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 controlphysically 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.
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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
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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
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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 storesexcept 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 disadvantagedboth 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 wheyor 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
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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
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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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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
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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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disposalthe 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
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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
-------
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 facilitieseither 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,,
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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
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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 ImpactOverview
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 responsibilitya 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 onethird 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
-------
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
-------
Leia^ trt.-a.tea by ,T
-------
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,
-------
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
-------
;-.,: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
-------
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
-------
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 disposalor 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
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A~7
A-7
A-8
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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 periodprimarily 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; .
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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 handledoften 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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