo
-j
Year and
month

1958
1959
I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971 ,
1972 ,

! Food
. manufacturers
;

, ... 1.94
.... 2.02
.... 2.11
.... 2.17
2 . 24
.... 2.30
.... 2.37
.... 2.43
.... 2.52
.... 2.64
.... 2.79
2.95
.... 3.16
.... 3.38
.... 3.60

! Food
. wholesalers

1.89
1.97
2.03
2.09
2.16
2.23
2.28
2.36
2.50
2.66
2.83
3.00
3.31
3.47
3.66

'. Retail food
stores

1.59
1.60
1.68
1.76
1.83
1.90
1.98
2.05
2.13
2.23
2.38
2.54
2.70
2.90
3.09

'. Food
. marketing !./

1.82
1.88
1.96
2.03
2.10
2.16
2.23
2.30
2.40
2.52
2.67
2.84
3.03
3.24
3.45.

: Eating &
: drinking
: places

_«_
_ ••
»~«
__..
__-
»••
1.25
1.30
1.40
1.49
1.62
1.73
1.85
1.95
2.02

II Weighted composite earnings of production employees in food manufacturing and

nonsupervisory employees in wholesale and retail food trade calculated by the

Economic Research Service from data of the U.S. Department ot Labor.
Source: Marketing and Transportation Situation, U. S. Department of Agriculture, Washington,

November, 1973.
-------
Table !-'.-•„ Output per man-hour in c-i':ith
originated foods., by industry, i"60-
s 11 m^nt.-: niei:;ul
Year

' * Ms r — * - ~ ^ P ^ £ '
:0utput , 'hou'rs 'per man- :0utput
: : : hour :
•

: All foods II
i960
1961
1962
1963
1964
1965
1956
1967
1968
1969
1970
1971
1972

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
..< 83
..: 86
..: 88
..: 91
..: 95
,.: 96
, . : 98
..: 100
. . : 1C3
..: 103
,.: 104
. . : 105
. . ; 105
Dairy
..! 93
95
96
99
... 100
... 101
... 100
... 100
... 100
99
98
99
..; 101
105
104
102
99
101
9$
9S
100
99
100
98
96
96
products
12!
119
114
109
108
105
101
100
95
92
88
65
P,2
79
83
87
92
94
97
99
100
104
103
106
110
110
A/
77
80
85
91
93
97
99
100
105
107
110
116
123

•- yjan_ : ^utpu
: bon: 5 *pfcr r'""'
: : t-our

Heat products
n
82
83
87
94
91
96
100
103
103
106
110
108
: Free
• and
73
78
85
82
87
91
96
100
109
104
108
ll'H
2.03
108
104
102
101.
108
10!
99
1 00
98
97
97
97
97
essed fruit
92
93
93
91
f;3
96
99
100
102
iOb
i 0 1
98
ICf,

y
75
78
31
86
3/
91
^ S
100
10 j
1C6
109
113
111
O/
79
85
9i
90
94
95
97
300
iu6
99
K,,
,1 i 1
108
n~ : Output ;

: 1'ouli
62
73
72
7e
SO
85
92
100
9 b
10?,
ll't
117
120
. Cn Ln-
84
87
91
96
98
9H
; oo
300
103
104
1U--V
1C;
", ',V:
• hci'i ,s

.1" <4
9?
96
r.fj
darts ]_•'
11
62
r.')
9"
/'b
:)8
102
30'i
104
106
109
111
1 1 1
I/ Output per man-hour indexes were computed froiii urn >unc LT. index*?.- '" .
worked by all employees and factory cutp^t. Man-hour eftir-? ».«,=. f?r i')rJ-'i-7! at-'; :-asei
on data published by the Bureau of Census, Estimates for 1972 •//•-; re in t« rpel a r? d rrom
employment statistics published by BLS, Output estimates fir., based OP v^.lue-fddcd
indexes published by the Bureau of Census orojec'.c-d tor nt -v ce.v us yea.s by physical
output data published by the U?DA. Data for 1964--/2 are pi. .'jrii ;airy . c/ Establish-
ments primarily engaged in ir.anufact^rlr:f shcrtenir.;;, an^i co. ^;:n«; oils, margarine,
macaroni, and spaghetti, as well a-:; industry grcjps shovni rn r,,.is cabJ:-, _3/ Meat
packing plants ar.d estab: icr.-.er.ts specializing in pre;.arc. . r.eat piou'nc >..<•-. £/ Foultry-
dressing plants and establishmen1. s :' ,jec:alizir,3 in proce >:-.S;L; e»-p, products, p/ Plants
engaged in processing tluia milk ar.d cre;'.r;i, butter, ivitur^i chteee, concentratea r.iiik,
ice cream and ices, and special dairy products. _6/ EstabJ is'pj!i-?nt s prir.-.ariJy engaged
in canning and freezing frc.its aud ve?,rtal-_ts .s'id r.anutacturing pickles ar.d sauces.
T_/ Establishments prinarily e,.ga?;ed ir Manufactur'.ng flour and meal, cereal products,
rice milling, blended and in.pai.i flou--, ard corn vet milling prc.d-jcts.
Sou rcc : Markotiji^f
Agriculture,
» nr. p o_r taj, _£n_ Situation, 0 . i. Depa rtmcnt of
hinrLon, N:-\eruber, 1973.
-------
Table 1-26. Selected employment related operating ratios for poultry and egg processing plants, 1958-1972
Payroll
per
Year employee
(dollars)
1958 2,578
1959 2,589
I960 2,628
1961 2,729
1962 2,842
1963 2,916
1964 3,067
1965 3,213
1966 3,501
1967 3,723
1968 3,920
1969 4,221
1970 4,579
1971 4,350
1972 5,144
SIC 2016
1972 5,119
SIC 2017
1972 5,292
Production
worker as
percent of
total
employment
(pe rcent)
90
92
93
92
93
91
91
91
91
91
91
91
91
90
91

90
A nn.ua 1
man-hours
of
production
workers
(number)
1,856
1,819
1,792
1,863
1,861
1,883
1,906
1,947
1,965
1,929
1,914
1,945
1,962
1,893
1,945

1,953

1,894
Acreage
hourly
earnings of
production
worke rs
(dollars)
1.27
1.27
1.31
1.31
1.36
1.41
1.47
1.51
1.62
1.76
1.87
1.98
2.14
2.26
2.42

2.41

2.50
Cost of
mate rials
per dollar
of
shipments
(dollars)
.84
. 82
.83
.82
.82
.82
.82
.81
. 80
. 80
.79
.76
.7.6
.75
.77

.78

.71
Cost of
mate rials
and payrolls
pe r dollar
shipments
(dollars)
.92
.91
.91
.91
.91
.91
.91
.91
.90
.91
.90
.87
.88
.86
.89

.90

.84
Value
added
per
employee
(dollars)
4,978
4,998
5,444
5,159
5,595
5,861
5,917
6,450
7,439
6,922
7,492
8,980
9,153
9,883
9,790

9,440

11,817
Payrolls
as percent
of value
added
(percent)
52
52
48
53
51
50
52
50
47
54
52
47
50
44
53

45
Value acded
per man-hour
of production
worker
(dollars)
2.98
2.98
3.28
3.01
3.25
3.42
3.42
3.65
4.17
3.93
4.31
5.08
5. 14
5.77
5.50

5.27

6.94
Source: 1967-1972 Census of Manufactures
-------
Table 1-27. General statistics , by employment size of establishment, 1967
All employees

Production workers

2015 Poultry Pro- Establish-
cessinsj Plants ments
(numbe r)

Establ.shments , Total 843
Establishments with
an ave raye of
1 tc 4 emplovef 3 188
5 to 9 employees 86
10 to 19 employees 55
20 tc 4<; employees 99
50 to 99 employees 126
100 to 249 employees 192
250 tc 499 employees , 80
500 to 999 employees 15
1 , GC-0 to 2, -i',< i
employees 2
Establishments covered
by Admin. Records 233
(D) V.'ithheld to. avoid disclosing fi
Source: 1967 Census of Manufact
Number
(1,000)

85.2

.3
.6
.8
3.3
9.2
30.5
28.3
12. Z

(D)

.8
Payroll
(mil dol)

317. 1

1. 1
2.0
2.9
12.5
33.2
113.3
106. 1
45. 9

(D)

2.5
Number
(1,000)

77.7

.3
. 5
.7
2.9
8.4
27.7
25.9
11.2

. 8
Man-hours
(millions)

149.9

.5
.9
1. 1
5.3
15. 1
53. 1
52.0 .
21.9

(D)

1.2
Wages
(mil
dol)
263.5

.9
1.6
2.3
9.9
27.0
93.3
89.3
39.2

(D)

2.0

Value
added
by
ma riu -
facture
(mil
dol)
588.0

4.6
5. 8
8.3
32.7
71.2
199.8
191. 1
74.3

(D)

8.2

Capital
expendi-
' Cost of
materials
(rml doi)

2,358.5 '

13.0
15.7
30.3
93.9
250.2
920.9
811.5
218.0

25.0
Value of
shipments
imii doi)

2,936. 1

17.6
21.5
38, 5
131.0
318.8
1, 114. 5
1,002.2
292.0

(D)

33.2
ture
new
(mil
dol)
57.2

4. 1
.5
.6
1.7
9.7
!6.3
17.3
7. 1

(D)

.9
End of year
inventories
(mil dol)

1-35.6

.9
_ 9
1. 1
5.9
18.4
43. 9
43.3
21.4

(D)

1.7

A ve rage
value of
shipments
pe r f: rm
(1 , OvJO COl)

3,482.9

93.6
250.0
700.0
1,323,2
2,530.2
5.8C4.7
12,527.5
19,466.7

(D)

.gures for individual companies
ures

-------
II. FINANCIAL PROFILE OF THE INDUSTRY
Most firms in the poultry processing industry are either closely held
corporations or operating divisions of larger corporations. In the
former group, financial information is proprietary and unavailable for
analysis. In the latter group, the poultry processing information is
consolidated with other divisions and therefore difficult to assess. In
both groups a high degree of integration of poultry operations further
compounds the difficulty of evaluating the processing sector.

Little published aggregate financial data for the poultry meat process-
ing industry per se is available. Census includes the egg processing and
small game dressing segments with the poultry processing industry.
USDA data are not compatible with SIC definitions. Similar problems
exist with other sources of data. Since the egg processing and small
game dressing segments represent a very small portion of the total
industry as reported by Census (about 5 percent of the value of shipments),
that data source provides the best published information of the industry as
defined in this report.

Supplementary information was obtained from the various trade associa-
tions, equipment suppliers, consulting engineers and operating executives
within the industry.
A. Sales
The contribution that different output categories made to total sales of
SIC 2015 in 1967 are shown in Table II-l.

Total sales of the poultry industry were $3, 874 million in 1972 (Table II-2).
This compared to $2, 936. 1 million in 1967 and $1, 888.2 million in 1958.
The increase of total sales over the 1958-1972 period reflects consumption
expanding faster than the rate of decline in wholesale prices. Per capita
chicken consumption increased from 28.2 pounds in 1958 to 42.9 pounds
in 1972. During the same period, turkey consumption increased from
5.9 pounds to 9. 1 pounds per capita. The increase in consumption
undoubtedly reflects increased quality of product as well as declining
prices. The farm price of broilers declined from 18.5 cents to 14.3
cents per pound from 1958 to 1972. Turkeys were somewhat more
stable with a farm price of 23. 9 cents in 1958 and 22. 2 cents in 1972.
II-l
-------
Table II-l. Value of shipments byproduct class, SIC 2015, 196?
Product
Code
2011
20111
20112
20113

Z0114
20115
20119
20110

2013
20116
20136
20117
20137
20118
20138

20139
20130
2015
20151
20153
20154
20155
20156
20150
2021
2023
2032
2037
2042
2051
2094
2096
2099
2891
3079
Product Class
Meatpacking plants
Beef, not canned or made into sausage
Veal, not canned or made into sausage
Lamb and mutton, not canned or made
into sausa ge
Pork, fresh and frozen
Lard
Hides, skins, and pelts
Miscellaneous by products of meat-
packing plants
Sausages and other prepared meats
Pork, processed or cured

Sausage and similar products
Canned meats (except dog and cat food)
containing 20 percent or more meat
Natural sausage casings
Meat processing plant products, n. s.k.
Poultry Products
Hens (or fowl) and chickens
Turkeys
Processed poultry, except soups
Other poultry and small game
Liquid, dried, and frozen eggs
Poultry dressing plant product, n. s.k.
Creamery butter
Condensed and evaporated milk
Canned specialties
Frozen fruits and vegetables
Prepared feeds
Bread, cake and related products
Animal and marine fats and oils
Shortening and cooking oils
Food preparations, n. e.c.
Adhesives and gelatin
Miscellaneous plastic products
Value of shipments
(million dollars)
(under 2)
-
-

-
-
-
(under 2}

(under 2)
(under 2)
(under 2)

(Z)

(under 2)
-
1. 0
2, 752.4
1, 831. 8
49 3 . 6
133. 5
(10-20)
151.9
(100-200)
6.3
(2-5)
(under 2)
6.7
(5-10)
(over 2)
2.2
-
-
-
-
II-2
-------
Table II-1 • (continued)
Product
Code

93000
99989
95120
99980

Product Class
other secondary products
miscellaneous receipts
Commission receipts
Resales
Shell egg sales
Other miscellaneous receipts
TOTAL
Value of shipments
(million dollars)
6.2
146.5
11.2
95.9
20.6
18.8
2,936. 1
(z) Less than $50 thousand

Source: 1967 Census of Manufactures
II-3
-------
Year
Table II-2. Value of shipments, poultry and egg processing

industry, 1962-1973 (million dolla rs)
Number of

establishments
SIC 2015
SIC 2016 -
'
Average sales/
SIC 2017 ' establishment
1973
1972 641
1971
1970
1969
1968
1967 843
1966
1965
1964
1963 967
1962
1961
I960
1959
1958 1,233
5,000.0 i/
3,874.3 3,322.0 552.3 6.044
3,488.8
3,456.9
3,466.7
3,071.4
2,936.1 3.483
2,754. 1
2,490.2
2,329.5
2,240.9 2,317
2,078.2
2,084.0
2,053.8
1,897.9
1,888.2 1.533
II
— U. S. Industrial Outlook, 1974.

y Data for SIC's 2016 and 2017 not available prior to 1972.

Source: 1972 Census of Manufactures.
II-4
-------
The 50 percent decline in the number of plants and the four-fold in-
crease in the average shipments per firm by 1972 indicate economies of
scale within the industry (Table II-2). The dynamics of the industry also
reflect the industry effort to provide more specialized products, partic-
ularly in the form of further processed poultry products.

The importance of further processing is shown by the fact that the amount
of ready-to-cook turkey which was further processed increased from 8
percent in 1961 to 36 percent in 1972 (9)-

Overall, the poultry processing industry has experienced some of the
typical patterns which characterize a growth industry. In the early
stages of development, there is a proliferation of small firms attracted
by favorable profits. As more firms enter the market, competition
for sales becomes keen and usually results in price cutting that reduces
profits. The small inefficient firms find it difficult to survive. The
more efficient and better financed firms absorb some of those that are
unable to remain viable. Even though the industry has experienced dram-
atic changes within the past decade, it appears a high degree of com-
petition will continue to exist in the forseeable future.
B. Distribution of Total Sales Dollar
While total sales increased from $2,936. 1 million to $3,874. 3 million
from 1967 to 1972, the distribution of the sales dollar was altered some^
what. The aggregate distribution of the total sales dollar derived from
the Census of Manufactures is summarized below.

Distribution of Sales Dollar
1967
1972
Percent-
Total sales
Cost of material
Production wages
Other operating costs, taxes
and profit
100.0
80.33
8.97

10.70
100.0
77.53
10.29

12. 18
II-5
-------
The number of production employees increased irom 77, 700 to 85,000 -
a 9.4 percent increase.— while total wages increased frum $263,, b million
to $400.0 million— a 51.8 percent increase. The greater portion of the
sales dollar for labor resulted from the fact that annual sales per pro-
duction worker increased 20.6 percent while annual wages per employee
increased 28, 9 percent.

The major cost of material consists of poultry meat which, as a percent
of sales, decreased over the 1967-1972 time frame. Although total
expenditures for materials increased from $2,358.5 million to $2, 967. 5
million, a 2o,8 percent increase, sales during the period increased by
32.0 percent. A more detailed distribution of the sales dollar is shown
in Table II-3. Most of the indirect cost as well as profits showed slight
increases during the 1967-1972 period.
C. Earnings
Sources for estimating profits in the poultry processing industry are
quite limited. Data on 17 firms for 1959-1964 are summarized in
Table IJ-4. However, these data are quite obsolete and unrealistic v/hen
the results are compared with the present cost of plant, equipment and
capital. A more realistic current estimate is shown in Table II-3 whc re
before tax profits for the industry as a whole ran 2. 9 percent of sales
in 197Z, That profit rate is roughly equivalent to 7. 5 percent of total
assets and about 20 percent of the book value of depreciable fixed assets.
Before tax profits were equal to approximately 25 percent of "et we HI*.

Annual Statement Studies by Robert Morris Associates reports 1972 earn-
ings for a sample of 11 poultry dressing companies financial rstaloments.
A range of before tax profits of 2.3 to 19.0 percent of total assets included
only 50 percent of the sample--indicating that profits vary quite v-'iriely
from firm to firm. Annual earnings for the industry as a \vhoie are quite
volatile. The cyclical nature 01 the industry accounts for much 01 the
annual profit va riability within the industry. Large profits in one year
may be more than offset by losses in the following year, e.g., 1973 and
1974. It appears that more plant closures can be traced to large short-
run losses than to chronic unprofitability. [n other words, capital avai-
lability and liquidity are critical problems for many firms. The imposition
of pollution control requirements will tend to accentuate this problem.
11-6
-------
Table II-3. Poultry meat processing industry distribution of sales by-
cost and earnings components, 1967 and 1972.

Sales
Direct Costs
Raw materials
Labor
Supplies- containers , parts
and other materials
Cost of resales
Fuels and electricity
Other direct costs
Total direct
Indirect Costs
Labor
Depreciation
Interest
Rents
Taxes
Other
Total indirect costs
1967
100.0

67.0
9.0

9.5
3. 1
0.6
0. 1
89.3

1.8
0.9
0.5
0. 1
0.5
. 4.4
8.2
1972
100.0

61. 1
10.3

8.4
5.7
1. 1
0.3
86.9

2.0
0.9
0.8
0. 1
0.6
5.8
10.2
Total Costs 97.5 97. 1

Profit before tax 2.5 2.9
Income taxes 1.1 1.3

Earnings 1.4 1.6
Source: Estimated by Development Planning & Research Associates, Inc.
II-7
-------
Table II-4. Earning rates for 17 chicken-processing
firms, 1959-64 L'

Year
1959
I960
1961
1962
1963
1964
6-year average. . .
Net
Sales
0.41
.60
.69
.80
73
.66
0.65
income after taxes
»
: Assets
2.3
2 ?
3 9
5 3
4 1
3.7
3.6
as a percentage of —
: Net \7orth
4 8
7 r*
ft 1
in 9
ft ^
7.6
7.7
I/ All meatpacking firms and firms with less than 50 percent of 1964
sales from meat and poultry were excluded. Firms were classified based
on 1964 operations. Excluded were firms processing more than one product;
that is, both chickens and turkeys. Many firms were vertically integrated:
however, fiscal years were not all on a calendar year basis, although most
of these years corresponded approximately.

Source: Organisation and Competition in the Poultry and Egg Industries.
Natl. Comnis. on Food Kktg. Tech. Study no. 2, June 1966.
II-8
-------
D. Industry Cash Flow
Based on the distribution of sales data presented in Section B, above,
it appears the industry-wide cash flows averaged about 2. 3 and 2. 5 per-
cent of sales for 1967 and 1972, respectively (cash flow = after tax earn-
ings + depreciation). In absolute terms, the 1972 cash flow for the
industry was about $95 million (including egg processing plants). Of
that, $60 million was spent for new plants and equipment. Another $5
million was probably expended for used plants and equipment.
E. Ability to Finance New Investment
The ability of a firm to finance new investment for pollution abatement is
a function of several critical financial and economic factors. In general
terms, new capital must come from one or more of the following sources:
(1) funds borrowed from outside sources, (2) equity capital or (3) inter-
nally generated funds -- retained earnings and the stream of funds attri-
buted to depreciation of fixed assets.
For each of the three major sources of new investment, the most critical
set of factors is the financial condition of the individual firm. For debt
financing, the firm's credit rating, earnings record over a period of
years, stability of earnings, existing debt-equity ratio and the lenders'
confidence in management will be major considerations. New equity
funds through the sale of securities will depend upon the firm's future
earnings as anticipated by investors, which in turn will reflect past earn-
ings 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 compari-
sons, the investor will probably look at the trend of earnings for the past
five or so years. New equity capital for a sole proprietorship will be
available only if the entrepreneur has sufficient cash reserves or has other
enterprises which can provide financial resources.

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.
II-9
-------
The condition of the firm's industry and general economic c jnditicns arc
also major considerations in attracting new capital. Tbu: industry v-iSl he
compared to otheT similar industries (i.e. , other processing industries)
in terms of net profits on sales and on net worth, supply-demand rela -
tionships, trends in production and consumption, the state of technology,
impact of government Jegulation, foreign trade and other oignificanl
variables. Declining ,->r depressed industries are net 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 now 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 fiui'neing. These gen-
eral guidelines ran be applied to the poultry professing -''idustry,

Capital expenditures in the poultry processing industry are rompilf.d
on an annual basis. These data are bhowr; in Table li-5. Total indus-
try expenditures have increcised from $28. 1 million in 1958 to $60. 2
million in 1972. While total expenditures have increased over tht;
period, year-to-year changes have been quite erratic. The average
expenditure per plant ha& increased from $22,800 jn 1958 to $93,900
in 1972. The increase in per plant expenditures reflects the trend to the
much larger and more efficient processing operation':. The year-to-
year erratic movements undoubtedly are at least partly a function o*'
capital availability. High profit years contribute to capital availability,
whereas low profit or loss years restrict the availability of capital,
The effect of the cyclical patterns in the industry has been discussed
above.

Given the nature of the poultry meat processing industry, it is antici-
pated that the requisite capital for investment in pollution control facil-
ities will not be available for some establishments. A lot of the small
and medium sized firms are rather highly leveraged. Shci;M capital
outlays for pollution control coincide with unprofitable operating posi -
tions such as we are currently seeing, willing lenders probably coiild
not be found in many cases. This is especially so for the smaller,
less-diversified firms in the industry.

It can be observed that the financial market is rathe? pessimistic in
evaluation of some of the firms involved in poultry processing. For
example, two firms with sales of $100-200 million in 1973 have a price/ ,
earnings ratio between 2 and 3. In addition, they are selling at 50-75
percent of book value. Even the larger conglomerates such as Esmark
and Greyhound are selling at 5 and 6 times 19" 3 earnings. £±/ This
situation raises serious doubts as to the avaiiibility of capital to these
firms for non-productive investment.
11-10
-------
Table II- 5. Annual expenditures for new plant and equipment in the poultry
processing industry, 1958-1972 (SIC-2015 except 1972 when change was
made to SIC 2016 and 2017

Year

1972 -/
1971
1970
1969
1968
1967 U
1966
1965
1964
1963 i'
1962
1961
1960
1959 ,
1958 -
y 1971

No. of
e s tabli s hme nts

641

843

967

1,233
Annual Survey of
— Excludes purchases of

Total industry
expenditures —
($ million)
60.2
62.8
60.3
51.7
37.9
57.2
43.6
31.9
21.3
34.3
19.3
19.2
23.0
24.5
28.1
Manufactures
Expenditures as Average
a percent of value expenditures
of shipments per plant — '
(Percent) ($000)
1.55 93.9
1.80
1.74
1.49
1.23
1.95 67.9
1.58
1.28
0.91
1.42 35.5
0.91
0.92
1.12
1.29
1.49 22.8

used plant and equipment
— Census of Manufactures
II-11
-------
III. MODEL PLANTS

The model plant concept was used to develop definitive financial profiles
representative of the different sizes and types of plants in the poultry
processing industry. While this approach has certain limitations, it
does reflect basic relationships and tendencies for firms within the
industry. The model plants do not represent specific firms, and they
require a considerable degree of simplification and standardization
which includes uniform factor prices and treatment of cost items as well
as the limitation of the product lines for individual plants.

A. Type of Plants

In this analysis, we have developed model plants as follows:
Chicken processing
Turkey processing
Duck processing
Fowl processing
Further processing of poultry meat
The first four types are considered as single,-product operations, even
though many multiple-product plants exist within the industry. The
chicken plants are processing broilers that are sold as whole ice-pack
birds. Turkey processing in the past has been associated with multiple-
product processing plants, but the more recent trend has been to larger
specialized operations. The turkey plants are assumed to be processing
mature young turkeys which are marketed as bagged whole frozen turkeys,

The duck processing plants are processing only ducks which are also
sold bagged, whole and frozen.

The fowl plants are handling fowl exclusively and these are sold as whole
ice-pack birds. Further processing has been characterized by prolifer-
ation of product lines, and this has necessarily been severely delimited
to only three lines. These product lines are: 1. cooked chicken parts;
2. turkey rolls and parts; and 3. canned whole chicken.
B. Sizes of Plants

Sizes of model plants were developed from prior research studies
as well as from discussions with personnel from engineering firms, equip-
ment supply firms, and processing firms within the industry.
III-l
-------
For ev detailed dis-.ussion of types and sixes o! plani.s in the- ^uclust'^ .
the reader is referred to Chapter I of this report.

For this analysis, four sizes of chicken plants are used. The small
plant was a 3,000 bird per hour facility with annual input of 21.26 million
pounds of live chickens. The medium plant wa b 6,000 birds per hour
with an annual input of 42,25 million pounds. The large six.'; had a
capacity of 9)600 birds per hour which gave an <;n.naal slaughter of
68 million pounds. The very large size was a plant with a rated capacity
of 14,400 birds per hour, and operating at 90% resulted in Hie processing
of 96,68 million pounds annually.

Three sizes of turkey processing plants were used lor thit.. analysis. The
small plant had a capacity of 900 birds per hour and tota.1 pounds processed
annually were 16.78 million (live weight). The medium-size plant, was
rated at 1, 800 birds per hour with an annual input of 3.-J, 56 million pounds,
The large plant capacity was 3, 000 birds per hour with bb. 94 million
pounds of turkey slaughtered annually.

The limited number of duck processing plants (17 plants) vary considerably
in both size and utilization. After discussion with industry representatives
it was decided to use a capacity of 1,400 birds per hour with annual utiliza-
tion of 60 percent. This gave an annual input of 10,584,000 pound;; (live
weight).

Fowl plants also exhibit considerable variation in size and utilisation.
Most of the fowl plants are older facilities that have undergone exten-
sive modification over the years. For this analysi" a fowl plant ^rii"l:«
48,000 birds pe r hour was used and it wa? considered to be operating at
60 percent of capacity on an annual basis. This resulted in an ai~nad.l liv«
weight input of ti7,072,000 pounds.

Further processing plants have been increasing in size in recent years.
The input of 9, 870, 000 pounds of poultry meat per year seemed to reflect
the increased sizes of these plants. The size, as well as utilization,
seems to be influenced by the product line or product mix. The input mix
by weight for the model plant id assumed to be 57.45 percent for turkey
rolls and roasts, and 21.28 percent i-a ch for conked chicken pares and
canned wlio 1 e chickenR .

Although the fowl, cluck and further processing segments were quite hetero-
geneous in size, the decision was made to coriKlruci only one model p]ant
for each segment. The decision for one plant in each of the us segments
was based upon the lirmtrd number of plants represented as well as
limited data time and bv.age.l.
-------
C. Inve s tmenl

The estimated replacement costs, book value and salvage for each model
plant in various classifications and size groups are shown in Tables III-1
through III-3. Separate estimates are shown for land, building and
facilities, and installed plant and equipment. In addition, current assets,
current liabilities and net working capital are shown.

Replacement Values

The plant replacement cost estimates reflect current construction costs
of the general design under which the plants would be built today. They
reflect improvements in building design as well as technological advances
in processing equipment that may not be included in some of the existing
plants. In other words, the cost estimates reflect replacing the operational
plants the way they would be built today. These costs were based upon
estimates provided by industry engineers.

It should be noted that no estimates for mobile equipment are included in
the replacement cost estimates. For this analysis, it is assumed that
transportation service is a purchased item and appropriate allowances
have been made for this service.
«

Except for holding sheds, building costs which included site development,
were estimated at $20. 00 per square foot. Economies of scale exist
in the building and equipment requirements. However, the larger
economies occur when moving from the small to medium-size plants.
This relationship can be observed from the building and equipment costs
per bird per hour of chicken processing. These costs for the 3,000,
6,000, 9,600, and 14,400 bird per hour capacities are $351, $274,
$247, and $201 per bird per hour respectively. A somewhat similar
relationship exists for the other types of plants.

Book Value of Investment
The operating year for the model plants was taken as 1972. This was
considered to be a "normal" operating year without the severe dis-
tortions which occurred in 1973. To achieve an estimate of book value
for 1972, the age of the plants were determined through discussions with
industry suppliers and operating executives. The original plants for
chicken and turkey processing were considered to have been built in
I960. Replacement costs were deflated to I960 to determine the original
costs. Price deflators did not appear to reflect the large increases in
current costs, especially for equipment. Industry suppliers and
operating executives felt costs had more than doubled since I960. The
original costs were taken at 50 percent of the value of current replacement
costs. These costs appeared to be compatible with previous estimates (1).*
*See reference at end of chapter.
III-3
-------
Based upon normal depreciation procedures, i.e. , 20 years for buildings
and 10 years for equipment, the book value was derived. The exception
to this procedure was the consideration given to minimum book value of
building and equipment. In common with most food processing plants,
poultry processing plants undergo periodic renovation, continuous repair
and maintenance and equipment items are replaced as they wear out or
become obsolete. In recent years, more stringent enforcement inspection
(USDA) requirements and concurrent stiffening of state inspection have
furred many plants to either undergo extensive remodeling or close. Also,
plant? may add new equipment to keep pace with new technology. As a result,
it was estimated that the book value of buildings and machinery and equipment
for !.b(; rnodt:! plants would depreciate to 66 percent of original value> then
periodic replacements result in the book value remaining at that level. Land
was included in book value at the estimated purchase price.

Salvage Value

The saJvage value of processing plants will vary widely from plant to plant,
depending on the age of plant and its condition, and the age of the equipment
and its condition. In some instances the salvage value of old, obsolete
plants will be equal to the site value only. If the building is remodeled
or refurbished for other uses such as a warehouse, the salvage value may
approach 20 percent of its replacement cost.

There is a limited market for used machinery. Virtually all new plants
would begin with all new equipment. As a result, with the high cost of
dismantling old equipment, used equipment may be purchased at 10
to 50 percent of replacement cost.

oince no data are available on actual salvage values for poultry processing
plants and only a very limited market exists for used equipment, it
is difficult to estimate the salvage value of a plant closed because of the
added costs of pollution abatement. It is assumed the land equals the
current market value and the salvage value of buildings and equipment
will approximate 20 and 10 percent respectively. All of the net operating
capital will be recovered intact. The combined values of land, buildings,
equipment and operating capital for each model plant are shown in Tables
J.Il-1 through III-3.
III-4
-------
Table III- 1. Estimated investment capital for chicken processing plants
Small

Land
Building
Equipment
Total
Current assets
Current liabilities
Net working capital
Total invested capital
3,000
Current

15
388
653
1,056
698
349
349
1,405

birds /hr.
Salvage Book

15
78
65
158
698
349
349
507

8
128
215
351
698
349
349
700
Medium
6,000
Current

30
550
1,066 .
.1,646
1 , 395
696
697
2,344
birds /h
Salvage

30
110
107
247
1,395
698
697
946
r.
Book
-$1,000
15
181
352
548
1,395
698
697
1,246
La r go
9,600
Current

45
793
1,535
2,373
2,231
1, 116
1, 115
3,488
birds /h
Salvage

45
159
153
357
2,231
1, 116
1, 115
1,473
r .
Book

23
261
507
791
2,231
1, 116
1, 115
1,907
Very Large
14,400 birds/hr.
Current Salvage Book

60
933
1,905
2,898
3, 172
1,586
1,586
4,484

60
187
190
437
3,172 3,
1,586 1,
1,586 1,
2,023 2,

30
308
628
966
172
586
586
552
I
(Jl
-------
Ts-Dle III- 2, Estimated investment capital for turkey
Small
900 birds/hr.
Current Salvage
Land
Building
Equipment
Total
Current assets
Current liabilities
Net working capital
Total investment capital

30
480
1,090
1,600
772
386
386
1,986

30
96
109
235
772
386
386
621
Book

15
158
360
533
772
386
386-
919
Medium
1, 800 birds/hr.
Current Salvage
__
-------
Table III-3. Estimated investment capital for duck and fowl processing plant

Land
Building
Equipment
Total
Current assets
Current liabilities
Net working capital
Total investment capital

1,400
Current
75
800
1,225
2,100
631
316
315
2,416
Duck

birds/hour
Salvage Book
75
160
123
358
631
316
315
674
38
264
402
704
631
316
315
1,020

Fowl
Further processed poultry
4, 800 birds/hour
Current Salvage Book
$000
24 24
489
930
1,443
666
333
353
1,776
98
93
215
666
333
333
548
12
162
307
481
666
333
333
814
56,400 Ibs/day
Current Salvage Book
74
740
1,480
2,294
619
310
309
2,604
74
148
148
370
619
310
309
680
37
244
488
769
619
310
309
1,079
I
-o
-------
Operating Capital^

Curient assets, current liabilities and net working capital are also shown
in Tables II1-1.HI-2, & III-3. Current assets were estimated to be 16 percent
of sales and conforms to the relationship existing in most food processing
industries. Many integrated operations have higher level;; of current assets
reflecting higher inventory levels necessary in integrated operations.
Current liabilities were estimated at 8 percent of sales. This gives a
-urrent ratio of ?,0 which is financially sound and comp* table to related
firms in the food processing industry where there is a relatively high
rate of inventory turnover.

D, Model Plant Capacity and Utiliga_tio£

Annual throughput for each of the model processing plants is sumrnari/.ed
in Tables III-4 through III-6 . Utilization of plant capacity varies with
the type of product. The most stable utilization rate is for processing
chickens where the small, medium and large plants are considered to be
operating at 95 percent of capacity, while the very large plant operates
at 90 percent of capacity. The chicken plants normally operate on an
8-hour day for Z50 days per year. Chickens were considered to give a net
yield of 72 percent for whole, ice-packed birds. This made allowance
for condemned birds, as well as for moisture pickup.

Turkey processing plants for large turkeys reflect the seasonal growing
period. The turkey plants are considered to be operating 140 working
days per year at a utilization rate of 90 percent of capacity. The yield
of heavy turkeys is 79.4 percent of live weight which allows for con-
demned birds and moisture pickup. The final product is bagged, frozen,
ready-to-cook turkey.

Considerable variation exists in the utilization of capacity for duck and
fowl plants. The model plants for this analysis were assumed to be
operating at 60 percent of capacity on an annual basis. Industry yields
on ducks appeared to range between 69 and 73 percent. Therefore,
a yield of 71 percent was taken as the yield for the model duck plant.
Yield differentials were somewhat greater on fowl, but a 62 percent yield
was used for the model fowl plant.
111-8
-------
TableIII-4. Input-output of model plants in the chicken processing industry.
Capacity
Raw Product
Birds/Hour
Birds/Day
Birds/Year
Lbs,. live wt. /Hour
Lbs.live wt. /Day
Lbs. live wt. /Year
Finished Product
Lbs. /Hour
Lbs. /Day
Lbs. /Year
Hours/Day - 8
Days/Year - 250
Average live weight/bird -
Yield of RTC with moisture
Lbs. offal/year (28%)

Small
3000 BPH

2, 850
22, 800
5, 700, 000
10, 630
85, 040
21,260, 000

7, 654
61,232
15, 308, 000

3.73 Ibs.
Medium
6000 BPH

5, 700
45, 600
11,400, 000
21, 260
170, 080
42, 520, 000

15, 307
122,456
30, 614, 000

Large
9600 BPH

9, 120
72, 960
18, 240, 000
34, 000
272, 000
68, 000, 000

24, 480
195, 840
48,960, 000

Very Large
14, 000 BPH

12, 960
103, 680
25, 920, 000
48, 340
386, 720
96, 680, 000

34, 805
278, 440
69, 610, 000

pickup, less condemned = 72%
5,952, 800
(small)
11, 905, 600
(medium)
19, 040, 000
(large)
27, 070, 400
(very large)
-------
Table HI-5.Input-output of model plants in the turkey processing industry,
Capacity
Raw Product
Birds /Hour
Birds /Day
Birds/Year
Lbs. live wt. /Hour
Lbs.live wt. /Day
Lbs. live wt. /Year
Finished Product
Lbs. /Hour
Lbs. /Day
Lbs. /Year
Small
900 BPH

810
6, 480
907,000
14, 985
119, 880
16,783,000

11, 898
95, 185
13,326,000
Medium
1800 BPH

1, 620
12, 960
1, 8! 4, 000
29, 970
239, 760
33, 566, GOO

23, 796
190, 369
26, 652, 000
Large
:ooo BPH

2, 700
21, 600
3. 024, 000
41, 950
399.- 600
55, V-14, 000

39, 660
337, 282
44, 420, 000
Hours/day - 8
Days/year - 140
Number of birds reflects heavy hens and toms processed at the rate of
4 hens to 3 toms.
Average weight live = 18. 5 Ibs.
Yield of frozen whole birds with moisture pickup » 82.2% less I. 8% con-
demned = 79. 4% net
Utilization of capacity = 90% for the number of days per y«a.r
III-10
-------
Table III-6. Input-output of model plants in the duck, fowl, and further processing industries

Capacity
Birds /hour
Birds /day
Birds /year
Lbs live wt/hr
Lbs. live wt/day
Lbs live wt/year
Finished Product
Lbs/hr
Lbs /day
Lbs /year
Hours
Days /year
Utilization of cap.
Ave. live wt/bird
Yield of RTC with moisture
pick up losses condemned

Ducks
1,400
840
6,720
1,680,000
5,290
42,336
10,584,000

3,757
30,059
7,515,000
8
250
60%
6.31

71%

Fowl
4, 800
2, 880
23, 040
5,760,000
13, 536
108,288
27,072,000

8,392
67, 139
16,785,000
8
250
60%*
4.7

62%

Raw product capacity Ibs/day
Lbs poultry input/hr
Lbs poultry input /day
Lbs poultry input/year

Finished Product
Lbs/hr
Lbs /day
Lbs /year

Product mix
Turkey rolls and roast
Cooked chicken pts
Canned chicken
Further Processing
56,400
4,935
39,480
9, 870,000

3,625
28,996
7,249,000
8
250
70%

57.45%
21.28%
21.28%
-------
FurT'u-:r process ing of poultry meat exhibit :-: by f ? r ihe L'reatesl \.itV.Vilii
in product line as wel] as size and util.izei.tion of Capacity. The oxirnsive
study by Rogers arid Smith was relied upon rather heavily in developing
the model plant for further processing (10). The raw produ -;t-fmi^ lied
product relationships for the three product lines were taken dire.cily
from the above source. The product mix input of poultry meat consisted
of 57.45 percent for turkey roi'.s and roasts and 2i.2y percent ea ch for
cooked chicken parts and canned chicken. The further processing plant
was assumed to be operating at 70 percent of capacity.
E. Annual Profits
After-tax income, return on sales, both pre-ta.x and alter- u-x., ac.-j.
return on invested capital both pre-tax and alter-tax, for various 'i profits
appear to be much lower for the first 5 months.

Profit margins vary considerably between types oi plaj.Ss. Tivk>; pl'-usts
are more profitable than chicken plants. Further processing plants appear-
to be the most profitable of all the plants. The reason *"or tl'i? is the
tendency toward a more differentiated product resulting in a more orderly
matching of supply and demand.

Generally, industries with widely fluctuating profit margins mast maintain
a higher average return on investment than those with a higher degree
of stability. The ROI must reflect an adequate margin for risk and
uncertainty if sufficient capital is to be supplied to maintain modern
efficient facilities. The actual profit levels as a percent of sales and
invested capital arc higher for the larger plants. This is consistent with
the tendency to larger and more specialized operations, and presents a
tight profit situation for the smyll plants,
-------
Table III-7. Net income, returns on sales and returns on total invested capital for model plants
Type and size of plant

Chicken
Small
Medium
Large
Very large
Turkey
Small
Medium
Large
Duck
Medium
Fowl
Medium
Further Processing
Medium
After-tax
income
($000)

48
HZ
184
278

60
160
309

128
Pre-tax re-
turn on sales
(percent)

1.74
2.32
2.45
2.63

2. 14
3.04
3.62

4.21

3,12

6.03
After-tax re-
turn on sales
(Percent)

1.06
1.29
1.32
1.40

1.24
1.66
1.92

2.36

1.73

3.31
Pre-tax*
ROI
(Pe rcent)

10.86
16. 18
17. 93
20.. 45

11.21
18. 58
24.81

16.25

15,97

21.59
After -tax*
ROI
(Percent)

6. 57
8.99
9.65
10. 89

6.53
10.08
13. 17

9.12

9.09

11.86
* Return on total invested capital calculated by financial statement method.
-------
F.
Estimated annual cash ilov, s for '.ho type.-; and sizes c-f ,-lanis a naly y,od
in this study are shown in Table III- ~< . Cash flow as calculcuted is lli«.
sum of after-tax income plus -depreciation. It is sbosn in absohno
dollars as well as a percent of sales and as a percent o" total invested
capital.

Annual cash flows differ soni-i\vriat from the; patterns ^st.bk i:hed by
annuiJ) profits. Even though the absolute iew.L < f cash flov. in r-ases
from the small to the larger chicKeri plantc. when c'xpi ?os-3ci as a perecnt
of sales the order is revered. This pattern rt.-s\uif from the: ;aot that
economie.-; of seal,-"1 are not ir,'ij.,e, the tax rate ir les-; ;/ :v,c snuiller
plants, and depreciation is ^rtater per sales dollar reiicoiin- "iva
higher iuvestment costs per c-ird processed, The ''-ilL.-r iactc?- i.,o^omef.
of lesser importance when cash flow is confide.rea as a per ;cri" ol
invested capital. Thus, it can be seen that only small differences exist
in the chicken plants based upon rhib comparison. Ca-.Ji f 1 o ,v for turVe-v
plants generally follow the same pattern as profits but a~-•"- move tightly
grouped for the reasons giveu above. How-.vur, greatei ac n^ortr e;, •">;"
scale exist than for the chic her plants and the large; afior-tax pr-;.\tij
offset the factors discussed above.
Cash fh-\vs for duck and lurrher processing are tne high
sidered as a percent c>r sale?-, Kr-we/er, this relatioinhip ,s ;;cn.p-'- red
conside r,-t b]y whiin casii f'o\v is relate:' to ROI,
G. Cost Structure of Model Pki
nl
The cost structure for the >"iortel plants are surr.rnarizert IT Tabj.es
III-9 through III-] H.

R a w P r o d u c 1 Cost;;

Raw product inputs for the i;,'"si four types uf plants < '.,nsi 6,: of li"'e biids
plus assembly costs, SO:T,<.; prubiorn exists a the df.errnina tioii of live
f a }. m prices of chick*-!:-, .since the irichist i •/ is -.Imost -vhoi:v intt: gra fed .
However, average U.S. f:irm prices •-/ Kve c'licrens a r-., t.ivcu ,n Poultry
and Ega Situation, ? nd t.he c/ric^ of i-U 1 cents per pound for 1972 was
fakeri from this source. A more detailed discusri.m of pric,i"ij.. ic How's
in C.'hap'er IV. A net yield of 17. p-.-rcer.L ready-to -i ook ire pack gave a
cost of 19. 55 c'.-nts per c 'i:-.- crated pound. The 72 percent yield allows
-------
Table III-8. Annual cash flow for model poultry processing plants
Type and size of plant

Chicken
Small
Medium
Large
Very large
Turkey
Small
Medium
Large
Duck
Medium
Fowl
Medium
Further processing
Annual
cash flow
($000)
\
89
179
281
397
127
259
436
174
133

Cash flow as
percent of sales
(percent)
2.04
2.05
2.02
2.00
2.63
2.69
2.71
4.41
«
3.19

Cash flow as percent
total invested capital
(percent)
12.71
14.37
14.71
15.56
13.82
16.42
18.58
17.06
16.34

Medium
221
5.71
20.48
III-15
-------
Table III- 9. Pro forma vao-nxf. -x;v:c-.y\ents for chic^rn p"oces3;'— model plants
Birds /hr. capacity
Annual Ibs live bird input
Annual output ice pack

21
15
Percent

Sales
Rav material cost
Poultry
Noii- Poultry
To ixi I
Direct cost
Labor
Supplies and containers
Utilities
Total
Indirect cost
Repairs &.- Maintenance
Taxes & insurance
General & admin.
Total
Total expense
Inte rest
Depreciation
Total cost
Net income B. T.
Income tax
Net inc.-une A . T.
Cash flow
Total invested capital
R. . O . 1 . be to r e taxe s
R.C. I. after taxes

68.
4.
73.
10.
1.
1.
13.
0.
0.
8.
10.
96.
0.
0.
98.
1,
0.
1.
2.
10 v
6.

65
56
21
64
74
06
44
78
71
67
16
79
96
26
74
69
06
04
fcfc
57
Srrvj.ll.
3", 00 v
,260,000
,308,000
Annual ^/
($000)
4,360

2,993
199
3, 192
464
76
46
586
34
31
378
4. A 1
4,220
23
42.
76
30
48
TOO

Mcvi.i'- .
6,000
42,520,000
30, 61 i, 000
Ib R

28.

19.
3.
20.
3.
0.
0.
3.
e.
0.
2.
2.
27.
0.
c.
27.
0.
0.
0.

TC*

4-8

55
30
85
03
50
30
85
2.L
20
47
89
57
14
27
98
c- r<
19
31

Fe rcent

68.
4.
73,
10.
1.
1
i *
33,
0.
0,
E.
-*•
96.
o..
0
97.
2.
1.
1.
2.
16.
8.

65
57
12
53
76
06
34
77
70
4-0
87
42
49
77
6t:
32
03
29
05
18
99
Annual £/ib 11 TC
($uuo)
8,718 28.48

5,985 !{>.5£j
398 1.20
G/U3 20.85
9 It* '''.0".
iSi 0.50
V? >;. U»
1, j^i 3 81,
6° 1.22
6 1 0 .. 2 0
/32 2.39
860 r..M
8,406 27 16
•^ C-. 14
67 0,22
8,516 27.82
?02 0.66
90 0.29
112 0,37
179
1,246

='•'• R e a r' -to-rock
III-
-------
Table III- 9. Pro forma income statements for chicken processing model plants
(continued)
La rge
Birds /hr. capacity
Annual Ibs live bird input
Annual output ice pack

Sales
Raw material cost
Poultry
Non- Poultry
Total
Direct cost
Labor
Supplies and containers
Utilities
Total
Indirect cost
Repairs & Maintenance
Taxes & insurance
General & admin.
Total
Total expense
Interest
Depreciation
Total cost
Net income B. T.
Income tax
Net income A . T.
Cash flow
Total invested capital
R.O.I, before taxes
R.O.I, after taxes
68,
48,
Percent

68.64
4.56
73. ZO

10.53
1.76
1.05
13.34

0.77
0.70
8.32
9.80
96.35
0.50
0.70
97.54
2.45
1.13
1.32
2.02

17.93
9.65
9,600
000,000
960,000
Annual
($000)
13,944

9,571
636
10,207

1,469
245
147
1,860

108
98
1, 160
1,366
13,435
69
98
13,601
342
158
184
281
1,907

£/lb RTC

28.48

19.55
. 1.30
20.85

3.00
0.50
0.30
3.80

0.22
0.20
2.37
2.79
27.44
0. 14
0.20
27.78
0.70
0.32
0.38

Ve
96,
69,
Percent

68.64
4.56
73.21

10.53
1.76
1.05
13.34

0.77
0.69
8.25
9.73
96.28
0.49
0.60
97.37
2.63
1.23
1.40
2.00

20.45
10.89
ry Larqe
14,400
680,000
610,000
Annual ^
($000)
19,825

13,608
905
14,513

2,088
348
209
2,645

153
137
1,636
1,928
19,087
97
119
19,303
522
244
278
397
2,552

•
f/lb RTC

28.48

19.55
1.30
20.85

3.00
0.50
0.30
3.80

0.22
0.20
2.35
2. 77
27.42
0. 14
0. 17
27.73
0.75
0.35
0.40

III-17
-------
Table III- 10. Pro forma income statements for turkey processing model plants
Birds /hr. capacity
Annual IDS live bird input
Annual output f. . -<< n RTC

Sales
Raw mote rial cost
Poult iv
Non~ Poultry
Total
Direct cost
Labor
Supplies and containers
Utilities
Total
Indirect cost
Repairs fk Maintenance
Taxes Si insurance
General & admin.
Total
Total expense
Interest
Depreciation
Total cost
Net income B. T.
Income tax
Net income A . T.
Cash flow
Tola] invested capital
R.O.I, before taxes
R.O.I, after taxes

16,
13,
Percent

77.25
2.76
80.01

5.58
5.39
1.66
12,63

0.60
0.50
2.32
3.42
96. 14
0.41
1.39
97.95
2. 14
0.89
1.24
2.63
19.05
11.21
6.53
Small
900
783,000
326,000
Animal ^
($000)
4,823

3,726
133
3,859

269
260
8C
609

29
24
112
165
4,637
20
67
4,720
103
43
60
127
919

Medium

5/lb RTC

36. 19

27.96
1.00
28.96

2.02
1.95
0.60
4.57

0.22
0. 18
0.84
1.24
34,77
0. 15
0.50
35.42
0.77
0.32
0.45

33,
26,
PC rccnt

77.26
2,77
80.03

5.53
5.25
1.66
12.43

0.61
0.50
1.96
3.07
95.53
0.41
1.03
96.96
3.04
1.38
1.66
2.69

18.58
10.08
1, i'.OU
566,000
6f->2,000
Annual <
($000)
9,645

7,452
267
7,719

533
506
160
1, 199

59
48
J89
296
9,234
40
99
9,352
293
133
160
259
1,577

£/lb RTC

36. 19

27. 96
1.00
28. 96

2.00
1.90
0.60
4,50

0.22
0. 18
0.71
1. 11
34,57
0. 15
0.37
35.09
1. 10
0.50
0.60

III-18
-------
Table III- 10. Pro forma income statements for turkey processing model plants
(continued)
Birds /hr. capacity
Annual Ibs live bird input
Annual output frozen RTC
Sales
Raw material cost
Poultry
Non- Poultry
Total
Direct cost
Labor
Supplies and containers
Utilities
Total
Indirect cost
Repairs & Maintenance
Taxes & insurance
General 8*. admin.
Total
Total expense
Interest
Depreciation
Total cost
Net income B. T.
Income tax
Net income A. T.
Cash flow
Total invested capital
R.O.I, before taxes
R.O.I, after taxes

55,
44,
Percent
77.26
2.76
80.02
5.52
5.19
1.65
12.38
0.61
0.50
1.66
2.76
95. 16
0.42
0.79
96.37
3.62
1.70
1.92
2.71
14.59
24.81
13. 17
Large
3,000
944,000
420,000
Annual
($000)
16,076
12,420
444
12,864
888
835
266
1,990
98
80
444
444
15,298
67
127
15,493
582
273
309
436
2,346

£/lb RTC
36. 19
27.96
1.00
28.96
2.00
1.88
0.60
4.48
0.22
0. 18
0.60
1.00
34.44
0. 15
0.29
34.88
1.31
0.61
0.70
III-19
-------
Table III- 11. Pro forma income statement for duck processing
Birds /hr. capacity
Annual Ibs live bird input
Annual output frozen RTC

Sales
Raw material cost
Poultry
Non- Poultry
Total
Direct cost
Labor
Supplies and containers
U! ili ties
Total
Indi reel cost
Repairs &t Maintenance
Taxes & insurant e
General &i admin.
Total
Total expense
Interest
Depreciation
Total cost
Net income B. T.
Income tax
Net income A. T.
Cash flow
Total invested capital
R.O.I, before taxes
R.O.I, after taxes

10,
7,
Percent

100.00

66.23
1.90
67.63

11.09
7.43
1. 14
19.66

0.99
0.67
3.81
5.47
92.76
0.99
2.05
95.80
4.21

2.36
4.41

16.25
9.12
Medium
1,400
584,000
515,000
Annual ^
($000)
3,945

2,593
75.
2,668

437
293
45
775

39
26
150
215
3,658
39
81
3,778
166
73
93
174
1,020

\
:/lb RTC

52.50

34.50
1.00
35.50

5.82
3.90
0.60
10.32

0.52
0.35
2.00
2.87
48.96
0.52
1.08
50.29
2.21
1.00
1.21
2.32

III- 20
-------
Table III- 12. Pro forma income statements for fowl processing
Birds /hr. capacity
Annual Ibs live bird input
Annual output ice pack

Sales
Raw material cost
Poultry
Non- Poultry
Total
Direct cost
Labor
Supplies and containers
Utilities
Total
Indirect cost
Repairs &: Maintenance
Taxes & insurance
General & admin.
Total
Total expense
Interest
Depreciation
Total cost
Net income B. T.
Income tax
Net income A . T.
Cash flow
Total invested capital
R.O.I, before taxes
R.O.I, after taxes

27,
16,
Percent

57.87
8. 07
65.94
17. 13
1.42
1.61
20. 15
0.50
0.34
7.95
8.79
94.86
0.60
1.42
96.88
3. 12
1.35
1.78
3.19
15.97
9.09
Medium
4,800
072,000
785,000
Annual £
($000)
4,163
2,409
336
2,745
713
59
67
839
21
14
331
366
3,949
25
59
4,033
130
56
74
133
814

/lb RTC

24.80
14.35
2.00
16.35
4.25
0.35
0.40
5.00
0.13
0.08
1.97
2. 18
23.53
0. 15
0.35
24.03
0.77
0.33
0.44
0.79

III-21
-------
Table III- 13. Pro forma income statements for further processing

Fount.!? /day input
Annual ibs poultry meat
Annual output finished pi

Sa les
Raw material cost
Poultry
Non~ Poultry
Total
Direct cost
Labor
Supplies and containers
Utilities
Total
ludirect cost
Repairs £c Maintenance
Taxes fc insurance
General Si admin.
Total
Total expense
late rest
Depreciation
Tula] cost
Ncl 3 ncome B. T.
Iiic,ome tax
Net income A , T.
Cash flow
Total invested capital
R.O.I, before taxes
R.O.I, after taxes

(70% cap)
•odiu't
Percent

100.00

60.79
1. 50
62.29

5.58
5 7.91
1.65
15. 14

1.03
0.75
11.58
13.36
90.54
1.03
2.40
93.97
6". 03
2.72
3.31

21.59
11.86
Me clium
56,-lCC
9, 870,000
7,249,000
Annual $1
($000)
3,869

2,352
58 .
2,410

216
306
64
586

40
29
448
507
3,503
40
93
3,636
233
105
128
22}
1,079

i- »- —

flb RTC

53.37

32.45
0.80
33.25

2.98
4.22
0.88
8.0E

0.55
0.40
6.18
7.13
48.32
0.55
1.28
50. 16
3.21
1.45
1.76

-------
for condemned birds and moisture pickup. It was assumed thai 90
percent of the blood, feathers and offal was recovered and sold to
Tenderers. Assembly costs were estimated to be 1.3 cents per
eviscerated pound. On the above basis, raw material costs accounted
for 74.0 percent of the sales dollar. This compares favorably with
1972 census data which had 77. 5 percent for material costs which als.o
included supplies, containers and energy.

The farm price of live turkeys for 1972 was taken from Poultry and Egg
Situation and was 22. 2 cents per pound. The turkey industry operates at
a lower level of integration than does the broiler industry. Therefore,
even though this is an average price, it is felt this represents a valid
cost figure. The average yield for heavy turkeys with moisture pickup
was taken as 82. 2 percent, and after deducting 2. 8 percent for condemned
birds resulted in a net yield of 79.4 percent. The above cost and yield
when converted to bagged, frozen, ready-to-cook form gave a per pound
cost of 27. 96 cents. Assembly costs were one cent per pound (RTC
basis). The total of 28. 96 cents per pound represented 80.45 percent
of the sales dollar for raw material costs. It should be noted that
sales of turkeys were assumed to be f. o.b. plant and did not allow for
delivery to the central markets.

Published national average farm prices of ducks are not available. It
was necessary to contact industry representatives to obtain estimates
of 1972 live duck prices f.o.b. plant. These estimates approximated
24.5 cents per pound. Considering a 71 percent yield, this resulted
in a raw product cost of 34. 5 cents per eviscerated pound and repres-
ented 66.23 percent of the sales dollar. By-product sales for ducks
include not only offal but also feathers and feet and these items make a
significant contribution to sales.

Fowl prices are characterized by wide variations and fluctuations. The
farm price of 8. 9 cents per pound was taken from Poultry and Egg
Statistics through 1972. Two cents per pound were allowed for assembly
costs. A 62 percent yield gave a raw product cost of 16.35 cents per
eviscerated pound for fowl which represented 66.25 percent of the
sales dollar.

Operating Costs

Derivation of both direct and indirect costs was based upon a synthesis from
several sources. These sources included industry operating executives,
census data and previous research studies (1, 2, 4, 5, 6, 7, 8, 9 arid 10).
111-23
-------
a. Direct Costs

Direct costs included labor, supplies, containers and utilities. As
a percent of the sales dollar, total direct costs ranged from a Jow of
12.38 percent for large turkey plants to a high of 20.26 percent for
fowl processing. The greatest variation was reflected in labor costs
with the large turkey plant low at 5. 52 percent and the fowl plant high
at 17. 22 percent.

The cost of supplies and containers were to a large degree a function.
of the form of the finished product. Ice-packed birds (chickens and
fowl) had the lowest cost, whereas further processed poultry had the
highest cost for supplies and containers.

The utility cost for all plants was less than two percent. Those plants
witli higher utility costs were those handling frozen poultry. It in well
to note that a great deal of concern was expressed over the major in-
creases that have taken place and are expected to take place in the future
in regard to utility costs,

b. Indirect costs

Indirect costs included repairs and maintenance; taxes and insurance;
and general and administrative expenses,. Total indirect costs varied f"om
a low of 2.76 percent of sales for the large turkey plant to a high of 13.36
percent for the further processing plant. The major variant of indir, ct
costs was in the sector of general and administrative expense. The
large turkey plant had 1.66 percent of sales for this category compared
to 8.32 percent for the large chicken plant. However, approximately
three-fourths of the large chicken plant percentage represented* trans-
portation costs to the central market. The turkey plant sales \veic ^.-sume
to be f.o.b. plant. Further processing had the largest percent? ^ co.-t
for general and administrative expense. A large portion of this is
accounted for by the differences in marketing which involves considerable
advertising and greater sales effort.

N on -ope rat ing Costs

Non-operating costs included interest and depreciation. Interest charges
as a percent of sales varied from 0.41 percent for turkeys to a high of
1.03 percent for further processing. Depreciation was somewhat higher
than interest but followed the sarne general pattern with further processing
being the highest at 2. 40 percent of sales. Both interest and depreciation
were affected by level of investment and degree of utilization of capacity.
111-24
-------
Summary

Overall, the poultry processing industry appears to be relatively effi-
cient. Economies of scale in chicken processing are relatively small,
particularly after reaching a level of 6,000 birds per hour. The major
economies that do exist are mainly attributed to lower investment costs
per unit and lower administrative overhead per unit. Somewhat the same
pattern holds for the other types of poultry processing. The operating
margins are extremely small, especially when considered on a unit
basis. This makes what seemingly are minor changes in costs or prices
have a major impact on profits.
Ill-2 5
-------
REFERENCES
1. The Chicken Broiler Industry: Structure, Practices and Costs,
USDA, ERS, Mktg. Research Report, 930.

2. The Turkey Industry: Structure, Practices, and Costs. USDA,
ERS, Marketing Research Report No. 1000

3. Poultry and Egg Situation, USDA, ERS.

4. Costs and Economies of Scale in Turkey Processing Plants, USDA,
ERS, Marketing Research Report No. 627.

5. Developments in Marketing Spreads for Agricultural Products in
1973, USDA, ERS, 1974.

6. Labor Efficiency in Broiler Processing Plants in the South,
Southern Cooperative Series Bulletin No. 11Z, January 3,966.

7. Kerns, Wallace R. and Frederick J . Wolerno, Cost of Waste Water
Pollution Abatement in Poultry Processing and Rendering Plants iu
Georgia, College of Agriculture, Department of Agricultural Econ-
omics, University of Georgia, Athens, Georgia, 1973.

8. Faber, Fred L. and William Gallitnore, Changes in Finn and Plant
Size in Broiler and Turkey Processing, Poultry and Egg Situation,
PES-259, November, 1969.

9. Costs, Margins and Projected Consumption of Turkey Rolls and
Roasts, USDA, ERS, 1974.

10. Rogers, George B, and Harold D. Smith, Further Processing
Industry and Impact of Economies of Scale in Poultry Plants,
Agricultural Experiment Station, University of Maryland,
December 1966.

11. The Poultry Processing Industry: A Study of the Impact of Water
Pollution Control Costs, USDA, ERS, June 1972.
-------
IV. PRICE PATTERNS
A. Pricing Processes
It appears that wholesale prices are strongly influenced by formula
pricing. During the 1950's and early 1960's, wholesale prices were
generally calculated on the basis of the current live price. However,
increasing vertical integration in the industry eliminated the availability
and dependability of live prices--especially for broilers. It appears
that processors have now turned to published wholesale and retail price
averages for the basis of formula pricing. However, formula prices
can only serve as a guide. The individual firm must evaluate the econ-
omic conditions being encountered and respond accordingly.

Considerable price variation and adjustment takes place on a daily and
weekly basis. The extent of weekly variations in broiler prices for
1965 through 1971 is shown in Table IV-1. These fluctuations are a
function of supply and demand and provide the mechanism for an orderly
market.

Prices paid for raw product are also generally determined on a formula
basis. If the supply is from company farms, the price for live birds is
essentially a transfer cost from one corporate division to another. A
similar situation exists for birds grown under contract. In the case of
a cooperative supplying the raw product, the processor may sell its
processing services to the growers and never take title to the product.
The above pricing situations cover most of the poultry meat processed.
For the remaining portion, live prices are probably heavily influenced
by transfer prices.
B. Historic Prices
Historic farm, wholesale and retail prices for broilers and turkeys
appear in Tables IV-2 and IV-3. Prices and price spreads for selected
locations appear in Tables IV-4 and IV-5. Similar data for fowl and
ducks are not available. However, farm prices of lightweight Central
California and heavyweight Southern hens (Alabama, Georgia, Missis-
sippi and Tennessee) are published and reported at 5. 61 and 15. 09
cents per pound respectively for 1972. The Agriculture Marketing
Service, U.S.D.A., publishes New York Grade A, RTC duckling prices
which were reported at 51. 32, 49. 97 and 72. 06 cents per ound in 1971,
1972 and 1973 respectively.

IV-1
-------
Table IV-1. Weekly average 9-city broiler pi-ices (1965-71)

1965
1966
1967
1968
1969
1970
1971
Average
Highest
weekly
price
29-6
32.2
28.9
31. 2
35.5
29-5
32. 2

Percent
Fluctuation
23.7
50.4
35.0
26.9
43.5
34.1
37.7
35.9
Price during the
week following Percent
the annual high decrease
28.6
29.3
26.8
28.9
35.3
28. 1
30.6

(3. 6)
{9.6}
(7-9)
(8.1)
(0.5)
(5.0)
Iii21
5. 7
Lowest
weekly
price
23. 9
21.4
21.4
24. 6
24. 7
22. 0
23.4

Source: National Broiler Council
IV-2
-------
Table IV-2.. Broiler prices, 1964-1973.
Wholesale average
of 9 cities, ready-
Frying chicken in
retail stores in
urban areas ready-
Farm, liveweight to-cook, per pound to-cook, per pound
Year per pound, (cents)
(cents)
(cents)
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
Source:
14.2
15.0
15.3
13.3
14.2
15.2
13.5
13.8
14.3
24.3
USDA, Poultry and
25.37
26.44
27.64
25.15
27. 15
29.06
26.42
27. 16
28. 14
42. 17
Egg Statistics , and Poultry
37.8
39.0
41.3
38. 1
39.8
42.2
40. 8
41. 0
41.4
59.6
and Egg Situation
(various issues).
IV-3
-------
Table IV-3. Tu rkey prices, 1964-1973.

Farm, liveweight
Year per pound, (cents)
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
* Average for
Source: USDA
21.0
22.0
23. 1
19.6
20.5
22.4
22.6
22. 1
22.2
34.3
8-16 pound
New York
wholesale, frozen,
ready-to- cook,
per pound (cents)*
33. 18
35.54
37.31
32.36
31.52
34.89
38.89
35. 69
35.84
57.65
young hens and 14-20

Prices in retail
stores, ready-to
cook, per pound (cents)
46,7
48.4
50.6
48.8
46. 4
48.8
55.9
54. 6
55. 3
73.5
pound young toms.
Poultry and Egg Statistics: Poultry and Egg Situation,
(various issues)
IV-4
-------
Table IV-4. Average October-December prices'and price spreads for ready to cook medium turkeys,
1966-70 and 1971
Prices Price Spreads

To
Re-
City Farm ceiver
Boston 29.0
New York 28.9
Baltimore 29.0
Washington 28.9
Atlanta 29.0
Cleveland 29.3
Chicago 28.8
St. Louis 28.8
Denver 28.8
Los Angeles N.A.
San Francisco N.A.
Ave. 8
cities ±/ 29.0
.•; /
— Excludes Los Angeles
36.7
39.5
37.5
38.3
38.3
37.1
37.9
37.3
37.0
37.0
38. 1

37.8
, San
city to
Re-
tailer Retail I
38.5 51.6 7.7
40.8' 54.8 10.8
41.0 51.7 8.5
41.7 53.6 9.4
42.6 49.0 9.4
40.3 52.4 7.8
41.9 49.0 9.1
41.9 48.6 8.4
38.7 48.6 8.2
39.5 49.4 N.A.
43.5 50.1 N.A.

40.7 51.3 8.8
1971
Prices
1971 Price Spreads
To city to

II
1.8
1.3
3.5
3.4
4.3
3.3
3.9
4.7
1.7
2.5
5.4

2.9

III
13.2
14.0
10.7
11.9
6.4
12. 1
7. 1
6.7
9.8
9.9
6.7

10.6

Farm
29.8
29.8
29.5
30.0
29.9
28.9
29.8
28.4
30.0
31.4
31.6

29.7
Re-
Re-
ceiver tailer
39. 1
39. 1
38.4
38.4
39.3
37.6
37.8
N.A.
39.0
38. 1
36.0

38.6
42. 1
42. 1
40.9
42.6
44.0
41.5
42.3
45.5
40.8
41.3
44.5

42.0

Retail
57.2
61.0
58.6
58. 1
52.4
58. 1
56.0
52.9
53. 1
53.7
55. 1

56.8

I
9.3
9.3
8.9
8.4
9.4
8.8
7.9
N.A.
9.0
6.7
4.4

8.9

II
3.0
3.0
2.5
4.3
4.7
3.9
4.5
N.A.
1.8
3.2
8.5

3.4

III
15. 1
19.0
17.7
:s. 5
S.4
16.6
13.7
17. 1
12.3
12.4
10.6

14.8
Francisco and St. Louis.
Source: Prices and Price Spreads for Eggs, Frying
Chickens, and
Turkeys
in 12 Major
Cities ,
1966-7
1, Statistical
Bulletin No. 524, Economic Research Service, U. S. Department of Agriculture, August, 1973. Also
Development Planning and Research Associates, Inc.
-------
'j. able TV-5, Average annual prices and price spreads for ready to cook fryin •_; c b. j KO-. i.
1966-70 and 1971
1966 -70- Prices.
To c
a-

- ^
-•--.
"In
iV ^~
i <-•!
Cl«
Cn
St.
De
T '^
Re-
:v Farm ceiver

f tori
v- York
"tirnere
.sj-j.nct on
- -r-- <• -%
::v eland
icaqo
Louis
nve r
s Angeles
San Francisco
11
-
K.-v
maior
i'.ies
.tree: Price

20. 7
19.8
18.6
19.2
18. 1
18.7
18.3
18.3
18.7
20. 1
19.8

19. 1
o and

27.
27.
27.
27.
25
26.
26.
26.
27,
2 7.
28.

?, 7

4
4
1
9
h
.-r
f
7
4
2
6
0

1
itv to
Re-
tailer

29.7
29.9
29,5
31.1
28.0
Z9.4-
29.9
29.6
29.2
31.3
34.6

30.2
Price Spreads for

1966-70. Price Spreads

Retail I

45.2
44.4
4 0 . 4
38.6
•39.2
40.0
39.0
41.4
35.7
39.2
45. 1

40,7
JLsJiS-L.

6.7
7.6
8.5
8.7
7.5
8.0
8.4
8.1
8.5
7.5
8.2

8.0
Frying

2.3
2.5
2.4
3.2
2.4
2.7
3.2
3.2
2.0
3.7
6.6

3. 1
Chickens

III

1971 Prices
T<~*
Re-
Farm ceiver
- cents per pound
15.5
14.5
10.9
7.5
11.2
10.6
9.1
11.8
6.5
7.9
10.5

10.5
, and
19.1
18.8
18.8
18.6
17.8
18.4
18.2
18. 1
18.5
19.7
19.2

18.7
Turke_y_s_in

27.8.
27.4
27. 1
28.1
25.7
26.8
26.7
26.5
27.4
27.8
28. 1

27.2
citv to
R c -
tE.ile r

30. 1
30.3
30.0
31.5
27.7
30.6
30. 1
30.5
29.4
32.8
35.5

30.8
12 Ivtaior C-t-fcF

Retail

-18.5
46.7
41.8
36.3
39. 1
4 " . i
40. 5
41.0
31.3
3 7 « 0
45.3

41. 1
. i?fab-7!
lc?7i Price Spreads

8.7
8.6
8.3
9.5
7.9
8.4
8.5
0.4
8.9
8. 1
3.9

8,5

2.3
2.9
2.9
3.4
2.0
3.3
3.4
4.0
2.0
5.0
7.4

2.6

III

18.4
16.4
11, G
4.8
] 1 . --
1 0 . ?
10. :-
10. 3
:. 9
5. £
10, 8

10.3
, Statistical
bulletin ."No. 524, Economic Research Service, U
Development Planning and Research A ssociates , Inc.
S, Department oi Agriculture, ^u
-------
With the exception of 1973, average annual live poultry prices have
held at fairly stable levels. The stability of annual average prices can
be related to relatively stable- feed prices up to 1973. Also, increases
in productivity of growing birds have been offset by increases in non-feed
costs. Compe tition within the industry has left profit margins very low.
Major changes in feed prices in 1973 and 1974 have created considerable
disorder in the poultry industry. However, the increase in price of
broilers was greater than the increase in the price of feed for 1973
which enabled most firms to generate rather high levels of profits.
On the other hand, in the first half of 1974 the price of broilers declined
to a considerably greater degree than the price of feed which has
created a chaotic situation with enormous losses.

The historic relationship between feed costs and the wholesale prices of
broilers is summarized in Tables IV-6 and IV-7. It can be seen that a
close long run relationship exists between feed prices and wholesale
prices of broilers. However, due to the time dimension of supply and
demand responses, wholesale price movements tend to lag behind short
run movements in feed prices. It must be remembered that most of the
broiler operations are highly integrated and any lags in the changes re-
flecting higher costs can be disastrous for an under-financed firm. Of
course, the corollary is the fact that larger firms with better access to
capital, and possible economies of scale, can better sustain themselves
during the periods of profit stress.

It is difficult to quantitatively assess the various elasticities affecting
poultry meat consumption. Although price elasticity estimates for fowl
and ducks are not readily available, such estimates for chicken and
turkey abound in the literature. Unfortunately, there is a great deal
less consistency in the estimates than is desirable. Probably the most
comprehensive elasticity study of recent vintage is one completed in
1971 by George and King. Their direct and cross-price elasticities
at the retail level for meats appear in Table IV-8. The direct measures
appear where the row and column for the same commodity intersect.
The cross measure is interpreted as the impact the price of the column
commodity has on the row commodity. For example, a 1.0 percent in-
crease in the price of pork induces a 0. 12 percent increase in chicken
consumption.

A 1970 study by O'Mara derived a wholesale price elasticiy for broilers
of 1.053. George and King's estimates of price elasticity at the farm
level appear in Table IV-9. Another measure of interest is the elasticity
or price transmission -- the percentage change in retail price resulting from a 1
percent change in farm price. This value is estimated at 0.775 for chicken
(Table IV-10).

Income elasticities for chicken and turkey were estimated at 0. 178 and
0. 768 respectively by George and King.

IV-7
-------
Table IV-6. Average monthly price indices (1964-71) 9-city broilers,
#2 yellow corn Chicago, 44% soybean Decatur
(annual average price = 100)

Jan.
Feb.
Mar.
April
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
USDA 9-city
Broiler price index
99.4
103.4
103.7
100.2
102.4
103.8
105. 6
101.8
99.5
94.6
' 94.9
91-5
#2 Corn price index
100. 7
100. 6
101. 1
101.2
103. 2
103. 5
102.0
99-5
98.4
95.9
94. 2
99-6
44% Soy meal
100. 0
98. 7
95. 4
95. 8
97. 0
103. 5
107. 1
106. 2
104. 1
97.2
95, 3
99. 7
Source: National Broiler Council
J.V-8
-------
Table IV-7. Increased corn and soybean meal cost per pound of
ready-to-cook broilers
Nov. '72 vs. '71 Dec. '72 vs. '71 Jan. '73 vs. '72
Increase in
wholesale price
of broilers 2. 87£ 4. 02£
Price
difference
minus cost
difference -.48^ -. 45£
Soybean meal 2.44£ 3. 25£ 3.
Corn .91 1 _. 22 1. 26

Total 3.35£ 4. 47£ 4.
Source: National Broiler Council
IV-9
-------
Table IV-8. Direct and cross price elasticity estimates at the retail level

Lamb and
Commodity Chicken Turkey Beef Veal Pork Mutton

Chicken -0.777 0.084 0.197 0.044 0,121 0.055

Turkey 0.400 -1.555 0.098 0.015 0,065 0.018

Beef 0,068 0.008 -0.644 0.028 0.083 0,045

Veal 0.174 0.014 0.359 -1.718 0.198 0.066

Pork 0.035 0.005 0.076 0.014 -0,413 0.060

Lamb and
Mutton 0.234 0.015 0.589 0.066 0.891 -2.626

Source: George, P. S. and G. A. King, Consumer Demand for Food
Commodities in the United States with Projections for 1980.
Giannini Founda';!^- Monograph Number 26, University of
California, Dav's, v^arch, 1971.
IV-10
-------
Table IV-9. Direct and cross price elasticity estimates at the farm level
* #
Commodity Chicken Turkey Beef Veal Pork
Chicken
Turkey
Beef
Veal
Pork
Lamb &
-0.602
0.310
0.052
0. 134
0.027
Mutton 0.181
*'c
'' Estimates for the turkey
Source:
George, P. S. and
x 0.127
x 0.063
x -0.416
x 0.032
x 0. 049
x 0.381
x 0.070
x 0.038
x 0. 048
x 0.115
x -0.241
x 0.520
Lamb &
Mutton
0.034
0.011
0.029
0.042
0.038
-1.670
and veal columns are not available.
G. A. King, Consumer Demand for
Commodities in the United States with
Projections for
Food
1980,
Giannini Foundation Monograph Number 26, University of
California, Davis, March, 1971.
IV- 11
-------
Table IV-10. Elasticity of price transmission, expressing the percentage
change in retail price resulting from a 1 percent change in
fa rm price.
Commodity Elasticity
Meats
Beef .64691?
Pork . 583224
Lamb ,636246
Chicken .774894
Source: P. S, George and G. A. King, Consumer Demand
for Food Commodities in the United States with
Projection s f or_ 1980, Giannini Foundation Mono-
graph No. 26, March, 1971, Calif. Ag. Exp. Sta.,
p. 62.
IV-12
-------
V. ECONOMIC IMPACT ANALYSIS METHODOLOGY
The economic impncl analysis utilizes (he basic industry information
developed in Chapters J-IVand that concerning pollution abatement U'ch-
nology and cost;; provided by the Environmental Protection Agency. The
impacts examined include:

Price effects
Financial effects
Production effects
Employment effects
Commxmity effects
Other effects

The determining force of plant shutdowns on these impacts is crucial;
consequently, the Financial and Production effects, those which most.
immediately reflect plant shutdowns, will receive most emphasis in this
financial and plant closure analysis.

In general, the impact analysis methodology is the same as that normally
used in feasibility capital budgeting studies of new investments. Simply
stated, the problem is one of deciding whether a commitment of time or
money to a project is worthwhile in terms of the expected benefits derived.
The decision in this case is complicated by the fact that benefits will accrue
over a period of time and that in actuality no analyst if; sufficiently clair-
voyant or physically able to reflect upon all of the required coct and benefit
analysis information which by definition must deal with projections of the
future. In the face of imperfect, incomplete information and time constraints,
the industry segments were reduced to money relationships insofar as
possible and the key non-quantifiable factors were incorporated into the
analysis to modify the quantified data. The latter process is particularly
important in view of the use of model plants in the financial analysis. In
practice, act vial plants will differ from the model, and these differences
must necessarily be considered in any interpretation of analytic data
reflecting the behavior of model plants.
A. Fundamental Methodology
Much of the underlying analysis regarding price, financial, and production
effects is applicable to all other impact effects. Consequently, the case
methodology described here is conceptually integrated and the specific
impact interpretations are discussed under their appropriate headings.
V-l
-------
The core conceptual data used in this analysis are tho physical and
characteristics of the various industry segments as projected on the bi'.ir,
of model plants. The estimated c< sh flows for these model plant", are
summarised in Chapter III.

The primary fa ctors involved in assessing the financial and production
impact of pollution ronfrc.J are proiit'ibility changes and these, in turn,
are a function of 'he eor-t of pollution control and the ability fo pa;-;.- alo:u;
these costs in hip.her price;... In iuality, of course, closure, decisions arc-
ecldom made on the has if; of well-defined common economic rules; such
decisions invariably include a wide ran^c of pernona.1 wluc.s, cxi<> ma)
forces such as the ability to obtain financing, or the rclc of tho production
•unit in an integrated larger cost center.

Such variables include but a re aot limited to the following conditions and
are generally characteristic of proprietorships and closely 1>'J c. enter-
prises rather than publically held corporations.

1. Production unite may lack sufficient financial accounting
data. This is especially likely to occur among siv.aJl,
independent operators who do aot have effective cost
accounting systems.

Z. Production units may be so old and fully deprccin- ec'
that management has no intention of replacing or
modernizing them. Production continues only so I-r.g
as it covers labor and materials costs and/or until
the eouinment become 4 ino'oerative.
the equipment becomes inoperative,
3. Marginally productive units in..-.y be acquired by n.^sv
ownership that cc.n re-evaluate existing assets or trial
can absorb temporary lov.- returua v, iih the expectation
of eventual acceptable profit returns.

4. Production unit ownership may have valae as psychic
income. Such cv/ner ship , 'i'V; is, may ansv/cr personal
values that are great^enGugh to override rational
economic decisions,

5. The production unit, if n;rt of a larger economic entity,
may (1) use riv, r^aiorir-,] s produced iu another plant
within the firm t'rit •>.'U;'t h.;% e an assured market c-r
(2} supply raw m? tc: is.'; „-, :o nnoth.er unit wiihiri the firm.
Y/her. the profits b'i itv of ;h.- second operation offsets
V-
-------
the losses in the first plant, the unprofitable
operation may continue indefinitely because the
total enterprise is profitable.

6. The owner-operator expects that adverse conditions
and consequent losses are temporary. His ability to
absorb short-term losses depends upon his access to
funds through credit or personal resources not
presently utilized.

7. There are very low (approaching zero) opportunity
costs for the fixed assets and for the owner-operator's
managerial skills and/or labor. As long as the operator
can meet labor and materials costs, he will continue to
operate. He may even operate with gross revenues below
variable costs until he has exhausted his working capital
and credit.

8. Production units may also continue to function if the
value of the land on which the plant is located is appre-
ciating at a rate sufficient to offset short-term losses,
funds are available to meet operating needs, and
opportunity costs of the owner-operator's managerial
skills are low.

While the above variable factors are frequently relevant to business deci-
sions, economic rules are commonly universal. Thus, to provide as use-
ful and reliable an insight into potential business responses to new invest-
ment decisions involving pollution control facilities, economic analysis
will be used as the core analytical procedure. Given known pricing condi-
tions, the impact of pollution control costs and resulting prices on profit-
ability can be determined by employing the ROI (or any other) profitability
measure under conditions of the new price and incremental inve-stment in
pollution control. The primary consequence of profitability changes is the
impact on the plant regarding plant shutdown rather than making the re-
quired investment in meeting pollution control requirements.

In the most fundamental case, a plant will close when variable expenses
(Vc) are greater than revenues (R). However, in practice plants may
continue to operate where Vc> R under such conditions as:

* a lack of cost accounting detail to determine when Vc > R,

* the opportunity cost of labor or other resource is less
than market values (This would be possible .in a proprietor-
ship whose owner considers his labor as fixed. ),
V-3
-------
* other personal and external financial factors exist, or

* there are expectations that revenues will shortly
increase to cover variable expenses,

A more probable situation is the case in which Vc < R but revenues are
less than variable, costs plus fixed, short-run cash overhead expenses (TCc).
In this situation a plant would likoly continue to operate as contribution:, are
being made toward covering a portion of these fixed ca->h overhead expenses.
The firm cannot operate indefinitely under this condition, but Ih? length of
this period is uncertain. Necessary to such a situation is thp firm's expec-
tation that, revenues will increase to cover cash outlay. The conditions
affecting closure decisions in such cases include:

* the extent of capital resources (If the owner has other
business interests or debt sources that will supply
capital input, the plant will continue.),

* there are inadequate cost accounting details or
procedures to know that TCc ^ R (particularly in
multiplant or business situation), or

* labor or other resources are considered fixed and the
opportunity cost for these items is less than market
value.

The identification of plants where TCc > R, but Vc < R Jeads to an estimate
of plants that should eventually close if revenues do not. increaz-e. The
timing of such closures, however, it; difficult to predict.

The next level of analysis, where TCc < R, involves estimating the 3Pri ings
before and after investment in pollution abatement. Under conditions in
which TCc < R, it seems likely that investment in pollution control w:;]l be
made and that plant operations will continue so long as the capitalized \v.lue
of earnings (CV) (at the firm's cost of capital) is greater than the scrap or
salvage value (S) of the sunk plant investment, 11 S > CV, the fiim could
realize S in cash and reinvest and be financially better cff. This presutr.es
reinvesting at least at the firm's (industry's) cost of capital.

Computation of CV involves discounting the future earnings flow to present.
worth through the general discounting function:
V-4
-------
v - i \
n=l

where

V = present value
An = a future value in n*" year
i = discount rate as target ROI rate
n = number of conversion products, i.e. ,
1 year, 2 years, etc.

It should be noted that a more common measure of rate of return is the
book rate, the rate which measures after-tax profits as a ratio of invested
capital. These ratios should not be viewed as a different estimate of
profitability as opposed to DCF measures (discounted cash flow); they re-
flect an entirely different profitability concept. The reader is cautioned not
to compare the DCF rates directly 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. The first
is the internal rate of return or yield, and it is the computed discount rate
(yield) which produces a zero present value of the cash flow. The yield is
the highest rate of interest the investor could pay if all funds were borrowed
and the loan were returned from the cash proceeds of the investment. The
second DCF measure is the net present value concept. Rather than solve
for the yield, a discount rate equivalent to the firm'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 earn-
ings 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.

Benefits

In this analysis, benefits for the book analysis have been called after-tax
income; and for the DCF analysis they are called after-tax cash proceeds.
The computation of each is shown below:
V-5
-------
After lax income = (1 - T) x (R - E - I - D)

After tax cash proceeds = (1 - T)x(R - E - D} f D

whe re

T = tax rate

R ~ revenues

E = expenses other than depreciation and interest

I - -- interest expense

D = depreciation charges

Interest is omitted in the cash proceeds computation since it is reflected
in the discount rate, the after-tax cost of capital (see 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.

A. tax rate of 48 percent was used throughout the analysis. Accelerated
depreciation methods, investment credits, and carry forward and carry
back provisions were not used due to their complexity and special limita-
tions. Obviously, in some instances the effective tax rate may be lower
in a single plant situation, but with the dominance of multiplarit firms, tbe
firm's tax rate will be close to the 48 percent rate.

The revenue, expense, interest and depreciation charges used were thos>£
discussed in Chapter Illand Chapter Vlfor pollution control facilities.
These were assumed to be constant over the period of analysis, •

Investment
Although investment is normally thought of as outlays for fixed assets and
working capital, in evaluating the closure potentiality 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 in its opportunity
cost or shadow price. LI For purposes of this analysis, sunk investment
— This should not be confused with a simple buy-sell situation which merely
involves a transfer of ownership from one firm to another. In this in-
stance, the opportunity cost (shadow price) of the investment may be
different.

V-6
-------
was taken as the sum of equipment salvage value plus land at current
market value plus the value of the plant's net working capital (current
assets less current liabilities, see Chapter III for values). This amount
was taken as a negative investment in the terminal year. Replacement
investment for plant maintenance was considered to be 66 percent of
annual depreciation, a procedure which corresponds to the operating
policies of some managements and which serves as a good proxy for
replacement in an on-going business.

Investments in pollution control facilities are the estimates provided by
EPA and shown in Chapter VI. Only incremental values were used.

Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U. S. business. It
provides both a measure of a firm's actual performance as well as its
expected performance. In the latter case, it is also called the cost of
capital. In this analysis the cost of capital is defined as the weighted
average of the cost of each type of capital employed by the firm, generally
its equities and interest bearing liabilities. There is no methodology that
yields the precise cost of capital, but the cost can be approximated within
reasonable bounds.
4
The cost of equities was estimated by two methods'--the dividend yield
method and the earnings stock price (E/P ratio) method. Both are simpli-
fications of the more complex DCF methodology. The dividend method is:
k = -- + E
K -p T o

where
k = cost of capital
D = dividend yield
P = stock price
g = growth

The E/P method is simply

k = E/P
where
E = earnings
P = stock price
and is a further simplicaticn of the first. The latter assumes future
earnings as a level, perpetual stream.
V-7
-------
The after tax cost of debt capital was estimated by using an estimated
10 percent cost of debt and multiplying it 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.

The average cost of capital for the poultry processing industry was esti-
mated as follows and was based on various Standard & Poor's industry
survey:

Dividend Yield Plus Growth Method
Capital Weight Cost Growth
Equity .60 .04 .09

Debt .40

Average cost of capital .0988

E/P Method

Equity .60 .143 -- .0858

Debt .40 .052 -- J^OS

Average cost of capital . 1066

As shown in the above computations, the estimated after-tax cost is
9.88 to 10.66 percent. The subsequent analysis was based on 10.0
percent.
— 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-8
-------
Construction of the Cash Flow

A thirty-two period cash flow was used in this analysis and was con-
structed as follows:

1. Sunk investment (salvage market value of fixed assets plus
net working capital) book value of investment or replacement
cost of investment taken in year t .

2. After tax cash proceeds taken for years ti to t^Q.

3. Annual replacement investment, equal to 66 percent of
annual current depreciation taken for years t, to ton.

4. Terminal value equal to sunk investment taken in year t-jj.

5. Incremental pollution control investment taken in year t .

6. Incremental pollution expenses taken for years t, to toQ.

7. Replacement investment equal to 66 percent of incremental
annual depreciation on pollution control investment taken
for years t to t^Q.
B. Price Effects
At the outset, it must be recognized that price effects and production
effects are so interrelated that each has an associated 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 simultaneously resolved.
V-9
-------
The determination of price effects requires a knowledge of demand growth
price and supply elasticities, the extent of regional market influence, the
degree of large firm dominance in the industry, the market concentration
of the industry's suppliers of inputs and purchasers of outputs, the organ-
ization, of and coordination within the industry, the relationship between
domestic output r nd the world market, the existence and nature of coino]^-
mentary goods, the industry's cyclical trends, the current utilization of
the industry's capacity, and the effect of exogenous influences that bear
upon price determination (e. g. , governmental regulation),

In view of this complex diversity of factors involved in determining the
market price, a purely quantitative approach to the problem o£ price effects
is not feasible; hence, the simultaneous considerations suggested above
have been made. The judgment factor was heavily employed in determining
th^ supply response to a price change and the alternative price changes to be
employed,

In order to provide a standard which would reflect price effects, this study
computed an estimated price sufficient to insure plant profit stability. The
requjred price increase at the firm lovel was evaluated in Kg? ': of the re-
lationship of the model plant to the industry and to the competitive character-
istic of the industry. The required price increase was computed by the
described DCF analysis. It dealt only with incremental pollution investment
and cash proceeds.

The application of the above DC-" procedure to these costs yielded the
present value of pollution control costs (i.e. , investment plus operating
costless tax savings). Wherever this is known, the price increase required
to pay for pollution control can readily be calculated by the formula

-------
C. Financial Effects
In Chapter III, the financial characteristics of model plants were presented.
These data served as the base point for the analysis of the financial effects
of pollution control. The primary focus of the analysis was upon profit-
ability in the industry and the ability of the firms to secure external capital.
Obviously, then, this portion of the analysis cannot be divorced from pro-
duction effects since profit levels and a firm's ability to finance pollution
abatement facilities will have a direct influence on supply responses—on
utilization of capacity and plant closures.

To measure profitability the analysis employed after-tax book rate of return
on invested capital and cash flow (after-tax profit plus depreciation) measure-
ments. After-tax profit as a percent of sales was reported in order to com-
pare financial data with standard industrial measures.

In addition to these factors, two additional measures of economic profitabil-
ity were also examined: (1) capitalized value of earnings and (2) present
values estimated by the procedures described in Section A above. Both of
these measures were calculated on pre- and post-pollution control bases.

Given these financial measurements, the ability of the industry to finance
th'e required pollution control expenditures was reexamined in light of the
financial results and the information shown in Chapter III The ability to
do this varies from one industry subsector to another due to differential
financial structures, profitability and abatement requirements; hence,
capital availability and cost had to be examined on a model plant by model
plant basis.
D. Production Effects
The potential production effects of the imposition of pollution controls in-
clude reductions of capacity utilization rates, plant closures and industry
stagnation. Reductions in capacity utilization were estimated via qualita-
tive techniques based upon the analysts' knowledge of the industry. The
same was true -or assessing the extent to which plant closures may be
offset by increases in capacity utilization on the part of operating plants.
Date, limitations and time constraints required that the i:npact of pollutic.
control siandarca upon future growth of the industry also be estimated vii.
qualitative methods.
V-ll
-------
The remaining effect, plant closures, was difficult to measure re:-»'i^licall
as discussed above in Section A. As a starting point in the plant closure
analysis, a shutdown model was employed to indicate which mocK-.l nl.;!:t<;
should close, which would function as marginal operations and which ••.*
sound. These conclusions assumed that a plant would close when it,,'; ;,et
present cash flow value is less than ?,ero. However, the an?l/su: roc o^'ii^e
that model plams are theoretical and cannot project ai! relevant f a«, t •>:•«-.
thus, for any given model plant one would expect to find some ,-.,(.-!ui;
plants \vith profits lower and some higher than shown for the model pi ir,i.
E. Employment Effects
Given the production effects of estimated production curtailment s, pl;: pot or
tial for re-employment.
F. Commurity Effects
Although the direct impacts of job losses x:pon a community ; re ir.-,::it
ly apparent, in many cases, plant closures and cut'uicks have, a far ..-••.; >c
impact than just that of employment loss. Multiplier effect.? '.•>:,•/ r.-M.1' ii
even more unemployment. Badly needed taxes for' vita' community .'jcr'-ic
may dwindle. Community pride and spirit may be dampened. However,
in some cases, the negative community aspects of production effects raay
be short-term and relatively minor within 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 were qualitatively analyzed as appropriate.
G. Other Effect a
Other impacts such as direct balance of payments effects were also
qualitatively analyzed.

V-12
-------
VI. EFFLUENT CONTROL COSTS
Water pollution control costs used in this analysis were furnished by
the Effluent Guidelines Division, Office of Air and Water Programs,
Environmental Protection Agency from materials developed in part
for the Environmental Protection Agency by North Star Research In-
stitute. !/ These basic data were adapted to the types and sizes of
slaughter plants and packinghouses specified in this analysis.

Three effluent guidelines were considered:

BPT - Best Pollution Control Technology Currently
Available, to be achieved by July 1, 1977

BAT - Best Available Pollution Control Technology
Economically Achievable, to be achieved by
July 1, 1983

NSPS - New Source Performance Standards, apply to
any source for which construction starts after
the publication of the proposed guidelines.
New Source Pretreatmert Standards—to be applied to all facilities
(that use municipal systems) constructed after promulgation of these
guidelines--are assumed to have no impact on the industry due to the
nature of the industry's effluent characteristics. The draft develop-
ment document reports "no constituents of the effluent discharged
from a plant within the poultry processing industry have been found
which would interfere with, pass through, or otherwise be incom-
patible with a. well-designed and operated, publicly owned activated
sludge or trickling filter waste water.treatment plant. The effluent,
however, should have passed through by-product recovery and in-
plant primary treatment in the plant to remove settleable solids and
most of the grease*" _'
— pj^aLftLrjevelppment Document for Effluent Limitations_ Guidelines
and Standards of Performance for the Poultry Processing Industry,
Prepared by North Star Research Institute for United States
Environmental Protection Agency under Contract Number 68-01-0593,
May, 1974.

2.1
— Ibid, p. 159-
VI-1
-------
A capital investment will be required of most plants with treatment
systems to upgrade or install waste water treatment to achieve the waste
water quality specified for 1977 and 1983. The estimated investment cost
to achieve the 1977 limitations is based on an analysis of the treatment
systems in use in the poultry processing industry and their effectiveness
on poultry plant waste water. The costs for a "typical" plant to imple-
ment waste treatment to achieve the 1977 limitations are based on the
following:

Addition of an anaerobic lagoon or the equivalent, or expenditure
of same dollars on revision of present treatment systems.

Installation of water recirculation systems for feather flow-away
water supply.

Installation of chlorination systems for the final effluent.

The following provide the basis for estimating the cost for the "typical"
plant to implement waste treatment to achieve the proposed 1983 waste
water limitations:

50 percent of the plants with waste treatment will have to
add dry offal handling systems.

50 percent of the plants will have to install improved primary
treatment such as dissolved air flotation.

Install a microscreen or sand filter or equivalent, as a
tertiary treatment.

The cost of the irrigation option is presented to demonstrate the eco-
nomic implications of a waste treatment system that produces no dis-
charge.

The effluent control costs for each of the three treatment levels are
based upon an assumption that baseline pre-BPT treatment includes
primary and secondary systems represented as removal of settleable
solids and grease plus a mixture of biological treatment.

The cost data provided by EPA applies to a series of "typical" plants
and is reproduced in Appendix A of this report. Even though the cost
VI-2
-------
data were specified for more than one size of plant for most industry
subsegments, those plant sizes do not correspond to the model plant
sizes presented in this report. Based on discussions with EPA and
North Star Research Institute personnel, DPRA estimated investment
and annual treatment cost data for the model plants b/ assuming that,
for a given treatment level, both investment and operating costs were
a function of quantity of wasteflow. Given that assumption, each of
the "typical" plants was plotted on a graph and a smooth curve was
drawn to "fit" the points. Although the points representing the
"typical" plants do not fall precisely on the line, the fit is acceptable.

The resultant cost of treatment curves appear in Figures VI-1 through
VI-8. The cost data for BAT represent the costs required beyond BPT
expenditure levels. In each of the other cases, the data represent the
incremental costs above baseline expenditures.

Production volumes and daily wastewater flow for each of the model
plants appear in Table VI-1. The investment requirements for each
level of abatement appear in Table VI-2 whils operating costs are re-
ported In Table VI-3. The investment costs include land, ($1,000 per
acre) design and engineering (10 percent) and contingencies and omissions
(15 percent) in addition to the basic treatment system.

Operating costs include labor, operation, maintenance, energy and
power, supplies, chemicals, taxes, insurance and iri see llaneous
operating costs, In the case of irrigation, a by-product income credit
of $20 per ton of dry hay at a yield of six tons per acre was taken.

Operating cost'; as reported in Table VI-3 exclude charges for capital
costs and depreciation. Also, the operating costs exclude any moni-
toring costs which might be required to insure that the system'is
operating properly and that effluent limitations are being met. Although
capital costs and depreciation are properly reflected in the impact
analysis, monitoring charges are ignored and, to that extent, costs may
be understated.

The draft development document recognizes that abatement costs for
any given plant may deviate from those presented for the "typical"
plant c£ ".qua.1 production volume. For plants ol' «qual flow, an accuracy
of - 20 to 25 percent is reported with xhe error iacf,o,jr,» rarely being
minus. We assume this error range covers anc standard deviation
on either side of the "typical" plant with the "£yp,.».ti;i plant representing
the median. In averaging the wasteflows for t'v,e S'jV.mtej^ories, one
standard deviation of flow per unit of produ,:ti,./n w.i;, found to be 50 to
100 percent of the average.— Given ihfcse. levels, ot confidence, the
Ibid, p. 128.
VI-3
-------
implication is that cost of treatment as reported for typical plants may be
substantially above or below the costs required for any given plant. In
the impact analysis chapter which follows, it is assumed that all plants
will encounter costs equal to those for the typical plants. The extent
to which cost variability might influence the impact of proposed standards
is examined in Chapter VIII, below.

It is important to note that the cost data presented in this chapter only
apply to direct dischargers and, hence, do not apply to those plants
served by municipal sewers. With exception of the dnck subsegment,
municipal treatment of wastewater is common in the Industry. The best
indication of private versus municipal treatment currently available is
North Star's extension of previous work conducted by the Economic
Research Service of USDA (Table VI-4). The size classifications used in
Table VI-4 are different than those used in this report and may be referenced
in Appendix Table A-l. North Star's estimates of municipal treatment were
adopted in this analysis.
VI-4
-------
Figure VI-l. Estimated typical plant incremental investment costs for implementing 1977 "RPT limitations.
<
t—I
!
Cost in $1, 000

250
ZOO H
150 J
100
50
.05
. 1
i

. 5
1. 0
2. 0 Flow in MGD
-------
I 1
Figure VI-Z. Estimated typical plant incremental investment costs for implementing 1983 BAT limitations.
<
(-(
I
Cost in $1, 000

400
320 .
Z40
160
80
05
. 1
. 5

Flow in MOD
1.0 2.0
-------
Figure VI-3. Estimated typical plant incremental investment costs for utilizing irrigation as a
treatment strategy.
Cost in $1, 000
800
600
400
ZOO
. 1
1.0 2.0
-------
Figure VI-4. Estimated typical plant incremental investment costs for implementing New Source
Performance Standards-

Cost in $1, 000

1,000
>—1
,00
800 «
600
400
200
.05
. 1
.5
1.0
2. 0 Flow in MGD
-------
Figure VI-5. Estimated typical plant incremental annual operating costs for implementing 1977 BPT

limitations.

Cost in $1, 000

40
<;
H-1
I
30
20 -
10
. 1
1.0
2. 0 Flow in MGD
-------
Figure VI-6. Estimated typical plant incremental annual operating costs for implementing 1983

BAT limitations.

Cost in $1, 000

120
t
i-^
o
90 -
60 -
30
. 1
1.0
2. 0 Flow in MGD
-------
Figure VI-"7. Estimated typical plant incremental annual operating costs for utilizing irrigation as a
treatment strategy.
Cost in $1, 000
50 ,
40 .
30 -
2,0 •
.05 - .1
.5 1.0 2.0 Flow in MOD
-------
Figure VI-8. Estimated typical plant incremental annual operating costs for implementing New Source
Performance Standards.
Cost in $1, 000

100 -
80
60
40
20
.05
. 1
.5 1.0 2.0 Flow in MOD
-------
Table VI-1. Model plant average daily throughput and wastewater
volume during peak operating month

Plant Type
Young chicKen
Small
Medium
Large
Very Large
Production
Unit
Birds/day
it
it
1!
Production
Volume
24,000
48,000
76,800
HE, 000
Wastewater
Volume
MGD-i/
. 223
.446
. 722
1.053
Fowl
Medium

Turkey
Small
Medium
Large

Duck
Medium

Further Processing

Medium
raw product
Ibs./dayl/
38,400
7,200
14,400
24,000
11,200
56,400
.371
. 205
.410
.684
. 269
.085
— Wastewater volume per unit of production was calculated from the
data presented in Appendix Table A-l. Daily . astewater volume
was calculated on the basis of production volume times per unit
wastewater volume.
2/-
— A yield factor of 100 percent was utilized to convert from waste-
flow per unit of finished product to wasteflow per unit of raw product
(added ingredients -- bread, spices, juices, etc. -- provide an
average 100 percent yield on further processed output).
VI-13
-------
Table VI-2. Estimated model plant incremental investment costs
for implementing proposed limitations
Investment cost
Plant Type
BPT •
BAT
, by treatment level
NSPS
Irrigation
Young chicken
Small $112,000 $125,000 $343,000
Medium 137,000 162,000 465,000
Large 161,000 203,000 578,000
Very Large 185,000 246,000 686,000
Fowl
Medium
130,000 151,000 428,000
87,000
175,000
272,000
375,000
144,000
Turkey
Small 110,000 122,000 332,000 80,000
Medium 134,000 158,000 451,000 160,000
Large 158,000 197,000 561,000 259,000

Duck
Medium 118,000 135,000 372,000 105,000

Further Processing
Medium 91,000 104,000 241,000 36,000
VI-14
-------
Table VI-3. Estimated model plant incremental annual operating
costs for implementing proposed limitations
Operating cost, by treatment level
Plant Type BPT BAT NSPS Irrigation

Young Chicken
Small $19,000 $32,000 43,000 25,000
Medium 22,000 41,000 53,000 29,000
Large 25,000 52,000 62,000 33,000
Very Large 28,000 63,000 71,000 37,000

Fowl
Medium 21,000 38,000 50,000 28,000

Turkey
Small 19,000 31,000 42,000 25,000
Medium 22,000 40,000 51,000 29,000
Large 25,000 50,000 61,000 33,000

Duck
Medium 20,000 34,000 45,000 26,000

Further Processing
Medium 17,000 26,000 36,000 23,000
VI-15
-------
Table VI-4. Industry breakdown by subcategory, size, and type of
waste treatment
Plant Type
Chickens
Turkey
Fowl
Ducks
Further Processing Only
Total
Percent
Private, On-Site
Treatment
29
20
19
91
10
26.2
of Subcategory
Municipal
Treatment
69
79
76
9
90
72
Source: Draft Development Document for Effluent Limitations
and Standards of
Performance for the
No
Treatment
2
1
5
0
0
1.8
Guidelines
Poultry Processing Industry
Prepared by North Star Research Institute for United States
Environmental Protection Agency under Contract No. 68-01-0593,
May, 1974, p. 124.
VI-16
-------
VH. IMPACT ANALYSIS
The imposition of effluent limitations on the poultry processing industry
will have both direct and indirect impacts on the industry, on consumers,
on its suppliers and on communities in which plants are located. An
analysis was made, for specified effluent control levels, in both quanti-
tative and qualitative terms, of the impacts which are expected.

The following types of impacts have been analyzed:

A. Price Effects
B. Financial Effects
C. Production Effects
D. Employment Effects
E, Community Effects
F. Balance-of-Trade Effects
A. Price Effects
As •will be seen in the following section of this report, the role of price
effects in this analysis is critical. The poultry processing industry is
one with a low value added and a very low profit margin in relation to
sales. A small change in the wholesale price with live poultry prices
and production costs staying constant results in substantial changes in
industry profits. The converse of this argument is likewise true.
Hence, if even a small increase in processor margins could be expected
as a result of mandatory effluent treatment practices, the adverse economic
impacts of those controls on the industry would be ameliorated. Unfor-
tunately, we do not expect this to be the case except in the duck subsegment.

Historical poultry production costs, live prices and retail prices have
been highly correlated in the long run--indicating that processors have
little control over price (production costs in some cases) at either level.
Also, the farm level demand for poultry is derived from the consumer
demand at retail. If processors could act in unison, they could effectively
shift the derived farm demand curve to the left while the consumer demand
curve remained constant. These seemingly inconsistent viewpoints are
partially explained by another point. If consumer demand is shifting to
the right (e.g. , due to population increases or income elasticity effects)
and the long run supply curve is also shifting to the right (e.g. , due to
technological advances), increases in processor margins could be
partially masked with both consumer and farm prices changing. However,

VH-1
-------
historical data do not support such a conclusion. The primary reason
processors cannot control price margins is due to the competitive nature
of the industry. Given the current and anticipated number and dive rslty
of firms in the industry, collective actions to control margins .vouJd
sureJy be futile.

The incremental costs of BPT treatment described in Chapter VI are
small when compared to sales volume — less than 1.5 percent for each
of the model plants (Table VII-1) but large when compared to profi:?s.
Economies of scale in effluent control become a major variable in de-
termining the price adjustment necessary to offset the increment,-,.' cost
factor of these controls. The necessary price adjustment u. cow, t costs
for the larger plants is much less than that for the smaller plants.
Therefore, initial closures resulting from an inability to ircjjjsfer flic tie
costs via wholesale price increases, would be concentratou in the -.miller
plant segments. The economies of scale, along with the fact that (?, per-
cent of the plants are on municipal sewers, makes it doubtful that capacity
will be reduced significantly by BPT closures.

Even though closures would not reduce capacity sufficiently to induce
price changes, one might expect that the normal forces of the market
system would tend to allow margins to widen enough to cover BPT effluent
treatment costs for large plants in the long run (assuming production
technology remains constant). The average wholesale price increase
required to cover BPT treatment in the large plants would rua aboiu
0.4 percent. The initial price response would develop ay •; result uf
decreased competition for live poultry (increased production costs fur
integrated firms). A price reduction or cost increase, at the i>rn: ~< -t i
would thus encourage farmers to reduce livestock production which,
eventually, would mean consumers would find meat a little ie«s pleutitol
and a little more expensive.

Up to this point, the implication has been that all firms in the industry
will face identical standards. That does not appear :o be thf-. ca.se,
Plants connected to municipal sewers are not alfocted by ihe standards
to which this report is addressed. Realizing that plants connected to
sewers rnayincur a treatment cost and that those p^nts are reported by
North Star to represent 72 percent of the industry , their influence on
price determination cannot be ignored. If their treatment: costs are
lower, new plants woulr, in most cases, locate where, sewers v/ere
available and a. disproportional number of uon-sew. red plants would
close. If their costs were higher the revers" 'r >nriri would b^ p.vpocted
Hence, to complete thu price analysis, ai ac • ior ' • at treatrr-jnt
costs for sevvere^ juants ha-.J. to be
VII-2
-------
Table VII- 1. Percentage incremental wholesale price* change required
to completely offset abatement costs**
Plant Type
BPT
BAT
Treatment Level
BPT it
BAT
NSPS Irrigation
Young chicken
Small
Medium
Large
Very large

Fowl
Medium

Turkey
Small
Medium
Large

Duck
Medium

Further Processing
Medium
1.1
0.6
0.5
0.4
1.3
0.9
0.6
0.4
1.2
1.0
(Percent change)
1.4
0.9
0.7
0.6
1.8
1.3
0.8
0.6
1.7
1.3
2.5
1.5
1.2
1.0
3.1
2.2
1.4
1.0
2.9
2.3
2.8
2.0
1.5
1.2
3.8
2.7
1.7
1.3
3.4
2.4
1.0
0.8
0.7
0.6
1.4
0.9
0.7
0.5
1.3
0.8
* Wholesale prices are those assumed for the model plants.

** Treatment costs as a percent of sales are calculated on the basis of a
32 year cash flow (30 years of operation) with both treatment costs and
revenues discounted back to year zero prior to calculating the per-
centage.
VH-3
-------
Economies of scale would suggest municipal treatment costs should be
lower than private treatment costs. Federal subsidies of municipal
plants would also tend to favor the sewered plants. However, municipal
plants in small towns and cities often aren't designed solely from an
economic point of view. Municipal capacity in such communities often
exceeds wasteflow by a factor of 2 or rnore--sometimes as high as 4.
Hopes for growth, politics, and a whole host of other factors may enter
into the design and operation of municipal plants. Hence, some would
argue that municipal costs would be higher than private treatment costs.
North Star indicates that position in their draft report. In view of the
absence of adequate data to justify another position, we have assumed
that municipal treatment (plus any required pr^treatment} in both 1977
and 1983 will equal private industrial treatment costs under baseline
conditions. It is further assumed that the current market prices reflect
baseline treatment costs and that baseline costs equal the currently
prevailing treatment costs for sewered plants.

For those plants not discharging to municipal sewers, we therefore con-
clude that price changes which would offset effluent treatment costs are
highly unlikely except in the duck subsegment where a long run wholesale
price change of about 1 percent for BPT and Z percent for BAT (about
3 percent total) is expected. Except for ducks, utilization of capacity is
expected to increase for sewered plants and the remaining capacity will
be absorbed by new plants constructed where sewer connections are
available.
B. Financial Effects
In c der to measure the financial impacts of proposed effluent controls
on the poultry processing industry, income, rates of return and cash
flows were calculated for various sizes and types of model plants with and
without effluent control costs. Rates of return were calculated on-aver-
age fixed investment and on sales. Analyses made include the following:

1. Pre-tax net income
2. Pre-t?,x rate of return on invested capital
3. After-tax rate1 of return on invested capital
4. After-tax rate of return on sales
5. Annual cash flows
6. Cash flow as a percent of invested capital
7. Pollution abatement cash flow requirements
8. Net present values
VII-4
-------
Prior to examining the financial impacts, a few comments concerning
the nature of the model plants are in order. The models are, in effect,
financial profiles depicting the median plant within the plant type group.
All plants within the plant type group are not identical and hence, devia-
tions between the model plants and actual plants should be expected.
While the model plant in a specific plant type group may show a profit,
some plants in the group may be experiencing losses and vice-versa.
In a statistical sense, then, the model plant is intended to represent the
median plant of the plant type group distribution. Although the scope of
this project did not allow a primary data survey to determine the types
of distributions involved and their associated standard deviations, the
reader should interpret the model plant data within such a framework.
For example, one can assume that 50 percent of the plants are more
profitable than the model being examined while 50 percent are less
profitable.

Pre-tax Net Income

The impact of alternative effluent treatment levels on model plant pre-
tax net income is shown in Table VII-2. The impact of BPT guidelines
ranges from a 9 percent reduction in pre-tax income for the large turkey
plant to a 49 percent reduction for the small chicken plant. In general,
BPT standards impact the small plants severely while the impact on the
large plants is only modest. In the case of BAT, however, the impact
is severe for all plants--ranging from a pre-tax income reduction of 23
percent for the large turkey plant to 118 percent for the small chicken
plant. Pre-tax income under irrigation is slightly higher than under
BPT for the small plants but lower for the large plants. The NSPS pre-
tax income levels are slightly less than the corresponding figures under
BAT treatment.

Pre-tax Return on Invested Capital

Pre-tax return on invested capital for specified types and sizes of plants
as affected by alternative effluent treatment levels is shown in Table
VII-3. The impact pattern is similar to that described for pre-tax
income effects.

After-tax Return on Invested Capital

After-tax returns on invested capital are shown in Table VII-4. Returns
are relatively low even in the baseline situation. BPT controls severely
impact the small plants and affect the large plants noticeably. BAT con-
trols reduce returns to less than 7 percent fu: ^. .i plants but two and drop
returns below Z percent for three of the ten modt-1 olants. Returns under
VII-5
-------
Table VII-2. Pre-tax net income for poultry processing model plants
at various effluent treatment levels, assuming no price
changes.
Pre-tax net income *
Plant Type
Baseline BPT BAT
NSPS Irrigation
($1,000)
Young chicken
Small
Medium
Large
Very Large

Fowl
Medium
76
202
342
522
130
39
157
291
464
88
-14
90
206
360
25
-23
73
186
339
10
41
152
277
443
85
Turkey
Small 103
Medium 293
Large 582

Duck
Medium 166

Further Processing
Medium 233
66
250
531
127
201
15
184
448
70
159
7
169
430
61
158
69
235
519
127
206
* Average annual interest charges on pollution control equipment were
calculated on the basis of a 10-year loan at 10 percent interest with
fixed annual payments.
vn-6
-------
Table VII-3. Pre-tax rate of return on invested capital for model
poultry plants at various effluent treatment levels,
assuming no price change.
Plant Type
Pre-tax rate of return on invested capital1
Baseline
BPT
BAT
NSPS Irrigation
Young chicken
Small 10.9 4.8
Medium 16.2 11.4
Large 17.9 14.1
Very Large 20.5 17.0

Fowl
Medium 16.0 9.3

Turkey
Small 11.2 6.4
Medium 18.6 14.6
Large 24.8 21.2

Duck
Medium 16.3 11.2
-1.5
5.8
9.1
12.07
2.3
1.3
9.8
16.6
5.5
-2.2
4.3
7.5
10.5
0.8
0.6
8.3
14.8
4.4
5.2
10.7
12.7
15.1
8.9
6.9
13.5
19.9
11.3
Further Processing
Medium 21.6
17.2
12.5
12.0
18.5
Invested capital calculated as book value of model plant plus capital
outlay required for pollution abatement. Book value of model plant
equals depreciated value of fixed assets plus net working capital.
VII-7
-------
Table VII-4. After-tax return on invested capital for model poultry plants
at various effluent treatment levels, assuming no price
change.
After-tax rate of return on invested capital
Plant Type
Young chicken
Small
Medium
Large
Very Large
Fowl
Medium
Turkey
Small
Medium
Large
Duck
Me dium
Further Processing
Medium
Baseline
%
6.6
9.0
9.7
10.9

9-1 .

6.5
10.1
13.2

9.1

11.9
BPT
%
3.3
6.4
7.6
9.1

5.5

4.0
8.0
11.3

5.4

9.5
BAT
%
-1.5
3.4
5.0
6.5

1.8

1.0
5.5
8.8

3.4

7.0
NSPS
%
-2.2
2.6
4.2
5.6

0.6

0.4
4.7
7.9

2.7

6.7
Irrigation
%
3.5
6.0
6.9
8.1

5.3

4.2
7.4
10.6

6.4

10.2
VII-8
-------
irrigation are slightly higher than under BPT for the small plants and
lower for the large plants. Again, NSPS is slightly less than BAT.

After-tax Return on Sales

Chicken, fowl and turkey processing plants generally operate on an after-
tax return on sales of 1 to 2 percent under average conditions. Duck and
further processing plants yield successively higher returns. The pro-
posed effluent limitations and standards impact this profitability measure
in the same fashion as those previously discussed. Table VII-5 presents
after-tax return on sales under baseline and proposed guideline conditions.

Annual Cash Flow

Estimated annual cash flows appear in Table VH-6. The severity of the
impacts is especially apparent under BAT and NSPS conditions.

Cash Flow on Invested Capital

Annual cash flow as a percent of invested capital is shown in Table VII-7.
Generally, the impact on this measure is similar to that for the previous
measure. It is interesting to note, however, that BPT ranks better than
irrigation in this frame work--even for the small plants. This factor
can be readily explained because of the large non-depreciable investment
required for land in the case of irrigation.

Pollution Abatement Cash Flow Requirements

Although the impact of effluent controls on total cash flow is important,
it is perhaps more meaningful to examine the cash flow requirements of
the effluent treatment systems in light of the funds available to support
such expenditures. As a first step, one can compare the cash flow re-
quirements with after-tax profits as shown in Table VII-8. As a very
rough rule of thumb, some analysts say that nonproductive capital outlays
equalling 25 percent of annual net profits will have an appreciable impact,
outlays of 50 percent will possibly result in a large number of plant closures
and outlays of 75 percent will endanger the operations of nearly all plants
in that subsegment. Applying that criteria would imply that most small
plants would be appreciably to severely impacted by BPT guidelines while
BAT would severely impact almost all non-sewered poultry processing
plants. Where irrigation can be implemented at or near the costs estimated
by North Star Research Institute, it would appear to be preferable to BAT,
but more costly than BPT. Given the fact tha. "2 percent of the plants
are sewered, the NSPS standards would appear to severely limit new
plant construction where sewers are not available.
VII-9
-------
Table VII-5. After-tax return on sales for model poultry plants
at various treatment levels, assuming no price change.
Plant Type
After -tax return on sales
Baseline BPT
BAT
NSPS Irrigation
Young chickens
Small
Medium
Large
Very Large

Fowl
Medium
1.1
1.3
1.3
1.4
1.8
0.6
1.0
1.1
1.3
1.2
-0.3
0.6
0.8
1.0
0.5
-0.5
0.5
0.7
0.9
0.1
0.6
1.0
1.1
1.2
1.2
Turkey
Small 1.2
Medium 1.7
Large 1.9

Duck
Medium 2.4

Further Processing
Medium 3.3
0.9
1.4
1.8
1.9
2.9
0.2
1.1
1.5
1. 1
2.3
0.1
1.0
1.4
0.7
2.3
0.9
1. 3
1.7
1.9
2.9
vn-io
-------
Table VII-6. Estimated cash flow for model poultry plants, at various
effluent treatment levels, assuming no price change.
Estimated Cash Flow
Plant Type

Young chickens
Small
Medium
Large
Very large
Fowl
Medium
Turkey
Small
Medium
Large
Duck
Medium
Further Processing
Medium
Baseline

89
179
281
397

133

127
259
436

174

221
BPT

80
169
272
386

124

119
248
426

166

213
BAT
($1,000)

52
150
248
356

107

102
230
402

150

201
NSPS

53
158
259
371

110

105
238
413

156

206
Irrigation

75
163
264
375

118

113
237
417

160

209
vn-ii
-------
Table VII-7. Estimated cash flow as a percent of total invested capital
for model poultry plants at various effluent treatment levels,
assuming no price change.
Cash Flow on Invested Capital
Plant Type
Young chickens
Small
Medium
Large
Very large
Fowl
Medium
Turkey
Small
Medium
Large
Duck
Medium
Further Processing
Medium
Baseline
%
12.7
14.4
14.7
15.6

16.3

13.8
16.4
18.6

17.1

20.5
BPT
%
9.9
12.2
13.2
14.1

13.1

11.6
14.5
17.0

14.6

18.2
BAT
%
5.6
9.7
10.9
11.9

9.8

8.9
12,3
14.9

11.8

15.8
NSPS
%
5.1
9.2
10.4
11.5

8.9

8.4
11.7
14.2

11.2

15.6
Irrigation
%
9.5
11.5
12. 1
12.8

12.3

11.3
13.6
16.0

14.2

18.7
VII-12
-------
Table VII-8. Model plant annual pollution abatement cash flow
requirements as a percent of annual profits —.
Plant Type
Fowl
Medium

Turkey
Small
Medium
Large

Duck
Medium

Further Processing
Medium
Abatement cost as percent of profits
BPT
BPT BAT &BAT NSPS Irrigation
Young chicken
Small
Medium
Large
Very Large

50
25
18
13

65
35
28
22

115
60
46
35

131
72
53
41

52
34
29
26
35
37
18
10
26
15
50
52
24
17
36
20
85
89
42
27
62
35
101
100
49
31
72
36
46
40
23
17
30
13
— Abatement cash flow requirement calculated as annual operating costs,
plus debt retirement at 10 percent interest on a 10-year loan (assuming
100 percent financing of abatement investment) less income tax reduc-
tion resulting from abatement costs.
VII-13
-------
Table VII-9 places the picture in a slightly different perspective. First,
the plant's generation of funds above what must be reinvested to maintain
productivity is presented. The figure is a composite cf three components:
{1} normal profits, (2) funds devoted to increasing productivity and effi-
ciency and, possibly, (3) profits in excess of (or below) what is typical
for the industry. Note, however, that reinvestment above 100 percent of
depreciation is financed from one of the two profit sources. Hence, the
column entitled Annual Net Cash Proceeds indicates the funds available
to meet the pollution abatement cash flow requirements if the firm was
willing to accept a zero return on equity and not invest any of its cm Tent
cash flow potential on items to increase productivity and efficiency.

With the current and anticipated opportunities for investment, no firm
would accept a long term return on equity of zero by choice! Also one
would assume sewered plants will continue to increase productivity and
efficiency which would place the non-sewered plant? at a cotnpa.rai.ive
disadvantage if all cash proceeds were devoted to pollution control. Last-
ly, if all cash proceeds were devoted to pollution abatement, no residual
funds would be available for meeting any other non-prouuctr-e investment
requirements which might be imposed by the Federals State,, or local
governments (e.g. APHIS of USDA, air programs of EPA, OSHA, et< .).
Hence, in reality, only a portion of the net cash proceeds could be devoted
to pollution abatement.

Table VII-9, then, seems to point to rather severe impacts. .After imple-
mentation of BAT, over one-third of net cash proceeds will be required
for pollution control for all but the very large chicken, tke lar^»;- turkey
and medium further processing model plants.

Net Present Value s

Net present values were calculated under baseline and proposed e/fluent
treatment levels as the final step in the financial analysis. Tua ne;
present values were calculated on the basis of a 32 year period with the
investment taken in year zero, years 1-30 reflecting plant operations
and salvage of the plant occurring in year 31. Year zero was assumed
to reflect 1976 in all cases except BAT where 1982 was used. Invest-
ment outlays for pollution control were made in year aero* In the case
of BAT, BPT was assumed to be inplace and have no market, value.
(Although BPT would have a book value and replacement, value, these
were not reflected in the calculations and, hence, one could argue that
the net present values calculated on book and replacement investment
basis are overstated at the BAT level.) This approach was taken because
of the concern for reflecting the firm's ability to bear the cost of pollu-
tion abatement rather than obtain a yield on pollution abatement investments.

VIL-14
-------
Table VII- 9. Model plant annual net cash proceeds compared with annual cash flow required to pay
for pollution abatement

Plant Type

Young chicken
Small
Medium
Large
Very Large
Fowl
Medium
Turkey
Small
Medium
Large
Duck
Medium
Further Processing
Medium

Annual!:
Net Cash
Proceeds

62
135
217
318

83
194
352

121

160
Annual
BPT

23
27
31
36

22
28
31

19
Abatement
BAT
mr

31
39
51
60

31
39
52

26
Cash Flow
BPT
&
BAT
»oo\ -

54
66
82
96

53
67
83

45
Requirements
NSPS

63
81
98
115

60
78
96

46
27
Irrigation

25
38
•54
71

24
37
52

17
U Annual after tax profit plus 34 percent of depreciation under baseline conditions.
— Annual operating costs plus debt retirement at 10 percent interest on a 10-year loan (assuming
100 percent financing of abatement investment) less income tax reduction resulting from abate-
ment costs.
-------
By 1982, BPT should be nearly paid for and an annual reinvestment
allowance to replace BPT equipment, when required,, is included in the
cash flows. The reinvestment allowance is taken at 66 percent o.f depre-
ciation in each case. This is just slightly higher than would be required
for payments to a sinking fund to replace the equipment every 10 years
assuming a 10 percent return on the fund. A 10 percent discount rate
reflecting the estimated cost of capital was used for all plants. The
construction of the cash flows used in the analysis is fully described in
Appendix B of this report.

Net present values for baseline conditions appear in Table VII-10. The
values are positive for all model plants when plant salvage value Is used
as the investment basis. When book value is used, only the small chicken
and turkey plants fall below zero,, When replacement investment is used
as the basis, all models reflect negative net present values. This latter
condition seems quite consistent with the fact that very few new poultry
processing plants have been constructed daring the past few years.

Net present values ander BPT limitations appear in Table VIC-11. The
small chicken model is the only one which falls below zero when plant
salvage value is used as the investment basis. However, significant
reductions can be seen in all of the values when compared to baseline
conditions.

The small turkey plant as well as the small chicken plant exhibit negative
present values when salvage value of the plants are used as the invest-
ment basis. The impact of BAT limitations cause 7 plants to drop below
zero when the book value basis is used, As suggested earlier. \.-e
assume 50 percent of the plants'would have net present values- lower
than those of the corresponding model. The resultant implications of
the BAT financial impact indeed appear to be serious. It should be
recalled at this point that, except for ducks, no price increases are
expected to lessen the financial impact.

For comparative purposes, net present values assuming irrigation as the
treatment strategy appear in Table VII-13. Irrigation shows a slight
advantage over BPT for the small chicken and medium further processing
plants. The impact of irrigation is less severe than BAT in all cases.

New Scarce Performance Standards5 impact on net present value is pre-
sented in Table VII-14. These values must be compared with the replace-
ment column of Table VII-10 (baseline net present values) for proper
interpretation. As can be seen, NSPS standards will make it much more
difficult to warrant new plant investment.
VI1-36
-------
Table VII-10.Net present value of baseline DCF cash flow under
alternative investment valuations.
Net present value of cash flow less investment at;'
Plant Type Salvage Book Replacement
($1,000)
Young chicken
Small
Medium
Large
Very Large
Fowl
Medium
189
583
989
1552

489
-4
Z83
555
1023

223
-709
-815
-1026
-909

-739
Turkey
Small 288 -10 -1077
Medium 942 499 -1115
Large 1967 1395 -728

Duck
Medium 690 344 -1052

Further processing

Medium 1052 653 -872
Investment in year zero taken at salvage, book or replacement value.
Investment is liquidated in year Slat salvage value in each case.
VII-17
-------
TableVII-11. Net present value of DCF cash flow under alternative in-
vestment valuations after implementation of BPT limitations,
with no compensating price increases.

Net present value of cash flow less investment at:'
Plant Type Salvage Book Replacement

Young chicken
Small -36 -229 -934
Medium 314 14 -1084
Large 667 243 -1338
Very Large 1207 678 -1254

Fowl
Medium 227 -39 -1001

Turkey
Small 74 -224 -1291
Medium 667 224 -1390
Large 1658 1086 -1037

Duck
Medium 449 103 -1293
•

Further Processing
Medium 867 468 -1057
* Investment in year zero taken at cost of pollution control equipment
plus salvage, book or replacement value of other assets. Investment
is liquidated in year 31 at salvage value in each case. Salvage value
of pollution control equipment is assumed to equal aero.
VII-18
-------
Table VII-12.
Net present value of DCF cash flow under alternative in-
vestment valuations after implementation of BAT limita-
tions, with no compensating price increases.
Young chicken
Small
Medium
Large
Very Large
Fowl
Net present value of cash flow less investment at*
Plant Type
Salvage
Book
($1,000)
Replacement
•237
63
343
797
Medium
-430
-237
- 91
268
-265
-1135
-1335
-1672
-1669
-1227
Turkey
Small
Medium
Large

Duck
Medium

Further Processing
Medium
-117
416
1336
244
703
-415
- 25
764
-102
304
-1482
-1641
-1359
-1498
-1221
Investment in year zero taken at cost of pollution control equipment
plus salvage, book or replacement value of other assets. Investment
is liquidated in year 31 at salvage value in each case. Salvage value
of pollution control equipment is assumed to equal zero.
VII-19
-------
Table VII-13. Net present.value of DCF cash flow under alternative invest-
ment valuations with irrigation as a treatment strategy with
no compensating price change.

Net Present Value of Cash Flow Less Invest-
ment at *
Plant Type Salvage Book Replacement
($1,000)---
Young chicken
Small -28 -221 -926
Medium 252 -48 -1,146
Large 535 101 -1,480
Very Large 970 441 -1,491

Fowl
Medium 197 -69 -1,031

Turkey
Small 78 -220 -1,287
Medium 626 183 -1,431
Large 1,535 963 -1,160

Duck
Medium 444 98 -1,298

Further Processing
Medium 893 494 --1,031
Investment in year zero taken at salvage, book or replacement value.
Investment is liquidated in year 31 at salvage value in each case.
VH-20
-------
Table VII- 14. Net present value of DCF cash flow after implementation
of new source performance standards, with no compensating price increases
Plant Type Net Present Value ($1, 000)
Young chicken
Small -1,325
Medium -1,661
Large -2,035
Very Large -2,092

Fowl
Medium -1, 513

Turkey
Small -1,708
Medium -1,931
Large . -1,719

Duck
Medium -1,707

Further Processing
Medium . -1,330
VH-21
-------
Special C^onside ra.ticms for Multi-Class Plants

The effluent treatment cost data presented in the previous chapter are
based upon an assumption of single class operation -- i.e. slaughter
plants slaughter only one class of poultry and perform no further pro-
cessing and further processing plants conduct no slaughter activities.
As noted in Chapter I of this report, 30 percent of the slaughter plants
mix classes to some extent and 50 percent of the further processing
plants have slaughter operations. Further, we estimate that 10 percent
of the slaughter plants have further processing operations.

For the purposes of this study, we have assumed that the mixing of classes
will result in the plants having at least as severe an impact • pocsiblv
greater--than that shown for the. single class models above. In those cas-->.s
where more than one class of poultry are slaughtered simultaneouhly (not a
very common practice) the costs and impacts would equal the weighted
average for the classes involved. In those cases where classes are run
separately within a short time interval (e.g. a week), the resui's would
still probably approximate a weighted average. Hov-ever, in those cases
where the classes are run separately with each class slaughtered for a
prolonged period, it would appear the plant would have to have a treatment
system designed for the class generating the largest flow, in those
situations, the impacts would be more severe than one wo'ild surmise from
examining the model plants. This fact is of special interest since about. 70
percent of the multi-class slaughter plants fall in the small size categories.

Based on data provided by EPA and North Star, it is assumed that those
slaughter plants with only a small amount of further processing V/K! not
have appreciably higher costs. For those plants which, are actively engaged
in further processing but for less than 50 percent of their slaughter, costs
would probably increase about 7 percent. When further processing exceeds
50 percent of the slaughter, wastewater treatment costs would increase
about 17 percent. In view of the added profits from further processing,
the single class based impacts should also represent the slaughter plus
further processing plants fairly well.

The existence of cut-up operations in slaughter plants should not appre-
ciably affect wastewater flow or treatment costs. To the extent that cut-
up activities may strengthen profit margins somewhat, the impact on
slaughter only plants may be slightly higher than on slaughter plus cut-
up plants ,

For those plants classified as further processors with slaughter, the treat-
ment costs would, presumably, equal the cost for further processing plus
the incremental cost for slaughter calculated by summing the two flow
components and referencing the figures in Cruipter VI above. The net
result would be a financial impact between that shov. ri for the slaughter
only and further processing only model plants.

VII-Z2
-------
C. Production Effects
The proposed effluent limitations are not expected to have a significant
long run impact on the product volume of poultry. The impact of the
guidelines will principally be reflected in a dramatic shift in production
away from plants served by private effluent treatment systems to sewered
plants. The exception to this generalization is the duck subsegment where
a reduction in productive capacity and a slight reduction in production is
anticipated.

Plant Closures
As noted in Chapter II-A, there has been a 50 percent decline in number
of plants between 1958 and 1972. More recently, from 1967 to 1972, the
industry experienced closures of-24 percent. The closures appear to
have resulted from normal maturation of the industry which can be char-
acterized by improved technology, economies of scale, intense competition
and volatile earnings in the short-run. These factors sometimes create
critical problems of capital availability and liquidity. Therefore, we
are projecting approximately 13 percent baseline closures as shown in
Table VII-15. These closures are our estimates of the impact of natural
market forces plus other regulations not pertaining to the proposed guide-
lines. The reduced capacity implied by these closures will normally, as
in previous years, be offset by new plant construction. The new plants
will be connected to municipal sewers or will be very large such that
economies of scale make them unlikely candidates for closure due to
pollution control requirements.

For the purposes of this analysis, the industry was viewed as comprising
the plants remaining after baseline closures. The number of plants
subject to BPT and BAT limitations were then determined by applying
the percent of plants on private treatment (Table VI-4, Chapter VI) to
the total number of plants in each of the industry subsegments. For the
further processing plus slaughter subsegment, which was not presented
separately by North Star, we estimate 20 percent of the plants are on
private treatment systems. The resultant number of plants subject to
the guidelines appear in the first column of Table VII-16.

Closure decisions are seldom made on the basis of well defined common
economic rules; such decisions invariably include a wide range of personal
values, external forces such as the ability to obtain financing, or the role
of the production unit in an integrated firm (see discussion in Chapter V),
However, it must be recognized that profitability remains as a major
determinant of the via ility of that firm. For this reason plant

VII-23
-------
Table VII-15. Baseline plant closure estimates
Plant Type
Young chicken
Small
Medium
Large
Very Large
Total
Fowl
Total
Turkey
Small
Medium
Large
Total
Duck
Total

Current

157
73
40
36
306

93
41
10
144

1?
Number of Plants
Baseline
Closures

30
7
3
2
42

15
2
0
17
•
2

Remaining

1Z7
66
37
34
264.

78
39
10
127

15
Further Processing Only
Total

Further Processing
with Slaughter
Total

Total Industry
20

557
2

7Z
19

485
VII -24
-------
Table VII- 16. Estimated plant closures resulting from imposition
of BPT limitations
Plants subject
Plant Type to guidelines
Young chicken
Small
Medium
Large
Very Large
Total
Fowl
Total
Turkey
Small
Medium
Large
Total
Duck
Total
Further Processing Only
Further Processing with Slaughter
Total Industry

40
21
11
10
82

16 .
8
2
26

14
2
4
138
Number of
plants closed

15
3
1
0
19

4
1
0
5

1
0
0
27
VII-25
-------
closures, to a large extent, are determined by the financial impact of
effluent control costs on firms that are unable to offset these costs via
price increases for their product output.

The determination of plant closures then considers the financial effects
in light of profitability, capital availability -- either generated internally
or acquired from external sources, and future expectations for the in-
dustry (see Chapter II for a discussion of financial considerations),

To measure profitability, the analysis employed after-tax book rate of
return on invested capital and cash flow measurements, Ttie after-tax
return for the model plants is summarized in Table V1I-4. It should be re-
emphasized that caution must be used in interpretation of model plant
results. These plants are designed to represent averages and approx-
imately 50 percent of actual plants are likely to be more profitable while
50 percent of the plants are likely to be less profitable.

Given the cost of capital as 10 percent, it can be observed that at base-
line conditions only 4 of the 10 plants have an after-tax return on invested
capital that exceeds the cost of capital. As expected, ;he imposition of
effluent control costs depress these returns to questionable levels. The
acquisition of external capital becomes extremely difficult, and at best,
very costly, under the above conditions. This can be confirmed by the low
price/earnings ratio of poultry processing firms that are publicly traded.
In many cases, these firms are selling well below book value. This
measure indicates many firms will have extreme difficulty obtaining
external funds to finance pollution control cost.

The cash flow measurements- are summarised in Tables VII-6 through VII-8..
As pointed out in the previous discussion, as a rough rule of thumb, some
analysts say that nonproductive capital outlays equalling 25 percent of annual
net profits will have an appreciable impact, outlays of 50 percent will
possibly result in a large number of plant closures and ov.tlays of 75 per-
cent will endanger the operations of nearly all plants in that subsegment.
The latter category would include the small chicken, fowl and small
turkey plants.

The discussion of net present values begins on page VII'-14 and the data
are summarized in Tables VII--10 through VII-14. From a strictly
economic basis, ceteris paribus, a firm would close when its net present
cash flow is J-:ss than zero. However, the analysis recognized that
model plants are theoretical and cannot project all relevant factors
involved in the shut-down decision. Nevertheless, net present value does
provide an additional tool for the analysis,

YII-26
-------
Given the previously developed quantitative measures, the estimated
plant closures become a qualitative decision incorporating the quantitative
tools as well as qualitative judgments of the analyst.

Estimated plant closures attributable to BPT guidelines are shown in
Table VII-16. A total of 27 closures are expected. Most of these are in
the small size categories. The closures equal 20 percent of the plants
on private treatment but only 6 percent of all plants remaining after
baseline closures.

Slightly over one-half of the anticipated closures are attributed to the
small plants in the young chicken subsegment. In total, the young chicken
subsegment will experience 70 percent of the BPT closures while repre-
senting only 59 percent of the plants on private treatment.

Plant closure estimates attributed to the incremental impact of BAT guide-
lines appear in Table VII-17. Of the plants on private treatment after
implementation of BPT limitations, 34 percent are expected to face
closure. The guidelines would eliminate most of the small plants in the
young chicken subsegment. Other segments with rather severe impact
are the medium young chicken, fowl and small turkey plants. It is felt
the effects on the remaining segments could either be absorbed or result
in minimal closures.

A summary of the collective impact of BPT and BAT guidelines is presented
in Table VII-18. A total of 65 plants or approximately 47 percent of the
plants subject to the guidelines are expected to close. It is well to note,
however, that 36 of the 65 plants are in the small young chicken segment
which appears to be rather marginal at the present time.

The above plant closure estimates may be overstated at the BAT level
to the extent that some plants may choose to select zero discharge via
irrigation as an effluent treatment strategy. As shown earlier, irri-
gation is cheaper than BAT. Of course, that conclusion is predicated
on the assumptions that land is available at a cost of $1, 000 per acre and
that soil conditions, etc. are conducive to the irrigation strategy. Un-
fortunately, the scope of this study did not permit an examination of the
degree to which irrigation could be substituted for BAT treatment.

Production Curtailment

As noted in Table VI-4 of the preceding chapter, 69 percent of the young
chicken, 76 percent of the fowl and 79 percent of the turkey plants are
sewered. We assume that the average production volumes in sewered

VII-27
-------
Table VII- 17, Estimated plant closures resulting from imposition
of BAT limitations
Plants subject
Plant Type to guidelines
Young chicken
Small
Medium
Large
Very Large
Total
Fowl
Total
Turkey
Small
Medium
Large
Total
Duck
*
Total
Further Processing Only
Further Processing with Slaughter
Total Industry

25
18
10
10
63

12
7
2
21

13
2
4
111
Plants
Closed

21
6
1
0
28

6
0
0
6

1
0
0
38
*
Plant closures for ducks estimated at 5 prior to an allowance for
anticipated price increases.
VII-28
-------
Table VII-18. Combined plant closure impacts resulting from
imposition of BPT and BAT limitations
Plant Type
Number of Plants
Prior to
BPT**
BPT and BAT
Closures
Plants
Remaining
Young chicken
Small
Medium
Large
Ve ry Large
Total
Fowl
Total
40
21
11
10
82
10
36
9
2
0
47
4
12
9
10
35
Turkey
Small
Medium
Large
Total
Duck
Total
Further Processing
Total

Total Industry
16
8
2
26
14

138
10
1
0
11
0

65
6
7
2
15
12

73
Plant closures for ducks were estimated at 6 prior to an allowance for
anticipated price increases.

Includes only those plants subject to BPT and BAT guidelines and,
therefore, excludes those plants connected to municipal sewer systems.
VII-29
-------
plants roughly equals that of the nonsewered plants. It is also assumed
that reductions in productive capacity due to baseline conditions will be
offset by additions of plants served by municipal sewers.

Plant closures resulting from BPT limitations would reduce the industry's
productive capacity by about 3 percent. With the exception of a few cases
where geographic isolation is a dominant factor, the remaining plants in
the industry should be able to increase production volume enough to off-
set the reduced capacity. This conclusion holds for ducks as well as the
other subsegments.

Reductions in capacity due to RPT plus BAT closures will approximate
twice that of BPT alone. Given the time log in implementation of BPT
and BAT, it is expected that the remaining plants should be able to in-
crease production volume to offset the reduced capacity. Therefore, in
all segments but ducks, the production and price levels should remain
relatively stable at baseline levels plus anticipated growth in the long
run.

Impact of New Source Performance Standards

The potential impact of New Source Performance Standards is best
analyzed by estimating the percentage of baseline plants with profits
large enough to warrant the current cost of constructing a new plant
under both baseline and NSPS treatment. Such estimates for poultry
processing plants appear in Table VII-19. It should be recalled that the
NSPS standards apply only to those plants on private treatment systems.
As can be readily observed, the standards would significantly dampen new
plant construction in non-sewered areas. For the industry as a whohi,
we estimate 5 percent of the plants could warrant new plant construction
costs under baseline conditions. Under NSPS guidelines, however, it is
estimated that only 1 percent of the total plants would have profits of
sufficient magnitude to warrant construction of new plants.
D. Em pi oym e n t E f f e c t s
As stated in Section C above, a substantial number of plant closures are
anticipated as a result of imposing the proposed effluent guidelines. The
employment and payroll loss as a result of these plant closures are
estimated as shown in Table VII-2G. Lost jobs are estimated at 3,425
and 4,800 for BPT and BAT related plant closures, respectively, for a
total employment displacement of 8,225. The annual payroll associated
with those jobs total? $42.2 million.
VII-30
-------
Table VII- 19. Percent of existing plants with profit levels sufficient
to warrant replacement investment, before and after
imposition of NSPS limitations
Percent of Plants
Plant Type Before NSPS After NSPS
Young chicken
Small
Medium
Large
Very Large
Fowl
Turkey
Small
Medium
Large
Duck
Further Processing
Further Processing with Slaughter
Total Industry

0
5
10
20
10

0
5
20
6
15
10
5

0
0
0
3
2

0
0
10
0
10
5
1
VII-31
-------
Table VII-20. Estimated direct employment impact resulting from
plant closures \l 2J .
Jobs Eliminated
Plant Type

Young chicken
Small
Medium
Large
Very Large
Total
Fowl
Total
Turkey
Small
Medium
Large
Total
Duck
Total
Further Processing
Total
Total Industry
BPT

1,550
625
325
0
2,500

200

450
225
0
675

0
3,425
BAT

2,775
1,250
325
0
3,750

300

700
0
0
700

0
4,800
BPT &
BAT

3,725
1,875
650
0
6,250

500

1,150
225
0
1,375

100

0
8,225
Payroll Reduction
BPT

7.9
3.2
1.7
0
12.8

1.0

2.3
1.2
0
3.5

0.3

0
17.6
BAT
($ million)

11.1
6.4
1.7
0
19.2

1.5

3.6
0
0
3.6

0.3

0
24.6
BPT &
BAT

19.0
9.6
3.4
0
32.0

2,5

5.9
1.2
0
7.1

0.6

0
42.2
I/ Includes both direct and indirect labor.

2/ Summation «.- components may not equal totals due to rounding.
VII-32
-------
The probability of those workers securing jobs in other poultry pro-
cessing plants is rather low for three reasons: (1) the geographic dis-
persion of plants may place the next closest plant beyond a reasonable
driving distance (2) an increase in capacity utilization in the re-
maining plants can be achieved with a very modest increase in labor
requirements and (3) new poultry processing plants may not be located
in the same communities impacted by plant closures. However, a
small percentage of the workers should be able to find jobs within the
poultry processing industry.

For those workers unable to find re-employment in the industry, finding
new employment will be difficult in most cases. The workers are gener-
ally of a low skill level as indicated by the low salaries existing in the
industry. The salary levels also suggest that the workers' employment
opportunities are quite limited (e. g. the salary level in the red meat
processing industry is roughly double that of the poultry processing
industry). Finally, as stated in Chapter I, many of the plants are
located in small communities. The labor markets in these areas are
typically weak under normal circumstances and the closure of a major
employer in the area would intensify the problem.

On the brighter side, some new employment would be created in com-
munities where new plant construction is focused. To a large extent,
the new jobs plus re-employment in existing plants should offset the
losses in employment to a large extent. Still, however, the problem of
spatial employment dislocations would be present.

To the extent that new plants were moved to other production areas,
the plant closures would also impact employment in the other sectors
of the poultry industry. Since the industry is characterized by a high
level of vertical integration, contract growers in marginal production
areas would be faced with a loss of their production contracts and no
alternative markets for their output. Also, many of the growers could
not stay in business without the financial and technical assistance pro-
vided by the integrator. In some cases a hatchery, feed mill, etc. ,
might also be closed if the processing plant could not be maintained.
VII-33
-------
E. Community Effects
Since a high proportion of the industry's plants are located in small
communities (see Table 1-18, Chapter I), their closure would have a
noticeable impact on the community and its surrounding area. For
example, the closure of a medium plant in the young chicken sub-
segment would mean a reduction in production worker payroll of nearly
$1 million. That would not include the salaries of those workers falling
in the indirect labor class. By the time indirect labor is included, the
loss of a medium young chicken plant could reduce the total payroll of
a city of 25, 000 by nearly 2 percent (based on 8, 000 employed workers
earning $8, 000 each). For a town of 58 000 the figure would jump to 10
percent with a corresponding reduction in the economic base of the
community.

In addition to the direct loss of payrolls, the loss in purchases of util-
ities, transportation services, office supplies and other items by the
plant would be felt throughout the community. By the time second and
third round multiplier effects are considered (in the neighborhood of
2.5 times the direct payroll loss), the impact wo uld be overwhelming
to many small communities.
*
It is impossible to precisely determine the communities in which poultry
processing plants would close. However, as indicated, a high proportion
of these plants are in relatively small communities. Few communities
have more than one poultry processing plant and, therefore, we conclude
that the number of communities impacted will approximate the number
of plant closures.

F» Balance of Trade Effects
The poultry industry has been actively engaged in expandirig'exports of
processed poultry. To a certain extent these efforts have been re-
warding. Exports of broilers and turkeys totalled 93.8 and 49.7 million
pounds, respectively, in 1973. Exports are viewed as an opportunity
for added growth in the industry even though the import policies of
foreign countries have and no donbt will continue to provide a myriad
of difficult problems.

Since we have concluded that pollution abatement requirements will
not significantly impact total industry production or prices in the long
run, we must reach the same conclusion with regard to balance of trade.

VO-34
-------
VIII. LIMITS OF THE ANALYSIS
A. General Accuracy
The poultry meat processing industry is complex in terms of the number,
ownership and geographic distribution of firms as well as the sizes and
types of plants.

Detailed financial information concerned with investments, operating costs
and returns was not available for individual plants or firms. Asa result,
the financial aspects of the impact analysis were, of necessity, based on
synthesized costs and returns for "representative" types and sizes of
model plants. These costs and returns were developed from a variety
of sources including published research from universities and govern-
ment agencies, previous studies done by the contractor, information
obtained from operating firms in the industry, published financial per-
formance data and discussions with equipment manufacturers and other
knowledgeable individuals.

Published information from the Internal Revenue Service, Standard and
Poors, Dun and Bradstreet, Robert Morris Associates, and other sources
of data on financial ratios and financial performance were used as checks
on the reasonableness of results obtained in the financial analysis of
representative plants.

Throughout the study, an effort was made to evaluate the data and other
information used and to update these materials wherever possible.
Checks were made with informed sources in both industry and government
to help insure that data and information used were as reliable and as rep-
resentative as possible.

Water pollution control costs were furnished by EPA, Effluent Guidelines
Division and resulted from costs developed for EPA by North Star Research
Institute. These costs were developed for "typical" processing plants
as described in Chapter VI and Appendix A of this report. It was necessary
to adapt these costs to the types and sizes of model plants used in this
analysis. These data are critical to the impact analysis and introduce an
additional element of uncertainty and possible inaccuracy.

However, given the accuracy of the pollution control costs to be accept-
able, it is believed that the analysis represents a usefully accurate
evaluation of the economic impact of the proposed effluent guidelines on
the poultry meat processing industry.
VIII- 1
-------
B. Range of Error
Different data series and different sections of the analysis will have
different possible ranges of error.

JL E r r or s in Da. ta - Estimated data error ranges as an average for
the industry are as follows:

Error Rane
-1. Information regarding the organi-
zation and structure of the industry,
number, location and size of plants,
and other information descriptive of
industry segments + 10

2. Price information for products and
raw materials + 3

3. Cost information for plant invest-
ments and operating costs + 10

4. Financial information concerning the
industry + 10

5. Salvage values of plants and equipment j-_ 20

6. Effluent treatment costs
a. For a specific plant _ 50 to + 100
b. For the average overall plants + 25

2. Errors in Plant Closure Estimates - In Chapter VII, expected, plant
closure numbers were -presented. Based on the best information available
to the contractor, those numbers represent the most probable number of
closures. Given the above described error ranges in the supportive
data, it is very important to recognize that the closures presented in the
impact chapter are subject to similar error ranges. Closure numbers
under the best possible and worst possible conditions with respect to
supportive data errors are described below. However, it is believed
that the possibility of either of these extreme conditions prevailing
is highly unlikely.
VTII-2
-------
Best possible situation ; Under the best possible conditions, errors in
supportive data would be:

1. 10 Percent fewer plants would be direct discharges
2. 10 Percent fewer plants would be small
3. Profits would be 25 percent higher than those used in
the analysis
4. Plant salvage values would be 20 percent lower than those
used in the analysis
5. Estimated effluent treatment costs would be too high by
25 percent
6. Capital availability would not be a determining factor
-7. Cost of capital would be 8 percent rather than 10 percent

Under the best possible conditions, plant closures would probably be
reduced by 50 - 75 percent.

If this best possible situation were coupled with the ability of large plants
to recover pollution abatement costs via increased product prices, plant
closures would be reduced by 75-100 percent.

Worst possible situation: Under the worst possible conditions, errors
in the supportive data would be:

1. 10 Percent more plants would be direct discharges
2. 10 Percent more plants would be small
3. Profits would be 25 percent lower than those used in
the analysis
4. Plant salvage values would be 20 percent higher than
those used in the analysis
5. Effluent treatment costs would be too low by 25 percent
6. Capital would not be available to finance effluent treatment
investment costs unless net present value of future earn-
ings less costs (including treatment costs) exceeds 10 .
percent of the plant salvage value (prior to installation
of BPT and BAT treatment systems)
7. Cost of capital would be 12 percent instead of 10 percent

Under these worst possible conditions, we would feel BPT closures
would fall about half way between the BPT and BAT closures presented
in Chapter VII while BAT closures would be increased by a factor of 2. 5
to 2.75.
VIII-3
-------
C. Critical Assumptions
The complex of types and sizes of poultry meat processing plants,
processes involved and effluent control levels and systems proposed
to meet these levels, all required the making of a series of assumptions
required to keep the analysis within manageable limits and to specify
"representative" situations which would permit estimation of industry-
wide impacts. These assumptions fall into seven general areas:

!„ Assumptions regarding industry structure
2. Assumptions concerning raw material and product prices
3. Assumptions concerning "representative" model plants
4. Assumptions concerning water pollution control costs
5. Assumptions concerning wastewater treatment costs for
plants connected to municipal sewers
6. Assumptions concerning the salvage value of plants and
equipment
7. Assumptions concerning "shutdown" decisions
1. Industry struct\ir_e_ ~ The poultry processing industry is both large
and complex in its organization. A critical factor affecting the analysis
is the number and size of plants. Data are not available on volume of
slaughter in non-Fede rally inspected plants. It was assumed that all
of these non-Fede rally inspected plants would fall into Ihe small category.
It is believed that, with few exceptions, this assumption is correct.
The assumed number of plants in the further processing segment cannot
be verified with published data.

'L» Price as sumptions^ - Where possible prices were based on pub-
lished prices, from U.S.D.A. As a result, it is believed that the
price series used are generally applicable to the types of plants and
products used in the analysis.

3. "Representative" model plants - No single plant is "representative"
of the complex of types and sizes of plants which constitute the poultry
processing industry. Model plants were constructed to represent median
conditions as closely as possible given the available data. Where practical,
alternative plant sizes were modeled to reflect economies of scale in
effluent treatment as well as processing operations.

It is recognized that this classification of plants does not approach the
variety of types and sizes of plants which exist in this industry. In
VIII-4
-------
reality, each plant is individually engineered and equipped to meet the
requirements of a particular site and location. In addition, the product
mix will vary from plant to plant and from time to time within a given
plant.

The need to classify plants into a manageable number of types and sizes
constitutes a limiting, but necessary assumption.

4. Water pollution control costs - Data on water pollution control costs
were supplied to DPRA by the Effluent Guidelines Division of EPA and
North Star Research Institute. Critical assumptions regarding the
applicability of these water pollution control costs include the following:

a. Their segmentation of the industry according to effluent
characteristics permits an adequate classification of the
industry for the purpose of differentiating economic
impacts of water pollution control costs.

b. EPA presented the costs of effluent control as incremental
costs. It is assumed that the baseline treatment configu-
ration is representative of current industry treatment
practices.
*

c. Wastewater treatment costs, as provided by EPA, were
not consistent with our model plants. It was necessary to
develop basic wastewater flow/cost relationships for the
proposed guidelines and standards. This required the use
of background data to develop the relevant cost curves.
Information from EPA and North Star indicated that the
capacity-cost relationships would be the same regardless
of the type of plant considered. Cost curves were devel-
oped and estimates of investment and annual costs were
made for the model plants defined in this report. It is
assumed that the resultant cost estimates are represen-
tative.

d. Lacking background information regarding effluent control
technologies specifically included in the control cost esti-
mates for each type of plant and control level, DPRA has
used the effluent control costs supplied by EPA and adjusted
these costs (where necessary) insofar as possible to the
types and sizes of plants analyzed in this report.

e. The costs provided by North Star and EPA do not provide
for effluent monitoring. If monitoring is required, it is

VIII-5
-------
assumed that the incremental impact associated with the added costs
will >rv: minimal.

5. MunicipalLwaslewater treatment charges - Since well over half of
the industry is served by publicly owned wastewater treatment systems,
an assumption concerning wastewater treatment costs for plants dis-
charging into municipal sewers was both necessary and critical in the
analysis. In the absence of definitive data concerning current aad
future municipal wastewater treatment charges, and at EPA's suggestion, it was
assumed that municipal charges will remain at current levels and that
those charges are roughly equivalent to private baseline treatment costs.

6. Salvage values^- Salvage values of buildings, equipment and land
will vary greatly from one location to another and with the type and
condition of structures and equipment.

In order to avoid analytical problems which would be inherent in attempting
to establish differential salvage values, a set of "standard" assumptions
concerning salvage values was developed:

a. Land was salvaged at current value
b. Buildings and equipment were Salvaged at a net amount
equivalent to 20 and 10 percent of their 1972 replacement
values, respectively
c. Net operating capital was recovered intact
7. "Shutdown" decisions - The general purpose of the "shutdown"
methodology is to examine profitability of the model plants before and
after the imposition of effluent limitation guidelines, to determine the
probability of forced closures which would result and to calculate
the price changes required to cover the added effluent control costs.

The methodology required assumptions relative to numerous factors.
These assumptions are described in detail in Chapter V and, in some
cases, Chapter VII of this report. Assumptions used, while arbitrary,
were made in accordance with estimates of conditions prevailing
in the poultry meat processing industry.
VIII-6
-------
BIBLIOGRAPHY
-------
BIBLIOGRAPHY
1. The Chicken Broiler Industry: Structure, Practices and Costs,
U.S.D.A. , E.R.S., Marketing Research Report 938.

2. The Turkey Industry: Structure, Practices and Costs. U.S.D.A.,
E. R. S. , Marketing Research Report No. 1000.

3. Poultry and Egg Situation, U.S.D.A., E.R.S.

4. Costs and Economics of Scale in Turkey Processing Plants,
.U.S.D.A., E.R.S., Marketing Research Report No. 1027.

5. Developments in Marketing Spreads for Agricultural Products
in 1973, U.S.D.A., E. R. S. , 1974.

6. Labor Efficiency in Broiler Processing Plants in the South,
Southern Cooperative Series Bulletin No. 112, January 1966.

7. Kerns, Wallace R. , and Frederick J. Holemo, Cost of Waste Water
Pollution Abatement in Poultry Processing and Rendering Plants in
Georgia, College of Agriculture, Department of Agricultural
Economics, University of Georgia, Athens, Georgia., 1973.

8. Fabor, Fred J. and William Gallimore, Changes in Firm and
Plant size in Broiler and Turkey Processing, Poultry and Egg
Situation, PES-259, November 1969.

9. Costs, Margins, and Projected Consumption of Turkey Rolls
and Roasts, U.S.D.A., E.R.S. , 1974.

10. Rogers, George B. , and Harold D. Smith, Further Processing
Industry and Impact of Economics of Scale in Poultry Plants,
Agricultural Experiment Station, University of Maryland, December
1966.

11. The Poultry Processing Industry: A Study of the Impact of Water
Pollution Control Costs, U.S.D.A., E.R.S., June, 1972.

12. P. S. George and G. A. King; Consumer Demand for Food Commodities
in the United States With Projections for 1980, Giannini Foundation,
1971 Monograph Number 26, Division of Agricultural Sciences,
University of California.

13. Department of Commerce, The Effects of Pollution Abatement
on International Trade, 1973.
-------
14. M. L. David, R, E, Seltzer, W. D. Eckhoff, Economic Analysis
of Proposed Effluent Guidelines Feedlots Industry, Office of
Planning and Evaluation, U.S. Environmental Protection Agency,
1973.

15. U. S. Agricultural Trade Outlook Foreign Agricultural Service,
U.S. Department of Agriculture - various issues.

16. G. L. Seevers, Before the National Agricultural Outlook Conference,
General Economic Outlook, Council of Economic Advisers,
Executive Office of the President, 1974.

17. W. E. Simon, Before the Agricultural Outlook Conference, Fuel
and the needs of Agriculture, Public Affairs, Federal Energy
Office, 1974.

18. E. M. Ojala, World Food Security, Economic and Social Policy
Department, 1974.

19 C. G. Brunthauer, Forecast for the Future,Office of the Secretary,
U. S. Department of Agriculture, 1974.

20. P. T. Allen, Agricultural Finance Outlook, 1974.

21. Eggs, Chickens, and Turkeys, Crop reporting Board, Statistical
Reporting Service, U.S. Department of Agriculture, various issues.

22. Hatchery Production, Crop Reporting Board, Statistical Reporting
Service, U. S. Department of Agriculture, various issues.

23. Marketing and Transportation Situation Economic Research Service,
U. S. Department of Agriculutre.

24. Poultry Meat,Watt Publishing Company, Mount Morris, Illinois -
various issues.

25. Conversion Factors and Weights and Measures for Agricultural
Commodities and Their Products, Econoinic Research Service,
U.S. Department of Agriculture.

26. Enterprise Statistics 1967 Part 1, and Part 3. Bureau of the
Census, Social and Economic Statistics Administration, U.S.
Department of Commerce.

27. Census of Manufactures, 1967, Vol. 1, Vol. 2, Vol. 3, Bureau
of the Census, U.S. Department of Commerce.
-------
28. Feedstuffs, Miller Publishing Company, Minneapolis, Minnesota -
various issues.

29. Prices and Price Spreads for Eggs, Frying Chickens, and Turkeys
in 12 Major cities 1966-1971, Economic Research Service, U.S.
Department of Agriculture.

30. Business Income Tax Returns 1970 Internal Revenue Service, Depart-
ment of the Treasury.

31. Who's Who in the Egg and Poultry Industries 1973-74, Watt
Publishing Company, Mount Morris, Illinois.

32. Poultry and Egg Statistics Through 1972, Economic Research
Service, U.S. Department of Agriculture.

33. Annual Statement Studies 1973, Robert Morris Associates.

34. Census of Manufactures, 1972. Preliminary Report Bureau of
Census, Social & Economic Statistics Administration, U.S.
Department of Commerce.

35. R. W. Schermerhorn, Feasibility of Broiler Operations in
Oklahoma, Oklahoma State University.

36. Changes in Turkey Contracting, Agricultural Experiment Station,
University of Missouri.

37. K. E. Wing, W. C. Geiss Jr. , Estimated Cash Flows and Profit-
ability of Maine Broiler Farms, Life Sciences and Agriculture
Experiment Station, University of Main at Orono.

38. Contract Production of Turkeys, Agricultural Experiement Station
University of Missouri.

39. R. K. Noles and M. Y. Dendy, Broiler Production In Georgia;
Growers Cost and Returns, College of Agriculture, Experiment
Stations, University of Georgia.

40. E. P. Roy, Relationships of Selected Broiler Production and
Marketing Factors to Contract Broiler Grower's Operations,
Department of Agricultural Economics and Agribusiness,
Louisiana State University.

41. W. E. Cathcart, Outlook for Poultry and Eggs, Economic Research
Service, U. S. Department of Agriculture.
-------
42. Census of Agriculture - Poultry 1969 Vol. 5, Part 7, Bureau of
the Census, Social and Economic Statistics Administration, U.S.
Department of Commerce.

43. Turkey World - various issues.

44. Some Factors Affecting Turkey Growers Attitude Toward the
Proposed Turkey Marketing Order, College of Agriculture,
University of Missouri.

45. Livestock and Poultry Inventory, Crop Reporting Board, Statistical
Reporting Service, U. S. Department of Agriculture.

46. Livestock and Poultry 1965-1972. Iowa County Estimates, Iowa
Crop and Livestock Reporting Service, Iowa Department 01
Agriculture, Division of Agricultural Statistics.

47. Market Structure of the Food Industries, Marketing Research
Report, No. 971, Economic Research Service, U. S. Department
of Agriculture.

48. Improved Layout for a Fowl Processing Plant, Marketing Research
Report No. 973, Agricultural Research Service, U. S. Department
of Agriculuute.

49. Troy, Almanac of Business and Industrial Financial Ratios -
various issues.

50. O'Mara, G. K. , and Analysis of Alternative Forecast Models
for Predicting Monthly Prices and Prod u£tion for the Broiler
Industry, M. S. Thesis, N. C. State University, 1970.

51. National Commission on Food Marketing, Organization and
Competition in the Poultry and'Egg industries, Tech. Study
No. 2, June, 1966.

52. Wall Street Journal, July 7, 1974.

53. Lancaster Farming, Campbell Publishing Co. , Lititz, Penn. ,
various issues.

54. Reid, R. J. , et al. , Draft Development Document for Effluent
Limitations Guidelines and Standards of Performance for the
Poultry Processing Industry, prepared for the U. S. Environ-
mental Protection Agency by North Star Research Institute, May, 1974.
55. Pollution Control Costs and Research Priorities in the Animal Slaugh-
tering and Processing Industries, Sub-council Report, June 1973,
National Industrial Pollution Control Council.
-------
APPENDIX A
Cost of Effluent Treatment Data Provided by the
Environmental Protection Agency
-------
Appendix A
The data presented in Appendix Tables A-l through A-3 were provideo
by the Environmental Protection Agency for use in this report. The
do(a represent a portion of a comprehensive draft report prepared
for EPA by the North Star Research Institute. !/ Appendix Table A -4
was provided by North Star Research Institute in clarification of
investment requirements for the irrigation treatment strategy.
J.' Reid, R. J. , et al. , Draft Development Document for _Effluent _L:m: ta
tions Guidelines and Standards of Performance for the Poultry Pro-
cessing Industry, Prepared by North Star Research Institute for
the United States Environmental Protection Agency under Contract
Number 68-01-0593, May, 1974.
-------
Appendix Table A-l. Typical Plant Operating Parameters Used for Estimating
Cost of Meeting Effluent Limitations
Plant Type
Chicken
Small
Medium
Large
Turkey
Fowl
Small
Large
Duck
Small
Large
Further Processing .Only
Small
Large
Production
Birds/Day

51,000
95,000
207,000
12,000

26,400
65,000

3,000
12,000
kg (Ib) FP/Day
21,000 (47,000)
77,000 (170,000)
Waste Water Volume
MM liters/day

1.794
3.38
7.80
1.30

0.964
2.37
-
0.272
1.10

0.265
0.965
MGD

0.474
0.893
2.05
0.342

0.255
0.627

0.072
0.288

0.070
0.255
-------
Appendix Table A~2,
Additional Investment Cost for "Typical" Plants in Each
Subcategory to Implement Each Indicated Level of Treat-
ment, No Previous Expenditure Included I/
Plant Type
Chicken
Small
Medium
Large
Turkey
Fowl
Small
Large
Duck
Small
Large
Further Processing Only
Small
Large
Total Industry Cost
1977
Limitations

$ 137,000
172,000
244,000
126,000

119,000
154,000

89,000
124,000

88,000
119,000
i
1983
Limitations

$ 171,200
217, 000
357,000
146, 000

138,000
183, 000

104, 000
142,000

102, 000
138, 000
$13,874,000 $![-, 568, 000
! _J
New Source
Standards

$470,000
640,000
950,000
400,000

364,000
539,000

227,000
385,000

225,000
364,000
—
Irrigation

$183,000
323,000
687,000
138,000

105,000
235,000

35,000
118,000

34,000
105,000
—
Costs include land where needed.
-------
Appendix Table A-3. Addition to the Total Annual Cost and Operating"" Cost for a Pl.'int
in Each Subcatcgory io Operate Treatment System as Described
Plant Type
Chicken
Small
Medium
Large
Turkey
Fowl
Small
Large
Duck
Small
Large
Further Processing
Only
Small
Large
1977
Operating

$22,450
26,800
35,200
20,700

19,800
24,600

16,450
20,000

16,400
19,800
Annual

S49.850
61,200
84,000
45,900

43,600
55,400'

34,250
44,800

34,000
43,600
1983
Operating

$ 42, 390
57, 060
96,840
36,540

33,600
47,500

25, 116
66,876

24,930
33,540
Annual

$104,030
155,626
217,000
91,020

85, 080
114, 940

63,636
119,996

63,010
85, 02C
New Source
Operating

$54,000
67,100
90,400
48,300

•45,400
59,700

35,300
46,400

35,100
45,400
Annual

?148,000
195,100
280,400
128,300

118,200
167,500

80,700
123,400

80,100
118,200
Irr igat ion
Opera i ins

$29,800
35,000
46,000
27,700

26,250
32,000

22,900
26,600

22,900
26,200
Annual

$66,400
99,600
183,400
55,300

47,250
79,000

29,900
50,200

29,700
47,200
*Total annual cost includes operating cost plus capital cost and depreciation in dollars per
Total operating cost includes manpower and burden, supplies, chemicals, power, taxes, and
insurance in dollars per year.
year.
-------
Appendix Table A-4. Land required for using irrigation as a
treatment strategy
Plant type
Chicken
Small
Medium
Large
Turkey
Fowl
Small
Large
Duck
Small
Large
Further processing only
Small
Large

Acres
83.0
155.0
357.0
60.0
44.0
109.0
12.5
50.0
12.5
44.0
Land required
Investment cost
$ 83,000
155,000
357,000
60,000
44,000
109,000
12, 500
50,000
12,500
44,000
Source: Telephone discussion with R. J. Reid, North Star Research
Ins titute, Mi nneapo li s, Miime s o ta.
-------
APPENDIX B
Calculations of Cash Flows Used In Discounted
Cash Flow (DCF) Analysis
-------
APPENDIX B
The tables contained in this appendix present the data utilized to obtain
the model plant net present values reported in Chapter VII of this report.
Tables B-1 through B-3 report the baseline cash flows while the remaining
tables present the incremental cash outflow resulting from proposed
effluent limitation guidelines and standards. As explained below, the data
differ from accounting cash flows as presented in Chapter III and, hence,
have been referenced as DCF cash flows to avoid possible confusion.

The DCF cash flows differ from accounting cash flows in two respects:
(1) before tax profit and income taxes are calculated without regard to
interest expenses (i. e. any interest expense in the profit and loss statement
is deleted prior to calculating net profit) and (2) a reinvestment allowance
equalling 66 percent of depreciation is subtracted from the cash flow. The
first step is necessary to conform with the after tax cost of capital figure
used as the discount factor. In other words, the discount factor already
reflects both interest charges and the income tax effects of those charges.
To include interest explicitly in the cash flows would, therefore, result
in double accounting. The reinvestment allowance is provided to reflect
repayment of long term debt and/or replacement of worn out equipment.
The allowance is intended to allow only for maintenance of the current pro-
ductivity/efficiency level and falls considerably below the industry's current
reinvestment of nearly 200 percent of depreciation.

All model plants were treated as single unit corporate entities with respect
to income tax calculations. Hence, taxes were calculated as 22 percent of
the first $25, 000 profit and 48 percent thereafter.
-------
Appendix Table B-1.
Annual baseline DCF cash flow for
model chicken plants

1.
2.
3.
4.
5.
6.
7.

Before tax profit
Interest
Adjusted before tax
profit (1 + 2)
Taxes (on 3 above)
Adjusted after -tax
profit
Depreciation
Reinvestment
Small

76
21
97
40
57
42
28
Medium
,_ ,
-------
Appendix Table B-2. Annual baseline DCF cash flow for
model turkey plants

1.
2.
3.
4.
5.
6.
7.
8.

Before tax profit
Interest
Adjusted before tax
profit
Taxes
Adjusted after tax
profit
Depreciation
Reinvestment (66% of 6)
Baseline DCF (5+6-7)
Small

103
20
123
53
70
67
44
93
Medium
.-__$! 000----

293
40
333
153
180
99
65
214
Large

582
67
649
305
344
127
84
387
-------
Appendix Table B-3. Annual baseline DCF cash flow for model
duck, fowl and further processing plants

1.
2.
3.
4.
5.
6.
7.
8.

Before tax profits
Int e r e st
Adjusted before tax
profit
Taxes
Adjusted after tax
profit
Depreciation
Reinvestment (66% of 6)
Baseline DCF (5 + 6-7)
Ducks

166
39
205
92
113
81
53
141
Fowl

130
25
155
68
87
59
39
107
Further processing

233
40
273
125
148
93
61
180
-------
Appendix Table B-4. Incremental BPT DCF cash flow for model
chicken plants

3.
4.
5.

8.
9.

Tax on baseline
DCF cash flow
Baseline before tax
profit
BPT operating cost
BPT depreciation
BPT before tax
profit (2-3-4)
Tax on BPT DCF
cash flow
BPT after tax
profit (5-6)
Tax reduction (1-6)
Reinvestment (66% of
Small

97
19
11

41
14
4) 7
Medium
($1,000)

111

245
22
14

209

115
17
9
Large

191

411
25
16

370

171

199
20
11
Very
Large

291

619
28
18

573

269

304
22
12
10. BPT Incremental DCF
• . cash flow (8-3-9) -12
-14
-16
-17
-------
Appendix Table B-5. Incremental BPT DCF cash flow for model
turkey plants
Small
Medium
Large
($1,000)
1. Tax on baseline DCF
cash flow 53

2. Baseline before tax profit 123

3. BPT operating cost 19

4. BPT depreciation
(10% invest.) 11

5. BPT before tax profit
(2-3-4) 93

6. Tax on BPT DCF
cash flow 38

7. BPT after tax profit (5-6) 55

8. Tax reduction (1-6) 15

9. Reinvestment (66% of 4) 7

10. BPT incremental DCF
cash flow (8-3-9) -11
153

333

298

137

161

-15
305

649

608

285

323

-16
-------
Appendix Table B-6. Incremental BPT DCF cash flow for model
fowl and duck plants

1.
2.
3.
4.
5.
6.
7.
8.
9-

Tax on baseline DCF cash flow
Baseline before tax profit
BPT operating cost
BPT depreciation (10% of invest.)
BPT before tax profit (2-3-4)
Tax on BPT DCF cash flow
BPT after tax profit (5-6)
Tax reduction (1-6)
Reinvestment (66% of 4)
Fowl
68
155
21
13
121
52
69
16
9
Ducks
92
205
20
12
173
77
96
15
8
10. BPT incremental DCF cash flow
(8-3-9) -14 -13
-------
Appendix Table B-7. Incremental BPT, DCF cash flow for model
further processing plants
Further Processing
($1,000)
1. Tax on baseline DCF cash flow 125

2. Baseline before tax profit 273

3. BPT operating cost 17

4. BPT depreciation (10% of investment) 9

5. BPT before tax profit (2-3-4) 247

6. Tax on BPT DCF cash flow 112

7. BPT after tax profit (5-6) 135

8. Tax reduction (1-6) 13

9. Reinvestment (66% of 4} 6

10. BPT incremental DCF cash flow (8-3-9) -10
-------
Appendix Table B-8. Incremental BAT DCF cash flow for model
chicken plants

Tax on BPT DCF
cash flow
BPT before tax
profit
BAT operating cost

Small

67
32

Medium
($1,000)

209
41

Large

171

370
52
Very
Large

269

573
63
4. BAT depreciation
(10% invest.) 13

5. BAT before tax
profit (2-3-4) 22

6. Tax on BAT DCF
cash flow 5

7. BAT after tax
profit (5-6) 17

8. Tax reduction (1-6) 21

9« Reinvestment
(66% of 4) 9

10. .BAT incremental DCF
cash flow (8-3-9) -20
16

152

-24
20

298

137

161

-31
25

485

226

259

-37
-------
Appendix Table B-9. Incremental BAT DCF cash flow for model
turkey plants

1.
2.
3.
4.
5.
6.
7.
8.
9.
LO.
-
Tax on BPT DCF cash flow
BPT before tax profit
BAT operating cost
BAT depreciation
(10% invest.)
BAT before tax profit
(2-3-4)
Tax on BAT DCF cash flow
BAT after tax profit (5-6)
Tax reduction (1-6)
Reinvestment (66% of 4)
BAT incremental DCF
Small

38
93
31
12
50
18
32
20
8
-19
Medium
($1,000)
137
298
4C
16
242
110
132
27
11
-24
Large

285
608
BO
20
538
252
286
33
13
-30
cash flow (8-3-9)
-------
Appendix Table B-10. Incremental BAT DCF cash flow for model
duck and fowl plants

1.
2,
3.
4.
5.
6.
7.
8.
9.

Tax on BPT DCF cash flow
BPT before tax profit
BAT operating cost
BAT depreciation (10% of invest.)
BAT before tax profit (2-3-4)
Tax on BAT DCF cash flow
BAT after tax profit (5-6)
Tax reduction (1 -6) \
Reinvestment (66% of 4)
Ducks

77
173
34
14
125
54
71
23
9
Fowl
($1,000)
52
121
38
15
68
26
42
26
10
10. BAT incremental DCF cash flow
(8-3-9) -20 -22
-------
Appendix Table B- 1 1. Incremental BAT, DCF cash flow for model

further processing plants
Further Processing

($1, OOP)

1. Tax on BPT DCF cash flow 112

2. BPT before tax profit 247

3. BAT operating cost 26

4. BAT depreciation (10% of investment) 10

5. BAT before tax profit (2-3-4) 211

6. Tax on BAT DCF cash flow 95

7. BAT after tax profit (5-6) 116

8. Tax reduction (1-6) 17
«

9. Reinvestment (66% of 4) 7

10. BAT incremental DCF cash flow (8-3-9) ~16
-------
Appendix Table B- 12. Incremental irrigation DCF cash flow for
model chicken plants

3.
4.
5.
6.
Small

Tax on baseline DCF
cash flow 40
Baseline before tax
profit 97
Irrigation operating
cost 25
Irrigation deprecia-
tion (10% invest.) 5
Irrigation before tax
profit (2-3-4) 67
Tax on irrigation
DCF cash flow 26
Medium

111

245
29
10
206
92
Large

191

411
33
15
363
168
Very
Large

291

619
37
19
563
264
7. Irrigation after
tax profit (5-6) 41 114 195 299
8. Tax reduction (1-6) 14 19 23
27
.9' Reinvestment
(66% of 4) -3 7 10 13

10. Irrigation incremental
DCF cash flow (8-3-9) -14 -17 -20 -23
-------
Appendix Table B-13. Incremental irrigation DCF cash flow for
model turkey plants
Small
Medium
-$1,000-
Large
1. Tax on baseline DCF
cash flow 53

2. Baseline before tax
profit 123

3. Irrigation operating cost 25

4. Irrigation depreciation
(10% invest. ) 4

5. Irrigation before tax
profit (2-3-4) 94

6. Tax on irrigation DCF
cash flow 3S

7. Irrigation after tax
profit (5-6) 55

8. Tax reduction (1-6) 14

9- Reinvestment (66% of 4) 3

10.- Irrigation Incremental
DCF cash flow (8-3-9) -14
153

333

39
295

135

160

-17
305

649

602

282

320

-19
-------
Appendix Table B- 14. Incremental irrigation DCF cash flow for
model duck and fowl plants

1.
2.
3.
4.
5.
6.
7.
8.
9-

Tax on baseline DCF cash flow
Baseline before tax profit
Irrigation operating cost
Irrigation depreciation (10% of invest. )
Irrigation before tax profit (2-3-4)
Tax on irrigation DCF cash flow
Irrigation after tax profit (5-6)
Tax reduction (1-6)
Reinvestment (66% of 4)
Fowl
($1,000)
68
155
28
8
119
51
68
17
5
Ducks

92
205
26
6
173
77
96
15
4
10. Irrigation incremental DCF cash
flow (8-3-9) -16 -15
-------
Appendix Table B - 15. Incremental irrigation DCF cash flow for model
further processing plants
Further Processing
($1, 000)
1. Tax on baseline DCF cash flow 125

2. Baseline before tax profit 273

3. Irrigation operating cost 23

4. Irrigation depreciation (10% of investment) 2

5. Irrigation before tax profit (2-3-4) 248

6. Tax on irrigation DCF cash flow 113

7. Irrgation after tax profit (5-6) 135

8. Tax reduction (1-6) 12

9. Reinvestment (66% of 4) 2

10. Irrigation incremental DCF cash flow (8-3-9) -13
-------
Appendix Table B-16. Incremental NSPS DCF cash flow for model
chicken plants

3.
4.

Tax on baseline DCF
cash flow
Baseline before tax
profit
NSPS operating cost
NSPS depreciation
(10% invest. )
NSPS before tax
profit (2-3-4)
Tax on NSPS DCF
cash flow
NSPS after tax profit
(5-6)
Tax reduction (1-6)
Small

97
43

16
36
Medium
($1,000)

111

245
53

145

82
48
Large

191

411
62

291

133

158
58
Very
Large

291

619
71

479

223

256
68
9- Reinvestment
(66% of 4) 22

10. NSPS incremental DCF
cash flow (8-3-9) -29
31
-36
38
-42
46
-49
-------
Appendix Table B-17. Incremental NSPS DCF cash flow for model
turkey plants
Small
Medium
Large
($1,000)
1. Tax on baseline DCF
cash flow 53

2. Baseline before tax profit 123

3. NSPS operating cost 42

4. NSPS depreciation
(10% invest.) 33

5. NSPS before tax
profit (2-3-4) 48

6. Tax on NSPS DCF
cash flow 17

7. NSPS after tax profit
(5-6) 31

8. Tax reduction (1-6) 36

9. Reinvestment (66% of 4) 22

10. NSPS incremental DCF
cash flow (8-3-9) -28
153

333

237

107

130

-35
305

649

532

249

283

-42
-------
Appendix Table B-18. Incremental NSPS DCF cash flow for model
duck and fowl plants

1.
2.
3.
4.
5.
6.
7.
8.
9-
-
Tax on baseline DCF cash flow
Baseline before tax profit
NSPS operating cost
NSPS depreciation (10% of invest.)
NSPS before tax profit (2-3-4)
Tax on NSPS DCF cash flow
NSPS after tax profit (5-6)
Tax reduction (1-6)
Reinvestment (66% of 4)
Ducks
($1,000)
92
205
45
37
123
53
70
39
24
Fowl

68
155
50
43
62
23
39
45
28
10. NSPS incremental DCF cash flow
(8-3-9) -30 -33
-------
Appendix Table B- 19. Incremental NSPS, DCF cash flow for model
further processing plants
Further Processing
($1,000)

1. Tax on baseline DCF cash flow 125

2. Baseline before tax profit 273

3. NSPS operating cost 36

4. NSPS depreciation (10% of investment) 24

5. NSPS before tax profit (2-3-4) 213

6. Tax on NSPS DCF cash flow 96

7. NSPS after tax profit (5-6) 117

8. Tax reduction (1-6) • . 29

9. Reinvestment (66% of 4) 16

10. NSPS incremental DCF cash flow (8-3-9) -23
-------