-------
IPP = index of pesticide prices, and
IPC = index of pesticide costs (see Table 2-2).
The statistics accompanying equation (2) demonstrate that there is a
close relationship between prices and costs. The R2 is 0.989 and shows
that 98.9 percent of the variation in price is associated with variation in
cost. Equation (2) is linear in logarithms, which implies that the esti-
mated coefficients can be interpreted as elasticities. The coefficient of
the cost variable thus implies that a 10 percent rise in pesticide costs
will cause a 11.5 percent rise in pesticide prices. The finding that prices
have risen faster than costs suggests that pesticide producers have been
able to increase profit margins on average over the 1967-1978 period. The
t-statistic of 13.27 indicates that the coefficient of the cost variable is
highly significant. However, the standard error of the cost index coef-
ficient is too large (0.086) to reject the hypo- thesis that the true value
of the coefficient is 1.0.Therefore, we cannot necessarily accept the
implication that prices are rising more rapidly than costs.*
Equation (2) can be criticized for excluding other forces that have a
direct bearing on price. For example, changes in the number of patented
products and changes in the product mix can both affect price. Patents
allow firms to obtain higher prices and hence profits on such products.
Changing the product mix may change both the processes used (and hence the
input cost coefficients) and the profitability of the products. Because
of data limitations, a trend variable (TIME) was selected to approximate
these other forces. The revised equation is presented below:
In IPP = -0.406 + 0.989 In IPC + 0.250 In TIME (3)
(-0.750) (4.821) (0.854)
R2 = 0.990
DW = 1.369
Estimation period: 1967-1978
Estimation technique: OLS with Cochrane-Orcutt
The t-statistic of the trend variable indicates that it is insignificant.
Nevertheless, it is worth examining equation (3). The coefficient attached
to the cost variable has decreased to 0.989. Alone, this coefficient implies
that the pesticide producers pass the cost increases along to the consumer
but do not increase profit margins. (Since the standard error is .205, this
estimate is not significantly different from 1.0.) However, the actual re-
lationship between changes in cost and changes in price depends on what is
imbedded in the trend variable (TIME).
*In addition, equation (2) only shows a relationship of cost and price
indices, not of cost shares. Costs may increase for a variety of reasons
other than price increases, including added regulatory costs, or changes
in the mix or quality of pesticides produced. Therefore, equation (2) is
only a rough indicator of profitability.
2-5
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To the extent that costs have been increasing over time, profit margins
may have been maintained, holding constant for product mix.
Equations (2) and (3) indicate that the elasticity of price with respect
to cost is roughly 1.0. An elasticity of 1.0 is consistent with a mark-up
model of pricing behavior: each percentage increase in costs is accompanied
by the same percentage increase in price. Thus, profits as a percent of
costs remain constant. Although profits may fluctuate in the short run due
to imbalances in supply and demand, they can be expected to even out over
time. In the long-run, all costs are passed through as higher prices, which
is consistent with the elasticity of price to cost of 1.0.
1985 Price Forecasts. Based on the above results, baseline estimates
of 1985 pesticide prices are made using the assumption that all costs are
passed through and that profit remains a constant fraction of price. This
is because all plants in the industry are assumed to face similar increases
in production costs. The 1985 baseline value of each cost component re-
presented in equation (1) is based on assumptions and energy price pro-
jections issued by the U.S. Department of Energy and chemical price pro-
jections by Data Resources Inc. The cost mark-up model derived from 1978
data was used to estimate baseline pesticide chemical prices in 1985.
In addition to a price for the entire industry, price forecasts are made
for the three major groups of pesticides: herbicides, insecticides and
fungicides.
As noted previously, two assumptions are made about increases from the
1985 baseline price due to treatment costs which reflect the fact that only
a fraction of all plants incur added treatment costs. In Case A, average
treatment costs per pound (including plants with no treatment costs) are
added to the baseline price to obtain the post-impact price. Profit mar-
gins are not assumed to increase proportionately; they remain unchanged
from the baseline. In Case B, prices are not assumed to increase. Price
increases are projected for all pesticides and for insecticides, herbi-
cides, and fungicides for each treatment option.
Demand-Production Submodel
Continuing increases in the profitability of pesticide application and a
growing awareness in the farm community of the existence of these benefits
have caused a rapid rise in pesticide demand over the last 20 years. There
are signs, however, that the industry is approaching maturity, with some
markets completely saturated and others not far from it. This impending
maturity makes it dangerous to forecast future pesticide demand by extrapo-
lating from past trends, since it is unlikely that the industry will be able
to sustain similar high growth rates in the future.
Unfortunately, data on pesticide usage by market are available only
for selected years, thus precluding a disaggregated econometric analysis.
2-6
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Consequently, a hybrid approach developed by A. D. Little, Inc.2 was
used for forecasting pesticide demand. First, an end-use model is used to
project pesticide demand by subgroup based on constant application rates.
The end-use projections are then adjusted to reflect increases in the real
price of pesticides, using an econometrically-derived price elasticity.
In the end-use analysis, herbicide sales are projected for the
following subgroups: (1) corn, (2) soybeans, (3) wheat, (4) cotton, (5)
sorghum, (6) other agricultural uses, (7) non-agricultural and (8) exports.
Insecticide sales are projected for the following subgroups:
(1) cotton, (2) corn, (3) soybeans, (4) wheat, (5) livestock, (6) other
agricultural uses, (7) non-agricultural uses, and (8) exports.
Fungicide sales are projected for the following subgroups: (1) fruits
and vegetables, (2) peanuts, (3) other agricultural uses, (4) non-agri-
cultural uses, and (5) exports.
The approach used to model agricultural usage of pesticides is
generally the same for each market subgroup and is described by the
following identity:
= ACRi x FRACTi X APPLi (4)
where:
= pesticide usage on crop i,
AC% « acreage of crop i planted,
= fraction of acreage of crop i treated with pesticides, and
= pesticide usage per acre for crop i.
Various U.S. Department of Agriculture (USDA) publications provide
1971 and 1976 values for the right-hand variables in equation (4) . The
1985 forecasts of acreage were obtained from the highly detailed National
Inter-Regional Agricultural Projection (NIRAP) model maintained by the
USDA. Projections of the other two variables were developed by Arthur D.
Little Inc.2 pesticide market experts. See Section 5, Tables 5-3 to
5-5, for the forecasts.
Published data on non-agricultural pesticide use are not available.
Imputed values for non-agricultural use were calculated for 1971 and 1976 by
comparing the USDA survey data on agricultural pesticide use with data on
aggregate pesticide production, exports, and imports. 5, 6 (The imputed
non-agricultural values were extremely high; USDA officials indicated that
this was so because the agricultural pesticide usage numbers were under-
stated.) The 1971 and 1976 imputed non-agricultural values are very close,
indicating a stagnating demand that will persist through 1985.
The United States has traditionally been a large exporter of
pesticides, while imports have been insignificant. Trend equations were
2-7
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used to generate initial 1985 forecasts for net exports which were then
modified to reflect institutional factors.
The end-use model described above implicitly assumes that pesticide
demand is not affected by price. Such an assumption is unwarranted as
previous econometric research by Carlson and others has demonstrated.7
In reaction to higher real pesticide prices, farmers are more likely to
adopt integrated pest-management methods which are based on a selective
application of pesticides, along with the use of other pest control
methods. Also, increases in the real price of pesticides might convince
the farmer to forego pesticide application on marginal areas and to defer
application on new areas. Consequently, the end-use analysis must be
augmented to take into account the depressing effects of real pesticide
price increases. The augmented model is written as follows:
PROD = EPROD - (PE x PCPRICE x EPROD) (5)
where
PROD = U.S. production of pesticides in 1985,
EPROD = U.S. production of pesticides in 1985 as forecasted by the
end-use model,
PE = price elasticity of demand for pesticides, and
PCPRICE = percentage change in real pesticide price between 1978
and 1985.
According to equation (5), U.S. production of pesticides in 1985 will
be less than the end-use prediction if the real pesticide price increases
between 1978 and 1985. The amount of this decrease will depend on the
price elasticity and the percentage increase in real price. An
econometric estimate of the price elasticity was made using data on
aggregate U.S. pesticide production, crop acreage, and real active
ingredient price.
Over the period 1967-1978, the application rate of pesticides has
increased due to the advances in technology and increases in crop prices
which made increased pesticide use profitable. Different alternative
demand equations were estimated using a variable for crop acreage to
capture these effects. The following equation shows pesticide demand as a
function of crop acreage and the real price of pesticides:
In PRODt = -6.109 + 2.302 In ACREt - 0.324 In RPRICEt (6)
(-3.185) (6.91) (1.650)
2-8
-------
R2 = 0.83
DW = 2.27
Estimation period: 1967-1978
Estimation technique: OLS with Cochrane-Orcutt
where
PROD = pesticide production (million lb.),
ACRE = acreage of principal crops planted,
RPRICE = real unit price for pesticide active ingredients.*
(IPP in Table 2-2)
Equation (6) is linear in logarithms, which means that the estimated
coefficients can be interpreted as elasticities. The influence of in-
creased insecticide use is seen in the coefficient of In ACRE. The re-
maining effect on demand is through the price of the pesticide. The co-
efficient of -0.324 for the price implies that if real pesticide prices
rise by 10 percent, demand will decrease by 3.24 percent.
The t-statistics, which are enclosed in the parentheses beneath the
coefficients, indicate that there is a 90 percent probability that the
variables do have some impact. The R2 value indicates that 83 percent
of the variation in pesticide production can be explained by variation in
crop acreage and pesticide price.
Equation (6) is relatively simple in that it employs a static
formulation and was estimated by ordinary least squares (OLS) with a
Cochrane-Orcutt correction for autocorrelation. Such an approach can be
criticized for ignoring dynamics and the simultaneity bias problem
inherent in estimating a demand/supply system. Equation (7) , which
addresses both these issues, is presented below. It contains a dynamic
Koyck lag structure and was estimated by two-stage least squares (TSLS)
with a Cochrane-Orcutt correction for autocorrelation:
In PROD = -4.357 + 1.437 In ACRE1 - 0.296 In RPRICE +
(-2.002) (2.459)
0.453 In PRODt^ (7)
R2 = 0.859
DW = 2.371
Estimation Period: 1968-1978
Estimation Technique: TSLS with Cochrane-Orcutt
Instruments: Constant, ACRE, PROD, and IPC (pesticide manufacture
cost index)
*Using the overall price index assumes that insecticide prices increase
at the same rate over the period 1978-85 as does the overall pesticide
price.
2-9
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In equation (7)/ the short-run price elasticity is -0.296 and the
long-run price elasticity is -0.541 (calculated by dividing -0.296 by
1-0.453).* This implies that a 10 percent rise in real pesticide price
will cause a 2.96 percent decrease in pesticide demand in that year, and
if the price remains at the higher level, demand will drop another 2.45
percent in subsequent years relative to the forecast based on a constant
real price.
For the projections, a price elasticity of -0.43 was used, which is
the average of the elasticities from equations (6) and (7).
Employment
Reliable data on employment in the pesticides industry are not available.
Therefore, industry employment was estimated for the 1985 baseline based on
value of shipments per employee in 1977 for the SIC group 28694 (Pesticides
and other Organic Agricultural Chemicals, Except Preparations). This value
was then applied to the value of active ingredient pesticide chemicals manu-
factured to obtain a 1977 employment estimate. The 1985 baseline employment
estimate was then derived by applying a production ratio (i.e. , projected
1985 production/1977 production) to the 1977 employment estimate. The
impact of treatment options on employment was derived from the 1985 pro-
duction impacts using the cost-price and demand-production submodels. That
is, the impact on employment is baseline employment multiplied by the
percentage output reduction.
Profits
For the projected baseline, industry profit is estimated from the cost
mark-up model. With regulations imposed on the industry, profits are
estimated for two assumed cases. In Case A, the dollar profit per pound
of pesticide is the same as in the baseline and only the costs associated
with regulations are passed along as price increases. The impact on total
profits results from the reduction in output. In Case B, producers are
assumed to completely absorb the additional treatment cost, i.e. , no price
increase. In the second case, production quantities do not change from
the baseline level, but profit margins are more severely affected compared
to the first case.
Plant Impact Analysis: Closure
The Technical Contractor estimated costs of compliance for each plant
in the study. To determine whether these costs impose a significant
burden on individual plants, costs of compliance are compared with the
value of pesticides production at each plant. A cutoff value of four
*The Koyck lag structure implies this relationship between the annual
elasticity in equation (7) and the long-run elasticity.
2-10
-------
percent for the ratio of treatment costs to product value is used to
identify plants which may close. All available data on these plants,
including products produced, patents, and relation to other company
business, are reviewed to assess whether the plant is likely to close as
a result of compliance costs. In some cases, only one product line at a
plant rather than the entire plant may shut down.
Information developed by the Technical Contractor12 for plants
manufacturing pesticide active ingredients included capital and annual
operating costs for different treatment levels. The costs are expressed
as an annualized cost by converting the capital cost to an annualized
equivalent and adding it to the annual operating cost. Capital costs are
converted to an annual equivalent by multiplying by a capital recovery
factor which measures the annual rate of return an investment must achieve
each year to cover the cost of the investment and maintain net earnings,
including depreciation and taxes.
A capital recovery factor of 0.218, which was computed for the organic
chemical industry by Meta Systems Inc, was assumed to be applicable to the
production of active pesticide ingredients. The capital recovery factor
is based on a 10 year life for the treatment equipment, a 13 percent cost
of capital and five year depreciation life. The derivation of the capital
recovery factor is given in Appendix B.
Information was obtained^ on the annual production of pesticide
ingredients at each plant and on the sales value of that output. The values
of the pesticide ingredients were based on the ranges of values obtained
from the technical 308 questionnaire. The mid-range of product value of the
unformulated pesticides was used in computing a ratio of annualized treat-
ment cost to value of sales. The total value of pesticide ingredients pro-
duced at each of the plants was estimated by multiplying the annual produc-
tion figures and the estimated value for each active ingredient and then
summing the results for all pesticide ingredients produced at the plant.
The total additional annualized treatment costs were divided by the total
estimated value of active pesticide ingredients at the manufacturer's level
to obtain the ratio of treatment costs to pesticide ingredient value. This
ratio was then used in an initial, screening step of impact severity because
more precise plant level financial data were not available.
Plants with treatment costs equal to or greater than four percent of
pesticide value were identified for further analysis and plants below the
4 percent level were screened out. The use of this screening criterion
does not mean that plants that fall below the level are unaffected by
treatment costs. Rather, the 4 percent criterion serves as a rough
indicator of those plants that may be severely impacted by treatment
costs. We have observed (as discussed in the Industry Profile) that
pre-tax profit margins range between 10 and 15 percent for pesticide
producers. Given that plants generally must make some positive return
greater than the return from immediately salvaging the plant, a loss of
four percent in the rate of return could push a plant over the edge of
profitability. Some sample calculations for the pulp and paper industry
2-11
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suggest that the return from salvage might be on the order of 2 to 3
percent.* Therefore, a plant with a 7 percent return would be pushed to
the shutdown point if treatment costs were 4 percent of sales. A plant
with a return of 7 to 10 percent would also be in a weakened financial
condition, if it had other capital needs as well. In addition, a range of
values for the cutoff ratio is considered.
For each treatment level, the total number of severely impacted plants
was identified and the aggregate value of production determined. The next
step was to review the available information for each plant where treat-
ment costs exceeded four percent of sales value for any of the treatment
levels. (The plant level data are considered confidential and therefore
not included in this report). Although plant level financial data were
not available, most of the information generally included plant location,
types of product lines, quantities and value of pesticides and other pro-
duct lines, period of pesticide production during the year, parent company
ownership and likely attitudes of firms about relocating production at
other company locations. This type of information developed by A. D.
Little, Inc.2 was used in conjunction with the treatment cost impact in
arriving at judgements about whether or not severely impacted plants (or
product lines) would be shut down.
Plant closures are estimated both for a baseline and for the incremental
impacts of the proposed effluent guidelines. Costs of compliance with hazar-
dous solid waste management rules under the Resource Conservation and Recovery
Act (RCRA) are included as part of the baseline, because these rules have
already been promulgated, but their compliance costs have not otherwise been
incorporated into the data base. Because impacts due to RCRA may be signifi-
cant, it is important to identify them before determining the incremental
impacts of the proposed effluent guidelines. Specifically, if a plant is
predicted to close due to RCRA costs alone, then it cannot be counted as part
of the incremental impact of the proposed effluent guidelines, even if those
compliance costs are also high.
Costs of compliance with RCRA requirements were estimated for each plant
based on various methods of disposing of process and treatment wastes.
Information was provided by the Technical Contractor about treatment methods
used at each plant. RCRA disposal methods were assigned to individual
plants using a set of rules (developed in discussion with the Technical
Contractor) that addressed on-site versus off-site disposal capabilities as
well as disposal methods such as incineration, deep well injection and
landfill. Total RCRA costs were calculated for each plant based on the
assignment of disposal methods.
A cutoff ratio of RCRA costs to plant product value of four percent was
used to identify baseline closure candidates. Other available information
about the plant or individual product lines was considered in assessing
whether or not closure due to RCRA costs was likely.
*See "Analyzing Economic Impacts in a Period of Inflation", EPA, Office
of Analysis and Evaluation, March 25, 1982, unpublished draft.
2-12
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In some cases, a plant will not close because of RCRA costs or BAT/
PSES costs alone, but may close due to their combined effect. These cases
are noted in Section 5. Again, these assessments represent best judgments
based on rather general information about each plant and the magnitude of
the additional costs.
Small Business Analysis
An analysis is conducted to determine whether small firms bear
disproportionate impacts under the proposed effluent guidelines. The method
used is to classify all firms in the data sample as either large or small
and then to compare the distribution of impacts on plants belonging to firms
in the two sets. The impacts include number of plants with compliance costs,
the distribution of the cost to sales ratio, and the number of closures.
The analysis is primarily concerned with small firms with limited resources
or those which would face barriers to entry due to regulation. In light of
these considerations, we have defined small businesses to be those having
less than $10 million in annual sales. 18 out of the 80 plants in the data
base, 23 percent of the total, fall under this definition of a small
business.
New Source Standards
Treatment costs were estimated by the Technical Contractor for new
plants, considering both direct and indirect dischargers.13'14 Types of
treatment subcategories were then postulated to handle different waste
streams that might be generated by new plants. Model plant sizes were
identified by the Technical Contractor for each subcategory. The treat-
ment costs are considered high because the estimates are for "end-of-pipe"
treatment whereas a new plant design would be likely to utilize in-plant
waste stream controls to reduce total plant costs. However, no data are
available to estimate the degree by which "end-of-pipe" treatment costs
may be overestimated when these costs are used for analyzing new sources.
The major groups of pesticides—i.e., fungicide, herbicide and
insecticide—that might be produced by a plant in each subcategory were
identified and price ranges for the pesticides were determined to estimate
ranges of product values for the model plants considered.12,13/14
As in the plant-level analysis, impacts are assessed primarily based
on the ratio of annualized treatment costs (annualized capital costs plus
O&M costs) to the plant's product value.
The likehood that new pesticide chemicals manufacturing plants will be
built by 1985 is assessed. This assessment is based on existing plant
capacities for producing the three major groups of pesticides and the
demands for those products by 1985 as projected by Arthur D. Little Inc.
and by Frost and Sullivan.15
2-13
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Section 3
Industry Profile
The pesticide industry is a two-tiered business encompassing at one
level, producers of. pesticide chemicals (active ingredients) and at the
second level, formulators who combine the active ingredients with sub-
stances such as diluents, emulsifiers and wetting agents so that the
pesticides can be applied by the ultimate users. Many of the firms making
the active chemical ingredients are also formulators, however, there are
also numerous independent formulators.
Pesticide active ingredients are primarily synthetic organic chemicals
that are covered in SIC 28694 (Pesticide and Other Organic Agricultural
Chemicals, Except Preparation) which is part of SIC 2869, (Industrial
Organic Chemicals N.E.C. (not elsewhwere classified)). The forraulators
and packagers of pesticide products are classfied in SIC 2879, (Pesticides
and Agricultural Chemical Producers, N.E.C.).
As of January 1979, there were 7,875 pesticide producers or formulating
plants according to the Establishment Registration System of the EPA. EPA
has determined that formulators operate essentially as a "zero discharge"
industry with only minor volumes of aqueous wastestreams. Furthermore, many
of the formulating plants may carry out no actual formulating or manufacturing
operations but are only involved in handling the formulated products.
According to the 1977 Census of Manufacturers, there were only 420
establishments whose primary business was classified in SIC 2879, the SIC
group that includes pesticide formulators and, according to EPA and
Technical Contractor data, there are only 117 plants in the U.S. that make
pesticide chemical active ingredients.
U.S. pesticide manufacturers produced 1.5 billion pounds of pesticide
active ingredient chemicals in 1980 valued at about $4.3 billion. These
ingredients were formulated with various inert materials and then distri-
buted to agricultural and other users. Table 3-1 gives historical produc-
tion, value, and pricing data on the domestic pesticide chemicals
manufacturing industry.
Structure of Demand
The most common categorization of pesticides is by type of pest
controlled: weeds, insects, fungal diseases, and the like. In the
agricultural sector (which constitutes the major market for pesticide
products) it is estimated that, for every $1 spent on pesticides, the
fanner obtains, on the average $5 in increased yields as a result of
lower crop losses.16 Three classes of products—herbicides, insecti-
cides, and fungicides—compose virtually all domestic pesticide produc-
tion, although small amounts of rodent and bird-control materials are
also produced. In simple terms, herbicides are used to eliminate weeds,
fungicides are used to protect plants from fungus, and insecticides are
used to kill insects.
-------
Table 3-1. Total U.S.. Pesticide Chemicals Production1
(1967-1978)
1 Production !
1 Million I
Year I Pounds 1
1967 1,050
1968 1,192
1969 1,104
1970 1,034
1971 1,136
1972 1,157
1973 1,289
1974 1,417
1975 1,603
1976 1,364
1977 1,388
1978 1,417
1979 1,429
1980 1,468
Average Annual Growth
1967-1974 4.4
1974-1980 0.6
1 1
Value2 !
Million $ I
Current 1
987
1,137
1,113
1,074
1,248
1,295
1,449
1,958
2,871
2,768
3,119
3,289
3,706
4,281
(%)
10.3
13.9
1
Constant4 I
987
1,120
1,039
961
1,116
1,127
1,206
1,336
1,382
1,277
1,304
1,322
1,336
1,380
4.4
0.5
1 Average Price^
$/lb
Current 1
0.94
0.95
1.01
1.04
1.10
1.12
1.12
1.38
1.79
2.03
2.25
2.32
2.59
2.92
5.6
13.3
1 1
Constant5
0.94
0.91
0.92
0.90
0.90
0.88
0.84
0.95
1.13
1.21
1.27
1.22
1.26
1.30
0.1
5.4
Herbicides, insecticides, and fungicides.
2
Value is the sum of the value columns in Tables 3-3, 3-4, and 3-5.
Average price is value/total production.
4
Constant dollars for pesticide values are calculated using pesticide
price indices shown in Table 2-2 (1967=100).
Constant dollars for pesticide average prices are calculated using a
GNP Deflator (1967=100).
Source: U.S. International Trade Commission, Arthur D. Little, Inc.,
and Meta Systems Inc calculations.
3-2
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Production of herbicides, insecticides, and fungicides has changed
considerably over the past two decades. Figure 3-1 demonstrates the
changes in production of these products. Herbicides have taken the lead
in production only since 1975. The sharp decline in herbicide production
in 1969 was due to a disruption in the supply of the intermediate chemi-
cals used in manufacturing herbicides. This disruption was caused by an
increase in demand for defoliants during the Vietnam War from which the
industry took several years to recover. Insecticide production has been
increasing since 1976 when it fell off by almost 100 million pounds.
Fungicide production has stayed about the same over the past ten years.
Herbicides constitute the newest and most important group of pesticides.
Table 3-2 shows that herbicides accounted for about 60 percent of the total
value of pesticide chemical production in 1977 and 49 percent of the total
quantity of pesticides produced. The relative contribution of each product
class to total production of pesticide is also shown in Table 3-2,
Historical data on production and dollar value of herbicides,
insecticides, and fungicides, are presented in Tables 3-3, 3-4, and 3-5,
respectively. The tables demonstrate that all of the pesticide groups
have experienced considerable growth since 1967.
Herbicide production has grown most dramatically, increasing from 409
million pounds in 1967 to 805 million pounds in 1980, which is an average
annual growth rate of 5.3 percent. The major agricultural markets for
herbicides are corn, soybeans, wheat, and cotton.1? Corn is particularly
important, accounting for about half the agricultural herbicide market.
The non-agricultural herbicides are used on lawns, parks, and golf courses,
and in the control of vegetation along right-of-way areas.
Insecticides kill by contact with, or ingestion by, the insect.
Insecticides can be aimed at a specific major pest, such as the boll
weevil, or at a broad spectrum of insects. The major agricultural markets
for insecticides are cotton, corn, peanuts, fruits and vegetables, with
cotton accounting for about one-third the 1976 agricultural applications.
Insecticides are also used by livestock farmers and in a variety of
non-agricultural applications.
The 496 million pounds of insecticides produced in 1967 represented 90
million pounds more than the herbicide volume for that year, but by 1980,
insecticide production of 506 million pounds was 300 million pounds less than
that of herbicides. Thus, insecticides may be considered a relatively mature
market; their 1967-1980 average annual growth rate of less than one percent
is significantly lower than that of herbicides.
Fungicides represent a relatively minor group of pesticides. In 1980,
production of 156 million pounds of fungicides represented only about 10
percent of total pesticide production and even less of pesticide value.
Furthermore, the fungicide market is stagnant, with the 1978 production
3-3
-------
Figure 3-1. Annual Pesticide Production by Product Type
900
800
700
SOO
900
400
300
200
100
SO 52 54 S3 S3 70 72
Source: Arthur D. Little
3-4
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Table 3-2. Estimated Composition of U.S. Pesticide
Chemicals Production in 1977
(1977 Dollars)
! Production
Class
Herbicides
Insecti-
cides
Fungicides
Totals
1 Million
1 libs.
674
570
143
1 *"™ 1
1
1 Percent
49
41
10
100
1 Valuel | Average Unit Value
1 Million
1 S
1,867
1,049
203
1 3,119
1 1
1 Percent 1
60
34
6
1 10° 1
$/lb
2.77
1.84
1.42
Represents the value of active ingredients produced.
Source: U.S. International Trade Commission, calculations by Meta Systems
Inc.
level 33 million pounds less than that of 1960. Most fungicides are
contact products and are used as a preventative measure. The plant is
coated with the fungicide which protects it from disease. A new type of
fungicide—and one that offers growth potential to the industry—is the
systemic fungicide. These products, unlike the contact group, can
actually reverse disease therapeutically.
The major agricultural markets for fungicides are fruits and
vegetables, particularly citrus fruits; peanut and cotton fanners are also
important users. Non-agricultural uses of fungicide are also significant,
with the applicaton of pentachlorophenol as a wood preservative for poles
and posts being the most important.
Structure of Supply
Producers of Pesticide Chemicals
There are difficulties in characterizing the suppliers of pesticides
because there are few companies for which pesticides are considered a
major source of revenue. There are no publicly-owned companies in which
pesticides are considered the prime source of revenue. In 1977, 81 com-
panies reported the manufacture of pesticide active ingredients to the
U.S. International Trade Commission (ITC). These producers included
petroleum companies (e.g., Shell), chemical companies (e.g., Dow and
DuPont), and pharmaceutical-based firms (e.g., Eli Lilly and Pfizer).
3-5
-------
Table 3-3. U.S. Herbicide Production (1967-1980)
1
1
Year 1
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
Average Annual
1967-1974
1974-1980 ,
Production
Million
Pounds
409
469
393
404
429
451
496
604
788
656
674
664
658
805
Growth (%)
5.7
4.9
1
1 Value2
1 Million $
617
718
662
663
781
812
843
1,214
1,781
1,692
1,867
1,843
2,020
2,695
10.1
14.2
1 Average Pricel
I
I $/lb
1.51
1.53
1.68
1.64
1.82
1.80
1.70
2.02
2.26
2.58
2.77
2.78
3.07
3.35
4.2
. 8.8
Average price is the quantity weighted average price of cyclic and
acrylic herbicide merchant shipments in current dollars.
2
Value is derived as weighted average price x production volume.
Sources: U.S. Tarriff Commission (to 1973), U.S. International Trade
Commission (1974-1977), and Arthur D. Little, Inc., calculations.
3-6
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Table 3-4. U.S. Insecticide Production (1967-1980;
Production
Year
Million
Pounds
Value2
Million $
Average Price^-
$/lb
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
496
569
571
490
558
564
639
650
659
566
570
606
617
506
Average Annual Growth (%)
1967-1974 3.9
1974-1980 -4.0
304
347
383
340
385
344
492
605
916
911
1,049
1,232
1,407
1,279
10.3
13.3
0.
0.
0.61
0.61
.67
.69
0.69
0.61
0.77
0.93
.39
,61
.84
.03
.28
1.
1.
1.
2.
2.
2.56
6.2
18.4
Average price is the quantity weighted average price of cyclic and
acrylic insecticide merchant shipments in current dollars.
Value is derived as weighted average price x production volume.
Sources: U.S. Tarriff Commission and Arthur D. Little, Inc., estimates.
3-7
-------
Table 3-5. U.S. Fungicide Production (1967-1980)
1
1
Year 1
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
Average Annual
1967-1974
1974-1980
Production
Million
Pounds
144
154
141
140
149
143
154
163
155
142
143
147
155
156
Growth (%)
1.8
-0.7
1 1
1 Value2 I
1 Million $ 1
66
72
68
71
82
93
114
139
174
165
203
214
279
307
11.2
14.1
Average Price^
$/lb
0.46
0.47
0.48
0.51
0.55
0.65
0.74
0.85
1.12
1.16
1.42
1.46
1.80
1.97
9.2
15.0
Average price is the quantity weighted average price of cyclic and
acrylic fungicides merchant shipments.
2
Value is calculated as weighted average price x production volume.
Sources: U.S. Tarriff Commission and Arthur D. Little, Inc., estimates.
3-8
-------
The production of basic chemicals is the first and most complex phase
of the pesticides industry. It involves the synthesizing of technical-
grade chemicals from raw materials. There are twenty major classes of raw
materials and chemical intermediates used in the manufacture of pesticides,
and in recent years about 2.5 billion pounds of these raw materials, valued
at over $1.6 billion, are consumed annually by the pesticide industry.
Table 3-6 lists the major chemical groups and raw materials that are used
in manufacturing pesticides. It also shows the proportional contribution
that each group makes to the total estimated value of pesticide production.
Pesticides are generally manufactured in plants which also produce other
organic chemicals, including Pharmaceuticals, plastics, and resins.
Approximately 95 percent of the plants produce no more than four pesticides,
while almost 50 percent produce only one. The pesticides, with the excep-
tion of such high-volume products as the cotton insecticide, toxaphene, are
not generally produced throughout the year. The plants in the industry also
vary widely in size. The outputs of a number of plants are worth more than
$75 million, and 12 of the 117 manufacturing plants account for slightly
more than 50 percent of the total value of the outputs. In contrast, almost
half of the plants have an annual market value for all pesticide chemicals
of less than $5 million.
Table 3-7 lists production, value, and market share data for the top 18
pesticide producers. The top four companies account for about half of the
industry's market share by value and the top eight firms account for 82
percent of the market share. Different segments of the pesticide industry,
however, exhibit varying degrees of concentration; for example, the top
four producers of corn insecticides account for 81 percent of the market
share and the top four soybean insecticide producers have 77 percent of the
market. Thus, within the various pesticide segments there are high levels
of industrial concentration.
Profile of Pesticide Chemicals Plants
The EPA identified 117 separate plants (belonging to 81 companies)
that produced pesticide chemicals in 1977. All 117 plants produce pesti-
cide active ingredients, and 55 of the 117 also formulate and package the
pesticide products. Thus about half the manufacturing plants are verti-
cally integrated operations. While all the 117 plants produce pesticide
chemicals, this is not necessarily their sole line of business, nor is it
necessarily a business that they carry on continually. About three-
quarters of the plants (87) produce various chemicals other than
pesticides.
Table 3-8 shows a classification of the 117 manufacturing plants by
major type of pesticides produced: herbicides, insecticides, fungicides,
and mixed pesticide products. In classifying the plants, for purposes of
the impact analysis, the fact that almost three-quarters of them also
3-9
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Table 3-6. Raw Materials and Key Chemical
Intermediates Used in Pesticide Manufacture
Product Group
Percent of Total
Estimated Value
of Production
Phenol and derivatives
Aniline derivatives
Cyanide derivatives
Carboxylic acid derivatives
Higher alkyl amines
Phosphorous pentasulfide
Benzene and related compounds
Phosgene
Chlorine
Phosphorous trichloride
Mercaptans
Bromine
Monomethylamine
Aldehydes
Carbon disulfide
L-Pinene
Cyclodienes
Total
25.3
12.4
12.3
11.3
8.5
5.5
4.9
4.2
3.7
3.2
3.0
2.6
1.2
1.1
0.4
0.4
100.0%
Source: U.S. Pesticides Market; Report IA907, Frost & Sullivan, Inc.,
New York, New York, May 1981.
3-10
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Table 3-7. Pesticide Market by Producer, 1980
(1980 Dollars)
1
1
Company 1
Monsanto
Ciba-Geigy
Stauffer
Eli Lilly
DuPont
Cyanamid
Union Carbide
Shell
FMC
Mo bay
BASF-Wyandotte
Diamond-Shamrock
Rohm & Haas
Uniroyal
Velsicol
1C I
01 in
Standard Oil
(Calif)
Total .2,
1
Value |
($MM) i
522-580
354-358
330
285-300
220
220
150-160
132-155
135-140
125-135
75-100
75
41-46
36
18
10-20
10-15
5
773-2,913,
Production
(MM Ibs. ) 1
169-173
142-147
105-117
72-82
75-99
82
57-73
40-55
55
40-45
20-25
25-30
13-15
11
9-10
—
5
2-3
1
1 % Market
1 Share by
! Value
20
13
12
10
8
8
6
5
5
5
3
3
1
1
—
—
—
—
100
1
1 % Cummulative
1 Market Share
20
33
45
55
63
71
77
82
87
92
95
98
99
100
—
—
—
—
1
Source: U.S. Pesticides Market; Frost & Sullivan
3-11
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Table 3-8
Profile of Pesticide Plants — Subcategorization
Subcategory Number of Plants
Herbicides
An Hides-cyclic 3
Triazines-cyclic 2
Hydrazides-cyclic 3
Benzoics-cyclic 3
Phenoxies-cyclic 4
Dinitrophenols and anilines-cyclic 1
Ureas-cyclic 1
Miscellaneous ' 7_
Total 24
Insecticides
Aldrin-toxaphene-cyclic 3
Organophosphorus-cyclic 3
Carbamates-cyclic 2
Chloro-organic-cyclic 3
Nematocides-cyclic 1
Rodenticides-cyclic 2
Attractants and repellants-cyclic 2
Synergists-cyclic 2
Organophosphorus-acyclic 4
Miscellaneous 19
Total 41
Fungicides
Polychloro-aromatics-cyclic 4
Chloroalkyl amides 1
Miscellaneous 8
Total 13
Mixed* Total 39
Total 117
*Production of pesticides is in more than one subcategory.
3-12
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manufacture non-pesticide products is not considered. Thus/ subcategor-
ization and the associated discussion relate exclusively to the pesticide
operations of the plants. Twenty-four plants mainly produce herbicides,
and their average production value is twice that of insecticide producers
and nine times that of fungicide producers.
Forty-one plants are classified as insecticide producers/ 13 as
fungicide producers/ and the remaining 39 plants manufacture more than one
type of product. The mixed-product plants tend to be larger than the
single-product plants; their average production value is almost twice that
of the herbicide producers.
The first three groupings can be further subdivided by the types of
chemicals produced. Thus herbicides can be subdivided into anilides,
triazines, hydrazides, benzoics/ phenoxies/ dinitrophenols/anilines,
ureas, and miscellaneous. The major herbicides in the anilide group are
alachlor and propachol. The former is used extensively on soybeans and
corn, the latter on sorghum. The most important herbicide in the
triazines group is atrazine, which dominates the corn market. The phen-
oxies group includes 2, 4-D, the use of which has come under environmental
restriction.
Insecticides are subdivided into aldrin-toxaphene, cyclic organophosphorus,
acyclic organophosphorus, carbamates, chloro-organics, nematocides,
rodenticides, attractants/repellants, synergists, and miscellaneous.
Acyclic organophosphorus is the most important group, and the insecticides
in this group have a wide range of applications, particularly in corn and
livestock. The cyclic organophosphorus group includes methyl parathion,
which is used on wheat and corn. Insecticides in the aldrin-toxaphene
group are used in cotton, soybeans, and livestock. The fungicides are
subdivided into polychloro-aromatics, chloroalkyl amides, and miscellaneous.
Capacity Utilization. The pesticides manufacturing industry overall
operated at a capacity utilization rate of 80 percent in 1979. Thus,
while 1,429 million pounds of pesticide chemicals were produced in 1979,
capacity was available to produce about 1,800 million pounds. The compo-
nents of the industry (fungicides/ insecticides, herbicides) varied with
respect to utilization of available capacity and Table 3-9 lists production
capacity and capacity utilization in 1979.
Formulators
It is difficult to describe pesticide formulators because there are a
large number of small operators for which statistical information is not
available. As mentioned earlier, while almost 8,000 plants were counted
as formulators in 1979, in fact, many of these are distributors of
formulated products.
3-13
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Table 3-9
Pesticide Production and Capacity Utilization in 1979
Type of |
Pesticide 1
Fungicides
Herbicides
Insecticides
All pesticides
Production
(million Ibs.
155
657
617
1,429
I Capacity
1 (million Ibs. )
184
888
726
1,786
1 Capacity I
1 Utilization I
.84
.74
.85
.80
Source: U.S. Pesticide Market, Frost & Sullivan (capacity values
calculated by Meta Systems Inc.
Technical grade pesticide chemicals are rarely used in the pure form
manufactured by the chemical firms but are mixed with inert materials in
the formulation stage. Mixing serves the dual purpose of stabilizing the
chemicals and preparing them in a form that will be useful to end users.
The form into which the chemicals are formulated depends upon such factors
as the type of pest being controlled, the environment, the desired method
of application and the properties of the technical grade chemical. Pesti-
cides are produced as dry or liquid concentrates and are then generally
formulated to meet application requirements. Dry concentrates include
dusts, granules, and wettable powders. Liquid concentrates consist of
solutions and stable suspensions.
New systems are being developed for the application of pesticides, the
most current being micro-encapsulation, or controlled release. This pro-
cess is still unproven on a large scale and is quite expensive, but its
developers (Health-Chem and Penwalt) claim it has superior field life and
efficiency.
Prior to 1970, the formulation of technical-grade pesticides was carried
out by a variety of independent firms and agricultural cooperatives. Formu-
lating firms bought pesticides from the basic manufacturers and formulated
and packaged the products for sale. In the mid-1970's there was an overall
domestic shortage of chemicals and during this period many of the technical-
grade pesticide producers integrated forward and formulated their own
chemicals captively. Although the chemical shortage is now over, most of
the chemical manufacturers have chosen to stay in the formulating business.
The current estimate in the Kline Guide is that 80 percent of the formulated
pesticide industry is controlled by technical-grade producers.
3-14
-------
Profitability
As mentioned earlier, most of the U.S. pesticide production is carried
on by diversified companies and their sales of pesticides are a minor
source of the firms' revenue. Therefore, the availability of reliable
financial data on pesticide production is extremely limited. Investment
analysts regard pesticide production as a very profitable business with
profit margins much higher than is suggested by an analysis of income
statements. For example, one investment house (Loeb Rhodes and Company)
estimates that the average net margin in sales (after taxes and all
charges) exceeds 20 percent. However, a detailed examination of the
annual reports and 10-K statements of pesticide producers revealed that
line-of-business, pre-tax profit margins in 1978 typically range between
10 and 15 percent. This finding is consistent with the Federal Trade
Commission's statement that chemical industry pre-tax profit margins in
1978 averaged 10.6 percent (versus 8.0 percent for all manufacturing).18
There are many individual pesticide products on which profit margins
exceed 40 percent. These are the proprietary (patented) products for
which the absence of competition allows the patent-holder to price the
product considerably higher than cost. The life of a patent is 17 years
and pesticide manufacturers aggressively seek to develop new pesticides to
maintain their pool of patented products. The National Agricultural
Chemical Association reported that pesticide research and development
expenditures in 1978 accounted for 8 percent of sales revenue. Neverthe-
less, in 1978, only 3 new pesticides were registered versus 28
registrations in 1966.19
The slowdown in the rate of new pesticide introduction is attributable,
in part, to governmental regulation, which has increased both the time and
cost required to commercialize a new pesticide. The regulation of pesti-
cides dates back to 1910, but it was only in 1947 that the Federal
Insecticide, Fungicide, and Rodenticide Act (FIFRA), as administered by
the USDA, required pesticides to be federally registered. The Federal
Environmental Pesticide Control Act (FEPCA) of 1972 and the Federal
Pesticide Act of 1978, as administered by the EPA, define the current
requirements for federal registration.
Research and Development
Research and development plays a major role in the continued success
of chemical producers. Because of the cost and time required to develop
new pesticides, R&D activities are concentrated in about 30 companies.
These are, generally, large, multi-product companies which can afford
risky ventures. Thus, to the extent that pesticide operations are very
profitable, examples of such profitability are likely to be found among
the large companies.
3-15
-------
The amount of money invested annually on pesticide R&D increased from
$61 million in 1967 to $290 million in 1978 (in current dollars) ,15
This is due in part to the increased complexity of pesticide chemicals and
new prohibitions on broad spectrum pesticides, but testing and regulatory
requirements also play a major role in added R&D expenditures. The 1978
Amendments to the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA)
are estimated by Frost and Sullivan to add 33 percent to the cost of regis-
tering a new pesticide and over 50 percent to the costs of re-registration.15
On the average, the entire process of developing and testing a new
pesticide takes six to eight years and costs about $15 million. In 1978 only
three new pesticides were registered, compared to 1966, when 28 new pesti-
cides were introduced, with an average development time of four years and a
cost of $2 million. R&D costs in the pesticide industry are expected to
increase.20/21 The likely consequence of such an increase will be further
concentration of the industry with only the largest firms either willing or
able to afford the high R&D costs. High R&D costs and the uncertainty
inherent in the commercialization of a new pesticide pose major barriers to
new firms seeking to enter the industry. The successful companies in the
future are likely to be those with existing technical bases (e.g.,
pharmaceutical companies) and/or those with long-term positions in the
industry.
Imports and Exports
The U.S. is a net exporter of pesticides and in 1977 exports exceeded
imports by 263 million pounds. Tables 3-10 through 3-12 present data on
production, exports and imports of pesticide products for 1966 to 1977.
As shown in Table 3-10, in 1977, the United States exported 109.4 million
pounds of herbicides which amounted to 16 percent of domestic production.
The 1977 export figures represent an increase of 87 million pounds since
1966. Imports of herbicides equalled 15.9 million pounds or 2.3 percent
of total domestic production.
Insecticide exports (Table 3-11) were 146.3 million pounds or 25.7
percent of total production, in 1977, and imports represented .12 percent
of domestic production. Exports of herbicides (Table 3-12) for the same
year were 27.1 million pounds and accounted for 19 percent of domestic
production, while imports were 2.5 million pounds or 1.7 percent of total
production.
Table 3-13 presents annual growth rates for both volume and value of
exports for the three major pesticide classes. From 1969 to 1977 the
volume of herbicide exports grew by 15 percent annually while the value of
those exports grew 22 percent a year. The volume of insecticides exported
grew 1.7 percent per year and the dollar value of those exports grew in
value by 15 percent a year. Fungicide exports grew 5 percent a year and
the value of fungicide exports grew 20 percent ayear between 1969 and 1977.
3-16
-------
Table 3-10. U.S. Production and Trade in Herbicides
Year I
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1
Production
(MM Ib)
324
409
469
393
404
429
451
496
604
788
656
674
1
1 Exports |
1 (MM Ib) 1
22.5
32.4
37.0
34.8
39.0
42.3
—
80.6
106.1
106.7
104.2
109.4
1 1
Exports as a
Percent of
Production
6.9
8.0
8.1
8.9
9.7
9.9
—
16.3
17.6
13.5
15.9
16.0
1 1 Imports as a
1 Imports 1 Percent of
1 (MM Ib) | Production
1.1
2.7
3.0
2.3
2.4
5.7
4.4
7.6
9.2
12.2
13.1
15.9
1 1
0.3
0.7
0.6
0.6
0.6
1.0
1.3
1.5
1.5
1.6
2.0
2.3
Sources:
Production is from International Trade Commission, Synthetic Organic
Chemicals (Washington, D.C., U.S. Government Printing Office) various
issues.
Imports and exports are converted to an active ingredient basis by
halving the values as reported in U.S. Department of Agriculture, The
Pesticide Review (Washington, D.C., U.S. Department of Agriculture,
Agricultural Stabilization and Conservation Service).
3-17
-------
Table 3-11. U.S. Production and Trade in Insecticides
Year 1
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1
Production
(MM Ib)
552
496
569
571
490
558
564
639
650
659
566
570
1
1 Exports 1
1 (MM Ib) 1
131.0
140.2
161.3
128.1
118.2
118.8
—
208.7
212.2
178.5
148.2
146.3
1 1
Exports as a
Percent of
Production
23.7
28.3
28.3
22.4
24.1
21.3
—
32.7
32.7
27.1
26.2
25.7
1 1 Imports as a
1 Imports | Percent of
1 (MM Ib) I Production
0.3
0.2
0.09
0.4
0.3
0.4
2.3
1.7
0.9
0.7
0.7
0.7
1 1
.05
.04
.02
.07
.06
.07
.40
.30
.14
.01
.12
.12
Sources:
Production is from International Trade Commission, Synthetic Organic
Chemicals (Washington, D.C., U.S. Government Printing Office) various
issues.
Imports and exports are converted to an active ingredient basis by
halving the values as reported in U.S. Department of Agriculture, The
Pesticide Review (Washington, D.C., U.S. Department of Agriculture,
Agricultural Stabilization and Conservation Service).
3-18
-------
Table 3-12. U.S. Production and Trade in Fungicides
Year 1
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1
Production
(MM Ib)
137
144
154
141
140
149
143
154
163
155
142
143
1
I Exports !
I (MM Ib) |
21.2
19.2
18.8
18.1
20.6
21.5
21.0
29.2
30.0
23.9
25.2
27.1
1 !
Exports as a I
Percent of 1
Production I
15.5
13.3
12.2
12.8
14.7
14.4
14.7
19.0
18.4
15.4
17.7
18.9
1
1 Imports as a
Imports | Percent of
(MM Ib) | Production
0.1
0.2
0.3
0.2
0.6
1.4
2.7
2.0
1.2
2.4
2.3
2.5
1
0.1
0.1
0.2
0.1
0.4
0.9
1.9
1.3
0.7
1.5
1.6
1.7
Sources:
Production is from International Trade Commission, Synthetic Organic
Chemicals (Washington, D.C., U.S. Government Printing Office) various
issues.
Imports and exports are converted to an active ingredient basis by
halving the values as reported in U.S. Department of Agriculture, The
Pesticide Review (Washington, D.C., U.S. Department of Agriculture,
Agricultural Stabilization and Conservation Service).
3-19
-------
Table 3-13. Annual Growth Rates for Volume and
Value of Pesticide Exports (1969-1977)
Product Class I Production (%) I Value * (%)
Herbicides
Insecticide
Fungicide
15
1.7
5 1
22
15
20
* in current dollars.
Source: U.S. Pesticides Market, Frost & Sullivan.
Of the 49 million pounds of pesticides imported by the United States
in 1977, West Germany was the originator of 31 percent, the United Kingdom
of 29 percent and Japan of 10 percent.
Industry Outlook
Market forecasts for pesticide sales are complicated by the industry's
dependence on such different variables as weather, farm income, predicted
insect infestations, previous years' pesticide inventory, and changing
health and environmental regulations. Regardless of the uncertainties in
predicting changes in the production and value of pesticides, however, the
use of pesticides can be expected to grow. In the United States alone,
the application of pesticides has increased at an average rate of 3.4 per-
cent a year or about 40 percent over the past decade. It is reasonable to
expect a general trend of modest growth to continue over the next five
years.
Production of pesticides was 1.4 billion pounds in 1980 and is
expected to grow about 1.4 percent annually until 1985 when production is
anticipated to reach 1.5 billion pounds according to one source (Frost and
SullivanlS). The dollar value of this production is projected to in-
crease by 8.4 percent a year from $4.3 billion in 1980 to $6,4 billion in
1985, expressed in current dollars. According to another source,22 the
average annual rate of growth in value of pesticide production, expressed
in constant dollars, is projected at 5.0 percent between 1980 and 1985.
The three major product classes that make up the pesticide industry
are expected to grow at different rates during the 1980-1985 period, with
herbicides growing at the highest rate (in terms of both volume and value)
and insecticides growing at the lowest annual rate. Table 3-14 shows the
projected annual growth rates for the pesticide market by product class.
3-20
-------
The structure of the pesticides industry is not expected to change
markedly in the next five years. Increasing research and development
costs and rising raw materials prices can be expected to result in the
exclusion of small companies from competition/ but the top ten companies
are likely to maintain their market shares relative to one another.
Table 3-14. Pesticide Market by Major Class—
Yearly Rate of Growth (1980-1985)
Product Class I Production (%) I Value* (%)
Herbicides
Insecticide
Fung icide
Total Industry
1.9
0.9
1.4
1.4 ,
8.6
7.8
8.4
8.4
* In current dollars.
Source: U.S. Pesticide Market, Frost & Sullivan.
3-21
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Section 4
Recommended Treatment Technologies and
Associated Costs
The 1972 Federal Water Pollution Control Act (FWPCA) amendments (Public
Law 92-0500) were primarily directed at the control of industrial and muni-
cipal wastewater discharges. The legislation and subsequent amendments
(Clean Water Act of 1977, Public Law 95-217) require that EPA revise and
promulgate effluent limitations and standards for all point sources of
pollution. Under FWPCA amendments, EPA must develop technology-based
effluent limitations for conventional pollutants (Section 301). Under
another part of the legislation (Section 307) , EPA must develop effluent
standards for individual toxic chemicals and pretreatment standards for
indirect industrial discharges to publicly owned treatment works. These
permissible levels of pollutant discharge correspond to Best Practicable
Control Technology Currently Available (BPT) and Best Available Technology
Economically Achievable (BAT) and Pretreatment Standards for Existing
Sources (PSES).
The law set specific timetables for achievement of discharge levels
corresponding to these levels of treatment (July 1977 for BPT and July
1983 for BAT). These timetables were subsequently revised via the 1977
amendments and distinctions were made among pollutants. The original BPT
and BAT regulations were modified by a new regulatory concept, Best
Conventional Pollutant Control Technology (BCT) and the universe of
pollutants was subdivided into conventional, nonconventional and toxics.
The law has also provided for toxic effluent standards for new sources
and/or dischargers to municipal wastewater treatment facilities. These
discharge categories are addressed by NSPS (New Source Performance
Standards), and PSNS (Pretreatment Standards for New Sources).
The manufacture of pesticide chemicals involves the production of
several hundred organic chemical compounds. These compounds are sometimes
produced at facilities where manufacturing pesticide chemicals is the main,
or the only business; in other facilities, pesticides represent only a
small portion of the facility's production. Under the proposed effluent
guidelines for the pesticide chemicals manufacturing industry, the EPA is
considering new effluent limitations guidelines for existing plants—both
for direct discharge to surface waters and for pretreatment (by indirect
dischargers) prior to discharge to publicly owned treatment works (POTW).
These new effluent limitations include not only the pesticides previously
regulated by the EPA under BPCTCA* (primarily to meet certain pollution
control parameters such as BOD, COD, or suspended solids), but also prio-
rity pollutants and certain pesticides, such as atrazine, which were
excluded from the BPCTCA regulations.
* Best Practicable Control Technology Currently Available; also
referred to as BPT.
-------
Cost Methodology
The cost estimates were developed by the Technical Contractor on a
subcategory, rather than plant-by plant, basis. They show the range of
costs potentially incurred by model plants of various flows and differing
pesticide treatability. They were derived in the following manner:
1. Costs were generated for each treatment unit based on September
1979 dollars and corresponding to a Marshall and Swift Index value
of 630. The total construction costs for each unit were prepared
from manufacturers' estimates which were compared to actual plant
data when available. The total construction costs include the
treatment unit cost, land, electrical, piping, instrumentation,
site preparation, engineering, and contingency fees. Annual and
energy costs were calculated in accordance with the assumptions
specified. Cost curves were prepared for dollars versus volume
treated, and each of the components included in the individual
treatment units was specified.
2. The total cost for each subcategory was derived by summing the
costs for individual treatment units that are specified for each
level of control. Treatment costs for each subcategory are based
on flow rates of 0.01 MGD, 0.1 MGD, and 1 MGD which were repre-
sentative of actual flows in the industry; flows below 0.01 MGD
were provided with alternative costs for evaporation or contract
hauling as is practiced in the industry. Treatment costs for zero
dischargers, metallo-organic pesticide manufacturers and pesticide
formulator/packagers, Subcategories 11, 12, and 13, respectively,
are based on representative flow rates of 50 gpd, 500 gpd, and
5,000 gpd.
3. For pesticide manufacturers, a high and low cost for each treatment
unit was introduced to reflect differences in degree of treatability
or differences in recoveries obtainable. For example, in each case
where pesticide removal was recommended, the costs for activated
carbon, resin adsorption, and hydrolysis were compared. The
effectiveness of these technologies has been demonstrated within the
design ranges provided; however, each individual pesticide plant
must determine by laboratory and/or pilot scale treatability studies
the exact design criteria to meet effluent objectives. In general,
this comparison resulted in the selection of carbon adsorption at
750 minutes detention time for the high cost, and hydrolysis at 400
minutes detention time for the low cost for each subcategory. In
this cost comparison, 12-hour equalization, neutralization, dual
media filtration, and pumping stations were assumed to be part of
both activated carbon and resin adsorption systems.
4-2
-------
High and low cost were also provided where steam stripping was the
designated technology to account for the fact that stripped
organics may either be returned to the process (in which case a
recovery has been calculated) or that they become a wastestream
which is normally disposed by incineration.
High and low costs have been provided for the incineration unit to
reflect the fact that the size of the unit and especially the
annual costs are quite different depending on whether a chlori-
nated hydrocarbon or aqueous oily waste is being disposed. A
reduction of fuel consumption based on the fuel value of
hydrocarbon wastestreams has been considered.
A high and low cost has been provided for evaporation ponds,
corresponding to solar evaporation and spray evaporation alter-
natives which are determined by site-specific climatic conditions.
The high and low costs for annual and energy may appear reversed.
This simply means that the annual cost for a high capital system
may be less than the annual cost for a low capital system.
4. The flows upon which unit treatment costs are based have been
split into three groups based on wastewater segregation. Waste-
streams not compatible with biological treatment (i.e., distil-
lation tower bottoms, stripper overhead streams, reactor vent
streams, etc.) are most effectively disposed of by incineration.
Based on the operating range of incinerators in the industry it
has been assumed that 1 percent of the total flow from the plant
requires incineration. This corresponds to a range of 100 to
10,000 gallons per day.
Based on the actual operating practices in the industry, steam
stripping, chemical oxidation, and metal separation have been
costed at flows equal to one-third the total volume disposed by
the plant for total flow rates of 0.1 MGD and 1 MGD. Flow rates
of 0.01 MGD have been costed at full flow. Pesticide removal
(hydrolysis, activated carbon, or resin adsorption) and biological
treatment (equalization, neutralization, nutrient addition,
aeration basin, etc.) have been costed based on the total flow.
5. Estimates of capital cost annual cost and energy were provided for
each subcategory and each level of technology. The capital costs
for Level 1 technology, excluding corporation or contract hauling,
are a minimum of $290,000 and a maximum of $4,690,000 at a flow
rate of 0.1 MGD for pesticide manufacturers (Subcategories 1
through 12); Level 3 technology is shown to cost a minimum of
$854,000 and a maximum of $5,250,000. There are four subcate-
gories (6, 11, 12, and 13) for which the flows were in the range
of less than 10,000 gallons per day for which it may be more
cost-effective to dispose of wastes by contract hauling or
evaporation, than to construct a wastewater treatment plant.
4-3
-------
The costs presented in this section for each plant are estimates by
the Technical Contractor of the capital, annual, and energy expenses which
could potentially be incurred to meet proposed effluent levels. The costs
are based on the assumption that existing plants already have installed
pesticide removal and/or biological oxidation systems where BPT regula-
tions require them. These estimates are therefore the incremental costs
above and beyond BPT.
Treatment Options
Existing Sources
A total of 267 manufactured pesticides were studied by the Technical
Contractor. To meet the anticipated new EPA guidelines, the Technical
Contractor considered a set of treatment technologies that could be
applied singly, or in combination, to achieve the required reduction of
pollutants, 12 these are:
Treatment Technologies
Steam stripping
Filtration
Chemical Oxidation
Activated carbon
Biological treatment
Metals separation
Resin adsorption
Hydrolysis
These technologies can be classified into four major groups: physical-
chemical treatment, biological treatment, multimedia filtration, and
carbon filtration. From the various treatment technologies listed, one or
more were selected for each plant (based on wastewater characteristics and
treatment currently in place) and this selection defined a limited number
of treatment options. To achieve different levels of effluent treatment,
the treatment options for each plant are combined to define several
treatment levels. For the indirect dischargers, the treatment levels are
designated as follows:
1: physical/chemical treatment (equals PSES Option 1 in
Development Document; this is the selected option)
2: Level 1 plus biological treatment (equals PSES
Options 1 and 2)
For direct dischargers, the designated treatment levels are:
4-4
-------
Level 1: physical/chemical and biological treatment (equals BAT
Option 2 in Development Document; this is the selected
option)
Level 2: Level 1 plus multimedia filtraton (equals BAT Options 2
and 3)
Level 3: Level 2 plus carbon filtration (equals BAT Options 2,
3, and 4)
Capital investment and annual costs were estimated for the two pretreatment
treatment levels and three direct discharge treatment levels. The options
and costs were developed in incremental terms: for indirect dischargers,
the second pretreatment level includes the first; and for direct dischargers,
each subsequent treatment level includes the technologies of the preceding
treatment level. The treatment levels for indirect and direct dischargers
are combined to define "economic" options whose impacts are to be analyzed.
The options are defined as follows:
Direct Indirect
Economic Discharger Discharger
Option Leve1 Level
111
221
331
412
522
632
Of the 117 plants that manufacture pesticide active ingredients in the
U.S., the Technical Contractor has identified 51 plants that might require
additional treatment to meet new treatment standards. (Existing and addi-
tional treatment technologies required for a sample of 38 plants are
described in Table 4-1.)
New Sources
The Technical Contractor has also specified treatment levels for
direct discharger and indirect discharger new sources (NSPS and PSNS,
respectively) for each of 13 subcategories. Pesticides were assigned to
subcategories based on several considerations, including raw materials
used in manufacturing, wastewater characteristics and treatability, and
disposal and manufacturing processes. Wastewater treatment trains that
meet new source standards were synthesized for each subcategory. The
treatment level for NSPS corresponds to Level 1 for direct dischargers
and the treatment level for PSNS corresponds to Level 1 for indirect
dischargers.
4-5
-------
Table 4-1
Present Wastewater Treatment and Estimated Treatment Required for
Compliance with Effluent Limitations
Plant Code
No.
Wastewater Treatment
Already in Place
Estimated Additional
Treatment Required
1
2
9
10
11
12
13
Gravity Separation
Stripping, Equalization, Activated
Carbon Neutralization
Resin Adsorption, Neutralization,
Equalization, Activated Carbon
Neutralization, Equalization, Trick-
ling Filters, Gravity Separation,
Evaporation Pond
Equalization, Aerated Lagoon, Gravity
Separation, Neutralization
Gravity Separation
Gravity Separation, Vacuum Filtration,
Resin Adsorption, Neutralization
Equalization, Neutralization
Ocean
Equalization, Not Available
Skimming, Gravity Separation, Strip-
ping, Chemical Oxidation, Equalization,
Activated Sludge
Equalization, Neutralization, Activated
Sludge, Coagulation, Vacuum Filtration,
Aerated Lagoon
Gravity Separation, Skimming, Hydro-
lysis, Neutralization, Equalization,
Aerated Lagoon
Stripping
Stripping
Stripping, Biological
Treatment, Activated
Carbon, Multimedia
Filtration
Multimedia Filtration,
Activated Carbon,
Stripping
Multimedia Filtration,
Activated Carbon
Stripping, Metal
Separation, Multimedia
Filtration, Activated
Carbon
Stripping
Multimedia Filtration,
Activated Carbon,
Stripping
Stripping
Stripping
Multimedia Filtration,
Activated Carbon
Multimedia Filtration,
Activated Carbon
Activated Carbon
4-6
-------
Table 4-1
Present Wastewater Treatment and Estimated Treatment Required for
Compliance with Effluent Limitations
(continued)
Plant Code
No.
Wastewater Treatment
Already in Place
Estimated Additional
Treatment Required
14
15
16
17
18
19
20
21
22
23
24
25
26
Gravity Separation, Aerated Lagoon,
Equalization, Stripping, Neutraliza-
tion
Neutralization, Equalization, Aerated
Lagoon, Gravity Separation
Equalization, Gravity Separation,
Multimedia Filtration, Activated Carbon,
Neutralization
Neutralization, Equalization, Activated
Sludge, Coagulation, Flocculation,
Aerated Lagoon, Gravity Separation,
Neutralization
Gravity Separation, Neutralization
Chemical Oxidation, Aerated Lagoon,
Trickling Filters, Neutralization
Chemical Oxidation
API-type Separator, Equalization,
Aerated Lagoon, Gravity Separation/
API-type Separator
Skimming, Neutralization
Gravity Separation
Equalization, Neutralization Gravity
Separation, Aerated Lagoon
Neutralization, Equalization
Multimedia Filtration,
Activated Carbon,
Stripping
Multimedia Filtration,
Activated Carbon
Activated Carbon,
Steam Stripping,
Multimedia Filtration
Activated Carbon,
Multimedia Filtration
Stripping
Multimedia Filtration,
Activated Carbon,
Stripping
Multimedia Filtration,
Activated Carbon
Stripping
Chemical Oxidation,
Stripping
Stripping
Activated Carbon
Chemical Oxidation/
Stripping/Activated
Carbon, Multimedia
Filtration
Stripping, Activated
Carbon
4-7
-------
Table 4-1
Present Wastewater Treatment and Estimated Treatment Required for
Compliance with Effluent Limitations
(continued)
Plant Code
No.
Wastewater Treatment
Already in Place
Estimated Additional
Treatment Required
27
28
29
30
Neutralization
Equalization, Gravity Separation,
Skimming, Flocculation, Coagulation,
Equalization, Skimming, Gravity Separa-
tion, Neutralization, Multimedia
Filtration, Activated Carbon
Not Available
Activated Carbon,
Stripping
Activated Carbon
Hydrolysis
Stripping, Activated
Carbon
31
Neutralization
32
33
34
35
36
Neutralization, Equalization, Activated
Sludge, Gravity Separation
Equalization, Not Available
Gravity Separation, Equalization,
Aerated Lagoon Coagulation, Floccula-
tion
Stripping, Resin Adsorption, Neutral-
ization
Not Available
Activated Carbon,
Stripping, Multimedia
Filtration, Metal
Separation
Activated Carbon
Stripping, Multimedia
Filtration, Activated
Carbon
Multimedia Filtration,
Activated Carbon,
Stripping
Stripping, Resin
Adsorption
Stripping
4-8
-------
It should be noted that impacts of NSPS are actually incremental to
all requirements for existing sources. That is, even if specific NSPS and
PSNS regulations are not promulgated, new source direct dischargers are
still subject to BPT and BAT requirements and indirect dischargers to
relevant POTW pretreatment requirements.
Treatment Cost Estimates
Existing Sources
Incremental Costs. The capital costs and annual operating costs for
the additional treatment required at each of the 51 plants are shown in
Table 4-2. The table shows the incremental costs of each treatment level
above the costs of the previous treatment level; for indirect dischargers,
the incremental capital costs of compliance sum to $12.6 and $33.8 million
for Levels 1 and 2, respectively, and for direct dischargers, the sums are
$24.1, $3.2, and $12.4 million for Levels 1, 2 and 3, respectively. The
incremental annual O&M costs for indirect dischargers sum to $6.0 and $5.9
million for Levels 1 and 2, respectively, and for direct dischargers, the
sums are $15.2, $0.2 and $13.4 million for Levels 1, 2 and 3, respectively.
The incremental capital and O&M costs for each plant are listed in Table 4-2
in addition to the totals for the industry under each option.
Annualized treatment costs can be computed from capital and annual
costs shown in Table 4-2 by the method explained earlier in tne report.
The incremental annualized treatment costs sum to $8.6 and $14.5 million
for Indirect Levels 1 and 2, and $20.4, $0.9, $16.1 million per year for
Direct Levels 1, 2 and 3.
Cumulative Costs for Existing Plants for Each Treatment Level. For
the economic impact analysis, treatment levels 2 and 3 include the treat-
ment requirements and costs of the lower treatment levels. For example,
Direct Level 2 includes treatment requirements and costs for Direct Level
1. Table 4-3 presents the total cumulative costs (in 1979 dollars) of
compliance for each treatment level. Table 4-4 presents the same
information in 1982 dollars.
Formulator/Packagers. The Technical Contractor provided unit treatment
costs for the Formulator/Packagers subcategory (13) and due to differences
in the way data were aggregated, this subcategory is handled separately from
Subcategories 1 through 12. The costs were developed on a model plant basis,
as shown in Table 4-5. These costs apply only to indirect dischargers
because Formulator/Packager direct dischargers are already regulated to zero
discharge under BPT. The costs are specified for contract hauling of hazar-
dous wastes and for solar evaporation. The annualized costs were calculated
4-9
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4-11
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Table 4-3. Total Cumulative Costs of Compliance for
Indirect and Direct Treatment Levels and Economic Options
(millions of 1979 dollars)
Capital 1 Annual I Annualized
Costs I O&M Cost I Cost
Indirect Discharger
Subcategories 1-12
Level 1
Level 2
Formulator /Packagers*
Level 1
Level 2
Total
Level 1
Level 2
I
Direct Discharger
Level 1
Level 2 *
Level 3
Economic Option
Subcategories 1-12
1
2
3
4
5
6
Formulator/Packagers
1-6
12.6
46.4
37.4
37.4
50.0
1 83'8 1
24.1
28.7
i "-1 1
36.7
41.3
53.7
70.5
75.1
37.5
i 37'4 1
5.9
11.8
2.6
2.6
8.5
14.4
i 1
15.2
16.1
1 29'5 1
21.1
22.0
35.4
27.0
27.9
41.3
1 2'6 1
3.6
21.9
10.8
10.8
19.4
32.7
20.4
22.4
38.5
29.0
31.0
47.1
42.3
44.3
60.4
10.8
*Capital costs for Formulator/Packagers subcategory are exclusive of
land costs.
4-12
-------
Table 4-4. Total Cumulative Costs of Compliance for
Indirect and Direct Treatment Levels and Economic Options
(millions of 1982 dollars)
Indirect Discharger
Subcategories 1-12
Level 1
Level 2
Foraulator /Packagers
Level 1
Level 2
Total
Level 1
Level 2
Direct Discharger
Level 1
Level 2
Level 3
Economic Option
Subcategories 1-12
1
2
3
4
5
6
Formulator/Packagers
1-6
1 Capiral
1 Costs
15.8
58.0
46.8
46.8
62.5
. 104.8
30.1
35.9
, 51.4
1 i
45.9
51.7
67.2
88.1
93.9
109.5
1 46-8
1 Annual
1 O&M Cost
7.4
14.8
3.2
3.2
10.6
, 18.0
19.0
20.1
. 36.9
26.4
27.5
44.3
33.8
34.9
51.7
1 3'2
I Annualized
1 Cost
10.8
27.5
13.5
13.5
24.3
. 40.9
25.5
28.0
, 48.2
36.3
38.7
58.9
53.0
55.4
75.6
! 13.5
4-13
-------
by multiplying the plant portion of the capital costs by the capital
recovery factor (see Appendix B) and adding the result to the annual O&M
costs.
For all model plant sizes, contract hauling of hazardous wastes is the
most expensive treatment option and solar evaporation at 5 inches per year
(net evaporation) is the most expensive evaporation technology.
Total costs of compliance for indirect dischargers in the industry are
estimated using model plant costs provided by the Technical Contractor and
information about the number of plants with treatment costs. The Technical
Contractor estimated treatment costs for three plant sizes: large, 5,000
gal/day; medium, 500 gal/day; and small, 50 gal/day. Total costs are
estimated using the following formula:
Total Cost = I COST, x SHR. x NUM.
i =1
where
COST^ = representative average treatment cost of plant with flow
size i
= fraction of plants of size i with treatment costs
•
= number of plants of size i in industry.
Treatment costs were estimated by the Technical Contractor for each size
model plant for several technologies and specifications; these are shown
in Table 4-5. Not all technologies are suitable for plants of all sizes.
In general, plants with flow rates of less than 1,000 gal/day will find it
more economical to use contract hauling, while larger plants would
probably use evaporation unless there were severe space limitations. As a
conservative assumption, plants using contract hauling are assumed to
incur costs for hazardous wastes, while plants using evaporation are
assumed to use 5 in/year solar evaporation.
Based on the model plant sizes, this implies that large plants will
use solar evaporation with average plant costs of $760,000 and annualized
costs of 211,800, while small plants will use contract hauling with
annualized costs of $4,460. Since the average flow rate of medium-sized
plants is 500 gal/day, it is assumed that half of them use evaporation and
half use contract hauling, yielding average plant costs of $52,000 and
annualized costs of £39,160. These are summarized below.
4-14
-------
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Average Treatment Costs
(1979 Dollars)
Plant Size 1 Capital 1 Annualized
Large 1,200,000 236,000
Medium 80,000 39,700
Small . 0 4,460
There are estimated to be 850 indirect discharger formulator/packager
plants in the industry, with the following size distribution:*
t No. Plants I Percent
Large 510 60
Medium 170 20
Small , 170 , 20
of these plants, 55 are also pesticide manufacturers with production in
other regulated subcategories. These plants are excluded flora the formu-
lator/packager analysis on the assumption that the treatment system they
install for other production processes can accommodate wastewater flows
from formulator/packaging operations without significant extra impact.
These manufacturer plants are relatively large, so they are assumed to
fall in equal numbers in the large and medium categories. Excluding them
leads to the following revised counts which are used in the analysis.
I No. Plants I Percent
Large 482 61
Medium 143 18
Small 170 21
Total , 795 , 100
* ESE memorandum, 1-28-81.
4-16
-------
According to the Development Document, approximately 90 percent of
formulator/packagers do not generate process wastewater. Of the remaining
ten percent which do generate process wastewaters, an undetermined number
will incur costs under the proposed regulation. As a conservative
assumption, all such plants are assumed to incur costs, so
SHRt = .10 , i = 1,2,3
Using the above values leads to the following estimate of total costs
of compliance:
Total Plant Capital Costs = 760,000 x 482 x .10 = 36,632,000
+ 52,000 x 143 x .10 = 743,600
+ 0 x 170 x .10 = 0
37,375,600
Total Annualized Cost = 211,800 x 482 x .10 = 10,208,760
+ 39,160 x 143 x .10 = 559,988
+ 4,460 x 170 x .10 = 75,820
10,844,568
Cost Estimates for New Sources
Treatment costs for model plants were developed by the Technical
Contractor for each subcategory. The treatment costs were estimated for
new sources that are direct dischargers (NSPS) and for indirect discharges
(PSNS). For each model plant, high and low cost estimates were made to
account for possible variations with respect to treatability and the
hazardous nature of wastestreams within a given subcategory. The model
plant treatment costs are shown in Table 4-6.
4-17
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Section 5
Economic Impact Analysis
To assess the economic impact of the wastewater treament options, the
industry-level and plant-level analyses described in Section 2 are used.
In the industry-level approach, publicly available data are used to assess
the economic state of the industry in 1985 with and without the costs for
the different treatment levels included; the costs that will be incurred
by the industry due to the Resource Conservation and Recovery Act (RCRA)
are ignored in this portion of the impact analysis.
For the analysis of individual plants, proprietary data are used to
assess impacts. Possible plant and product line closures are investigated
for the various treatment levels with the effects of RCRA included in the
baseline. Following the industry and plant level assessments, the effect
of treatment costs on small businesses is analyzed. The section concludes
with an analysis of New Source Performance Standards (NSPS) and Pretreat-
ment Standards for New Sources (PSNS).
Proposed effluent standards could impose annualized costs (expressed
in 1979 dollars) on the pesticide chemicals industry of $8.6 million for
Level 1 treatment and $21.9 million for Level 2 treatment on indirect dis-
chargers, $20.4 million, $22.3, and $38.5 million for Levels 1, 2, and 3
treatment, respectively, on direct dischargers, and between $29.1 million
for economic option 1 and $60.4 million for economic option 6. In 1985,
industry production of pesticides is forecast to be 1.584 billion pounds
and have a value of $4.4 billion in 1979 dollars.1 Thus, the possible
effects of treatment costs could range from 1.8 to 3.8 cents per pound or
0.7 to 1.4 cents per dollar value of pesticide production depending on the
economic option.
Industry-Level Analysis of Impacts on the Pesticide Chemicals Industry
The baseline projection describes the state of the industry in 1985
without the imposition of new treatment standards, and is compared with a
projection of the industry as it would be after compliance with new
standards; the differences between the two projections are attributed to
the standards.
Baseline and Impact Projections of Cost and Price
To develop 1985 baseline price projections, each production cost item
for pesticide chemicals in 1978 was projected to 1985. For this purpose,
energy and chemical price predictions of the U.S. Department of Energy and
information developed by Data Resources Inc. were reviewed. Based on
analysis of past trends, this assessment led to the selection of the
-------
following 1978-1985 annual nominal escalation rates*: inorganic chemicals,
11 percent; organic chemicals, 16 percent; utilities, 11 percent; labor, 7
percent; and fixed costs, 5 percent. The general inflation rate for prices
over the period 1978-85 is assumed to be 9 percent per year. The result of
these escalations is to raise the cost by $2.08/lb (or 101 percent) to
$4.14/lb. expressed in 1985 dollars. Assuming a constant markup model, the
price will rise 101 percent from $2.34/lb. in 1978 to $4.70/lb. in 1985.
These costs and prices, shown in Table 5-1 in terms of 1978 and 1985
dollars, are next adjusted to 1979 values to put item on a comparable basis
with the treatment costs that were developed by the Technical Contractor in
terms of 1979 dollars.
Given a 9 percent per year annual inflation rate, this implies a 0.596
adjustment factor for converting 1985 prices to 1979 dollars. Therefore,
the 1985 average pesticides price in constant 1979 dollars is $2.80 per
pound.
Table 5-1 presents the baseline average unit cost and price projections
for 1985 in current and constant 1979 dollars for all pesticide active
ingredients, along with the 1978 values. As the table shows, the pre-tax
profit rises from $0.28/lb. in 1978 to $0.56/lb. in 1985 ($0.33/lb. in 1979
dollars). Pre-tax profit as a percent of cost remains at 13.6 percent
reflecting the assumption of a constant markup.
Table 5-1
Baseline Cost and Price Projections
$/lb. of Active Ingredient
1978 1985 1985 Percentage of Total Cosjt
(1978$) (1985$) (1979$) 1978 1985
Cost item
Inorganic chemicals 0.29 0.60 0.36
Organic chemicals 0.58 1.64 0.98
Utilities 0.22 0.46 0.27
Labor 0.36 0.58 0.35
Fixed costs 0.61 0.86 0.51
Total costs 2.06 4.14 2.47
Pre-tax profit Q.2J3 0_. 56 0_. 3_3
Price 2.34 4.70 2.80 113.6 113.6
*Nominal escalation rates incorporate price changes due to inflation,
real changes in prices (i.e., changes expressed in constant dollars) and
changes in amounts of inputs to production. These escalation rates
reflect information available in 1980 and 1981; use of more recent
information would cause these forecasts to be revised. However, we do not
believe such changes would affect the results of the analysis
significantly.
5-2
-------
To compare the real change in price and profit between 1978 and 1985,
we assume a nine percent average annual rate of inflation over that
period. Thus, the 1985 forecasts can be converted to 1978 dollars by
dividing them by 1.83. This means that in 1978 dollars, the 1985 average
price will be $2.57/lb. and the 1985 profit will be $0.31/lb. The 1978
price was $2.34/lb. and the unit profit was $0.28/lb. Thus, in real
terms, the 1985 price and profit will be 9.8 percent higher than in 1978.
The direct impacts of possible new control options are calculated
based on the Technical Contractor's cost estimates. The first eight lines
of Table 5-2 show total annualized costs and annualized cost per pound of
production for individual treatment levels and each economic option. The
cost data are presented for the entire industry as well as the separate
product groups: herbicides, insecticides, and fungicides. The costs to
indirect dischargers range from a low of .250/lb. of insecticides for
Level 1 treatment to a high of 5.99^/lb. of fungicides for Level 2
treatment. The costs to direct dischargers ranged from a low of . 26jd/lb.
of insecticide for Level 1 treatment to a high of 3.77^/lb. of herbicide
for Level 3 treatment. Costs per pound in 1985 (expressed in 1979
dollars) for economic options range from 1.84^/lb to 3.81^/lb for the
industry as a whole, and from 2.66jd/lb to 4.64jz!/lb. for herbicides, from
0.51(zf/lb to 1.92«Vlb for insecticides, and 2.83
-------
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1.47 percent for indirect dischargers, 0.05 to 0.49 percent for direct
dischargers, by 0.28 to 0.59 percent depending on the economic option
selected, and from 0.09 to 1.74 percent depending on the option and its
effect on specific pesticide groups.
For the cost absorption case (Case B) treatment cost per pound is the
same as shown in Table 5-2, baseline prices are unchanged and profit re-
duction is equal to treatment cost. Percent changes in profit for Case B
are shown on the bottom line of Table 5-2.
Baseline and Impact Production Projections
Table 5-3 contains the baseline projections of herbicide production and
Tables 5-4 and 5-5 present similar information with respect to insecticides
and fungicides. The projections are based on work done in 1979 by the U.S.
Department of Agriculture and Arthur D. Little, Inc. While there may have
been changes in the market since then, uncertainty in these projections is
not expected to affect the results of .the analysis significantly.
Under the baseline scenario, we forecast that pesticide production
will grow at a compound annual rate of 1.60 percent from 1,417 million
pounds in 1978 to 1,584 million pounds in 1985. This overall baseline
growth rate reflects an annual growth of 3.2 percent in herbicide pro-
duction, 0.6 percent in insecticide production, and 0.9 percent in fungi-
cide production. The projected growth rates are considerably lower than
those recorded historically. During the 1960-1978 period, herbicide
production grew at a rate of 10.9 percent, insecticide production grew at
a rate of 2.8 percent, and fungicide production decreased at a rate of 1.1
percent. The difference in projected growth rates between fungicides and
insecticides is caused by the differing pesticide requirements caused by
new agricultural practices. The projected slowdown primarily reflects the
fact that most of the major markets for pesticides are close to saturation.
For Case A, the average cost passthrough case, the effect of additional
effluent treatment costs is to increase price and, in accordance with the
demand model, to lower demand. The total reductions in production expected
to accompany the treatment options are presented in Table 5-6. (Percent
reductions for production are the same as for profit reduction shown in
Table 5-2.) Reductions for the industry as a whole range from 270 to 3,371
million pounds per year for indirect dischargers, 263 to 5,908 million
pounds per year for direct dischargers, and 4.6 million pounds per year for
economic option 1 to 9.3 million pounds per year for economic option 6.
Projections of production reductions are shown for the major groups, herbi-
cides, insecticides, and fungicides as well as the overall industry. The
estimation of demand reductions is based on the demand elasticity of -0.43
and the percentage price changes calculated for individual product groups
shown in Table 5-2. The values shown for those groups do not sum exactly
to the industry totals due to the aggregation procedure. The estimates for
the groups are, nevertheless, indicative of the approximate comparative
magnitudes and distribution of effects among herbicides, insecticides, and
5-5
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Table 5-5
Fungicide Baseline Projections
Usage (million Ib.)
Market
Peanuts
Fruits and vegetables
Other agricultural
Total agricultural
Nonagricultural
Net exports
Price adjustment
Total production
1971
4.4
33.2
4.3
41.9
87.2
20.1
149.2
1976
6.8
35.1
1.1
43.0
76.2
22.9
142.1
1985
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40.0
5.0
52.0
78.0
30.0
-6.8
153.2
Notes:
1. The 1971 and 1976 production data are on an active-ingredient basis
and are reported in U.S International Trade Commission, Synthetic
Organic Chemicals, Washington, D.C. (various issues).
2. The 1971 and 1976 export values are reported on a formulated basis in
U.S Department of Agriculture, The Pesticide Review, Washington, D.C.
(various issues). They were converted to an active-ingredient basis
by halving the values (a procedure discussed with Theodore Eichers of
the U.S. Department of Agriculture). The production data are already
on an active-ingredient basis.
3. The 1971 and 1976 values on agricultural pesticide usage and acreage
cultivated are from U.S. Department of Agriculture, Farmers Use of
Pesticides, Washington, D.C. (1975 and 1978).
4. The 1985 values for fraction of acreage treated and application rate
per acre were developed by Arthur D. Little industry experts (assuming
constant real pesticide prices) after a review of an unpublished docu-
ment prepared by Austin Fox of the U.S. Department of Agriculture,
entitled Agricultural Input Projections and Related Information,
Washington, D.C. (July 1979) .
5. The 1985 values for acreage (except corn) are generated by the NIRAP
Model and are contained in U.S. Department of Agriculture, Adjustment
Potential in U.S. Agriculture, Washington, D.C. (undated, probably
mid-1979) .
5-8
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5-9
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fungicides. For Case B, which assumes cost absorption, additional
effluent treatment costs will have no effect on production.
Table 5-7 summarizes the 1985 baseline and impact projections of
production and price for economic option 1 by the three major pesticide
groups. Total production is reduced by approximately 5 million pounds,
which is less than 0.3 percent. (If the most stringent option were shown,
the reduction from the baseline would be 9.2 million pounds which is 0.6
percent.) Average industry price for the impact projection is about 0.7
percent higher than for the baseline.
Table 5-7
Summary of Baseline and Impact Projection; Production
and Prices for Economic Option 1 and Case A:
Average Cost Passthrough (in 1979 dollars)
1985 Baseline 1985 Impact Projection
Production Price Production Price
(million Ibs) ($/lb) (million Ibs) ($/lb)
Herbicides 812 3.30 808 3.33
Insecticides 619 2.42 618 2.43
Fungicides 153 1.75 152 1.78
Total or average 1,584 2.80*. 1,578 2.82*
*Average, based on price of each pesticide group, weighted by production.
Baseline and Impact Employment Projections
Reliable data on employment by the pesticide manufacturing industry are
not available. Therefore an estimate was developed based on 21 establishments
in SIC group 28694 for the year 1977. Table 5-8 presents data on employment
and shipments showing that shipments per employee averaged about $216,400. In
1977, the pesticide active ingredient industry had a production of 1.388 bil-
lion pounds valued at $3.123 billion. Assuming $216,000 of production per
employee, this implies an employment of 14,500 and an output of 96,000 Ibs.
per employee. By 1985, we expect pesticide production to increase under the
baseline projection from 1.388 billion pounds to 1.584 billion pounds, an
increase of 196 million pounds. Assuming constant labor productivity, this
implies an increase in baseline employment of 2,040 of 1985.
Table 5-9 shows the Case A reductions in baseline employment that will
result from the imposition of the proposed treatment options, the
reductions range from 14 for Level 1 treatment for indirect dischargers,
to 61 for Level 3 treatment for direct dischargers to 47 for economic
option 1 and 97 for economic option 6. The percentage reductions in em-
ployment are the same as those for profit shown in Table 5-2, since the
changes are proportionate. The impact of the treatment options on Case B
employment will be zero.
5-10
-------
Table 5-8
Relationship Between Employment and Shipments for SIC Group 28694
(1977)
Value of Shipments per
Shipments Employment Employee
Product ($000,OOOs) (OOOs) ($00Os)
Pesticides and other 1,666.1 7.7 216.4
organic agricultural
chemicals
Source: U.S. Bureau of the Census, 1977 Census of Manufacturers, U.S.
Government Printing Office, Washington, D.C. (1980).
Profit
Profits were calculated by multiplying production by the unit profit
rate. In the baseline scenario, 1985 production is 1.584 billion pounds
and the unit profit is $0.33 in 1979 dollars thus implying an industry
profit of $523 million. In the impact scenario, production is reduced
while the unit profit rate remains at $0.33/lb. As shown in Table 5-2,
the impact of additional treatment is predicted to reduce industry-level
profits by from 0.04 to 1.47 percent for indirect dischargers, 0.05 to
0.49 percent for direct dischargers, and from 0.28 percent to 0.59 percent
for economic options 1 and 6, respectively, or $1.52 to $3.09 million
expressed in 1979 dollars.
The above profit analysis (Case A) assumes producers will increase
prices to compensate for the average added cost of treatment. For Case B,
producers are forced to absorb the increased costs and cannot raise
prices, and the profit impacts will be more severe. Under Case B, there
would be no impact on production, and pesticide manufacturers would sell
1.584 billion pounds at reduced profits; profits would decrease by 6.0
percent or $30.0 million for economic option 1 up to 12.0 percent or $60.4
million for economic option 6 expressed in 1979 dollars.
Formulator/Packagers
Table 5-10 shows the total cumulative compliance costs that may be
borne by the Formulators/Packagers subcategory.
Because such a small percentage of the subcategory will experience
costs, those Formulator/Packagers that do incur costs can be expected to
absorb them. Given the Case B assumption of cost absorption, the impact
of the regulations on the prices, output and employment of Formulator/
Packagers will be zero, and profits will be reduced by $10.8 million
annually.
5-11
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5-12
-------
Table 5-10
Total Cumulative Costs of Compliance for Formulator/Packagers
(millions of 1979 dollars)
Costs
I 1 Annual I
I Capital I O&M | Annualized
Formulator/Packagers 37.4 2.6 10.8
Agricultural Sector
Because the agricultural sector constitutes the major market for
pesticides, it is important to understand how agriculture is affected by
higher pesticide prices resulting from treatment costs. The effect of
additional treatment cost is to increase average active ingredient prices
0.80 to 1.65 percent for economic options 1 and 6, respectively. Active
ingredient prices equal 58 percent of the price of the pesticide acquired
by the farmer which means that the price of the pesticide at the farm
level will increase approximately 0.46 to 0.96 percent.
Based on discussions with the United States Department of Agriculture,
pesticide costs (excluding application) are estimated to account for about
6 percent of farm crop variable production costs. Thus, a 0.96 percent
increase in pesticide prices should increase crop variable costs by 0.06
percent. Crop variable costs equal about 40 percent of farm revenue.
Therefore, assuming a cost passthrough at the farm level, we would expect
to see farm crop prices rise 0.02 percent. Table 5-11 presents data on
crop prices, variable costs, and pesticide costs that were used to arrive
at these assumptions.
Summary Comment
The pesticide industry is characterized by considerable heterogeneity.
Therefore, the above analysis must be interpreted with caution. The
plant-level analysis which follows, deals with such heterogeneity by
assessing the impact of treatment costs on a plant-specific basis.
Plant-Specific Impact Analysis
An assessment is made of the economic impact on individual plants
identified as incurring additional treatment costs. We then identify the
5-13
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5-14
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ones that are severely impacted and, among those, the plants that face
closure or shutdown of pesticide product lines. The imposition of RCRA
standards are considered, as well as the imposition of treatment costs
resulting from the proposed effluent guidelines.
Treatment Costs as a Percent of Pesticide Chemical Value
To assess the cost burden of the proposed treatment levels, the
estimated treatment costs and the value of the active ingredients (prior
to the formulation and packaging operations) were analyzed. Results for
indirect dischargers are given for Levels 1 and 2 and for direct
dischargers for Levels 1, 2, and 3.
Information was obtained on the annual production of pesticide
ingredients at each plant and on the value of that output.2 in an
initial screening step, the ratio of annualized treatment costs to the
value of pesticide active ingredients (using sales as the measure of
value) was calculated for each plant.
Table 5-12 displays the cost-to-sales ratio, (expressed as a
percent). Up to 51 plants may incur additional treatment costs depending
on the economic option selected. The five columns on the left side of the
table display the results for each treatment level for indirect and direct
dischargers^ separately.
The six columns on the right side of Table 5-12 show the cost-to-sales
ratio for the six economic options. For example, the right hand column
shows the treatment cost as a percent of sales if the highest level of
treatment is required for both direct dischargers Level 3 and indirect
dischargers Level 2. Economic Option 1 shows the cost-to-sales ratio if
Level 1 is applied to the indirect dischargers and Level 1 is applied to
direct dischargers.
Plants with treatment costs equal to or greater than four percent of
product value are identified by an asterisk in Table 5-12 so that plants
below the 4 percent level can be screened out. (The rationale for the
screening criterion is discussed in Section 2.) Under economic option 6,
the highest level of treatment, 26 of the 51 plants would incur a treat-
ment cost equal to, or greater than four percent of the sales value of the
chemicals produced. Of the 26 plants, 18 are indirect dischargers, seven
are direct and one plant (No. 186) is both a direct and indirect dis-
charger. There are 9 plants with costs equal to or greater than 20 per-
cent of sales and three plants with costs in excess of 100 percent of
sales.
If economic option 1 were imposed, a total of 13 plants would have
treatment costs in excess of four percent of sales; of these, five plants
are direct dischargers, seven are indirect and one plant (No. 186) is both
a direct and indirect discharger.
5-15
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Screening criteria of three, two and one percent were also applied to
get a sense of how alternative criteria would affect the plant by plant
analysis. Considering economic options 1 and 6 only, the four percent
criterion results in 13 plants (economic option 1) and 26 plants (economic
option 6) being severely impacted. Applying the other screening criteria,
the number of plants severely impacted under economic options 1 and 6
respectively, are: with three percent, 14 and 28 plants; with two per-
cent, 18 and 38 plants; with one percent 24 and 42 plants.
Table 5-13 is a summary of the impacts of all treatment options
regardless of the magnitude of the cost; the impacts are described as the
number of plants incurring treatment costs under each option and the value
of production of those plants. The number of plants impacted depends on
the particular treatment level selected. For example, if Level 1 is
imposed on indirect dischargers and Level 3 on direct dischargers, 30
plants producing pesticide chemicals valued at $671 million would be
affected; this represents 18.1 percent of the total value of pesticides.
The effect of economic option 1 must be read from the lower portion of
Table 5-13 because the upper portion of the table, which does not combine
treatment levels for direct and indirect dischargers, includes double
counting of one plant that is both a direct and indirect discharger.
If the most stringent economic option (option 6) is imposed, 48 plants
are affected and these plants account for 28.9 percent of the total value
of pesticides produced by the 117 plants.
Formulator/Packagers
The plant-specific impact analysis of the Formulator/Packager subcategory
uses the model plant sizes, flows and costs developed by the Technical Con-
tractor. The model plants were designated small, medium, and large with
average flow rates of 50, 500, and 5,000 gallons per day, respectively.
Based on an average 10 gallons of flow to 1,000 pounds of product ratio, the
small, medium, and large plants have daily production of 5,000, 50,000, and
500,000 pounds, respectively. To convert pounds of product to gallons of
liquid concentrate we used a 7:1 ratio, based on the BPT economic impact
analysis* estimates of dry powder versus liquid concentrate values, and
estimate that the small, medium, and large plants have the capacity to
produce 710, 7,100, and 71,000 gallons per day of liquid concentrate,
respectively.
Product value was estimated by multiplying the daily production by 330
days of production to obtain annual production and then multiplying this by
the price of the formulated product. In the BPT study, the range of
* USEPA, Office of Water Planning and Standards, "Economic Analysis of
Effluent Limitations Guidelines for the Pesticides Chemicals Manufacturing
Point Source Category". EPA-230/2-78-065f, February 1978, pp. 40-41.
5-18
-------
Table 5-13
Summary of Plants Incurred by Treatment Costs
Number
of Plants
Value of
Pesticide
Production
(millions of
1979 dollars)
Percent of
Value of
Production,
Total Industry
Total Industry
Plants Impacted by:
Indirect Dischargers
Level 1
Level 2
Direct Dischargers
Level 1
Level 2
Level 3
Economic
Economic
Economic
Economic
Economic
Economic
Option 1
Option 2
Option 3
Option 4
Option 5
Option 6
117
16
34
15
18
18
30
33
33
48
48
48
3706
249
450
430
630
630
671
870
870
872
1071
1071
100.0
6.7
12.1
11.6
17.0
17.0
18.1
23.4
23.5
23.5
28.9
28.9
formulated product prices was $7-14/gallon for liquid concentrates and
$l-2/pound for dry powders (in 1975 dollars). Assuming that the prices of
formulated products escalated at the same rate as manufactured pesticide
prices, and using the price indices in Table 2-2, the prices of formulated
products range from $10.4 to $20.9/gallon for liquids and from $1.5-3/
pound for powders in 1979 dollars.
The impact ratios are in terms of total annualized costs to product value
and were calculated only for the small size plant because the impact will be
greatest for the smallest plants. From Section 4, the total annualized treat-
ment costs for the small model plant are about $4,460. From the discussion
above, the daily production is 5,000 pounds (or 710 gallons), thus making
annual production 1.65 million pounds (or 234 thousand gallons). Using the
prices derived above, this level of production has a value that ranges from
$2.5 million to $4.9 million. The cost to value impact ratio is therefore
between .1 percent and .2 percent. These impacts are not considered to be
significant.
The analysis of the Formulator/Packagers subcategory is based on the
assumption that 1,000 pounds of product result in 10 gallons of flow. It
can be shown how sensitive the analysis is to changes in this assumption.
That is, how many gallons of flow per 1,000 pounds will cause the impact
5-19
-------
ratio to exceed 2 percent? In this case, for the impact ratio to exceed 2
percent/ the flow per 1,000 pounds of product would have to exceed 200
gallons.
Closure Analysis of Plants and Product Lines
An assessment of the severely impacted plants—those with treatment
costs four percent or more of the value of the pesticide products—was
made to identify potential plant closures or product line shutdowns.
Plant-specific financial data are not available, consequently the assess-
ment primarily is a qualitative analysis based on market trends and
general plant characteristics.
Faced with an increase in costs, plants have the option of raising prices
(Case A), absorbing the cost increases in the form of lower profits (Case B),
or some combination of the two. The price-raising option is precluded if (1)
other producers of the product do not incur equivalent treatment costs, or (2)
the market for the product is weak. Cost absorption could cause a plant to
discontinue pesticide production, although this action is not synonymous with
a plant shutdown because a plant could be producing plastics, Pharmaceuticals,
or other chemicals at the same facility. However, discontinuation could mean
a shutdown if the plant were basically dedicated to pesticides. Also, discon-
tinuation of pesticide production at a specific plant could result in shifting
that production to another plant location in which case the firm would not
necessarily reduce its total output of pesticides. These possibilities were
considered in the analysis of each plant severely affected by added treatment
costs.
Pretax profits on sales in the pesticide manufacturing industry have
averaged 10 to 15 percent in recent years and, as discussed earlier in the
report, plants with treatment costs exceeding four percent of pesticide
value are not necessarily going to cease operations. The particular cir-
cumstances of each plant were analyzed in order to judge the likelihood of
shutdown. The analysis took into consideration type of pesticide
chemical, volume and value of production of pesticides and non-pesticide
products, parent company resources, etc., however, as noted earlier,
plant-specific financial data were not available. Before the impacts of
treatment costs were examined, the effects of the Resource Conservation
and Recovery Act were first considered so that closures that would be
caused solely by RCRA would not be attributed to treatment costs. If a
plant was predicted to close due to RCRA compliance costs, this was
counted as a baseline closure, since that Act has already been promulgated.
Costs of compliance with RCRA requirements were estimated for each of 51
plants that incur costs. Total cost of RCRA compliance are $2.2 million for
an average of about $43,400 per plant. Three product lines and no plants
were identified as likely candidates for closure; all the product lines are
small with the largest one having an annual value of production of $100,000.
5-20
-------
The ratio of RCRA costs to product value for the four plants ranges from 40
percent to 161 percent, indicating a substantial impact.
Table 5-14 presents a summary of the plants severely impacted by the
imposition of treatment levels. Part I of Table 5-14 shows the results if
the various treatment levels are imposed. For example, if Level 1 is
imposed on the indirect dischargers, eight plants will be severely im-
pacted and the value of the pesticides they produce ($55.5 million) is 1.5
percent of the total value of production. If Level 2 is applied to in-
direct dischargers, the number of plants severely impacted is 19 and the
value of their production ($116.9 million) is 3.1 percent of the total
value. Level 1 or 2 for direct dischargers affects six plants severely
and they account for 4.8 percent of total value; if Level 3 is imposed on
direct dischargers, eight plants are severely impacted and they account
for 8.1 percent of total value.
Part II of Table 5-14 indicates the number of plants and product lines
that possibly will shutdown as a result of the various treatment options—
RCRA included. For example, if Level 1 is imposed on indirect dischargers,
two plant and five product line shutdowns are anticipated and their value
will amount to 0.6 percent of the total value of pesticides production.
Imposing Level 2 on indirect dischargers raises the number of closures to
14 (a total of six plants and eight product lines) with a percent of total
value of 1.6. Level 1 for direct dischargers indicates three shutdowns
which account for 0.3 percent of total value; imposition of Levels 2 o^r 3
does not increase the number of shutdowns. The aggregate effects of com-
binations of treatment options for indirect and direct dischargers are not
displayed in Table 5-14 and the numbers shown cannot be simply added
because one plant would be counted twice; that plant is both a direct and
indirect discharger.
Table 5-15 shows the aggregate effects on indirect and direct dischargers
for all feasible combinations of treatment levels. As seen from the table,
potential shutdowns represent less than two and a half percent of the total
value of pesticide production. (Note that the imposition on direct
dischargers of treatment levels more stringent than Level 1 does not increase
the number of shutdowns of direct dischargers.) For the more stringent
options resulting in seven plant and ten product line shutdowns (those which
include Level 2 for indirect dischargers), two plants and one product line
account for approximately half of the $63.6 million in value associated with
those closures. For the less stringent economic options, one plant and one
product line account for about $15 million (about 60 percent) of the value
associated with the ten shutdowns.
The results shown in Table 5-14 and 5-15 are based on plant-by-plant
assessment conducted for the 26 plants, which is the greatest number that
may be severely affected by the most stringent economic option. There
are, however, two other plants for which treatment costs are somewhat
above four percent of the sales value but available data are inadequate to
make certain judgements regarding the plants closure potential. Both
plants are indirect dischargers; one is at treatment Level 1 and 2 and the
5-21
-------
Table 5-14
Summary of Plants Severely Impacted by Treatment Costs
I ! | Value of I
I I No. ! Pesticide I
I No. ! of 1 Production |% of Total
I of I Product I (millions of I Value of
LPlants*I Lines 11979 dollars) I Production
I Plants severely impacted
(i.e., treatment costs
greater than 4% value
of production) by treat-
ment options.**
Indirect Dischargers
Level 1
Level 2
8
19
55.5
116.9
1.5
3.1
Direct Dischargers
Level 1
Level 2
Level 3
II Plants and/or product lines
where shutdown is possible
with treatment imposed.
Baseline Case***
Indirect Dischargers
Level 1
Level 2
Direct Dischargers
6
6
8
2
6
5
8
176.4
176.4
301.6
0.7
20.8
64.8
4.8
4.8
8.1
0.01
0.6
1.6
Level 1
Level 2
Level 3
1
1
1 X 1
2
2
2 1
12.4
12.4
12.4
0.3
0.3
1 °'3
*0ne plant (No. 186) is both an indirect and direct discharger and is
counted in both totals.
**Impacts are defined in terms of total pesticide value at the plant,
not individual product lines. Therefore, Part I does not distinguish
between plants and product lines.
***Closures due to RCRA costs.
5-22
-------
Table 5-15
Summary of Closure Analysis for Economic Options
Economic Options
1
2
3
4
5
6
Number of
Shutdowns
Product
Plants Lines
3 7
3 7
3 7
7 10
7 10
7 10
Value of Pesticide
Production Lost
(millions of
1979 dollars)
25.1
25.1
25.1
63.6
63.6
63.6
% of Total
Value of
Production
0.7
0.7
0.7
1.7
1.7
1.7
other is at treatment Level 2 only. More specific plant-level detail is
necessary in order to make a certain decision on these two plants and the
Agency is currently soliciting that information.
Table 5-16 provides detail on the closure analysis. The table
indicates which of the 26 severely impacted plants may experience either
plant or product line shutdown .as a result of the various treatment levels.
The plants are identified in the table by a) dominant pesticide product
line, b) production quantity, c) pesticide value and d) type of discharge,
(indirect or direct).
Small Business Analysis
This section analyzes the relative impact of the proposed effluent
guidelines on small and large firms to determine if small firms face
disproportionate impacts. Based on the discussion in Section 2, small
firms are defined as those having less than $10 million in annual sales.
Since it was not possible to obtain sales data for all firms, the results
are presented for a sample of 80 plants for which these data are available
for the parent firm from the Dun and Bradstreet data base. This sample is
a large fraction of the total number of 117 plants which comprise the
definition of the pesticide industry used in this study and includes many
plants owned by small firms, so the results are not likely to differ much
from those for the entire pesticide industry.
Using the definition of small businesses given above, 18 out of the
sample of 80 plants belong to small firms. Table 5-17 shows the distri-
bution of the following items for the small firm plants, the large firm
plants, and all plants in the sample under economic option 1: total
number of plants; number of plants with positive incremental costs of
compliance; numbers of plants whose cost-to-sales ratio falls in a given
range; and number of plant closures.*
*The plant and firm data on which these results are based are given in
Appendix A.
5-23
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The results in Table 5-17 indicate that small firms bear a less than
proportionate impact under economic option 1. Only two out of 18 plants
owned by small firms have costs of compliance, none of which have a cost
to sales ratio greater than four percent or are expected to close. In
comparison, 22 of the 62 large firm plants have positive incremental
costs, over one-third of the total; nine of the 22 plants have cost-to-
sales ratios greater than four percent; and two plants and four product
lines are predicted to close due to incremental costs.
New Source Standards
The potential impacts of NSPS (New Source Performance Standards) and
PSNS (Pretreatment Standards, New Source) if new plants or expansions are
built by pesticide manufacturers or pesticide formulator/packagers are
described. The impacts are expressed in terms of treatment costs as a
percent of sales. Also, the prospects for manufacturing plant expansions
occurring in the next four to five years are discussed. Costs incurred by
new source ("greenfield") sites are assumed to be the same as those that
would be incurred by a major modification of an existing site.
Impacts of PSNS and NSPS.Treatment Costs. In studies by the Technical
Contractor^,13,14 specific pesticides were classified in one of 13 sub-
categories, and estimates of treatment costs for each subcategory were
developed. Pesticides were assigned to a subcategory based on several
considerations including raw materials used in manufacturing, wastewater
characteristics and treatability, disposal, and manufacturing processes.
Wastewater treatment trains that meet new source standards were synthe-
sized for each subcategory. The level of treatment obtained by applying
NSPS to direct dischargers is equivalent to Level 1 when applied to
Table 5-17. Results of Small Business Analysis:
Economic Option 1
I Number I Number of Plants I Number of
I of Plants I With Cost-to-Sales I Closures
I I Compliance I Ratio of I I Product
1 Total 1 Costs 1 0-1% 1 1-2% 1 2-4% 1 4% 1 Plant I Line
Owned by
Small Firms 18 2 10100 0
Owned by
Large Firms 62 22 2 299 2 4
Total , 80 , 24 .3 , 2 . 10 . 9 , 2 4
5-26
-------
existing sources. Pretreatment standards recommended by the Technical
Contractor for indirect dischargers are equal to direct discharge treat-
ment Level 1 without biological oxidation (because this treatment is
provided by POTWs) and are achieved with Level 1 treatment for indirect
dischargers.
For each subcategory, treatment costs are based on model plant sizes
selected by the Technical Contractor. Table 5-18 lists the unit prices of
each pesticide group by subcategory. Table 5-19 lists the plant sizes for
the subcategories and three major pesticide groups that could be produced.
Note that plants assigned to four of the subcategories are not compatible
with production of all three major pesticide groups; herbicides and insecti-
cides would not be produced by a plant in subcategory 3, 6 or 7 and fungi-
cides would not be produced by a plant in subcategory 8.
The information shown in Table 5-19 was obtained from 1979 ITC data (as
shown in Table 5-18) and where sufficient detail was available, the range of
values takes into account the compatibility of specific pesticide chemicals
with a subcategory. For example, the price of the fungicide PCP (penta-
chlorophenol) is listed by the ITC as $0.44 per pound. This chemical can be
placed in subcategory 2 only, and the average price of PCP sets the lower
price shown in Table 5-19 for subcategory 2 fungicides. The lower price
shown for fungicides in other subcategories excludes consideration of PCP.
Similarly, only subcategory 5 includes the fungicide napthenic acid, copper
salt ($0.86 per pound) in establishing the price range shown in the table.
In this instance, we assume treatment of the waste stream requires metals
separation which is part of the treatment designed for the model plant in
subcategory 5. For fungicides, the lower price shown for subcategory 1
($0.77) is set by chloropicrin which is not compatible with any of the other
subcategories.
It is assumed that if a new plant were to be constructed, it would
produce only one of the three major groups of pesticides—fungicides,
herbicides or insecticides. Therefore, a range of values is shown in
Tables 5-18 and 5-19 for each type of pesticide rather than an average
value for all three types.
Capital and operating costs were developed by the Technical Contractor for
each subcategory. The estimates are considered to be high in that treatment
costs for NSPS and PSNS would probably never be greater than the cost for the
same level of treatment for an existing plant. A new plant would be designed
to maximize production efficiency, and therefore would incorporate some treat-
ment process components in the basic design of the facility; this has not been
taken into account in the estimates used here. High and low treatment cost
estimates were developed because each subcategory includes a group of chemicals
rather than a specific chemical. This grouping of chemicals was done to limit
the number of subcategories to a reasonable figure. Within a subcategory,
production of different chemicals can affect the hazardous nature of the
wastes and the treatability of the wastestream; the high and low cost esti-
mates account for such variability. The capital and O&M costs for each model
plant were combined into a total annualized cost in an intermediate step.
5-27
-------
Table 5-18
Types of Pesticides and Price Ranges by Subcategory
Treatment
Subcategorv
1
2
3
4
5
6
7
8
9
10
11
12
13
Average Daily
Production
(1,000 Ib. )
20.
22.
26.
7.
25.
12.
4.
76.
39.
50
5.
5.
5.
9
7
8
74
6
7
35
9
3
0
0
0
2
Price Ranges for Types of Pesticides ($/lb.)
Fungicide
1.
0.
1.
1.
0.
1.
1.
1.
1.
0.
1.
1.
20
44
20
20
86
20
20
20
20
86
34
50
to
to
to
to
to
to
to
*
to
to
to
to
to
2.74
2.74
2.74
2.74
2.74
2.74
2.74
2.74
2.74
2.74
10.44
3.00
Herbicide
2.84 to
2.84 to
*
2.84 to
2.84 to
*
*
2.84 to
0.84 to
2.84 to
0.84 to
1.34 to
1.50 to
3.99
3.99
3.99
3.99
3.99
3.99
3.99
3.99
10.44
3.00
4
Insecticide
0.77
1.17
1.17
1.17
1.17
1.17
1.17
1.17
0.77
1.34
1.50
to
to
*
to
to
*
to
to
to
to
to
to
to
3.15
3.15
3.15
3.15
3.15
3.15
3.15
3.15
3.15
10.44
3.00
Pesticide identified in column heading is not compatible with
treatment subcategory.
Plant size selected by Technical Contractor for development of NSPS
and PSNS treatment costs.
2
Based on value of merchant shipments reported in Synthetic Organic
Chemicals, United States Production and Sales 1979. United States
International Trade Commission.
3,
4
Includes plant growth regulators.
Includes rodenticides/ soil conditioners and fumigants.
5-28
-------
Table 5-19
Value of Pesticide Production of Model Plants
Plant Size,'
Annual
Value of Production ($1,000)
Treatment
Subcategory
1
2
3
4
5
6
7
8
9
10
11
12
13
Production
(1,000 Ib. )
6,897
7,491
3,844
2,554
8,448
4,191
1,435
25,377
12,969
16,500
1,650
1,650
1,650
Fungicide
8,276 to 18,898
3,296 to 20,525
10,613 to 24,233
3,065 to 6,998
7,265 to 23,147
5,029 to 11,483
1,722 to 3,932
*
15,563 to 35,535
19,800 to 45,210
1,419 to 4,521
2,211 to 17,226
2,475 to 4,950
Herbicide3
19,587 to 27,519
21,274 to 29,889
*
7,253 to 10,190
23,992 to 33,707
*
*
72,071 to 101,254
10,894 to 51,746
46,860 to 65,835
1,386 to 6,583
2,211 to 17,226
2,475 to 4,950
4
Insecticide
5,311 to 21,726
8,764 to 23,597
*
2,988 to 8,045
9,884 to 26,611
*
1,679 to 4,520
29,691 to 79,938
15,174 to 40,852
19,305 to 51,975
1,270 to 5,197
2,211 to 17,226
2,475 to 4,950
Pesticide identified in column heading is not compatible with
treatment subcategory.
Plant size selected by Technical Contractor for development of NSPS
and PSNS treatment costs; annual production based on 330 days of plant
operation.
Based on value of merchant shipments reported in Synthetic Organic
Chemicals, United States Production and Sales 1979. United States
International Trade Commission. Value is obtained by multiplying the
annual production by the prices listed in the ITC.
Includes plant growth regulators.
4
Includes rodenticides, soil conditioners and fumigants.
5-29
-------
The annualized treatment costs (high and low values) are expressed on
a per pound basis of pesticide produced by the model plant and also
expressed as a percent of pesticide value. (Annual pesticide production
assumes 330 days per year of production). Tables 5-20 (for NSPS) and 5-21
(for PSNS) summarize the annualized treatment cost impacts relative to
pesticide prices for direct and indirect dischargers, respectively. The
percentage range shown for any given row and major pesticide group is
based on the high and low price per pound of pesticide shown in the ITC,
whereas the high and low column headings reflect the variability in treat-
ment costs for the different chemicals included within a subcategory.
For the direct dischargers (Table 5-20), treatment cost impacts are
greatest for pesticides in subcategory 7 where costs range from 16 percent
(for the higher priced insecticides that can be produced in new plants
requiring relatively low treatment costs) to 73 percent (for lower priced
insecticides that require relatively high treatment costs). For subcate-
gories 4 and 7, treatment costs are generally greater than 10 percent
(herbicide production in low treatment cost plants is the only exception
at 9 percent) of pesticide prices, regardless of which type of pesticide a
new plant might produce. Treatment cost impacts for subcategories 6 and 8
are lowest and range from zero to five percent of pesticide prices.
A treatment cost greater than 20 percent of pesticide price is used to
identify severe impacts that seriously threaten the feasibility of building
a profitable new plant. The selection of 20 percent is admittedly arbitrary.
If construction is for a new plant to produce an existing, non-patented
pesticide, the 20 percent criterion is high. However, if the new plant is
to produce a new pesticide protected by patent rights, the selling price
could be established to recover treatment costs in addition to pesticide
development costs (which are probably much greater than treatment costs).
Use of this 20 percent criterion suggests that new plants for chemicals in
subcategories 1, 6, 8, 9 and 10 would not be seriously threatened. For
pesticides in subcateogry 2, new plants being considered for the production
of some of the lower priced fungicides would be judged infeasible—unable to
meet profit objectives of the firm—and hence would not be built.
Table 5-21 presents similar information for indirect dischargers. As
may be expected, the effect of treatment costs on pesticide prices is less
than in the case of direct dischargers; for indirect dischargers, the
biological treatment is carried out by the POTWs whereas for the direct
dischargers the biological treatment is done at the new plant. Again, it
is new plants in subcategory 7 that would be more severely impacted than
plants associated with any of the other subcategories; treatment costs
range from 11 percent to 58 percent of prices depending on the particular
chemicals. Using the 20 percent cost criterion to judge economic feasi-
bility suggests that plants constructed to produce any of the chemicals in
subcategories 1, 6, 8, 9 and 10 would be feasible. Also, new plants to
produce herbicide and insecticide chemicals in subcategories 2 and 5 would
not incur treatment costs that exceed 20 percent of the prices of those
pesticides.
5-30
-------
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Prospects for Additional Plant Capacity
Projections of pesticide consumption compared to industry capacity
suggest that there will be little, if any, need for additional capacity by
1985. The pesticides industry overall operated at a capacity utilization
rate of 80 percent in 1979. Thus, while 1,429 million pounds of pesticide
chemicals were produced in 1979, capacity was available to produce almost
1,800 million pounds. The components of the industry (fungicides, insecti-
cides, herbicides) varied in their utilization of available capacity and
Table 5-22 lists production capacity and capacity utilization for the
industry.
Table 5-22 shows that the 1979 capacity was 184 million pounds for
fungicides, 888 million pounds for herbicides and 726 million pounds for
insecticides. The high point for pesticides production in the past decade
occurred in 1974 when combined production of 1610 million pounds exceeded
1979 output; in 1974, about 160 million pounds of fungicide were produced,
660 million pounds of insecticides and 790 million pounds of herbicides.
Table 5-22
Pesticide Production and Capacity Utilization, 1979
Type of
Pesticide I
Fungicides
Herbicides
Insecticides
All pesticides
Production
(million Ibs. )
155
657
617
1,429
Capacity
! Utilization I
.84
.74
.85
1 '80 1
Capacity
(million Ibs. )
184
888
726
1,786
Source: U.S. Pesticide Market, Frost & Sullivan (capacity values
calculated by Meta Systems, Inc).
Projections by Arthur D. Little, Inc. forecasted insecticide production
to be 625 million pounds, herbicide production to be 820 million pounds and
fungicide production to be 155 million pounds by 1985. For each of these
three major pesticide types, production data for the last several years
demonstrate that the industry is capable of meeting the projected production
requirements with current capacity.
5-33
-------
Appendix A
Plant and Firm Data Ordered by Firm Employment
and Firm Sales
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Appendix B
Derivation of Capital Recovery Factor
-------
Appendix B
Derivation of Capital Recovery Factor
The capital recovery factor (CRF) measures the rate of return that an
investment must achieve each year in order to cover the cost of the invest-
ment and maintain net earnings, including depreciation and taxes. Stated
another way, the capital recovery factor is the excess of revenues over
variable costs, per dollar of invested capital, needed to cover the cost of
borrowing, depreciation and net profit-related taxes, while preserving the
market value of the firm's stock.
The formula for CRF used in previous analyses was:
A(N,K,) - td
CRF = - 1 - (B-l)
1 - t
where:
N = lifetime of investment
Kf = average after-tax cost of capital
A(N,Kf) = annuity whose present value is 1,
given N and Kf [Kf/(l-(l+Kf
d = depreciation rate
t = corporate income taxes
Changes in the tax code dealing with rapid depreciation and investment tax
credits, require alterations in the formula for calculating the capital
recovery factor. The revised formula is:
A(N,Kf)(.9-c)
CRF = - 1 - (B-2)
1 - t
where: c = E
where:
n| = depreciation lifetime under tax code
d' = new depreciation rate
Other variables as above.
The derivation of these formulas are given in the back of this Appendix.
The assumptions and data used to obtain values for the above variables are
described below.
A single, industry-wide CRF equal to 21.8 percent has been used in our
analysis. For a given investment, a firm's CRF will vary with their cost
of capital and mix of financing. However, it was not possible to estimate
a separate CRF for each establishment or firm.
-------
Average Cost of Capital
The cost of capital, Kf, is the average percentage return that
suppliers of debt and equity demand. For firms which have more than one
type of capital, Kf is calculated as the average of the after-tax costs
of debt and the costs of equity, weighted by the share of market value of
each relative to the total market value of the firm. In equation form:
K* = bi(l-t) + (l-b)r (B-3)
where:
Kf = average cost of capital after taxes
i = average of cost of debt
r = average cost of equity
t = corporate income tax rate
b = share of debt financing
The costs of debt and equity are measured by the current market value
of outstanding debt and stock, rather than the original costs when the
debt and equity were issued. The argument that projects should be eval-
uated using the weighted average cost of capital as the discount factor
has been made elsewhere* and rests on several assumptions. Firms are
assumed to have an optimal debt/equity ratio (or at least some preferred
debt/equity ratio), to have already obtained that ratio, and to strive to
maintain it over time. In addition, it is assumed that new projects do
not alter the overall risk position of the firm. (A change in the risk
level might result in a change in the debt/equity level.) Therefore, new
projects, on average, will be financed with these same desired fractions
of debt and equity.
Cost of Debt. Since firms often have more than one debt issue, it is
necessary to calculate an average cost within a company as well as across
companies. The following information on the debts of 40 chemical
companies was obtained from Standard and Poor's Bond Guide (August 1979).**
1) yield to maturity
2) debt outstanding
3) closing price
First, the total market value of each bond issue is calculated as the
bond price multiplied by the amount of debt outstanding. Second, the
average cost of debt is calculated as a weighted average of the various
*See, for example, J. Fred Weston and Eugene F. Brigham, Managerial
Finance (6th ed.), Dryden Press, 1978, Chapter 19.
**See: Draft Industry Description: Organic Chemical Industry, Vol. I,
December 1979, pages 3-7 through 3-16, for a detailed presentation of the
data.
B-2
-------
values for yield to maturity, where the weights equal the ratio of the
market value of each bond issue to the total value of debt. The average
before-tax cost of debt for these companies is 9.89 percent.
Cost of Equity. A firm's cost of equity can be expressed in equation
form as:
r = — + g (B-4)
P
where e is the annual dividend, P is the stock price, and g the expected
growth rate of dividends.* To estimate the firms' cost of equity, the
following data were obtained from Standard and Poor's Stock Guide (August
1979):
1} dividend yield;
2) closing price;
3) number of shares outstanding.
Information was collected for common stocks. The existence of
preferred stocks complicates the calculations substantially, since a
preferred stock is more nearly a stock-bond hybrid. Preferred stocks are
ignored except where they represent more than 10 percent of the market
value of all stocks. In those cases where preferred socks represent a
signficiant portion of equity, the company was removed from the survey.
An estimate of the expected growth rate was obtained using data from
the USITC Organic Chemicals (1977) and the DRI Chemical Review. A
weighted average of annual growth rates for plastics, fibers, and
elastomers sales was obtained for the entire industry:
g = .745(7.1 ) + .125(1.6 ) + .130(3.8 ) = 6.0
Plastics Elastomers Fibers
Depreciation
Depreciation is normally defined as the fraction of revenues set aside
each year to cover the loss in value of the capital stock. Due to recent
changes in the federal tax code, the economic life of a capital item is
now considerably longer than the depreciation life for tax purposes.
Based on earlier work the lifetime of capital stock for this industry is
assumed to be about 10 years.* The depreciation rate for most personal
property now is straight-line over five years (20 ). These values are
used in the revised calculation of the capital recovery factor.
''See, for example, J. Weston and F. Brigham, op.cit.
B-3
-------
Tax Rate
The current federal corporate income tax rate is 20 percent on the
first 225,000 of profits, 22 percent on the next $25,000, and 46 percent
on all profits over $50,000. For this analysis, we assume that plants are
paying an even 46 percent federal tax on all profits. A study by Lin and
Leone** indicates that state and local income taxes also are a significant
factor in pollution control investments. State corporate income tax rates
may be as high as 9.5 percent. In their study, a weighted average of 7
steel-producing states yielded an average state corporate income tax rate
of 7.55 percent. State income taxes, of course, are deductible expenses
in computing corporate income tax. We assume a state corporate income tax
rate of 8 percent. Deducting this figure before computing the federal
income tax rate reduces the net effect of the 8 percent rate to about 4
percent. Thus, the overall effective income tax rate is approximately 50
percent.
Sensitivity Analysis
Table 1 presents various values for the capital recovery factor,
assuming various weighted costs of capital (Kf) and different
formulations allowing for changes in the federal tax code. Both the rapid
depreciation and the investment tax credit serve to lower the capital
recovery factor, thus reducing the return necessary to justify a given
investment.
In previous work in both the pulp and paper industry and the organic
chemical industry, we have estimated the weighted cost of capital based on
the current costs as reflected in the current prices and yields of a
sample of corporate stocks and bonds for that industry. In August of
1979, the weighted cost of capital for the organic chemical industry was
estimated to be about 10 . There are two major assumptions in using this
method. First that current prices and yields accurately reflect future
costs of capital. However, interest rates have increased significantly
since the summer of 1979. Second, that the current portfolio mix will
remain constant over the next several years. Given changes in tax codes,
and changes in the availability of certain sources of capital such as
industrial revenue bonds, this is unlikely. Therefore we expect that the
cost of capital will be higher than 10 percent. Given the mix of financ-
ing sources available, it is unlikely to be as high as 15 percent and we
believe that 13 percent is a good estimate of the weighted cost of capital
for the period covered by this study.
*Draft Industry Description: Organic Chemical Industry, Vol. I,
December 1979.
**An Loh-Lin and Robert A. Leone, "The Iron and Steel Industry," in
Environmental Controls, (Robert A. Leone, ed.), Lexington, MA: Lexington
Books U976), p. 70.
B-4
-------
Variable
Table B-l
Alternative Derivations of the Capital Recovery Factor
Values
Weighted cost of
capital (K,.)
Life of asset (N)
A(M, Kf)
Depreciation life (n)
Depreciation rate (d)
Tax rate (t)
c
CRF(l)
CRF(2)
CRF(3)
.10 .15 .20 .10 .13 .15 .20
10 10 10 10 10 10 10
.163 .199 .239 .163 .185 .199 .239
10 10 10 5 5 5 5
.10 .10 .10 .20 .20 .20 .20
.50 .50 .50 .50 .50 .50 .50
.330 .310 .300 .275
.226 .298 .378
.218 .255 .279 .347
.185 .218 .239 .299
where: CRF(l) is original formula (2-1 in text)
CRF(2) allows for rapid depreciation but not investment tax credit
CRF(3) allow for both rapid depreciation and investment tax credit
(2-2 in text)
B-5
-------
Original Form
The capital recovery factor can be expressed analytically as follows.
Let:
R = annual revenue
C = annual variable costs: labor, materials, energy, etc.
I = investment cost
* = capital recovery factor = (R-O/I
d = depreciation rate
t = tax rate
Kf = weighted cost of capital (after-tax)
N = investment lifetime in years
A(Kf,N) = annuity whose present value equals 1, given discount
rate Kf and lifetime N.
Given revenues and direct costs, average cost of capital, tax rates,
depreciation rates, and investment lifetime, the problem is to find that
gross return per dollar of invested capital which allows the firm to just
cover its costs of capital, depreciation, and taxes and maintain the value
of the firm. Equation (B-5) expresses the relationship that must hold for
the firm to break even on its invested capital, I. In other words, the
present discounted value of the net income flow (using the average cost of
capital as the discount factor) just equals the cost of the firm's initial
investment:
N
Z (R-C) - t(R-C) + tdl (5-5)
The numerator of the left-hand side of equation (B-5) shows net profits
plus the tax subsidy on depreciation. Note that the tax subsidy on
interest payments is not included because it is already taken into account
by using the after-tax cost of debt in the average cost of capital.
Dividing equation (B-5) by I and substituting IT for (R-O/I gives:
N
Z IT - tir + td ., (B-6)
0=1 (1 * Kf)J
Note that if the numerator is assumed constant (i.e., constant R-C,
depreciation and tax rates) over all periods, it represents the annuity
whose present value is 1, given discount rate Kf and lifetime N, i.e.,
A(Kf,N). We can then "solve" equation (B-6) for IT using the tables for
"Annuity whose Present Value is 1." Then ir will be the "capital recovery
factor," expressed as a percentage of initial investment, which must be
added to direct operating costs to ensure the project return equals its
cost of capital. The result is given below:
it - t* + td = A(Kf,N)
B-6
-------
A(K,,N) - td
- - - (B-7)
1 - t
Alternative Form
The 1981 tax reform act allows firms to depreciate capital stock for
tax purposes at a rate faster than depreciation for economic purposes.
Therefore d is no longer the inverse of N as above. In addition, a 10
tax credit is allowed on new investments, thus reducing the initial cost
of the investment to 90 of its original cost. Therefore, equation (B-6)
above becomes:
N
V IT - tlT
= .9 (B-8)
where:
n = depreciation lifetime under tax code
d1 = new depreciation rate
Setting:
n
td1
1=1 (1V=C
Then:
E * " tir , = .9-C (B-9)
N
Z (TT - ti
= 1 (1
t) / (.9-C)
+ Kf)J
= 1
Assuming as before that the numerator is a constant over all periods, it
represents the annuity whose present value is 1, given discount rate Kf
and lifetime N.
B-7
-------
Therefore:
—2 L_ = A(K ,N)
.9-C .9-C f
(_kl_) = A(K ,N) (B-ll)
.9-C f
A(K,M)(.9-C) (B
1-t
B-8
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Appendix C
References
-------
References
1. U.S. International Trade Commission, Synthetic Organic Chemicals,
1977, U.S. Government Printing Office, Washington, D.C., 1978.
2. Arthur D. Little Inc., unpublished information furnished by E.P.A.
3. Bureau of the Census, 1977 Census of Manufacturers, U.S. Government
Printing Office, Washington, D.C., 1980.
4. Radian Corp., Industrial Process Profiles for Environmental Use:
Chapter 8 - Pesticides Industry, Parson, T.B., ed., National
Technical Information Service, Springfield, VA, PB-266 255, January
1977.
5. Production, import, and export values calculated from U.S.
Department of Agriculture. The Pesticide Review, Washington, D.C.,
various issues.
6. Agricultural pesticide usage figures taken from Reference 7.
7. Carlson, G.A., Long-Run Productivity of Insecticides, American
Journal of Agricultural Economics, 59, 3, August 1977, pp. 543-548.
8. Meta Systems, Inc Memorandum for the Organic Chemicals file, October
22, 1981.
t
9. Meta Systems, Inc Memorandum to E.P.A., "Effect of RCRA Costs on
Pesticide Plant Closures", dated October 11, 1981.
10. Meta Systems, Inc Memorandum to E.P.A., "Pesticide Plant and Product
Line Closures", dated January 29, 1982.
12. Environmental Services and Engineering, Inc. (ESE) Revised
Contractor Report for Best Available Technology, Pretreatment
Technology, New Source Performance Technology and Best Correlational
Pollution Control Technology in the Pesticide Chemicals Industry,
November 1980, est. No. 79-238-001.
13. ESE Memorandum dated January 7, 1981, subject: Revised New Source
Performance Standards Cost.
14. ESE Memorandum dated January 19, 1981, subject: Additional NSPS
Product Information, Pesticides BAT Reviews.
15. Frost and Sullivan U.S. Pesticides Market.
16. Pimental, D., et al. Benefits and Costs of Pesticide Use in U.S.
Food Production, Bioscience, December 1978, pp. 772-783.
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C-2
References
(continued)
17. Eichers/ T., Andrilenasr P., and W. Anderson, T.W., Farmer's Use of
Pesticides in 1976, USDEA, Washington, various issues.
18. Federal Trade Commission, Quarterly Financial Report, U.S.
Government Printing Office, Washington, D.C., various issues.
19. William Blair & Company, The Pesticide Industry: An Overview,
Chicago, Illinois, 1975.
20. Goring C., The Costs of Commercializing Pesticides, in Pesticide
Management and Insecticide Resistance, Harcourt Brace Jovanovich,
New York, 1977, pp. 1-33.
21. Arthur D. Little, Inc., Evaluation of the Possible Impact of
Pesticide Legislation on Research and'Development Activities of
Pesticide Manufacturers, Report to Office of Pesticide Programs,
EPA, 1975.
22. C. H. Kline & Co., The Kline Guide to the Cheaical Industry, Fourth
Edition, Industrial Marketing Guide IMG 13-80.
23. Economic Information Systems, Inc. On-Line Data Base.
24. Dun and Bradstreet Million Dollar Directory, 1981.
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