&EHV
United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, DC 20460
EPA 440/2 85-027
September 1985
Water
Economic Impact Analysis
of Effluent Limitations
Guidelines and Standards
for the Pesticide Chemicals
Industry
QUANTITY
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ECONOMIC IMPACT ANALYSIS OF
EFFLUENT LIMITATIONS GUIDELINES AND STANDARDS
FOR THE PESTICIDE CHEMICALS INDUSTRY
Submitted to
Environmental Protection Agency
Office of Analysis and Evaluation
Office of Water Regulation and Standards
Washington, DC 20460
Submitted by
Meta Systems Inc
10 Holworthy Street
Cambridge, MA 02138
September 1985
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This document is an economic impact assessment of the promulgated effluent
limitations guidelines and standards. The report is distributed to EPA
Regional Offices and state pollution control agencies and directed to tne
staff responsible for writing industrial discharge permits. The report
includes detailed information on the costs and economic impacts of various
treatment technologies. It should be helpful to the permit writer in
evaluating the economic impacts on an industrial facility that must comply
with BAT limitations or water quality standards.
The report is also being distributed to EPA Regional Libraries, and copies are
available from National Technical Information Service (NTIS), 5282 Port Royal
Road, Springfield, VA 22161, (703) 487-4550.
If you have any questions about this report, or if you would like additional
information on the economic impact of the regulation, please contact the
Economic Analysis Branch in the Office of Water Regulations and Standards at
EPA Headquarters:
401 M. Street, SW (WH-586)
Washington, DC 20460
(202) 382-5397
The staff economist for this report is Mitchell Dubensky (202/382-5388).
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PREFACE
This document is a contractor's study prepared for the office of Water
Regulations and Standards of the Environmental Protection Agency (EPA). The
purpose of the study is to analyze the economic impact which could result from
the application of effluent limitations guidelines and standards issued under
Sections 301, 304, 306 and 307 of the Clean Water Act to the Pesticide
Chemicals Point Source Category.
This study supplements the Development Document (Section IV of the
Pesticide Chemicals industry Administrative Record) supporting the notice of
these regulations. Section VI surveys existing and potential waste treatment
control methods and technologies within particular industrial source
categories and supports certain effluent limitations guidelines and standards
based upon an analysis of the feasibility of these standards in accordance
with the requirements of the Clean Water Act. Presented in Section VIII are
the investment and operating costs associated with various control and
treatment technologies. The attached document supplements this analysis by
estimating the broader economic effects which might result from the
application of various control methods and technologies. This study
investigates the impact on product price increases, employment and the
continued viability of affected plants, and foreign trade.
This study has been prepared with the supervision and review of the Office
of Water Regulations and standards of EPA. This report was submitted in
fulfillment of EPA Contract No. 68-01-6774 by Meta Systems inc. This analysis
was completed in September 1985.
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TABLE OF CONTENTS
Chapter 1; Executive Summary
1.1 Introduction 1-1
1.2 Methodology 1-2
1.3 Industry characteristics 1-6
1.4 Baseline Projections 1-8
1.5 Effluent Guideline Control Options and Costs 1-8
1.6 Economic Impact Analysis 1-9
1.7 Small Business Analysis 1-10
Chapter 2: Economic Assessment Methodology
2.1 Overview 2-1
2.2 Industry Characteristics 2-2
2.3 Industry Surveys 2-3
2.4 Baseline Estimates 2-4
2.5 Price Changes 2-10
2.6 Production, Profit and Employment Changes 2-12
2.7 Potential Plant and Product Line Closures. .... 2-14
2.8 Small Business Analysis 2-19
2.9 Foreign Trade 2-20
2.10 New Sources 2-20
Chapter 3: Industry Characteristics
3.1 Overview 3-1
3.2 Plant Characteristics 3-4
3.3 Structure of the Pesticide Industry. 3-16
3.4 Exports and Imports 3-34
Chapter 4: Baseline Projections of Industry Conditions
4.1 Pesticide Manufacturing 4-1
4.2 Pesticide Formulating and/or Packaging (PFP) . 4-6
Chapter 5: Effluent Guideline Control Options and Costs
5.1 Overview 5-1
5.2 Control and Treatment Technology Costing 5-1
5.3 Compliance Cost Estimates 5-3
Chapter 6; Economic Impact Analysis
6.1 Total Compliance Costs for Existing Sources 6-1
6.2 Price, Quantity and Profit Changes 6-3
6.3 Plant Closure Potential 6-4
6.4 Other Economic Impacts 6-8
6.5 New Source Impacts 6-12
Chapter 7; Small Business Analysis
7.1 Introduction 7-1
7.2 Definition of Small Business 7-1
7.3 Pesticide Manufacturers 7-2
7.4 Pesticide Formulator/Packagers 7-4
-i-
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Table of Contents (continued)
Page
Chapter 8: Limits of the Analysis
8.1 Pesticide Active Ingredient Manufactures 8-1
8.2 Metallo-Organic Pesticides 8-3
8.3 Pesticide Formulator/Packagers; 8-3
References R-l
Appendix 2-A; 308 Survey of Pesticide Formulator/Packagers . . . 2-A-l
Appendix 2-B; Estimation of Price Elasticities of Demand .... 2-B-l
Appendix 2-C; Estimating the Net Present Value 2-C-l
Appendix 2-D: Derivation of Capital Recovery Factor 2-D-l
Appendix 3-A; Information on Zero Discharger
Formulating/Packaging Plants 3-A-l
Appendix 3-B: Comparison of Profitability Ratios;
Pesticide Manufacturing Firms 3-B-l
Appendix 3-C: Comparison of Profitability Ratios
For Formulating/Packaging Firms 3-C-l
Appendix 3-D: Historical Data on Pesticide
Active Ingredients; Production Quantity and Value. 3-D-l
Appendix 3-E: Discussion ofMajor Markets
and Uses for Pesticides , 3-E-l
Appendix 4-A: Estimating the Pesticide Manufacturing
1982 Baseline 4-A-l
Appendix 4-B: Estimating the Forirulator/Packager
1982 Baseline 4-B-l
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List of Tables and Figures
1-1 Total Cost of Compliance and Industry Impacts 1-3
2-1 Ratios Used in Determining the Number of Plants in
the Entire PFP Industry 2-5
2-2 Relationship of Quantity Sold in 1982 to Quantity
Produced in 1977 2-7
2-3 ITC Prices for Subgroups 2-8
3-1 Number of Pesticide Active Ingredient Manufacturers
by Employment Size 3-5
3-2 Geographic Location of Pesticide Active Ingredient
Manufacturing Plants by EPA Region 3-6
3-3 Total U.S. Pesticide Active Ingredient Production . 3-7
3-4 Profile of Pesticide Chemicals Plants 3-9
3-5 Pesticide Production Capacity Utilization and Expansion . . . 3-11
3-6 Indirect Discharge Pesticide Formulator/Packagers 3-13
3-7 Geographic Location of Pesticide
Formulator/Packager (PFP) Plants 3-14
3-8 Characteristics of Pesticide Formulator/Packager (PFP)
Plants by Percent of Internally Manufactured Active
Ingredients 3-17
3-9 Pesticide Formulator/Packagers Employment summary for
Zero Discharge Plants 3-18
3-10 Raw Materials and Key Chemical Intermediates Used in
Pesticide Manufacture 3-20
3-11 Concentration Ratios Based on Pesticide Active
Ingredient Sales 3-21
3-12 Comparison of Profitability Ratios: Pesticide Manufacturing 3-23
Fig. 3-1 Annual Pesticide Production by Product Type 3-31
Fig. 3-2 Annual Pesticide Value by Product Type 3-32
3-13 Estimated Composition of U.S. Pesticide Chemicals Production 3-33
3-14 U.S. Production and Trade in Herbicides 3-35
3-15 U.S. Production and Trade in Insecticides ..... 3-36
3-16 U.S. Production and Trade in Fungicides 3-37
3-17 Annual Growth Rates for Volume and Value of U.S. Pesticide
Exports (1970-1980) 3-38
3-18 The World Pesticide Market, 1980, User's Level,
Percent of Market 3-40
4-1 Baseline Production Quantity and Value
of Pesticide Active Ingredients 4-5
4-2 1982 Baseline for Indirect Discharge PFP Plants 4-7
4-3 1982 Baseline Value of Production and
Employment Estimates for All PFP Plants 4-9
4-4 Baseline Value of Production and Employment Estimates,
1982 and 1990 Pesticide Formulating/Packaging 4-11
-111-
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List of Tables and Figures (continued)
6-1 Total Cost of Compliance 6-2
6-2 Price, Quantity and Profit Impacts for Pesticide
Manufacturers and Formulator/Packagers 6-5
6-3 Summary of Plant and Product Line Closures. ......... 6-7
7-1 Distribution of Treatment Cost Impacts on Large and
Small Firms: Pesticide Active Ingredient Manufacturers 7-3
7-2 Distribution of Treatment Cost Impacts on Large and
Small Firms: Pesticide Formulator/Packagers 7-5
2-B-l Estimated Coefficients for Pesticide Production (Total
and For Each Product Group) 2-B-2
2-C-l Ratios to be Used in Net Present Value Calculations Based
on Simple Average of Values for 1982, 1981 and 1980 . . 2-C-3
2-C-2 Ratio of Operating Income to Sales (Operating Margins) for
Pesticide Production and for
Total Corporate Sales, 1980 2-C-4
2-C-3 Estimated Real Rate of Return 2-C-6
2-D-l Alternative Derivations of the Capital Recovery Factor. . . . 2-D-5
3-A-l Pesticide Formulator/Packagers Zero Dischargers:
SIC Code Summary 3-A-2
3-A-2 Pesticide Formulator/Packagers Zero Dischargers 3-A-3
3-B-l Profitability Ratios for Thirty One Firms . 3-B-2
3-B-2 Profitability Ratios for Three Industries (Percentage). . . . 3-B-5
3-C-l Financial Ratios for Pesticide Formulating and Packaging
Corporations 3-C-2
3-C-2 Profitability Ratios for Four Industries (Percentages). . . . 3-C-3
3-D-l U.S. Herbicide Production (1967-1983) 3-D-2
3-D-2 U.S. Insecticide Production (1967-1983) 3-D-3
3_0_3 u.S. Fungicide Production (1967-1983) 3-D-4
4-B-l Estimates of Value of PFP Shipments; Various Data Sources . . 4-B-2
-IV-
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1. EXECUTIVE SUMMARY
1.1 Introduction
This report presents and analyzes the economic effects on the pesticide
chemicals industry of effluent limitations guidelines and standards being
promulgated at this time. This analysis utilizes data made available to the
public subsequent to the proposal of regulations. The availability of this
information was announced in Notices issued under authority of Sections 301,
304, 306, and 307 of the Federal Water Pollution Control Act, as amended by
the Clean Water Act of 1977 (Public Law 92-500). The regulations analyzed in
this document include limitations and standards based on:
o Best Practicable Control Technology Currently Available (BPT)
o Best Available Technology Economically Achievable (BAT);
o Pretreatment Standards for Existing Sources (PSES);
o New Source Performance Standards (NSPS); and
o Pretreatment standards for New Sources (PSNS).
The primary factors examined by this study in determining the effects of
these regulations include:
o Total capital and annual costs of compliance with the regulations;
o Potential changes in price, production costs, and profit;
o Potential plant and product line closures;
o Potential employment reductions;
o Balance of trade impacts;
o Impacts on new sources; and
o Impacts on small businesses.
For the purposes of this analysis, the pesticide chemicals industry is
divided into three subcategories. The first is composed of plants that
manufacture pesticide chemicals (active ingredients). This report analyzes
114, of the approximate 119, manufacturers of pesticide active ingredients
affected by the regulation. These 114 plants comprise the majority of
pesticide active ingredient production in the United States. Effluent
limitations guidelines and standards are promulgated for both direct and
indirect discharge plants.
The second subcategory includes plants that manufacture metallo-organic
pesticides. This report analyzes the economic effects of the effluent
limitations guidelines and standards for the one indirect discharging
manufacturer of metallo-organic pesticides containing mercury which has been
identified by the Agency.
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The third subcategory is composed of pesticide formulating/packaging (PFP)
plants that combine the pesticide active ingredients with substances such as
diluents, emulsifiers, and wetting agents to produce final products and/or
package them for distribution and sale. The plants included in the scope of
this regulation encompass only those that formulate and/or package
agricultural or household pest control products (herein referred to as PFP
plants). A separate study was conducted for the soaps and detergents industry
which included sanitizers and disinfectants (SIC 2841) and these products are
not covered by the scope of this regulation. Since direct discharge plants
already have been required to achieve zero discharge, the economic effects of
the effluent limitations guidelines and standards examined in this report will
apply only to indirect discharge PFP plants. The Agency estimates that this
regulation applies to 169 indirect discharge PFP plants. A sample of 28
representative PFP plants is analyzed. The economic impacts for PFP plants
are based on an extrapolation of data from the 28 indirect discharge PFP
sample plants which submitted financial and production dataf to the 169 plants
in the industry. Total costs of compliance with the regulations are based on
an extrapolation of the costs from these 28 sample plants to a total of 157
plants plus plant specific treatment costs for an additional 12 PFP plants.
A summary of the impacts for the three subcategories is shown on
Table 1-1. The remainder of this chapter summarizes each of the following
chapters of the report.
1.2 Methodology
1.2.1 Overview
The methodologies used to analyze the three subcategories of the pesticide
chemicals industry are basically the same. The major steps in the analysis
are:
o Estimate baseline prices and production levels (i.e., without
additional treatment requirements).
o Estimate the effects of treatment costs on prices, production costs,
and profitability.
o Estimate the likelihood of plant and product line closures based on a
comparison of the current liquidation value of the plant to the net
present value of the sum of earnings a plant could expect to earn if
it met the regulations. This is called the net present value (NPV)
test.
These steps are described in more detail in the following paragraphs.
Treatment cost estimates for specific plants are provided by the
Industrial Technology Division, formerly the Effluent Guidelines Division, in
EPA, based on their analyses of the waste streams at each plant and treatment
systems which would enable each plant to meet the effluent limitations
guidelines and standards. In addition, treatment cost estimates include
monitoring costs for all plants and the incremental costs to comply with the
Resource Conservation and Recovery Act (RCRA) requirements.
1-2
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1.2.2 Industry Surveys
Much of the analysis is based on the responses to two 308 Surveys
conducted by EPA. In 1977, the Agency surveyed 117 pesticide active
ingredient manufacturing plants, since then, three of the plants have
discontinued manufacturing pesticide active ingredients—therefore, only 114
manufacturing plants are included in this analysis.A/ in 1983, EPA surveyed
formulator/packager plants. The survey consisted of two steps. First, a
telephone survey was performed on a sample of plants drawn from the EPA Office
of Pesticide Programs (OPP) file. The purpose of the telephone survey was to
identify indirect discharge facilities that formulate and/or package
agricultural pesticides or household pest control products, as defined by this
regulation. Written questionnaires we.:e sent to plants identified by the
telephone survey as an indirect discharger within the scope of the
regulation. Based on the results of the telephone and written surveys, it is
estimated that there are approximately 1,264 PFP plants of which 169 are
indirect dischargers covered by this regulation. The economic analysis for
the PFP subcategory includes 40 indirect discharge PFP plants for which data
are available from their written 308 Survey responses. The results for a
scientifically designed sample of 28 plants are extrapolated to assess the
effects on the estimated 169 indirect discharge PFP plants t.o be covered by
the regulation.
1.2.3 Baseline Estimates
A baseline description of industry conditions (i.e., without additional
treatment requirements) is developed separately for pesticide manufacturers
and for pesticide formulator/packagers. The pesticide manufacturers 1982
baseline is derived from the production levels reported by individual
manufacturing plants in the 1977 308 survey. These 1977 levels of production
are adjusted to reflect production levels and product mix in 1982. This
adjustment is necessary because production levels of many pesticides decreased
significantly between 1977 and 1982, while prices increased. Therefore, a
baseline using 1977 production levels would overstate revenues for many plants
in 1982. The quantity and price data are provided by the International Trade
Commission (ITC)..2/ Production quantity and value are also estimated
separately for the three major product groups: herbicides, insecticides and
fungicides, at each plant. This provides an adjusted total quantity of output
for each of the 114 plants and an adjusted value of production. The total
quantities and values of production for the manufacturing subcategory are
equal to the sums of the quantities arid values at all the individual plants.
These adjusted plant quantities and revenues are used in the closure analysis.
A/Based on information currently available to the Agency, subsequent to
the survey five additional plants have started to manufacture pesticide active
ingredients.
2/ U.S. International Trade Commission, Synthetic Organic Chemicals, 1977
and 1982, USITC publications 920 and 1422.
1-4
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The baseline value of production (i.e., production in the absence of
additional treatment requirements) for formulator/packagers is derived from
data provided primarily by the U.S. Bureau of the Census, for SIC Product
Group 2879.1/ and the 308 Survey results for indirect discharge
formulator/packager plants. The 308 Survey is used to estimate a baseline for
the indirect discharge PFP plants, while total PFP production is derived from
the Census data. The difference between industry totals and indirect
discharge estimates are attributed to the zero discharge plants. The PFP
subcategory is analyzed as one market and not evaluated on a product group
basis because the costs of compliance for this subcategory do not vary with
the type of pesticide handled and because more detailed plant-specific and
pesticide-specific financial data are available from the 1983 308 Survey,
making product group analysis unnecessary.
1.2.4 Price, Production, and Profit Changes
It is assumed that manufacturers of pesticide active ingredients
(Subcategory 1) will increase their prices in response to the regulations.
The percentage increase in price for pesticide manufacturers is assumed equal
to the average cost increase (i.e., the total annual cost of providing
treatment for all plants in each product group divided by the total sales for
that product group). This allows the percentage price increase to vary among
the three product groups. The increase in prices will result in a decrease in
demand, and thus a decrease in production levels and in profits. The amount
by which production levels decrease depends on the price change and the price
elasticity of demand. Price elasticities are estimated for each of the three
product groups: -0.67 for herbicides, -0.32 for insecticides, and -0.35 for
fungicides. It is assumed that the profit per pound of product is unchanged
by the regulation. Therefore, profits drop by the amount of decrease in
production.
It is assumed that the one plant identified by the Agency as an indirect
discharge metallo-organic pesticide manufacturer of mercury will not be able
to pass any of its treatment costs on to its customers. There are a number of
other metallo-organic pesticide manufacturers who will not incur any costs as
a result of this regulation since they are already zero dischargers due to the
BPT regulation. In addition, the plant analyzed currently competes with
foreign producers. Therefore, the no cost pass through assumption is
reasonable. With no price change, there is no change in production levels and
the total cost of compliance will come out of this plant's profits.
It is assumed that PFP plants will not increase their prices in response
to the regulations. This assumption is based on several factors described in
Chapter 2. In some cases, plants may be able to pass on all or part of the
costs. Where this is possible, this analysis overstates the severity of the
impacts on firms.
V U.S. Department of Commerce, 1981 Annual Survey of Manufactures, M81
(AS)-2.
1-5
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1.2.5 Potential Plant and Product Line Closures
For the pesticide active ingredient manufacturing subcategory, the closure
analysis as described when the regulations were proposed and in the June 1983
Notice of Availability began with a screening of plants to identify
potentially impacted plants and product lines. The screening compared annual
compliance cost to sales (ACC/S) at each plant. For plants with an ACC/s of
one percent or more, a net present value analysis (NPV) was performed. The
analysis presented in this report calculates the NPV ratio for all plants
affected by the regulation. The NPV analysis is a comparison of the current
liquidation value to the potential discounted earnings (including a final
liquidation value) over a ten year period, with treatment costs included. If
the current liquidation value is less than the sum of the discounted earnings,
the Agency assumes that the company will invest in the necessary treatment
equipment and remain open. For plants which are potential closure candidates
according to the NPV test, additional factors are considered to refine the
assessment of closure. These factors include: the pesticide products made,
the financial strength of the parent company, and the degree to which this
operation is important to the rest of the parent company's business.
This same net present value analysis is used to assess the potential for
closure of the one metallo-organic pesticide manufacturer analyzed. However,
there is one major difference between the analysis of plants in Subcategories
1 and 2. Pesticide active ingredient sales are not estimated on the basis of
adjusted 1977 production levels for the one metallo-organic plant. Instead,
sales are derived from the company's public comment to the Agency.
The NPV analysis is performed for each of the sample plaints in Sub-
category 3. Plant specific operating costs and revenues are available from
the 1983 308 Survey. Therefore, the net present value without treatment
costs, as well as with treatment costs, is calculated to determine the
financial condition of each plant in the absence of this regulation. A plant
which fails the net present value test without treatment costs is considered a
baseline closure. Plants which fail the NPV test with treatment costs, but do
not fail the NPV test without treatment, are considered potential closures due
to the regulation.
1.3 Industry Characteristics
Pesticides are generally characterized by the type of pest controlled.
There are three major product groups which describe both active ingredients
and formulated/packaged products. The.-se three product groups are:
o Herbicides, which control, prevent, or eliminate unwanted plants and
plant parts;
o Insecticides, which control or prevent insects; and
o Fungicides, which control or destroy fungus and bacteria.
1-6
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Herbicides are the most important product group in terms of quantity of
pesticide active ingredients produced. Of the three product groups, it has
experienced the most rapid growth over the past 15 years. This is the result
of: increased acreage; development of new products; and more wide-spread, as
opposed to infestation specific, use. The second most important group in
terms of production is insecticides, and the smallest group is fungicides.
There are 114 plants which manufacture pesticide active ingredients
analyzed by this report. Of the 114 plants, 40 are direct dischargers, 35 are
indirect dischargers and two plants have both direct and indirect wastewater
flows. Thirty-seven other plants are neither direct nor indirect because they
utilize other means of discharge, such as deep well injection.
The 114 plants in the pesticide manufacturing subcategory are owned by 81
companies. These plants are located throughout the country with
concentrations in the Southeast, the upper Midwest, the far West, and New
York/New Jersey. Pesticides are generally manufactured in plants which also
produce other products such as organic chemicals, including Pharmaceuticals.
With the exception of certain high-volume products, pesticides generally are
not produced throughout the year.
It is difficult to obtain financial data on the pesticide operations of
specific companies, since pesticide operations are generally not a major
source of revenue for most of the companies and are not reported separately.
Manufacturers of pesticide active ingredients include pertroleum companies,
chemical companies, and pharmaceutical companies. The industry is relatively
concentrated, with the top four companies accounting for 46 percent of the
total industry value of pesticide production. Certain segments of the
industry exhibit greater levels ot concentration.
Agriculture constitutes the major market for pesticides. Demand is
somewhat inelastic due to the relatively low cost of pesticides and their
importance to farmers in maintaining crop production levels. The demand for
pesticides is influenced by a number of factors which include: national farm
policies and programs, crop acreage, pest conditions, weather, farm income,
interest rates, pesticide prices, foreign crop production and exchange rates,
and farming techniques.
The pre-tax profitability of specific pesticides varies from 10 percent to
over 40 percent of sales, depending on the demand for the product, the
product's effectiveness, whether the product is patented or not, and the
availability of substitutes. The profitability of a specific product may
shift as demand changes/ as patents expire, and substitutes become available.
Entry into the pesticide active ingredient manufacturing sector of the
pesticide industry usually requires a significant capital investment.
Development of new products is also heavily dependent on research and
development expenditures, or the licensing of the rights to produce a
pesticide.
1-7
-------
The United States is a net exporter of pesticides. On the basis of
pesticide active ingredients, in 1980 the U.S. exported aboat 7.5 pounds for
every pound imported. In 1980, exports of herbicides were equivalent to 16
percent of domestic production; for insecticides and fungicides, exports were
26 and 29 percent of U.S. production, respectively. Since 1980, imports have
increased, while exports have declined. In 1982, the U.S. exported about four
pounds for every pound imported.
There are about 1,264 plants which formulate and/or package pesticides;
approximately 169 are indirect dischargers covered by the regulation. The
plants tend to be concentrated in the Southeast and upper Midwest regions.
Based on the 308 Survey about half of the indirect discharge PFP plants also
manufacture some of the active ingredients that they formulate and package.
There has been a significant trend over the past 10 years for manufacturers to
integrate downstream and to formulate and package their own active
ingredients. Formulating and packaging pesticides is less capital intensive
than pesticide manufacturing.
1.4 Baseline Projections
Production of pesticide active ingredients by the 114 plants in 1982 is
estimated to be 1.17 billion pounds, with sales valued at $3.85 billion. This
production represents a capacity utilization rate of only 65 percent.
Production in 1990 is projected to be 1.28 billion pounds, with a value (in
1982 dollars) of $4.95 billion. This represents an annual growth rate for
production quantity of 1.7 percent and for unit value of 1,,9 percent in real
terms.
The value of PFP products by all plants in 1982 is estimated at $5.20
billion, of which indirect dischargers account for $1.56 billion (or 30
percent). The value of production for formulator/packager plants is estimated
to grow at the same rate as for manufacturers, resulting in a value in 1990 of
$6.69 billion for pesticide formulated/packaged products of which $2.01
billion will be produced by indirect dischargers.
1.5 Effluent Guideline Control Options and Costs
BPT, BAT, PSES, PSNS and NSPS effluent limitations guidelines and
standards are analyzed for pesticide plants that manufacture active
ingredients (Subcategory 1). Only PSES, PSNS and NSPS standards are analyzed
for pesticide plants that manufacture metallo-organic pesticide active
ingredients (Subcategory 2) and plants that formulate and/or package
pesticides (Subcategory 3). BPT for Subcategories 2 and 3 already requires
zero discharge.
1-8
-------
The total capital and annual costs of compliance are shown in Table 1-1.
For pesticide active ingredient manufacturing plants, the cost of compliance
is the sum of three components: 1) the cost of the wastewater treatment
system, 2) the monitoring costs, and 3) the incremental costs to comply with
the Resource Conservation and Recovery Act (RCRA).
The treatment cost estimates to remove mercury for the one metallo-organic
plant are presented by the company in their public comments. For pesticide
formulating/packaging plants, all indirect discharge facilities incur costs
under the recommended treatment technology and under an alternative technology
where PFP limits were set equal to manufacturers.
1.6 Economic Impact Analysis
Price increases for manufacturers of pesticide active ingredients are
expected to average approximately 1.30 percent, with associated increases in
the cost of production of approximately 1.72 percent as shown in Table 1-1.
For the three product groups, the percentage changes in prices and cost of
production are: for herbicides, 1.70 percent increase in price and a 2.16
percent increase in the cost of production; for insecticides, 0.64 percent
increase in price and 0.81 percent increase in the cost of production; and for
fungicides, 0.81 percent increase in price and a 1.03 percent increase in the
cost of production. The metallo-organic manufacturer is not expected to raise
prices in response to this regulation. The change in the cost of production
is not reported because the information is confidential. Formulator/packagers
are not expected to increase prices in response to these regulations. Average
profits will decline by approximately 2.0 percent for the indirect discharge
PFP plants.
As a result of the NPV analysis, one plant which manufactures pesticide
active ingredients (Subcategory 1) is expected to shut down its pesticide
product line. Twenty four plants that formulate/package pesticides are also
expected to shut down their pesticide product lines. Other products are also
produced at these twenty five active ingredient and formulator/packager
plants, and production of these other products is expected to continue. The
one metallo-organic indirect discharger is not expected to close as a result
of this regulation.
If the one manufacturing plant discontinues its pesticide production, this
will result in the loss of one job. The twenty four formulator/packager
plants that may discontinue PFP operations each employ less than one full-time
PFP employee. The twenty five plants with potential product line closures are
located in different, relatively large metropolitan areas and the job losses
are not expected to significantly impact the surrounding communities.
The small price increases which will result from the regulation are
expected to have little impact on overall foreign trade trends. Likewise, the
product line closures are not expected to alter the structure of this industry.
1-9
-------
Since there are no incremental costs above BAT and PSES associated with
the new source performance standards (NSPS and PSNS), no additional impacts
are expected.
The impacts projected for the pesticide chemicals industry in future years
are less severe than for 1982. For pesticide active ingredient manufacturers
the total cost of compliance represents about 0.8 percent of the value of
production (in 1983 dollars) in 1990 compared to 1.1 percent in 1982. There-
fore, changes in price, cost of production, and profits will be less severe in
1990 than the 1982 estimates. For the indirect discharge formulating/packag-
ing plants, the profit reduction is estimated to be approximately 1.5 percent
in 1990 compared to 2.0 percent in 1962.
1.7 Small Business Analysis
The small business analysis is conducted to determine whether the
regulations may place a disproportioneite burden on small businesses. For
purposes of this analysis, companies that manufactured pesticide active
ingredients are considered small if their annual sales are less than $10
million. Companies that formulate/package pesticides are considered small if
corporate sales are less than $7.0 million. In terms of the number of
closures, these regulations will have no small business impact on pesticide
active ingredient manufacturers. In terms of the number of PFP closures, this
regulation appears to have minimal impact on small businesses. The impact on
each of these small pesticide formulator/packagers plants is neglible, with
very few employees involved. Therefore, we conclude that the regulation does
not have a small business impact.
1-10
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2. ECONOMIC ASSESSMENT METHODOLOGY
2.1 Overview
This chapter describes the methodology, assumptions and data sources used
in the analysis of the effects of treatment costs on the pesticide chemicals
industry. The primary variables examined to determine the effects of the
treatment costs are: changes in prices, production costs, profit/ and
employment; potential closures of plants and product lines; and shifts in
foreign trade. The analysis also determines whether small businesses may
bear a disproportionate share of the treatment costs to be incurred by the
industry. Finally, the effects of treatment costs on new sources and the
prospects for construction of new facilities or major modifications to exis-
ting facilities are considered.
The economic impact assessment utilizes wastewater treatment costs devel-
oped by the Industrial Technology Division (ITD) in EPA. The waste streams
of pesticide plants were studied by ITD, and treatment systems (with
associated costs) that enable each plant to meet the effluent guidelines
limitations were identified. (These treatment costs include monitoring costs
for all plants including those plants not incurring any treatment costs and
the incremental costs to comply with the Resource Conservation and Recovery
Act (RCRA).) The development of the estimated treatment costs for the
pesticide chemicals industry, the assumptions made and the data used, are
described in Section IV, Subpart B of the Pesticide Chemicals Rulemaking
Record. The treatment costs are used along with the baseline estimates (an
estimate of conditions in the industry in the absence of the regulations) to
analyze the aggregate effect on the pesticide chemicals industry and on the
major markets in which pesticides are used. In addition, a plant-level anal-
ysis is conducted to assess the likelihood that plants, or product lines,
might close in response to the regulations. All pesticide manufacturing
plants!/ are subjected to a net present value (NPV) analysis to identify
potential closure candidates. The NPV analysis is also used to identify
formulator/packager plants^/ which are potential closure candidates.
In general, the study proceeds through the following steps:
J/This includes Subcategory 1: Pesticide Active Ingredient Manu-
facturers, and Subcategory 2: Manufacturers of Metallo-Organic Pesticides.
2/This includes Subcategory 3: Pesticide Formulator/Packagers.
-------
o Description of industry characteristics;
o Estimation of price elasticities;
o Development of industry baseline conditions;
o Analysis of compliance cost estimates;
o Estimation of changes in price, production costs, and profit;
o Assessment of plant closure potential;
o Assessment of other impacts;
o New source analysis; and
o Small business analysis.
As described in Chapter 3, the pesticide chemicals industry is a two-
tiered industry. First the pesticide chemicals, or active ingredients, are
manufactured. Second these chemicals are formulated into usable forms and
packaged for sale and distribution. While many companies manufacture and
formulate/package active ingredients at the same location, a majority of the
plants do one or the other. The two tiers are analyzed separately, even
though there are interrelationships, because separate effluent guidelines are
being developed by EPA for the two tiers. The first tier, manufacturers, is
broken into two subcategories: Pesticide Active Ingredient Manufacturers and
Metallo-Organic Pesticides Manufacturers. The joint impact of the
regulations on pesticide manufacturers and on formulator/packagers is
analyzed where relevant.
2.2 Industry Characteristics
The first step in the analysis is to describe the basic characteristics
of the pesticide chemicals industry. The characteristics aire presented in
Chapter 3, and include:
o Description of the industry subcategories;
o Plant characteristics;
o Product characteristics;
o Company characteristics, including concentration ratios, vertical and
horizontal integration, and financial aspects;
o Description of markets; and
o Export and Imports.
Chapter 3 uses information obtained through the pesticide chemicals industry
308 Surveys described below, the U.S. Department of Commerce's Census of
Manufactures, information from the U.S. Department of Agriculture, EPA,
industry studies like the Kline Guide, and company annual reports.
2-2
-------
2.3 Industry Surveys
Much of the analysis is based on the results of two 308 Surveys conducted
by EPA. The 1978 survey addressed manufacturers of pesticide active
ingredients and collected data for 1977. The 1983 survey addressed pesticide
formulator/packagers and collected data for 1982.
2.3.1 Manufacturers of Pesticide Active Ingredients
The survey of pesticide active ingredient manufacturing plants collected
data on production levels and wastewater characteristics. This survey
covered 117 manufacturing plants within the scope of the regulations. Since
then, three of these plants have discontinued manufacturing pesticide active
ingredients. Therefore, 114 manufacturing plants are analyzed in this study
and they are assumed to comprise most, if not all, of the manufacturing
plants within the scope of this regulation. One of these 114 plants produces
both pesticide active ingredients in Subcategory 1 and pesticide inetallo-
organic chemicals in Subcategory 2.
2.3.2 Pesticide Formulator/Packagers (PFP)
The majority of the information obtained on pesticide formulator/packager
(PFP) plants is from a 308 Survey conducted by EPA in late 1983 and early
1984. Initially, EPA's Office of Pesticide Programs (OPP) generated a
computerized list of 6,460 entries identified as potential PFP plants from
Parts 2 through 5 of a FIFRA listing of Pesticide Formulators and Packagers.
After an initial review to remove obvious duplicates, a listing of 3,980
individual plants remained. However, this number includes plants that
formulate/package substances not included within the scope of this
regulation, such as soaps and detergents, sanitizers and disinfectants.
These products, which are part of SIC 2841, are covered by a separate study.
In addition, the OPP list does not indicate the discharge status of any of
these plants. Therefore a telephone survey was conducted on a sample of
1,263 of these plants. The plants in the sample are representative of all
the plants on the list of 3,980, because they have been selected from the
list on a random basis.
The telephone survey identified those plants that formulate/package agri-
cultural or household pest control products and that discharge wastewater (or
any other liquid) to a publicly owned treatment works (POTW) or to a pri-
vately owned treatment facility..!/ That is, the telephone survey iden-
tified indirect discharge PFP plants as defined by this regulation.
A written questionnaire (described in Appendix 2-A) was sent to those
plants identified by the telephone survey as indirect discharge PFP plants.
In addition, written questionnaires were sent to two other groups from the
sample of plants: 1) plants that would not answer the questions on the
telephone, and 2) plants that could not be contacted by telephone because
A/If the privately owned treatment facility is owned by the same firm as
the plant, the plant is excluded.
2-3
-------
either no one answered the telephone or no telephone number was listed. The
responses from those three groups are handled separately. In each of the
three groups, not all surveys were returned. It is assumed that the
non-respondents in each group are like the respondents in that group. In
other words, the distribution across categories found in the responses is
applied to the non-respondents to obtain an estimate for the total sample.
In many cases, the written survey confirms the results of the telephone
survey. However, in some cases the plant responded that it was not a PFP
plant and/or not an indirect discharger. Therefore, the number of indirect
discharge PFP plants identified by the telephone survey is reduced, while
additional PFP indirect discharge plants have been identified from the plants
which did not respond to the telephone survey.
The number of plants and ratios shown in Table 2-1 reflect all the
adjustments made to the telephone survey results as a consequence of the
written responses. Counts according to the initial telephone survey are
listed in the first column. These initial counts are adjusted positively or
negatively based on follow-up surveys, and adjusted sample counts are listed
in column six. The adjusted sample counts are extrapolated to the total
inventory of 3,980 plants. The plants listed as not documented are allocated
among the remaining categories. Finally, the plants not covered by the
regulation are split from those that are covered by the regulation. These
ratios are rounded to simplify the calculations and have been applied to the
total of 3,980 plants. Complete financial and production cost information
was available from 308 Surveys for only 28 of the 55 PFP indirect dischargers
identified in the telephone survey. Therefore, total impacts (such as number
of closures) are estimated by multiplying the impacts for the 28 by a factor
of 6.04 (169/28).
2.4 Baseline Estimates
The baseline describes conditions in the pesticide chemicals industry in
the absence of any additional costs for wastewater treatment. The conditions
described are the value and volume of production, profit, plant capacity and
employment. The baseline for manufacturers of active ingredients is
developed separately from, but not independently of, the baseline for
formulator/packagers. A separate baseline for metallo-organics pesticide
chemicals is not estimated.
2.4.1 Manufacturers of Active Ingredients
The baseline for manufacturers of pesticide active ingredients is devel-
oped for the year 1982 and then projected to 1990. The baseline quantity of
production is estimated from the production quantities (in pounds) reported
for 1977 on the 308 Survey, adjusted to reflect changes in production levels
between 1977 and 1982. The U.S. International Trade Commission (ITC) pub-
lishes data annually on the total quantity of active ingredients produced and
the average unit value (dollars per pound) for all pesticides, based on
reports of manufacturers. The ITC data show that overall production levels
2-4
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of pesticide active ingredients have dropped significantly between 1977 and
1982.J/ in addition, production levels for different products have changed
at different rates. Therefore, the 1977 production level of each pesticide
reported in the 308 Survey is adjusted by applying the ratio of quantity sold
in 1982 to quantity produced in 1977 for the relevant product subgroup. (See
Table 2-2.) This yields an estimate of the quantity sold in 1982. The
adjusted production level is estimated for each pesticide at each plant.
These adjusted production levels are then summed to yield: total pesticide
active ingredient production at each plant, total pesticide active ingredient
production at all plants, and total production of each product group,
(herbicides, insecticides, and fungicides).
Prices are estimated for each pesticide using the 1982 average prices
(unit value) published by the International Trade Commission (ITC)..2/
There are 19 subgroups to ITC's Pesticide and Related Products group for
which ITC provides average prices. The subgroups are defined in terms of
herbicide, insecticide, fungicide, and chemical composition,, (e.g., by cyclic
and acyclic groups and about 15 subgroups of these). In addition, prices on
the other subgroups are published by ITC. Table 2-3 illustrates the break-
down used by the ITC. For certain pesticides, the ITC released product-
specific price information for this study which is used instead of the pub-
lished averages.I/ The 1982 prices multiplied by the adjusted quantities
yield a reasonable baseline estimate of revenues at each plant, the total
value of pesticide production, and the values of herbicide, insecticide, and
fungicide production.
Profit, expressed as operating income after federal income taxes, is
estimated as a percent of the total value of production or revenues. The
percent is based on a 1982 analysis conducted by an investment firm of seven
major pesticide manufacturing companies!./.
Industry production capacity is derived from the adjusted production
quantity and from capacity utilization rates estimated by the U.S. Department
of Agriculture from a survey of producers conducted in October-December
1982.1/
I/ Synthetic Organic Chemicals, 1982 USITC Publication 1422, and 1977
USITC Publication 920.
I/ Ibid.
2/ ITC has released these prices only when the company involved has
given written permission for the release.
.!/ Smith Barney, Harris Upham and Company, Chemicals/ July 23, 1982.
jL/ U.S. Department of Agriculture, Inputs, Outlook and Situation,
Economic Research Service, IOS-1, June 1983.
2-6
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Table 2-2. Relationship of Quantity Sold in 1982
to Quantity Produced in 1977
Product
Cyclic
Fungicides
Naphthenic Acid
All other
Herbicides
2,4-Dichlorophenoxy-
ocet ic acjd dimeth-
ylamine salt
2,4-Disoctyl ester
All other
Insect icides
Organophosphorus
All other
Acyc 1 i c
Fungicide
Dit hiocarbanic
acid salts
All other
Herbicides
Insect icides
Organophosphor us
Trichloronit ro-
methane
All others
Total ITC Pesticide
Group.1/
ITC Other Groups^/
Chlorobenzene
0-Dichlorobenzene
P-Dichlorobenzene
Trichlorobenzene
EDB
Grand Total
Quant ity
1982
511
85,889
15,389
3,130
483,415
68,039
109,322
21,189
2,443
160,903
57,432
3,834
135,255
1,146,751
63,799
35,159
49,468
503,233
75,777
1,874,187 |
(000 Ib.)
1977
1,276
109,348
21,281
6,392
522,472
113,498
219,629
29,650
3,003
124,063
90,547
5,803
105,873
1,387,519
325,518
47,371
65,094
526,121
244,238
2,595,861
Source: Synthetic Organic Chemicals, 1977 and 1982, U
Rat io of
1982/1977
0.4005
0.7855
0.7231
0.4897
0.9252
0.5995
0.4978
0.7146
0.8135
1.2969
0.6343
0.6607
1.2775
0.826
0.1960
0.7422
0.7160
0.9565
0.3103
I 0.722
.8. International Trad
Commission.
I/ Section XIII, Pesticides and Related Products.
2/ Section III, Cyclic Intermediates; and Section XIV, Miscellaneous End-Use
Chemicals and Chemical Products.
2-7
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Table 2-3. ITC Prices for Subgroups
1982
Unit Value
Pesticides and Related Products.!/
Cyclic
Fungicides
Naphthenic acid, copper salt .99
All other cyclic fungicides 3.04
Herbicides and Plant Growth Regulators
2-Chloro-4-(ethylamino)-6-( isopropylamino)-
5-triazine (Atrazine) 2.45
2,4,-Dichlorophenoxyacetic acid,
climelthylamine salt 1.18
2, 4-Dichlorophenoxyacetic acid,
iso-octyal ester 1.17
3 ' ,4 '-Dichloropropionanilide (Propanil) ---
All other cyclic herbicides 4.89
Insecticides and Rodenticides
Organophosphorus 4.39
All other cylic insecticides and rodenticides 5.02
Acyclic
Fungicides
Di thiocarbamic acid salts 1.53
All other acyclic fungicides 2.62
Herbicides and Plant Growth Regulators 4.22
Insecticides, Rodenticides, Soil Conditioners,
and Fumigants
Organophosphorus 3.32
Trichloroni tromethane (Chloropicri n) 0.91
All other acyclic insecticides 1.66
Other Subgroups.2/
Chlorobenzene 0.32
O-Dichlorobenzene 0.38
P-Di chlorobenzene 0.36
Tri chlorobenzene 0.40
EDB 0.27
Source: 1982 USITC publication 1422,, Synthetic Organic Chemicals U.S.
Production and Sales, 1982.
I/ Section XIII, Table 1.
I/Section III, Table 1 and Section XIV, Table 1.
2-8
-------
Baseline conditions are projected to 1990 based on rates of growth anti-
cipated in a 1981 evaluation by the U.S. Department of Agriculture,J/
modified for the downturn in pesticide production that has occurred since
then. The 1981 evaluation incorporated the trends in supply and demand and
the changes in farming practices (e.g. no-till, integrated pest management)
that are likely to occur. The projected dollar value of production in 1990
is based on an industry analysis with projected values adjusted to 1982 con-
stant dollars.2/ profits in 1990 are estimated using the same factors
applied in deriving the baseline. The capacity utilization rate is based on
the derived production level and the prospects for new pesticide active
ingredient manufacturing plants.
2.4.2 Pesticide Formulator/Packagers
Estimates of total industry baseline value of production of formulated
and packaged pesticide products are available from several sources that are
independent from this economic impact assessment..l/J/^/ These sources were
compared in order to select a baseline value of production. This comparison
is presented in Appendix 4-B. Since the 308 Survey provided production and
financial data on indirect discharge PFP plants only and zero discharge PFP
plants tend to be smaller than indirect discharge PFP plants (see Chapter 4),
the baseline for the total PFP industry is not estimated from the 308 Survey.
The value of PFP production accounted for by indirect dischargers is
estimated from 308 Survey data. Twenty-eight plants submitted responses
which are sufficiently complete to allow estimation of the value of
production, employment, operating income and annual investment for the
indirect discharger segment of the PFP industry. The questionnaire also
requested the value of total plant production, and total plant employment.
Employment, reported in estimated hours, is converted to full time equivalent
(FTE) employees for the baseline using 1,960 work hours per year per full
time employee.
As described above, it is estimated that 1,095 PFP plants are zero
dischargers. It is assumed that these plants account for the difference
between the total value of production and the value of production estimated
for indirect dischargers. Employment at zero discharging plants is
estimated, based on the average value of production per employee (FTE) as
reported in the 308 Surveys and the total value of production estimated
above. In other words, the total value of production for all zero discharge
A/ U.S. Department of Agriculture, Farm Pesticide Economic Evaluation,
1981, Economic and Statistic Service, Agricultural Economic Report 464.
I/ Frost and Sullivan, U.S. Pesticide Market, Report A907, May 1981.
!/ C.H. Kline & Company, The Kline Guide to the Chemicals Industry,
Fourth Edition, Industrial Marketing Guide, IMG13-8G, 1980.
.!/ U.S. Department of Commerce, Bureau of the Census, Annual Survey of
Manufactures.
I/ U.S. Department of Commerce, 1983 Industrial Outlook.
2-9
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PFP plants is divided by the average value per employee at indirect dis-
charge plants, yielding the estimated total number of employees at zero dis-
charge plants.
Operating income and capital investment are estimated Cor indirect dis-
chargers from 308 Survey data. These baseline variables are not estimated
for the zero discharge segment of the industry, since these plants have
already been regulated. However, the relatively small size of zero discharge
plants suggest that the profit margins and scale of investment may be dif-
ferent from indirect discharge plants.
The baseline estimates for 1982 are projected to 1990. The total dollar
value of production is estimated by applying the same real rate of growth
derived for the pesticide active ingredient manufacturers in Chapter 4. The
relative share of total production value for zero discharge and indirect
discharge plants is assumed to be the same as used for the 1982 baseline.
Employment in 1990 is projected using the 1982 production value per worker,
adjusted for real growth in prices, and total value of production estimated
for 1990. Operating income as a percent of production value is assumed con-
stant over the future years; the dollar amount is therefore derived directly
from the value of production.
2.5 Price Changes
Due to differences in the total number of plants, the proportion of
plants incurring treatment costs in each subcategory, and the structure of
the subcategories (e.g., patent protection), different assumptions about
price responses were made for pesticide manufacturers and for pesticide for-
mulator/packagers. As described below, it is assumed that manufacturers of
pesticide active ingredients can pass on part of the treatment costs in the
form of higher prices, and that manufacturers of metallo-organic pesticide
chemicals and formulator/packagers aasorb all of the costs and do not raise
prices.
2.5.1 Manufacturers of Pesticide Active Ingredients
The economic impact analysis of manufacturers in Subcategory 1 assumes
that the price increase for each product group (i.e., herbicides, insecti-
cides, and fungicides) equals the average annual cost increase due to treat-
ment requirements for all plants in the industry producing that product
group.i/ Note that this does not imply that all costs are passed through
JL Annual cost is the O&M cost for the treatment system plus an annual-
ized portion of the capital investment, based on equipment life, cost of
capital and tax rates.
2-10
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in the form of higher prices, since the average includes those plants which
do not incur any additional costs. The assumption of an average cost pass
through is based on the fact that many of the products in this industry have
little or no competition, which allows the companies to pass on some of the
treatment costs. In addition, the smaller the proportion of industry pro-
duction affected by the treatment costs, the smaller the proportion of the
costs that can be passed on.
The price increase results in changes in demand and, in turn, changes in
quantity and dollar value of pesticide sales, profit, and capacity utiliza-
tion. Changes in the average prices of each product group (herbicides,
insecticides, and fungicides) are calculated by summing the annual treatment
costs for that product group for all plants, and dividing by the value of
production of that product group using: a) the quantity reported in the 308
Survey adjusted to reflect production levels in 1982, and b) the 1982 price.
This adjustment procedure is described above in section 2.4.1.
In order to estimate the effect of the price increase on production for
the pesticide active ingredient manufacturing subcategory, an overall price
elasticity of demand is estimated for all pesticides in addition to price
elasticities of demand for each of three product groups. A price elasticity
of demand measures how much the demand for a product will decline if the
price increases by a given amount. It is defined as: the percent change in
quantity divided by the percent change in price. Elasticities are estimated
from historical data for the 1967-81 period using regression analysis. A
description of the estimation procedure is presented in Appendix 2-B. The
estimated price elasticities are:
o -0.67 for Herbicides;
o -0.32 for Insecticides;
o -0.35 for Fungicides; and
o -0.49 for all Pesticides.
In other words, if the price of herbicides goes up 10 percent, then the
quantity of herbicides demanded by the market will decline by 6.7 percent.
Likewise, a 10 percent increase in the prices of insecticides and fungicides
will result in a 3.2 percent and 3.5 percent decline in demand, respectively.
2.5.2 Manufacturers of Metallo-Organic Pesticides
This analysis includes only indirect discharge metallo-organic plants,
since direct discharge metallo-organic plants have already been required to
achieve zero discharge under BPT. The Agency based the zero discharge PSES
for Subcategory 2 plants which manufacture metallo-organic pesticides
containing arsenic, cadmium and copper on the recommended treatment
technologies of either contract hauling and incineration or recycle and
reuse. The Agency did not calculate any compliance costs with this standard
because there are currently no existing indirect dischargers manufacturing
these pesticides. Since plants categorized as Subcategory 2 manufacture
metallo-organic pesticide chemicals, they are analyzed in a manner similar to
2-11
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other pesticide manufacturing plants (Subcategory 1). However, the Agency
identified only one plant that currently discharges to a POTW. The Agency
believes that only this one plant will experience a cost increase due to this
regulation. There are a number of other metallo-organic pesticide
manufacturers who will not incur any additional costs as a result of this
regulation because they do not discharge process wastewater. Lacking
detailed market information on the competitive position of each product, it
is not possible to estimate the portion of the treatment costs the plant
could pass on to its customers. Therefore, the analysis assumes that none of
the cost will be passed on and there will be no price increase resulting from
this regulation.
2.5.3 Formulator/Packagers
This analysis concentrates on the microeconomic (plant-specific) effects
of the regulation because the effects on the overall consumer or industrial
price indices will be immeasurably small. Formulated products are made in a
vast array of concentrations and formis, some requiring wet processes, and
they frequently compete only in regional or other submarkets. Therefore,
some plants may be able to pass on compliance costs, which causes the
regulatory effects to be spread over all their customers. However, there are
relatively few indirect discharging P.FP plants within the s;cope of this
regulation (approximately 169 out of an industry total of 1,264). Therefore,
other plants will not be able to pass on the treatment costs. If, however, a
plant must absorb the compliance costs and effectively reduce its profits,
the effects of the regulation will be highly concentrated, resulting in a
great likelihood of significant negative effects from the regulation. In
order to understand what the concentrated effects on a plant might be, the
Agency performs its economic analysis with the assumption of zero cost-past
through by PFP plants.
2.6 Production, Profit and Employment Changes
Profit and employment changes are both a function of changes in produc-
tion levels. As described above, production levels for manufacturers of
pesticide active ingredients are expected to decline in direct response to
the regulations, due to the resulting price increases. The percent reduc-
tion in production depends on the percent change in prices and the elasti-
cities. Production levels for the metallo-organics and the PFP subcategories
will not decline in direct response to the regulation, because the analysis
assumes that there will be no price increases.
2.6.1 Manufacturers of Pesticide Active Ingredients
The percent changes in prices are multiplied by their elasticities to
obtain the percent change in quantity produced. The production quantity
before the regulation multiplied by the percent change in quantity yields the
total change in pounds of production resulting from the effluent guideline
requirements. Thus for herbicides (H):
2-12
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_ Sum of treatment costs for herbicides _ percent
( P JH Total value of all herbicides Change in Price
and
( dp)
- * Elasticity = Percent Change in Quantity
( P )H
and
( dp)
* Elasticity * Quantity (Ib.) = Quantity (Ib.) Change as a
( p ) Result of the Regulation
H
And similarly for insecticides and fungicides.
The impact of treatment costs on value of production for the subcategory
as a whole (and for each product group) is the difference between the base-
line value of total production, and the new production quantity priced at
baseline unit value plus average unit treatment cost. Impact on profit is
derived from the absolute change in quantity produced multiplied by the unit
profit before treatment; the assumption of average cost pass through, but
without mark-up, maintains the same unit profit.
Change in employment is determined from the plant and product line clos-
ure estimates discussed later in this Chapter. Pesticide manufacturing
employment for each plant is reported on the 1977 308 Survey, and those jobs
are assumed to be lost at plants where closure is predicted. Change in the
capacity utilization is calculated using the absolute change in production
quantity and the subcategory-wide plant capacity.
2.6.2 Metallo-Organi cs
As discussed in the previous section, it is assumed that there are no
price increases due to this regulation. The assumption of no cost pass
through means that all of the compliance costs come out of profits for this
plant and there will be no decrease in production.
2.6.3 Formulator/Packagers
As discussed above, it is assumed that there is no change in price for
formulator/packagers, and so there is no change in production levels due to
this regulation. Operating income (after income taxes) is estimated for each
plant on the basis of the statutory tax rate, revenues, operating costs, and
interest and depreciation for each plant as reported in the 308 Survey. This
operating income is a proxy for profits. By including annual treatment costs
in the calculation, a change in profits is estimated for the sample of
plants. This is extrapolated for all indirect dischargers in the manner
described in the section on the 308 Survey above.
2-13
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2.7 Potential Plant and Product Line Closures
The Industrial Technology Division of EPA estimated costs of compliance
for each plant in the study. The costs include capital investment and
operating costs for wastewater treatment, plus monitoring and RCRA compliance
costs. The costs are expressed as an annual cost by converting the capital
cost to an annualized equivalent and adding it to the annual operating and
maintenance 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 to cover the cost of the investment and
maintain net earnings, including depreciation and taxes. A capital recovery
factor of 0.218 is used, based on a 10 year life for the treatment equipment,
and a 13 percent annual cost of capital.
The central test used in the closure methodology is a comparison of the
current liquidation value of the plant to the net present value of the stream
of earnings the plant could expect to earn if it met the regulations. It is
assumed that if the current liquidation value is less than the sum of the
discounted stream of earnings (including a final liquidation), then the com-
pany will invest in the necessary treatment facilities and remain open. This
is referred to as the net present value (NPV) test.A/
The mathematical representation of the net present value test is:
y-l
where: Uy = operating income in year y
LO = current liquidation value
LY = terminal liquidation value at the end of Y years
r = cost of capital.
The equation is in real terms (dollars and rates of return) not nominal
terms. To facilitate the estimation, two simplifying assumptions are
made.^./
1. Real operating income, Ur, is constant from year to year, i.e.
Uy = Ur
2. The terminal liquidation value is equal to the current liquidation
value/ i.e.
LY = L0
A/ Income to be received in future years is worth less today than the
same income received today. Future income is discounted to take this into
account.
—/ J. Yance, Office of Analysis and Evaluation, EPA, Analyzing Economic
Impacts in a Period of Inflation, Draft, March 25, 1982.
2-14
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Table 4-B-l. Estimates of Value of PFP Shipments;
Various Data Sources
Estimated Value (mill. $)
Year I II III IV
1975 2056 2266
1976 2288 2430
1977 2704 2704 2443 3035
1978 3265 - 3045 3375
1979 3840 3840 3537 4150
1980 4688 4265
1981 5234 4525
1982 5160
I. U.S. Department of Commerce, Bureau of the Census, 1981 Annual Survey of
Manufactures, Value of Product Shipments, M81(AS)-2.
II. U.S. Department of Commerce, 1983 Industrial Outlook, Bureau of
Industrial Economics, January 1983.
III. U.S. Department of Agriculture, The Pesticide Review 1978, Agriculture
Stabilization and Conservation Service, February 1980 and unpublished
data for later years provided by D. Lee Fowler, USDA pesticide
specialist.
IV. c.H. Kline & Co., The Kline__Guide to the Chemicals Industry, 1980. (The
report notes that data shown for 1980 is probably low by 20%)
4-B-2
-------
Appendix 4-B
Estimating the Formulator/Packager 1982 Baseline
Estimates of total industry value of PFP production are available from
several sources independent of this report: The Annual Survey of
Manufactures provides estimates for SIC product group 2879 up to 1981, the
1983 Industrial Outlook, presents estimates for selected years through 1982,
the Kline Guide shows the value of shipments of formulated pesticides through
1980 (based primarily on the government publications cited above), and the
USDA Pesticide Review. The Kline Guide notes that their estimates, based on
government sources, probably underestimate the 1980 value by 20 percent
because sales of some agricultural cooperatives and pesticide formulators are
not included. The various estimates or value of PFP product shipments are
summarized in Table 4-B-l.
-------
Appendix 4-A
Estimating the Pesticide Manufacturing 1982 Baseline
Bureau of Labor Statistics data a.re used to compare 1982 and 1983 prices
of pesticide active ingredients!/. The producer price index for code
number 06-53 (i.e. "Other Agricultural Chemicals—i.e. herbicides,
insecticides, fungicides, and other pesticides) is the relevant index for
this analysis. For 1982 the index is 463.3 and for 1983 the index is 458.8.
Thus 1983 prices are 99 percent of 1982 prices at the producers level;
therefore 1983 prices are considered the same as 1982 prices for this
analysis.
The profit estimate (i.e. after-tax operating income) is based on pre-tax
operating income equal to 21.3 percent of sales value and an effective
corporate income tax rate of 32.2 percent. These factors, developed in
Chapter 2, represent averages for seven majpr pesticide producers analyzed in
that section.
_!/ Bureau of Labor Statistics, personal communication, March 1984.
-------
19 percent of total fungicide farm use.A/ The major field crop markets for
fungicides are peanuts, (84 percent of major crops fungicide use), followed
by wheat (11 percent), soybeans (2 percent), and tobacco (2 percent).
Approximately 81 percent of all fungicides for farm use are applied to fruits
(particularly citrus), potatoes, sugar beet, and other vegetable crops.
Non-agricultural uses of fungicides constitute an important segment of
the market. The industry which uses the greatest amount of fungicides is
wood and lumber (for treating poles and posts). Other significant users
include the paint, plastics, optical and photographic, leather, petroleum,
pharmaceutical, and cosmetic industries.
The 1982 production of 111 million pounds represented only about 10 per-
cent of total pesticide production and seven percent of total pesticide
value. In 1982 fungicide production was about 33 million pounds less than in
1967 (see Table 3-22). The number of fungicide-treated acres increased 27
percent from 1964 to 1976, but decreased 35% between 1976 and 1982.1/
Relatively constant acreages for fruits and vegetables and major reliance on
routine spray schedules assure a fairly stable demand.
_!/ Eichers, T.R., P.A Andrilenas, T.W. Anderson, Farmers' Use of
Pesticides in 1976, U.S. Department of Agriculture, Economics, Statistics,
and Cooperative Service, Agricultural Economic Report 418, December 1978.
2/ U.S. Department of Agriculture Inputs—Outlook and Situation, Economic
Research Service, IOS-1, June 1983.
3-E-4
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but, by 1982, insecticide production of 379 million pounds was 144 million
pounds less than that of herbicides. Thus, insecticides may be considered a
more mature market; production quantity in 1982 was two thirds of the 1967
output. Sharp declines can be noted in the past decade: in 1976, 1980, 1981
and 1982 as shown in Table 3-21. Before the 1980 decline, the average annual
growth rate between 1967 and 1979 was 1.8 percent, considerably lower than
that for herbicides.
There are a number of reasons for the declines in insecticide production
on a quantity basis. One major factor is the shift in types of insecticide
chemicals used. There are three major types of insecticides used by
farmers: carbonates, organophosphates, and organochlorines. The patterns of
use of these three groups have changed because of environmental regulations
and restrictions,* residue buildup, and reductions in efficiency due to pest
resistance. These changes have led to corresponding changes in application
rates. For example, in 1971, an average of 2.6 pounds of insecticides were
applied to every treated acre while in 1976 this average declined to 2.0
pounds per acre. More recently, an even greater shift has occurred due to
the introduction of a new class of chemicals, the synthetic pyrethroids. A
major advantage of the pyrethroids is their effectiveness in controlling
specific insect pests with a minimum of harm to beneficial insects. In
addition, these chemicals are effective at much lower concentrations (some
require only one-tenth the amount of chemical active ingredient per acre of
other insecticides). The synthetic: pyrethroids are used primarily on
cotton. In the early 1970's, cotton accounted for about 50 percent of total
insecticide use, but in 1980 the cotton share of the market had dropped to 40
percent, as production capacity for synthetic pyrethroids caught up with
demand.
A second major reason for the decline in insecticide production has been
the growing use of Integrated Pest Management (IPM), and alternative con-
trols. Decrease in insecticide use is also a function of changes in the
proportion of acres treated and changes in acres in production. In 1976,
about 66 million acres were treated with insecticides, while by 1982
treatment declined to 54.2 million acres.
While the quantity of insecticide production has dropped since the
mid-1970's, the unit value has increased. In 1982, unit value in real terms
exceeded the value in 1974 by 102 percent. In comparison, the 1981 unit
value of herbicides exceeded the 1974 value by only 19 percent.
Unlike herbicides and insecticides, fungicides are not used extensively
on major field crops. As of 1976, major field crops accounted for less than
* For example, application of aldrin and dieldrin, the widely used
organochlorine corn insecticide was suspended in 1974, as was the use of
chlordane and heptachlor in 1976. The widely used organochloric cotton
insecticide DDT, was also prohibited from being applied in the United States.
3-E-3
-------
payment-in-kind (PIK) program implemented by the U.S. Department of
Agriculture (discussed in Chapter 4). The increase in herbicide growth
through 1981 can be attributed to the percentage increase in both planted
acres of corn and soybeans, and the percentage of treated acres. Treated
acreage of corn grew from 69 percent in 1972 to 93 percent in 1980 while the
proportion of treated soybean acreage grew from an average of 71 percent to
92 percent..!/ j^e amount of herbicide applied, per acre, has also changed
over the past two decades and is a second factor in the increasing growth rate
of herbicide production. For example, in 1964 an average of 0.80 Ibs of
herbicides were applied per acre of major field crops while in 1976 and 1982
the proportion increased to 1.96 and 1.91 Ibs/acre, respectively.^./ These
higher use rates are attributable in part to increased use of multiple
treatments and herbicide mixtures. More recently, over the 1977-1982 period,
average unit value has increased by 5.8 percent while production quantity
declined by 7.6 percent.
Until recently, application of insecticides was limited to fruits,
vegetables, tobacco, cotton, and a few other specialized crops. In the past
decade, however, a large percentage of corn and other field crops has also
been treated with insecticides. For example, between 1972 and 1980, the
proportion of all U.S. corn acreage treated has increased from 25 to 43
percent, and soybean acreage from 1 to 11 percent. In 1976, major field crops
accounted for approximately 80 percent of the insecticide materials used on
all crops and nearly 90 percent of the farm land treated with insect-
icides.^./ in 1976, the major agricultural uses, based on per pound of
active ingredient, were cotton (40%); corn (20%); soybeans (5%); wheat (4.4%);
and alfalfa/other hay (4.4%).
Insecticides are also used by livestock growers, particularly on beef
cattle. These chemicals are applied in dilute sprays and at very low doses.
Livestock insecticides constitute a very small percentage (2%) of the total
insecticides market.
Insecticides accounted for 34 percent of U.S. pesticides production
quantity and 30 percent of the value in 1982, down from 41 percent of the
production quantity and 34 percent of the value in 1977 as shown in
Table 3-19. In 1967, the 496 million pounds of insecticides produced
represented 87 million pounds more than the herbicide volume for that year
_!/ U.S. Department of Agriculture Inputs—Outlook and situation, Economic
Research Service, IOS-1, June 1983.
2/ includes corn, soybeans, cotton, wheat, sorghum, rice, other small
grains, tobacco, peanuts, alfalfa, hay and forage, and pasture and range land,
excluding California.
3/ Eichers, T.R., P.A Andrilenas, T.W. Anderson, Farmers' Use of
Pesticides in 1976, U.S. Department of Agriculture, Economics, Statistics, and
Cooperative Service, Agricultural Economic Report 418, December 1978.
3-E-2
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Appendix 3-E
Discussion of Major Markets and Uses for Pesticides
Approximately 85 percent of all herbicides for farm use (by weight of
active ingredients) are used on four major crops: corn (53 percent); soy-
beans (21 percent); wheat (6 percent); and cotton (5 percent).A/ Con-
stituting more than one-half of the agricultural herbicides market, corn also
represents the single largest market for all pesticides in the U.S. The
future demand for corn herbicides depends more on changes in corn acreage in
production, than on significant changes in percentage of acres treated. This
is because, as°of 1976, more than 90 percent of all corn acreage in
production was treated with herbicides. There is also a large
proportion—about 90 percent—of soybean acreage currently treated with
herbicides.
More than 95 percent of the herbicides produced are manufactured from
synthetic organic chemicals. The herbicides most commonly applied are
atrazine to corn, alachlor and trifluralin to soybeans, 2,4-D to wheat, and
trifluralin and fluormeturon to cotton. The majority of pesticides marketed
today are used to control pre-emergent weeds. However, due to changes in
farming practices, use of post-emergent herbicides is increasing and it is
estimated that markets for these chemicals will quadruple by 1985. The non-
agricultural uses of herbicides include controlling unwanted plants on lawns,
parks, and golf courses, and eradicating vegetation along right-of-way
areas.
In 1982, herbicides accounted for 63 percent of total value and 56
percent of total quantity of all pesticides active ingredients produced, as
shown in Table 3-14. Since 1967, herbicide production had grown from 409
million pounds to 623 million pounds in 1982, which is an average annual
growth rate of 0.39 percent. During this period, the sharp decline in 1969
was attributed to disruption in the supply of the intermediate chemicals used
in manufacturing herbicides. This disruption was caused by an increase in
demand for defoliants during the Vietnam War which diverted the intermediate
chemicals toward that end, and from which the industry took several years to
recover. The sharp decline in 1982 is attributed to the downturn in the
nation's economy, the large inventories carried over from prior years and the
I/ Eichers, T.R., and W.S. Serletis, Farm Pesticide Supply-Demand Trends,
1982, U.S. Department of Agriculture, Economic Research Science, Agriculture
Economic Report, 485, April 1982.
-------
Table 3-D-3. U.S. Fungicide Production (1967-1983)
Production
Production Value
(Million i)
I/
Average Unit Value
2/
Year | (Million Lbs.) | Current | Constant
Current j Constant
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983*
144
154
141
140
149
143
154
163
155
142
143
147
155
156
143
111
95
66
72
68
71
82
93
114
139
174
165
203
214
279
309
358
302
257
66
69
62
61
68
74
85
96
116
99
115
112
135
137
145
115
94
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
1.98
2.50
2.72
2.70
.46
.45
.44
.44
.45
.51
.55
.59
.75
.69
.80
.76
.87
.88
1.01
1.04
0.99
Average Annual Growth (%)
1967-1974
1974-1982
I
1.8
-4.7
11.2
10.2
1 1
5.5
2.3
9.2
15.6
1 1
3.6
7.3
Sources: U.S. International Trade Commission, Synthetic Organic
Chemicals, 1981 and prior issues; and, Arthur D. Little Inc., unpublished
information furnished by EPA.
I/ Production value is derived as the average unit value multiplied by
production quantity.
2/ Average unit value is production value divided by production.
3/ Constant 1967 dollar value is calculated using the GNP deflator (1967
= 1.00) from U.S. Department of Commerce, Bureau of Economic Analysis.
* Estimate for 1983 by Meta Systems Inc.
3-D-4
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Table 3-D-2. U.S. Insecticide Production (1967-1983)
Production
Production Value
(Million i)
I/
Average Unit Value
2/
Year | (Million Lbs.) | Current | Constant
3/
Current | Constant
3/
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983*
Average Annual
1967-1974
1974-1982
496
569
571
490
558
564
639
650
659
566
570
606
617
506
448
379
326
Growth (%)
3.9
-6.5
304 304
347 332
383 329
340 294
385 317
344 272
492 368
605 416
916 609
911 545
1,049 593
1,232 647
1,407 680
1,265 560
1,465 593
1,282 490
1,092 401
10.3 4.6
9.8 2.1
1
0.61
0.61
0.67
0.69
O.S9
0.61
0.77
0.93
1.39
1.51
1.84
2.03
2.28
2.50
3.27
3.38
3.35
6.2
17.5
1 1
.61
.58
.61
.60
.57
.48
.58
.64
.92
.96
1.04
1.07
1.10
1.11
1.32
1.29
1.23
0.69
9.2
Sources: U.S. International Trade Commission, Synthetic Organic
Chemicals, 1981 and prior issues; and, Arthur D. Little Inc., unpublished
information furnished by EPA.
I/ Production value is derived as the average unit value multiplied by
production quantity.
2/ Average unit value is production value divided by production.
3/ Constant 1967 dollar value is calculated using the GNP deflator
(1967 = 1.00) from U.S. Department of Commerce, Bureau of Economic
Analysis.
* Estimate for 1983 by Meta Systems Inc.
3-D-3
-------
Table 3-D-l. U.S. Herbicide Production (1967-1983)
Production
Production Value
(Million i)
I/
(Average Unit Value
2/
Year | (Million Lbs.) j Current | Constant j Current | Constant
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983*
Average Annual
1967-1974
1974-1982
1
409
469
393
404
429
451
496
604
788
656
674
664
658
805
839
623
592
Growth (%)
5.7
0.39
617
718
662
663
781
812
843
1,220
1,781
1,692
1,867
1,843
2,020
2,672
3,373
2,695
2,540
10.2
10.4
617
688
602
573
643
641
630
839
1,184
1,012
1,054
968
977
1,183
1,366
1,030
932
4.5
2.6
1
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
3.32
4.02
4.33
4.29
4.2
10.0
1 1
1.51
1.47
1.53
1.42
1.50
1.42
1.27
1.39
1.50
1.54
1.56
1.46
1.48
1.47
1.63
1.65
1.57
-1.1
2.2
Sources: U.S. International Trade Commission, Synthetic Organic
Chemicals, 1981 and prior issues; and, Arthur D. Little Inc., unpublished
information furnished by EPA.
I/ Production value is derived as the average unit value multiplied by
production quantity.
2/ Average unit value is production value divided by production.
3/ Constant 1967 dollar value is calculated using the GNP deflator (1967
= 1.00) from U.S. Department of Commerce, Bureau of Economic Analysis.
* Estimate for 1983 by Meta Systems Inc.
3-D-2
-------
Appendix 3-D
Historical Data on Pesticide
Active Ingredients; Production
Quantity and Value
The tables show quantity and dollar value of
production for herbicides, insecticides and
fungicides.
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3-C-3
-------
Table 3-C-l
Financial Ratios For Pesticide
Formulating and Packaging Corporations*
(Percentage)
Formulating &
Packaging
Company
Nalco Chemical
American Cyanamid
FMC Corp
Rohm & Haas
Du Pont
Gulf Corp.
Average
Avg. All Years
PROFIT MARGIN
(PRE-TAX)
1982 1981 1980
PROFIT MARGIN
(POST-TAX)
1982 1981 1980
16.94
5.30
6.00
7.05
8.42
8.96
8.78
10.37
21.43
8.41
7.66
8.38
9.56
12.11
11.26
21.07
7.61
5.01
8.66
8.26
15.85
11.08
10.00
3.83
4.36
4.68
2.68
3.17
4.78
5.67
12.18
5.40
5.24
4.94
4.74
4.36
6.14
11.72
4.61
4.10
5.43
5.24
5.31
6.07
Nalco Chemical
American Cyanamid
FM: corp
Rohm & Baas
Du Pont
Gulf Corp.
Average
Avg. All Years
RETURN ON EQUITY
(PRE-TAX)
1982 1981 1980
RETURN ON EQUITY
(POST-TAX)
1982 1981 1980
32.42
11.56
13.69
15.96
25.86
25.70
20.86
24.61
42.52
20.09
19.86
20.79
20.85
34.26
26.40
42.46
18.33
14.02
21.26
19.82
43.55
26.57
19.13
8.34
11.34
10.60
8.24
9.08
11.12
13.28
24.17
12.89
13.60
12.25
10.34
12.33
14.26
23.61
11.09
11.46
13.33
12.58
14.60
14.45
Nalco Chemical
American Cyanamid
FMC Corp
Rohm & Haas
Du Pont
Gulf Corp.
Average
Avg. All Years
RETURN ON ASSETS
(PRE-TAX)
1982 1981 1980
RETURN ON ASSETS
(POST-TAX)
1982 1981 1980
23.47
6.11
6.65
9.44
11.53
12.47
11.61
13.92
30.65
10.02
9.41
11.71
9.15
16.75
14.61
31.22
9.02
6.67
12.05
11.69
22.52
15.53
13.84
4.41
5.51
6.27
3.67
4.40
6.35
7.59
17.42
6.43
6.45
6.90
4.54
6.03
7.96
17.36
5.46
5.45
7.56
7.42
7.55
8.47
* Based on data from Corporate COMPUSTAT, Standard and Poors Compustat
Service, Inc.
3-C-2
-------
Appendix 3-C
Comparison of Profitability Ratios
for Formulatoc/Packaging Firms
Table 3-C-l lists the six profitability ratios for the three
years 1980/ 1981 and 1982. The data are shown for six firms. Table
3-C-2 compares four sectors of the manufacturing industry.
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3-B-5
-------
Table 3-B-l. Profitability Ratios for Thirty-One Firms (cont.)
Return on Assets
Corporation
Assets Less than $1 Billion
Alco Standard
Great Lakes Chemical
Pennwalt Corp.
Reichhold Chemicals
Vulcan Materials
Witco Chemical
GAF Corp.
Fairmount Chemicals
Average of all Companies
Average of all Years
Average of First 6 Companies
Average of all Years
Assets $1 - $10 Billion
American Cyanamid
CPC International
Diamond Shamrock
FMC Corp
Hercules
Kerr-Mcgee
Martin Marietta
Merck & Company
Monsanto
Olin Corp.
Pfizer
PPG
Rohm & Haas
Stauffer
Uniroyal
Upjohn
Average of all Companies
Average of all Years
Assets Greater than $10 Billion
Dow Chemical
Du Pont
Eastman Kodak
Gulf Corp.
Mobil Oil Corp.
Shell Oil
Union Carbide
Average of all Companies
Average of all Years
TOTAL - All Companies
TOTAL - Average All Years
Pre-Tax Return on Assets
1982 1981 1980
Post-Tax Return on Assets
1982 1981 1980
11.46
12.68
4.83
2.47
11.64
7.58
0.86
-39.20
1.54
6.18
8.44
11.32
6.11
15.81
7.25
6.65
5.35
9.07
3.24
16.41
8.24
3.36
14.52
6.23
9.44
9.27
3.11
8.20
8.27
9.95
ion
2.66
11.53
17.62
12.47
12.32
12.70
3.81
10.44
13.89
7.02
9.87
11.37
15.50
7.89
7.29
19.55
9.42
-5.90
-7.98
7.14
11.84
10.02
14.81
12.47
9.41
9.39
11.06
11.13
17.71
11.42
8.39
11.99
11.93
11.71
11.75
5.21
12.03
11.28
5.95
9.15
23.11
16.75
19.84
15.00
9.15
14.14
10.86
12.47
24.81
8.01
6.23
18.99
11.55
1.30
-4.49
9.86
13.68
9.02
14.17
11.80
6.67
7.27
11.85
13.46
22.89
3.55
2.47
12.24
13.11
12.85
8.78
1.43
13.95
10.29
10.73
11.69
22.42
22.52
25.73
15.40
11.20
17.10
11.72
6.68
8.12
3.24
1.25
7.70
4.51
2.60
-36.40
-0.29
3.26
5.25
6.91
4.41
9.68
4.68
5.51
4.34
5.57
3.23
11.38
5.41
3.26
8.88
4.74
6.27
5.64
1.85
6.26
5.69
6.54
2.90
3.67
10.94
4.40
5.05
7.51
2.92
5.34
7.20
4.07
5.84
6.36
10.59
4.73
4.17
11.58
5.32
-5.05
-6.44
3.91
7.13
6.43
8.87
7.63
6.45
6.83
6.18
7.86
12.83
7.33
5.74
7.54
7.15
6.98
7.37
3.11
9.37
7.30
4.51
4.54
13.12
6.03
9.00
8.46
6.23
7.41
6.45
6.88
16.01
5.22
3.76
11.79
6.49
1.48
-2.24
6.17
8.36
5.46
8.48
7.20
5.45
6.83
6.49
9.89
14.58
2.57
2.19
7.57
7.40
7.56
6.47
-0.51
10.20
6.43
6.98
7.42
13.18
7.55
11.03
8.73
6.97
8.84
7.01
-------
Table 3-B-l. Profitability Ratios for Thirty-One Firms (cont.)
Return on Equity
Corporation
Assets Less than $1 Billion
Pre-Tax Return on Equity
1982 1981 1980
Post-Tax Return on Equity
1982 1981 1980
Alco Standard
Great Lakes Chemical
Pennwalt Corp.
Reichhold Chemicals
Vulcan Materials
Witco Chemical
GAP Corp.
Fairmount Chemicals
Average of all Companies
Average of all Years
Average of First 6 Companies
Average of all Years
Assets $1 - $10 Billion
American Cyanamid
CPC International
Diamond Shamrock
FMC Corp
Hercules
Kerr-Mcgee
Martin Marietta
Merck & Company
Monsanto
Olin Corp.
Pfizer
PPG
Rohm & Haas
Stauf fer
Uniroyal
Upjohn
Average of all Companies
Average of all Years
26.56
21.19
9.99
4.47
19.23
16.79
2.28
-63.84
4.57
12.06
16.37
21.58
11.56
29.23
16.45
13.69
9.93
20.40
21.04
27.16
14.36
6.82
27.57
11.93
13.96
18.70
8.05
16.97
16.86
19.89
29.39
24.23
15.83
14.19
32.61
23.08
-24.53
-13.13
12.71
23.22
20.09
29.52
27.88
19.86
17.84
25.16
23.61
29.29
20.81
17.11
25.76
21.65
20.79
23.23
14.58
24.18
22.58
29.83
31.59
16.96
12.88
32.15
27.40
7.44
-7.00
18.91
25.14
18.33
29.80
26.55
14.02
13.61
24.79
25.25
35.21
7.33
5.11
26.20
24.68
21.26
19.81
4.43
26.93
20.21
15.49
13.56
6.70
2.26
12.72
9.99
6.70
-59.28
1.02
6.48
10.12
13.04
8.34
17.74
10.63
31.34
8.05
12.54
20.99
18 . 84
9.43
6.62
16.86
9.09
10 . 60
11.39
4.80
L2.95
LI. 89
13.13
16.43
16.56
9.50
8.13
19.32
13.03
-20.97
-10.61
6.42
13.83
12.89
17.68
17.05
13.60
12.98
14.06
16.67
19.90
13.37
11.70
16.12
12.97
12.25
14.57
8.68
18.83
14.59
16.45
20.38
11.04
7.78
19.96
15.39
8.46
-3.50
12.00
15.17
11.09
17.83
16.21
11.46
11.30
13.59
17.06
22.30
5.30
4.52
16.21
13.94
13.33
14.59
-1.59
19.70
12.93
Assets Greater than $10 Billion
Dow Chemical
Du Pont
Eastman Kodak
Gulf Corp.
Mobil Oil Corp.
Shell Oil
Union Carbide
Average of all Companies
Average of all Years
TOTAL - All Companies
TOTAL - Average All Years
6.23
25.86
24.82
25.70
26.78
26.38
7.83
20.52
27.52
14.52
19.59
15.21
20.85
32.25
34.26
42.73
32.64
18.13
28.01
21.26
27.88
19.82
32.56
43.55
58.30
33.48
22.65
34.04
23.00
6.79
8.24
15.41
9.08
10.97
15.60
6.01
10.30
14.16
8.72
11.65
11.53
10.34
18.30
12.33
19.38
18.40
12.33
14.66
12.49
18.13
12.58
19.14
14.60
25.00
19.04
14.09
17.51
13.72
3-B-3
-------
Table 3-B-l. Profitability Ratios for Thirty-One Firms
Profit Margin
Corporation
Assets Less than $1 Billion
Alco Standard
Great Lakes Chemical
Pennwalt Corp.
Reichhold Chemicals
Vulcan Materials
Witco Chemical
GAF Corp.
Fairmount Chemicals
Average of all Companies
Average of all Years
Average of First 6 Companies
Average of all Years
Assets $1 - $10 Billion
American Cyanamid
CPC International
Diamond Shamrock
FMC Corp
Hercules
Kerr-Mcgee
Martin Marietta
Merck & Company
Monsanto
Olin Corp.
Pfizer
PPG
Rohm & Haas
Stauffer
Uniroyal
Upjohn
Average of all Companies
Average of all Years
Assets Greater than $10 Billion
Dow Chemical
Du Pont
Eastman Kodak
Gulf Corp.
Mobil Oil Corp.
Shell Oil
Union Carbide
Average of all Companies
Average of all Years
TOTAL - All Companies
TOTAL - Average All Years
Pre-Tax Profit Margin
1982 1981 1980
Post-Tax Profit Margin
1982 1981 1980
3.70
15.10
3.84
1.11
11.49
3.84
8.64
•23.96
1.97
4.76
6.51
8.27
5.30
9.33
7.28
6.00
4.34
9.03
2.68
19.34
7.92
3.01
13.76
6.18
7.05
12.54
2.18
9.03
7.94
9.00
i
2.96
8.42
17.31
8.96
7.38
13.53
4.46
9.00
11.43
6.62
8.44
4.10
17.55
5.79
3.13
16.86
5.29
-4.91
-4.94
5.36
8.76
8.41
8.39
11.14
7.66
6.98
9.87
8.60
20.01
9.97
6.78
13.46
10.51
8.38
13.85
3.36
12.30
9.98
6.27
9.56
21.12
12.11
10.35
13.95
9.38
11.82
9.20
4.13
23.19
5.59
3.81
14.93
6.28
1.34
-2.76
6.95
9.51
7.61
8.81
10.48
5.01
5.53
9.56
10.63
23.99
3.13
2.87
13.39
11.73
8.66
18.94
8.95
13.23
9.07
11.65
8.26
20.16
15.85
13.77
13.68
10.83
13.46
9.51
2.16
9.66
2.57
8.56
7.60
2.29
1.95
-22.25
0.57
2.67
4.14
5.16
3.83
5.66
4.71
4.36
3.52
5.55
2.60
13.55
5.20
2.92
9.64
4.71
4.68
7.63
1.38
6.89
5.42
5.93
3.22
2.68
10.74
3.17
3.02
8.00
3.42
4.89
6.16
4.05
5.14
2.29
11.99
3.47
1.79
9.99
2.99
-4.53
-3.99
3.00
5.42
5.40
5.03
6.82
5.24
5.02
5.52
6.07
13.60
6.41
4.64
8.42
6.30
4.94
8.68
2.00
9.57
6.48
4.75
4.74
11.99
4.36
4.69
7.86
6.38
6.40
5.57
2.27
14.96
3.64
1.82
9.27
3.48
1.52
-1.38
4.45
5.91
4.61
4.79
6.40
4.10
4.59
5.24
7.18
15.19
2.26
1.83
8.41
6.62
5.43
8.06
-0.34
9.68
5.88
7.58
5.24
11.85
5.31
5.90
7.78
6.73
7.20
5.81
3-B-2
-------
Appendix 3-B
Comparison of Profitability Ratios;
Pesticide Manufacturing Firms
Table 3-B-l shows the six profitability ratios for 32 pesticide
manufacturing firms for 1980, 1981 and 1982. Table 3-B-2 compares
pesticides manufacturing profitability with two other industry
sectors: Chemical and Allied Products, and All Manufacturing.
-------
Table 3-A-2. Pesticide Formulator/Packagers zero Dischargers
Statistical Year
Parameter Established
Minimum 1880
Maximum 1977
Average 1945
Median 1948
Standard Deviation 21
Number of Respondents 46
Ii-A-3
-------
Table 3-A-l.
Pesticide Formulator/Packagers Zero Dischargers:
SIC Code Summary
Number of Times Reported
SIC Code
2879
2842
2899
2851
2873
2869
2841
2048
2819
2874
2875
2834
2861
2992
2870
3499
3523
2491, 2812
3079, 3221
3991
2047, 3292
3423, 3996
2891, 2649
2833, 2821
Total
52
14
9
9
7
5
4
4
3
3
3
3
2
2
2
2
2
1 Each
1 Each
By Single
SIC Code
Plants *
34
6
5
6
3
_
1
2
-
—
2
2
-
1
2
2
1
1 Each
—
By Multiple
SIC Code
Plants **
18
8
4
3
4
5
3
2
3
3
1
1
2
1
-
_
1
—
1 Each
Source: Various state industrial guides,
Section for a complete list.
* 72 plants reported a single SIC.
** 26 plants reported multiple SIC.
See the end of the Reference
3-A-2
-------
Appendix 3-A
Information on Zero Discharger Formulating/Packaging Plants
As described in Chapter 3, data are collected from state industrial
guides for a sample of plants determined to be zero discharge PFP plants by
the telephone survey. The state industrial guides used are listed in the
reference section of this report. Table 3-A-l summarizes the data on SIC
codes reported by the zero dischargers in the state industrial guides. Since
some plants report more than one SIC, the total number of times the codes are
reported is greater than the number of plants reporting SIC codes.
Ninety-eight plants report a total of 139 SIC codes, 72 plants report a
single SIC and 26 plants report multiple SIC codes. Over thirty-seven
percent of the codes reported SIC 2879—Pesticide Formulators and Packagers.
This SIC is followed by:
SIC 2842—plants which manufacture specialty cleaning, polishing
or sanitation preparations (10 percent).
SIC 2899—plants which manufacture or prepare miscellaneous
chemicals, i.e., chemicals other than pesticides; soaps; other
cleaning agents; paints and allied products; industrial organic
and inorganic chemicals; plastics;, and medicinal chemicals (6
percent).
SIC 2851—plants that manufacture or package paints, varnishes,
lacquers, enamels, and allied products (6 percent).
SIC 2873—plants which formulate nitrogenous fertilizers (5
percent).
As expected, a majority of the SIC codes reported fall into the larger
group of SIC 28—Chemicals and Allied Products. Out of the 139 SIC codes
reported, 86 percent (120) fall in SIC 28. The distributions for single
versus multiple SIC plants look similar. Of those reporting a single SIC, 47
percent (34 plants) report SIC 2879. Therefore it can be concluded that for a
large proportion of formulator/packagers, this is neither their most important
nor their sole product.
The year the plant was established is reported by 46 plants (see Table
3-A-2). For the most part, these are plants which have been established for
some time. While the year established ranges from 1880 to 1977, the average
(1945) is close to the median (1948). Unfortunately, no information is
available on whether or not expansion or modernization have taken place
recently.
-------
N
Z U - tn) / (.9-C) = 1
j=l (1 + Kf)J
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.
Therefore:
.9-C .9-C f
, (-^-) = A(K ,
= A(K ,N) (2D-10)
n =
.9-C f
A(Kf,N)(.9-C)
1-t
2D-8
-------
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 0 using the tables for
"Annuity whose Present Value is 1." Then d 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:
T, - tn + td = A(Kf,N)
A(Kf,N) - td
n = - - - (2D-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 11
tax credit is allowed on new investments, thus reducing the initial cost
of the investment to 91 of its original cost. Therefore, equation (B-6)
above becomes:
N n
.9 (2:D_8)
-
j=1 (1 V 1=1 H V
where:
n = depreciation lifetime under tax code
d' = new depreciation rate
Setting:
n
1=1 (1+Kf)
Then:
N
.9-C (2D-9)
Kf)J
2D-7
-------
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 11 percent. Given the mix of
financing 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.
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
u = 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
I (R-O - t(R-C) * tdl (2D-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 b for (R-O/I gives:
N
n - tn * td 1 (2D-6)
"
2D-6
-------
Table 2-D-l. Alternative Derivations of the Capital Recovery Factor
Variable
Weighted cost of
capital (K^)
Life of asset (N)
A{N, Kf)
Depreciation life (n)
Depreciation rate (d)
Tax rate (t)
c
CRF(l)
CRF(2)
CRF(3)
.10
10
.163
10
.10
.50
.226
.15
10
.199
10
.10
.50
.298
.20
10
.239
10
.10
.50
.378
Values
.10
10
.163
5
.20
.50
.330
.218
.185
.13
10
.,185
5
.20
.50
.310
.255
.218
.15
10
.199
5
.20
.50
.310
.279
.239
.20
10
.239
5
.20
.50
.275
.347
.299
where: CRF(l) is original formula (2D-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
(2D-2 in text)
2D-5
-------
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 11 years.!/ The depreciation rate for most personal
property now is straight-line over five years (21 ). These values are
used in the revised calculation of the capital recovery factor.
Tax Rate
The current federal corporate income tax rate is 21 percent on the
first $25,111 of profits, 22 percent on the next $25,111, and 46 percent
on all profits over $51,111. For this analysis, we assume that plants are
paying an even 46 percent federal tax on all profits. A study by Lin and
Leonef/ 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 51 percent.
SensitivityAnalysis
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 11. 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
I/Draft Industry Description: Organic Chemical Industry, Vol I,
December 197T.
2/An Loh-Lin and Robert A. Leone, "The Iron and Steel Industry," in
Environmental Controls, (Robert A. Leone, ed.), Lexington, MA: Lexington
Books (1976), p. 70.
2D-4
-------
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
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 (2D-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 11 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
I/See, for example, J. Weston and F. Brigham, op.cit.
2D-3
-------
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 (2D-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 I/ 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 41 chemical
companies was obtained from Standard and Poor's Bond Guide (August
1979).2/
I/See, for example, J. Fred Weston and Eugene F. Brigham, Managerial
Finance (6th ed.), Dryden Press, 1978, Chapter 19.
I/See: Draft Industry Description; Organic Chemical Industry, Vol.
I, December 1979, pages 6-1 through 3-ib, ror a detailed presentation of
The data.
2D-2
-------
Appendix 2-D. 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 arid 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,Kf) - td
CRF = - (2D-1)
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)-N)]
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 (2D-2)
1 - t
where: c = —^-
£ M +K r
1=1 u V
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.
-------
Table 2-C-3. Estimated Real Rate of Return
Company 1980
Stauffer 7.6%
DuPont
7.6
American Cyanamid 8.2
Union
Rohm &
Dow
Carbide 10.3
Haas NA
NA
Monsanto NA
Simple
Average 8.4%
Simple Average for four
companies with data for
1980-1982
Simple
1982 Average
7.3% 7.4%
6.3 7.0
7.2 7.7
5.8 8.1
9.4 9.4
5.5 5.5
NA NA
6.9% 7.5%
7.5%
Source: Meta Systems Inc calculations and company annual reports for 1980
and 1982.
2-C-6
-------
Liquidation Value (L0). It is assumed that the plant and equipment have
no scrap value except as a tax write-off. This is appropriate since much of
the pesticide active ingredient manufacturing takes place at plants which
produce other chemicals as well. Even if the production were discontinued,
it would not be possible to sell just the pesticide manufacturing capacity.
Therefore, the liquidation value is calculated as:
Lo = 0.70 (Current Assets) + (t1) (Book Value of Fixed Assets)
where t' is the statutory tax rate (0.46). The statutory rate is appropriate
because of the assumption that the company will be writing off the value
against taxes. This equation assumes that a majority but not all (i.e. 70
percent) of the value of current assets can be recovered.
Current Assets. Current assets include: cash and equivalents, accounts
and notes receivable, and inventory. Since this current asset information is
not available for individual business segments within a firm, the ratio of
current assets to sales is calculated from company-level data. An average
value of this, ratio is then applied to each plant's sales to obtain an
estimate of that plant's current assets. For the sample of seven firms, the
ratio of current assets to sales averages 0.400. The value of inventories is
not adjusted for replacement value since this information is not available
for assets. Any underestimate of the current asset value resulting from this
is expected to be small because inventories are not held for long periods of
time.
Non-Current Assets. As with value of current assets, this information is
only available on a company basis. Non-current assets are the book value of
plant and equipment. A ratio of non-current assets to sales is calculated
for the sample of seven firms and for three years, and then averaged. The
average ratio of 0.490 is applied to individual plant sales to obtain an
estimate of the plant's non-current assets.
Planning Horizon (Y)
The net present value is discounted over a period of 10 years. This
approximates the useful life of the treatment equipment.
2-C-5
-------
Table 2-C-2. Ratio of Operating Income to Sales (Operating Margins)
for Pesticide Production and for Total Corporate Sales, 1980
Pest
Oper<
Company Mar<
icide Corporate
sting Operating
jin Margin
American Cyanamid .169 .093
Dow
DuPont
.148 .114
.250 .102
Monsanto .396 .031
Rohm &
Haas .112 .100
Stauffer .281 .150
Union
Carbide .1
36 .129
Source: Smith Barney, Harris Upham & Co., Chemicals, July 23, 1982.
2-C-4
-------
Table 2-C-l. Ratios to be used in Net Present Value
Calculations Based on Simple Average of
Values for 1982, 1981 and 1980*
Company Name | OI/S | T/OI | CA/S | BV/S
American Cyanamid .169 .360 .423 .374
Dow .148 .272 ** .389 .559
DuPont .250 .512 .349 .440
Monsanto .396 .325 .372 .485
Rohm & Haas .112 .322 .398 .289
Stauffer .281 .258 .492 .684
Union Carbide .136 .210 .386 .597
Average .213 .323 .400 .490
| | | |
01 = Operating income, before federal income tax
S = Sales
T = Taxes
CA = Current assets
BV = Book value of plant and equipment
* Ratio OI/S is for pesticide operations of each firm for only one year
(1980) from industry study by Smith Barney, Harris Upham & Co., Chemicals,
July 23, 1982. All other ratios calculated as 3-year average (except as
noted) by Meta Systems Inc from company annual reports.
** Based on 1980 and 1981 only.
2-C-3
-------
minus cost of sales and operating expenses (which includes depreciation and
interest). For the sample of seven firms, the ratios of operating margin
(i.e., operating income before taxes to sales) for pesticide production range
from 0.112 to 0.396. The simple average is 0.213 (the sales-weighted average
is 0.247). See Table 2-C-l. It is assumed that the ratio of before-tax
operating income to sales for the pesticide production averages 21.3
percent. (The weighted average is larger since the very profitable firms are
also the largest; if the weighted average is used instead of the 21.3
percent, it yields higher, more optimistic, estimates of operating income and
net present value).
The tax rate is calculated from company annual reports data as:
£ - Income Taxes (or Reserve for Taxes)
Operating Income
For the sample of seven companies, the effective tax rate is 0.323. There-
fore, after-tax operating income for each plant is equal to:
(0.213) Plant Sales (1-0.323) = (0.144) Plant Sales
This estimate overstates the after-tax operating income slightly because
depreciation is included at book value not at replacement value. However,
the correction necessary to use replacement value is possible only at the
corporate level since depreciation for pesticide production (either book
value or replacement value) is not known. The firm-level operating margins
for these seven companies is much lower than the operating margins for their
pesticide production as shown in Table 2-C-2. Thus, the after-tax operating
income based on operating margins for pesticide operations without correction
for inflation is closer to the true value than the corporate margins would be
even though they could be corrected.
Real Cost of Capital (r). It can be shown that the cost of capital is
equivalent to the rate of return on assets. Since the net present value test
requires the real rate of return, it can be calculated from corporate annual
report data as:
Real Earnings
r =
Assets Adjusted For Replacement Value
In other words, the real cost of capital is estimated by comparing the
after-tax operating income, corrected for inflation, plus interest (i.e. real
earnings) to current net replacement costs of assets. The correction for
inflation involves adjusting the historical values of depreciation, plant,
property and equipment, and inventories for current dollars. Since this
information is not available on a business segment basis, the real cost of
capital is estimated using company data. Based on 1980 and 1982 figures for
six of the seven companies used to calculate profit rates, the real rate of
return is 7.5 percent as shown in Table 2-C-3. The value of each plant's
assets is needed in order to calculate plant liquidation value as explained
below.
2-C-2
-------
Appendix 2-C. Estimating the Net
Present Value (NPV)
Manufacturers
As described in Chapter 2, the net. present value test compares the
estimated rate of return on its liquidation value that a plant would earn if
it complied with the regulation, to the real cost of capital for this
industry. In order to perform the NPV test, the values for several factors
are needed for each plant. In most cases, these values are not known on the
plant level and so must be estimated. A valid estimate of the value of
pesticide production before treatment is available for each plant. This
value (called sales in the following sections) is calculated on the basis
of: 1977 production, as reported in the 308 Survey, adjusted to 1982 levels,
and 1982 prices, as discussed in the chapter. A/ The average rate of price
increase under the regulation is calculated for each of the three product
groups by dividing the total annual treatment cost for the product group by
the total sales of the product group. The price increase for each product is
estimated by applying the relevant percentage price increase to the product's
price. Using the elasticity relevant to each product group (herbicide,
insecticide, fungicide), a new quantity sold is estimated,, This new price
and new quantity yield a post-treatment value of sales which is used in the
analysis of impacts. A plant's sales equals the sum of the; sales of its
products. The other values needed for the calculation are estimated by
applying ratios, calculated from annual report data for a group of pesticide
producing firms, to the plant sales. The specific ratios and the sources of
the data are listed as follows.
Sample of Firms Used to Estimate Ratios. The ratios are calculated for a
sample of seven pesticide producing companies. These companies are used
because estimates of pesticide sales and pesticide operating incomes, as
distinguished from total sales and income, are available for each company.
(The firms are identified in Table 2-c-l). The values are calculated from
1980 data, which is a fairly representative year. In other words, profits
and sales in 1980 are fairly typical of the last five years—neither the low
point nor the high point of the period. These seven firms make up a large
percentage of total pesticide sales. Their sales are 89 percent of the total
sales for the 13 largest producers and 77 percent of the total sales of 34
producers.
Operating Income, After-taxes (U). After-tax operating income after
treatment is defined as operating income before federal income tax, minus
annual treatment costs and federal income taxes. The pre-tax operating
income is reported as such on annual reports, and is usually equal to: sales
_!/ Prices are from two sources: 1) ITC average prices for groups of
pesticides as found in Synthetic Organic Chemicals, USITC Publication 1422,
1982, and 2) pesticide-specific prices from the ITC, if permission for
release by the company.
-------
stable (i.e., they were unchanged when it was included). For these
reasons, the industrial production index is not included for insecticides
and fungicides.
The equation for insecticides is estimated for a shorter time series
than the other equations. Insecticide production in 1980 and 1981
dropped significantly due to unusually large carry-overs. These
carryovers were in part the result of unusually low insect infestations
during those years. It is assumed that the price elasticity of demand
will continue at its historical levels and that these drops in production
were a short-term correction. There has been a decrease in the amount of
insecticides produced due to the substitution of synthetic pyrethroids
for more conventional pesticide ingredients. The synthetic pyrethroids
are very powerful (and expensive) so that lower dosages offset the higher
costs, thus reducing the weight of production. However/ in terms of
total insecticide production, these impacts are not large.
2-B-3
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Table 2-B-l. Estimated Coefficients for Pesticide Production
(Total and for Each Product Group)*
Ln of
Production of
Independent Variables
Intercept
Ln Acres
LN
Real Price
LN
Production
Previous
Year
Industrial
Production
Index
Herbicides**
R2 = .98
Insecticides***
R2 = .68
Fungicides**
R2 = .35
Total Pesticides**
R2 = .89
-12.93
(-3.51)
-3.49
(-1.32)
-1.46
(-0.47)
-6.42
(-2.26) |
3.19
(4.02)
1.53
(2.90)
1.04
(2.02)
1.88
(3.02)
-€.67
(-2.49)
-0.32
(-2.51)
-0.35
(-2.07)
-0.49
j (-2.37)
0.299
(1.88)
0.142
(0.57)
0.05
(0.18)
9.427
| (1.84)
-0.00651
(-3.24)
-0.00254
(-1.17)
Data Sources:
Acres-Various U.S. Department of Agriculture publications.
Real Price-Average price for each product group and total pesticides
calculated from U.S. International Trade Commission, Synthetic
Chemicals, various years, and converted to real prices by use of: GNP
Deflator, U.S. Department of Commerce, Bureau of Economic Analysis.
Production—U.S. International Trade Commission, Synthetic
Chemicals , various issues.
Industrial Production Index—U.S. Board of Governors of the Federal
Reserve System, Federal Reserve Bulletin, various issues.
* T-Statistics shown in parentheses.
Lag.
** Estimated for 1967-81.
*** Estimated for 1967-79.
In logarithmic form with Koych
2-B-2
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Appendix 2-B. Estimation of Price
Elasticities of Demand
For purposes of estimating price elasticities, production is a function
of the number of agricultural acres planted, the real price of pesticides,
and the pesticide production in the previous year, all expressed in terms of
natural logarithms. In addition, the industrial production index is added to
see if production is sensitive to the overall business cycle.
The basic equation form used is:
In PRODt = a + b In PRODt-i + c In ACREt
+d In RPRICEt + f (ixt)
where:
PRODt, pRODt_i = production of pesticide active ingredients
in year t and t-1.
ACREt = Acreage of principal crops planted in year t
RPRICEt = Real unit price for pesticide active
ingredients in year t
ixt = industrial production index in year t
The estimated coefficients are shown in Table 2-B-l. Business cycles are
statistically significant only in the case of herbicides. Since the
regressions are estimated in terms of logs, the coefficients can be
interpreted as elasticities, with the coefficient on the Heal Price term
equal to the price elasticity of deirand. The overall price elasticity of
pesticides is -0.49. In other words, a ten percent increase in real prices
would result in a 4.9 percent decrease in the amount demanded. The price
elasticity for herbicides (at -0.67) is much larger than that for the other
two product groups (insecticides at -0.32 and fungicides at -0.35). During
the 1970's, herbicides experienced a large increase in application rates and
the proportion of acres treated, and the coefficient on acres in the
herbicide equation reflects this. One of the reasons that the amount of
variation explained by the fungicide; equation is so low (R^ = .35) is that
a very large proportion of fungicides are used for non-agricultural
purposes. Attempts to develop a variable which would indicate the demand for
these other uses, in the way that acreage indicates the demand for farm
useage, have been unsuccessful. However, the coefficient on the real price
term is statistically significant and therefore is considered a reasonable
estimate of the price elasticity. There is no ready explanation for why
business cycles are important for herbicides and not for the other two
product groups. Not only is the coefficient of the industrial production
index very insignificant in the case of insecticides and fungicides and the
R^ unchanged when it was included, but the other coefficients are quite
-------
Appendix 2-A. 308 Survey of
Itesticide Formulator/Packagers
As described in Chapter 2, a sample of indirect discharging PFP plants
has been identified by a telephone survey conducted by EPA. A written
questionnaire was sent to these plants, and to plants which refused to answer
questions on the telephone and to plants which could not be contacted by
telephone.
Information obtained from the completed written questionnaires includes
plant characteristics such as: number of plant personnel, formulating/
packaging production value, wastewater characteristics, and wastewater
treatment/control technology currently in place. The methodology used to
develop the baseline and impact estimates is based primarily on specific data
obtained from the survey such as the following plant characteristics:
o Number of PFP plants with and without production of active
ingredients at the plant;
o Annual PFP production value and total plant production value;
o Employment in production of PFP products;
o Employment in production of other products;
o Employment in nonproduction work; and
o Fraction of plant operating days during which PFP production
occurred;
o Percent of active ingredients used that are manufactured on site.
The quantitative information is tabulated so that averages and high-low
ranges of the different variables can be determined from the responses.
_!/ 1983 308 Survey for the Formulating/Packaging Subcategory of the
Pesticide Chemicals Industry, OMB No. 2040-0041.
-------
REFERENCES (continued)
64. Environmental Protection Agency/ Office of Pesticide Programs,
Economic Analysis Branch. Pesticide Industry Sales and Usage, 1982
Market Estimates. December 1982.
65. U.S. International Trade Commission. Synthetic Organic Chemicals,
United States Production and Sales, 1982. USITC Publication 1422
and prior issues, U.S. Government Printing Office, Washington, DC.
66. Washington Manufacturers Register, 1982-83, Times Mirror Press,
California, 1982.
67. Wyoming 1982 Directory of Manufacturers and Mining, Wyoming
Department of Economic Planning and Development, 1981.
R-5
-------
REFERENCES (continued)
47. Oklahoma Directory of Manufacturers & Products 1983, Oklahoma
Economic Development Department, 1982.
48. Pimentel, D., et al. "Benefits and Costs of Pesticide Use in U.S.
Food Production." Bioscience, pp. 772-783, December 1978.
49. Predicasts, as quoted in "Pesticides: $6 Billion by
1990."Chemical Week, p. 45, May 7, 1980.
50. South Carolina 1983 Industrial Directory, South Carolina State
Development Board, 1983.
51. Standard & Poor, Compustat, Standard and Poors' Compustat
Services, Inc., data on six companies.
52. Storck, W.J. "Pesticides Head for Recovery." Chemical and
Engineering News, 62 (1984): pp. 35-57.
53. Tennessee Directory of Manufacturers 1982, Tennessee Department of
Economic and Community Development.
54. U.S. Department of Agriculture. Agricultural Outlook. March 1982.
55. U.S. Department of Agriculture. Agricultural Outlook. March 1983.
56. U.S. Department of Agriculture. Inputs—Outlook and Situation.
Economic Research Service, IOS-1, June 1983.
57. U.S. Department of Agriculture. Inputs—Outlook and Situation.
Economic Research Service, IOS-2, October 1983.
58. U.S. Department of Agriculture, Crop Reporting Board, SRS, June
1981.
59. U.S. Department of Agriculture. The Pesticide Review. Agricultural
Stabilization and Conservation Services, Washington, DC, Annual
issues from 1976-1979.
60. U.S. Department of Commerce, Bureau of the Census. 1977 Census of
Manufactures. Washington, DC, 1980.
61. U.S. Department of Commerce. 1981 Annual Survey of Manufactures.
Bureau of the Census, M8KAS) May, 1983.
62. U.S. Department of Commerce. 1983 Industrial Outlook. Bureau of
Industrial Economics, January, 1983.
63. U.S. Department of Commerce. 1982 U.S. Industrial Outlook. Bureau
of Industrial Economics, January 1982.
R-4
-------
REFERENCES (continued)
30. Federal Trade Commission. Quarterly Financial Report.
Washington, DC, 3rd Q 1983.
31. Frost and Sullivan. U.S. Pesticides Market. Report A907, May
1981.
32. Georgia Manufacturing Directory 1982-83, Georgia Department of
Industry and Trade, 1982.
33. Harris, 1983 Indiana Marketers Industrial Directory, Harris
Publishing Company, Ohio, 1982.
34. Harris, 1983 Ohio Marketers Industrial Directory, Harris
Publishing Company, Ohio, 1982.
35. Illinois Manufacturers Directory 1983, Manufacturers News Inc.,
Illinois, 1983.
36. Iowa Works 1983-84, Directory of Iowa Manufacturers, Iowa
Development Commission, 1983.
37. 1983 Kentucky Directory of Manufacturers, Kentucky Department of
Economic Development.
38. McRae's Industrial Directory New Jersey, 1984, McRae's Blue Book
Inc., New York, 1983.
39. McRae's New York State Industrial Directory, 1983, McRae's Blue
Book Inc., New York, 1982.
40. McRae'sPennsylvania State Industrial Directory .1982, McRae's Blue
Book, Inc., New York, 1982.
41. Meta Systems Inc, Memorandum to the Organic Chemicals file,
October 22, 1981.
42. Meta Systems Inc, Memorandum to EPA, "Effect of RCRA Costs on
Pesticide Plant Closures," October 11, 1981.
43. Meta Systems Inc, Memorandum to EPA, "Pesticide Plant and Product
Line Closures," January 29, 1982.
44. Michigan Manufacturers Directory 1983, Pick Publications,
Michigan, 1983.
45. Mississippi Manufacturers' Directory 1982, Mississippi Research
and Development Center, 1982.
46. Missouri Directory 1983, Mining, Manufacturers, Industrial
Services, Industrial Supplies, Informative Data Company, 1983.
R-3
-------
REFERENCES (continued)
15. Directory of New England Manufacturers 1983-84, the New England
Council, George D. Hall Company, Massachusetts, 1983.
16. 1983-84 Directory of North Carolina Manufacturing Firms, North
Carolina Department of Commerce, 1982.
17. Directory of Oregon Manufacturers 1982-83, State of Oregon Economic
Development Department.
18. Dun and Bradstreet, Inc. Million Dollar Directory. 1981.
19. Eichers, T.R. Evaluation of Pesticide Supplies and Demand for 1979.
U.S. Department of Agriculture, Economic, Statistics and Cooperative
Service, Agricultural Economics Report No. 422, April 1979.
20. Eichers, T.R. Farm Pesticide Economic Valuation, 1981. U.S.
Department of Agriculture, Economic and Statistics Service,
Agricultural Economic Report, 464.
21. Eichers, T.R. The Farm Pesticide Industry. U.S. Department of
Agriculture, Economics, Statistics and Cooperatives Service,
Agricultural Economic Report 461, September 1980.
22. Eichers, T.R., P.A Andrilenas, T.W. Anderson. Farmers' Use of
Pesticides in 1976. U.S. Department of Agriculture, Economics,
Statistics, and Cooperative Service, Agricultural Economic Report 418,
December 1978.
23. Eichers, T.R., and W.S. Serletis. Farm Pesticide Supply-Demand
Trends, 1982. U.S. Department of Agriculture, Economic Research
Science, Agriculture Economic Report, 485, April 1982.
24. Environmental Science and Engineering, Inc. Revised Contractor Report
for Best Available Technology, Pretreatment Technology, New Source
Performance Technology and Best Correlational Pollution Control
Technology in the Pesticide Chemicals Industry, est. No. 79-238-001,
November 1980.
25. Environmental Science and Engineering Memorandum "Additional NSPS
Product Information, Pesticide BAT Reviews," January 19, 1981.
26. Environmental Science and Engineering Memorandum, "Revised New Source
Performance Standards Cost," January 7, 1981.
27. Farm Chemicals, "A Look at World Pesticide Markets" September 1981.
28. Farm Chemicals, "Presstime News Report" April 1983.
29. Federal Trade Commission, competition in Farm Outputs: An
Examination of Farm Industries. February, 1981.
R-2
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REFERENCES
1. 1980-81 Alabama Directory of Mining and Manufacturing, Alabama
Development Office, 1980.
2. 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, U.S.
Environmental Protection Agency, 1975.
3. Aspelin, A. Economic Aspects of Current Pesticide Regulatory Programs
and Outlook for the Future. -U.S. Environmental Protection Agency,
Office of Pesticide Programs, Washington DC, February 1983.
4. C.H. Kline & Co. The Kline Guide to the Chemicals Industry. Fourth
Edition, Industrial Marketing Guide, IMG 13-80, 1980.
5. California Manufacturers Register 1983, Marketing Research Department,
L.A. Times.
6. Carlson, G.A. "Long-Run Productivity of Insecticides." American
Journal of Agricultural Economics, 59, pp. 543-548, August 1977.
7. Chemical Week. "Forecast 1984,—The Gains for Chemicals Will
Continue" pp. 30-41, January 4, 1984.
8. 1984 Classified Directory of Wisconsin Manufacturers 1980-81,
Wisconsin Association of Manufacturers and Commerce.
9. Directory of Florida Industries 1983-84, The Florida Chamber of
Commerce, Inc., 1983.
10. Directory of Kansas Manufacturers and Products 1983-84, Kansas
Department of Economic Development, 1983.
11. 1982 Directory of Louisiana Manufacturers, Louisiana Department of
Commerce, 1982.
12. The Directory of Maryland Manufacturers 1981-82, Department of
Economic and Community Development, 1981.
13. Directory of Montana Manufacturers 1980-81, Governor's Office of
Commerce and Small Business Development.
14. Directory of Nebraska Manufacturers and Products 1982-83, Nebraska
Department of Economic DeveJopment.
-------
condition of the plants in the absence of any additional regulations by
estimating the NPV without treatment costs. Lacking enough information to
estimate price responses and the price elasticity of demand for individual
PFP products, the conservative assumption is made that all treatment costs
come out of profits. For many plants, this is an appropriate assumption,
since a large majority of the PFP plants are already at zero discharge and
will not incur additional costs due to this regulation. As a result,
competing indirect discharge PFP plants will not be able to raise their
prices. There will be instances where all competing plants do incur
equivalent treatment costs. Certain products can be produced only with wet
processes, and therefore they all have some wastewater. In addition, some
products are produced by a single firm in a given market (either
geographically or user determined). Any bias due to this assumption of no
cost pass through will be in the form of an overestimate of the impact on
profits and closures.
As with operating income and liquidation value, the value of production
in 1982 is determined directly from the 1983 308 Survey. There is no need to
estimate the dollar value of pesticide output on the basis of production
quantity and unit price (as is the case for the pesticide active ingredient
manufacturing plants), making for a more accurate value.
8-4
-------
Therefore, this ratio is appropriate for large firms. To test the
sensitivity of the results for small business, estimated operating income was
reduced and the NPV ratio recalculated. There are only two plants with
treatment costs that are owned by small firms. One of these plants is both a
manufacturer of active ingredients and a formulator/packager. In the
analysis reported in the earlier chapters, the joint impact of manufacturing
and PFP costs and sales was calculated. However, the manufacturer costs were
calculated separately from the PFP costs and the PFP costs assumed contract
hauling of PFP wastewater. In actuality, the plant is likely to run its PFP
wastewater through its treatment facility, thus avoiding the PFP contract
hauling costs with no additional manufacturer treatment costs. Therefore,
the sensitivity analysis is calculated including the manufacturer treatment
costs with zero additional costs for treating PFP wastewater. The operating
income can" be reduced by 25%, and there is no change in the number of
estimated closures among plants owned by small business. Therefore, the
results are insensitive to the ratio used to estimate operating income as a
function of sales.
In addition, the sensitivity of the results to changes in the estimated
liquidation value was tested for small businesses. The larger the estimated
liquidation value, the more likely the plant is to close because it will have
to earn more money in order to maintain its rate of return. Increasing the
liquidation value in the NPV ratio for plants owned by small firms by 15%
results in no changes in the estimated number of closures. Therefore, the
results are not sensitive to the ratios used to estimate the liquidation
value.
8.2 Metallo-Organics Pesticides
The impact assessment is based on data for the single indirect discharge
plant known to the Agency. The sales estimate used in the analysis is based
on the firm's public comments to the Agency and thus does not involve any use
of average prices nor adjustments in production quantities. Therefore, it is
very accurate. The operating income and liquidation values used in the net
present value calculation are estimated on the basis of plant sales, by
applying the same ratios used in the pesticide active ingredient
manufacturer's analysis, it is assumed that these ratios are appropriate,
since both Subcategory 1 and Subcategory 2 involve the manufacture of
pesticide chemicals. Data are not available for a separate estimate of these
ratios for metallo-organic pesticide manufacturing.
8.3 Pesticide Formulator/Packagers
Since the sample of plants analyzed is selected in a scientifically
determined way to be a random sample, it is representative of all indirect
discharge PFP plants. It is not necessary to estimate industry-wide
operating income to sales and liquidation value to sales ratios, since the
1983 308 Survey provides the information required to estimate the amounts
directly. This information also makes it possible to evaluate the financial
8-3
-------
levels are adjusted to reflect industry changes in production quantity and
the mix of pesticide products between 1977 and 1982. The U.S. International
Trade Commission (ITC) reports total production levels and prices for groups
of pesticides each year. Production levels in 1982 and 1977 for the
appropriate groups are used to adjust the plant level outputs of specific
pesticides. For some insecticides, the adjustments derived from the ITC
groups include changes in non-pesticide uses of the chemicals as well.
Production at any individual plant may not have followed the industry trends
observed in the pesticide groups as reported by ITC. However, we feel that
these adjustments are appropriate and necessary since these adjusted
production levels are closer to actual 1982 production levels than are the
1977 levels. For a few plants, actual changes in production level and mix
were available and these were used in place of adjusted levels.
Sales for each plant are estimated by multiplying the adjusted production
levels by the 1982 prices as reported for the groups of pesticides by ITC.
Companies were requested by EPA to grant ITC permission to release the
product-specific pesticide active ingredient prices. These product-specific
prices are used in all cases when they are available. However, permission
was not granted to release prices for most of the pesticide active
ingredients. When product-specific prices are not available, the average
price for the product subgroup, as published by ITC, is used. Since there
are 19 subgroups, there is sufficient disaggregation in the ITC data that
these average prices are reasonable estimates of the product-specific price.
The 1977 308 Survey did not ask for profits and/or operating costs.
Therefore, profits are estimated using an industry average of operating
income to sales. Since the average is obtained from information on the
pesticide operations of seven major firms it is considered representative of
the industry. However, profit margins will vary among individual plants for
such reasons as: different geographical regions, applicable crops, and types
of pesticides. Therefore, individual plant profit levels may be higher or
lower than the seven firm average. The sensitivity of the results to our
assumptions about operating income and liquidation value are discussed below.
8.1.1 Sensitivity Analysis for Pesticide Manufacturers
As stated above, after-tax operating income is estimated for each plant,
based on the average ratio of operating income to sales (OI/S) for seven
large pesticide producers. Various public comments on the proposed
regulations argue that small firms face a higher cost of capital and
frequently have a lower profit margin than large firms. To accomodate the
higher capital costs, the analysis uses separate costs of capital for large
manufacturers (7.5 percent) and small manufacturers (9.5 percent).
The sensitivity analysis reported in this section investigates whether
the closure results for small firms are sensitive to the OI/S ratio or to the
calculation of liquidation values. The NPV ratio in the earlier chapters
calculates operating income as a function of sales, using the average ratio
of operating income to sales for seven large pesticide manufacturing firms.
8-2
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8. LIMITS OF THE ANALYSIS
This section discusses the limitations of the economic impact analysis.
It focuses on the methodological assumptions and on the restrictions placed
on the analysis by data limitations. Limitations which pertain to the
plant-specific compliance cost estimates used in this analysis are outlined
in Section IV of the Pesticide Chemicals Industry Administrative Record.
Limitations for the pesticide active ingredient manufacturers, for the
metallo-organic subcategory, and for formulator/packagers are discussed
separately.
8.1 Pesticide Active Ingredient Manufacturers
The major variables used in the economic impact analysis are compliance
cost and sales estimates for each plant. The compliance cost estimates are
provided by the Industrial Technology Division of EPA. The sales estimates
are made by the Agency on the basis of production levels reported by the
plants in 1977, adjusted to reflect changes in production levels and product
mix between 1977 and 1982, and 1982 prices. It is necessary to adjust the
production levels because total production in the industry has declined
during the 1977-1982 period, while the production of certain products has
increased. Using the 1977 production levels would provide an incorrect
estimate, and in many cases an over-estimate, of sales for individual
plants. Every attempt has been made by the Agency to accurately estimate
sales, since operating income and liquidation values are estimated for each
plant on the basis of its sales and industry-wide ratios. This approach is
necessary because the 1977 308 Survey did not request information on
operating income, assets, or liquidation values from pesticide active
ingredient manufacturers. The industry-wide ratios used are:
o After-tax Operating Income = 0.144 Sales
o Liquidation Value = 0.70 (Current Assets) + (.46)(Book Value)
= 0.51 Sales
o Real Cost of Capital = 7.5 percent for large firms
= 9.5 percent for small firms
We feel that these are accurate estimates since they are based on the
pesticide operations of seven firms that make up a large proportion of
pesticide active ingredient production. The estimation procedures are
discussed in more detail in the following paragraphs and in Appendix 2-C.
It was necessary to estimate plant sales for 1982 in order to make valid
comparisons with the current compliance costs. The sales estimates start
with the 1977 production levels reported by the 114 plants. These production
-------
Table 7-2. Distribution of Treatment Cost Impacts on
Large and Small Firms: Pesticide Formulator/Packagers
Small Firms
Large Firms
Total number of firms
Total number of plants
Number of plants that fail
NPV Test*
16
16
12
12
Number of plants with:
Plant Closures
Line Closures
0
1
Number of plants with
cost to sales ratios
in these ranges:
cost / sales = 0-0.5%
cost / sales = 0.5-1.0%
cost / sales = 1.0-2.0%
cost / sales
greater than 2.0%
1
5
2
Source: 1983 308 Survey; Corporate Compustat, as of February 23, 1984,
Standard & Poor's Compustat Services, Inc.; and Meta Systems Inc calculations,
*A11 plants fail if their NPV is less than 9.5 percent.
7-5
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7.4 Pesticide Formulator/Packagers (PFP)
For the PFP subcategory, a small business is defined as a firm with
annual sales of $7.0 million or less. The criterion of $10 million, used for
manufacturers, is not considered compatible with the intent of the Small
Business Act. The regulatory flexibility analysis is primarily concerned
with small firms with limited resources or those that would face barriers to
entry due to regulation. Since the PFP sector requires lower capital
investment as well as lower R&D expenditures than the pesticide manufacturing
sector, it is easier to enter the industry, and a lower sales criterion is
appropriate. About 65 percent of the firms involved in PFP operations would
be considered small businesses if the $10 million annual sales criterion used.
The $7.0 million definition was selected after ordering 28 firms by sales
from lowest to highest. There was a break in the distribution at that point,
and the $7.0 million sales criterion divides the sample into two groups with
approximately 57 percent of the firms considered small. However, sales data
were available for only five out of the 28 firms. These 5 firms own one
plant each. When firm sales were not known, the plant sales were used in
place of corporate sales. This tends to overstate the number of small firms,
for many small plants are owned by large firms.
Table 7-2 summarizes impact imformation on plants owned by small firms
and plants owned by large firms. All of the PFP plants analyzed had
treatment costs. For the 28 plants forming the basis of the estimate of the
total number of closures, 57 percent belong to small firms, and a slightly
higher percentage of plants owned by small firms have cost-to-sales ratios of
over 2%. Three out of the four plants likely to close their pesticide
product lines under the regulation are owned by small firms.
However, in each case, the production and employment loss resulting from
the regulation is so small as to have a neglible impact on the overall
operations of the plant. In addition, to some indeterminate degree, we may
have overstated the impacts on small businesses since some plants were
considered small businesses when they are really large businesses. For
example, the twelve plants which volunteered data and were included in the
estimate of total cost, but not in the estimate of closures, are 1/3 small
firms and 2/3 large firms. There are no closures associated with these 12
plants. In conclusion, EPA believes that there is no small business impact.
7-4
-------
Table 7-1. Distribution of Treatment Cost Impacts on Large and Small
Firms: Pesticide Active Ingredient Manufacturers
| Small Firms
Large Firms
Total number of firms
Total number of plants
Total number of plants
with treatment costs
Number of plants that fail
NPV Test**
Number of plants with
Plant Closures
Line Closures
Number of plants with
cost to sales ratios
in these ranges:
cost / sales = 0%
cost / sales = 0-2%
cost / sales
greater than 2%
14
14
12
0
60
100
38*
62
13
25
Source: 1977 308 Survey; Corporate Compustat, as of February 23, 1984,
Standard & Poor's Compustat Service, Inc.; and Meta Systems
calculations.
* Excludes one plant which has a treatment cost, but sales data
are not available.
** Small firm plants fail if their NPV is less than 9.5 percent
and large firm plants fail if their NPV is less than 7.5 percent.
7-3
-------
following stipulations: the firm is independently owned and operated, is not
dominant in its field of operation, does not have a net worth in excess of $6
million, and does not have an average post-tax net income in excess of $2
million for the preceding two years. Assuming a pre-tax profit margin on
sales of 20 percent,.!/ and a corporate income tax rate of 48 percent,
together with the SBA criterion of $2 million net income total for two years,
the two-year annual sales would equal $20 million. Thus, if a firm is to be
considered a small business, annual sales must be no larger than $10 million.
7.3 Pesticide Manufacturers
For purposes of this analysis, a small pesticide manufacturing business
is defined as a firm with annual sales of $10 million or less. By this
definition, about 18 percent (14 out of 74) of the firms which manufacture
pesticide active ingredients are designated as small business entities.
Annual company sales in 1982 are obtained from COMPUSTAT, where
possible.2/ if not available, annual sales for past years are used.J/
In a few cases, company sales are not available and plant sales are used
instead. This results in an overestimation of the number of small firms.
Table 7-1 presents impact information on plants owned by small firms and
plants owned by large firms. Fifteen percent (two out of the 14) of the
plants belonging to small firms incur treatment costs. Of the 100 plants
belonging to large firms, 38 percent incur treatment costs. Both of the
small-firm plants incurring costs have cost-to-sales ratios of over 2%, while
25 out of the 38 large-firm plants have cost-to-sales ratios of over 2%.
One plant owned by a small company and one plant owned by a large company
each have NPV ratios, after incurring treatment costs, that are smaller than
their respective cut-offs. The plant owned by a large company will
experience a product-line closure. However, the plant owned by the small
company is not expected to close when the joint impacts on its PFP and
manufacturing operations are considered. These joint impacts must be
considered, since this plant is integrated, with its PFP operations highly
dependent on the continuation of its manufacturing operations. Therefore,
there are no small business impacts for the manufacturing subcategory as a
result of this regulation.
A/Herbicide Suicide, December 1975, Loeb, Rhodes and Company, cited in
The Economic Health of the Pesticide Industry, Seehusien, M.H., January 1978.
I/Corporate COMPUSTAT, as of February 23, 1984, standard & Poor's
Compustat Service, Inc.
.I/These were collected from corporate annual reports for the analysis of
proposed regulations: "Economic Impact Analysis of Proposed Effluent
Limitations Guidelines, New Source Performance Standards and Pretreatment
Standards for the Pesticides Industry Point Source Category," November 1982.
7-2
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7. SMALL BUSINESS ANALYSIS
7.1 Introduction
The Regulatory Flexibility Act of 1980 (Public Law 96-354) amends the
Administrative Procedures Act and requires Federal regulatory agencies, such
as EPA, to consider small business entities throughout the regulatory
process. If a substantial number of small firms will be significantly
impacted, the act requires the evaluation of alternative regulatory
approaches to mitigate or eliminate the small business economic impacts.
This chapter addresses these objectives by identifying the impacts on small
businesses likely to result from the regulation. The primary variables
considered are those which are also analyzed in the general impact analysis:
the number of plants with treatment costs, the number of plant and/or
product-line closures, and employment lost due to closures.
7.2 Definition of gmall Business
Two approaches are considered to define small pesticide chemicals
industry operations: (1) The Small Business Administration (SBA) definition
and (2) a firm's net income and sales.
The Small Business Act, Section 3, defines a small business in the
following statement:
"....a small business concern shall be deemed to be one which is
independently owned and operated and which is not dominant in its
field of regulation. In addition to the foregoing criteria the
Administration (of the SBA), in making a detailed definition, may
use these criteria, among others: number of employees and dollar
volume of business.".!/
The Small Business Administration definition of "small business" for the
Pesticide Chemicals Industry is a business (including its affiliates)
that employs less than five hundred people.
An alternative definition of a small business is based on income and
sales. For the purpose of pollution control guarantee assistance, the
definition of a small business is addressed in Section 121.3.16 of the
Federal Code under Public Law 94-305, which in turn, refers to Section
121.3.11. This section defines small business and includes some of the
_!/ 536 85 Congress 2 Session,
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6.5 New source Impacts
The new source standards (NSPS and PSNS) are equal to BAT and PSES
standards for Subcategory 1. The technology basis of physical/chemical or
physical/chemical plus biological will continue to be the recommended
treatment technology. The Agency is not establishing NSPS or PSNS for
Subcategory 2 pursuant to paragraph 8 of the Consent Decree. For Subcategory
3, PSNS is equal to PSES and NSPS is equal to the PSES with controls also of
the conventional pollutants BOD and TSS, all of which are regulated by BPT.
Since there are no incremental costs/ no separate economic analysis was
performed. The Agency believes new sources will be similar to existing
sources and treatment costs will be similar to and may actually be less for
new sources. New sources could take advantage of potential lower treatment
costs including water flow reduction capabilities and avoidance of retrofit
and repiping required of existing sources. Based on the economic impact
analysis presented for existing sources, the impacts for new sources are
assumed to equal existing sources and impacts are not large enough to
constitute an additional barrier to entry.
6-12
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As pesticides are subjected to more stringent regulatory controls, U.S.
producers may shift production overseas due to a decline in U.S. demand as
other environmentally safer pesticides are produced.
Based on these findings and the pesticide-specific impacts, including the
small price increases that are estimated by this analysis, this regulation
will not have an impact on the U.S. balance of trade. In addition, none of
the pesticides identified as facing severe foreign trade competition will
cease production due to this regulation. Domestic firms which are expanding
overseas do so for many reasons, particularly to take advantage of lower wage
costs and to be nearer their foreign markets since pesticides production and
use banned domestically can still be undertaken overseas.
No foreign trade impacts are expected for formulated/packaged products.
This conclusion is based on our assumption that this regulation will have a
small impact on prices, affect a small percent of the PFP industry, and is
based on our finding that the regulation will have a small effect on industry
closures.
6.4.3 Industry Structure Effects
The potential pesticide active ingredient manufacturing product line
closure represents a small fraction of the total industry ceipacity. In addi-
tion, this plant is owned by a large company, and the regulation will not
result in a reduction in the proportion of production coming from small
firms. Therefore, no change in market structure is anticipated as a result
of this regulation.
The formulator/packager product line closures are a very small fraction
of the total industry capacity. There will be no change in market structure
as a result of this regulation.
6.4.4 Future Impacts
Based on the industry growth projections in Chapter 4, the future impacts
will be less severe than the impacts estimated for 1983 and 1982. For
pesticide manufacturers, total annual cost of compliance is $52.5 million in
1983 dollars ($53.8 million in 1985 dollars) which is about 1.36 percent of
the total value of production in 1983. In 1990, the total annual cost of
compliance represents only about 1.0 percent of production value. Therefore,
price changes, production quantity impacts and profit impacts will be less
severe than the 1982 estimates.
For pesticide formulator/packagers, the total annual cost of compliance
is $15.5 million, in 1982 dollars (17..0 million in 1985 dollars), which is
about 1.0 percent of the total value of PFP production by the indirect
discharge plants in 1982. By 1990, the treatment costs represent 0.8 percent
of production value. Decrease in profit in 1990 will be 1.5 percent,
compared to 2.0 percent estimated for 1982.
6-11
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As discussed in Chapter 3 of this report, exports greatly exceed imports of
pesticide active ingredients. The pesticide industry continues to generate a
very positive trade balance with the total value of exports exceeding the
value of imports by about an 8 to 1 margin in recent years.!./ Additionally,
few U.S. producers have opened facilities overseas to manufacture pesticides
for marketing in the United States.
This is not to say that some segments in the pesticide industry have not
experienced increases in imports. Imports of benzenoid pesticides have grown
quickly during the past decade. Imports of these pesticides increased from a
level equal to 5 percent of U.S. production (1977) of benzenoid pesticides to
15.8 percent in 1982 as a result of decline in U.S. production by volume..2./
It is important to note that import of these pesticides increased rapidly due
to the introduction of new, patented pesticides by European and Japanese
companies. Another reason that U.S. imports of certain pesticides have risen
is that the 17 year patent protection period for U.S. manufacturers has
expired for older pesticides. Foreign companies, freed from the need to pay
licensing fees, have stepped up sales of these products in the U.S.
market..!/ The loss of these proprietary rights was a major cause of
location changes that took place in the 1970's.
Expanded imports of some pesticides can be linked to environmental
factors. Three pesticides in particular showed increased imports after U.S.
production ceased in the 1970's because of environmental problems. Lindane
imports rose dramatically in the late 1970's but imports have since decreased
as registration for many uses has been suspended..!/ DBCP production in the
U.S. ended when it was learned that chemical workers in several DBCP
formulatng plants had low or zero sperm counts. Two countries began to
produce DBCP but the situation proved temporary as one country ceased
production due to work place hazards and the other country had plants shut
down on several occasions due to work place hazards. EPA has banned domestic
uses of DBCP except for pineapple growing in Hawaii. Dicofol has been
imported in recent years as domestic production has ceased. EPA has since
curbed these imports when high concentrations of DDT were discovered in the
imported products.
A/Leonard, Jeffrey H., "Are Environmental Regulations Driving U.S.
Industry Overseas?*, The Conservation Foundation 1984.
.I/Calculated from figures in U.S. International Trade Commission reports,
Synthetic Organic Chemicals 1982, p. 225 and Imports of Benzenoid Chemicals
and Products 1982, p. 97.
^./Leonard, Jeffrey H., "Are Environmental Regulations Driving U.S.
Industry Overseas?", The Conservation Foundation 1984.
.1/U.S. Department of Health and Human Services, Public Health Service,
"Second Annual Report on Carcinogens" (Washington, D.C.: U.S. Government
Printing Office, 1981), pp. 152-153.
6-10
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6.4.1 Employment and Community Impacts
The one pesticide active ingredient manufacturing product line closure
identified above employs one person. The plant is located in a large
metropolitan area, and its employees account for a very small proportion of
the total labor force in the area. Therefore, the impact on local employment
will not be significant.
The four formulator/packager product, line closures identified from the 28
plant sample employ from 0.1 to 0.8 full-time worker each. The plants are
located in large metropolitan areas and, therefore, the closures will have no
impact on local employment. The same is assumed for the other closures
expected on the basis of extrapolating the sample impacts to all the indirect
discharger PFP plants. A maximum of 90 part-time or 11 full-time equivalent
PFP jobs will be lost and they are expected to have no impact of local
employment.
6.4.2 Foreign Trade Impacts
As discussed in Chapter 3, the export market for manufacturers of pesti-
cide active ingredients is important to the pesticide industry. Assembling
information on the competitive position of specific products; in foreign
markets, and of foreign products in U.S. markets, is difficult since a
product's competitive position depends on a great many factors. Among the
relevant issues are: the relative production costs in the U.S. versus other
countries, transportation costs, demand levels and availability of competing
products in foreign markets, and subsidies provided by and/or restrictions
imposed by foreign markets to promote production in their own countries. The
impact of the regulations on foreign trade was assessed in terms of impacts in
addition to these other factors.
A search was undertaken to collect available data on products that are
under foreign trade pressure. In particular, products that were highlighted
in the Public Comments were examined. This search included telephone calls to
several firms to gather more information than was available from the 308
Survey. These included calls to: Pfizer concerning DEBT, PPG concerning
Chlorobenzilate and related products, Cosan concerning PMA (phenyl mercuric
acetate), and Rohm and Haas. In addition, the extensive resources of EPA's
Office of Pesticide Programs (OPP) were used. These include estimates made by
OPP staff based on their expert judgment, plus information from various
reports including those published by: Doane Western, RvR Consultants, C.H.
Kline, Technomics inc., and the SRI Chemical Economics Handbook.*
* Product profiles were written on PMA, DEBT, DNCA, and the chlorobenzenes
and related products. These are filed in the Confidential portion of the
Administrative Record for this report. Records of the phone conversations are
in the Confidential sections of the Administrative Record for this report and
for the report at Notice.
6-9
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of the total plant's treatment cost and 16 percent of the value of production
whereas the formulating/packaging component accounts for 14 percent of the
cost but 84 percent of the value. This plant is not considered a closure
candidate under the combined impact of these regulations.
Based on the results presented in Table 6-2, the one metallo-organic
(Subcategory 2) plant will not close. The net present value ratio is large
enough to indicate that the plant will stay open.
There are an estimated 24 possible product line closure candidates among
the 169 indirect discharge formulator/packager plants in the industry. The
closure assessment is based on applying the net present value test twice
(i.e., with a°nd without treatment cost), and a consideration of the products
made and the strength of the company. If the plant fails the net present
value test without including treatment cost, the plant is considered a
baseline closure, i.e., a closure not attributable to additional wastewater
treatment requirements. There are an estimated 17 baseline closures in
Subcategory 3. Whether a plant actually closes depends on a number of
factors specific to the plant and the parent company. If the plant does not
fail the NPV test without treatment costs but does fail when treatment costs
are included, it is considered a possible closure candidate. Based on this
dual application of the net present value test, four plants in the sample of
plants analyzed are judged possible closure candidates due to the
regulation. For each of these plants, pesticide formulator/packager
operations are a small part of total plant operations but treatment costs
have a large impact on the net present value comparisons. Therefore, these
plants are likely to close the product lines while maintaining their other
operations. Extrapolating this conclusion to all PFP indirect discharge
plants subject to this regulation, yields an estimate of twenty-four closures
and all are expected to be product line closures.
The four product line closure plants identified in the sample of 28 PFP
plants each produce more than one PFP product. The closure analysis projects
that all PFP operations at these four plants will be discontinued. The
multiproduct PFP operations at these 4 plants represent a very small percent
of total plant operations. In particular, for Plant 74, of the three PFP
products produced, two were reported in the 308 survey as being in production
for only one day per year. The third is produced about 20 days per year.
For Plant 108, two PFP products are produced: one for one day per year and
the other for five days per year. At Plant 87, six PFP products are
produced, ranging from two to 64 days of production per year. For plant 73,
five PFP products are produced, ranging from one to 18 days of production per
year.
6.4 Other Economic Impacts
The effects of the regulations on employment, the community, foreign
trade, and industry structure are addressed in the following sections.
6-8
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Table 6-3. Summary of Plant and Product Line Closures
Active Ingredients
Manufacturers*
Total Industry
Manufacturers of
Metallo-Organics
Indirect
Formulator/Packagers
Indirect Dischargers
Sample
Total
Industry
Number of Plants
119
28
169
Number of Plants
Incurring Treatment Costs 42**
Number of Plants that
Failed Net Present
Value Test 2
Likely Closure:
28
169
24
Plants
Product Lines
0
1
0
0
0
4
0
24
* The sample equals the total industry for manufacturers.
** This includes one plant that was not analyzed for closure because it was
not possible to estimate its sales.
6-7
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were no further regulations. For Subcategory 1 plants, both operating income
before installation of additional treatment and liquidation value are estimated
as a function of the plant's sales. Therefore, it is not possible to identify
plants with operating costs before treatment that are particularly high in
relation to their sales or liquidation value.
The potential for closure is assessed by applying the net present value test
(NPV) to plants with treatment costs. This involves comparing the returns the
owner would expect to receive if the plant closes (i.e., the current
liquidation value) with the returns the owner would expect to receive if the
plant remains in operation and the additional treatment is provided (i.e., the
net present value of earnings—with treatment costs—over the next ten years
plus liquidation value at the end of the ten years). If the current
liquidation value is less than the net present value of earnings, then it is
assumed that the treatment will be provided and the plant will continue to
operate. Two manufacturing plants fail the net present value test. A/ These
plants are further analyzed to determine the likelihood of closing (See Table
6-3).
One of the two manufacturing plants that fail the net present value test is
likely to close its pesticide product line, while continuing the rest of its
operations. The plant has a negative estimated after-tax operating income,
based on industry-wide average tax rates and ratio of operating costs to sales,
and the plant specific treatment cost estimate. The plant produces pesticide
active ingredients for a relatively few days out of the year and its production
levels are small. It has a very high cost to sales ratio and a large, negative
net present value ratio. Therefore, this plant is likely to close its
pesticide operations.
The other possible closure candidate is both a manufacturer of active
ingredients and a formulator/packager of pesticide products. Since a large
majority of the active ingredients it formulates and packages are produced on
site, the plant could not close its manufacturing operations while continuing
its PFP operations. Therefore, it is appropriate to consider the impact of
the regulation on the manufacturing and formulating/packaging operations
jointly. Considering its manufacturing activities alone, it fails the net
present value test. However, considering manufacturing and formulating/
packaging production and treatment costs jointly, the plant is not a closure
candidate. This was done by summing the Subcategory 1 and Subcategory 3
treatment costs for this plant and comparing this to the sum of the value of
its Subcategory 1 and Subcategory 3 production. The costs for the two
subcategories were estimated independently of each other and thus the sum is a
conservative estimate (i.e. likely to be high) of the total treatment cost for
this plant. The manufacturing component of the plant accounts for 86 percent
J One plant is not included in this part of the analysis because it did
not provide production data, and it was not possible to estimate its revenues
nor perform this comparison. This plant is owned by a large company that also
produces Pharmaceuticals.
6-6
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Table 6-2. Price, Quantity and Profit Impacts for Pesticide
Manufacturers and Formulator/Packagers
Change Due to Treatment Costs (percent)
Subcategory I Price Increase I Quantity Decrease* I Profit Decrease!
Manufacturers of Active Ingredients
Herbicides 1.70% 1.14% 1.14%
Insecticides 0.64% 0.20% 0.20%
Fungicides 0.81% 0.28% 0.28%
All Pesticides 1.30% 0.64% 0.73%
Metallo-Organics Manufacturers
All Pesticides 0 0 +
Formulator/Packagers**
All Pesticides I 0 i 0 i 2.0% i
Source: Meta Systems Inc estimates,
* Quantity decrease is a function of the percentage change in price and the
price elasticities which are developed in Chapter 2.
+ Not reported due to confidentiality restrictions.
** Indirect dischargers only.
6-5
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Profit reductions will occur because the quantity of pesticides produced is
declining and some of the treatment costs cannot be passed on to customers.
Profit reduction for all pesticides is expected to be 0.73 percent, with: 0.20
percent for insecticides, 0.28 percent for fungicides, and 1.14 percent for
herbicides (See Table 6-2.)
While there are several metallo-organic pesticide chemical manufacturing
plants that will not incur compliance costs under this regulation because they
do not discharge process wastewater, none of them currently produce the
metallo-organic pesticide that is the subject of this analysis of the
regulation. However, the plant analyzed here does compete with foreign
producers, i/ Therefore, the analysis assumes that this one plant will not
be able to increase its prices. If there is no change in the quantity
produced by this plant, then all of the costs come out of its profits. Since
only one plant is analyzed, the profit decrease is not reported.
There are many more formulator/packager plants in this industry than there
are pesticide active ingredient manufacturing plants. However, of the total
number of plants that formulate/package agricultural and/or household
pesticides (about 1264 plants), only 13 percent are indirect dischargers
subject to this regulation. Not all of these plants are in direct competition
with each other. A variety of products are produced and plants may specialize
in a specific user market or in geographical markets. Also, some products
cannot be produced with a dry process and plants using wet processes will have
wastewater to handle. Nevertheless, because there are relatively few indirect
dischargers, it is assumed that these plants will also absorb their treatment
costs and will not increase prices. If there is no price increase, there is
no change in quantity produced. Based on the assumption that all treatment
will come out of profits, the profit reduction for indirect dischargers will
be about 2.0 percent for all pesticides. To the extent that this assumption
is incorrect and plants are able to pass on their treatment costs, this
analysis has overestimated impacts in terms of number of closures and
estimated profit reductions.
6.3 Plant Closure Potential
Based on the analytic steps described in Chapter 2, it is concluded that
one plant that manufactures pesticide active ingredients is likely to close
its product line in response to this regulation. The plant also produces
non-pesticide chemicals and this production will continue. It is not possible
to estimate baseline closures for Subcategory 1, because the necessary
plant-specific information is not available. Baseline closures are plant
and/or product-line closures that are expected to take place even if there
i/Based on work done as part of the promulgation of BPT regulations,
including: Economics Analysis of Effluent Limitations Guidelines for the
Pesticide Chemicals Manufacturing Point Source Category, EPA-230/2-78-065f,
February 1978, and public comments.
6-4
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Total capital costs for Subcategory 1 direct dischargers will be $68.7
million and total annualized costs will $35.1 million, while total capital
costs for Subcategory 1 indirect dischargers will be $39.0 million and total
annualized costs will be $18.7 million,.
Among Subcategory 2 plants, only indirect dischargers will incur costs
due to this regulation since BPT imposed zero discharge on all direct
dischargers, it is estimated that the total capital costs for Subcategory 2
will be $47 million and total annualized costs will be $129.8 million.
For Subcategory 3 plants, only indirect dischargers will incur costs
since BPT imposed zero discharge on direct dischargers. For the recommended
treatment technology, total capital cost will be $22.6 million and total
annualized costs will be $17.0 million. The Agency also calculated costs for
compliance with a treatment option allowing a discharge based on the
manufacturer's standards. Total capital costs were $22.2 million and total
annualized costs were $16.9 million.
6.2 Price, Quantity and Profit Changes
For the pesticide active ingredient manufacturing plants in Subcategory
1, price increases due to treatment costs, and the associated decreases in
production, were calculated for each of the three major product groups:
herbicides, insecticides and fungicides. In all three product groups, the
changes were small. As described in Chapter 2, it is assumed that
manufacturers will pass on the average treatment cost per unit of output in
the form of a price increase. The average cost is calculated as the total
treatment costs for pesticides in that product group divided by the total
sales of all pesticides in that product group. Therefore, the larger the
percentage of products with costs, the larger the percentage of costs passed
on. This is probably a conservative estimate in that many individual
pesticides are protected by patents and/or manufactured by only one company,
and these plants may be able to raise their prices to cover all of their
treatment costs. The average price increase for all pesticides is 1.30
percent and the increases for the three product groups are: 0.64 percent for
insecticides, 1.70 percent for herbicides, and 0.81 percent for fungicides.
In response to higher prices, the quantity of pesticides demanded will
decline. The amount by which the quantity demanded declines is expressed in
terms of the demand elasticity. Separate demand elasticities were calculated
for each product group. A/ Based on these elasticities, the decrease in
quantity of all pesticides produced is estimated to be 0.64 percent and the
decreases for the three product groups are estimated to be: 0.20 percent for
insecticides, 0.28 percent for fungicides, and 1.14 percent for herbicides.
I/ The size of the percentage decrease in production depends on both the
percentage increase in price and the price elasticity of deunand for the
product group. (Chapter 2 discusses this derivation in detail.)
6-3
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Table 6-1. Total Cost of Compliance
(Costs are in 1st Quarter 1985 dollars)
Number of plants
incurring costs
Capital costs
($000)
Annual costs
($000)
Manufacturers
Total
Direct
Indirect
Metallo-Organics
Total+
Formulator/Packager**
Total +
42*
21
21
169
107,705
68,656
39,049
47
22,559
53,795++
35,107++
18,688++
129.8
16,963
* 41 of 119 manufacturing plants incur treatment costs and/or RCRA costs
and monitoring costs. One plant is both a direct and indirect
discharging plant. Separate costs are assigned to the direct and
indirect flows. Therefore, the plant is treated as two separate
entities: one indirect and one direct discharger and the total reflects
this.
+ Includes only indirect discharge facilities.
** Based on extrapolation from a sample of 28 plants.
++ Annualized costs for manufacturers include the annualized capital cost,
operating and maintenance costs, and annualized land costs.
6-2
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6. ECONOMIC IMPACT ANALYSIS
This chapter provides estimates of the economic impacts; associated with
the costs of the effluent treatment technologies described in Chapter 5. The
analysis is based upon an examination of the estimated compliance costs and
other economic, technical, and financial characteristics using the methodol-
ogy described in Chapter 2. The economic variables examined include:
changes in prices, quantities produced, employment, foreign trade, and plant
closures.
The pesticide chemicals industry is divided into two sectors or tiers:
plants that manufacture the pesticide active ingredients, including metallo-
organic chemicals (Subcategories 1 and 2), and plants that formulate and/or
package the pesticide products (Subcategory 3). The analysis of active
ingredient manufacturing plants in Subcategory 1 is based on a survey of 114
plants, which includes most of the manufacturing plants in the United
States. The analysis of metallo-organic chemical manufacturers (Subcategory
2) is based on a single indirect discharge plant. The Agency believes that
this is the only plant to be affected by the regulation since it is the only
indirect discharging manufacturer of metallo-organic pesticide active
ingredients. The analysis of pesticide formulator/packagei: plants is based
on survey information from a sample of indirect discharging plants. Since
the sample of indirect discharge formulator/packager plants surveyed was
scientifically drawn and conducted, they are representative of all the
estimated 169 plants to which the regulation applies. See Chapter 2 for an
explanation of the sampling procedures and the extrapolation to the entire
industry. The impact analysis is based on sales and operating income data
for 1982 and 1983, using costs in 1982 dollars.
6.1 Total Compliance Costs for Existing Sources
Table 6-1 presents the total compliance costs, both capital investment
and annual, for existing plants in the pesticide chemical industry. These
costs are estimated for 1985. For the 42i/ manufacturing plants in
Subcategory 1 that will incur costs under this regulation, the total capital
investment will be $107.71 million and the total annual costs will be $53.8
million. The annual costs include operating and maintenance, annualized land
cost, as well as the annualized portion of the capital cost including
interest and depreciation. The annuailized portion of the capital costs is
calculated using a capital recovery factor (CRF) of 0.218.2./.
J/ 41 of 119 manufacturing plants analyzed incur treatment costs and/or
RCRA and monitoring costs. One plant is both a direct and indirect
discharging plant. Separate costs are assigned to the direct and
indirect flows. Therefore, the plant is treated as two separate
entities: an indirect and a direct discharger, and the total
reflects this.
2/ See Chapter 2 and Appendix 21) for a more detailed discussion of the
~ derivation and use of the CRF.
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Subcategory 1: Manufacturers of organic pesticide chemicals
o The 308 surveys reported production and sales in 1977 and were
updated to 1982 production and 1982 dollars. ITC price
information by pesticide group was obtained to update prices to
1982.
o Treatment costs developed by ITD are expressed in 1983 dollars
and are used in determining plant specific economic impacts (it
was not necessary to inflate 1982 sales dollars to 1983 dollars
because the pesticide producer price index used to inflate prices
did not change). Therefore, impacts can be analyzed in the later
Year of 1983.
o Total capital and annual treatment costs to comply with the
regulation are expressed in first-quarter 1985 dollars.
o Plant compliance costs are based on the amount of effluent flow
and on process chemistry determinations of the pollutants and
their amounts in the effluent.
o Capital costs are annualized based on a captial recovery factor
of .218 (see appendix 2-D for derivaton of CRF), and on Operating
and Maintenance costs adjusted for total operating days.
Subcategory 2: Metallo-organic manufacturers
o Plant sales and treatment costs taken from plant's comments at
Proposal and Notice. 1983 sales and costs used.
o Total capital and annual treatment costs to comply with the
regulation are expressed in first-quarter 1985 dollars.
Subcategory 3: Pesticide formulator/packager plants
o The 308 Surveys for pesticide formulator/packager plants were
reported in 1982 sales.
o Treatment costs developed by ITD are expressed in 1984 dollars
and are deflated to 1982 dollars (based on the engineering
construction cost index) in determining plant specific economic
impacts.
o Total capital and annual treatment costs to comply with the
regulation are expressed in first-quarter 1985 dollars.
The total costs of compliance for each regulatory option analyzed are
presented in the next chapter.
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For indirect discharging manufacturers of metallo-organic pesticides
containing mercury/ the Agency established PSES based upon the recommended
treatment technology of zinc precipitation. The capital and; operating costs
assumed by the Agency for compliance with this PSES were based upon the data
submitted by the one indirect discharging manufacturer of mercury-based
metallo-organic pesticides.
The Agency is not establishing BAT effluent limitations guidelines for
this industry because BPT currently requires zero discharge.
5.2.3 Subcategory 3; Pesticide Formulators and Packagers
The Agency established the zero discharge PSES for PFP's based upon
recommended treatment technologies of contract hauling and incineration or
physical/chemical treatment followed by recycle and reuse. Of an estimated
1,264 PFP's that are subject to the PSES, the Agency estimated that 169
currently are indirect dischargers that will have to incur costs to comply.
The Agency determined that approximately 96 percent of the PFP's that
would have to incur costs have wastewater flows considered low enough that
contract hauling with incineration was the recommended treatment technology.
The Agency calculated costs for contract hauling and incineration for these
plants. For the remaining estimated four percent, the Agency determined
these plants had high wastewater flows thereby making treatment and
recycle/reuse the recommended technology. Costs for such treatment was
calculated for this four percent of the industry.
For the four percent of plants with high flows, the Agency also costed,
for comparison purposes, a treatment option for meeting effluent limitations
based on the manufacturers' effluent limitations rather than zero discharge.
Treatment technologies which the Agency costed included contract hauling for
highly concentrated wastestreams and treatment and discharge of the remainder
of the wastestream. The total costs for this alternative were similar to the
costs for the recommended treatment technology.
RCRA compliance costs are included for both low and high flow ppp
plants. There are no monitoring costs associated with low and high flow
plants under this recommended treatment technology.
5.3 Compliance Cost Estimates
5.3.1 Critical Assumptions
The assumptions made to estimate compliance costs are outlined in Section
IV of the Pesticide Chemicals Industry Administrative Record. Some of the
critical assumptions are summarized below:
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For indirect dischargers, the Agency recommended physical/chemical
treatment for the 24 of 28 priority pollutants (five volatiles and phenol are
not regulated by PSES). Two priority pollutants (cyanide and 2,
4-dinitrophenol) have limitations based on physical/chemical plus biological
and two priority pollutants (1,3-dichloropropene, Bis-(2-chloroethyl)ether)
have PSES equal to no discharge. The same level of physical/chemical
treatment as recommended for BAT is recommended for the 34 nonconventional
pesticide pollutants. The recommended technology for the other 49
nonconventional pesticide pollutants is physical/chemical plus biological
treatment. The same six nonconventional pesticides with no discharge under
BAT are also no discharge under PSES.
EPA has identified 119 existing organic chemical pesticide manufacturers
covered by BAT or PSES. Of these 119 plants, the Agency estimates that 42
will incur costs to achieve compliance with the applicable requirements.
These plants include 21 direct dischargers and 21 indirect dischargers.
The Agency determined that for all of the direct dischargers, the
recommended treatment technology would be physical/chemical plus biological
to comply with BAT. In calculating the costs, the Agency assumed that the 21
plants would incur costs for physical/chemical treatment only because
biological treatment was already in place at these plants.
For the 21 indirect dischargers that the Agency assumed would incur
costs, the recommended treatment technology for eight of the plants was
physical/chemical plus biological and for the remaining 13 plants,
physical/chemical treatment only. The Agency costed physical/chemical plus
biological treatment at seven of the eight plants, since an eighth plant
which already had biological treatment installed, was costed for
physical/chemical only. The Agency calculated costs for the remaining 13
plants based on the cost of physical/chemical treatment.
The total costs calculated by the Agency include costs for monitoring
priority and nonconventional pesticide pollutants four times per month, daily
monitoring for conventional pollutants, and RCRA compliance costs for both
direct and indirect dischargers that would have to dispose of contaminated
sludges. Monitoring costs of $54,000 were also applied to the remaining 73
manufacturing plants not incurring treatment costs. As a result, no
incremental closures occur.
5.2.2 Subcategory 2: Metallo-Organic Pesticide Manufacturers
The Agency based the zero discharge PSES for Subcategory 2 plants which
manufacture metallo-organic pesticides containing arsenic, cadmium, and
copper, on the recommended treatment technologies of either contract hauling
and incineration or recycle and reuse. The Agency did not calculate any
compliance costs with this standard because there currently are no existing
indirect dischargers manufacturing these pesticides.
5-2
-------
5. EFFLUENT LIMITATIONS GUIDELINES AND STANDARDS CONTROL OPTIONS AND COSTS
5.1 Overview
The alternative water treatment control systems, costs, and effluent
limitations for the Pesticide Chemicals Industry Point Source Category are
enumerated in Section IV of the Pesticide Chemicals Industry Administrative
Record. Section IV also identifies various characteristics of the industry,
including manufacturing processes; products manufactured; volume of output;
raw waste characteristics; supply, volume, and discharge destination of water
used in the production processes; sources of wastewaters; and the
constituents of wastewaters. Using these data/ pollutant parameters
requiring effluent limitations guidelines and standards of performance are
selected by EPA.
Section IV also identifies and assesses the range of control and
treatment technologies for the industry. This involved an evaluation of both
in-plant and end-of-pipe technologies. This information is then evaluated
for existing surface water industrial dischargers to determine the effluent
limitations required for the Best Practicable Control Technology Currently
Available (BPT), and the Best Available Technology Economically Achievable
(BAT). Existing dischargers to Publicly-Owned Treatment Works (POTWs) are
required to comply with Pretreatment Standards for Existing Sources (PSES).
New direct and indirect dischargers are required to comply with New Source
Performance Standards (NSPS) and Pretreatment Standards for New Sources
(PSNS), respectively. Identified technologies are analyzed to calculate cost
and performance above treatment-in-place. Cost data are expressed in terms
of capital investment and annualized costs. Annualized costs are calculated
using a capital recovery factor (CRF) of 0.218 and an O&M cost adjusted for
the number of days of operation per year (see Appendix 2-D for discussion of
CRF).
5.2 Control and Treatment Technology Costing
5.2.1 Subcategory 1; Organic Chemicals Pesticide Mainufacturers
The Agency based the final effluent limitations and standards for
Subcategory 1 on use of physical/chemical treatment technologies, sometimes
in combination with biological treatment. The physical/chemical processes
include activated carbon, hydrolysis/ resin adsorption/ multimedia
filtration, stream stripping, chemical oxidation, and/or metal separation
while the biological processes include aerated lagoons or activated sludge.
For direct dischargers, the Agency recommended that physical/chemical
plus biological treatment could be used to achieve the BAT limitations for 23
priority pollutants and 49 of the 89 nonconventional pesticide pollutants.
The Agency is not establishing BAT limitations for nine priority pollutants.
Two priority pollutants have BAT equal to zero discharge., For 34
nonconventional pesticide pollutants, the Agency recommended physical/
chemical treatment only to meet BAT limitations. Six nonconventional
pesticides have BAT equal to no discharge.
-------
Table 4-4. Baseline Value of Production and Employment Estimates,
1982 and 1990 Pesticide Formulating/Packaging*
1982 1990
Value of PFP Production (mil. $)
Total PFP Industry
Indirect Dischargers
Employment in PFP Production - FTE**
Total PFP Industry
Indirect Dischargers
Operating Income (mil. $)***
Indirect Dischargers
is, 200
|l,561
1 1
7,104
2,133
1 1
$253
1 1
$6,690
^2, 008
8,143
2,445
$326
Source: Meta Systems Inc estimates.
* Dollar values are in constant 1982 dollars.
** FTE = Full time equivalent employees; (i.e. one full time worker = 1,960
hours per year).
*** Operating income after federal income taxes.
4-11
-------
Table 4-4 shows the baseline estimates for 1982 and 1990 for indirect
dischargers and the total PFP industry. Employment in 1990 is estimated by
dividing the 1990 dollar value of production by the 1990 dollar value per
employee..!/ Operating income is estimated for 1990 by applying the 1982
relationship between dollar value of production and profit.
A/Value of production per employee in 1990 is derived from the 1982
value per employee adjusted for real price increase of 1.9 percent per year
between 1982 and 1990.
4-10
-------
Table 4-3. 1982 Baseline Value of Production and Employment Estimates
For All PFP Plants
Indirect Dischargers
(per plant Average) i
Zero Dischargers:
(per plant Average) i
Total PFP
Number
of
Plants
169
1
1,095
1,264
1
Value of PFP
Production
mill.$
$1,561
($9.24) i
i3,639
($3.32) i
$5,200
PFP
Employment
FTE
2,133
(12.6)
4,971 *
(4.54)
7,104
PFP
Operating
Income
mill.$
$253
1 ($1.5)
**
**
**
1
Source: Meta System Inc estimates.
FTE Full time equivalent employees; one full-time worker = 1,960 hours per
year.
* Estimate based on value per employee for indirect dischargers of $0.732
million per FTE.
** Not estimated.
4-9
-------
In addition to value of PFP production and PFP employment, Table 4-2
shows plant average estimates. For the average indirect discharge PFP plant,
value of pesticide products is $9.2 million and average PFP employment is 13;
the average PFP value per employee is $732,000. One reason for this high
value per employee is that the cost of the inputs, particularly the active
ingredients, is high. This value per employee should not be confused with
value-added per employee, which would be much lower. Value-added per
employee measures how much the value has increased between the inputs and the
outputs of the facility. Value per employee simply measures the value of the
output.
The average annual capital investment for PFP operations over the last
few years has been $44 thousand for each of the 169 plants, as determined
from the 308 Survey data.
4.2.1.2 Other PFP Plants
There are an estimated 1095 zero discharge plants out of a total of 1,264
plants estimated for the PFP industry. The average plant size in this seg-
ment of the industry is small relative to indirect discharge plants.
Estimated employment for zero dischargers is 49 per plant, based on a sample
of 97 plants described in the industry profile compared to an average total
plant employment of 135.1/ per indirect discharge plant, based on the
results of the 308 Survey. Since PFP employment is not known for zero
dischargers, it is estimated on the basis of the unit value per employee
(FTE) derived for indirect discharging plants ($0.732 million per employee).
Assuming this same unit value for zero dischargers, the total PFP employment
for zero discharge plants is about 4,971. A summary of the PFP industry
showing all groups of dischargers is shown in Table 4-3.
4.2.2 Projected Baseline
The pesticide active ingredient manufacturers and the pesticide formu-
lator/packagers are projected to grow at the same average rate because the
formulating/packaging operations are the downstream activities which follow
pesticide manufacturing. The value of pesticide active ingredient production
is projected to grow at a real rate of 3.2 percent annually between 1982 and
1990; this rate accounts for growth in quantity produced and growth in real
prices. Applying this rate to the $5.20 billion estimated as the value of
PFP production in 1982, the projected value of PFP production is about $6.70
billion in 1990 (expressed in constant 1982 dollars), of which indirect
dischargers account for $2.01 billion.
I/For the indirect discharge PFP plants, hours worked have been
converted to full time equivalent (FTE) employment based on 1,960 hours per
year per full time employee.
4-8
-------
Table 4-2. 1982 Baseline for Indirect Discharge PFP Plants
Number of plants 169
Value of Production
-PFP production (mil. $) i 1,561
-Total plant (mil. $) $ 8,76.L
-PFP as percent of total
plant 17.8%
Employment
-PFP employment-FTE* 2,133
-Total Plant-FTE* 14,535
-PFP as percent of total
plant employment 14.7%
Operating Income From PFP**
-Percent of PFP production
value 16.2%
-Millions of Dollars $252.95
Averages***
-Value of PFP production
per plant (mil. $) $9.24
-Value of PFP production
per employee (mil. $)* $0.732
-PFP employment per plant* 12.6
Source: Meta systems Inc calculations from 308 Survey.
* FTE = Full time equivalent employees; i.e. one full time worker = 1,960
hours per year.
** Operating income after federal income taxes.
*** Value of production and employment are for PFP operations only, not
total plant.
4-7
-------
4.2 Pesticide Formulating and/or Packaging (PFP)
The scope of this regulation includes plants that formulate and/or pack-
age agricultural and household pest control products and the notation, PFP,
(Pesticide Formulator/Packager) refers to those plants.
The 308 Survey requested information for the year 1982 and therefore PFP
baseline conditions are described for that year. The baseline also is pro-
jected to 1990. The variables used to describe conditions in the PFP
industry are value of production, profit (expressed as after-tax operating
income), employment, and average annual capital investment.
4.2.1 Current Baseline
The PFP industry is comprised of approximately 1,264 plants. The total
value of production in 1982 for formulated and packaged pesticide products is
estimated to be $5.20 billion. The estimate is based on information pub-
lished in the 1983 U.S. Industrial Outlook, the Annual Survey of
Manufacturers, the Kline Guide, and USDA information. Appendix 4-B presents
the information provided by these sources.
The value of PFP production accounted for by indirect discharge plants is
estimated using the EPA 308 Survey responses. The remainder of the total PFP
industry value is assigned to zero dischargers.
4.2.1.1 Indirect Discharging PFP Plants
The estimated value of PFP 1982 baseline production by 169 indirect dis-
chargers is $1.56 billion; employment is 2,133. (See Table 4-2.) The base-
line for the 169 plants is derived by extrapolating estimates for the 28
representative sample indirect discharge PFP plants that supplied this
information in response to the EPA 308 Survey. The 169 plants represent 13.4
percent of the total number of PFP plants (1,264) and account for 30.0
percent of the total $5.20 billion PFP industry value. For most of the
indirect discharge plants, PFP operations are not the primary production
activity; value of PFP production represents 17.8 percent of the total plant
production value for the 169 plants.
Similarly, employment in PFP operations does not account for the major
portion of total employment at these indirect discharge PFP plants. Total
plant employment for indirect dischargers is about 14,535 with employment for
PFP of 2,133, or about 14.7 percent.
As a measure of profit, after-tax operating income is estimated to be
16.2 percent of the total value of PFP production at indirect discharge PFP
plants. In absolute terms, the profit was $252.95 million in 1982.
4-6
-------
Table 4-1. Baseline Production Quantity and Value
of Pesticide Active Ingredients*
1982 1990
All pesticides
Quantity (mill. Ibs.) 1168 1280
Total Value (mill. $) $3850 $4950
Herbicides
Quantity (mill. Ibs.) 521 600
Average Unit Value ($/lb.) $4.095 $4.760
Insecticides
Quantity (mill. Ibs.) 423 435
Average Unit Value ($/lb.) $2.873 $3.340
Fungicides
Quantity (mill. Ibs.) 224 245
Average Unit Value ($/lb.) $2.239 $2.603
Source: Meta System Inc calculations.
* Dollar values are in constant 1982 dollars.
4-5
-------
million, cotton acreage is 4 million, sorghum acreage is 3.5 million and rice
acreage is one million..!/ These conditions which depressed pesticide pro-
duction in 1983 are not expected to persist.
More robust growth rates than assumed above for the baseline projection
might be argued, based on crop acreage increases expected in 1984 and the
general economic upturn that has occurred in 1984. However, the large
inventory carry overs of pesticides into 1984 anticipated by the USDA tempers
such optimism at this time..2/ if higher growth rates had been used for the
projection, then the estimated impacts of treatment costs would be reduced.
Thus the projected baseline provides a conservative basis upon which to
assess the future impacts of treatment costs.
An analysis in 1981 by Frost and Sullivan supports the conclusion of
relatively low average rates of growth over the 1980-1985 period and antici-
pates a production growth rate of 1.4 percent for the total industry..37
Total dollar value of production is projected to increase at a rate of about
8.4 percent in current dollars, equivalent to an average increase of 6.9
percent in dollar per pound (unit value) of pesticide active ingredients.
Assuming an average rate of inflation of five percent over the 1980-85
period, the average annual real rate of increase in unit value would average
1.9 percent.
To estimate the dollar value of production in 1990, the unit values in
the current baseline for the three product groups are increased using the 1.9
percent real annual rate of growth derived above. The value of production
equals the projected quantity of production times the unit value, expressed
in constant 1982 dollars. Table 4-1 summarizes the 1982 and 1990 baseline
estimates of value and quantity of production.
The production levels predicted for the next several years can be accom-
modated by the existing capacity. Assuming no major plant shutdowns occur
due to factors such as plant obsolescence, the 1990 production levels repre-
sent a capacity utilization rate of 71 percent for the total industry; 86
percent for herbicides, 62 percent for insecticides and 61 percent for fungi-
cides. Also pesticide active ingredients are manufactured on a "campaign"
basis in many of the existing plants; that is, production is by batch opera-
tions carried out over a period of several weeks or a few months and the
output satisfies annual production targets. Thus existing plants have poten-
tial for greater output by extending the batch operation periods rather than
investing in new facilities.
—' 0. Overboe, U.S. Department of Agriculture, personal communication,
August 1983.
2/
— U.S. Department of Agriculture, Inputs-Outlook and Situation, Economic
Research Service, IOS-2, October 1983.
I/ Frost and Sullivan, U.S. Pesticide Market, Report A907, May 1981.
4-4
-------
The growth rates for production quantities are based on a 1981 USDA eval-
uation which concluded that U.S. production of all pesticides would show an
average annual growth rate of only slightly over one percent between 1978 and
1990.A/ For herbicides, production is projected to increase at a rate of
1.8 percent, insecticides at 0.4 percent and fungicides at 1.1 percent. The
higher growth rate for herbicides is attributed to increasing use of reduced
tillage practices by farmers. Reduced tillage is advantageous to farmers
since it reduces the amount of top-soil lost to erosion, and reduces the
amount of fuel used by farmers. Instead of tilling, the trend will be to
apply herbicides on a routine basis to control vegetation before planting and
in the early phase of crop growth. In contrast, insecticides will be used
with greater selectivity than in the past to minimize use of chemicals toxic
to animal life, or which may come in contact with food supplies, or may enter
the environment.
In the 1981 study, the USDA examined demand as well as supply, and con-
cluded that domestic use for agricultural and non-agricultural purposes would
increase at an average annual rate of 0.3 and 0.8 percent, respectively, over
the 1978-1990 period. Growing use of .integrated pest management programs,
more government restrictions, and market saturation in the U.S. were cited as
the reasons for the relatively low growth rate. In other areas of the world,
particularly the developing nations, agricultural use was expected to
increase at a faster rate than in the U.S. because current use of pesticides
is less intense and pressures are greater to increase food production. Thus,
exports by the U.S. were projected to grow at a faster rate than domestic use.
The depressed conditions in pesticide manufacturing since that study—
particularly in 1983—make 1983 an inappropriate year on which to base
long-run projections. As discussed in the industry profile, U.S. production
of pesticide active ingredients as reported by the ITC was about 1.4 billion
pounds annually between 1977 and 1981. Production declined to approximately
1.1 billion pounds in 1982 (about 78 percent of the 1981 level) and declined
again in 1983. The production declines are due to large inventory carry
overs into 1983 which, in turn, are attributable to several factors: the
economic downturn, the payment-in-kind (PIK) program implemented by the U.S.
Department of Agriculture in 1983, and to insect infestations that were lower
than usual. Under the PIK program, the Commodity Credit Corporation entered
into contracts with farmers who agreed to divert acreage from crop production
in 1983 to approved conservation uses. The eligible crops were wheat, corn,
sorghum, upland cotton, and rice. The farmers were compenscited in the form
of quantities of these commodities which had accumulated over the years in
the nation's inventory. The USDA does not intend to make PIK a long-term
program, although it will be extended another year for the wheat crop. The
effect of PIK on the 1983 crop year has been to take about 48 million acres
out of production of which corn acreage is 22 million, wheat acreage is 18
.i T.R. Eichers, Farm Pesticide Economic Evaluation, 1981, USDA, Economic
and Statistic Service, Agricultural Economic Report, 464.
4-3
-------
The plant-by-plant production quantities for 1977 are adjusted to 1982
rather than 1983 because industry output jn 1983 was unusually low. As
discussed later in this chapter, 1983 is considered to be atypical of
industry conditions, and thus is not an appropriate basis from which to pro-
ject future levels of production. Pesticide prices are adjusted to 1982
based on ITC data. Pesticide-specific prices for 1983 were not available
from the ITC. However they are essentially the same as 1982 based on a
comparison of pesticide producer price indexes for those two years. (These
indexes are discussed in Appendix 4-A. The adjustment for changes in
production quantity and price between 1977-82 have been discussed in Chapter
2.)
Profits for manufacturers of pesticide active ingredients are estimated
to be £555 million in 1982 dollars. Profits are expressed as after-tax oper-
ating income and are derived from pesticide sales as explained in Chapter 2
and Appendix 4-A.
Total industry capacity is approximately 1.8 billion pounds; herbicide
and insecticide production capacities are each about 0.7 billion pounds and
fungicides about 0.4 billion pounds. These estimates are based on capacity
utilization rates reported by the U.S. Department of Agriculture (USDA) for
1982 (summarized in Chapter 3) and the estimated baseline quantities of
pesticides sold by the manufacturing plants. The 1982 capacity utilization
rates are 65 percent overall; 71 percent utilization of herbicide production
capacity, 60 percent utilization for insecticides and 55 percent for
fungi cides.
4.1.2 Projected Baseline
Production of pesticide active ingredients is projected to increase at an
average annual rate of 1.17 percent, reaching 1.28 billion pounds in 1990
valued at $4.95 billion (in constant 1982 dollars). Production quantities
for the three major groups are: 600 million pounds for herbicides, 435 mil-
lion pounds for insecticides and 245 million pounds for fungicides. Applying
the same profit margins and tax rates used for the current baseline, profits
in 1990 are estimated at $715 million.
Based on comments by USDA experts, it can be concluded that 1983 was an
aberrant year for purposes of estimating long-term trends (discussed below),
and that 1982 production is a more reasonable year on which to base projec-
tions of production levels in 1990.A/ According to predictions made in
mid-1983 by USDA, 1983 production was expected to be down about nine percent
from 1982.1/ Long-term growth rates estimated by the USDA in 1981 on the
basis of their on-going analysis of pesticide use and production levels are
applied to the current baseline production quantities to project the 1990
quanta ti es.
-1/ Eichers, T.R., and Salathe, L., personal communications, USDA, March
and February 1984.
—/ U.S. Department of Agriculture, Inputs-Outlook and Situation, Economic
Research Service, IOS-1, June 1983.
4-2
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4. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This chapter provides estimates of current and future conditions in the
pesticide chemicals industry in the absence of additional effluent limita-
tions guidelines and standards, i.e. baseline conditions. Baseline estimates
are made for pesticide active ingredient manufacturers and for pesticide
formulator/packagers (PFP).
4.1 Pesticide Manufacturing
The baseline conditions for manufacturers of pesticide active ingredients
are derived from 1977 308 Survey data for each plant, updated to 1982 levels
as explained in Chapter 2. In addition to describing current baseline condi-
tions, industry trends are projected to 1990, so that the: severity of treat-
ment cost impacts after 1982 can be assessed in Chapter 6.
The variables selected to describe industry conditions are: quantity and
dollar value of pesticides sold (total for the subcategory and separately for
each of the major product groups, i.e. herbicides, insecticides, and fungi-
cides), profit, production capacity and capacity utilization rate.
4.1.1 Current Baseline
The 1982 baseline quantity of pesticide active ingredients sold by the
114 .V manufacturing plants is 1.17 billion pounds of which herbicides
account for 521 million pounds, insecticides for 414 million pounds, and
fungicides for 224 million pounds. The value of pesticide active ingredients
sold by the manufacturers is $3.85 billion of which herbicides account for
$2.14 billion, insecticides for $1.2 billion and fungicides for $0.5 billion.
Though referred to as the 1982 baseline, the estimated values of baseline
variables are not identical to the actual performance of the manufacturing
plants in the industry in 1982 because 1982 production quantities were not
available for individual plants and therefore, are derived from 1977 data.
The baseline describes the recent performance of the plants included in the
analysis, assuming that changes between 1977-82 in pesticide manufacturing
output at each plant and in price are the same as the changes for pesticide
chemical groups reported by the U.S. International Trade Commission (ITC).^./
J/ Baseline projections are based on the 308 data, which are available
from 114 of the approximately 119 pesticide active ingredient manufacturers.
2/ U.S. International Trade ComirJssion USITC publication number 1422,
Synthetic Organic Chemicals, 1982, and USITC publication number 920,
Synthetic Organic Chemicals, 1977.
-------
Table 3-18. The World Pesticide Market, 1980,
User's Level, Percent of Market*
Herbicides
Insecti cides
Fungicides
Source: Farm Chemicals,
U.S.
44%
23%
10%
September
Western
Europe
24%
13%
39%
1981 and Meta
Japan &
Far East
11%
26%
24%
Systems
Rest of
World
21%
38%
27%
Inc calculations.
* Based on Millions of U.S. 1980 Dollars.
3-40
-------
Import quantities have been much less than exports. In I960, herbicide
imports were 31 million pounds, insecticides 6.7 million pounds and
fungicides 2.9 million pounds. However, in 1982, imports of the two major
pesticide product groups—herbicides and insecticides—were about 1.5 times
the 1980 quantities, while imports of fungicide active ingredients showed a
ten percent decline. (See Tables 3-14, 3-15 and 3-16.)
The 40 million pounds of pesticide active ingredients imported in 1980
originated in a relatively few number of nations with established chemical
technology. Switzerland accounted for 36 percent of imports by weight, West
Germany 27 percent, the United Kingdom ten percent, and Japan four percent.
(Based on value of the imported pesticides, West Germany accounted for 36
percent while Switzerland, Japan and the United Kingdom accounted for 19, 16
and 11 percent, respectively.)
In 1980, the U.S. accounted for the greatest dollar share (44 percent) of
the world herbicide market, 23 percent of the world insecticide market and 10
percent of the world fungicide market. Western Europe accounted for the
greatest share of the fungicide market (39 percent), and the rest of the
world (other than Japan, the Far East and Western Europe) was the largest
market for insecticides, as noted in Table 3-18.
There are a number of growing world markets from which U.S. pesticide
industries should be able to profit. The largest are Brazil, The People's
Republic of China, Mexico, and Japan. JL/ Corn and soybean herbicides offer
the greatest opportunities for continued growth in world herbicide
markets. The developing countries are likely to continue increasing their
use of pesticides by five or six percent per year as many of the countries
strive to obtain a better balance between fertilizer and pesticide use. One
industry observer predicts that exports will provide greater growth than
domestic markets during the next decade, averaging an increase of 2.7 percent
per year. .2/
A/Farm Chemicals, April 1981.
.i/Predicasts, as quoted in Chemical Week, May 7, 1980.
3-39
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Table 3-17. Annual Growth Rates for Volume and
Value of U.S. Pesticide Exports (1970-1980)
Product Group Volume (Percent) Value* (Percent)
Herbicides
Insecticides
Fungicides
12.7
1.2
8.1
22.9
14.5
23.8
All Pesticides** 5.1 18.7
Source: U.S. Department of Agriculture, The Pesticide Review, Agri-
cultural Stabilization and Conservation Services, Washington, DC, Annual
issues from 1975-1979.
* Based on current dollars.
** Includes other pesticides such as miticides.
3-38
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Table 3-16. U.S. Production and Trade in Fungicides —
Year
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
|
Production
(Mil. Lbs.)
137
144
154
141
140
149
143
154
163
155
142
143
147
155
156
143
111
95
Exports
(Mil. Lbs.)
21.2
19.2
18.8
18.1
20.6
21.5
21.0
29.2
30.0
23.9
25.2
27.1
39.8
38.3
45.2
39.7
44.1
38.0
1
Exports as
a Percent
of U.S.
Production
15.5
13.3
12.2
12.8
14.7
14.4
14.7
19.0
18.4
15.4
17.7
18.9
27.1
24.7
29.0
27.8
39.7
40.0
Imports —
(Mil. Lbs.)
NA
NA
NA
0.3
1.2
2.0
NA
NA
1.6
4.0
4.4
3.2
1.5
1.0
2.5
2.5
2.4
NA
|
Imports as
a Percent
of U.S.
Production
NA
NA
NA
0.2
0.9
1.3
NA
NA
1.0
2.6
3.1
2.2
1.0
0.6
1.6
1.7
2.2
NA
Source: U.S. International Trade Commission, Synthetic Organic Chemicals, 1981
and prior issues, U.S. Government Printing Office, Washington, DC. U.S.
Department of Agriculture, The Pesticide Review, Agricultural Stabilization and
Conservation Services, Washington, DC, Annual issues from 1976-1981.
Unpublished information from Lee Fowler, Pesticide Specialist, USDA.
—' imports and exports are converted to an active ingredient basis by halving
values.
2.' Estimated by Meta Systems Inc by country of origin, and proportionate share
of herbicides, insecticides, and fungicides as reported for selected
chemicals in U.S. Department of Agriculture, The Pesticide Review,
Agricultural Stabilization and Conservation Services, Washington, DC,
Annual issues from 1976-1981 and unpublished information from Lee Fowler,
Pesticide Specialist, USDA.
NA Not available.
3-37
-------
Table 3-15. U.S. Production and Trade in Insecticides —'
Year
Production
(Mil. Lbs.)
Exports
(Mil. Lbs.)
Exports as
a Percent
of U.S.
Production
Imports —
(Mil. Lbs.)
Imports as
a Percent
of U.S.
Production
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
|
552
496
569
571
490
558
564
639
650
659
566
570
606
617
506
448
379
326
131
140
161
128
118
119
104
172
184
155
136
146
143
144
133
99.7
91.8
95.0
1 1
23.7
28.3
28.3
22.4
24.1
21.3
18.4
26.9
28.3
23.5
24.0
25.6
23.6
23.3
26.3
22.2
24.2
29.0
1
NA
NA
NA
0.5
0.6
0.5
NA
NA
1.1
1.0
2.5
1.5
5.0
7.0
6.7
9.4
11.0
NA
NA
NA
NA
0.1
0.1
0.1
NA
NA
0.2
0.2
0.4
0.3
0.8
1.1
1.3
2.1
2.9
NA
1
Source: U.S. International Trade Commission, Synthetic Organic Chemicals/
1981 and prior issues, U.S. Government Printing Office, Washington, DC.
U.S. Department of Agriculture, The Pesticide Review, Agricultural
Stabilization and Conservation Services, Washington, DC, Annual issues
from 1976-1981. Unpublished information from Lee Fowler, Pesticide
Specialist, USDA.
2/
Imports and exports are converted to an active ingredient basis by
halving values.
Estimated by Meta Systems Inc by country of origin, and proportionate
share of herbicides, insecticides, and fungicides as reported for
selected chemicals in U.S. Department of Agriculture, The Pesticide
Review, Agricultural Stabilization and Conservation Services/
Washington, DC, Annual issues from 1976-1981 and unpublished
information from Lee Fowler, Pesticide Specialist, USDA.
NA Not available.
3-36
-------
Table 3-14. U.S. Production and Trade in Herbicides i
Year
Production
(Mil. Lbs.)
Exports
(Mil. Lbs.)
Exports as
a Percent
of U.S.
Production
2/
Imports —
(Mil. Lbs.)
imports as
a Percent
of U.S.
Production
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
324
409
469
393
404
429
451
496
604
788
656
674
664
658
805
839
623
593
22.5
32.4
37.0
34.7
39.0
42.3
44.0
70.0
95.2
100.4
99.0
105.5
117.1
131.8
129.3
111.6
111.4
125.0
1
6.9
8.0
8.1
8.9
9.7
9.9
9.8
16.3
17.6
13.5
15.9
16.0
17.6
20.1
16.1
13.3
17.9
21.0
NA
NA
NA
2.9
4.8
7.9
NA
NA
11.5
20.2
24.2
20.1
29.0
32.6
31.0
37.4
45.7
NA
NA
NA
NA
0.7
1.2
1.8
NA
NA
1.9
2.6
3.7
3.0
4.4
5.0
3.9
4.5
7.3
NA
Sources: U.S. International Trade Commission, Synthetic Organic Chemicals,
1981 and prior issues, U.S. Government Printing Office, Washington, DC. U.S.
Department of Agriculture, The Pesticide Review, Agricultural Stabilization
and Conservation Services, Washington, DC, Annual issues from 1976-1981.
Unpublished information from Lee Fowler, Pesticide specialist, USDA.
2/
Imports and exports are converted to an active ingredient basis by
halving values.
Estimated by Meta Systems Inc from total imports reported by country of
origin; and proportionate share of herbicides, insecticides, and
fungicides as reported for selected chemicals in U.S. Department of
Agriculture, The Pesticide Review, Agricultural Stabilization and
Conservation Services, Washington, DC, Annual issues from 1976-1981 and
unpublished information from Lee Fowler, Pesticide Specialist, USDA.
NA Not available.
3-35
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pest management (IPM). IPM is practiced mostly on large grain crops and
cotton, and consists of scouting and monitoring pest populations to opti-
mize the time of pesticide applications. The timing of planting and har-
vesting is also part of the IPM strategy. Another factor is the use of more
complex pesticides, such as synthetic pyrethroids, which are applied less
frequently and at lower rates than traditional insecticides. The highest
growth will occur in herbicides because of the increasing use of less
intensive tillage practices which tend to increase the likelihood of weeds,
as discussed earlier. Some of the primary use characteristics of each of
these three major pesticide classes are discussed in Appendix 3-E.
3.4 Exports and Imports
The export-import analysis is based on pesticide active ingredients, but
the trends are, in general, applicable to formulated products as well.
The U.S. is a net exporter of pesticides. In 1980, exports exceeded imports
by 270 million pounds on the basis of pesticide active ingredients.
In 1982, the net balance declined to 190 million pounds. Tables 3-14, 3-15,
and 3-16 present data on U.S. exports and imports of the three major product
groups from 1966 to 1982. Exports and imports are described in terms of
pounds and percent of U.S. production quantities.
In 1982, the U.S. exported 111 million pounds of herbicides active
ingredients, or about 18 percent of U.S. production. For insecticides and
fungicides, the 1982 export quantities were 92 million pounds and 44 million
pounds, respectively. For insecticides, the 1982 exports represent 28
percent of U.S. production and for fungicides, 40 percent of U.S. production.
Exports in 1983 are expected to show an increase over 1982. Exports for
herbicides are estimated to be 125 million pounds, for insecticides about 95
million pounds and for fungicides 38 million pounds. A/ The estimates are
based on a survey of major producers by the U.S. Department of Agriculture in
mid-1983. 2/ The major producers expected exports of herbicides to be 21
percent of the U.S. production, for insecticides and fungicides, the exports
were estimated at 29 percent and 40 percent, respectively. (The percentage
estimates refer to depressed production levels for pesticide manufacturers in
1983 due to large inventory carryovers, the Department of Agriculture's
acreage set aside program (PIK) and general economic conditions.)
Table 3-17 displays the average annual growth rates over the 1970-1980
decade for both the quantity and value of pesticides exports. The quantity
of herbicide exports showed the highest quantity rate of growth (12.7
percent). The value of exports of herbicides and fungicides showed growth
rates exceeding 22 percent compared to 14.5 percent for insecticides.
A'Meta Systems Inc estimates.
—'U.S. Department of Agriculture, Inputs—Outlook and Situation,
Economic Research Service, IOS-1, June 1983 and IOS-2 October 1983.
3-34
-------
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3-33
-------
Figure 3-2. Annual Pesticide Value by Product Type
10,000^
5000
3000
1000
CO
or
',500
o
o
&300
CO
100
50
30
20
10
- Herbicides
~o^
~-o-
Insecticides
^0—o—o'
/ /
—o' ./,
.x--x.
_ Fungicides
Note:
Solid line =
current dollars
Broken line =
constant dollars
I I I I I
I 1 I I
67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82
YEAR
Source: U.S. International Trade Commission, Synthetic Organic Chemicals,
1982 and prior issues, U.S. Government Printing Office, Washington, DC.
Also, Arthur D. Little Inc., unpublished information furnished by EPA.
3-32
-------
Figure 3-1. Annual Pesticide Production by Product Type
900
800
700
600
500
, I . I . I .
INSECTICIDES,^ „ , x.
FUN(BICIDES
I , L.LL I i I . I . I . I . I . I . I .
60 62 64 66
70 72 74 76 78 80 82 84
YEAR
Source: U.S. International Trade Commission, Synthetic Organic Chemicals,
1982 and prior issues, U.S. Government Printing Office, Washington, DC.
Also, Arthur D. Little Inc., unpublished information furnished by EPA.
3-31
-------
provide attractive habitats for some insects. In 1982, pesticides were
expected to account for two to 16 percent of total farm production costs
depending on the crop; e.g., 2.3 percent of the cost for wheat, 11.3
percent for soybeans and cotton, and 15.7 percent of peanuts, averaging 3
percent for all pesticide expenditures. JY
The demand for pesticides is also directly related to crop acreages,
pest conditions, and the weather. For example, demand for herbicides will
increase with increasing acres in production, severe cold or drought will
usually decrease the need for and use of insecticides, while fungicide
demand depends on disease levels which, in turn, are influenced by
humidity and temperature.
Total annual production of pesticide active ingredients, which
increased rapidly in the sixties and early seventies, had leveled off to
about 1.4 billion pounds in the last several years through 1981. In addi-
tion, the production mix of herbicides, insecticides and fungicides
changed considerably over the past two decades as shown in Figure 3-1.
Herbicides have taken the lead in production quantity only since 1975.
However, the value of herbicide production had exceeded that of insecti-
cides even prior to 1975 as shown in Figure 3-2; for example, between 1967
and 1975 the value of herbicide production ranged from 1.7 to 2.4 times as
great as the value of insecticide production.
3.3.3.2 Market Maturity
Between 1977 and 1981, pesticide production grew less than four
percent overall while the value of production had increased by 20 percent
in real terms, with herbicides showing the greatest gain. However, the
six year period ending in 1982 shows a production decline of almost 20
percent and only a seven percent increase in value due to the 1982 produc-
tion downturn. Table 3-13 shows the relative contribution of each major
pesticide group to total production quantity and value in recent years.
(Appendix 3-D presents historical data since 1967 on production quantity
and value for the three pesticide groups.) In general, the U.S. pesticide
market appears to have reached maturity and the highest growth rate some
analysts expect to see is about one percent. 2/ This maturity is
related to a number of factors, including the increasing use of integrated
A/ op. cit. EPA, Office of Pesticide Programs, Dec. 1982.
.2/Eichers, T.R., Farm Pesticides Economic Valuation, 1981, USDA, Eco-
nomic and Statistics Service, Agricultural Economic Report, 464. Frost
and Sullivan, U.S. Pesticide Market, Report A907, May 1981.
3-30
-------
based on volume of active ingredients. Home and garden use accounted for
five percent of herbicides, 12 percent of insecticides, and two percent of
fungicides. I/
3.3.3.1 Factors Influencing Demand
The demand for pesticides has been characterized as somewhat inelastic
due to pesticides' importance in increasing crop production and the
general lack of pesticide substitutes. U Nevertheless, demand is
influenced by a number of variables including crop acreages, pest
conditions, weather, farm income, interest rates, dollar exchange rates,
pesticide prices, foreign crop production, and farming techniques. The
effect of prices on demand is considered to be less important than some of
these other factors.
The FTC study noted that in cases where pesticide costs are a small por-
tion of input expenditures, farmers view pesticides as necessary insurance
for a large crop yield. 2/ Even if their pesticide cost doubled or
tripled, these costs would easily be recovered by an increase of only one
to two percent in the crop yield.
During the decade ending in 1981, pesticide prices increased much less
than other agricultural inputs. ±/ Nominal prices for pesticides
increased 78 percent compared to 137 percent for labor, 186 percent for
fertilizer, 207 percent for machinery and 391 percent for interest rates.
During this period, quantities of pesticides used almost doubled while
fuel and fertilizer use increased by one-third and machinery sales were
unchanged. These changes in use patterns are due, in part, to the rela-
tive price changes among these farm inputs. Farmers can opt to reduce
machinery use and fuel consumption In favor of applying more pesticides.
Such reductions can be achieved by less intensive tillage practices—such
as minimum tillage and no-till—which have been gaining acceptance since
the mid-1970's. Reduced tillage leaves the soil surface undisturbed in
contrast to the conventional practice of plowing under the crop residues.
Thus, less machinery and fuel is used. However, pesticide use tends to
increase, because undisturbed crop residues promote weed growth and
,1/EPA, Office of Pesticide Programs, Economic Analysis Branch,
Pesticide Industry Sales and Usage, 1982 Market, Estimates, December
1982.
^./Federal Trade Commission, Competition in Farm Outputs; An Examina-
tion of Farm Industries, February, 1981.
.Vo£. cit. Federal Trade Commission, February 1981.
.i/Eichers, T.R., and W.S. Serletis, Farm Pesticide Supply-Demand
Trends, 1982, U.S. Department of Agriculture, Economic Research Service,
Agriculture Economic Report, 485, April 1982.
3-29
-------
3.3.3 The Market for Pesticides
The end use markets for pesticide active ingredients and formulated
pesticide products are the same, excluding the effects of international
trade. The specific information discussed here is based on active ingre-
dients, unless stated otherwise, but we assume market trends are the same
for both tiers of the industry since one provides the inputs to the other.
The agricultural sector constitutes the major market for pesticide
products. In 1982 the agricultural share of total U.S. domestic use of
all pesticides used was 70.3 percent. I/ Agricultural use accounts for
79 percent of total 1982 domestic use of herbicides (based on weight of
active ingredients) and 76 and 39 percent, for insecticides and
fungicides, respectively. Considering all three pesticide product groups,
agricultural use has grown steadily since the mid-1960's, and in terms of
pounds used, has more than doubled from 1964 to 1982. The number of acres
of major field crops treated with pesticides at least once has increased
180 percent. Based on weight of active ingredients, farm use of
insecticides has declined relative to other domestic uses as more
effective chemicals such as synthetic pyrethroids have been introduced
into the agricultural sector. J2/
There is evidence that the market is not yet saturated and this
implies future growth possibilities. It is estimated that 12 percent of
U.S. crop production, valued at over $12 billion, is lost to weeds each
year. Further, it is estimated that for every dollar spent on pesticides,
the farmer currently obtains, on the average, three dollars in increased
yields as a result of lower crop losses. J/.1/
Use of pesticides is not confined to the agricultural sector.
Industrial and commercial pest control constitute a market sector, as do
pesticide products sold for use in the home and garden. In 1982, the
industrial/commercial/government use of pesticides was 16 percent of
herbicides, 12 percent of insecticides, and 52 percent of fungicides,
'EPA, Office of Pesticide Programs, Economic Analysis Branch
Pesticide Industry sales and Usage, 1982 Market, Estimates, December
1982.
.2/Eichers, T. R., personal communication. U.S. Department of
Agriculture, August 1983.
—/senechel, D.M., personal communication, Agribusiness Associates,
Inc., Wellesley Hills, MA.
.I/A value of four dollars return for every dollar spent on pesticides
was estimated for 1978 by D. Pimental et al., Benefits and Costs of
Pesticides Use in U.S. Food Production, Bioscience, December 1978.
3-28
-------
percent of expenditures went to all other materials and components, parts,
and supplies. I/
Hochberg, a chemical consulting firm in Chester, NJ, predicts a growth
in the demand for chemicals used to formulate agricultural pesticides of
16 percent by 1987, to $245 million. 2/ Reasons cited for this growth
are: end of the PIK program, general economic recovery, and technological
improvements in pesticide delivery systems and toxicants. Surfactants
will represent 45 percent of this total market, solvents will account for
22 percent, and carriers/diluents will represent 19 percent. The
remaining 14 percent would be comprised of deactivators, thickeners, pre-
servatives, antifreezes, antifoams, alcohols, and oils.
Limited insights can be gained by examining profitability ratios for
companies that, are involved in PPP operations. The 1983 308 Survey
provides information on 28 PFP plants. The 28 plants represent only 2.2
percent of the estimated 1264 total PFP plants. An examination of the
affiliations of the 28 plants reveals there are 28 different owners.
Profitability ratios for six of these firms are available from the
COMPUSTAT data base. I/ The sample is too small to subdivide by firm
size. All six firms are relatively large compared to the many small firms
that own PFP plants. The smallest of the six firms has assets of $400
million; all the other firms have assets over $1 billion. Also five of
the six firms—including DuPont and American Cyanamid—are represented in
the 31 plant sample of pesticide manufacturers that was analyzed earlier.
While the six firms do not constitute a statistical sample of PFP plants,
their profitability ratios are informative about large firms which
formulate/package pesticides.
The same profitability ratios defined for manufacturers are compiled
from the COMPUSTAT data base and are presented in Appendix 3-C. Based on
three-year (1980-1982) averages, all six profitability ratios are higher
than the 31 plant averages for manufacturers {shown in Table 3-12) by 0.5
to 5.0 percentage points. For example, average after-tax return on equity
for the six PFP firms is 13.3 percent compared to the average of 11.6
percent for the 31 manufacturing firms, a difference of 1.7 percentage
points.
Compared to other industry sectors, the six firms with PFP plants show
lower profitability ratios for after-tax profit margin and return on
equity than the chemicals and allied products sector, but higher ratios
than the average for all manufacturing. The specific ratios for the PFP-
owning firms are shown in Appendix 3-C together with the averages for the
other manufacturing sectors.
-i'U.S. Department of Commerce, Bureau of the Census, 1977 Census of
Manufactures.
I/Chemical Week, October 5, 1983, p. 17.
I/Corporate COMPUSTAT, op. cit.
3-27
-------
infrequent availability of these patents can prohibit patent acquisition.
These two barriers make it difficult for new, small companies to enter the
industry.
3.3.2 Companies that Formulate/Package Pesticide Products
Twenty-eight companies own the 28 formulator/packager plants in the
sample of plants discussed earlier. Therefore it is estimated that the total
169 indirect discharge PFP plants are owned by approximately 169 firms.
Vertical integration in the PFP industry is high. As noted earlier, a
major share of PFP production is carried out by firms that manufacture pesti-
cide active ingredients. Analysis of interplant transfers indicate that
pesticide formulator/packager production retained by manufacturers had
increased from 5.8 percent to 1958, to 11.3 percent in 1972, and to 13.6
percent in 1977. !/
3.3.2.1 Profitability
A study by the USDA found that during the 1966-76 period, prices at the
manufacturer level increased at nearly twice the rate as prices at the retail
level. 2/ Thus, the manufacturers' share of the farmer's pesticide dollar
increased from 45 percent to 66 percent during this period. The study attri-
buted this shift to: (1) manufacturers performing more of the formulating,
packaging, and distribution of the pesticides themselves, (2) use of more
highly concentrated pesticides which thereby reduced formulating, packaging,
and distribution costs, and (3) a reduction in margins in the more competi-
tive distributor sector in an attempt to retain customers' patronage for
fertilizer and other farm supplies.
Pesticide active ingredients account for a large share of the price of
formulated/packaged products. In 1977, 27.0 percent of material costs for
SIC 2879 were attributable to synthetic organic pesticides and related
synthetic organic agricultural chemicals (SIC 286941), 10.7 percent was
attributed to containers, 9.1 percent to solvents, 6.9 percent to inorganic
chemicals (SIC 281900), 1.3 percent to inorganic carriers, 0.8 percent to
surfactants, and 0.1 percent to aerosol propellants. The remaining 44.2
.I/Federal Trade Commission, Office of Policy Planning, Competition in
Farm Inputs: An Examination of Four Industries, February 1981.
.2/Cited in Competition in Farm Inputs: An Examination of Four
Industries, op. cit.
3-26
-------
respectively, due to the litigation over the 1978 Amendments to
FIFRA. However, the average number of new chemicals registered
each year was 17 between 1970 and 1975, and 16 between 1979 and
1982.
On average, the time from discovery of a new chemical until its
registration under FIFRA is six to eight years. Development costs
for each new chemical can range from $15 to $30 million (in terms
of 1980 dollars). About 20 to 25 percent of the total cost is for
registration-related R&D expenditures.
In the opinion of some industry observers, R&D costs in the pesticide
industry are expected to increase. !/ 2/ The likely consequence of such
an increase will be further concentration of the industry with only large
firms able to afford the high R&D costs. High R&D costs and the
uncertainty inherent in the commercialization of a new pesticide are 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 posi-
tions in the industry.
3.3.1.3 Barriers to Entry
There are several obstacles to overcome before a potential entrant to
the pesticide chemicals industry can expect to be profitable. If a firm
is already a producer of organic chemicals, then the additional equipment
and plant construction, and associated capital outlay, would be relatively
small. However, the cost for an entirely new chemical plant could pose a
significant barrier to entry.
A second potential barrier in this industry is obtaining access to a
patented, profitable chemical. Manufacturing rights are generally
acquired in one of two ways. A firm can develop a new pesticide chemical
"in-house" and patent it. This is the approach commonly used by large,
existing pesticide producers. Developing a new chemical takes several
years and is sufficiently expensive so as to be prohibitive for most
potential industry entrants. The second route is to buy the rights to an
existing patent. The capital required for such a purchase and the
'Goring C., "The Costs of Commercializing Pesticides," in Pesticide
Management and Insecticide Resistance, Harcourt Brace Jovanovich, NY,
pp. 1-33, 1977.
—'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.
3-25
-------
If the ratios for the pesticide manufacturing industry are compared for
each year between 1980-1982 (rather than the three year average), the ratios
are highest for 1980 and lowest for 1982. The decline results from the
general downturn in the manufacturing sector of the economy over that period
and these ratios are expected to improve with improvement in the overall
economy.
Compared to other manufacturing sectors (shown in Table 3-12), the average
after-tax profit margin for pesticides manufacturing is lower than that for
producers of chemicals and allied products (5.1 percent versus 6.8 percent),
but higher than all manufacturing industry average (5.1 percent versus 4.5
percent). However, the average return on equity for pesticide active
ingredient manufacturing (11.6 percent) is lower than either chemicals and
allied products (14.4 percent) or all manufacturing (12.6 percent).
3.3.1.2 Research and Development
Research and Development (R&D) plays a major role in the continued success
of chemical producers. Because of the time and cost required to develop new
pesticides, R&D activities are concentrated in about 30 companies, i/
Analysis of information obtained from a survey by the National Agricultural
Chemicals Association (NACA) in 1981 reveals several major characteristics of
the industry's R&D activities. £/
o Expenditures for R&D in 1981 represented 8.3 percent of
sales, which is higher than the average for all of U.S.
industry. R&D effort appears to be maintaining the same rela-
tionship to sales (about 8 percent) as in the late 1960's,
although it has been as high as 9.7 percent and as low as 6.5
percent between 1970 and 1981.
o Considering three categories of firm size, different levels
of R&D are sustained. Companies with sales of less than $15
million averaged 22.9 percent of sales for their R&D;
companies in the $15 to $100 million sales category averaged
12.4 percent; and companies over $100 million averaged 7.2
percent of sales.
o Each year, about 15 to 20 new pesticide chemicals are
registered under the Federal Insecticide, Fungicide and
Rodenticide Act (FIFRA). There was a temporary drop in new
pesticide registration to three and eight in 1977 and 1978,
A/Frost and Sullivan, U.S. Pesticides Market, Report A907, May 1981.
—/Industry Profile Survey, National Agricultural Chemicals Association,
1982 and previous years, prepared by Ernst & Whinney.
3-24
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However, a detailed examination of the annual reports and 10-K statements
of pesticide producers reveal that line-of-business, pre-tax profit
margins in 1978 typically range between 10 and 15 percent. (See
Appendix 3-B.) This range 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)..!/
There are many individual pesticide products, however, on which profit
margins exceed 40 percent. These are proprietary (patented) products
without competitive substitutes, allowing the patent holder to price the
product considerably higher than cost.
The profitability of the pesticide industry can also be assessed by
examining the profitability ratios for the corporations which have sub-
sidiaries that are involved in pesticide manufacturing. Six profitability
ratios for 31 corporations which manufacture pesticides are analyzed.
Table 3-12 presents average ratios for the 31 corporations, calculated on
the basis of total firm profits—not just pesticide profits.^/ Firms
are grouped on the basis of asset size: companies with assets less than
$1 billion; $1 billion to $10 billion, and assets greater than $10
billion. (There are eight firms in the smallest asset group, 16 firms in
the middle group and 7 firms in the largest group.) Also, measures of
profitability for pesticide manufacturers are compared to two other manu-
facturing sectors: chemicals and allied products, and the all manu-
facturing industry averages..!/
Based on three year averages (1980-1982), the after-tax profit margin,
and the returns on equity and on assets are highest for the largest firm
group (assets over $10 billion) and lowest for the smallest firm group
(assets less than $1.0 billion). See Table 3-12. Profit margins range
from 2.3 to 6.2 percent, return on equity from 6.5 to 14.2 percent, and
return on assets from 3.3 to 13.9 percent. Two of the six firms in the
smallest group had negative profits in one or more years between 1980 and
1982. if these two firms are excluded, the profitability ratios are
similar for the three groups; for example, profit margins range from 5.2
to 6.2 percent; returns on equity and assets range from 13.0 to 14.2
percent and from 6.9 to 13.9 percent, respectively. (If these ratios are
compared on the basis of pre-tax conditions, the ratios increase by a
factor of 1.5 to 2.0 which is shown in Appendix 3-B.)
.I/Federal Trade Commission, Quarterly Financial Report, various
issues, Washington, DC.
—/Profitability ratios based on data obtained from Corporate
COMPUSTAT, as of February 23, 1984, Standard & Poor's Compustat Service,
Inc. See Appendix 3-B for individual company ratios.
.I/Quarterly Financial Report, op. cit.
3-22
-------
Table 3-11. Concentration Ratios Based on
Pesticide Active Ingredient Sales
Number of
Corporations
Number of Plants
Owned by
These Corporations
Corporations
Concentration
Ratio (in %)
1977 Plant
Pesticide Sales
(Million $)
Top 4 10 46.16 1,355
Top 8 22 67.15 1,970
Top 16 41 87.03 2,560
Total
114
100.0
2,940
Source: U.S. EPA, 1977 308 Survey for the Pesticide Active Ingredient
Manufacturers Subcategory and Meta systems Inc calculations.
3-21
-------
Table 3-10. 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
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
1.2
1.1
0.4
0.4
100.0%
Source: Frost and Sullivan, U.S. Pesticides Market, Report A907, May 1981,
3-20
-------
The production of active ingredient chemicals used in pesticides is
the first and most complex phase of the pesticides industry. Pesticide
production involves synthesizing technical-grade chemicals from raw
materials, and requires substantial capital and technical background to
conduct research and to construct and operate process facilities. 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, have been
consumed annually by the pesticide industry. Table 3-10 lists the major
chemical groups and raw materials that are used in manufacturing pesti-
cides. It also shows the proportional contribution that each group makes
to the total estimated value of pesticide production.
Information from the 1977 308 Survey indicates concentration ratios as
follows: the top four companies account for 46 percent of 1977 total
value of active" ingredient production and the top eight firms account for
67 percent, as shown in Table 3-11. Another source has estimated that in
1980, the top four firms had 44 percent of the market and the top eight
had 82 percent.!./ Major product groups within the pesticide industry
exhibit varying degrees of concentration; for example, in .1976 the top
four producers of insecticides used on corn accounted for 31 percent of
the market while the top four soybean insecticide producers had 77 percent
of the market ..2/
Vertical integration among firms that produce pesticide active ingre-
dients is common. Most active ingredient producers formulate pesticide
products captively. A 1980 assessment reported in the Kline Guide to the
Chemicals Industry indicates approximately 80 percent of the formulated
pesticide industry is controlled by pesticide active ingredients
manufacturers.
3.3.1.1 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 firm's revenue. Therefore, financial data specifically on
pesticide production vary between sources. While investment analysts
regard pesticide production as a very profitable business, profit margins
suggested by an analysis of income statements are lower than those quoted
by these analysts. For example, one investment firm estimates that the
average pre-tax profit margin on sales exceeds 20 percent,,.!/
A/Frost and Sullivan, U.S. Pesticide Market, May 1981.
—'U.S. Department of Agriculture, The Farm Pesticide Industry,
Agricultural Economic Report, No. 461, September 1980.
—/Loeb, Rhodes & Co., Herbicide Suicide, December 1975, cited in
Seehusen, M.H., The Economic Health of the Pesticide Industry, January
1978.
3-19
-------
Table 3-9. Pesticide Formulator/Packagers Employment
Summary for Zero Discharge Plants*
All Plants
Plants Reporting
Single SIC
Plants Reporting
Multiple SIC
Employment Levels
Reported: **
Minimum 1
Maximum 750
Average 49
Median 26
Standard
Deviation 90
Number of
Plants Reporting 97
1
150
32
20
32
68
2
750
82
30
159
24
Source: Industrial Guides for 31 states (listed in the References
Section).
* Based on a sample of plants which identified themselves as zero
dischargers on the telephone survey/ and information in State
Industrial Guides.
** Employment is total count reported, not full time equivalent
employment. When a range was reported, the mid-point of the range is
used. 34 plants gave employment ranges, 63 gave discrete values.
3-18
-------
Table 3-8. Characteristics of Pesticide Formuleitor/Packager
Plants (PFP) Plants by Percent of Internally Manufactured
Active Ingredients
Percent of Active
Ingredients Manu-
factured Internally
0
0.1 - 9.9
10 - 24.9
25 - 49.9
50 - 74.9
75 - 99.9
100
Unknown
Number Pe
of Plants of
14
6
1
1
2
2
1
1
Average Number of
rcent Formulating/Packaging
Plants Employees*
50 3.2
21.4 4.9
3.6 7.6
3.6 20.4
7.1 3.4
7.1 36.7
3.6 156.8
3.6 I
Source: U.S. EPA, 1983 308 Survey for the Pesticide Formulator/Packager
Subcategory and Meta systems Inc calculations.
* Employment expressed as full time equivalent employees.
3-17
-------
Half of all formulator/packager plants (50.0 percent) manufacture at
least some of their own active ingredients as shown in Table 3-8. Plants
that manufacture high percentages of their active ingredients tend to be
plants with a large number of PFP employees.
3.2.3.2 Zero-Discharging Pesticide Formulating/Packaging Plants
There are about 1,095 zero discharge PFP plants. Since BPT has
required all direct discharge PFP plants to meet a zero discharge limit,
all PFP plants are either indirect or zero discharge. While zero
discharge plants are not included in the impact assessment because they
already meet the regulation, some of their major characteristics are
summarized here. Information on 103 of these plants is obtained from
state industrial guides, and is presented in this section. In terms of
total employment, zero discharge plants vary greatly in size as shown in
Table 3-9; specific pesticide related employment data are not available.
Total plant employment ranges from one employee to between 500 and 999
employees. While the average size is 49, the median is only 26. This
indicates that plants tend to be concentrated at the lower end of the
scale.
Zero discharge plants identify their activities in terms of one or
more SIC codes. Plants reporting more than one SIC code have an employ-
ment range of from one to 150 employees. The range for plants with
multiple SIC codes is from two to 750 employees. However, based on the
median size of plants, the multiple SIC code plants are only slightly
larger. (The average size of multiple SIC plants is so much higher due to
a few very large plants.) For additional information on the zero
discharge plants, see Appendix 3-A.
Most of the zero discharge plants are relatively old; with 1945 the
average year of establishment. Additional statistics on plant age are
included in Appendix 3-A.
3.3 Structure of the Pesticide Industry
3.3.1 Company Characteristics of Pesticide Active Ingredient
Manufacturers
There are no publicly-owned companies for which the manufacture of
pesticides is the prime source of revenue. However in 1982, 77 companies
reported the manufacture of pesticide active ingredients to the U.S.
International Trade Commission. 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).
3-16
-------
Table 3-7. (continued) Geographic Location of Pesticide
Formulator/Packager (PPP) Plants
Location
Written
Survey
Percent of
All Plants
Region VI Total
Texas
Oklahoma
Arkansas
Louisiana
4
4
0
0
0
14.3
Region VII Total
Nebraska
Iowa
Kansas
Missouri
3
0
1
0
2
10.7
Region VIII Total
Montana
South Dakota
Wyoming
Colorado
North Dakota
0
0
0
0
0
0
0.0
Region IX Total
California
Arizona
5
5
0
17.9
Region X Total
Washington
Oregon
Idaho
3.6
Totals
28
100
Source: U.S. EPA, 1983 308 Survey for the Pesticide Formulator/Packager
Subcategory and Meta Systems Inc calculations.
3-15
-------
Table 3-7. Geographic Location of Pesticide
Formulator/Packager (PFP) Plants
Writ
Location Sur^
Region I Total 0
Maine 0
Massachusetts 0
Connecticut 0
Region II Total 3
New York 1
New Jersey 2
Puerto Rico 0
Region III Total 0
Pennsylvania 0
West Virginia 0
Virginia 0
Delaware 0
Maryland 0
Washington/ DC 0
Region IV Total 7
Kentucky 0
Tennessee 2
North Carolina 0
South Carolina 0
Mississippi 0
Alabama 0
Georgia 3
Florida 1
Region V Total 7
Minnesota 0
Wisconsin 0
Illinois 2
Michigan 1
Indiana 1
Ohio 2
:ten Percent of
/ey All Plants
0.0
10.7
0.0
25.0
25.0
i
3-14
-------
Table 3-6. Indirect Discharge Pesticide
Formulator/Packagers (PFP)
In Sample j Industry Total
Number of Companies 28 NA
Number of Establishments 28 169
Value of PFP Production
in 1982 ($000) 258,621 1,560,959
Total Plant Value of
Production in 1982 ($000) 1,451,520 8,760,960
Ratio of Value of PFP Production
to Total Plant Production (percent) * 17.8
Number of PFP Employees** 341*** 2,133
Ratio of Value of PFP Production
to PFP Employment ($) * I 731,814
Source: U.S. EPA, 1983 308 Survey for the Pesticide Formulator/Packager
Subcategory and Meta systems Inc calculations.
* Not calculated for the sample, ratios based on total industry
estimates.
** Employment expressed as full time equivalent employees (FTE).
*** Estimate based on 27 plants that reported number of PFP employees on
1983 308 Survey.
3-13
-------
arsenic or mercury. Metallo-organic compounds are the smallest in both
volume and value of pesticide sales. They are used primarily as fungi-
cides and herbicides, although compounds which act as miticides are also
produced. The particular products affected by this regulation are concen-
trated in the fungicide product group and may be used for non-agricultural
uses such as paint additives. Based on the public comments the Agency
received, domestic production of these products has declined while the
imports of these products have increased over the past few years.
3.2.3 Pesticide Formulator/Packagers (PFP)
There are an estimated 1,264 pesticide formulator/packager plants as
defined by this regulation, of which approximately 169 are indirect dis-
chargers. Data, in response to a written 1983 308 Survey, are provided by
28 indirect discharge PFP plants. The sample of 28 plants is randomly
selected, and therefore their survey responses are representative of the
industry .A/ Most of the following discussion is based on these replies,
using 1982 data.
3.2.3.1 Indirect Dischargers
In 1982, the 169 indirect discharge PPP plants had a value of PFP
production of $1.56 billion and PFP employment of 2,133 as shown in Table
3-6. On average for these plants, only about 18 percent of the total
value of their production is derived from their PFP operation. For most
of the plants, employment in PFP operations is small; 82 percent of the
plants employ less than 20 PFP people..2/ These plants, with employment
of less than 20, only account for 11 percent of total formulator/packager
production value. In contrast, 18 percent of the plants employ between 21
and 200 formulator/packager employees, but these larger plants represent
89 percent of the production value.
The 28 indirect discharge PFP plants are located in fourteen states
and territories of the United States. The regions with the heaviest
concentrations of plants are the North Central (Region V), South Atlantic
(Region IV), and Southwest (Region IX, specifically California), with
19.0, 16.7 and 16.4 percent, of the nation's plants, respectively. A
breakdown of plant locations is presented in Table 3-7.
!/ See section 2.3.2 of Chapter 2 for discussion of the sampling and
other procedures used to derive these estimates.
y The 1983 308 Survey provided employment data expressed as the
number of employment hours in PFP operations. The hours are converted to
full time equivalent employment (FTE) for this analysis, based on 1,960
production hours per year, per full time worker.
3-12
-------
Table 3-5. Pesticide Production Capacity Utilization and Expansion
Production as a
Percent of Capacity
Capacity Expansion,
Percentage Change
1976
1977
1978
1979
1980
1981
1982
19831/
All
Pesti-
cides
86
80
83
80
78
73
65
60
Herbi-
cides
91
85
81
74
77
74
71
67
Insecti- Fungi-
cides cides
85
76
87
85
79
72
60
51
82
77
83
84
84
63
NA
NA
All Herbi-
Pesti- cides
cides
12 19
16 23
3 3
4 4
2 2
2 3
5 4
* *
Insecti-
cides
2
8
4
3
1
0
7
*
Fungi
cides
0
12
3
11
3
0
0
NA
Sources: Eichers, T.R., and W.S. Serletis, Farm Pesticide Supply-Demand
Trends, 1982, U.S. Department of Agriculture, Economic Research Science,
Agriculture Economic Report, 485, April 1982. Eichers, T.R.,, Evaluation of
Pesticide Supplies and Demand for 1979, U.S. Department of Agriculture,
Economic statistics and Cooperative Service, Agricultural Economics Report No.
422, April 1979. Eichers, T.R., Farm Pesticide Economic Valuation, 1981, U.S.
Department of Agriculture, Economic and statistics Service, Agricultural
Economic Report, 464. U.S. Department of Agriculture Inputs—Outlook and
Situation, Economic Research Service, IOS-1, June 1983. U.S. Department of
Agriculture, Inputs—Outlook and Situation, Economic Research Service, IOS-2,
October 1983.
I/ Projected by U.S. Department of Agriculture
* Less than one percent
3-11
-------
Plants producing only 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 to corn and livestock. The cyclic organo-
phosphorus group includes methyl parathion, which is used on wheat and
corn. Insecticides in the aldrin-cyclic group are used on soybeans and
livestock. The fungicides are subdivided into polychloroaromatics,
chloroalkyl amides, and miscellaneous.
Forty-seven of the 114 plants produce herbicides. Of these, 24 plants
produce herbicides exclusively and their average production value is twice
that of plants that make only insecticides, and nine times that of plants
that make only fungicides. Of the 66 plants producing insecticides, 39
make only insecticides and of the 42 fungicide producers, 12 manufacture
fungicides exclusively. In all, there are 39 mixed-product plants and
these tend to be larger than the single product plants; for example, their
average production value is almost twice that of plants that make only
herbicides.
3.2.1.2 Plant Capacity
Capacity utilization in 1983 for production of pesticide active
ingredients is estimated to have been 60 percent, significantly lower than
prior years as seen in Table 3-5.JL/ The average capacity utilization
for the five-year period 1978 to 1982 was 75 percent. The recent low
utilization rates are attributable to the large carryovers from previous
years. The carryover from 1982 amounted to 49 percent of the 1982
production of herbicides, 42 percent of the insecticide production and 46
percent of the fungicide production. The carryover into 1982 averaged
about 30 percent of the 1981 production. The average carryover considered
"healthy" by manufacturers is 15 to 20 percent.
Pesticide producers planned to increase overall capacity by only 0.4
percent in 1983. For herbicides, the planned increase is 0.5 percent and
0.25 percent for insecticides.^./ This compares to annual increases of
two to four percent for herbicides, and zero to seven percent for insecti-
cides during the five-year period 1978-1982.
3.2.2 Metallo-Organic Pesticide Manufacturers
Subcategory 2 includes plants which manufacture metallo-organic
pesticide compounds. The most common metallo-organic compounds contain
A/U.s. Department of Agriculture, Inputs—Outlook and Situation,
Economic Research Service, IOS-1, June 1983.
I/Ibid.
3-10
-------
Table 3-4. Profile of Pesticide Chemicals Plants
Pesticides Manufactured Number of Plants
Herbicides only
Anilides-cyclic 3
Triazines-cyclic 2
Hydrazides-cyclic 3
Benzoics-cyclic 3
Phenoxies-cyclic 4
Dinitrophenols and anilines-cyclic 1
Ureas-cyclic 1
Miscellaneous herbicides _7
SUBTOTAL 24
*Herbicides and other pesticides 2J.
TOTAL PLANTS PRODUCING HERBICIDES 47
Insecticides only
Aldrin-cyclic 3
Organophosphorus-cyclic 3
Carbamates-cyclic 2
Chloro-organic-cyclic 2
Nematicides-cyclic 1
Rodenticides-cyclic 2
Attractants and repellants-cyclic 2
Synergists-cyclic 2
Organophosphorus-cyclic 4
Miscellaneous insecticides JL8
SUBTOTAL 39
*Insecticides and other pesticides j27_
TOTAL PLANTS PRODUCING INSECTICIDES 66
Fungicides only
Polychloro-aromatics-cyclic 4
Chloroalkyl amides 1
Miscellaneous fungicides _7
SUBTOTAL 12
*Fungicides and other pesticides _30
Total plants producing fungicides 42
Total Number of Plants 114
Source: U.S. EPA, 1977 308 Survey of Pesticide Active Ingredient Manu-
facturers and Meta Systems Inc calculations.
* Included in the total count of 114 plants are 39 which produce
pesticides in more than one of the three major subcategories and are
counted (more than once) in each appropriate subcategory.
3-9
-------
(e.g., cyclic intermediates, miscellaneous end-use chemicals and chemical
products). For purposes of describing the industry in this chapter, the
ITC statistics on pesticides and related products are used. For the
impact assessment, all pesticide chemicals produced by the 119 plants are
included regardless of their ITC classification. (More detailed
information on the major pesticide groups is presented later in this
chapter). The large inventory carryovers are attributable to several
factors, including weather conditions during the 1982 planting season that
affected herbicide use, and lower than usual insect infestations combined
with more selective insecticide applications based on scouting techniques
to locate infestations. Large carryovers again occurred going into 1983.
Production was further depressed in 1983 by the payment-in-kind (PIK)
program implemented by the U.S. Department of Agriculture. The PIK
program reduced crop acreage, particularly for corn (down by 22 million
acres) which is a major user of pesticides. As a result, 1983 pesticide
production was expected to decline to one billion pounds as shown in
Table 3-3.
Pesticide active ingredients are generally manufactured in plants
which also produce other organic chemicals including Pharmaceuticals,
plastics, and resins. Approximately 85 percent of the plants produce no
more than four pesticides, while almost 50 percent produce only one.
Pesticides generally are not produced throughout the year. Of the 114
plants identified by the EPA 308 Survey as producers of pesticide active
ingredients, 55 also formulate and package the pesticide products. Thus,
about one-half the pesticide active ingredient manufacturing plants are
vertically integrated operations. About three-quarters of the plants (87)
produce chemicals other than pesticides.
The plants in the industry also vary widely in size. Based on the 308
Survey the Agency conducted in 1977, pesticide production for a number of
plants was worth more than $75 million, and 12 of the 114 manufacturing
plants identified by EPA accounted for slightly more than 50 percent of
the total value of production. In contrast, almost half of the plants had
an annual market value for all pesticide chemicals of less than $5 million.
3.2.1.1 Plant Production by Pesticide Type
Table 3-4 identifies the different subgroups within the major pesti-
cide groups for the 114 plants which manufacture active ingredients
according to the 308 Survey. Herbicides can be subdivided into anilides,
triazines, hydrazides, benzoics, phenoxies, dinitrophenol/anilines, ureas,
and miscellaneous. The major herbicides in the anilide group are
alachlor, used extensively on soybeans and corn, and propachlor which is
used on sorghum. The most important herbicide in the triazine group is
atrazine, which dominates the corn market. The phenoxies group includes
2,4-D, the use of which has been restricted.
3-8
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Table 3-3. Total U.S. Pesticide Active Ingredient. Production*
Year
1967
1968
1969
1970
1971
1972
1973
1975
1976
1977
1978
1979
1980
1981
1982
1983++
Production
Million
Pounds
1,050
1,192
1,104
1,034
1,136
1,157
1,417
1,603
1,364
1,387
1,417
1,430
1,467
1,429
1,113
1,013
Value
Average Unit Value***
Million $ $/lb.
Current**
987
1,137
1,113
1,074
1,248
1,295
1,964
2,871
2,867
3,119
3,289
3,706
4,246
5,196
4,279
3,890
Constant+
987
1,089
1,013
928
1,027
1,023
1,351
1,090
1,656
1,762
1,727
1,792
1,880
2,104
1,635
1,430
Current
0.94
0.95
1.01
1.04
1.10
1.12
1.39
1.79
2.03
2.25
2.32
2.59
2.89
3.64
3.84
3.94
Constant
0.94
0.91
0.92
0.90
0.91
0.89
0.96
1.19
1.21
1.27
1.22
1.25
1.28
1.47
1.47
1.41
Def lator+
1.000
1.044
1.099
1.157
1.215
1.266
1.454
1.504
1.672
1.772
1.904
2.068
2.258
2.470
2.616
2.726
Average Annual Growth (%)
1967-1974
1974-1982
10.3
-3.0
4.6
10.2
5.7
13.5
0.3
5.5
Source: U.S. International Trade Commission, Synthetic Organic
Chemicals, 1982 and prior issues, and Meta Systems Inc calculations.
* Herbicides, insecticides, and fungicides.
**
***
Value is the sum of the value of herbicides, insecticides and
fungicides tabulated in Appendix 3-D.
Average unit value is total value divided by total production.
+ Constant 1967 dollars value is calculated using the GNP deflator
(1976 - 1.00) from U.S. Department of Commerce, Bureau of Economic
Analysis.
++ Estimate by Meta systems Inc
3-7
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Table 3-2. Geographic Location of Pesticide Active Ingredient
Manufacturing Plants by EPA Region
Region/state |
Region I Total
Maine
Connecticut
Rhode Island
Region II Total
New York
New Jersey
Region III Total
Pennsylvania
West Virginia
Maryland
Region IV Total
Kentucky
Tennessee
North Carolina
South Carolina
Mississippi
Alabama
Georgia
Region V Total
Minnesota
Illinois
Michigan
Indiana
Ohio
Region VI Total
Texas
Loui si ana
Region VII Total
Iowa
Kansas
Missouri
Region VIII Total
Colorado
Region IX Total
California
Nevada
Arizona
Region X Total
Washington
Oregon
Total I
Number of Plants Percent of Total
5 4.4
3
1
1
15 13.2
3
12
8 7.0
1
6
1
27 23.7
2
8
2
2
2
7
4
16 14.0
1
5
6
2
2
16 14.0
10
6
8 7.0
1
2
5
2 1.8
2
15 13.2
8
1
6
2 1.8
1
1
114 i 100.0
Source: U.S. EPA, 1977 308 Survey of Pesticide Active Ingredient
Manufacturers and Meta Systems Inc calculations.
3-6
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Table 3-1. Number of Pesticide Active Ingredient
Manufacturers by Employment Size
Plant Size
Number of
Employees
1-24
25-49
50-99
100-199
200-299
300-399
400-499
500-999
over 1000
Total
No. of
Plants
In Range
25
20
10
18
3
8
2
14
14
114
Percent of
Total Plants
21.9
17.5
8.8
15.8
2.6
7.0
1.8
12.3
12.3
100.0
Plant Pesticide
Value in 1977
($ millions)
60.150
87.754
50.062
417.252
106.696
371.792
96.950
980.767
766.002
2,937.425
Percent of
Total Value
of Shipments
2.1
3.0
1.7
14.2
3.6
12.7
3.3
33.4
26.1
100.0
Source: U.S. EPA, 1977 308 Survey of Pesticide Active Ingredient
Manufacturers, and Meta Systems Inc calculations.
3-5
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fungicides, act therapeutically to reverse a disease. They are effective
at lower concentrations than other fungicides. In addition, they require
less frequent application and therefore remain effective throughout more
of the crop growth season.
3.2 Plant Characteristics
3.2.1 Manufacturers of Pesticide Active Ingredients
According to EPA 308 data, there are 114 I/ plants, owned by 81
companies in the U.S. that manufacture pesticide chemicals active
ingredients. In 1977, these 114 plants employed a total of about 70
thousand workers (including those employees not involved in pesticide
chemicals manufacturing). The distribution of pesticide active ingredient
manufacturing plants by number of employees is shown in Table 3-1.
The plants are dispersed throughout the country, with concentrations
in the eastern and southern states. Thirty-one states are represented,
with New Jersey and Texas having the greatest numbers of plants (12 and
10, respectively). Plant locations by state are presented in Table 3-2.
According to a report by the International Trade Commission (ITC),
U.S. pesticide manufacturers produced 1.1 billion pounds of pesticide
active ingredient chemicals in 1982 valued at about $4.3 billion..2/ The
ITC information provides a good profile of pesticide production because
data are collected from all pesticide manufacturers on an annual basis.
The ITC classities the production information by three major pesticide
groups (herbicides, insecticides, and fungicides) covered by this
regulation.
Production had been running about 1.4 billion pounds annually from the
mid-1970"s through 1981. However, inventory carryover from prior years
was large and production declined in 1982. Table 3-3 shows historical
data on U.S. production and value of pesticide active ingredients.^/
The pesticides manufactured by the approximately 119 plants affected by
this regulation include chemicals in other ITC classifications as well
A Of the 117 plants identified by EPA in 1977, three plants no
longer manufacture pesticides. An additional 5 plants have started
production since the 308 Survey was done.
2/ U.S. International Trade Commission, Synthetic Organic Chemicals,
1982 and prior issues, Washington, DC.
.I/ Data presented in Table 3-3 are compilations for a group of
chemicals classified as "Pesticides and Related Products,• by the ITC.
Synthetic Organic Chemicals, ITC, various issues.
3-4
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o defoliants and desiccants: chemicals that cause plants to
either drop their foliage or hasten the drying of plant
tissue, which aids in harvesting crops such as cotton and
potatoes; an.3
o plan4- grow^i c-jjulators: chemicals primarily used for
tobacco production and for some fruit production.
In most data compilations that a.re prepared by public agencies, fumi-
gants, rodenticides, and miticides are included under insecticides, while
plant growth regulators are included under herbicides.
3.1.2.1 Herbicides
Herbicides constitute the newest and most important group of pesti-
cides. Herbicides are used to prevent or control the growth of undesir-
able plants and are of two types—selective and non-selective. Selective
herbicides are designed to be effective against specific plants and there-
fore usually have a wide range of agricultural applications. Non-specifig
types primarily are used in non-agricultural situations where removal of
all vegetation is desired.
Herbicides can also be classified according to their time of applica-
tion: pre-plant herbicides are applied before/during crop planting; pre-
emergence herbicides are used after crop planting but prior to plant
emergence; and post-emergence herbicides are applied after the crops have
emerged.
3.1.2.2 Insecticides
Insecticides kill by contact with, or ingestion by, the insect.
Insecticides can be used to eradicate a specific pest, such as the boll
weevil, or a broad spectrum of insects.
3.1.2.3 Fungicides
Fungicides represent a relatively minor group of pesticides. Fungi-
cides are used to control fungi and bacteria on living and non-living
plants and on other materials. There are two types of fungicides which
function differently in their methods of control. Eradicant fungicides
kill by contact, and are applied following an infestation. Protectants
are applied prior to contamination and thus, are used preventively. The
majority of fungicide chemicals are protectants. A more recently
developed type of fungicide—and one that offers growth potential to the
industry—is the systemic fungicide. These fungicides, unlike the contact
3-3
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pesticide products are classified in SIC 2879, (Pesticides and
Agricultural Chemicals Producers, Not Elsewhere Classified). In 1982,
there were about 35,000 formulated products registered under the Federal
Insecticide, Fungicide and Rodenticide Act.A/
Prior to 1970, the formulation of technical-grade pesticides was
carried out by a variety of independent firms and agricultural coopera-
tives. Formulating 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 pesticide active ingredient manufacturers integrated
forward to formulate/package their own chemicals captively. Although the
chemical shortage is now over, most of the pesticide active ingredient
manufacturers continue to formulate/package pesticide products. The
estimate in the Kline Guide is that 80 percent of the formulated pesticide
industry is controlled by technical-grade producers.2/
3.1.2 Product Characteristics
The most common categorization of pesticides is by the type of pest
they treat, such as weeds, insects, and fungal diseases. Three classes of
products—herbicides, insecticides, and fungicides—comprise the majority
of the domestic pesticide production. In simple terms, herbicides are
used to control, prevent, or eliminate weeds; insecticides are used to
control or eliminate insects; and fungicides are used to control or
destroy fungi and bacteria. In addition to these three major product
classes, smaller product classes include the following:
o fumigants: space fumigants are used as gases or vapors in
enclosed areas, soil fumigants are cultivated into the soil
to control nematodes, fungi, insects, weeds or combinations
of these pests;
o nematicides: chemicals used in soils or in water to control
worms such as pinworm, trichina, and Guinea worm;
o miticides: chemicals used primarily on fruits and vegetables
to control very small organisms which are similar to ticks;
o rodenticides: chemicals used to control rats and mice:
A/EPA, Office of Pesticide Programs, Economic Analysis Branch,
Pesticide Industry Sales and Usage, 1982 Market Estimate, December 1982.
—/C. H. Kline & Co., The Kline Guide to the Chemicals Industry, Fourth
Edition, Industrial Marketing Guide, IMG 13-80, 1980.
3-2
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3. INDUSTRY CHARACTERISTICS
3.1 Overview
This chapter describes the characteristics of plants and companies in
the pesticides industry, and the determinants of demand and supply for the
industry. The primary characteristics include the number, size, and loca-
tion of plants and companies, degree of integration and industry concen-
tration, and financial performance. The primary determinants of demand
are the nature of the end-use markets, the nature of competitive products
and technology, and the magnitude of imports and exports. The industry
characteristics and market structure are pertinent to determining industry
behavior when faced with additional pollution control requirements. This
information is used to estimate the baseline characteristics of the
industry during the 1980's which are described in Chapter 4, and to
estimate the potential economic impacts of the effluent regulations which
are described in Chapter 6.
3.1.1 Industry Coverage
The pesticide industry is two-tiered, encompassing at one level, the
manufacturers of pesticide chemicals (active ingredients), and at a second
level, the formulator/packagers who combine the active ingredients with
substances such as diluents, inorganic carriers, stabilizers, emulsifiers,
and aerosol propellents and package them in plastic, glass,, paperboard, or
metal containers for application in the field. Many of the firms making
the pesticide active chemical ingredients are also formulator/packagers,
although there are also numerous independent formulator/packagers.
The two levels of pesticide production share a domestic market and
final product characteristics, but their manufacturing processes and
immediate products are different. Because of this, they are treated
separately in the discussions of plant characteristics and imports/
exports, but jointly in the discussion of the domestic market.
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, Not Elsewhere Classified). The formulator/packagers of
-------
with annual sales of $10 million or less/ and small pesticide formulator/
packager firms are defined as firms with annual sales of $7.0 million or
less. The impacts analyzed include the number of plants with compliance
costs, the number of plants failing the NPV test, and the number of closures.
2.9 Foreign Trade
The industry-wide impact of this regulation on foreign trade is measured
in terms of the price increases resulting from the regulation. Foreign trade
is an important aspect for the pesticide industry, both in terms of selling
abroad and competition at home from foreign producers. As foreign producers
become more developed, the ability to Compete in terms of price becomes more
important. In addition to the industry-wide analysis, specific pesticides
identified by public comments were studied in detail as to the proportion of
production imported and exported and domestic producers' abilities to compete
with foreign producers. Often information on the competitive position was
scarce and these case studies include information from various proprietary
sources. Therefore, they cannot be reproduced here.
2.10 New Sources
The new source limitations, both NSPS and PSNS, are the same as the BAT
and PSES limitations respectively. There are no incremental costs nor
economic impacts attributable to this regulation. The impacts are assumed to
be the same as those for existing sources, and no barriers to entry are
anticipated as a result of the compliance costs.
2-20
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As in the case of manufacturing plants, information on the financial
health of the company and the degree to which formulating/packaging opera-
tions are integrated into the overall company operations is assessed, for
those plants considered to be closure candidates based on the NPV analysis.
Company-level financial data are collected about the owners of PFP plants
known to be indirect dischargers on the basis of the 308 Survey, since these
data are needed for the closure analysis. The degree to which formulat-
ing/packaging is integrated into the overall business is measured by compar-
ing the results of the PFP 308 Survey to that of the 308 Survey of pesticide
manufacturers. Additional sources oi: information about the plant, its non-
pesticide products, and its owner are: the SRI Directory of Chemicals Pro-
ducers, which lists all the products produced at specific chemical facil-
ities; corporate annual reports; and industry literature.^/ The analysis
of financial conditions and integration is the same as that described earlier
for pesticide manufacturers.
For PFP plants, net present value is calculated twice; once with treat-
ment costs included and once without treatment costs. If the plant fails the
net present value test without inclusion of the treatment costs, then it is
assumed to be a baseline closure candidate regardless of this regulation. If
a plant does not fail the net present value test without treatment costs, but
does fail with the costs included, then this potential plant closure is
considered attributable to the added costs of the regulation.
The results of the plant-specific analysis of the 28 plants that comprise
the representative sample are extrapolated to the indirect discharger
industry segment on the basis of ratios derived for the PFP plants in the
sample. The number of plants likely to close is estimated and
characteristics of those closure candidates are assumed to be the same as the
closure candidates in the sample.
2.8 Small Business Analysis
An analysis is conducted to determine whether small firms bear dispro-
portionate impacts under the promulgated effluent guidelines; (i.e.,
Regulatory Flexibility Analysis). The small firms of primary concern in this
analysis are those firms with limited resources and/or those that would face
barriers to entry due to the regulations. The relevant measure, as in the
case of pollution control guarantee assistance, is the financial ability of
the firm to raise the necessary capital and to assume the resulting carrying
costs. Therefore the criterion for a small business is the sales of the
parent firm. Small pesticide active ingredient firms are defined as firms
A/ 1979 Directory of Chemical Producers; United States, SRI
International, 1979.
2-19
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2.7.3 Formulator/Packagers
In order to identify potential closure candidates, the same net present
value analysis described above is applied to all indirect discharge PFP
plants for which 1983 308 Survey data are available. Most of the data
required for the net present value analysis are available directly from the
308 Survey, and industry ratios are not required for the indirect discharge
PFP subcategory. The analysis assumes that compliance costs incurred by
indirect discharge PFP plants are not passed on to consumers. This is a con-
servative, yet reasonable and appropriate assumption for the following
reasons, since a relatively small number of plants will incur costs, they
will not be able to pass on these costs. The market has already adjusted to
the treatment costs incurred by direct dischargers under previous regulations
and these direct discharge plants are not expected to increase their prices
in response to treatment costs incurred by indirect dischargers. Even if
some cost pass-through is assumed, it is not possible to estimate demand
elasticities because insufficient time series data are available for the wide
variety of formulated/packaged products. Therefore a change in production
levels can not be estimated.
Since the 1983 PFP 308 Survey includes questions about revenues and
expenses, after-tax operating income (U) is directly estimated from the 308
Survey responses. Pre-tax operating income is equal to: market value of
pesticide products minus operating costs, interest and depreciation. The tax
rate is assumed to be the statutory rate of 0.46. Therefore:
U = (1 - .46)(pre-tax operating income)
Since the 308 Survey does not ask for the value of current assets,
current assets are assumed to be equal to 34.9 percent of sales. This ratio
is calculated from FINSTAlJ/ data for firms in SIC 2879, Pesticides and
Agricultural Chemicals. These data are considered representative of the
firms in this industry since they are in the same SIC group and the Dun and
Bradstreet data base contains a large proportion of the companies. The book
value of plant and equipment is taken directly from the 1983 308 Survey.
The NPV analysis is done on 36 PFP plants. If any of the values, other
than sales, which are needed in the NPV analysis are not reported by a plant,
they are estimated by applying ratios calculated from the other plants
responding to the 308 Survey.
A FINSTAT DATA BASE, prepared by Social and Scientific Systems Inc. for
the Small Business Administration (derived from Dun and Bradstreet Financial
Profiles data base) and made available to EPA by the Small Business Adminis-
tration.
2-18
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If the potential closure candidate manufactures high-profit products,
then its pre-tax operating income is recalculated based on value of
production and the profitability category for each product. If the ratio of
pretax operating income to sales is higher than average (.213), the net
present value ratio is recalculated for the plant, using the higher estimate
of operating income. The remaining plants, including any for which it was
not possible to estimate a profit rate, are considered as possible closure
candidates.
Finally, two additional factors are considered in analyzing plants that
remain as possible closures. One is the size and financial strength of the
parent company. A large, well-financed company is better able to raise the
capital necessary for treatment facilities and better able to carry a
facility with reduced profits for a few years if the long-term outlook for
the products produced is favorable. The second factor is the degree to which
the plant is integrated into the overall operations of the parent company.
If the plant is a captive operation using the firm's raw materials and/or is
the supplier for other plants owned by the firm, the company is less likely
to close the plant. A plant which fails the net present value test but has a
ratio near the cut-off value is considered a border-line closure candidate.
A border-line closure candidate with a financially strong owner and/or that
is highly integrated into the overall corporate structure is not considered a
closure candidate.
In some cases, a plant which is a potential closure candidate may close
the pesticide product line while continuing to operate the rest of the
facility. This is more likely to occur if pesticide production is a small
part of the plant's total production. The specific information needed to
judge whether the plant will close or just the product line is not readily
available. However, information on the number of days of pesticide produc-
tion and whether other products besides pesticides are produced at this site
are available. If pesticide production goes on for only a small part of the
year (e.g. less than one-third) and other products are produced, then the
predicted closure is assumed to effect the pesticide product line only while
the plant continues its other operations.
2.7.2. Metallo-Organics
The analysis proceeds through the same steps applied to other manufac-
turers of pesticide active ingredients, with one difference. First, 1982
sales are not estimated by revising the 1977 production levels and applying
1982 prices. Instead, metallo-organic pesticide chemical sales for this
plant is derived from the response of the company during the public comment
period following the proposal of regulations. The net present value analysis
employs the same industry wide ratios used for the pesticide active
ingredient manufacturing plants (Subcategory 1). If the plant appears to be
a potential closure candidate based on the NPV test, then additional factors:
such as the profitability of its products, the financial strength of the
parent company, and the importance of pesticide metallo-organic chemical
manufacturing to the parent company, are assessed.
2-17
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In order to calculate the net present value ratio, estimates of the after
tax real operating income and the liquidation value of the facility are
required (as described in Section 2.7 above). Much of the information needed
for the NPV test is not available for individual plants that manufacture
active ingredients. Therefore, the values are estimated using representative
ratios for the industry combined with estimates of individual plant sales.
The calculation of these ratios is discussed in Appendix 2-C. The ratios are
based on financial data from the pesticide operations of seven major
pesticide producers. Since the ratios represent pesticide production rather
than total production for these companies, they are considered representative
of the industry and appropriate to estimating operating income from pesticide
production at specific plants. A sensitivity analysis using the lowest
operating income to sales ratio instead of the average is discussed in
Chapter 8: Limits to the Analysis.
Individual company and product operating margins vary, while the analysis
assumes an average value. Therefore, each plant which fails the net present
value test is examined to determine if the operating income estimate based on
the industry average is appropriate for the pesticides produced by that
plant, if the plant's operating income is higher than that estimated on the
basis of the industry averages, then it may not be a potential closure
candidate. Specific operating margins are not available for individual
pesticides. However, profitability is a function of several factors; two of
which are considered important for this analysis. First, a patented product
is very likely to have a higher operating margin than a non-patented product,
particularly a commodity pesticide. The second factor is whether or not a
pesticide is highly differentiated from other products. Even if a product is
patented, its operating margin will not be particularly high if there are
other products- that can be substituted for it.
Three profitability categories are used to characterize pesticides; low,
medium, and high. The categories of profitability—defined by operating
margin—are:A/
Low (10-20 percent of sales)
Medium (20-40 percent of sales)
High (40 percent of sales or more)
If a product is not patented, it is placed in the low profitability
group. If a product is patented and has few or no substitutes, then it is
placed in the high profitability group. If it is patented but does face com-
petition, it is assigned to the medium profit group.
A/ The ranges are established by Meta Systems Inc based on discussion
with industry experts.
2-16
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Applying these simplifications, the test reduces to:
-5L >
_ — r
where: f = real after-tax cost of capital
U = real operating income
Lo = current liquidation value in real terms
The equation states that if the rate'of return on the liquidation value
{U /LO ) is greater than or equal to the real cost of capital, then the
plant will remain in operation. The analysis presented in this report uses
the ratio form of the net present value test. The real cost of capital is
estimated to be 7.5 percent for plants manufacturing pesticide active
ingredients that are owned by large firms. (See appendix 2--C.) Since this
is based on information from large firms only and in order to take into
account instances where small firms may have to pay a premium when borrowing
money, the cost of capital for small firms is estimated to be 9.5 percent.
Since PFP plants tend to be owned by smaller companies, and they are
downstream production to pesticide manufacturers, the cost of capital for PFP
plants is also estimated to be 9.5 percent.
2.7.1 Manufacturers of Pesticide Active Ingredients
At proposal and for the Notice of Availability, the Agency began its
analysis of the impacts associated with Subcategory 1 by using a screening
analysis. The Agency examined the ratio of annual compliance costs to sales
(ACC/S) and if this ratio was less than four percent at proposal and one
percent at the Notice, the Agency assumed these plants would not be
significantly affected. At the Notice the Agency performed a Net Present
Value (NPV) Analysis only on plants with an ACC/S less than one percent. The
Agency now has eliminated the screening and simply performs the NPV analysis
on all plants.
The closure analysis for plants that manufacture pesticide active
ingredients has two steps. First, the net present value ratio is calculated
for all plants. Second, plants which appear to be potential closures under
the net present value test are analyzed in further detail as to the relative
profitability of their products, the importance of pesticides to their
company, and the financial strength of their owners. Each of these steps,
including the assumptions involved, are discussed in detail in the following
paragraphs.
The net present value ratio is calculated based on the estimated 1982
value of production at each plant, after treatment costs are incurred. The
value of production is equal to the new price (based on average cost
increase) multiplied by the new quantity (based on the percentage price
increase and the elasticity).
2-15
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