INITIAL ANALYSIS OF THE ECONOMIC
IMPACT OF WATER POLLUTION CONTROL
COSTS UPON THE DAIRY PRODUCTS
INDUSTRY.

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   INITIAL ANALYSIS OF THE ECONOMIC IMPACT

    OF WATER POLLUTION CONTROL COSTS UPON

        THE DAIRY PRODUCTS INDUSTRY
                   to

    Environmental Protection Agency
                   by

        Economic Research Sei'vice
United States Department of Agriculture

           January  12,  1973

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                              Table of Contents
Impact of Pollution Control Costs Upon the Dairy Industry                         2
Summary             ~--                                                             3
Dairy Industry                                                                    8
Pricing MiIk--An Overview                                                        18
Pricing Milk and Milk Products                                                   20
   Fluid Grade Milk                                                              20
   Pricing Milk for Manufacturing                                                23
   Product Pricing--Fluid                                                        25
   Pricing Other Dairy Products                                                  27
Price Impacts                                                                    32
Financial Characteristics of Dairy Finns                                         34
   Investment Capitol                                                            43
Pollution Control Requirements                                                   44
   Procedure for Costing                                                         44
Dairy Processing Industry Waste Disposal Situation                               61
Impact Analysis                                                                  67
   Price Effects                                                                 67
   Financial I,fleets                                                             71
   Production Effects                                                            83
   Employment Effects                                                            8'5
   Community Impact--An Overview                                                 91
   Industrial Ti-ade                                                              95
Critical Assumption                                                             101
Limitations of the Analysis                                                     105
Jmpscv Areas For Additional Consideration                                       106
Appendix                                                                          A

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                                 List of Tables

Table No.                  Table (abbreviated tables)                                 Pac

    1      Number and Employment of Dairy Processing Plants                            ?
    2      Dairy Plants by Industry                                                    ~i
    3      Income Characteristics of Corporation in Dairy Products Industry           3f
    4      Comparison of Income Characteristics of Corporations in Dairy Products      3(
             Industry
    5      Income Characteristics of Corporations in Dairy Products Industry          31
    6      Dairy Plant Sizes and Waste Load Characteristics                           4!
    7      Investment and Costs of Four Waste Treatment Systems for Butter            5C
             Plants by Size
    8      Investment and Costs of Four Waste Treatment Systems for Cheese            51
             Plants by Size
    9      Investment and Costs of Four Waste Treatment Systems for Condensed          52
             and Evaporated Plants by Size
   10      Investment and Costs of Four Waste Treatment Systems for Ice Cream          5'
             Plants by Size
   11      Investment and Costs of Four Waste Treatment Systems for Fluid Plants       5'/
             by Size
   12      Investment and Costs of Four Waste Treatment Systems for Fluid-Cottage      5£
             Cheese Planes by Size
   13      Investment and Costs of Four Waste Treatment Systems for Fluid-Cottage      5S
             Cheese (with whey) Plants by Size
   14      Waste Intake and Discharge by U. S. Dairy Trd-.isi.ry 1967                    61
   15      Waste Treatment Practices of Wisconsin Dair} Plants by Community Size       6''
   16      Distribution of Income of Dairy Firms                                      7;
   17      Estimated Increase in Vulnerability of Dairy Plants in Light of Water       8'
             Pollution Control Requirements
   18      Dairy Product Imports and Exports U. S. 1960-71                            91
   19      Value of Dairy Product Imports and Exports  U.  S. 1960-71                   9£
   20      Potential Impact of Water Pollution Control upon Annual Consumer          IOC
             Expenditures

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              INITIAL ANALYSIS OF THE ECONOMIC IMPACT

               OF WATER POLLUTION CONTROL COSTS UPON

                   THE DAIRY PRODUCTS INDUSTRY

                               by

              Floyd A. Lasley and Clark R. Burbee
      Animal Products Branch, Marketing Economics Division
                   Economic Research Service
             United States Department of Agriculture
This study is one of a series commissioned by the Environmental Protection
Agency to provide an initial assessment of the economic impact of water
pollution control costs upon industry, and to provide a framework for future
industrial analysis.

For the purpose of this initial analysis, the water pollution control re-
quirements were assumed to be those developed in 1972 as effluent limitation
guidance by the EPA Office of Permit Programs.  Costs were developed by
the EPA Economic Analysis Division on the basis of treatment technologies
assumed necessary to meet the effluent limitation guidance.

Because of the limitations of time and information available, these studies
are not to be considered definitive.  They were intended to provide an
indication of the kinds of impacts to be expected, and to highlight possible
problem areas.

This document is a preliminary draft.  It has not been formally released by
EPA and should not at this stage be construed to represent Agency policy.
It is being circulated for comment on its technical accuracy and policy
implications.

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       IMPACT OF POLLUTION CONTROL COSTS UPON THE DAIRY  INDUSTRY




 Impact analysis of necessity  focuses upon differences.  In this




 report we have concentrated our attention upon  those differences  in  the




 dairy  industry which  should be expected to  significantly  influence the impact




 of  pollution control  measures.  These  characteristics include pricing of




 raw milk and milk products, financial  variables, size groupings of plants  by




 subindustry, employment, and  relation  to  the community.






 In  addition to the above, type and volume of plant  effluent, standards for




 performance, implementation timetables and  alternative  methods considered




 acceptable are extremely important in  estimating impact.
 Each of  the variables ere  considered  in  this  report.  However,  these  findings




 should be  considered  in  light  of  other work and  as  subject  to revision under




'further  analysis.







 Considerable  data were obtained from  Vermont, Wisconsin,  and Oregon.  These




 three States  were selected  because  of their differences and the  role  of




 dairying in each.  These State data were  useful  in  interpreting  the more




 aggregate  data  for the United  States. Aggregates and averages  can be quite




 misleading when considering cost  impact  of a  change such  as pollution control.




 Specific plants in specific communities will  close,  contract, or expand




 their operations.







 This study focuses upon  the impact  of pollution  control cost in  the dairy




 processing industry.  It does  not consider impact of changes in  milk  produc-




 tion, transportation, or retailing.   Neither  does it consider adjustments




 which might result from  cost increases due to pollution control  in other




 industries which provide inputs for the dairy industry, ie. feed, chemical,




 steel, equipment, refrigerant, container, and ingredient  manufacturers.

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    Initial Analysis of the Economic Impact of Water Pollution Control Costs
                     Upon the Dairy Products Industry


                               Summary

Pollution control requirements will have an economic impact upon the dairy

industry.  It will not be uniformly felt throughout the industry but will

 be  a differential impact.  Differences will be noted among the sub-industries,

among plants of different volume groupings, and among geographical regions.

Variation will also result from plant location regarding concentration of

population, access to municipal sewage systems, access to land for private

disposal, and concentration of milk supplies.


Financial characteristics of the firm, including competitive industry struc-

ture^ will greatly affect the impact of pollution control costs upon individual

firms and, thereby upon the industry.  The dairy industry is made up of a

large number of small plants (and firms) with relatively low dollar returns.

These small plants have been going out of business at a rapid rate for

several years.


The short term impact upon the small and medium size dairy plants will largely

depend upon how the pollution control costs are financed.  Assuming that

the additional costs can be passed on to consumers, if the costs can be met

as increased operating costs to the plant the exit rate will be increased.

If the plant must finance these as capital investment costs, then there

would be a mass exodus at the cut-off date.


Very few of the small plants, and perhaps only about 50 percent of the medium

size plants could make the capital outlay required for private treatment

facilities or for their share of expanded municipal treatment systems.  They

do not have the financial capability, either from internal funds or from the

capital funds market.

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Most large volume plants could be expected to successfully finance facilities




for pollution control.  This does not mean to minimize the magnitude of




their problems, but to recognize that these plants can solve them and remain




viable.






Fluid milk plants are in the best position.  The large proportion of them




are already using municipal systems, they are larger in size, and probably




can better make the in-plant adjustments necessary.  Most will probably dis-




continue making cottage cheese in the fluid plant unless they have adequate




volume and facilities for handling the whey.  Further specialization and




interplant transfers of packaged products so as to minimize BOD loadings




from product loss can be expected.  The cheese industay will be most




affected by pollution control—physically and financially.  Although a few




large plants have been constructed recently, cheese plants are predominantly




small-volume.  They are located in smaller towns and rural areas.  Few have




used municipal systems for treatment of plant effluent.  Land disposal or




dumping into waterways have been the most common methods of disposing of




whey and plant effluent.






It is not feasible for cheese makers to treat whey as an effluent.  Most




whey will have to be processed and utilized.  Although much work has been




done to develop new uses for whey and new methods for processing it, con-




densing and drying are the most practical at present.  Small cheese plants




cannot afford to do either.  Generally, this puts them in the position of




being dependent upon a large plant to take their whey for processing.  A




decision by one dryer can effectively close down several cheese makers as




they would have no outlet for their whey.

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This study has assumed that sweet whey will be processed and the returns




will offset the extra costs.  This will not be true in all cases.  The excep-




tions probably will be critical to the individual plants concerned but not




to the industry.






Joint-treatment — Joint-treatment with municipal systems will be the most




favorable solution for those plants with this alternative.  In fact, when




plants pay their pro rata share of treatment costs, the benefit will be




mutual.  Both plant and community will realize lower effluent treatment




costs than if each treat separately.






In conducting this study, we found a great deal of confusion, and no little




consternation, regarding joint-treatment for plant and community.  Generally




they were taking opposing views, with very few recognizing the potential




for mutual benefit.  We would suggest that constructive effort toward




acquainting community leaders and industry personnel with the advantages




would be effort well spent.






Flexibility — Dairy plant people and municipal employees expressed concern




over another major problem.  They are quite concerned that tolerance levels




may become intolerable.  Although the plant and community may have invested




large sums and provided a treatment system deemed quite adequate by best




available expertise, there is still a possibility of mishap resulting in a




temporary overload.  Such mishaps are more likely to .occur with industry




sources than with residential sewage loads.  In fact, it may not be feasible




to so overinvest in facilities and operating procedures that a mishap could




be absolutely avoided.  There is tremendous difference in the cost of ade-




quately meeting control needs 99.99% of the days and providing for 100% plus




adequacy.

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Employment -- Labor displacement will be felt mostly in small rural communi-




ties.  Heavy milk producing areas where cheese, butter, powder and condensed




products are manufactured will lose some jobs in the dairy industry as




plants are closed because of pollution control.  Larger cities should not




be much affected by loss of jobs or relocation of dairy plants due to pollu-




tion control requirements.






Price Impacts -- As presently envisioned dairy plant pollution control costs




should not greatly affect the price of dairy products.  This effect should




result in price increases below 2%, except cottage cheese.  Additional supplies




 of dried whey, almost doubling last year's marketings, will put pressure on




 nonfat dry milk, perhaps dropping the price to the support level.






Consumer Demand -- The potential price increases should not reduce consumer




demand for dairy products except in the case of cottage cheese.  If cottage




cheese manufacturers cannot find a more economical method to dispose of




acid whey than conventional treatment, the cost increase could significantly




reduce quantity demanded.






Suppliers -- Milk producers should not be affected by adjustments of dairy




product manufacturers to the proposed environmental standards.  Some pro-




ducers may realize different milk prices as a result of plant relocations




that alter milk utilization ratios and therefore blend prices.






Community Effects -- Numerous rural communities in the Lakes Region are




already being adversely affected by the structural changes in the dairy in-




dustry.  A small number of additional communities in this region will be




adversely affected if they cannot provide plants with waste treatment services.

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Foreign Trade -- The increases in domestic costs for dairy products are not




expected to affect the foreign trade situation.  Imports are already regulated




by a quota system and the Federal government can effectively regulate imports




to prevent foreign countries from taking advantage of any increase in price




differentials that might result from higher domestic prices.  Exports




under government programs are not expected to be affected unless surpluses




disappear.  Commercial exports are not of major importance to the industry;




and the impact on exporting firms is expected to be minor.

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                         Dairy Industry




     Dairy processing is divided into five major categories:  butter,




SIC 2021; natural cheese, SIC 2022; condensed and evaporated products,




SIC 2023; ice cream, SIC 2024; and fluid and fluid products (cottage cheese),




SIC 2026.  While there is considerable product specialization in processing,




a substantial number of establishments engage in multiple product processing.




In 1967, the primary product specialization ratios were: butter, 71 percent;




cheese, 93 percent; condensed and evaporated products, 82 percent; ice cream,




97 percent; and fluid milk, 90 percent.




Butter industry




     The output of butter, number of establishments and employment has been




decreasing for years.  Total shipments of butter decreased from 1.4 billion




pounds produced by 1320 plants in 1963 to 1.1 billion pounds produced by




619 plants in 1970.  The decrease is attributed to the availability and con-




sumer acceptance of lower priced non-dairy spreads such as oleomargarine.




Further decreases in output and consumption are expected.




     The number of plants primarily engaged in butter production decreased




from 766 in 1963 to 408 in 1970.  Of the 408, 308 are classified as small




plants employing less than 20 persons.  These plants are estimated to have




accounted for 20 percent of the industry's output.  Ninety-one plants em-




ployed from 20 to 99 employees each and accounted for an estimated 70 percent




of the industry's output.  The remaining nine plants each employed more




than 100 employees and accounted for the remaining 10 percent of the in-




dustry's output (Table 1).




     Employment in the butter industry has decreased rapidly, from 12,000




in 1963 to 7,200 in 1970.  Approximately 75 percent of the employment is in




plants with 20 or more employees.

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     The butter industry is located primarily in the Lakes Region, an area




extending from northern New England to Minnesota and Iowa.  The States in




the region accounted for two thirds of total butter production in 1970, and




60 percent of the 619 plants that produced butter.  The 273 plants in




Minnesota, Wisconsin, and Iowa produced 52 percent of the butter in the U.S.




Butter plants are generally located in small communities in rural areas




close to the milk supply.  The plants produce large quantities of skim and




buttermilk by-products and the larger plants have the facilities to con-




dense or dry these products.  In 1967, 25 percent of the dried milk produc-




tion came from plants in the butter industry.  The industry is also an




important source of bulk fluid milk and cream for other segments of the




dairy industry.




Cheese, natural and processed




     Cheese production has been increasing for some time.  Production in-




creased from 1.6 billion pounds produced by 1283 plants in 1963 to 2.2 billion




pounds produced by 963 plants in 1970.  The output of cheese is expected to




increase during the foreseeable future.




     The number of plants in the cheese industry decreased from 1,138 in




1963 to 846 in 1970, with the decrease confined to small plants    employing




less than 20 employees.  The number of small plants decreased from 932 in




1963 to 598 in 1970.  Larger plants employing from 20 to 99 employees in-




creased from 178 to 209 during the same period.  Plants employing 100




persons or more also increased from 28 to 39.  The adjustment is apparently




in response to economies of size in processing resulting in greater effi-




ciency and lower unit costs.   The small plants were estimated to account for




15 percent of total production,  the 20-99 employee plants 40 percent  and




the large plants 45  percent of output in 1970.
                                      10

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     Employment  in  the cheese  industry has increased since 1963, the only




 sector of  the dairy processing industry to show an increase.  Total employ-




 ment increased from 18,000 in  1963 to 21,000 in 1970.  Employment in small




 plants,  1-19 employees, decreased to an estimated 3,800 in 1970.  Employment




 in the 20-99 category has increased to an estimated 8,800 in 1970.  The




 larger plants have also increased employment with an estimated 8,400 employ-




 ees in 1970.  Employment in cheese manufacturing is expected to continue to




 increase but only in large scale operations with attrition occurring in the




 smaller  scale plants.




     The natural cheese industry, like the butter industry is primarily lo-




 cated in the Lakes Region.  Of the 2.2 billion pounds produced in 1970,




 almost 75  percent, 1.6 billion pounds, was produced by plants located in




 the Lakes  Region.  Three States, Wisconsin, Minnesota, and New York, pro-




 duced 58 percent of the natural cheese in 1970 with Wisconsin accounting for




 43 percent of total U.S. output.  Fifty-eight percent or 561 plants produce




 cheese in  the three States, over half the cheese plants, 481, are located




 in Wisconsin.




     Cheese plants, like butter plants, are generally located in rural com-




munities near the source of milk supplies.  Plants tend to specialize but




 some plants manufacture butter (most often whey butter), dry milk or whey,




and many serve as fluid milk supply plants.




     The major by-product of the natural cheese industry is sweet whey.




Whey is generally condensed or dried or shipped to condensing or drying plants




by the cheese plants.  But only 50 to 60 percent of total sweet whey output




 is processed into human or animal food items.  Some of the remainder is fed




 to hogs and the balance is disposed of by various practices as a waste pro-




duct.  It  is the disposal of surplus whey that is a major source of water




pollution.






                                     11

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     The positive trend in cheese production and limited market for whey




products increases the problem.  Currently, dried whey is utilized in the




baking, beef, and ice cream industries but the major use, 53 percent, is in




livestock and poultry feeds.  H:igh processing and transportation costs




relative to other feed ingredients limits the use of dried whey in animal




feeds.




     The output of natural cheese and sweet whey is expected to increase




during the foreseeable future.  The prospects for increasing the utilization




of whey will depend upon new processing technology, factor costs, and the




ability to increase the penetration into existing or new markets.  To date,




no information is available to ascertain the potential market utilization




of sweet whey.
                                     12

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 Condensed  and  evaporated  products




     The condensed  and  evaporated  products  industry  includes  the  condensing




 of whole and skim milk  products, drying of  whole,  skim, and whey  products




 and manufacture of  miscellaneous items such as  ice cream mixes.   U.S. output




 of finished products  in this  industry has decreased  from 11.1  to  10.8




 billion pounds between  1963 and 1970.  Output of condensed and evaporated




 products decreased  from 3.4 to 2.7 billion  pounds, dried products from  2.7




 to 2.4 billion pounds,  and mixes increased  from 5.0  to 5.7 billion pounds.




     The number of  plants in  this  industry  decreased  from 281  in  1963 to




 257 in 1970.   (New  data indicate   plant numbers increased in  1971), The  small




 plants, employing 1-19, decreased  by one to 114, the  medium size  plants,




 employing  20-99, from 135 to  121,  and the large plants from 31 to 22.   It




 is estimated the small  plants produce 5 percent of the output.  The middle




 size plants 50 percent.and the large plants 45  percent.  It is expected




 that both  output and  plant numbers will continue to decrease.  Employment




 in this industry has  also decreased from 12,300 in 1963 to 10,700 in 1970.




 The small  plants employed an estimated 1,000 in 1970, the middle  size




 plants 5,500, and the large plants 4,200.




     This  industry  is also heavily concentrated in the Lakes Region near




 sources of whole, skim, and whey inputs.  Ohio, Wisconsin, New York and




Michigan are important  States for  condensed products, but there are condens-




 ing plants in other regions of the U.S.  Dried milk production is  centered




 in Minnesota, Wisconsin, and Iowa with these States accounting for  over half




 the total output.
                                     13

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     An  estimated  250  plants  probably manufacture all  the condensed products




 and  150  plants  dry milk  or  fluid  by-products.  These plants are generally




 located  in  rural areas in small size communities.   Plants in  this industry




 are  also important in  producing butter and marketing fluid milk.




 Ice  cream




     Output of  ice cream and frozen desserts has increased steadily since




 1963.  With production of 717 million gallons of ice cream and 333 million




 gallons  of  frozen  dessert in  1963, output increased to  763 million gallons




 of ice cream and 425 million  gallons of desserts in 1970.  However, the




 output of ice cream has  been  very stable since 1967.




     The number of plants has decreased over the same  time period.  Primary




 plants of the industry decreased  from 1,081 to 689, with the  closings




 occurring in all size  catagories.  The number of small  plants (1-19 employ-




 ees) decreased  from 694  to  397, medium size plants  (20-99 employees) from




 321  to 243,  and large  plants  (100 or more employees) from 66  to 49.




 Besides  the  primary plants, there are thousands of over-the-counter opera-




 tions that manufacture and  sell frozen desserts and some ice  cream.  These




 operations are  quite small  and located in population centers.




     Employment in the ice  cream industry has decreased with  plant numbers.




 The number employed declined  from 29,100 in 1963 to 22,400 in 1970, and this




 trend is  expected  to continue.  Employment by plant size is estimated at




 2,400 for the small, 11,000 for the medium and 9,000 for the  large.




     Ice  cream  industry plants are geographically dispersed and located pri-




marily in major population  centers near the demand source.   Twenty-five




 percent of the plants are located in California,  New York and Pennsylvania,




 and production  is greatest  in  the major population areas.  The industry pro-




       insignificant quantities of other dairy products.
                                      14

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Fluid milk and related products




     The fluid milk industry includes fluid processing into various con-




sumer products, the manufacture of cottage cheese, and production of several




miscellaneous dairy drinks.  This industry is by far the biggest user of




whole milk and is the most important segment of the dairy processing industry.




Product output increased gradually from 56.2 to 59.5 billion pounds between




1963 and 1970.  Cottage cheese output increased from 0.87 billion pounds




in 1963 to 0.98 billion pounds in 1970.  Output of this industry is expected




to continue to increase gradually.




     Industry plant numbers have declined rapidly, from 4,619 to 2,824,




during the 1963-70 period.  The change in plant numbers by size of employment




classification during the period was 2,670 to 1,326 in the 1-19 employee




group, 1,448 to 1,090 for the 20-99 employee group, and 501 to 408 for the




over 99 employee group.




     An estimated 800 plants process cottage cheese, but most of these are




primarily fluid processing plants.  In 1967, 37 plants were classified as




primarily cottage cheese processing operations, and 15 had a specialization




ratio of 75 percent or more.




     The trend in fluid plants is expected to continue to decline.  The




small plants account for an estimated 5 percent of sales, the medium size




plants 35 percent, and the large plants 60 percent.  Larger processing plants




will decrease in number but increase in size and account for an increasing




proportion of sales.



     Employment in the industry has shrunk from 185,000 in 1963 to 141,000




in 1970.  By employment size classification, the small plants (1-19 employ-




ees) were estimated to have 8,000 employees in 1970, the medium size plants




(20-99) 50,000 employees and the large plants (over 100) 82,700 employees.
                                      15

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The reduction in employee numbers is expected to continue with consolida-




tion in plant numbers.




     Fluid processing plants are generally located in population centers




close to their markets.  These plants specialize heavily in their primary




product but some do manufacture other products such as butter and condensed




products.  Plants producing cottage cheese have a by-product of acid whey.




To date, this product is of little or no commercial value.




Additional plant information




     Table 2  provides a further break-out of dairy processing plants by




type of product specialization, number, and employment for 1967.
                                     16

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                 Table 2 '   Dairy plants by industry and
                  primary product specialization,  196?


 SIC                    Product                    Plants    Employment
                                                               Cooo)

 2021    Butter
            Industry                                  540        8.7
            75$ or more specialization                371        3-6
 2022    Cheese
            Industry                                1,026       20.0
            75$ or more specialization                970       18.1
20221    Natural cheese
            Primary product                           465       H«9
            75$ or more specialization                403        9.2
20222    Process cheese
            Primary product                            58        5.4
            75$ or more specialization                 48        3*6
 2023    Condensed & evaporated milk
            Industry                                  291       13.2
            75$ or more specialization                220        9.3
20231    Dry milk products
            Primary product                           104        5-6
            75$ °r more specialization                 60        2.7
20232    Canned milk (consumer)
            Primary product                            64        5-1
            75$ °r more specialization                 49        3-8
20233    Concentrated milk (bulk)
            Primary product                            25         .6
            75$ °r more specialization                 18         .2
20234    Ice cream and ice milk mix
            Primary product                            47        1.2
            75$ °r more specialization                 28         .6
 2024    Ice cream and frozen desserts
            Industry                                  850       24.6
            75$ or more specialization                817       23.4
 2026    Fluid milk
            Industry                                3,48l      165.2
            75$ or more specialization              3,249      142.0
20261    Bulk fluid milk and cream
            Primary product                           203        7«3
            75$ or more specialization                102        2.4
20262    Packaged fluid milk and
         related products
            Primary product                         1,721      133.9
            75$ or more specialization              1,301       87.8
20263    Cottage, bakers',  pot, and
         farmers' cheese
            Primary product                            37        1.7
            75$ or more specialization                 15         .5
20264    Flavored milk products
            Primary product                            12         .3
            75$ or more specialization                 10        D

Source:  U.S. Dept. of Commerce, Bureau of Census, 1967
         Census of Manufactures   Dairy Products M3 67(2)-20B

                                    17

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                         Pricing Milk — An Overview




     The most significant characteristic in pricing dairy products is the




extreme degree of interdependency of the - different segments of the dairy




industry.  Milk that is eligible for the fluid market may be utilized as




fluid or in manufacturing other dairy products.  Since milk may be used




interchangeably in all manufactured products there is extreme competition




between manufacturers for supplies of milk and for market outlets.   Small




differences in price may cause large volumes of milk to move from one




utilization to another.  Hie fact that joint products utilize varying




proportions of fat and nonfat solids further complicates the pricing problem.




     Due to its unique role in our food  supply the public has been intensely




interested in the price of milk and milk products.  Most public pricing




activity has considered the perishable nature of milk, the fact that it is




bulky and expensive to transport, and problems stemming from the fact that




we have a fluctuating supply to be coordinated with a variable demand.  In




light of these characteristics, the stated goals of most pricing activity




have included reference to achieving and maintaining stability, adequate




supply, income levels, sanitary requirements, and reasonable prices  to




consumers.




     Two recent developments in the structural organization of milk  marketing




firms are influencing pricing at all levels from the farm to the consumer.



Development of large regional producer cooperatives with increased bargaining




strength and the increasing role of supermarkets have brought about  marked




changes in the marketing of milk and its pricing.




     Except for a few isolated markets, fluid-grade raw milk in the  United




States is priced under Federal orders or State regulations.  A classified




pricing system is almost universally used.  Classified pricing recognizes




milk which is indistinguishable in a physical sense can be differentiated



                                       18

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in the economic sense and priced by use.  Factors other than product use  can




also enter into pricing decisions.  With this  system of classified prices




fluid milk, Class I, is the preferred or highest price utilisation.




     In most Federal orders, milk which is used for manufacturing, is priced




at (or in relation to) the Minnesota-Wisconsin average price for manufacturing




milk.  Recommendations from recent hearings would add 20 cents per hundredweight




to the Minnesota-Wisconsin price for Class 2 milk used to produce cottage cheese,




yogurt, and all fluid cream and cream products.  Milk for other manufactured




products, Class 3> would continue to be priced at the Minnesota-Wisconsin




series.




     Basically, the Minnesota-Wisconsin price  series (for manufacturing milk)




serves as the mover for most milk in Federal order markets.  Prices in other




regulated markets generally follow quite closely to this pattern.  It is  this




marginal use price which acts as the price mover for milk in all uses.



     The price of manufacturing milk is definitely influenced and undergirded




by the price support program.  This program supports the price at a level




between 75 to 90 percent of parity.  Support is accomplished by government




purchases of butter, nonfat dry milk, and cheddar cheese at a level which




enables manufacturers to pay prices to producers which are equal to the




announced support price.




     Essentially, minimum prices for manufacturing and fluid milk are set




by administrative action.  At times actual prices are at these levels.  At




other times, as at present, market prices may  be above the minimum level




due to demand and supply conditions as evidenced in the marketplace.
                                       19

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                        Pricing Milk, and Milk Products




                               Fluid Grade Milk






     The concepts of orderly marketing, public interest, adequate supply,




and parity price permeate the statutory authorization for Federal milk




marketing orders.  Inherent in this authorization was a desire on the part




of Congress:  (l) to remedy a short run condition of disruptively low milk




prices and chronic surpluses, (2) to provide a framework for long-run




price and income stability for dairy farmers.




     Orderliness has several different dimensions.  In the short-run




context, orderliness implies seasonal adjustment of price to even out




milk production while avoiding large short-term Class I price changes like




those previously associated with seasonal swings of production relative to




demand.  In the long-run, it implies prices which achieve a reasonable




balance between production and consumption.  Orderliness implies short




term protection of a market from unwarranted movement of milk supplies.




At the same time, it implies adjustment of supply to least cost sources




as well as to regional changes in production cost.  Orderliness implies




a proper relationship between fluid and manufacturing uses.  It implies




establishment of relations between producers and handlers which facilitate




fair, but not disruptive, competition among producers and handlers while




encouraging the establishment of reliable channels of trade.  At the




same time, it implies protecting the rights of producers to choose their




market outlet, free of coercion and unreasonable barriers to market entry.
                                       20

-------
     This concept of orderly marketing is implicit  in the Act where it is




declared to be the policy of Congress




          "...To establish and maintain such orderly marketing condi-




     tions...as will provide, in the interest of consumers and produeers,




     an orderly flow of the supply thereof to market throughout its normal




     marketing season to avoid unreasonable fluctuations in supplies




     and prices."




     The Federal milk order system was developed as a joint enterprise of




the Federal government and niilk producers.  It was designed to raise pro-




ducer returns by restoring order in a disorderly marketing system and




redressing an imbalance of market power between dairy farmers and handlers.




Measured in these terms, this institution has provided more orderly market-




ing and has served the interest of the general public as well as those of




producers, cooperatives, and handlers.  The public interest has been




served by a supply-demand pricing system which has provided an adequate




supply of milk at reasonable prices from the standpoint of both producers




and consumers.




     Approximately 757o of the nations milk supply is Grade A (eligible for




fluid use) and about half of all milk is used for fluid purposes.  Federal




order receipts represent about 60% of total milk markets.  Thus, the level




of Federal order Class I prices directly influences the blend price received




by producers of 6070 of the total milk supply.
                                      21

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     With a system of classified prices of the general type utilized under




Federal orders, manufactured dairy products are the residual use of milk




supplies.  Fluid-milk products return a higher class 1 price to producers




and have first claim on supply.  Semi-perishable products, such as ice cream




and cottage cheese, may be made from either local milk supplies or inter-




mediate products shipped in from surplus areas.  Hard products such as




cheese, butter, and powder, are residual claimants on milk supplies.  The




relative prices of the products and of milk for these uses determine the




allocation of milk among the different uses.




     At the present time, Class I prices move up and down with changes in




the average price paid for manufacturing grade milk in Minnesota and Wisconsin.




The department has  relied on the manufacturing market to reflect the




impact of all supply and demand factors operating in the dairy economy.




Good measures of manufacturing milk prices have been relatively easy to ob-




tain, and have provided a sensitive measure of changes in the overall supply-




demand balance in the dairy economy.  The Class I differential is added to




the Minnesota-Wisconsin  series to obtain the Class I price to producers.




     The use of manufacturing milk prices as a mover of Class I prices has




provided a needed link between the price support and the milk order program.




Under present arrangements, changes in support price levels are directly




reflected in Class I prices as well as in prices paid for milk for manufac-




turing.




     Prices established under Federal milk orders are minimum prices.  With




the development of large regional cooperatives and federations premiums




above Federal minimum prices were negotiated in  many markets.  There was




a tendency for average premiums to increase until 1968, and since then




premiums have been relatively stable to slightly declining.  In most instances






                                      22

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these negotiated premiums also reflected additional services provided to the

handler by the producer cooperative.



                 Pricing Milk for Manufacturing

     Although most attention is generally given to pricing milk for fluid

use, approximately one-half our milk supply is used to manufacture other

dairy products.  About 1/3 of the grade A milk (eligible for fluid use) is

used for manufacturing.  The rest is produced by manufacturing grade pro-

ducers and is not eligible for fluid use.

     Manufactured dairy products compete in a wider market than do fluid

products.  Hard products such as cheese, butter, and powder compete in the

national market.  Ice cream and cottage cheese, the soft products, are most

closely affiliated with fluid markets but are sold and distributed by

large plants over a large market area.

     In most Federal order markets, that milk which is surplus to fluid

needs is priced according to manufacturing milk values.  In 30 orders,the

surplus class price is the Minnesota-Wisconsin price.  In 18 other markets,

it is either the Minnesota-Wisconsin price or a butter-powder formula price,

whichever is lower.  Recent hearings have been held to standardize classi-

fication and procedures among the various Federal order markets.  As

recommended in these hearings, milk would be priced in three classes -

Class I or fluid use, Class 2 for that used to produce cottage cheese, yogurt,
and all fluid cream and cream products, and
Class 3 for that used in other manufactured products.  With this arrangement,

Class 2 would be priced 20c above Class 3.  Class 3 would continue to be

the Minnesota-Wisconsin price.
                                      23

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     The Minnesota-Wisconsin price has provided the best measure to date




of manufactured milk values.  This series, the average of prices received




by farmers for manufacturing grade milk in the two States, is used throughout




the dairy industry as a basic indicator of changes in milk values.




Approximately 1/2 of the manufacturing grade milk sold in the United States




is produced in Minnesota and Wisconsin.  Prices paid farmers by manufactur-




ing plants in the two States are particularly sensitive to changes in the




national milk supply-demand balance as reflected by changes in the wholesale




markets for butter, non-fat dry milk, and cheese.




     The 1949 Agricultural Act directs the Secretary to support the price




of milk at a level between 75 and 90 percent of parity which will assure




an adequate supply.  The price support program has been carried out primarily




by purchases of butter, cheddar cheese, and non-fat dry milk at prices




designed to enable,(manufacturersof dairy products to pay prices to producers




for manufacturing milk which would result in U.S. annual average prices for




such milk approximating the announced support objective.




     Under the price support program, the government stands ready to re-




move all surplus from the market.  Through the purchase of butter, cheddar




cheese, and non-fat dry milk, the government has effectively supported the




price of milk going into other manufactured dairy products.  Because of




the close tierin which has prevailed in Federal market orders and other




fluid milk markets between class I prices and manufacturing milk prices, the




price support program also has provided substantial support to Class I




prices.  Close coordination between Class I price policy and price support




action must be maintained.
                                     24

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                          Product Pricing--Fluid




     The fluid milk market, which began as a home delivery operation, has




now moved to the supermarket.  These supermarkets, and especially the large




food chains, are exerting a great deal of influence in marketing practices




and pricing of milk and milk products.  Perhaps the greatest influence, and




the most obvious to the consumer, is that found in the packaged fluid milk




market.




     Supermarkets have gained a marked advantage in negotiating with fluid




processing plants.  Increasing delivery cost, especially for servicing small




accounts, and a switch from home delivery to large-volume wholesale deliver-




ies has put the small processing plant at a great disadvantage.  But the




disadvantage is not limited to small plants when dealing with a supermarket.




     Retail food chains have developed central procurement programs to ob-




tain their packaged fluid milk products.  These central programs may consist




of various degrees of vertical coordination:  (1) centralized buying and




merchandizing of fluid milk; (2) adoption of limited service delivery and




performance of services in the marketing channel that traditionally were




performed by fluid milk processors; (3) more emphasis on price competition




at the processor-food chain level negotiations; (4) innitiation of private-




label brands; and (5) full integration into fluid milk processing.




     Perhaps the greatest impact upon processors and upon price of the




above mentioned changes comes from that of centralized buying.  Food chains




increasingly are negotiating terms of trade at their division or regional




offices rather than at the local stores.  These retailers are limiting the




brands of milk handled — often to their private label and the brand of the




processor supplying the private label.  The processor thus has an all-or-nothing




bargaining situation.  This result, together with the size of the account,
                                     25

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has greatly increased the risk associated with servicing store accounts.




To compete for supermarket accounts, the processor must be large enough to




handle the total volume of business or retail store division, which may




involve several market centers.  Since retail store divisions are often




dispersed over large areas, other fairly large processors in the same




vicinity could consequently lose their accounts.  Even if such processors




continue to compete, the advantage lies with multi-unit processors who




have plants covering the entire area served by retail store divisions.




     Food chains, through  actual integration into fluid milk processing




or the threat of such integration,  have brought additional pressure into




the negotiations with processors.  Private label brands, whether processed




by the retailer or by a processor, give the retailer additional advantage




as this erodes the value of processor brands.




     Fluid milk processors, caught between the large retail supermarket




on the one side and the expanding large scale producer cooperatives on the




other, have lost much of their previous bargaining power in the marketplace,




Many smaller markets which previously were local in nature have become




part of a much larger market with distribution by plants  located some dis-




tance away.




     The net result of these changes has been a reduced profit margin for




processing plants.
                                    26

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                      Pricing Other Dairy Products

    Dairy products other than fluid milk are sold mostly through food stores--

almost entirely supermarkets and convenience stores—except for sales of

ice cream through specialty ice cream stores and drug stores.  While small

amounts of these products are sold on home-delivery routes, the quantity
                                                            fluid
is not large enough to be significant.  At the retail level/dairy products

other than whole milk are not regarded as competitive products.  Ice cream

is widely regarded as an excellent traffic builder and is frequently

specialed.  It has been treated as a low margin item for most of the post

World War II period.  Cheese is frequently specialed as is evaporated milk.

On the other hand butter is seldom specialed since it no longer posseses

the transfer effect it once had in drawing consumers.

     Wholesale prices of processor-labeled dairy products other than fluid

milk are made almost entirely by thequoted-price system.  Large buyers of

private-labeled products can obtain products at negotiated prices, while

smaller buyers deal with a quoted-price system.

     Wholesale prices of butter and cheese fluctuate quite closely according

to the changing supply-and-denand situation, so that the pricing system for

these products is something of a hybrid between the quoted-price system and

supply-and-demand pricing.   For most of the other products, prices fluctuate

less often,  being somewhat less sensitive to changes in supply and demand

of raw milk.   Butter is particularly sensitive to changes in supply and

demand because of its residual nature.  Wholesale prices of butter, non-fat

dry milk, and American cheese rest on the floor provided by the Support

Purchase Program of the U.S.  Department of Agriculture so long as the

Department is purchasing these products.  When supplies become tighter,  prices

tend to rise above support levels.  These products face a national market

situation.
                                     27

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     Butter represents the balance wheel of the dairy industry as it is




usually the lowest return dairy product.  Milk is not used for butter




manufacture until all other demands have been met, and butter manufacture




increases or decreases as necessary to balance total milk production with




utilization.




     A large percentage of the butter produced at country plants is packed




into boxes and sold to primary receivers.  These primary receivers assemble




butter at central locations where they print and package it for distribution.




They also sell bulk butter to wholesalers and to food chain warehouses




which then distribute to their own stores.  In some instances a chain acting




as its own assembler prints and packages under private label for distribu-




tion to its own retail stores.




     Wholesale butter prices are largely determined by. activities of the




two butter exchanges: The Chicago Merchantile Exchange and the New York




Merchantile Exchange.  Prices of bulk butter at manufacturing plants are almost




exclusively based on one or the other of these exchange prices.  Both these




merchantile exchanges provide facilities for cash trading and trading




futures contracts for several commodities in addition to butter.  Members




of the exchange can execute trades on the floor and nonmembers can execute




trades through brokers who are members.  Trading is conducted by voice on




the exchange floor.  Offers to sell or bids to buy are posted along with




grading quantity.




     In the market news service the quoted daily price for each grade is




the latest sale, bid, or offer.  In the case of a bid, it will not change




the quotation from the previous day unless it is  a  higher price.  If an




offer, it will not change the quotation from the previous day unless it is




  a lower price.  Thus, it is possible for the quotation to varry from day




to day with no trade taking place on the exchanges.  However,  hundreds of






                                    28

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country manufacturing plants sell butter on the basis of these quotations.




Relatively small quantities of butter are actually traded on the exchanges.




    Prices   of print butter to chains, retailers, and food wholesalers are




tied directly to the spot market quotations.  Sales agreements are in terms




of the margin over the price quotation for either New York or Chicago.  The




amount of margin is the only item to be bargained for at this level of butter




marketing.




     Retail butter prices are less closely related to the spot market quota-




tions than butter prices at any other level of the marketing system.  One




reason may be that general mark-up policies of the store chain are followed




and then changed only weekly or at some other time even though purchase




prices may have changed during the period.  Since retail stores are selling




in restricted market areas, retail prices for butter show less similarity




throughout the nation than do wholesale prices which are made in a national




market.
                                     29

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     Cheese prices are established on a national market basis.  The




Wisconsin cheese exchange in GiFeen Bay,"Wisconsin, meets each Friday morning




for one half hour, at which time trading members and owners of licensed




cheese factories may buy or sell American, brick, or Swiss cheese.  This is




the only cheese exchange in the country.  There are no geographic restric-




tions with respect to either the place of business of individuals or firms




trading on the exchange, or the source of cheese bought or sold on it, so




prices established through transactions on the Wisconsin cheese exchange




have nationwide  implications.  While exchange prices are not official, they




are regarded as an accurate barometer of the value of cheese at any




time.  Only a very small portion of the cheese produced in this country is




sold on the exchange--less than one percent of the total.




     The cheese support price acts as a floor for exchange prices, since if




exchange prices fall              below support prices, firms can buy




cheese on the exchange and sell it to the USDA at support price.




     Soft products such as ice cream and cottage cheese, tend to be distrib-




uted in local markets by the same processors who distribute fluid milk.




Because of this and their bulky and perishable nature,pricing also tends to




be on a local market basis rather than a national market.  However, since




manufactured products such as butter, powder, and condensed milk and heavy




cream can be used in making these products the cost of their manufacture is




rather standard.




     These soft dairy products are often differentiated by brand name and




by quality differences.




     As with fluid milk, supermarkets are very influencial in pricing these




products.  Those retail food chains which have integrated into fluid milk
                                      30

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processing also have integrated into processing these products.




     Distribution areas are expanding for these soft dairy products.




Extremely large plants are benefiting from marked economies of scale.




     Under Federal order pricing these products have been classified  as




manufactured products and milk being used in their manufacture has generally




been priced at manufacturing price.  However, a recommended decision  based




upon evidence received at the recent public hearings on 33 market orders




would create an intermediate category for milk going into cottage cheese,




yogurt, and all fluid cream and cream products.  Milk for products in this




class would be priced 20c over the monthly Minnesota-Wisconsin milk price




series.
                                       31

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                              Price Impacts

                                                               *,
     Ericas for dairy products will be affected for two reasons.

Increased costs of pollution control cannot be absorbed by  the processors

so these costs can be expected to be reflected in product prices.   The

second is more difficult to  assess.  Prices also will be affected by  any

shift in production because of pollution control.

     Much more cheese vhey will be condensed and dried.  This additional

whey product will compete with nonfat dry milk in the market place.   If

all whey were to be dried, this would be approximately a 69 percent

increase over that currently being processed.  This increase would  be

equivalent to a 25 percent increase in nonfat dry milk production,  too

great an increase for the market to absorb without marked price effects.

In fact, there is no ready market for this much additional  volume at

present.

     Since dry whey (human food grade) is only about one-fifth the  price

of nonfat, whey is being utilized in those food products where it is  most

acceptable.  Most all the additional whey would be expected to go into

animal feed which is about two-thirds the price of whey for human use.

However, if this additional whey comes onto the market within a short

period of time we should expect the market price of nonfat  dry milk to

fall to the support level.  There is no support price for whey.  Whey

would be driven to the price of animal feed.

     The major portion of whey now being condensed or dried is from the

larger cheese plants.  These plants either dry the whey themselves, or

condense it and haul the condensed whey to a drying plant,  (or outlet

for condensed) or haul the liquid whey to a dryer.
                                     32

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     Small plants do not have adequate volume to support their own dryer.




Unit costs of condensing and handling are greater than for large plants.




Therefore, small plants are further disadvantaged—both absolutely and




relatively.  With very limited alternatives, these plants are in a poor




bargaining position.  They must often provide extra service or take a




lower price for their whey—or even pay the dryer to take it.




     Under present market conditions, we cannot expect increased




pollution control costs to be passed on through higher prices for dry




nonfat or whey.  This would mean the producers of these products would




need to be subsidized, either by revenues from other products or by




some other form of subsidy.




     Perhaps new uses can be found for whey and current uses expanded.




This, however, is a long term solution and not immediately applicable.




Greater volumes of dry whey will be manufactured, not to meet product




demand but to dispose of a byproduct formerly dumped as a waste.  With




present technology,  one might say regulations almost require that this




product be produced.
                                       33

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                Financial Characteristics of Dairy Firms




     Data are not available to permit comparison of financial character-




istics of different size groups of firms within each subindustry.  How-




ever, the Internal Revenue Service Corporation Source Book of Statistics




of Income, does permit comparisons of firms in the dairy industry grouped




according to size of total assets.




     The 1968 tax returns for 2,875 dairy products firms     (2,599 regular




corporate returns plus 276 firms reporting on Form 1120S) reveal that




several financial characteristics show a definite association with size of




the business as measured by total assets.




     Just over one-half the firms reported total assets under $250,000




(Table 3).  These firms had less than 3 percent of the total assets, almost




4 percent of the current liabilities, about 5 percent of total receipts




and slightly over 5 percent of the deductions.  These small firms realized




only 1.7 percent of total net income,  and  only 1.1 percent of the total




income subject to tax.  They paid less than 0.7 percent of the income tax




(before investment credits).




     At the o-ther extreme, 25 firms, fewer than 1 percent of the total,




reported assets over $10 million.  These firms owned 71 percent of the




total assets, with 64.5 percent of the current liabilities.  They realized




60 percent of total receipts and 59 percent of the total deductions.  Most




of the net income, 80 percent, was earned by these large firms who reported




84 percent of the income subject to tax, and reported 85.8 percent of the




income tax (before investment credit).  Only the largest two classes




reported a smaller proportion of deductions than receipts, and the largest




asset class was the only group whose net income was a higher proportion of




the total than was their total receipts (Tables  3,  4 and  5).
                                     34

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Table 3.   Income  Characteristics  of Corporations Classified  in  the
           Dairy Products  Industry (SIC  2020).   Percent  of  Total for
           Each Characteristic Represented by Firms  in Each Size
           Grouping According to Total Assets,  Computed  from  Data as
           Shown in Internal Revenue Service 1968 Corporation Source
           Book of Statistics of Income.  (Summary Form  of  Table Al.)

Item
/t ^•otx--^1- '7
5etal Returns
Total Assets
Current Assets
Current Liabilities
Total Receipts
Total Deductions
Depreciation
Total Receipts Less
Deductions
Net Income Less Deficit
Net Income
Deficit
Income Subject to Tax
Income Tax (Before Credit)
:
! Total-/
2,875
4,867,691
2, 498, 736
1,335,556
12, 288, 990
11, 851, 518
222, 843
437, 472
447, 394
475, 036
27, 642
44o, 392
224, 942
: Total
| Over zero
; under 250
Size Group
51.72
2.98
2.80
3.95
4.90
5.07
3.95
.26
.25
1.70
25.05
1.12
.68
Assets $1,
250 :
under :
5j 000 :
as Percent
46.09
21.57
23.58
26.32
28.90
29.48
26.64
13.15
12.82
15.27
54.88
11.82
10.44
000
5,000
or
more
of Total.
2.05
75.44
73.62
69.72
65.94
65.19
69.36
86.36
86.70
82.82
20.07
86.83
88.64
_!/  Actual numbers and $1,000, not percentages.
    Includes 4 firms with  zero assets.
                                      35

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Table 4.  Comparison of Income Characteristics of Corporations Classified
          as in the Dairy Product Industry  (SIC 2020).  Computed from Data
          as Shown in the Internal Revenue  Service 1968 Source Book  of
          Statistics of Income, by Size of  Total Assets.   (Summary Form  of
          Table A2.)
: : Total Assets $1,
Item

Number Returns
Returns With Net Income
Returns With Deficit
Total Assets
Current Assets
Current Liabilities
Total Receipts
Total Deductions
Depreciation
Net Income Less Deficit
Net Income
Deficit
Income Subject to Tax
Income Tax (Before Credit)
Net Income, Those With
Deficit, Those With
Estimate of Cash Flow:
Returns With Net Income
Returns With Deficit
I Total* ;
• •
Average
2, 875*
1,95^
921
1,693
869
465
4,274
4,122
78
156
165
10
153
78
243
30
321
48
Over zero
under $250
Per Income
1,W
847
640
98
47
35
405
404
6
l
5
5
3
1
10
11
16
-5
$250 :
under :
$5, 000 :
Tax Return,
1,325
1,054
271
792
445
265
2,68o
2,637
45
43
55
11
39
18
69
56
114
-11
000
$5, ooo
or
more
$1, 000
59
50
9
62, 245
31, 180
15,784
137, 346
130, 943
2,620
6,57^
6,668
94
6,482
3,379
^,868
616
10, 488
2,004
*  Includes 4 firms with zero assets.
                                       36

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Table 5.  Income Characteristics of Corporations Classified as in the
          Dairy Product Industry (SIC 2020).  Computed from Data as
          Shown in 1968 Corporation Source Book of Statistics of Income,
          by Size of Total Assets.  Average Per Income Tax Returns
          Expressed as Percentage Relationship Within Each Size Group.
          (Summary Form of Table A3.)
Item
Number Returns
Percent of Returns With
Net Income
Current as Percent of Total
Assets
Current as Percent of Total
Liabilities
Receipts as Percent of Assets

Total Deductions
Depreciation
Net Income
Deficit
Net Income Less Deficit
Income Subject to Tax
Income Tax (Before Credit)
." Total*
4
2,875
68.0
51-33
27.44
252.46
— Items
96.44
1.81
3.87
.22
3.64
3.58
1.83
Total
] Over zero
\ under 250
Assets $1,
250
under
5,000
l, 487 l, 325
57.0 79-5
48.18
36.33
414.43
56.11
33.^8
338.23
000
5,000
or
more
59
84.7
50.09
25.36
220.66
as Percent of Total Receipts 	
99.81
1.46
1.3^
1.15
• 19
.82
.26
98.38
1.67
2.04
.^3
1.62
1.47
.66
95.3^
1.91
4.86
• 07
4.79
4.72
2.46
* Includes 4 firms with zero assets.
                                      37

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     Although the financial condition of individual firms cannot be ascer-




tained by studying averages, the impression gained as to the probable




relative condition is meaningful.  Firms must have some minimal amount of




assets to effectively process and distribute dairy products.  To remain a




viable competitor requires a flow of income sufficient to provide those




assets, either from internally generated capital funds or from the capital




funds market.  Neither source will continue readily available unless re-




turns compare with alternative enterprises.




     Technology has made it possible, and competition coupled with marginal




costs has made it almost mandatory, for plants to replace some labor with




equipment.  Generally, this has increased both fixed costs and economies




of scale, placing smaller plants in a more disadvantageous position.  As




a group, the very small firms, with assets below $50,000, have current




liabilities     greater than their current assets (Table A4). Reported net




income was less than reported deficits for this group, although two-thirds




of this group did realize some net income (Table A5).  In other words, as




a group, these smallest plants have no source of funds from the business--




either from current assets or from earnings--to permit investment in plant




or in pollution control facilities.  When their total assets are used up




most of these plants will be out of business whether or not they are faced




with additional investment or operating costs.  Requirements which they




could not meet would hasten their demise.




     The next smallest firms, those with assets over $50,000 but less than




$100,000,fared even worse as a group.  Only one-third of this group reported




any net income, and deficits reported were greater than net income.  The




group did have a better balance between current assets and current
                                      38

-------
liabilities with current assets more than double current liabilities.  This




suggests that some part of these firms were operating successfully, and




perhaps could obtain funds for investments that were not excessive.




     Smaller size firms show greater receipts per dollar of assets--both




total and current assets--than do the larger firms (Table 5).  They also




tend to hold a higher portion of total assets in the form of current assets,




suggesting that larger firms have gone further in mechanization and re-




placing labor with equipment.




     In the eleven size groups there were only two significant  exceptions




to the positive association between size of firms and the percentage re-




porting net incomes.  All firms in the three largest asset groups reported




net income.  Net income as a percent of total receipts increased as firm




size increased.




     Because of their position in regards to total assets, current assets,




total receipts, and net incomes, the larger plants should not have too




much difficulty in obtaining investment capital for pollution control fa-




cilities if the increased cost can be recovered through higher prices for




their products.




     The three largest size groups were the only ones with net incomes




averaging three percent or more of total receipts.  These same three groups




were the only ones whose income subject to tax was two percent or more of




total receipts.  No group with assets below $1 million had incomes subject




to tax over one percent of their total receipts.
                                     39

-------
     Census of Manufactures data for 1967 illustrate  some of the similarities




and differences of the dairy industry as compared with other manufacturing




industries.  These data also reveal marked differences existing between the




sub-industries within the dairy industry.




     One measure of total volume is the value of shipments made by an




industry.  It does not differentiate between total value and value added by




the industry; to that extent this measure is an overstatement of the industry




contribution.  The measures as shown in TableA^ should be used in connection




with the more descriptive measures shown in Tables A5, A6, and A7-




     Value added by manufacture is a more meaningful measure of manufacturing




activity by an industry.  The average dairy products company adds about




two-thirds as much value by manufacturing as does the average food processing




company.  The same relationship holds on a per establishment basis (Table A5).




     The condensed products industry is characterized by high value added




per company, per establishment, per employee, per production worker, per




dollar labor cost, and even per unit of capital expenditures for machinery




and equipment.  On the other hand, the cheese industry tends to be low in




these respects.




     Cheese plants have the highest proportion of production workers to total




employees of any of the dairy products industries.  Fluid milk is at the




other extreme, with only one-third of the employees represented by production




workers.




     Capital expenditures are required to replace buildings and equipment




and to adopt new technology.  Individual establishments face peak periods




of heavy investment such as expansion, rebuilding, etc., but the industry as




a whole tends to invest in a more or less regular flow pattern.
                                      40

-------
     Cheese and butter, the two small-type dairy industries, spent consider-




ably less on new capital expenditures per establishment than did the other




dairy industries (Table A6).  Both were also low in capital expenditures per




production worker and per dollar of depreciable assets.  However, they held




high values of depreciable assets per production worker and per dollar added




by manufacture.  The replacement rate of machinery, equipment and buildings




was low.  Perhaps this low rate is due to a slower rate of depreciation of




butter and cheese making equipment, and to a slower rate of adoption of new




technology.  Low returns were no doubt a major consideration.
                                     41

-------
We recognize the variations in net income, cash flow, and other characteris-




tics of plants in the same volume and product groups, and certainly between




product groups.  Despite these variations we believe it meaningful to make




the transition from IRS Dollar Asset categories for SIC 2020 to the Census




size categories based upon number of employees and to extend this transition




to the SIC breakdown into 2021, 2022, 2023, 2024, and 2026.







To make the comparisons, small plants are considered those employing fewer




than 20 employees.  Medium size plants are those employing 20-99, and plants




were considered large if employing more than 100 employees.







Using the IRS data, small firms were considered to be those with assets




below $250,000, medium firms those with $250,000-$5,000,000, and large firms




those above $5 million in total assets.  Since the small firms are predomin-




antly single plant, this group compares with the "small" category employing




fewer than 20 employees.  In each case, just over one-half the plant-firms




are groups that will be hardest hit by any additional cost.







The medium-size groups are not so similar.  Some firms in this range are




multi-plant firms.  However, the major difference is that large firms own




several plants that are in the medium size category.  We were unable to




separate these plants, but feel that the comparisons between the two groups




are valid and meaningful.
                                      42

-------
                      Investment Capital




Additional capital will be required to implement pollution control measures.




Both private industry and municipalities will be requiring investment capital




and operating funds as new treatment facilities are built and operated.







Municipalities probably will be able to obtain some grant monies from the




Federal government.  The remainder will need to come from bond issues and




from charges to industry.  Some municipalities are planning to issue bonds




adequate to finance the non-grant portion, recovering the industry portion




through increased charges.  Others plan to require industry to immediately




put up their proportionate share of the investment.  The latter method will




have a more pronounced effort upon the firms, and will decrease their ability




to obtain credit for other needs.







Although pollution control will be a very major investment for the dairy




industry, dairy's portion of the total will be rather small.  Simultaneous




demand for funds will be forthcoming and competing with regular demand for




capital funds.






With Federal grants to municipalities and with municipal bond issues, ade-




quate capital funds should be available for most dairy plant pollution




control.   However, small municipalities and small plants will both experience




difficulty.  Subsidized loans may alleviate the situation.  But even then,




most small dairy plants will not be able to adequately finance pollution




control facilities.  They do not have the financial structure to justify




credit of this amount.  If pollution control costs were passed on in higher




prices these plants could continue for a time if they could pay the increased




costs as  operating expenses rather than as capital investment.
                                      43

-------
                                                                          37
                 Po" ,.•.:<.:'-.id

     'IhiK t,et,tion of rhe repor; di,-; usses the procedure, analysis and

results of tmpler.enti ng standards to reduce the BOD and suspended solids

content cr dairy processing *,*astft effluents.  Under the proposed guidelines,

achievement of the minimum act <, ../table effluent levels (schedule B) will

require a removal of 88.6 percent in BOD. If  Achievement of the "highest"

level of control technology now consl-'eved "practicable" and "available" to

the industry  will require a BOD redaction on the order of 97 percent or

more,


Procedure jfor Costing

     The reduction of dairy processing plant waste loads and costs can be

accomplished by the exclusive use of tn-plant modifications or waste treat-

mi? tit systems or some combination of the two.  Tin-plant modifications offer

the advantage of cost savings in water and sewage fees and reductions ir

product less that will offset partially or completely the cost of modifica-

tions,  V'.'jfi.e treatment" does not offer any possible savings.  Costs are

increased without any offsetting benefits in terms of increased efficiency.

     For dairy processing plants, one alternative can substitute for the

other.  The most, economical technological system is probably some combina-

tion of the two alternatives.  However, a lack of information on the types

of in-plant modifications and costs for reducing waste loads by varying

amounts prevented an analysis of this alternative and the combination of

in-plant and waste treatmeac systems.
  JY Effluent Limitations Guidance for the Refuse Act Permit Program, the
Dairy Products Industry", Aug. 4, 1972.
                                  44

-------
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                                                45
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      Infv)nr,
-------
desired levels.  Thxs problem w~ll be prevalent in rural areas of the Lakes




Region where numerous butter, cheese, and condensing plants are located.




     Pretreatment followed by municipal treatment is a method to reduce




loadings discharged to municipal systems.  For this analysis, pretreatment




Is activated sludge with an expected reduction in BOD of 80 to 85 percent.




It is assumed the municipal system can achieve for further reductions in BOD




and suspended solids to desired Levels.




     The fourth system is the privately owned system.  This is an activated




sludge process followed by a filtration system to reduce BOD by 96 to 98




percent before effluent discharge into a stream.  Such systems would be




constructed, owned, and operated by the processing plants.  Private treat-




ment ayseems would be necessary for plantfe located in communities without




a municipal system, or too great a distance from municipal sewer lines fo




justify extension.




     While other treatment systems exist and are in use such as spray




irrigation, lagoons, reverse osmosis, etc., the four systems considered here




cover the expected range in costs of all treatment alternatives currently




available to firms in the industry.
                                     47

-------
      Investment,  and  costs  were  determined  by  each  plant  size  for  each
 system.   Costs are divided into two  categories:  fixed costs  or  those  that
 do not  vary  with volume  of effluent  treated and  variable costs or those
 costs that do vary with  effluent volume.   Municipal  charges are  based  on
 the hydraulic load and a surcnarge  for  FOD is added  when the  concentration
 exceeds 200  PPM. It is  not assumed  that  the  charges are sufficient  to cover
 trie costs Incurred.   In  many cases,  plants may pay additional amounts  for
 annual  assessments covering appurtenances  installed  by the municipality in
 addition to  a hook-up charge.   In all probability, the municipal  charges
 usfid in this analysis are  well  below those that  would cover the  full cost
 burden  to che community.
      Costs are determined  on the basis  of  1,000  Ibs. of  milk  equivalent
 input.   The  costs are transformed into  the cost  for  treatment on  a per unit
 of finished  product.  In all cases but  the fluid milk-cottage cheese process
 case,  it is  assumed  the  cost is added to  the  cost  of the primary  product

 of the  plant.  In actuality, firms may  attempt to  assign some of  the cost

 to by-products and recover it on increases in by-product prices.
 Results
      Preliminary results on investments and costs  are presented  in
 tables   7-13      .   The  ridge  and furrow  and municipal  alternatives are
 the least cost solutions.   Harper has indicated  that plants processing 90
 percent  of the milk  equivalent  are connected  to  municipal systems. I/  While
 this  would support a  conclusion of a minimum  impact  on the industry  in

total, it is not  likely that all existing municipal  systems are achieving a
reduction in BOD and suspended  solids equal to those  in  the proposed standards.
Therefore plants connected  to systems that require upgrading  face the  pros-
pects of higher  rates and assessments or investment  in treatment
  JL/ See pages 62 and 66.
                                     48

-------
facilities a: some fururc uate.




     Tl.e pretreat-mun.-cipal a no private treatment systems are the most ex-




pensive alternatives.  Either will create a heavy demand for capital,




possibly beyond the borrowing capacity of many small and medium size plants,




In addition, additional investment for in-plant process changes will be




necessary to achieve consistent reductions in effluent BOD and suspended




solids by the treatment systems.




     The investment and cost figures presented below should be interpreted




as only estimates for a set of unique conditions:




     (1) Capacity is defined as 260 days of operation at the daily




         volumes Indicated.  In actuality, processing is seasonal




         for many commodities and plants can vary the hours of operation




         per day or days per week.




     (2) Plants are assumed to have a consistent product mix, but




         many vary the  mix and this alters the processing plant effluent




         characteristics from day to day.




     (3) Treatment investment figures do not incorporate the concept




         of economies of size.  Such economies do exist and the figures




         presented here underestimate investment for smaller planus




         and may overestimate for larger size plants.




     (4) Uniform rates  for hydraulic and BOD loadings per 1,000 Ibs.




         M.E. are, used.  Information to date indicates some plants have




         superior levels while others are substantially inferior.




     (5) Investment figures do not include capital requirements for in




         plant modifications.   Plants with outmoded technology may




         require large  investments.
                                   49

-------
                     jflv<-ov>i-.'.t Ljria costs oi' four waste treatment
                     ato^ij  Joj.  tnretj outter plant sizes.
Item
.
]
(M.E. :
40, 000 : 1
Plant size
In ibs. per
+25^000 :
day)
670, ooo
                                                         dollars
Ridge and furrpw
  Investment,!/ ,
  Annual cost2./             /
    tiZ per 1,000 Ibs. M.E.2/
6,400
1,280
 0.12
68,000
13,600
  0.12
107, 000
 21, 440
   0.12
MuivLeJpal _ t
investment^/
Annual cost!?/
Cost per 1,000 Ibs. M.E
rretreao plus municipal
.investments/
Annual cost.5/7/
Cost per 1,000 Ibs. M.E
JV-ivatt; treatment
TnvestnientiV ,
Annual co£ti>/
Cost per 1,000 Ibs. M.E


_ /
.3/


_ /
J/


_ /
J/

__
1,300
0.125

23, 000
6,560
0.63

37, ooo
8,880
0.85

__
13, 813
0.125

242, 000
64, 290
0.58

392, 600
86,372
0.78

-.,
21, 775
0.125

381, ooo
101, 240
0.58

619. ooo
136^ 180
0.78
     I/  Investment based  on $3,200 per acre,  acreage requirement based on
application rate of 8,000  gallons  of waiter per acre per day.
     2/  Airiual cost  is  20 percent of investment.
     _3/  Ear-ed on annual operation of 260 days with annual M.E. input of
',0,400,000 Ibs., 110,500,000 Ibs.,  and 174,200,000 Ibs., respectively.
     i;/  No investment assumed but firms may have  additional charges assessed
('or trunk and lateral sewer lines.
     5/  Cost is based on  25 cents per 1,000 gallons of waste water and an
fxtra strength charge of 3 cents per pound BOD for concentrations exceeding
200 PPM.
     6/  Investment is determined  from the equation:  /C$300 x waste water
Coefficient) + ($275  x BOD coefficient^ x S^10"5 °^ gger Pcr day.   The
waste water coefficient  is 3-3^ and the BOD coefficient is 1.5 for butter
L'i ants.
     "[/  Annual cost  is  sum of the fixed cost,  12  percent of investment; the
variable cost, 12 percent  of investment for investments less than $100,000,
10 percent for investments ranging from $100,000 to $1,000,000, and 8 percent
for investments over  one million;  and municipal charges (see _5/).
     _8/  Investment is estimated from equation 6/  plus /t$250 x waste water
,-./.: ri'icient) + ($200  x BOD coefficient]/ y gallons of waiter per day.   The
coefficients are 3-3^ and  0.3,  respectively.         1,000
     _9/  Annual cost  is  the same as in J/ excluding municipal charges.

-------
                            . - -, 3;^. cc: l:. of  four  different treatment
                           1 nroe dirforerit si^e cheese plants.
j leu


Ridge and furrow
Investment!-' ,
Annual coct^/ _ ,
Cost per 1,000 Ibs. M.E..2/
•lunicipai
Annual cost2/ ,
Cost per 1,000 Ibs. K.E.3/
Pretax at plus municipal
J nves Unent6/
Annual; cost!/
Cost per 1,000 Ibs. M.B..3/
Private L-SI^ .,,<:.nt
J'nvof: ..?.- ^V
A.^uit-..: ;,.;,",.;_'/
Coot _i-vr 1,000 Ibs. M.E.^/
^ ' -
V-' -« Ji.
: 35, 000 :


5, 600
1, 120
0.12

1, 274
0.14

21, 700
6,118
0.67

34, 500
8,280
0.91
Plant size
:'.r. Ibs. per
J-T^OOO :
•- dollars --

28, 000
5, 600
0.12

6,370
o.i4

108, 600
28, 442
0.625

172, 700
37, 99^
0.835
day)
1^400^000


224, 000
44, 800
0.12

50, 960
o.i4

869, 100
227, 600
0.625

1, 381, 500
276, 3,'-o
C, I'D
      ;./'  Irvestment based on $3; 200 per  acre,  acreage requirement based  on
appliuutior, I'^A- of 8,000 gallons of vaste  per acre per day.
      2f  ."-iru/a.! cost is 20 percent of  investment.
     _3/  Baaed ori annual operation of  260 days with annual M.E. input of
9,100, OOG  ID,-?.,  4^,500,000 Ibs., and 364,000,000 Ibs.,  respectively.
      4/  No  Lnv'fstni'-int assumed but firms may have  additional charges assessed
for trunk  anc  latdi".^. ,>ewer lines.
     _5/  Co:-;';  .13 baaed on 25 cents per 1,000 gallons of waste water and  ;.^
>.!Xi,ru Ltrenglii charge of 3 cents per pound  BOD for concentrations exceeding,
:?oo PPM.
      'V'  ir.-'c;:,ti'ieni i;; determined from the  equation /J"$300 x wasr.e water
nouffT'-jioni;) - (^275 /- BOD coefficient]/ x  gallons or water per aay.  ^g
coef f-ioiontE are IO;T axid 2.0 respectively  for cheese'plants.
      ,'/  Annual cost J.s sum of the fixed cost,  12.  percent of investment;
:,h'.' varJ^Wu- cost,  :2 percent of investment less than $100,000, 10 percent
l\>r values becween $100,000 and $1,000,000, and 6  percent for values over
u/;e million aollars;  ani the municipal charge  (see 5/)«
     _8/  Inv^i-stment is estimated from  equation in  6J plus estimate for the
follow!rig  equation:   /[$2^0 x waste water coefficient)  + ($200 x BOD
,•<>effjcientTy  v ;;&HoPs 01 waste water.W1-^ coefficients 3-34 and 0.4
respectively.             1,000
      9/  Annual cost determined as in "]_] excluding municipal charges.
                                      51

-------
     (6) Tite :,uuiic,ipai ,ra?-o ^£ed ij based on a constant charge for




         Hydraulic volume and surcharge for excessive BOD loading.




         Rates are known to vary widely between communities.






Gutter:  Treatment system investment by butter plants ranges from zero for




municipal to slightly over $900 per 1,000 Ibs. M.E. input capacity per




day.  Investment for the ridge and furrow system is $160 for 1,000 Ibs.




M.E, per day, and pretreat investment is $375 per 1,000 Ibs. M.E. per day.




     Operating costs (fixed and variable) range from 12 cents to 85 cents




per 1,000 Ibs. M.E. processed.  Both ridge and furrow and municipal have




essentially the same cost, 12 and 12.5 cents per 1,000 Ibs. M.E. respectively.




The cost estimate per 1,000 Ibs, M.E. for pretreat-municipal ranges from




61 cents for the small plant to 58 cents for the medium and large plants.




The cost for private treatment range from 85 cents to 78 cents per 1,000




~hs. M.E. with the medium and larger size plants having the cost advantage.




Natural Cheese:  Investment in treatment systems range from zero for




municipal treatment to almost $1,000 per 1,000 Ibs. of M.E. capacity per




day for private treatment.  Investment in the ridge and furrow system is




estimated at $160 per 1,000 Ibs. M.E. capacity per day to slightly in excess




of $600 for a pretreat-municipal combination.




     Operating costs per 1,000 IDS. M.E. input are 12 cents for ridge and




furrow, 14 cents for municipal, 62.5 to 67 cents for pretreat-municipal,




and 76 to 91 cents for private treatment.  For the latter two systems,




unit cose (variable) decreases with plant size.




Condensed and evaporated products:   Investment for treatment systems per




1,000 Ibs.  of daily M.E.  capacity for condensed and evaporating plants are




^ero for municipal, $160 for ridge  and furrow, $511 for pretreat-municipal,




and $860 for private treatment.
                                   52

-------
                              ,. v-o.., 00 of four-  different treatment systems
                              oiiX.- eG;<^.'jru,ed  and evaporated plants.
ll<(J,;l

Ridr--,e and furrow
— rj y
Annual costly
Cost per 1,000 Ibs. M.E..3/
investment^/
Annual cOoti5/
Cost per 1,000 Ibs. M.E.2/
Pru treat plus municipal
Investment^;/
Annu:J. cojt7/ o.
Cost per .1,000 Ibs. M.E.2/
V -ivate treatment
] nvcs uT.cnt^/
Annual cost9/
Cost per 1,000 Ibs. M.E.3/
: (M.E.
; 25, 000 :
4,000
800
0.12
.,._
715
0.11
12, 770
3,715
0.57
21, 500
5,160
0.80
Plant size
in Ibs. per
250, 000 ;
— dollars --
40, 000
8,000
0.12
-_
7,150
0.11
127,700
34, 594
0.53
215, ooo
47, 300
0.73
day)
i, 150, ooo
184, ooo
36, 800
0.12
_„
32, 890
0.11
587, hQQ
159, 128
0.53
989, 900
217,800
0.73
      i/   investment "based on $3,200 per  acre,  acreage requirement based on  an
application  rate of 8,000 gallons of waste  per acre per day.
      2.j   A'.,..c«L cent is 20 percent of investment.
      3/   iif -od on annual operation of 260 days with annuixL M.S. input of
:>, 5007000 ILs.,  65/000,000 Ibs., and 299,000,000 Ibs.,  respectively.
     _4/   Ko  Ir:vc3tr;.--nt atss-omed but firms may  be subject to additional
ruobesijmerttG  for tru/:K iind lateral cewer  lines.
      5/   Cost,  is om;ed on 25 cents per 1,000  gallons of waste water and an
• .-.tra ,, u-ength charge o-1.' 3 vents per pound  BOD for concentrations exceeding
-"00 PPM,
      6/   Javo.utraoni, is estimated from ttie equation /JJ$300 x waste water
• •^efficient) -t-  ($275 x BOD coefficient^/ x  gallons fel water per day.vjth
 •^efficients of 3*j4 and 1.0 respectively.           1,000
      7/   Annual coat is the sum of the fixed  cost,  12 percent of investment;
Uie variable cost,  12 percent of investment less than $100,000^ 10 percent
.;''  Investment  between $100,000 and $1,000,000 and 8 percent of investment
• >vor  .'pi, 000, 000;  and municipal charges.
     _8/   Investment is estimated from equation _6/' above plus estimate from
i.hu foilowinr  equation:   /T$250 x waste water  coefficient) + ($20C x BOD
(•G,,:Tficient]7  x ^.^Q.115-^ vater Per day with coefficients of 3.34 and 0.2
r u spe c t i ve ly.             -- > 000
     _9/  Annual cost determined as in J/ above  excluding municipal charges.
                                       53

-------
                              ,nt or.a c •-:-:,.-; of four waste treatment
                               t;:a-;-_ ice cream plant sizes.
                                                       Plant size
                                                 (M.E. in Ibs. per day)
                                            10, 000
                                                        Q5 000
            325, ooo
                                                         dollars
        '.«•*  ' - --V—.' /
  Annual cor-t/V            „ ,
  •lost per 1,000  Ibs.  M.E.J/

Municipal
                                             2,560
                                               512
                                              0.20
21, 760
 ^,352
  0.20
89, 600
17,920
  0.20
Invc
r' -'- "nf ^n °i
Li ^ iiiUXl U
«— ,
Annual cos^2/
Cost
Pretre
1 nvo
A,mu
Cos ::,
"py* "1 "\/" O "j-
(, JL -L V C?, LJ
Annu
Cost
per 1
atment
:• 'jrnen-c,
.Vi cos
per 1
BOTient
al cos
per 1
,000
,fjlus
*** i
il/
,000
efnt
ti2/
,000

/
Ibs. M.E.3/
municipal


Ibs. M.E.3/


Ibs. M.E..3/
_-
520
0.20

8,400
2,291
0.88
12, 390
2,97^
1.14
--
4, 4l7
0.20

71, 500
19, 464
0.88
105, 300
23, 166
1.05
--
18, 195
0.20

273, 300
69, ooc
0.8?
402, (.JC,
kQ>2.::

     I/   :nyo,r^ment "based  on  $3^200 per acre,  acreage requirement basec. on an
application rate of 50 pounds BOD per acre per day.
     £/  A.;nur.u_ cost  is  20 percent of investment.
     ~3/  Ba.sed or. annual operation of 260 days with annual M.E. input of
2, COO, OOC IDS., 22,100,000 Ibs.,  and 84,500,000 Ibs.
     _4/  So investment assumed,  but firms may be subject to additional
uncesGrnentr, for trunk and  lateral sewer lines.
     5/  COLT, Is based on  25  cents per 1,000 gallons of waste water and an
•:xlra strength charge of 3 cents per pound BOD for concentrations exceeding
200 PPM.
     (
-------
     Operating coi'.t-j,  ,,ier  1,000  Ibd. M.r,.  j npui.  per  day  are  in  ascending




order:  11 can<_s  for  c-.ua.Lc L va..,  i.2  cents  for  ridge  and  furrow,  53  to 57  cents




for pretreat-Piunicipal, and  73  LO 80  cents for  private  treatment.   In the




case of the  latter  two  oysters,  unit  cost  decreases with  increasing plant




size reflecting operating ec:noru^fcs  ui  variable cost  items.




Ice cream:   Treatment system investment by ice  cream  plants  range  from zero




for municipal systems to  $1,239  per  1,000  Ibs,  of M.E.  input capacity per




day for private treatment.   Investment  for ridge and  furrow  is  $256 and




pretreat-tnunicipal  $840 per  1,000 Ibs.  of  M.E.  input  capacity  per  day.




     Operating costs  are  20  cents per 1,000 Ibs. M.E. processed for both




the ridge and furrow  and  municipal  treatment  systems.   Pretreat-municipal




operating costs decrease  with plant  size  from 88 cents  to 82 cents for a




large plant  on a  1,000  Ibs.  of M.E.  basis.  Private treatment  costs alec,




decrease with plant size  from $1.14  to  $1.05  per 1,000  Ibs.  M.E. processed.




Fluid milk:  Investment for  treatment systems by fluid  milk  plants ranges




irom zero for municipal systems  to approximately $920 per 1,000 Ibs. of  M.E.




capacity per day  for  private treatment.  The  investment for  ridge  and furrow




and pretreat-municipsl  systems  is $160  and  $565 per 1,000 Ibs,  of  M.E.




capacity per day  respectively.




     Operating costs  are  12  and  12.5  cents  per  1,000  Ibs. M.E.  for ridge




and furrow and municipal  treatment.   Pretreat-municipal operating  costs  are




62 cents per 1,000  Ibs. M.E. for small  and  medium plants  and 58 cents per




1,000 Ibs. M.S. for large planes.  Private  treatment  costs are  85  cents  per




1,000 Ibs. of M.E.  for  small arid medium size  plants and 78 cents per 1,000




Ibs. M.E. for large plants.




Fluid mi Ik-cottage cheese:  The addition of a cottage cheese processing




operation even at a otnall proportion  of total milk  equivalent  processed  has
                                     55

-------
a  signif ii..-i.ii_  impact;  or;  .lulu  ;>l^nt  invescmenc  and  treatment  costs, _!/

r n this situation,  thu v;hc-y  i ;; collected  and  shipped  out  for  disposal.

TreaL.nent  system  investment  ranges  from zero  for municipal  to almost  $1,500

per  1,000  Ibs.  of plant  M.E. capacity  per day for private treatment.   But

investment par 1,000  Ibs.  M.E.  per day of capacity  for  fluid  ranges  from

zero  to $924 while  -die investment  for  cottage cheese  waste  treatment  ranges

rrom  zero  co $7,270 per  1,000  Ibs. ot  M.E,  capacity per day.   Ridge and

 arrow system  investment  is  $183 per 1,000  Ibs.  M.E.  of plant processing

capacity and pretreat-municipal requires  an investment  of $950 per 1,000

Ibs.  M.E. of capacity per  day.

      Operating  costs  for plants with either ridge and furrow  or municipal

systems are 14  and  15 cents  per 1,000  Ibs.  M.E.  respectively.   Costs  for

the iiuid product waste  treatment are  12  and  13  cents per 1,000 Ibs.  M.E,

for the two systems,  but 31  and 46 cents  per  1,000  Ibs. M.E.  processed  into

ivttage cheese  for  ridge and furrow  and municipal treatment.

     Average plant waste treatment cost by  pretreat-municipal decreases

irom  99 to 92  cents per  1,000  Ibs. M.E. and from $1.38  to $1.27 for private

treatment.  On  a product basis  per 1,000  Ibs. of M.E.,  the  cost decreases

with  increasing plant size from 62 to  58  cents  for  fluid  product wastes  and

from  $4.72 to $4.35 for cottage cheese waste  by  pretreat-municipal.   With

,>rivate treatment,  the cost  likewise decreases with increasing plant  size,

trom 35 to 78 cents for fluid and $6.71 to  $6.15  for  cottage  cheese on a

,x-r 1,000 Ibs.  of M.E. input.

Fluid milk-cottage cheese  (whey discharged):  21   This  situation differs from


 J./Milk equivalent input  is allocated 91 percent to  fluid  operations and
9  percent to cottaee cheese orocessins.
percent to cottage cheese processing.
                                     56

-------
                                          03,..j of four  treatment
                                           rrujjc plant sizes.
Item


Ridre and furrow
I nve s tmentii/ ,
Annual cout£/ /
Co jL per 1,000 Ibs. M.E.— '
Investment^/ ,
Annual cost2/ r
Cost per 1,000 Ibs. M.E.3/
Pr e tr e a trac n t f 7}lus mun i c i pal
Investment^
Annual costl/ ^/
Oost par 1,000 Ibs. M.E.-^/
irvesvner, cV
Annual cost9/ /
Cost per 1,000 Ibs. M.E.-2/
: (14. L.
: 14, 000 :

2,240
448
0.12
0.125
7, 920
2,266
0.62
12, 930
3,104
0.85
Plant size
in Ibs. per
88, 000 :

14, 100
2,820
0,12
2,860
0,125
49, 800
14, 238
0.62
8l, 300
19, 512
0.85
day)
408, 000

65, 300
13., 060
0.12
10, 608
0.125
230, 900
61, 395
0.58
376, 900
82,910
0.76
      . /  JnvL,:: tment based on $3> 200 per acre, acreage  requirement based on an
•i, ;\i,icat/Lcn  v.vtc  of 8,000 gallons of waste water per acre  per day.
     lij   -."ru,,',! cost is 20 percent of investment.
     3/  L.u'.'d on an annual operation of 260 days with annual M.E.  input of
3,6407000 Ibs,, 22,880,000 Ibs., and 106,080,000 Ibs.,  respectively.
     h-/  So  j_;.vestmei"t assumed but firms may be subject to additional
a;;sessments  for trunK ana lateral sewer lines.
     5/  Cost Is  based on 25 cents per 1,000 gallons of waste water and an
•  /i.ra strength charge of 3 cents per pound BOD for  concentrations exceeding
'JGO PPM.
     fi/  Investment is estimatea from the equation  /J"$300  x waste water
,-ueffic^ent) -»- ($275 x BOD coefficient)? x &^-lQns  rf  yater Per dM with
                    ^                  •"             i  nnn
coefficient;; of 3-34 and 1.5 resrsp^:; ve'iv.          J-, uuu
     _7/  Annual  cost  is  the sum of -che fixed cost, 12 percent of investment;
;,i\(j variablt. cost,  12 percent of investment under $100,000,  10 percent of
j nvestztenc from  .$100,000 to $1,000,000 and 8 percent over  $1,000,000;  plus
municipal charges.
     8/  Investment is estimated from equation in 6/ above plus estimate
from the following  equation /T3250 x waste water coefficient) + ($200  x
EOL coefficient^/ x gallons o"fwater per day with coefficients of 3.34 a
0. 3 respect.! voly.             ^-> &OQ
     9/  Annual  cost  is  estimated the same as ia 7/ above  excluding
muj. Lc '.pal oh ar,-':es.
and
                                      57

-------
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-------
 the  it'jjv.-. OTi^y in tht: r:.c- _AOG or oiopOi>j.n,., of chu ac^.d whey.  In this

 situation,  the whey is disch^r^d WIL.I the rest of the plant processing

 wastes.   The tfOD loading is ^'i, reascC substantially with only a small in-

 crease  in hydraulic volume.

      Plant investment ranges from zero for tha municipal alrernative to

 $2,593  per 1,000 Ibs. of M.E.  capacity pt-r oay for private treatment.  The

 investment for ridge and furrow is $309 and $1,873 for pretreat-municipal

 for  esi-h 1,000 Ibs. of M.E. capacity per day.  From 50 to 73 percent of

 the  investment is for treatment facilities for the cottage cheese processing

 wastes  and whey.

      Operating costs for plants by systems are:  24 cents per 1,000 Ibs.

 M.E.  processed for ridge, and furrow and municipal, $1.71 to $1.87 per

 1,000 ibs.  «,£.  processed for  pretreat-municipal, and $1.99 to $2.39 p\.-r

 1,000 Ibs,  of M.E.  processing  capacity for private treatment.  By systsm,

 the  cost per 1,000 Ibs.  of M.E. processed into fluid products is:  12 cents

 tor  rids,e and furrow, 13 cents for municipal, 58 to 62 cants for pretreat-

 mdnicipai,  and 71 to 85  cents  for private.  For each 1,000 Ibs, M.E.

 processed into cottage cheese, the treatment cost is: $1,39 for ridge and

 furrow,  $1,27 for municipal, $13.11 to $14.53 for pretreat-municipal, and

 $14.97  to $i7.97 for private.  I/
   _i/ A reportedly far  less expensive method  to  dispose  of  whey is to dry and
mix the condensed whey with fuel oil and  burn the mixture  in the  plant's
boilers.  No pollutant problems were reported with  stack eases  or ash disposal,
                                  60

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          Dairy  Proems Sir^-, Incl^o^r/  wa^e  Disposal  Situation






 Several  sources of  data  on waste  disposal practices  of dairy processing




 plants were  analyzed  to  obtain additional information on the magnitude of




 the  problem  of  eliminating scream pollution.   Data sources and areas con-




 sidered  are  (1) the 1967 Census of  Manufactures, Water Use in Manufacturing




 for  the  li.S.,  (2) several sources on practices in  Wisconsin a major dairy




   'ite, and (3)  survey  information from Vermont.
 United  States




 la  1967,  518 dairy  processing  establishments each reported  the use of 20




 million or more  gallons  of water  a year.  Fluid  plants  comprised by  far  the




 largest single group,  303 or 58 percent.  In order  of  importance,  the next




 largest e,roup was condensed and evaporated milk,  71 plants;  butter,  61 plants;




 cheese, 4"j plants and  ice cream,  40  plants.  These  plants  reported an Lat,.ke




 of  55, y billion  gallons  and a  discharge of 53.1  billion gallons  (table 14 ).




 Discharge of water  by  these plants is  principally into  municipal sewers, 5c ,4




 percent -.,r 31,0  billion  gallons.  But  there is considerable  difference




 between tho several industry groups.   Fluid and  ice cream  plants discharged




 76  and  72 percent of their waste  volumes  respectively  into municipal systems,




 Plants  in the other three groups  have  a less impressive record, with only 44




 percent of the waste water from butter plants, 49 percent  from cheese, and




 30  percent from  condenseries being discharged into  municipal  systems.  Because




 of  che  predominately rural orientation of these plants,  in terms of  location,




municipal systems are not as readily available as for fluid and ice cream




plants .







Approximately 38 percent of the waste water discharge of the  industry is dis-




posea in jarface and tidal waccr with  the small balance  3.4 percent discharged
                                   61

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'•'able  14 ;   W<,. uy J.ic u.S. dairy industry,  1967 	/
Water (billion gallons)
; n J.;*.i': ry pro up
IV.: liter
Cheese
Condensed and
Evaporated Milk
Ice Cream
fluid Milk
uairy Industry
Eotablisrituunts
61
43
71
40
303
518
Employment
2,900
4.400
5,400
4,400
51,500
68,600
Intake
6.6
3.8
13.5
3.2
28.3
55.9
7,
11.8
6.8
24.2
5.7
51.5
100.0
Discharge
6.2
3.5
13.1
2.9
27.4
53.1
%
11.7
6.6
24.7
5.5
51.5
100.0
 into the ground or transferred to other uses.  Cheese, butter, and condensing




 ^industries discharged 50 percent or more of  their waste waters into  surface




 bodies while the fluid milk and ice cream industry establishments discharged




 20 percent or less of their waste volume into surface waters.







 Wisconsin
 A survey of the plants of the dairy processing industry in Wisconsin revealed




 Additional information on waste disposal practices and location characteristics,




 In 1972, 739 plants had an average monthly input volume of 1.92 billion pounds.




 A total of 171 plants with an aggregate input flow of 0.75 billion pounds milk




 were connected   to municipal treatment systems.  These plants account for 23




 percent of the total number and 39 percent of the input volume, and average




 4,4 million pounds of input per month, well above the statewide plant average




 of 2.6 million pounds (table 15).







 Another 42 plants, 6 percent of the total, with a monthly flow of 0.12 billion




 pounds, 6 percent of che total volume, utilized lagoon systems.  These plants




 average 2.8 million pounds of input a month,  slightly greater than the




 statewide plane  average.







                                      62

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 Ywo.lvu  i-'ianus  .ad  privc-U-  .'caLrncru' sys to.v.t, and a monthly input flow of 35




 million pouaus.  These  giants n..;/rcno"i: a.;oui  1.5 percent OL  the tuLal plants




 and  2 percent  or the volume.  Tne plants averaged 2.9 million pounds of input




 a  month.






 The  remaining  514  plants, 70 percent of the total, had a total monthly input




 of 1.02 billion  pounds of whole,  skim, or buttermilk, cream,  or condensed




 products,  equivalent to 53 percent of the state total.  These plants reported




 the  use of a wide  variety of waste disposal practices or none at all.  The




 practices  reported were primarily land disposal methods and  a few others of




 questionable value.   In general,  it appears these plants are  utilizing




 unacceptable or  questionable methods that will have to be changed before




 obtaining  permits.






 The  reasons tor  the  large number  of plants utilizing questionable practices




 are  two:   (1)  location and (2)  economics.  Analysis of plant  location indi-




 cated that 54  percent,  399 plants, are located  in communities  with a population




 (1970)  of  less than  2,000.   A total of 303 of  these plants did not have




 municipal,  private,  or  lagoon waste treatment,  and they had a total input




 volume  of  .59  billion  pounds a  month.






 In the  communities with  2,000 to  5,000 population,  there are  118 plants with




 81 not  utilizing municipal,  private,  or lagoon  syscems.   These plants had  a




 total input volume of  0.17  billion  pounds.






The 384 plants in the  two  population  catagories  generate 75 percent of the




wastes  receiving what appears to  be  inadequate  disposal.   But  these plants




are in  general smaller than  the state  average.   Consequently  they  cannot be




expected to aave adequate  reserves, earning capacity,  or borrowing capacity
                                     63

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64

-------
 to build treatment facilities.  Furthermore, it is unlikely the small com-




 munities with the same type financial problems can provide joint treatment




 facilities without outside aid.






 The majority of these plants are cheese processors followed by a smaller




 number of butter, condensing, and collection or transfer facilities.  Since




 there is a major structural change in terms of size and numbers of plants




 in the cheese, butter, and transfer industries  underway, there is even less




 incentive to improve the waste treatment practices of the small plants in




 small communities.






 Oregon:  The state has been involved in the regulation and control of water




 pollution for over 30 years.  Regulations adopted early in 1968 emphasize pre-




vention and require removal of 85 percent of the BOD and suspended solids




 before waste discharge.  Other requirements pertain to pH,temperature, color,




 and other characteristics.  These standards are at least equal to those pro-




 posed in schedule B by EPA.






 The impact upon Oregon's dairy industry has  been slight.  Production trends




 of the fluid and manufactured products are positive and appear no different




 than those in contiguous states during the 1967-71 period.  There has been




 a gradual   reduction in plant numbers for all products except natural cheese.




 Cheese plants decreased from 19 to 6 through consolidation into larger facili-




 ties, and production increased 10 percent in ch.e four year period.  The




 number of plants proGucing cottage cheese decreased by two, from 19 ro 17,




and produccion increased 50 percent in the four year period.

-------
Vermont




The State of Vermont has moved rapidly tc improve environmental quality.




As of May 1, 1972, whey and waste from dairy plants can no longer be dumped




into waterways or on land such that the effluent will drain into the State's




rivers.






This firm regulation has effected a marked change by dairy plants, most of




which had followed the practice of dumping the liquid effluent into water-




ways.  Cheese plants, especially, have been affected because of the volume




and high BOD loadings of their effluent.







The larger size fluid milk processors are located in the larger population




centers and are utilizing the municipal treatment system.  Only two cheese




plants have this alternative, and that is for waste water only.







All the other cheese plants are handling their effluent problem themselves.




The communities do not have adequate facilities to treat such large volumes.




These are small communities, several of which are confronted with inadequate




municipal systems for handling residential sewage.







Faced with the stringent State regulation on pollution control, Vermont




cheese makers, the State of Vermont, University of Vermont, local and




Federal governments, have cooperated in an effort to solve the problem.  In




an unique joint-venture, these participants have contracted to build and




operate a central whey drying plant which would dry almost all the sweet and




acid whey produced in the State.







The central drying plant is a long-term solution for whey disposal.  However,




until the plant can be built and  successfully operated--and for water
                                      66

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 disposal—the  plants must make  other arrangements.  Most of  the  cheese makers




 have  built  large  lagoons; some  are also  spraying on land, some hauling for




 land  disposal, and  some hauling to livestock  feeders.  They  plan to  continue




 to  use  the  lagoons  for waste water disposal after  the  drying plant is opera-




 tional.  Cheese makers are paying 5$-6c  per hundredweight of whey to get  it




 hauled.






                            Impact Analysis




                             Price Effects




     The financial situation of the industry and the cost estimates for pollu-




tion control indicate many product manufacturers will require higher prices




to cover the increase in costs.   In this section, the costs  for the several




treatment alternatives are converted  into unit costs for the primary product




of each of the several industry  groups.
                                     67

-------
Butter;




     The increase in manufacturing costs for butter by treatment system is




0.26 cents per Ib. for ridge and furrow, 0.27 cents per Ib. for municipal,




1.26 cents to 1.37 cents per Ib. for pretreat-municipal, and 1.69 to 1.84




cents a Ib. for private.  These increases are based on capacity operations.




     Output of butter plants is subject to seasonaiity of milk supplies,




and consequently plants will not achieve capacity operation levels over




time.  The effect is an increase in unit treatment costs as fixed costs are




spread over fewer units of output.




     The maximum impact on butter prices is an increase of one to two cents




a pound.  With butter retailing between 79 and 89 cents a pound, the addi-




tional cost for treatment could increase retail prices between ona and 2.5




percent.







Cheese




     Waste treatment costs for natural cheese with manufacturing operations




at capacity are:  0.11 cent a Ib. of cheese for ridge and furrow, 0.12




cent a Ib. for municipal, 0.54-0.58 cent a Ib. for pretreat-municipal, and




0.66 to 0.79 cent a Ib. for private waste treatment.  The costs are based




on shipment of all sweet whey to condensing and drying plants, a practice




chat is not conducted by all firms in the industry.  Large quantities of




sweet whey are surplus to existing roarket needs and disposal will add cor-




siderably to the above treatment coses.




     The maximum effect oa prices at retail is an increase of oae cent a




pound.   At an average price of $1.20 a Ib., the cent represents C,-




rise in retai"^ prices.
                                  oo

-------
      Cheese manufacturers  are  also  subject  to  seasonality of milk supplies.




 This  effect will  tend  to increase waste  treatment costs.




      Of more  serious concern is  the problem of whey disposal.  There  is




 little potential  to expand the demand  for condensed or dried whey at  exist-




 ing prices.   If manufacturers  have  to  subsidize part of  the cost of pro-




 duction of whey products or treat whey in the  plant effluents, costs  will




 increase considerably  and  have a far greater impact on retail cheese  prices.




 Condensed and evaporated products




      The price effect  from increased costs  for waste treatment in this




 industry is expected to be minimal.  On  a per  can basis  (14.5 ounces  of




 product) the  potential increases are:  0.03  cents for ridge and furrow,




 0.02  cents for municipal,  0.11 to 0.12 cents for pretreat-municipal and




 0.16  to 0.17  cents for private treatment.  On  a per case basis (48 cans),




 the increases range from 1 to  7 cents.   These  products retail for 17-19




 cents per 14.5 oz. can.  Possible impact on  retail prices may be a fraction




 of a  cent a can, but processors, wholesalers and retailers may absorb the




 increase.




 Ice Cream




     The price effect per  gallon of ice  cream  from processing waste treat-




ment  costs ranges from 0.25 cent a  gallon for  ridge and furrow and municipal




 treatment to 1.4 cent a gallon for  private treatment.  Pretreat-municipal




would add 1.3c to the cost of a gallon of ice  cream.  At retail,  ice crerT,




 sells for $1.50 to S3.00 per gallon depending on quality.  Trea^aent costs




passed through the market  cou^c add a maximum  of one to two cents co  the




 retail price.

-------
 Fluid milk




      Treatment costs of fluid processing wastes are negligible, ranging




 from 0.025 cents  to 0.183 cents a quart.  By  treatment system, the costs




 per quart are 0.025 cents for ridge and furrow, 0.027 cents  for municipal,




 0.125 to 0.134 cents for pretreat-municipal,  and 0.168 to 0.183 cents  for




 private treatment.




      At retail, milk is priced at 30-35 cents a quart and from $1.00  to




 $1.25 a gallon.  Potential price impact is a  fraction of cent a quart  and




 a cent a gallon.




 Fluid milk-cottage cheese (sit 1.)




      The effects on milk prices are the same  as those reported above.  For




 cottage cheese, the impact is much greater.   Costs per Ib. of product




 range from 0.20 cents for ridge and furrow to 4.22 cents for private.




 Municipal costs are 0.29 cents a Ib. and pretreat-municipal  are 2.75-3.0




 cents a pound.




      Cottage cheese retails for 33-37 cents a pound.  The possible increase




 in prices could range between one and three cents a pound at retail for most




 firms.




 Fluid milk-cottage cheese (sic 2.)




      Under this situation, the cheese whey is discharged with other wastes.




 No additional effects on cost are assumed for fluid milk with all additional




 costs allocated to cottage cheese processing.  Costs per Ib. of product" b/




 system are:   0.88 cents for ridge and furrow, 0.86 cents for .-r^nicipai,




 8.3 to 9.2 cents for pretreat-municipal and 9.4 to 11.3 cents for o/ivatu.




 treatment.  The effect or. retail prices under this situation is a rr ..nx-ru..




 of a one cent incree.do anc z --.zxirr.ux of 3 to  10 cenci a pound increase.




 Increases oJ d.is magnitude would reduce consumption, output, and number of




firms manufacturing cottage chiase.







                                       70

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                               Financial Effects




 New investment for pollution control would range  from  negligible amounts up to




 approximately $1 per pound of milk handled per day.  Those  plants already being




 adequately serviced by municipal systems may not  have  any additional investment.




 Plants  that will be required to build and operate their  own treatment facilities




 will have the high investment and operating cost.   Increased annual costs won]a




 range from about 12c up to 91c ?er 1,000 pounds of  milk  handled.







 Can dairy processing firms financially afford the costs  of  the  pollution




 control  facilities without, price relief?  The income characteristics and cash




 flow information presented in the tables Ai, .42,  and A3  provide name answers




 to  the question.







 For the  small firms with assets of less than $250,000  and average revenues o<




 $405,000 in 1967 that comprise half the firms in  the industry,  the situation




 appears  critical for many.  Nearly two-thirds of  these firms,  particularly




 firms involved in the processing of butter, cheese, and  cottage cheese have




 inadequate  cash flows and resources to finance pretreat  or  private treatment




 facilities.   Some of these firms would experience difficulty in covering




municipal treatment costs without considering the added  burden  of hook-up cr




 assessment  fees.   Neitner ice cream nor specialized fluid processors would




 encounter as  serious ii.^anci.^1 problems, especially since many  already are




 connected to  municipal sy&tems.






The medium  size category consis>.-.,nfa cf 1,325 firms  or  45 percent  with total




assets of $250,000 to S5,OCO,,GGG ^o. average revenues  of S2.7 r:.il^ior. wouj>.




not be expected to en.cour._«_.  -^  serious ^ J.i.;iar.cio.l problem.  Two-_hiras iio




75 percent  co.^^a  afro^rc cr.v.  _-..t.c_^..»c.ry ^nv^^^.^e^it-t c.c,^  aridt;
-------
 The remaincer  of  the0c : _mi wouL- anoo^nter financial difficulties in




 attempting  to  construct or o-peivca the pretreat or private treatment system:.;.




 Some of  these  firms could noc afford substantially increased municipal fees.






 The 59 firms in the large group comprise the large single plant and multi-




 plant firms  that  accounted for two-thirds of the revenue to the industry in




 1967.  Nine  of these finis reported deficits, but had positive cash flows.




 Although  these firms have adequate returns,  the multi-plant firms wild




 probably  not make large investments in marginal plants.






 The  IRS data indicated that incomes reported by dairy firms in t'^c nic^iur.i-




 size  category  tended coward a normal distribution, with  a rather flat  curve




 (Table 16  ).  This tendency appears to be strong enough to penr.it cne




 assumption of  a normal distribution of incomes for this  group.






 Distribution of income among the  small firms was somewhat skewed to the left.,




 with more firms reporting incomes below the  group mean than above the  mean.




Examination  of the  data  indicates that the  mean income  for these small lirnw




 would be at approximately the 62  percentile  rather than  at the median.






 The large firms are  multi-plant firms,  so are not comparable with the  ^m.-sll




 or medium size  firms,  nor  wi.tr. other data which are on a plant  basis.




Neither are the data adequace for estimating how nearly  the income ciscri-




bution approached normal.   The array is  presented in Table 16 for comparison.




although no estimates  are  oiaae in chio  section as to the increasec




vulnerability of  large  firms.

-------
Table 16:   Distribution of Incomes of Dairy Firms as Computed From Data in
  the Internal Revenue Service 1968 Source Book of Statistics of Income
  Assuming a Normal Distribution Within Size Grouping I/
      Size of dairy firms by asseta
Small
Medium
Large
Total number 	   1,487      1,325

Number with net income	     847      1,054

Number with deficits	     640        271

Average net income, $ 100	      54        548

Average deficit, $100	...		     -47       -114

Average net income less deficit, $100	       8        433

Average net income, those with net, $100 ....      95        688

Average deficit, those with deficit, $100 ...    -108       -560

Percent within 1 standard deviation (1 side).      34         34

Percent below zero (with deficit) 	      43         20

Percent of plants from mean to zero net
  income	      19*        30

Derived standard deviations from mean to zero
  net income 	,	    0.50*      0.85

Derived standard deviation (implicit $100) . .     108        643

Derived percent below net income 0.5 standard
  deviation below mean	      43*        31

Derived net income level ai. 0.5 standard
  deviation below mean,  $100..,	       0*       229

Derived percent below net income 0.5 standard
  deviation i, :>ova mean	      77*        69

Derived net income level at G.5 scandard
  deviation above mean,  $100	     108*       871

I/ See appendix tables Ai, A2, A3.

* Adjusted to coimcriwCt for skew co left. Set
  mean ac c2/o of group rscner than 50%.
                          59

                          50

                           9

                      66,68°

                        -940

                      6!>3742

                      78,?iB'>

                      -6 , 16-4

                          34

                          15


                          35


                        1.04

                      64 , 1 1 ,


                          31
                          69
                                   73

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With these exceptions, the assumption of normal distribution appears to be


reasonably valid for approximating the relative income position of dairy


firms.  These data for previous years, and for 1969 which just became


available, substantiate these assumptions.




With a normally distributed population, about 34 percent of the population


would have incomes between the mean income and one standard deviation below


the mean.  Thirty percent of the medium-size firms reported incomes between


the mean and zero.  This was 0.85 percent of 34, so that one standard
deviation would be (mean - Ch = $545 (Table  16).
                      0. 85



By applying these assumptions to the size groupings and their reported


incomes, the relative income positions of the firms were estimated.  These


distributions were then compared with plant investment required for


pollution control facilities so as to estimate the vulnerability of plants.




Reported net income by small dairy firms averaged $5,400 (Table 16).  The


average deficit was -$4,700 for the group and -$10,800 for those 640 with


no net income.  Those with net income averaged $9,500.




Medium-size firms averaged $54,800, with an average deficit of -$11,400,


Those with deficits averaged -$56,000,  and those with a net income averaged


$68,800.


The situation confronting dairy manufacturing plants is very similar,


especially zcr cheese plants and butter plants.  Manufacturing is


characterized by a large number of small and medium size plants, wit I-, only


a few large plants.
                                       74

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The  great majority  of  these manufacturing  plants  are  located  in rural  areas




and  small towns  in  or  adjacent  to  heavy milk production areas.   Relatively




few  have access  to  municipal  treatment plants which would  be  adequate  for




economically handling  the  plant effluent.   For most of  these  plants,  effluen




treatment is a plant problem.   Costs  for providing treatment  facilities are




very similar for  these planes.






Considering these similarities,  for this discussion  the plants,  were grouped




into two groups:  (1)  manufacturing plants and (2) fluid plants.






Small manufacturing plants:




These are the plants which have been  experiencing the highest rate of




attrition.  They are having difficulty remaining  competitively  vi ~r.lt.




Most of the plants  have been  depreciating  their capital investment and




accepting a low return on  capital  and labor.   They have not been making




new  capital expenditures sufficient to maintain themselves in the industry




(Table A13).






Financially, physically, and  competitively,  the small manufacturing plants




are  in a most disadvantageous position.  Many do  not  have  equity capital




for  further investments; they do not  have  adequate incomes to make invest-




ments from current  revenue; and  current revenues  certainly do not justify




loans for investment purposes.






Less than one _n -Jour  onic.ll manufacturing  plants  have acces.:  to .. ^.it£.bla




treatment facilities,  and  fuwer  c.ian  10 percent are on  taur-icipc.^ :--  ,3:.-.^




(Table A23).   Most  all zl  the- others  would be faced with the  necessity t




provide tr»eir cvn cT^^c^^r.^. laci.*.—ties.
L.C

-------
 A small  plant  earning  less  than  $105000  per  year  could not be  expected to




 successfully  install effluent  treatment  facilities.  Such a plant would be




 able  to  make  only  limited,  low-cost  adjustments.  Three out of four  small




 plants fall in this category.






 Allowing for  those plants with municipal systems  available and those that




 could use other methods  satisfactorily,  approximately 65 percent of  the




 small plants would be  seriously  vulnerable if pollution control requirements




 were imposed upon  them (Table  17).   Extending the trend of the past  few




 years would indicate nearly 30 percent would close even  if they were not




 confronted with such an  investment.






 Medium size manufacturing plants;




 Following the  same procedure indicates a. more favorable situation for medium




 size plants.   Besides  being in better financial condition, about one-half




 these plants are using some sort of  effluent treatment, with about one-fifth




 on municipal systems.






 Medium size plants cannot expect to meet effluent standards without  treatment,




 Most of  those with municipal systems available are already using then.  Tha




 remaining plants have  very limited alternatives.






 If pollution control were required, an estimated  30 percent of thas; plants




would be in a vulnerable position.  These would be those with net incomes




 below $23,000, 01 which  cwo-thircs (20 percent of total group) reported




 deficits.

-------
Large manufacturing plants:




The IRS income data for large firms are not applicable in this instance.




There are a few single-plant large firms, but multi-plant firms predominate




in this group.  Also, large plants tend to be part of multi-plant firms.




However, 85 percent of the large firms reported net incomes.






Large plants should not experience undue difficulty meeting pollution control




requirements as discussed in this report.  Their earnings, financial




situation, being a part of a multi-plant firm, location in regards to




municipal treatment facilities, economies to scale, and physical facilities




all give large plants a greater ability than small plants to meet pollution




control standards.






Multi-plant firms also have the potential to use plant specialization  yet




offer a full line of products.  Large firms can close one plant and transfer




those operations to another plant.  The large firm has a great deal more




flexibility to meet changing conditions than does the small one-plant firm.






For these reasons, explicit estimates are not made for large plants.  Such




an estimate would be purely guesswork and probably misleading.






Industry adjustment;




Plants and companies in the condensed and dry products industry (SIC 2023}




tend to be larger than the industry (SIC 202) average.  Increased specialisa-




tion of plants has increased the demand for intermediate dairy products to be




used as ingredients by other dairy plants, i.e. condensed for ice cream,

-------
powder for ice  cream,  cottage  cheese,  and  fortification.   More  whey  is  also




being condensed and dried  thereby  increasing  the  demand  for  condensing




services.  Both these  factors  are  expected to continue and to moderate  the




impact of pollution control upon condenseries and driers  as  compared with




the other dairy manufacturers.






The cheese industry has a  large number of  small-volume plants located in




small towns and rural  areas.   Relating the increased  investment anti  operacing




costs to this industry shows that  a  considerable  adjustment  could  be




expected.






Increased annual costs would not be  the major reason  for  cheese plants  cio,i\r^




down.  These costs could be passed on.  The major factor  is  the ni&i inver>r-v.i




required.






Small cheese plants are already in financial  trouble.  Their rural location




means they will have to provide treatment  facilities—either for taemtselves  or




to bear a major portion of new municipal systems  for  small towns.  Most  ss^l!




plants cannot finance  an investment  of  this magnitude.  Large plants should  be




able to finance  and make the investment.   Medium-size plants are the dividing




line.






Small cheese plants, 598 out of 846  total, produced about  15 percent ~;  the




cheese in 1970.   The IRS data reveals  that about  45 percent  of  these pianos




realized no r.et incorr.-a.  Xost of chests  would  be going out  of business whether




or not they were required to invest  so  as  to  control  pollution.
                                       78

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Cheese plants  averagt-u only 40 perceive of the average per  plant,  for Cna dc~iry




industry  in  dollar  value addec by manufacture in 1967  (Table  A5).   The averag




value of  shipments  per cheese plant was about 80 percent that of  the average




for the dairy  industry.   Average dollar depreciable assets was 55  percent of




the industry average.







Applying  these measures  to cne 1968 IRS data, would indicate an average assec




value of  approximately $2S,OQG-$3G,CGG fcr these small  c>.ae£c. plar.ns c-nu a,;n ..




receipts  about $320,000.   The average small cheese plant with net  returns w.:u:




have earned considerably leas char; the $10,000 dairy industry average for ;",••.




plants.







For these plants, the  necessity ^..vt-b^aeni. for poiiutioti uontro.,  . ;aid bu




almost equal to  their  presern: toc.il assets.  Only a jinail  part oi  chdb^ K/,-.  ;




plants could justify tni= type investment.  In thib group, tne pLint sucae. --




fully making che invar,uaenc VOL.Id be the exception.







V:;e salvage vaiue oi uiosc dfiir;' plants is extremely low.   Tnis 15  acpcciai^




true for  Si~c.ll raanuiacturing plants.   There is a surplus of used equipment




&na ic it very special",-,ev,,

-------
Fluid milk products:




Fluid milk plants  tend  to be located in  larger population  centers.  Most of  the




effluent is discharged  into municipal systems.  Therefore, these plants do not




face as much of a  disposal problem as do many milk manufacturing plants.  Even




in those instances where new or expanded treatment facilities are required,  che




cost is lower, for both plant and community, than if the plant had  to provide




its own treatment  facilities.






Average dollar value of shipments per fluid milk establishment (Table A4) were




about 10 percent greater than the overall average for the  dairy industry.






Small fluid firms:




Small fluid processors have been experiencing strong competitive pressures which




have resulted in a high attrition rate.  These pressures are expected to continue




during the next 5 years, and add to the impact of pollution control requirements,






Approximately 62 percent would have earned less than the mean income and most of




these could not be expected to survive the necessity to make additional invest-




ment.  However, increased municipal sewage charges that could be treated as




operating costs and mostly passed on through higher product prices would simply




put a little more stress upon snail plants.  About 60 percent of the sna^i J^uid




plants could be expected to oe very vulnerable co closing during che next 5 years.




Most of them would be vulnerable aven without being faced with pollution control




requirements.   Pollution control requirements would probably be a significant




reason for increasing such vulr.eraoi.;.;.,:/ for 20 percent of this group (Table 17).

-------
Medi.uin
A normal distribution wouic.  indicate about 31 percent of these plants would have




earned less than  $22 s 500 and 69 percent would have been below $87,000.






Large f lu 1 d f i rms :



Host large fluid plants are operated by regional and national firms.  Food




retailers and producer's cooperatives also operate some large fluid plants.






The comparison between data sources is not BO evident, nor as valid, for large




plants as is the case for small and medium size plants.  However, applying the




percentage figures for large firms to large plants (for they do operate




primarily large plants) , only 15 percent failed to earn net incomes (Table 16) .






Large plants will close during the next 5 years, but these will tend to be




selective closings, and there will be some replacements.  The data are not




adequate to make meaningful estimates for these plant closings due to pollution




control,
                                    81

-------
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            82

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                              Production Effects






     The decision  to  invest or to shut-down is a separate decision to "be




made by each plant.   There  are eotJa profitable and unprofitable plants in




al_L size categories of  each ir.dcstry.   However,  despite the many variations,




the problems—.financial, and physical-- tend to be of like magnitude for




certain group:-; of  plants.



     Basically plants that  will facp the greatest problems are:




          Small plants,




          Cottage  cheese plants,




          Cheese plants.,




          Butter plants,




          Plants without access to municipal systems,




          Plants in communities with small population base,




          Northern plants (frozen ground for land disposal).




     This ecri,ainly implies that small cheese plants located in small




Northern eoruvonities  vithout access to municipal sewage systems will be




facing the no,;t difficult problems.   In fact,  very few of these plants can




be expected to survive  pollution control requirements if left to thair own




resources.




     Some larger plants  will be shut down.   Primarily,  the reasons will be




T,O consolidate operations,  to close obsolete plants,  to change location,




or for some reason that  would cause pollution control costs to be unusually




great.   Shut-downs because  of pollution control will tend to  be a selective




process for larger plants.   The  opposite  is  true for small plants as only a




select i'cw can be expected  to remain competitively viable.
                                     83

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r'ianc eludings wcuid  :;«a&d  r^asiaerable  problems  because  of  a. shortage of


facilities  for Handling milk daring  che  spring  flush  production  of  May and


June.   These  shortages would be  in  the manufacturing  industry, cheese, butter


and powder.   Extra  capacity would need to  be  provided at  new or  existing plants.


Local communities would still t-e hard pressed for short periods.  Fluid plants,


except  for  isolated instances, would not be expected  to have a capacity problem


because of  closings due to  pollution control  requirements.



Production  of dairy products will be affected by  water pollution control


requirements  in the dairy processing industry.  In general the major effects


will be higher processing costs, slightly  higher  prices,  reduced  number of


plants, larger and  more specialized  plants, and some  relocation  of  processing


plants.



Pollution cor.trol requirements will  have the  greatest impact upon small


manufacturing plants and will cause  them to be more vulnerable.   These


requirements could  be expected to significantly increase  the vulnerability


or about    third of the small manufacturing plants and about  one-seventh of


the medium  size plants.  This would  seriously threaten abo\it  14 percent of the

                                                    /
total volume of manufactured  dairy products (Table 17).   The expected  impact


upon fluid  industry would be  about one-half as great as that  upon the


manufacCuring industries.
                                      84

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limp 1 oytnc-it Lcfects




    Aitiio^/h the da^jy  industry _,.  undergoing major structural changes in




terms 01' reduction::  In  plant, r_u;ubero ana. employment,  the adoption of more




stringent pollution  ::QiYt?"Cl regulations is expected, to accelerate the




rate of  exits  froii  txxe industry,   1,.:, types of communities are expected




to be most impacted:  (l)  rural eoimrvrnities primarily In the western half




of the- Lakt'3 Begion  vhere  daivy product manufacturing activity is




concentrated and (2) urban communities throughout the country wnere




fluid and ice cream  processing  facilities are located.  In the first




case, a high proportion of the  product manufacturing plants; butter,




cheese and condensing;  are located  in lightly populated communities,




less than 2,000 in the  majority of  cases.  These communities probably




will not te financially able to construct and operate treatment faciLr  -"it.




to service local industry  without major assistance in the form of grants




or aids from outside sources.




    Thi.-:re are 1,463  plants in the butter, cheese,  and condensing




industries in the U.S.  employing j8>068 persons during 1971•  While




plant numbers are decreasing at the rate of 3 to 5 percent a yoar,




employment has decreased at a lower rate of 2 percent a year.  Decreases




in employment ir the "butter and condensing industries is being partially




offset by increases  in  cheese manufacturing.




    It is anticipated that the  current practice of consolidating small




plants,  employing generally its3 than 20 persons,  into fewer large scale,




more efficient plants,,  with satisfactory in-plant pollution control




equipment or with joint treatment facilities will continue.
                                      85

-------
p! an •,;... Wu  I .--1 loc:.c ''. I.: t,i,_ -Larger rural centers  not far removed from




 Uuu ,:,oui'( -.„• o.r  mill?  fAiopliot;,  Tht evr.ployment  problem is one of disloca-




 tion  as  wall as loss, ot era-pi cyme ric opportunities.








    Some sinor secondary effects are likely,  both, favorable and unfavor-




able.  The small coiffiiunities losing plants will  experience reduced economic




activity ana a lower property tax base.  But  thti communities gaining the




new plants will benefit from the losers.  Regionally,  the losses may be




largely  offset by the benefits.  However, the full  economic impact will




depend on how  pollution control regulations affect  all economic activity




:>n a particular region.




    u1}"-',  number of communities impacted will number  less than a thousand




and rno_, I will  be located in the Lakes Region.  Since firms in ihe three




ind.ULtrie.-3 are already in the process of restructuring,  the number of




communioies impacted primarily by adoption of the pollution control




s lantuiiM s  may  number only several hundred.




    'ilie  fluid  and ice cream processing industries presents a different




situation  in several respects.   The two account  for  70 percent, of the




plants,  3^ 316,  and  80 percent of the employment, i^3j 953;  in the dairy




industry.   While plant numbers are decreasing at about 6 percent a year,




employment is  decreasing at an increasing rate.  Over  9>100 jobs,  almost




7 percent,  were  lost between  1970 and 1971.




    These  plants are located  primarily in population centers and will




not experience the  impact from pollution control regulations as is




expected in the  rest of tfie industry.   Most of the plants  are  connected
                                    86

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 tu  raui.lc i;.-ij- ayt.'tcmu b^'c nay Iiave to r.&kc in-plant modifications or




 construct pro-cryatment facillt-iee to reduce waste loads.  Some plants




 monxrfactur:n^ cottage cheese may be forced to cease this activity.




     It i a expected that sone plants will be forced to cease operations




 or  relocate  as a result of poliutiou controls.  Relocation will not




 likely involve more than a move of a few miles except for cottage cheese




 operations,   "These operations vill probably be consolidated into large




 units outside metropolitan areas.




     Community impact from adjustments by fluid and ice cream plants will




•be  negligible since these operations represent a very small part of the




 economic  activity of the community.  Employees that may lose their jobs




 should oe able to obtain new employment in the large and diverse job markets




 of  urban  areas.   Employment outside the dairy industry is the best prosnect




 since there  is no indication of a reversal in the employment trend in the




 fluid and ice cream industries.
                                    87

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                ar.!_  /c, „-;..;:• m  wer^ ut,3G co illustrate employment effects.




Basically, Wisconsin  ii  a ru.w*  ^c^^e.  xuc/i  01  tne  State's




income  is»  realized  r'rom ^riculcure and related industries.   Any




decrease  in  job opportunities in these industries would be felt




throughout the State's ticcv.&my,




      According to the Bureau of tht Censua'  County Business  Patterns,




1970,  there  were 15,673 aitployeeo vorking in dairy products  plants




in Wisconsin.   More ~han one-half of the?e,  7,901 were employed in




cheese  plants.  Fluid milk  plants employed 4,133; condensed  and dry




milk  plants  2,108;  butter plants 1,012; and ice cream plants employed




519.




      According to data provided by the Wisconsin State Department of




Agriculture, more than one-half the cheese plants employed 7 or fewer




worK^is.   The  majority of Wisconsin cheese plants are located in or




near  small towns.  They have a marked impact upon the labor  market in




these suali  communities. In fact, 121 of the cheese plants  are in




communities  with fewer than 500 population,  and 214 are in communities




under 1,000  population.   Tnere are 150 in towns with populations of




1,000-5,000, so that over 80 percent of the State's cheese plants are in




communities  below 5,000 population.




      Fluid milk plants in Wisconsin Cend  to be in the larger towns and




cities.  This  is especially true of the larger plants.  Fifty-nine




fluid planes (of 121)  are in counties with more than 20,000  employed




workers.   These 59  plants* ^aployea over 3,200 people, or 78  percent of




the employees  of  fluid plants  in  cue  State.   These larger  plants  packaged




most of the fluid milk.

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     ice cream plant*, also ^re located In the larger population  centers.




Only 7 of the 70 were in coomunities with fewer  than 1,000 population,




and 10 more in towns up to 5SOOC,  About 60 percent, 42 of 70 plants,




were in cicies with snore tnan 1^,000 population.  These were the larger




plants and produced mosc of the State's ice cream.




     Cottage cheese is produced in Wisconsin primarily by fluid  milk




processors.  The plants are located in the larger population centers,




with 80 percent of them in cities over 10,000.   Only small amounts are




produced by those plants in smaller communities.




     «xscansin dairy product plants employed 15,673 workers, which w*^s




1.3 percent of total employees _!/ in the State.  More than i percent   ."




total employees were employed by dairy product plants in 34 counties,




In 10 of these counties dairy plants employed more than 5 percent, and




in one of these they employed more than 10 percent of all employees in




the county.




     The ratio of dairy plant employees to total employees tands higher




in tne lesapopulous Wisconsin counties.  Due to  nondisclosure requirements,




the breakdowns shown in the county business patterns are limited for




those counties wluh few firms.  Therefore, the impact of dairy plants




in the local labor taarket is greater than these  data reveal.




     Receiving stations 
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stations are combined witn, or ^ least operated in connection with,




manufacturing plants.  In thib manner, che milk, can be assembled and




routinely forwarded to fluid plants when needed or simply used for




manufacturing when not needed for fluid.  Often-times, the milk is




received and transferred for manufacturing in large plants so as to




realize, economies of scale.  Central manufacturing aldo evens out the




milk flow, reducing variation in receipts, manufacturing, and also




in the effluent.




     The Vermont dairy industry differs from that of Wisconsin in




several ways.  Nearly 90  percent of farm income in the Scate conies




from dairying.  Basically, Vermont is geared toward supplying fluid




milk to the Boston metropolitan area, manufacturing that which is




excess to fluid needs.  Due to the distance from Boston, Vermont




absorbs much of the variation in supply and demand so about 30  percent




of the milk is used in manufacturing.  Cheese is the primary product




made from this milk.




     The 40 dairy plants employ 1,905 people, 15.3 percent oi total




employment in the State.  Thirty of these plants in Vermont are fluid




milk plants, while only 7 are classed as cheese plants.  These fluid




plants employ more than 82 perceat of total dairy plant employees in




the State.  As in Wisconsin, these fluid plants, and especially the




larger ones, are located in the larger population centers.




     Vermont's cheese plants are small to medium size.  They are




located in small towns and have an important role in the community.
                                 90

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The cheese plant Is the only manufacturing Industry in some instances.




In such cases, percentage comparisons fail Co portray the full impact




which would result from a change in employment and associated economic




opportunities.






                      Community Impact—Overview




     Wisconsin and Vermont were selected to illustrate the probable




impact that pollution control requirements would have upon the dairy




industry and  the community.  It is recognized that each production-




processing area has a different set of circumstances, but the similari-




ties are significant and provide useful guidelines for evaluating change.




     Botii States are basically rural.  Milk production is concentrated




in rural areas.  Vermont has no manufacturing grade milk production.



The emphasis  is upon servicing the metropolitan Boston fluid milk market,




Due co location, Vermont plants handle much of the fluctuation in this




surplus by manufacturing it into cheese.  These manufacturing plants




are located in small communities within the milk producing areas.




     Wisconsin services a large proportion of the Chicago fluid milk




market.  Other fluid markets, some quite distant, use Wisconsin as the




ultimate source of reserve supply.  About 16 percent of the State's milk




production is shipped out of State for processing.  However, the




Wisconsin dairy industry is primarily manufacturing oriented, and it




is by far the leading State in manufactured dairy products.
                                 91

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     The Northeastern  State^"dairy  industry would  realize  an  impact




similar to  that  ±a Vermont.  Thia «rea  is primarily  a  fluid milk market,




with the surplus being manufactured in  rural areas.  The fluid plants,




and associated ice cream and cottage cneese plants,  are located in or




near larger metropolitan areas.  These  urban plants  and communities




will be least affected by pollution control on the dairy plants.  For




them, it is more a community effluent treatment problem.   The Northeast




milk manufacturing industry is very much a sub-industry of the fluid




industry.  Therefore,  the impact upon these plants will also be tempered.




     The neavy milk producing North Central States are similar to




Wisconsin.  This area  produces a large  portion of  the nation's manufactured




milk procucts.  These  manufacturing plants are mostly located in smaller




towns and communities.  Effluent treatment for them will be more of a




plan, problem insofar  as the milk plant will be producing  snore effluent




than that produced by  the remainder of  the community.  Even if the milk




plane uses the municipal sewage treatment plant, it will be bearing a




large share of the sewage treatment responsibility—a much different




situation dian when wash water, whey, and similar  effluent were discharged




into waterways or onto the land.




     Even where the manufacturing in these areas is in connection with




the fluid market, the  overall ratio  of  fluid to manufacturing is much




lower than in the East.  Therefore,  the Midwest manufacturing industry




will necessarily bear  more of the pollution control costs  than in those




markets where fluid mi lit dominates  the  markec.  Unless this changing




cost rclciCionship i.^ r^^i^^i/.ted, shifting production patterns could be
                                 92

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fostered through pricing ar.d regulatory procedures whereby the fluid




sector uiiGuly and unevenly subsidized some, part of the manufacturing




industry.  If such were r.o occur, without offsetting considerations,




the Midwest manufacturing industry would be disadvantaged in comparison




with the fluid markets of the Northeast, Southeast, South, Southwest,




and Far West.




     Pollution control costs will be lower for those plants that can




pay a prorata share and utilize municipal systems than those which must




provide their own treatment facilities.  This economy will increase the




rate at which smaller plants have been closing.  The greatest impact




resulting from pollution control measures will fall upon plants in




small communities and upon those smaller communities.




     Bulk handling of raw milk has resulted in many receiving stations




being closed down.  Although much of the adjustment to bulk handling




has ..iready been made, more will be closed as the additional pressure




and coat of pollution control is felt.  Over one-half the receiving




and transfer stations in Wisconsin are in communities of less than




2jOOO, with 60 percent of these in small communities smaller than




1,000.




     Unless the receiving station can use the municipal system, effluent




treatment would be too costly.  Once loaded, the transport could move




the milk directly to the processing plant rather than using & receiving




station.  The exception would be those receiving and transfer stations




operati^ as part of a manufacturing plant complex.

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     Probably about one™third of  the receiving and transfer stations




would be subject to closing  rather than implementing measures to



adequately control pollution.




     Forty percent of Wisconsin licensed fluid plants are in communi-




ties with fewer than 2,000 population.  However, these tend to be




smaller plants and process not much more than 10 percent of the packaged




milk.  At least one-half these plants could be expected to discontinue




packaging fluid milk as pollution control would be too costly  for these




already competitively disadvantaged  plants.
                                  94

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                      International Trade




     International  trade  is not a particularly important factor to the




economic activity of  the  U. S. Dairy Industry.  Exports over the past 13




years have averaged 1.5 percent of total milk production and ranged between




a  low of 0.3 percent  in 1967  to a high of 5.4 percent in 1964.  Imports




have been more stable in  volume averaging 1.1 percent of U. S. production.




One distinct difference is the growth in imports and contraction in exports.




     A substantial  proportion of the dairy products export trade is made




under government sponsored programs, in particular P.L. 480.  Stocks of




dairy products acquired by the CCC (Commodity Credit Corporation) in their




activities to support dairy prices are distributed under P.L. 480 as dona-




tions, and for soft or hard currencies, to foreign countries for welfare




feeding programs.  The volume depends on the level of activity of the CCC,




inventory of stocks in excess of domestic program needs, and available




lands.  In recent years,  supplies of dairy products have come more closely




in baianct with demand and stocks available for distribution have shrunk.




Currently, supplies have  been reduced to a level that has almost ended




distribution under  P.L. 480.




     Under P.L, 480,  the  major products exported have been dried milk,




canned milk, butter and some  cheese.  These products were exported pri-




marily co Asiatic and South American countries.  During the early period




of the program, 1954-60,  over 60 percent of total exports were under




P.L. 480,  In more recent years, commercial exports have comprised a maj-




ority of shipments.




     The commercial export shipments have consisted of dried milk, canned




milk, butcer, small amounts of cheese,  and infant and dietetic foods and




mixes.  Snipnents tend to fluctuate widely on a year to year basis.   The
                                    95

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U. 3. x^ euco^niering Increasingly severe competition in commercial foreign

iriSTKets from western European countries, Australia and New Zealand,  The

U. S. is not likely to increase sales abroad in the near future.

     Dairy product imports by the U. S. have consisted of a variety of

cheeses and casein.  Cheese and casein are imported from western Europe,

Australia and New Zealand.  During the past two fiscal years, cheese and

casein imports have accounted for 92 and 95 percent of the dollar value of

dairy product imports.  Cheese imports substitute for cheese produced in

the U. S., but the U. S. relies on imports for its entire supply of casein.

World supplies of casein have been short of market requirements.

     Two programs are used to regulate the quantity of dairy products

imported into the U. S.  Tariffs are applied to all dairy products but have

been imposed under section 22 of the Agricultural Adjustment Act of 1933

as amended in 1953.  Quotas have been established for all dairy products

except some special cheeses, casein, and lactose.  The quotas have been

effective in almost every year in restricting imports of products that

would substitute for products produced domestically.

     Table 18 is a comparison of the imports and exports of dairy produces

on a milk equivalent basis.  During the early sixties exports exceeded

imports, but this situation has changed with increased imports and dimin-

ishing P.L. 480 export shipments.  Imports are expected to exceed exports

during the years in the near future. I/   Beginning with 1966, imports

have exceeded exports on an average of slightly more than one billion pounds

M.E. a year.
  _!/ During 1971 large commercial sales of bucter were made to the United
Kingdom oecause of a lacs of supplies by traditional exporting countries
to the U. K.
                                  96

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    Table   18:   Dairy  produce  imports  and  exports, U.  S.,  1960-1971 _!/
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
i')71
mi liion
604
760
795
915
830
923
2,791
2,908
1,780
1,600
1,874
1,342
Imports
Ibs . '/, of production
0.5
0.6
0.6
0.7
0.7
0.7
2,3
2.4
1.5
1.4
1.6
1.1
million
776
655
1,287
5,036
6,872
1,836
778
363
1,185
921
438
2,480
Exports
Ibs. 7o of production
0.6
0.5
1.0
4.0
5.4
1.5
0.6
0.3
1.0
0.8
0.4
2.1
  J./ Milk equivalent,  fat  solids basis







     Table 19  compares  the dollar value  of  imports and  exports of dairy




 products on  a  fiscal year  basis from  1960 through 1972.  In every year but




 two, 1967 and  1970, the value of exports has exceeded imports.  On  the




 average the  difference has been $54.4 million  in favor  of exports.  However,




 some o£ the  exports under  P.L. 480 have  been donations  or for soft  curren-




 cies.  Currently, P.L. 480 shipments  are for hard currencies.




     In terms of balance of payments, the U. S. has maintained a very small




 favorable balance of payments.  However, with the value of imports increas-




 ing and expectations of a decreasing dollar value for exports, the balance




or payments ia expected to become  unfavorable by several million dollars a




year.





                                    97

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Table  19:  Value of dairy product imports and exports, U. S., 1960-1972 _!/
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1.971
1972
Imports
(millions
49.2
52.7
54.1
54.8
57.2
67.6
94.1
133.2
85.8
101.1
112.1
125.6
140.2
Exports
of dollars)
114,4
117.3
114.9
143.1
191.5
204.6
160.8
110.6
103.6
138.7
109.1
131.2
195.1
Difference
+ 65.2
+ 64 . fc
+ 60.8
+ 8S.3
+ 134.3
+ 137.0
+ 66.7
- 22.6
+ 17.8
+ 37.6
3.0
+ 5.6
+ 54.9
  _!/ Fiscal year






     The impact of implementation of environmental control programs on the




dairy, production and processing industries is expected to aggravate the




balance of payments situation.  However, during the adjustment period, the




U. S. can maintain or even change import quotas to minimize the payments




problem.  This would further reduce dairy product supply availability from




all sources and increase product prices to consumers.
                                    98

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iiffeets upon t,he liiduoTxry' ~ Suppliers and Consumers




Supplier i-;



     Only miner effects are expected upon milk producers.  As plants  are




closed producers may have to find new buyers for their milk  in  some




instances.




     Another possible effect is the relocation of processing facilities




from on*.; iaIXK market order area to a different area.  This could result




in a change in the utilization ratio of fluid to manufactured and  alter




the blend price received by producers.  This is not expected to become




a serious problem.




     ATI additional potential problem is the supply of equipment for




in-plant modifications and waste pretreatment facilities to  either




reduce or treat hydrological and BOD loadings.  Recognizing  that a




number of industries will be in the market for this type of  equipment




at the aa/ae time, suppliers may not be able to furnish the equipment




without considerable delay.



     Businesses servicing the dairy industry can expect dairy plants  to




decrease in number but increase in size.  Small manufacturing plants  loca-




ted in rural areas will be most affected, as will those businesses which




are dependent upon this segment.





Consumers




      Table 20 presents three possible price  effect  levels  upon consumers




expenditures.  These are:   low, expected, and high.  The  low is based on




extensive use of plant-community joint treatment,  the expected  level  is




a mix of joint treatment  and plane pretreat while  the high  is based on a




mix cf jo^nc, pretreat, a;:o priv^c  treatment.  The  figures  have been




adjured uo reflect the r,^n proportion of dairy product wastes already
                                     99

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 Leia^ trt.-a.tea by ,T
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                        C r: ^ i c a 1 Asa um jj t i o ;i s

 Several ci.-ssumptions were  use^ in order  co estimate  the  impact which might be

 expected  as  a  result  of i.-.vosi".^ pollution control  requirements upon  the

 dairy  processing  industry.   Some of tho. more  critical include:

     1,   The data  as  presented  j.r.  the ^967 and previous  editions of
          Census of Manufactures IH representative of the sub-industries
          (SIC  2021, 2022,  2023, 2024, 2026) and  that past trends will
          continue.

     2.   The data  as  presented  by  Internal Revenue  Service  in the  1968
          Corporation  Source  Book of Statistics of Income are repre-
          sentative of firtr.d  in  the dairy industry;  that  these can  be
          projected through  the next 5 years;  that the incomes within each
          size  grouping approximated the normal distribution (in fact,
          it  is somewhat skewed  to  left  in small  and medium  size groupings).

     3,   Cost  estimates for  treatment facilities were supplied by  EPA.
          These estimates, made upon limited data, were applied to
          different size plants and to the wide range of  conditions as
          found in  the  industry.  Economies to scale were treated as minor.

     4.   It  was assumed that facilities would be available  and that
          effluent  treatment methods and facilities would perform satis-
          factorily.  Allowances for failures were not made, although
          some new  facilities are reporting operational troubles.
         Allowances were not made  for geographical differences in  cost
          estimates.

     5.   Ii-plant  modifications were not considered.  Neither was  the
          cost of whey disposal from cheese plants, except as noted in
          the discussion.  Product mix was not considered as influence-
          ing treatment costs except as noted.  Subsidization (firm,
          product,  government) was not considered.

     6.   Increased cost from pollution control was considered only as it
          applies to the dairy processing industry.  Cost changes in other
         activities were not considered.  Such changes would affect the
          net result as these changes are cumulative.

Limitations  due to assumptions:  Detailed data are not available to array

plants by size and income in che produce groups.  The assumptions were made

and the available data used for comparisons,  but it is recognized  that such

data do not adequately reflect industry conditions, especially the variety

of circumstances and the changing competitive situations.


The comparisons have not been reviewed by the dairy industry nor technical

engineers.  T.^is should be done,

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     Pollution control w^ii cos;,  .-iow the cost will be distributed and




what will be  the dif£ereiv,:iei  impacts are the main considerations.




     If one incorporates economies of scale  In controlling pollution  the




larger plants naturally will fare better than under the assumption of




linear costs.  However, in general, neither  assumption would permit small




dairy plants  to survive.




     Were all increased costs  to be passed on to consumers in the form of




higher product prices, small plants still could not invest the sums required




co provide their own treatment  facilities.   These small plants could con-




tinue to operate, but at an increasing disadvantage, if pollution control




-ould be effected solely through increased operating costs.  They would con-




tinue the process of "living off depreciation", but at an accelerated rate,




     Plants using municipal treatment systems will probably realize an




advantage over those who must provide their  own treatment facilities.  This




would be true for investment and for operating costs.  Even though the




community r..ust expand or even build new facilities, this would be the least




cost method of handling effluent from most dairy plants.




     Processing plants located  in communities where the plant generates a




large proportion of the cottil effluent will  be somewhat handicapped.  If




iuch plants are charged proportionately to their contribution to total




cfiluent, they will have higher costs,investment and operating, than similar




plants using larger municipal systems.




     Industry reports signiii cant vjconornies  to scale in treating waste




discharges.  Dairy plants, discharging a waste that is compatible with




municipal systems, can benefit  themselves and the community by using the
                                    102

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;-.,:niclpa! aystc.u.  The broader bfcse will  then  permit  lower  investment  and




operating unit  cjsts  for  treatment t,f  residential  and plant effluent.




(Perhaps ciiis fact could  be  used  by plants  in  public  relations.  Many  com-




munities are "blaming" dairy plants for increasing their  sewage  treatment




costs.)



     Compliance dates must be set in order  to  secure  compliance.   However,




mere drastic adjustments  should be expected when  the  conversion  period is




relatively short.




     Cheese plants in one ares, under  time  pressure to adjust, were  offered




various solutions to  their whey disposal  problem by firms who proposed to




drv the whey,  Generally, the proposals assured   the  dryer  operater  that.




h,.s expenses would be covered and some profit  realized for  a designated




period of LI sue ranging up to 30 years.  Under  long-term contracts,  che




cheese manufacturers would have been responsible  for  providing trie whey at




;•  nrice stipulated under present  market conditions, which amounts  to almost




yjving the viity to the dryer in order  to  "get  rid  of  the problem",




     While market conditions  may  remain unfavorable for raw whey for some




time, the change in demand for skim tnilk  (which formerly was considered




waste) should not bo dismissed.   If in 1960 butter plants had contracted




co sell skim jdlk to dryers  for 30 years, at 1960  prices, they would already




be defunct.   ",n 1960, butter  represented  70.6  percent  of the value of  butter




f   nonfat dry milk and 85 percent of the price paid  to farmers  for  milk.




In 1971, the value of butter  in whole milk  was only 54.5 percent of  the




value of butter + nonfat dry milk, and equal to 63.3  percent of  the  price




received by farmers.




     Were a similar shift in value to occur for whey,  no cnease plant  could




survive under the contracts as had once been agreed to by  Vermont cheese makers,
                                    103

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i'ltis acU.u.1, taken u;.d.. :  pressure  u L.icet  a  time  deadline s  then would have




changta taut btttte'.*. cheese  in^usLry completely.   Either  the  present  cheese




pients would :-.ave been  forced out  of business  or  would  have cotne  under




complete co>";>:rol of  'cae dryer as he subsidized their  operation.




     Wilh the breakdown of negotiations, and a cooperative  approach by the




State, community, EPA and thu Cheese makers, Vermont  now  is in the  process




of making new arrangements which appear  to be  much more workable  and  ad-




vantageous to the industry.




     Timing, standards, and  realistic alternatives are  all  important  con-




Eiterations in improving  the effectiveness of  pollution abatement.  At




best there will be some cost, but  disruptions  to  the  industry may be  min-




imized.  Otherwise, cost may be considerably higher and the disruptive




ef fee L much greater.




     This analysis has considered  the economic impact of water pollution




control in the dairy processing industry.  Other  pollution  control  require-




ments also will have an impact.  Whereas any single control program may




in itself indicate only minor impact, the  cumulative  result or the  various




coatrol measures and adjustments within each subindustry may  cause  the




aggregate to be quite different from the individual parts.
                                     .04

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                   Lit..: .c tic^s  c-i  J."i^ Analysis




TI'il-j analysis  has  incovporacec  tai, ^acicional cocco  of pollution control into




the oairy  processing  incustry.   A.vy cha-.^c which would change the cost would




change  the  results of  the  analysis.  Perhaps  the most  significant variable




is the  level of  pollution  abatunenc required.  Limitations upon effluent




treatment  or disposal  methods  can  greatly  alter costs  and feasibility of




making  adjustments.






The time schedule  for  meeting  requirements will also influence plant adjust-




ments.  Excessive  delay would  encourage  noncompliance; too rapid a time-table




would make  it  impossible for many  plants to make necessary adjustments,




Perhaps it  would be advisable  to approve some methods  on an interim basis,




while long-term  solutions  are  being effected.






W.th the limitations of this analysis we cannot assign specific statistic^




measures of reliability.   However,  in light of  the data and consultation with




industry pr-i'sonnel, we feel the  unit cost  results are  reliable within 20




percent (plus  or minus).






Estimated plant and volume adjustment are  discussed.   These estimates do not




claim that  pollution control requirements  would close  the plant,  there is




no feasible way to make a meaningful estimate of that  adjustment.   The dis-




cussion is  intended to indicate  where pollution control would be  a significant




consideration  in the decision  to close.  These  estimates provide-,  indicators




Cor change  i,-. dairy plant natabertj.  Actual closings will be greater,  but that




would be true for most of  tne dairy  industry  even without increasing costs




or investment due to pollution control.






In-plane Modifications are not analyzed  in this  report.   The  potential for




reduction of hydraulic t.r.d BOD loadings  are not  well enough known.   Neither




arc cue coj;t> or in-pit.nc cnangtj adequately  known.

-------
Snatistictol fs<.;Mi>urc!B have beer, appliec  co describe certain perimeters  although
riif oa.ta t.iu nat meec all necessary qualifications for  statistical  reliability.

                    Impact Areas for Additional Consideration
We strongly recommend that the potential and  cost for  reducing  effluent  by
' a-plarit modifications be che subject of farther research.   Such  research
could be accomplished without undue cost or use of time.  It should be done
in different size plants, making different products under different lex/els
of technology.
The most critical assumption implicit in this  report is that plants would be
dble to successfully and continuously meet pollution abatement  requirements
iv providing the facilities.  This is not necessarily  true.  New  plants
*i':;•! new treatment facilities are reporting operational problems.   These
reports are from large firms with considerable expertise and experience, a:,
well as financing.

Changes are inter-related to such an extent that even  problems  in physical
treatment ca-inc; all be foreseen and provided  for.  This economic analysis
,'c.es not inquire into the technological aspects of handling  and cresting
plant effluent.
^conomies of scale for treating waste are probably greater  than recognized
-n these cost computations.  To that extent,  smaller plants  will  be more
seriously affected and large plants less seriously affected  than  shown.
Trie re is no existent market for the volume of  dried whey which  will be forth-
coming because plants are no longer permitted  to dump  their  whey  as they
have in the past.  New uses will be developed and present uses  expanded.
However, the impact of this additional volume  is open  to question.   At least
: ;"i trie Siiort-run, nonfat cry iv.i^k prices can  be expected to  be  forced  co che
aupporc pnco.   There is no su^c^rc for whey, so dry whey would be  expected
 v> remain ac a very xow-level price.
                                     106

-------
 Certain ••:!".. uu\itanccs co^iu a^cer t/i^ conclusions of this report significantly.




 If r'litna cauld not psu,s -he incruesto coats along to their custoiTiers the




 Impact  would  be much more drastic than indicated.






 A  control policy which would permit some form of land disposal—or other less




 costly  K,etliod--by small plants in uncor.gasted areas would reduce the impact




 upon small manufacturing plants located in such areas.  Total effluent from




 such a  plant  may be less polluting than the treated effluent from a large




 plant in a congested area.






 Time allowed  for meeting standards is critical.  The quicker plants are re-




 quired  to meet standards,  the greater the impact upon the industry.






 Technological Developments,  in plant or in effluent treatment, could have; a




 real influence.   This is especially true if it were to alter the economies




 co  scale  relationships.   Changes  in national demand and supply conditions




 lor  milk  t»na  vrdlk products  would  have a marked influence upon the impact ex-




 pected  in  the industry.






 Structural  changes  in the  industry could alter the  expected impact of pollu-




 tion control,






 Impact  of  pollution  control  will  be greatly influenced by the proportion of




 dairy products produced  by  plants  using municipal treatment facilities, as




 this  is  the most  economical  way.   Harper estimated  that plants with 90




 percent of  the volume were  usir.i, municipal  facilities.   This  estimate appears




 Co be valid for  fluid milk  plants.   However,  survey data from Wisconsin and




Vermont snow  a much  lower proportion of the manufacturing industry using




municipal i>y& cents.  "M&r.y of  the .^nutac taring  plants do not have access to
                                     107

-------
•such syiiifciaa  ^Yables AI9, A~v,  n21,  A/2, r.23).  ADOUL  three-fourths of a




billion pounud of atlk  a  KIGI^'H  ii .•.^r.dl.cc by Wisconsin plants  not on muni-




cipal systems (lafale A23).

-------
Table
Al
A2

A3
A4
A3
A6
A 7

A8
A 9
A 10
Ml
A12
Fig  1
Fig  2
A 13

Ftp,  3
A 14
A IS
Ait)
A1 7
A'th
         Income characteristics of  corp
         Comparison of  income character:
           industry
         Income characteristics of  cotpoi
         Value of shipments by selector]  '
         Value added by manufacture  in  «e
         Capital expenditures by self'. [<.••>
         Depreciable as sett,  -MJ b.\  ,;, • l.
         Structural aspoc'. "  ••  *;«<:  -irj I , .
         Fluid milk hot t liu,;
         Fluid milk plants  o
         Size distribution  o
         Plants i>iflnu£a< tun f ,
         Dairy pvc«iuct  cstabi. ; sh.iK',->
         Dairy product  Lndus; rie°. ,
         Dairy product  indus1" r ic& ,  .
         Dairy product  ind:K
         Fluid m"l!" product, s, !,•/ t •,.,
         Milk boiiJina  Hart-; (-1 >';*-.
         Concent i « t i or  :;'   Hi i i. •-   , >  '
         Prc-']jrti<^, of  >,. i:^ -?r>' ,-' ' ;
         Milk and daJry pr,   ••.-'  ;••-  •
         Wisconsin dairv p1 -'->:', r.  •
         Voi.ime of Wisconsin ]/:fi-,'  ;
         I, ; ..onsiii dairv pi-antR ;>y  <
         V: i srons in fiaLrv n].j-.- , ;:••-•  ,
         !Jl^nt effluent  di sO''.'-jf> I  ni • '
         r;a ; ry pi OIJ.H '   \ ia1 ••  -•-". ,is.: T
           U.S.
         -laniPt-r T-'L'MiLS  maii'ifgr; ,-'.•'
         Whole mil!v used ii> maruiLac'
         K-if "<- r r'T'i'ution  ••   L". (ate
         Cheese . •'. 'xiiici. ion  '>\' State-
         Amp ri can ; 'nacso production
         I Lallan Hr^oso  prcdu'-t icn  !
         Sw(;S i '.}.-, :;O '.-Olilioi . O'i1  '-,\
in dt-Jrv  products industry
 i 01 i>ot H tions in dairy  products

in dairy  products industry
o s
l:iclLSi ries
  rjo1 ::  types of firms
  processors
•" by ntu,'i)('r  employees
 ic!erisL;cs  by number employees
-,  utr.ulcyees,  volue added,
   .-: .-,;oi ps
   lu; d ;.n'lk  industries
                                                            10f population
                                                           ,ie of" 'ill 11-.
                                                            'i^r-nin,' , Oregon, and
                                                        IF  by otaie
    12
A
A-l

A-2
A-3

A-4

A-5
A~7
A-7
A-8
A MO
A-M1
A-12
A-12
A-13

A-14
A-15
A-16
A-19
A-20
A-21
A-22
A-22
A-23
A-24
A-25
A-26

A-31
A-32
A-33
A-34
A-35
A-36
A~37
A-38
A-39

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               Structural Aspects  of  the Dairy  Industry
      Two  recent  structural changes have altered  the  traditional relationships
 among sectors of the dairy industry.  Producer  cooperatives have grown from
 local to  regional  organizations.   Concurrently,  retail food chains have
 developed central  procurement programs to obtain their packaged fluid milk
 products.


                            Producer  Cooperatives

      Cooperatives  have  effected a  dramatic change  in their relationships with
 producers  and processors, and, perhaps most importantly, among themselves.
 The  local  producers' cooperative has  become regional and national in its
 milk marketing principles.

      New  production, processing, and  transportation  technologies, economies
 of size,  and the breakdown of intermarket barriers all have increased the
 mobility  of milk supplies.  Distributors service large marketing areas from
 a central  plant.

      Bargaining  and functional effectiveness were both limited for local
 producer  organizations.  Producers' cooperatives found that they had to grow
 to properly service their members  and the processors.

      A number of Midwestern cooperatives formed  two  large bargaining federations
 in the early 1960'ss and these initial federations have been followed by
 extensive mergers  among cooperatives.  Thus3 truly regional cooperatives have
 developed  throughout the Central and  Southeastern United States.  These
 mergers have probably set tlit: pattern for continuing merger activity among
 cooperatives in  the dairy industry.

      Cooperatives  have developed full-supply arrangements with many processors.
 Under full supply, the cooperative exercises complete responsibility for
 providing  the processor with a flow of milk as needed.  Procuring the fluc-
 :-anting supply and coordinating it with a variable demand has been a high-
 cost  operation.  Variability of fluctuations, the risk factor and degree of
 uncertainty, and cost have been reduced by this  cooperative action.

      'arm  quality  control, intermarket transfer, and surplus management are
 be ITU- more effectively performed by these large  cooperatives.  Their size
 and method of coordinating these activities give flexibility of operation,
while  providing  necessary stability for efficient milk production and marketing,
 especially in maintaining price relationships among  markets.  Approximately
 72 percent of the Nation's milk supply is marketed through cooperatives.  Both
 the  number of cooperatives and producer membership have dropped to one-half
 f.he  level 20 years ago.  Though some  of this attrition occurred because coop-
 eratives went out of business, recent merger activity also has reduced their
number.

     These large cooperatives have consolidated much of their bargaining
activity into big regional cooperatives and federations.  Increased bargaining
activities and shifting a major p/irt  of the responsibility for supply coordi-
nation from processors to cooperatives will continue to influence number, size,
and competitive activities of processors of fluid and manufactured milk
products.

  ^./Excerpted from "Market Structure  of the Food Industries" MRR 971, ERS,
USDA,  Sept., 1972.
                                       A-5

-------
                              Number of Plants

     The most consistent structural change In the dairy industry has been
the decline in plant numbers.  A major influence has been the continuing shift
in the economies of size curve.  Small plants find themselves at an increasing
cost disadvantage in processing milk compared with larger plants.  As proces-
sing becomes more complex and equipment more costly, unit cost of processing
small volumes becomes prohibitive.

     In the 1900's and 1910's, introduction of many city ordinances requiring
milk pasteurization resulted in relatively higher costs for  small distributors
compared with large ones, and many small distributors  could  no longer compete.
In the 1920's and 1930's, introduction oi" rl.-JFsified pricing plans providing
for uniform prices to producers oy ,11 tu-r.'' lers, both  large  and small,  forced
numerous small handlers to pny the ,-anie prices a.,c; their large competitors.
Many of these small handlers found lc impossible to do so and they, too, went
out of business.  In the late 1930's and 1940's, cost  levels of smaller
distributors were raised further by ininv-d-iction of the paper carton.   Since
World War II, several technological and economic developments--none of  them
outstanding--have tilted the cost curves further.

     Economies of size in plant operations are well demonstrated by the
following tabulation ;


            Plant size (quarts per day)."     Cost per  quart

                                                  Cents

             6,000	„ :           6.7
            20,000	......:           4.5
            50,000	 :           3.7
           100,000	.....:           3.4
           200,000 ..............,.....:           2.8
           400,000	..:           2.6
           800,000 ....................:           2.4
     Obviously, the smallest plants are severely disadvantaged and cannot
 -.nn., etc unless they obtain access to specialized markets at higher than average
r-xices or unlcnn their owners are willing to accept substantially reduced
returns for both investment and management.  Middle-sized plants operate at
some disadvantage.

     Number of plants operated by local firms has declined most sharply.  How-
ever, the trend h;is be^-i downward for milk bottling plants under all types
of ownership (table A8).

     Fluid, milk bottling plants in the United States fell 53 percent between
1948 and 1964.  This decrease in 17 years was equaled by a 54-percent decline
during the next 7 years--through 1971 (table A-9).
                                     A-6

-------
  Table A8.--Fluid milk bottling plants operated by various types of firms,
                       December 1964 and December 1970
Type of firm



Local :
Multiunit 	

Cooperatives :
Multiunit 	 	


Total 	 	

December 1964 :
Number
280
90
231
3,209
115
152

4,077

December 1970 :
Number
205
66
110
1,658
95
81

2,215

Change,
1964-70
Percent
-37
-27
-52
-48
-17
-47

-46

   'able  A9  .-.--Fluid"milk bottling plants operated by commercial processors,
                          1948, and December 1964-71
    Period
 Regulated by
Federal orders
Other
Total
1948
] 964
1965
1966
! 967
19f,8
1969
1970
197L
     1,936
     1,782
     1,530
     1,456
     1,485
     1,478
     1,349
     1,136


2,14i
1,939
1,828
1,503
1,155
980
866
728

8,484
4,077
3,721
3,358
2,959
2,640
2,458
2,215
1,864
                                     A-7

-------
     While many small plants have gone out of business, remaining plants have
grown larger.  Fluid milk plants packaged an average of slightly more than
20 million pounds per plant in 1970, compared with less than 13 million
pounds in 1963 and about 5.6 million in 1948.

     From 1965 to 1970, number of plants selling less than 4 million pounds
per month of packaged fluid milk decreased sharply.  In contrast, a marked
gain took place in plants packaging more than 4 million pounds  (table  A10).

  Table A10 >.--Size distribution of fluid milk plants, comparable Federal
                      orders and States, 1965 and 1970
   Monthly sales volume of    :                 :                :    Change,
 packaged fluid milk products:      1965       :     1970       :    1965-70
        (1,000 pounds)         :                 : -               :
                                           Plants 	     Percent
Less than 100 	
100-499 	
300-999 	 	
1,000-1,999 	
2,000-2,999 	
3,000-3,999 	
4,000-4,999 . . 	 	
5,000-9,999 	
10,000-14,999 	
15,000-19,999 	
20,000-29,999 	 	
	 	 . , : 495
	 : 855
........: 300
........: 266
........: 128
	 . . . . : 102
	 : 48
	 	 ..: 120
......,.: 33
	 : 12
	 .: 7
220
444
183
205
108
82
65
138
38
18
12
-56
-48
-39
-23
-16
-20
+35
+15
+15
+50
+71
  Total	,,......:     2,366           1,513             -36
     Manufacturing plants increased the average volume of milk  (milk equivalent
basis) which they made into manufactured dairy products from 5.6 million pounds
per plant in 1948 to 10 million in 1963 arid about 17 million in 1970.

     Though most of the impetus for larger plants undoubtedly comes from
economies of size in processing, institutional factors also exert a strong
influence.  Under full-supply arrangements, cooperatives pick up milk from
farmers, deliver it to plants according to a specified time and volume
schedule, and have complete responsibility for filling shortages or processing
surplus into manufactured products.  TMs3 shift in procurement practices has
enabled fluid milk processors to close r.ar-y small country plants which they
had maintained as a source of fluid milk and a means of handling their
surplus.  This change has contributed to overall efficiency in supplying the
fluid milk market and in manufacturing dairy products
                                     A-8

-------
     Number of plants manufacturing dairy products also has been declining,
but at a slower rate than that of fluid milk plants.  Manufacturing plants
dropped 37 percent between 1944 and 1961 and 42 percent from 1961 to 1970
(table  All).

     Smaller volume plants have accounted for most of the decline in numbers,
both in fluid milk plants and manufacturing plants (table  A12 and fig.  1).
The decline has been dramatic for plants with fewer than 20 employees, while
the number of plants with more than 100 employees has remained almost steady.

     Larger plants naturally have a greater than proportionate share of
employees, value added, and value of shipments in the industry (fig. 2 and
table A13).  However, considering economies of size, their proportion of new
capital expenditures appears more than adequate to maintain the greater
share.   Thus, the shift toward larger plants should continue or accelerate.
                                Distribution

     The fluid milk market, which began as a home-delivery operation, has now
moved to the supermarket (fig. 3).  Increasing delivery costs, especially for
servicing small accounts, combined with economies of mass merchandising and
new shopping habits by consumers to bring about this shift.

     The switch from home delivery to large-volume wholesale deliveries has
put the small processing plant at a great disadvantage.  Processors outside
the immediate area can service large supermarket accounts, whereas they would
not find it practical, to service home-delivery accounts.  Many of these
smaller plants have discontinued processing and become distributors for other
fluid milk processors.  In some cases, a number of small distributors have
joined together to establish a jointly held bottling plant, while maintaining
their separate identities as distributors.

     Supermarkets have not been the only outlets to gain a part of the volume
formerly delivered to homes.  Dairy stores, delicatessens, convenience stores,
and other types of foodstores account for about a fifth of sales; restaurants,
hotels, institutions, schools, military establishments, and vending machines,
another fifth (table A14).
                         Integration by Supermarkets

     In the 1930's, two large national grocery chains built their own milk
bottling plants to serve some of their stores.  After World War II, they
added more plants in other areas,  In the last few years, they have been
supplying a high proportion of their stores with milk from their own plants.
In the postwar period—primarily in the late 1950's and the 1960's--other
chains and a few cooperative and voluntary groups built or purchased milk
plants.

-------






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able  A12.--Dairy product establishments, by  number of employees, census years
                                    1954-67
Industry and
year
Hreamery butter:
1954 	 	
1958 	
1963 .. .„ 	
1967 .... 	 	 	
Natural and processed
cheese:
1954 . , 	 	 	
1958 . . 	 ......
1963 	
1967 	 	 	
Condensed and
evaporated milk:
1954 	 	
1958 	 	 	
1Q63 . 	 	
1967 	 	
Ice cream and frozen
desserts:
1954 ..,..,.....,...
1958 	 	
1963 ...... 	 . 	
1967 	 	 	 	
Subtotal, sum of four
nd,, series:
;9v; . 	 	
;9;8 , 	 	 . .
1961 	 	
19r.:< 	 	 	 	
r'iuld milk:
L^~ 6 «... . „ ......
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-------
                HOME-DELIVERED  FLUID  MILK  SALES
      % OF TOTAL SALES
        1947
1951
1955
1959    1963
1967
1971
           SOURCE) *UNCHfSTE«, 4L.""* ( F HIIINC mil * -NDO'I'!^ PRODif', i SIN C IPLf 5, PR/1 C TICES, AND
            PPObl CM 5, (J ? DEf'AfirHlf~*IT Or A C?IC Ui. ~ I V F, A GRiC r' L 1 '1 P F ' i "WOMfC ftrpOK T ?i-/, /UWt" '971,
     U.S. D( PARTMLNT Of AORirul 1 URf
                                                      tCONOMiC RESEARCH SERVICE
                                   Figure  3

     In 1965, 20 companies in the  Unir.ed States operated 36 plants which
processed 3 percent of total volume  (tab!-. A15'"'. liy 1967, this figure had
increased to 5.1 percent and, by 1969., 23 companies operated 41 plants and
accounted for 6.8 percent of total volume,

     Some incentive for vertical Integra! lor. by supermarket chains is provided
by the existence of relatively high  fixeu s^rgim-. under resale price control.
Cnder such control, there has been considerable reluctance to permit quantity
discounts and limited service 'ielivery.  in these circumstances, supermarket
organizations have an incentive to build or acquire their own milk plants to
...; (;t:ure available profits.  In parts of the country where resale price control
does aot provide guaranteed margins, incs-rnt5ves -are less clear cut.  The
E rHU.'ipttt has been gi\ren that a ret.fd i o<>,jntzation deals with a different labor
organization than do processors and might be able to achieve economies of
distribution which conventional milk processors could not.  Generally, however,
this argument does net seam to have held.  Another possible incentive is that
a retail organization operating its own or-, Ik plant can be fully assured of
capturing all economies possible in a lar^e-volurnej limited service operation.
     economies might be prevcnced
       ;r r>r~. e*
                         ne>:oLj'-i.,ion with processors were
      because of trade practice regulation activities of Federal and State
agenci et>.

     A broad range of forces can afCect a food chain's decision to integrate
backward in the raaiketin^ channel.  These forces include:  (1) relative cost
of performing a set of functions under a vertically integrated system compared
with cost under an open market price system; (2) forces that may influence
                                       A- 14

-------
   Table A14 '.—Fluid milk products,  by type of outlet and distributor,
                                      1969
                                           Volume accounted for by —
         Outlet
:            '             :  Producer-
Commercial  : Subdealer  ^distributor  ;    Total
:processor  :           — :     2/       :
Home delivered 	:   15.4

Plant and farm sales to     :
 consumers 	:    3.0

Stores:                     :
  Supermarkets:             :
    Integrated 	:    7.1
    Other	:   21.6
  Dairy and convenience     :
   stores:                  :
    Integrated	:    3.4
    Other .	.	 ...:    5.2
  Other grocery stores and  ;
   delicatessens	,:    5.5
  Commissary stores 	:    1.0
  Nonfood stores 	:	._7_
      All stores	.:   44.5

Institutional outlets:      :
  Military	:    2.3
  Schools	:    5.4
  Restaurants, hotels, and  :
   institutions	;    8.3
      All institutional     :   16.0

Vending machines .	:	 1.8

           Total	:   80.7
                                                  Percent
                                             7.4
                                              .1



                                              .2

                                             5.6
                                             5.9



                                             1.4

                                              .9
                                             2.3

                                              .6
                              0.4
                                                           .9
                              1.1
                               .3
                              1.4



                               .3

                               .1
                               .4
 23.2
                                           3.9
                                           7.1
                                          21.7
  4.5
  5.4

 11.4
  1.0
   .7
 51.8
  2.3
  7.1

  9.3
 18.7

  2.4
                                            .16.2
                              3.1
100.0
  [/ Distributors who operate no milk processing facility but purchase their
total supply as packaged milk.
  21 Obtain their primary supply of raw milk for processing from their own
herds.
  3/ Les^ than 0.05 percent.
                                     A-15

-------
Table A15  .—Milk bottling plants operated by supermarket groups under Federal
           orders and other regulations, December 1965, 1967, and 1969 I/
Item
Plants:
Federal orders 	 	
Other 	
Total 	
Companies 	 	 	
Volume:
Federal orders 	
Other (estimated) 	
Total 	
Proportion of sales of

December
1965 : 1967 :


21 24
15 16
36 40
20 22

88,0 130.7
48.6 80.6
136.6 211.3

3.0 5.1
1969
)
28
13
41
23
209.7
96.0
305.7
6.8
    _!/ Most sales go through supermarket's stores.   At least 5  other  supermarket
  companies operate milk plants which supply other  outlets  beside  their  own
  stores; their volume is not. included here but in  table 19.

    Source:  Manchester, Alden C. Pricing Milk and Dairy Products, Principles,
  Practices, and Problems, Econ. Res. Serv. U.S. Dept. Agr., Rpt.  207, June 1971,
                                          A-16

-------
survival or growth of a firm;  (3) forces chat may have market power connota-
tions; and (4) the legal and institutional evironment--various laws, regulatory
agencies, and bargaining groups.

     The extent to which food  chains have adopted centralized milk programs
which represent various degrees of vertical coordination has been increasing.
Developments that undoubtedly  have resulted because of the forces encouraging
backward vertical integration  in fluid milk marketing channels by food chains
are:  (1) a general trend toward centralized buying and merchandising of
fluid milk; (2) adoption of limited service delivery and performance of
services in the marketing channel that traditionally were performed by fluid
milk processors; (3) more emphasis on price competition at the fluid milk
processor-food chain level of  negotiations; (4) more attention to separating
out the cost of fluid milk from the associated bundle of services at various
stages in the channel; (5) initiation of private-label brands; and (6) full
integration into fluid milk processing.

     A somewhat different form of Iritcgrati-'H--or coordination--which super-
markets are practicing may have a greater impact on distribution.  Food chains
increasingly are negotiating terms of trade at their division or regional
offices rather than at local stores.  A study of the North Central Region
found that about 80 percent of the supermarkets and 60 percent of the smaller
stores served by 183 food distributors without their own milk plants were
supplied milk on a centralized basi}

     Supermarkets are limiting the brands of ailk handled—often to their
private label and the brand of the processor supplying the private label.
The processor thus has an all-or-nothing bargainire. situation.  This result,
together with the size of the  account, has greatly increased the risk associated
with servicing store accounts.  To compete tor t.upcni>arket accounts, the
processor taust be large enough to hanule tiu. total volume of business of a
retail store division, which aay involve several market centers.  Since retail
store divisions are often dispersed over large areas, other fairly large
processors in the same vicinity could consequently lose their accounts.  Even
xf such processors continue to compete, the advantage lies with multiunit
processors who have plants covering the entire area served by retail store
divisions.

     from one point of view, a processor is not large enough to compete for
supermarket chain or group accounts if he would be unable to withstand the
; Ln..v.: ial chock of losing the  account later.  In general, medium-sized
processors can exist primarily by serving the home-delivery market and non-
supermarket portions of the wholesale market.   These outlets are significant,
however, and account, for about 68 percent of all milk distributed.


                           Indus cr^Coric en t ration

     Ei^br large dairy companies are Important in the market for all types of
dairy products.  Several date back into the 19th century, but major growth of
all eight has occurred since the turn of the century and of all but one, since
                                      A-17

-------
the mid-1920's.  Much of  the growth of  these  companies--like  that  of  other
industrial firms throughout the economy--occurred during  two  of the three
merger movements in the United States.

     The first wave of mergers around  1900  did not  include significant
activities in the dairy industry.  The  second merger movement--during the
latter half of the 1920's~-saw one dairy  company with sales of  over $100
million in 1919 more than double  its sales  volume,  primarily  because  of  mergers
within the industry.  Another company was organized in  1923 and immediately
began a period of rapid growth, primarily through mergers.  By  1930,  this
dairy company had become  the largest in the industry.

     The 1950's brought the third major merger movement.   As  in many  other
industries, several companies ii>  the dairy  industry grew  very rapidly,
primarily by merger with  other ? irrar: in the industry.   By 1956, each  of  the
eight national dairy companies "iad sales  of over $100 million,  although  not
entirely of dairy products.

     In 1934, the three Largest dairy  companies accounted for 22.8 percent
of sales of packaged fluid rnlik s-id crr^m made by all commercial handlers
(excluding producer~dey 1 !.-,rs ••„  3>  i:j'30,. their shar-a had declined to 16.4
percent.  Between lc?50 and  1957,  the charv»  of these three companies increased
modestly--from 16,4 to 18.8 perc'^ti!:.  T.-urin^  tm* same period, the  share  of
the fourth to eighth largest com^-.ar-.ios  went frrro 4.3 to 8.3 percent.

     Horizontal acquisitions made by dairy  companies have slowed substantially
since 1957, primarily because the FTC has challenged acquisition efforts of
a number of the large companies trader .section ? ol  the  Clayton  Act.  The four
largest fluid milk corapo-txlss dropped from a 23-percent  share  in 1958  to  21
percent in 196?,  This change was offset  with an equal  gain by  the fifth to
eighth largest: thus, tne eig!:t large-'-: maintained  their  29-percent share of
the; national market.  The ninth throngh 20th  Largest companies  also increased
their share so that the top 20 companies  moved from 37  percent  in  1958 up to
40 percent in 1967 (table A16),

     These large dairy companies, prevented from expanding their activities
;:.xj the dairy industry, have been diversifying into  a wider variety of product
lines.  Largely through mergers,  they have  moved into new lines inside and
outside the food Industry.

     Despite the rapid decline in plant numbers, concentration  in  manufactured
1,,-coducts has changed Ht'lu "
-------
Table A1&.-—Concentration In dairy manufacturing  and  fluid milk  industries,
                              census years  1947-67
         Industry and year
                                                 Value of  shipments
                                                 accounted for by^~
                                        4  largest
                                        companies
8 largest
companies
20 largest
 companies
                                                      Percent
  Butter:
    1947  	:      18
    1954  	:      14
    1958  	:      11
    1963  	:       8
    1967  	:      14

  Cheese,  natural  and  processed:      :
    1963  	...:      45
    1967  	:      45

  Condensed  and  evaporated  milk:      :
    1958  	:      38
    1963  		,:      33
    1967  	,.:      35

  Ice  cream  and  ices:                 :
    1954		,..:      33
    1958	:      35
    1963  . ,.,	..,....:      34
    1967	;      32

  Fluid milk and related  products:    :
    1958  .........	..	......:      2">
    1963	........:      22
    196?  .		............:      23
   19
   15
   14
   20
   50
   53
   48
   42
   47
   41
   44
   43
   42
   29
   29
   29
   32
   28
   24
   25
   33
   59
   62
   58
   55
   61
   52
   54
   57
   57
   37
   38
   40
    Source:   Bur.  of  the Census Census  of Manufactures,  1967  Special Report
  Series:  Concentratiqn Ratios  in Manufacluring, Part 2; Product Class Concen-
  tration._Ratios,  U.S. Degt. Commerce,  1971.
                                        A-19

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