EPA 230/1 -74-040
JULY. 1974
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
Independent Rendering Industry
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 2046O
\
-------
ECONOMIC ANALYSIS OF PROPOSED EFFLUENT GUIDELINES
INDEPENDENT RENDERING INDUSTRY
Donald J. Wissman
Raymond J. Coleman
July, 1974
Prepared for
Office of Planning and Evaluation
Environmental Protection Agency
Washington, D. C. 20460
Contract No. 68-01-1533
Task Order No. 9
-------
This document will subsequently be available
through the National Technical Information Service,
Springfield, Virginia 22151
-------
PREFACE
The attached document is a contractor's study prepared with the super-
vision and review of the Office of Planning and Evaluation of the U.S.
Environmental Protection Agency (EPA). Its purpose is to provide a
basis for evaluating the potential economic impact of effluent limitations
guidelines and standards of performance established by EPA pursuant to
section 304(b) and 306 of the Federal Water Pollution Control Act.
The study supplements an EPA technical Development Document issued in
conjunction with the promulgation of guidelines and standards for point
sources within this industry category. The Development Document sur-
veys existing and potential waste treatment and control methods and
technologies within this category and presents the investment and oper-
ating costs associated with various control technologies. This study
supplements that analysis by estimating the broader economic effects
(including product price increases, continued viability of affected plants,
employment, industry growth and foreign trade) of the required application
of certain of these control technologies.
The study has been prepared with the supervision and review of the
Office of Planning and Evaluation of EPA. Thift report was submitted in
fulfillment of Contract No. 68-01-1533, Task Order No. 9 by Development
Planning and Research Associates, Inc. Work was completed as of
July, 1974.
This report is being released and circulated at approximately the same
time as publication in the Federal Register of a notice of proposed rule
making under sections 304(b) and 306 of the Act for the subject point
source category.
This report represents the conclusions of the contractor. It has been
reviewed by the Office of Planning and Evaluation and approved for pub-
lication. Approval does not signify that the contents necessarily reflect
the views of the Environmental Protection Agency. The study has been
considered, together with the Development Document, information
received in the form of public comments on the proposed regulation,
and other materials in the establishment of final effluent limitations,
guidelines and standards of performance.
-------
'a Be
CONTENTS
I INDUSTRY SEGMENTS I-1
A. General Description of the Industry I-1
B. Industry Segmentation 1-4
C. Number of Plants 1-6
1. Type of Plants 1-7
2. Size 1-7
3. Location 1-9
D. Market and Product Concentration 1-9
1. Number and Size of Firms 1-9
2. Level of Integration 1-12
3. Variety of Products Processed 1-12
4. Competition 1-12
E. Employment I- 14
II FINANCIAL PROFILE OF INDUSTRY II-1
A. Sales II-1
B. Distribution of Sales Dollars II-4
C. Earnings II-5
D. Industry Cash Flow II-5
E. Ability to Finance New Investment - II-5
1. General Industry Situation II-6
2. Capital Expenditure II-6
3. Capital Availability II-7
III MODEL PLANTS III-l
A. Types of Plants III-l
B. Sizes of Plants III-l
C. Investment and Assumptions III-2
1. Source of Data III-2
2. Age of Plants III-2
3. Exclusion of Mobile Equipment for
Assembling Raw Product III-3
4. Wages ' III-3
5. Price of Final Product III-3
6. Assets, Liabilities and Net Worth II1-5
7. Operating Capital III-5
D. Utilization III-5
E. Annual Throughput III-6
F. Annual Profits III-8
G. Annual Cash Flows III-8
H. Value of Assets III-ll
1. Replacement Values III-ll
-------
CONTENTS (continued)
2. Book Value of Investment TTT- 14
3. Salvage Value III-14
ni-is
I. Cost Structure III-15
1. Raw Material HI-15
2. Operating Costs HI-16
3. Depreciation and Interest III-16
4. Cost Relationships III-16
IV PRICE EFFECTS IV-1
A. Raw Product IV-1
B. Finished Product IV-2
C. Expected Price Impact IV-6
V ECONOMIC IMPACT ANALYSIS METHODOLOGY V-l
A. Fundamental Methodology V- 1
1. Benefits V-6
2. Investment V-7
3. Cost of Capital - After Tax V-7
4. Construction of the Cash Flow V-8
B. Price Effects V-9
C. Financial Effects V-l I
D. Production Effects V-ll
E. Employment Effects V-12
F. Community Effects V-13
G. Other Effects ' V-13
VI EFFLUENT CONTROL COSTS VI-1
A. Current Status of Effluent Control in the
Industry VI-1
3. "Typical" Effluent Control Costa VI-3
C. Effluent Control Costs for Model Plants VI-6
IMPACT ANALYSIS VU-1
A. Price Effects VII-1
1. Required Price Increase VII-2
2. Expected Price Increase VII-2
E. Financial Effects VII-5
1. Pre-tax Net Income VII-5
2. Return on Sales VII-7
3. Return on Invested Capital VII-7
4. Cash Flow VII-10
5. Net Present Value (NPV) VII-10
-------
CONTENTS (continued)
C. Production Effects VII-12
1. Production Curtailment VII-14
2. Plant Shutdowns Resulting from
Pollution Control Guidelines VII-15
D. Employment Effects VII-17
E. Community Effects VII-18
F. International Trade VII-18
VIII LIMITS OF THE ANALYSIS VIII-1
A. General Accuracy VIII-1
B. Range of Error VHI-2
1. Errors in Data VUI-2
C. Critical Assumptions VIII-2
1. Industry Structure VIII-3
2. Price Assumptions VIII-3
3. "Representative" Model Plants VIII-3
4. Water Pollution Control Costs VIII-4
5. Current State of Waste Water
Treatment in the Industry VIII-4
6. Salvage Values VIII-4
7. "Shutdown" Decisions VIII-4
SELECTED REFERENCES
-------
PHASE I - INDUSTRY DATA AND ANALYTICAL FRAMEWORK
I. INDUSTRY SEGMENTS
The purpose of this etudy is to analyze the economic impact of the cost
of proposed effluent control guidelines on the independent rendering in-
dustry. These requirements are being developed by EPA pursuant to
the Federal Water Pollution Control Amendment of 1972.
The three levels of treatment are being considered. They are:
1. Best practicable control technology currently available
(BPT) - to be met by industrial dischargers by 1977.
2. Best available technology economically achievable
(BAT) - to be met by 1983.
3. New source performance standards (NSPS) - to be applied
to all new facilities (that discharge directly to navigable
waters) constructed after the promulgation of these guide-
lines (approximately January 1, 1974).
A. General Description of the Industry
The independent rendering industry falls within Industry No. 2094, Animal
and Marine Fats and Oils. The 1967 Census of Manufactures describes
this industry as those establishments primarily engaged in manufacturing
animal oils, including fish oil and other marine animal oils, and by-
product meal, and those rendering inedible grease and tallow from animal
fat, bones, and meat scraps. Establishments primarily engaged in manu-
facturing lard and edible tallow and stearin are classified in Group 201;
those refining marine oils for medicinal purposes in Industry 2833; and
those manufacturing fatty acids in Industry 2899. The following products
are included in 2094.
Fish liver oils, crude Oil, neat's foot
Fish meal Oil, animal
Fish oil and fish oil meal Oils, fish and marine animal: herring
Grease and tallow: Inedible menhaden, whale (refined), sardine
Meat meal and tankage Stearin, animal: Inedible
1-1
-------
The independent rendering industry covered in this report includes only
meat-meal and tankage; animal oils; and inedible grease and tallow.
However, these three categories account for over 81 percent of the
value of shipments for the entire industry classification.
Total value of shipments in the industry (SIC 2094) increased from $558
million in 1967 to $910 million in 1972 (Table 1-1). Detailed census
statistics are available only for 1967 at which time value of the primary
products accounted for 94 percent of total shipments (industry speciali-
zation ratio of 94 percent). In 1967 the Animal and Marine Fats and Oils
(SIC 2094) coverage ratio was 67 percent. Total value of all primary
products made in all industries amounted to $709. 4 million. There was
no change in the specialization ratio and coverage ratio from 1963 to 1967.
In summary, the 1967 value of shipments for SIC 2094 amounted to
1967
Item Value of Shipments Percent
Grease and inedible tallow 201.9
Meat meal and tankage
Animal and marine products
Animal and marine fats and oils
Other secondary products
Total shipments
The rendering industry consists of off-site or independent Tenderers,
as well as on-site or captive Tenderers. It should be noted that the
on-site or captive Tenderers are not included in Industry No. 2094.
The independent Tenderers reprocess discarded animal materials such as
fats, bones, hides, feathers, blood, and offal into saleable by-products,
almost all of which are inedible for human consumption, and "dead stock"
(whole animals that die by accident or through natural causes).
Independent Tenderers operate regular daily truck routes to collect dis-
carded fat and bone trimmings, meat scraps, bone and offal, blood,
feathers, and entire animal carcasses from a variety of sources. In
some cases there are independent haulers who would pick up material
and sell it on a competitive basis to two or more rendering plants. These
1-2
-------
Table I-1 . Industry and primary product shipments; specialization ratios and coverage ratios
for Animal and Marine Fats and Oils (SIC 2094), 1967 and 1963
Year
1972
1967
1963
Value of Shipments (SIC 2094) Value
Primary
Primary Secondary Misc. Product Total Made
Total Products Products Receipts Speciliza- in All
tion Ratio Industries
($ mil 1 t°l~\
A . B C D E F
910 I/
557.9 472.1 31.3 54.5 94 709.4
474.0 430.4 24.5 19.1 94 642.9
of Primary Product Shipments
Made Made
In This In Other
Industry Industries
$ mil. )
G H
472.1 237.3
430.4 212.5
Coverage
Ratio
(%)
I
67
66
Source: 1967 Census of Manufactures.
1.' 1972 Census of Manufactures preliminary
-------
sources are butcher shops, supermarkets, restaurants, poultry pro-
cessors, slaughterhouses, and meat pacing plants, farmers and ranchers.
The independent rendering industry daily processes over 50 million pounds of
animal fat and bone materials, along with dead animals, that would other-
wise have to be suitably disposed of to prevent its becoming a national
public health problem. The rendering industry has been in the recycling
business for over a hundred years.
Payments by the independent tenderers to the meat processing industry
represent income to that industry and thereby reduces the cost of
meat to the consumer. Final products include tallow for soap and
derivatives for the chemical industry, and meal and inedible grease
for animal and poultry feed.
The United States is the world's leading producer, consumer, and ex-
porter of tallow and grease. The United States accounts for 55 to 60
percent of the world's tallow and grease output. The export market
has been the largest single outlet for inedible tallow and grease con-
suming about 50 percent of the domestic output.
In 1967 there were 558 establishments in the animal and marine fats
and oils industry. It was estimated that approximately 100 of these
were processing marine fats and oils. In 1973 it was estimated by the
industry that there were approximately 450 independent rendering establish-
ments processing animal by-products.
B. Industry Segmentation
The major segments of animal and marine fats and oils (SIC 2094) are
grease and inedible tallow (SIC 20941) and meat meal and tankage
(SIC 20942). Table 1-2 shows the value of shipments by all producers
of grease and inedible tallow to be $302.6 million, and the value of
shipments of meat meal and tankage to be $277. 8 million in 1967.
The above two segments account for over 80 percent of total shipments.
Foots, animal, vegetable and fish acidulated scrap stock accounted for
$33. 3 million in shipments and fish scrap and meal accounted for ship-
ments of $30. 1 million for the next two most important categories.
The $709.4 million shipments in 1967 represent shipments by all in-
dustries whether classified as primary or secondary products. The
major source of these products classified as "secondary" products was
from the captive or on-site Tenderers associated with the meat packing
industry. The independent Tenderers, with these products as primary
products, accounted for $557.9 million in shipments in 1967.
1-4
-------
Table 1-2. Products and product classes - quantity and value of shipments by all producers, 1967 and 1963
i
VJl
Product
.
AJIIXAl. Him XAR1NI FATS AKD OIUI, ivTAL1 -•
Cro... ud IMdlbl. t.llov"
Kc.t >o.l Md t.nk.icr (IKludlni tto.t n. 1, M.t .nd Oone ...1,
poultry byproduct seal, dlf..t.r twk.g , or •n'^"t^ ™M
Don. B.K!
ttnor'fccd .nd f.rltllur, Includlnl drl.d blood, «tc.
Ar.Uil «nd n.rtn. oil product., Inolttdlnl foot.
root. ulHl. v.tct.bl. .nd fl.h «nd .cldul.tod >o.p .lock.....
.11 otter .nlM.l ell «ic»pt f.tty Kid.
•.rid* «nl..l oil product.:
fllh .nd «.rlno «nl«.l oil
run .ertp «na «.l
Oth. r fl.b ua r.rln. «il».l oil product
ABlUl .nd -.no. J.t. .1* oil., »...k. C°r conp.nl.. .1th «>«
tojMl'U'Sir^'i.trinJ oil., n...k. (Tor co»p.nl.. .Ith U..
MM^ ^—
Unilol
fltlWII
— ^— — — ^-^~
llllon Ibi...
,000 ihort
. .do..
. .do..
. .do..
. .do..
Million Ibi...
Toul itiitjsenti indirfinj mteiplant Uans'eu
I3S
•
Quantity
_
(X)
3,381 3
3,757.0
3,191.2
110.7
MJ.O
•133.0
•40.1
(x)
(KA)
(XA)
(NA)
(X)
(X)
(x)
7
— -
Valui
(millio.n dollars)
— — —
7OT.4
301.4
777 .1
335.7
17.1
11.1
19.1
3.9
33.3
11.4
13. »
30.1
1.0
M.I
8.4
19C
— -~~ — —— •
Quantity
—^^-^—^-^
4,706.3
1,973.3
1,138.1
998.4
V 469.0
' 33.8
(X)
(X)
116.1
(X)
(X)
(X)
(X)
(X)
(X)
3
_— *-> — — —
Vllurt
rr.illio.i doMjn)
_^.^^.^.^.^-^—
641. t
iM. a
146.7
176.1
15.0
41.0
4.6
111.1
10.0
10.T
14.7.
41.0
1.1
0.8
10.7
than 10 eopLoy***. So« Sot...1
Note: Includes quantity and value of the products reported not only by establishments classified in this
industry, but also by establishments classified in other industries, and shipping these products
as "secondary" products.
-------
In terms of raw product volume the animal segment processes roughly
three times the volume of the marine segment. In terms of finished
product, there is an even larger differential since yields from animal
rendering tend to run roughly 50 percent higher than for fish reduction.
Raw product volume for 1971 is as follows:
Raw Product Volume
Segment (millions of pounds)
Animal rendering 10,854
Fish reduction 3,034
Total, SIC 2094 13,888
The raw product volume for the animal segment was estimated by apply-
ing product coverage ratios implied by the 1967 Census of Manufactures
Report to the total U. S. production data of inedible tallow and grease and
meat meal and tankage production as reported in the U. S. Department of
Commerce Current Industrial Report Series M20J and M20K. An average
yield factor of 50 percent was then assumed to calculate raw material
volume. The resultant estimates compare favorably to the National
Renderers Association's unpublished estimates of 10 to 12 billion pounds
for 1971. In estimating raw product volume for the marine segment a
similar approach was used, however, more reliance had to be placed on
DPRA estimates of volumes of miscellaneous products and product
coverage ratios. To the greatest extent possible, data published by the
National Marine Fishery Service was included in the calculations.
Again it must be noted that these two segments do not represent 100 per-
cent coverage of the industry. However, within the constraints of the
study, it was not possible to examine the other miscellaneous categories
of plants.
C. Number of Plants
The number of establishments listed in the primary product classification
2094 of the 1967 Census of Manufacturing was 588. It is estimated that
approximately 500 of these were processing animal and poultry byproducts.
It has been estimated that there are currently 450 plants involved in the
latter activity and will processing approximately 10 to 12 billion pound
of raw product in 1974 (1). •
1-6
-------
I. Type of Plants
Inedible rendering plants are of two basic types: (1) batch process and
(2) continuous process. The batch process type is the older process and
currently accounts for 75 to 80 percent of present plants. Most of the
newer installations are using the continuous process type plant which is
somewhat more efficient with better quality control. However, the con-
tinuous process does not appear feasible for the small independent rendering
operators where new installations if any would probably continue to be the
batch-type process.
A distinction should be made between the city and country Tenderers.
The country Tenderers normally have older processing equipment of
lower capacity, longer route runs with their trucks to pick up dead stock
and other types of lower yield raw material. The lower yield results
from higher moisture content. The average industry yield is estimated
at 50 percent with the small rural plants running about 45 percent (1). The
batch plants and continuous process plants would obtain the same yield
relationships with identical raw material.
2. Size
The size distribution of establishments for 1967 is shown in Table 1-3
for the independent inedible rendering industry. The data reflect approx-
mately two-thirds of the total inedible rendering industry. The remaining
one-third production derives from captive or on-site Tenderers associated
with meat and poultry processing establishments. The value of shipments
in 1967 ranged from less than $100,000 for those with one to four employees
to over $7 million for those with more than 100 employees. The mean
average establishment was characterized as having 23 employees with
value of shipments of nearly $1 million. However, the use of the mean
value to describe the "average" plant can be very misleading since the
data are skewed considerably to the right of the size distribution. It can
be noted that 362 (61%) of the 588 firms in SIC 2094 had average sales equal
to or less than $489,700 during 1967. Furthermore, 519 (88%) of the 588
firms had average sales of $1, 319, 100 or less. It is estimated the median
size plant had sales of approximately $475,000 compared to the mean size
of $948, 800 in 1967. As a result of some consolidation and increased final
product prices, the current value of shipments of the average establish-
ment is approximately 50 percent higher in 1972 than in 1967.
1-7
-------
Table 1-3. Size, structure of the Animal and Marine Fats and Oil Industry,
(SIC 2094), 1967
Establishments Number of Value of
•with an Average of: Establishments Shipments
1 -
5 -
10 -
20 -
50 -
100 -
4 Employees
9
19 "
49 "
99
249 "
132
103
127
157
51
18
($ OOO's)
12,000
27,900
62,200
207, 100
117,700
131,000
Average Value of
Shipments per Firm
<$ OOO's)
90.9
270.8
489.7
1,319. 1
2,307.8
7,277.7
Totals 588 557,900 948.8
Source: Size of Establishments, 1967 Census of Manufactures.
1-8
-------
The National Renderers Association provided their estimate of the size
distribution of the 450 independent rendering plants grouped by typical small,
medium and large size plants. It is as follows:
Item Small Medium Large
Pounds/day y 37,000 125,000 350,000
Pounds/year-' 9,250,000 31,250,000 87,500,000
No. of Plants 210 200 40
_' Raw product
3. Location
Geographic distribution of the independent inedible rendering industry is
indicated by Table 1-4. The rendering establishments are dispersed
throughout the United States. The dispersion reflects the perishability
of the raw product and therefore the necessity to have the rendering
facilities near the source of supply.
Independent Tenderers are located in both urban and rural areas. It is
estimated that over 50 percent of the members of the National Renderers
Association are located in rural communities where small slaughter-
houses and locker plants are located (1). These rendering plants also
process the dead animals that originate from small farms and feedlots
located in these areas.
D. Market and Product Concentration
1. Number and Size of Firms
Of those firms operating the estimated 450 plants in the inedible rendering
industry, approximately 15 are multi-plant operations. One publicly-
owned and two privately-owned firms are each operating 15 to 30 plants.
Four firms (one of which is publicly-owned) are operating five plants
each. Those operating two to four plants would include approximately
5 to 10 firms, and the remainder would be single owner plants. Most of
the firms are family-owned enterprises.
The relative sizes of the 50 largest firms in the inedible rendering industry
are given in Table 1-5. Fifty-seven percent of total industry shipments in
1967 were accounted for by the 50 largest firms. This percentage re-
mained relatively unchanged from 1963.
1-9
-------
Table 1-4. Distribution of establishments in the Animal and Marine
Fats and Oils Industry, 1967
Geographic Area
United States
Northeast Region
New England Oiv.
Middle Atlantic Div.
North Central Region
East North Central Div.
West North Central Div.
South Region
South Atlantic Div.
East South Central Div.
West South Central Div.
West Region
Mountain Div.
Pacific Div.
No. of Establish.
with 20 or more
employees
rotai
588
110
31
79
198
100
98
172
74
34
64
108
30
78
226
42
11
31
69
36
33
80
39
13
28
35
6
29
All Employees
Number
13,700
2,700
900
1,800
4,500
2,700
1,800
4,400
2,000
700
1,700
2,100
400
1,700
Payroll
($ mil. )
91.3
19.6
5.9
13.6
31.4
20.2
11.2
23.6
11.7
3.6
8.3
16.8
2.4
14.4
Value
of
Shipments
($ mil. )
557.9
108.9
28.7
80.2
179.3
119.7
59.6
138.3
69.7
19.7
48.9
131.3
15.1
116.2
Source-: 1967 Census of Manufactures.
I-10
-------
Table I- 5. Value of shipments accounted for by the largest companies from all sources,
in SIC: 2094, 20941 and 20942 for 1967, 1963, and 1958
4 Largest
Year
2094
Animal & Marine Fats & Oils 1967
1963
1958
20941
J, Grease & Inedible Tallow 1967
1963
1958
20942
"Meat Meal & Tankage V967
1963
1958
Total
($ mil. )
709.4
642.9
534.3
302.6
264.2
246.7
277.8
246.7
174. 3
% of
Total
18
18
19
23
26
23
2T)
20
22
$ per
Firm
(mil.)
31.9
28.9
25. 3
17.4
17.2
14.2
TV9
12.3
9.6
5-8 Largest
% of
Total
8
9
9
10
8
11
11
9
8
$ per
Firm
(mil.)
14.2
14.5
12. 0
7.6
5.3
6.8
7.6
5.5
3.5
9-20 Largest
% of
Total
15
13
NA
16
12
13
16
16
14
$ per
Firm
(mil.)
8.9
6.9
-
4.0
2.6
2.6
3.7
3. 3
2.0
21-50
% of
Total
16
16
NA
16
16
14
19
19
16
Largest
$ per
Firm
(mil.)
3.8
3.4
-
1.6
1.4
1. 2
1.8
1.5
.9
Source: Concentration Ratios, Census of Manufacturers, 1967.
-------
2. Level of Integration
The total inedible rendering industry is basically segmented into the
"captive" sector which is integrated with the meat and poultry processing
industry and the independent sector which operates free-standing plants
apart from any allied industry.
In 1968 there were approximately 770 firms operating 850 facilities in
the production of animal and marine fats and oils. It is estimated that
330 of the facilities were independent or captive renderers controlled
by the meat and poultry processing industries. Four out of five of
these establishments were engaged in edible as well as inedible rendering.
Approximately 460 of the facilities were operated by independent renderers
whose final product was 100 percent inedible material. The inedible final
products are sold on the commodity market, and therefore the independent
renderero would be characterized as being neither integrated forward to
final product nor backward to the source .of raw product.
3. Variety of Products Processed
The independent renderers reprocess discarded animal and poultry materials
such as fats, bones, feathers, blood and offal into saleable by-products?, ail
of which are inedible for human consumption. These products are obtained
from slaughterhouses, meat markets, and eating establishments. A typical
1, 000-pound beef animal butchered for human consumption would yield
approximately 100 pounds of rendered finished product. The yield wouM
consist of approximately 62 pounds of tallow, 33 pounds of 50 percent meat
and bone meal, and five and one-half pounds of dried blood. (3)
The independent renderers also process cows, horses, sheep, poultry and
other animals v/hich have died from natural or accidental causes. This-
provides recycling of material that would have to be disposed of otherwise
to prevent its becoming a public health problem.
4. Competition
Raw Product
On-site processors have a captive supply of raw product determined
by primary operations. Raw product supply for independent renderers
is usually arranged by contracts with suppliers. Raw product prices are
generally more stable than finished product on both up and down markets..
By its- very nature, raw product is a relatively low-priced item, and
therefore considerable service competition, rather than price competition,..
1-12
-------
exists in the industry. Since raw product is a by-product of processing
meat or poultry, supply is very inelastic. Because of perishability of
raw product, sources of supply are usually limited to 150-mile radius of
processing plant.
Finished Product
The export market represents the largest market sector for inedible
grease and tallow, accounting for nearly 50 percent of total United States
production. The United States is the leading producer and exporter of
inedible tallow. The export market is, of course, subject to many and
varied pressures, but has maintained a fairly constant percentage of
domestic production. Demand pressures exert considerable influence
on the domestic market price.
Since 1961, animal feeds use has displaced soap as the second highest
consumer of inedible tallow and greases. However, the use of more non-
detergent soap could reverse thia trend in the future. The production of
fatty acids, lubricants and similar oils, and other uses account for the
balance of use.
A free market exists for inedible tallow and greases with price determined
by supply and end-use demand. Fluctuations in average annual prices are
shown in Table III- 1.
Meat and bone meal is used basically as a high protein feed supplement
for animals and poultry. For this use it competes in the market place
with other high protein products. Two of the more important competitive
products are fish meal and soybean meal. The annual average prices of
these products are shown along with the prices of 50 percent meat and
bone meal in Table III- 1. A sharp decrease in the supply of fish meal in
1973 was reflected in extreme changes in the prices of not only fish meal,
but also a meat and bone meal and soybean meal. The end-use demand
for meat and bone meal has a high cross-elasticity with other high pro-
tein supplements and the Tenderers have little control over the market
price.
1-13
-------
E. Employment
Total employment in the inedible rendering industry hae decreased over
40 percent from 14.600 employees in 1958 to 10,000 employees in 1972.
Production workers represent approximately 80 percent of total employees,
and during the above period decreased from 10,900 to 8,000. It should be
noted that value of shipments increased from $389 million in 1958 to $910
million in 1972. A portion of the increase in value of shipments can be
attributed to an increase in price of finished product, but there has also
been a substantial increase in productivity. For instance, the production
of tallow and inedible grease increased from 3.2 billion pounds in 1958
to over 5. 2 billion pounds in 1971. (2) A major portion of the reduction
in employees has occurred within the past five years and coincides with
the introduction of continuous process rendering systems and more efficient
materials handling equipment.
Production workers in the industry are largely unskilled. Much of the
labor is involved in collection and the handling of raw product. Average
hours worked by production employees have remained relatively stable
and totaled 2,125 hours per employee in 1972.
Although total number of employees declined by 40 percent during the
1958-1972 time frame, total payroll increased 60 percent from $67.9
million to $108 million. A doubling of wages per production worker
man hour took place with wages increasing from $1.97 in 1958 to $4.00
in 1972; Value added per production worker man hour was quite volatile
(resulting from price fluctuation of final product) but over the 14-year
period increased from $6.42 to $19.18. Furthermore, the value of ship-
ments per production worker increased from $58, 000 to $96, 200 during
the same time period.
I- 14
-------
Table 1-6. Employment statistics for the Animal and Marine Fats and Oils Industry,
SIC: 2094, 1958-1971 \J and 1972 i'
All Employees
Year
1958
1959
1960
1961
1962
1963
7 1964
~ 1965
1966
1967
1968
1969
1970
1971
1972
No.
(000)
14.6
14.0
13.7
12.6
13.3
14.3
14.2
14.2
13. 3
13.7
13. 1
13. 1
12.9
12.4
10.0
Payroll
($ mil.)
67.9
67.0
69.9
69.0
74.2
78.3
84.6
90.2
89. 3
91.8
92.8
99.5
108.6
111.9
108.0
Production Workers
No. Man Hrs
(000)
10.9
10.6
10.0
9.4
9.8
10.3
10.4
10.2
8.7
9.5
9.2
9.4
9.4
9.0
8.0
(Mil.)
23.6
21.8
21.8
20.5
21.2
22. 7
23.9
23. 7
19.8
21.7
20. 1
21. 1
22.2
19.5
17.0
. Wages
($mil.)
46.4
45.9
46.9
46.5
50.0
51.3
54.7
56.6
50.6
58.2
58.7
63.7
66. 1
68.6
68.0
Value of Man Hrs.
Shipments -per
per Production Production
Worker Worker
($000)
35.7
33.3
31.8
40.0
40.9
46.0
52.9
65.6
88.0
58. 7
56.0
64.8
87.5
96.2
113.7
(000)
2. 165
2.057
2. 180
2. 181
2. 163
2.204
2.298
2.324
2.276
2.284
2. 185
2.245
2.255
2. 167
2. 125
Wage Per
Production
Worker
Man Hour
1.
2.
2.
2.
2.
2.
2.
2.
2.
2.
2.
3.
3.
3.
4.
($)
966
106
151
268
358
260
289
388
556
582
920
019
118
518
000
Value Added
Per Production
Worker
Man Hour
($)
6.
6.
5.
8.
7.
8.
8.
10.
15.
9.
9.
10.
13.
14.
19.
42
44
92
00
93
52
82
48
48
49
50
95
73
26
18
_
Source: 1971 Annual Survey of Manufacturing.
—' Source: 1972 Census of Manufactures, Advance Report.
-------
U. FINANCIAL PROFILE OF INDUSTRY
Firms in the rendering industry are family or closely-held corporations.
As a result, financial information is considered proprietary and there-
fore extremely difficult to obtain. Information used to develop financial
profiles for the industry was integrated from several sources. These
sources include the 1967 and 1972 Census of Manufacturers, the Annual
Survey of Manufacturers, interviews with equipment suppliers, National
Renderers Association, consulting engineering firms and associated industry
operation and financial statistics.
A. Sales
Total sales of the independent rendering industry were $910 million in 1972
(Table II-l). This compared to $557.9 million in 1967 and $389.3 million
in 1958. The increase in total sales has resulted from both an expansion
of production of livestock and poultry and an increase in the overall price
level. During the past two decades the total production of inedible tallow
and grease has increased from 2.3 billion pounds in 1950 to an estimated
5.4 billion pounds for 1971-1972.
Volume of production is predetermined by the availability of raw product.
This is a finite quantity and the amount processed by the independent r.en-
derers in 1973 has been estimated by the industry at 10 to 12 billion pounds.
In 1971 the value of shipments for the animal and marine fats and oils
industry (2094) was $865.9 million for 588 firms. This gives shipments
for the average plant of $1,472,000. This compares to $948,800 for the
average plant in 1967 (Table II-2).
While the average plant had sales of nearly one and one-half million in
1971 with 21 total employees, the actual plants varied considerably in
size. Actual plants ranged in size from small operations employing one
to four employees with annual sales less than $100,000 to large operations
employing over 100 men with sales of $5 to $10 million.
II-l
-------
Table II-1. Value of shipments by establishments in Primary
Product Classification, SIC 2094, 1958 - 1972
Year Value of Shipments
($ millions)
1958 389.3
1959 353. 1
I960 318.0
1961 376.3
1962 400.6
1963 474.0
1964 550.4
1965 669.2
1966 765.3
1967 557.9
1968 515.1
1969 608.7
1970 822.5
1971 854.9
1972 910.0-
Number of establishments in 1967: 588.
Source: 1971 Annual Survey of Manufactures
1972 Census of Manufactures
U-2
-------
Table II-2. Shipments, value added, and employees in the independent rendering
industry, 1967 and 1971
1967 Lf Per 1967 2J Per 1971-' Per
Firm Firm Firm
Number of firms 15 588 588
Value of shipments $20. 9 mil. $1,393,000 $557. 9 mil. $948,000 $865. 9 mil. $1,472,000
Value added 9. 3 mil. 620,000 206.0 mil. 350,000 278. 1 mil. 473,000
Total employees 458 30 13,700 23.3 12,400 21
— 1967 Enterprise Statistics, Department of Commerce.
— 1967 Census of Manufactures.
— 1971 Annual Survey of Manufactures.
-------
B. Distribution of Sales Dollars
Distinct changes have occurred in distribution of the sales dollar from
1967 to 1971. Some of the changes can-be attributed to price effects, but
some undoubtedly reflect the changes resulting from increased capital1
expenditure. Cost of material increased from $349 million in 1967 to
$558 million in 1971. As a percent of sales dollar, this represented an
increase from 62 percent to 66 percent.
The number of production workers declined from 9,500 in 1967 to 9,000
in 1971. During this period wages increased from $2. 68 to $3. 52 per
hour. However, during the period production worker wages as a percent
of sales declined from 10. 5 percent to 7. 9 percent of the sales dollar.
Other operating cost, taxes and profit declined from 27. 5 percent
in 1967 to 26. 1 in 1971. The distribution of the total sales dollar
derived from the Census of Manufacturers and Annual Survey of Manu-
factures is summarized below.
Distribution of Sales Dollar (Percent)
1967*
Total Sales 100. 0
Raw material 62.0
Production wages 10.5
Other operating cost
taxes and profit 27.5 26.1
II-4
-------
C. Earnings
No published data on earnings has been obtained on the rendering in-
dustry. From our discussion with industry and other information, we
have estimated earnings for 1972 by size and type of plant in the fi-
nancial profiles of the model plants. The reader should turn to Chapter
III, Section F, for a discussion of earnings by type and size of plant.
D. Industry Cash Flow
See Chapter in, Section G
E. Ability to Finance New Investment
The ability of a firm to finance new investment for pollution abatement
is a function of several critical financial and economic factors. In gen-
eral terms, new capital must come from one or more of the following
sources: (1) funds borrowed from outside sources, (2) equity capital
through the sale of common or preferred stock, (3) internally generated
funds--retained earnings and the stream of funds attributed to depreci-
ation of fixed assets.
For each of the three major sources of new investment, the most criti-
cal set of factors is the financial condition of the individual firm. For
debt financing, the firm's credit rating, earnings record over a period
of years, stability of earnings, existing debt-equity ratio and the lenders'
confidence in management will be major considerations. New equity
funds through the sale of securities will depend upon the firm's future
earnings as anticipated by investors, which in turn will reflect past
earnings records. The firm's record, compared to others in its own
industry and to firms in other similar industries, will be a major de-
terminant of the ease with which new equity capital can be acquired.
In the comparisons, the investor will probably look at the trend of
earnings for the past five or so years.
Internally generated funds depend upon the margin of profitability and
the cash flow from operations. Also, in publicly held corporations.
stockholders must be willing to forego dividends in order to make earn-
ings available for reinvestment.
The condition of the firm's industry and general economic conditions are
also major considerations in .ill-acting new capital. The industry will
be compared to oihor similar industries (i.e., other processing in-
dustries) in terms of net profits on sales and on net worth, supply-
demand relationships, trends in production and consumption, the state
of technology, impact of government regulation, foreign trade and other
II-5
-------
significant variables. Declining or depressed industries are not good
prospects for attracting new capital. At the same time, the overall
condition of the domestic and international economy can influence'
capital markets. A firm is more likely to attract new capital during
a boom period than during a recession. On the other hand, the cost
of new capital will usually be higher daring an expansionary period.
Furthermore, the money markets play a determining role in new
financing.
These general guidelines can be applied to the inedible independent
rendering industry by looking at general economic data and industry
performance over the recer.t past.
>. General Industry Situation
Although difficult to assess, the industry appears to be in a relatively.
healthy position at the present time. Apparently the industry has been
alert to adopt changes in technology which have increased productivity
at an ^bove-average rate since 1958.
Because of the inelasticity of supply for raw product and the high cross-
elasticity of demand for final product, profit levels vary widely from
year to year. Profits in 1973 were probably at an all-time high result-
ing from the generally high prices for commodities. The higher prices
reflected increased world demand as well as the drastic curtailment of
the supply of fish meal. Supply and demand pressures will undoubtedly
force profit levels to return to the more normal ranges.
Considerable concern is apparent in the industry with regard to controls
relating to odor control, water pollution and occupational safety and
health. The investment needed to meet these requirements contribute
little to increased productivity, and it was felt the major portion of these
costs must be absorbed within the industry. A major concern was the
fact that the feasibility of controls for each of these areas is considered
separately, but the impact is additive.
2 Capital Expenditure
Capital expenditures in the rendering industry are compiled on an annual
basis by the Annual Survey of Manufactures. These data are shown in
Table II-3. Total industry expenditures for new plants and equipment have
expanded rapidly from $13.9 million in I960 to $43 million in 1972. Expend-
itures were averaging about $20 million per year during the latter part of
the 60's but increased to $28. 5 million in 1970, then jumped to $43 million in
II-6
-------
1971 and 72. On a per plant basis, average expenditures increased from
about S35 thousand to $48.5 in 1970 and $73.0 in i971 and 1972. This is
largely due to ihe installation of new continuous process plants which
are rapidly replacing the older batch type plants as well as expenditures
for odor control and waste-water treatment.
3. Capital Availability
In summary, it would appear that the industry has been able to maintain
a profit position comparable to the average manufacturing plant in the
United States. Another important consideration is that the industry also
has been able to maintain T. relatively stable profit margin over the
recent years. In addition, sales in the industry have been constantly-
increasing at a 5 percent rate per year over the decade.
The industry has a large number of single plant firms, many of which
are family-owned and operated. This is especially true among the smaller
size categories. Family-owned plants would tend to have a high ratio of
net worth to total assets. Most likely they would tend to self-finance any
additional capital project as indicated in the report by the Committee on
Small Business.
New capital expenditures by the industry have been constantly increasing
over the past 10 years and averaged 73,000 dollars per plant for 1972.
for all plants in the industry.
The rendering industry is in a reasonably good financial position and
is constantly making new capital investment in existing plants. On this
basis it appears that industry does have the ability to raise reasonable
amounts of capital for pollution control equipment, either through retained
earnings or debt capital. It should be recognized, however, that there
are a number of plants operating at profit levels lower than the averages
reported herein that may conceivably incur substantial difficulty in obtaining
the necessary capital to invest in pollution control equipment. The lower
profit levels would tend to be associated with the rural Tenderers and
these are the ones that would face limited capital availability.
II-7
-------
Table Il-'i. rr.-.ual expenditures for new plant and equipment in the
:r.uependent rendering industry, 1958-1972
Year
1972^'
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
I960
1959
1958
Tolal industry
expenditures.!.'
5 .I.C. 2094
(SI. 000)
43.0
43.4
28.5
19.5
18.7
21.7
22.6
12.7
14.7
13.7
20.6
15.3
13.9
19.2
12.7
Expenditures as
percent of value
of shipments
4.7
5.0
3.5
3.2
3.6
3.9
3.0
1.9
2.7
2.9
5.2
4.1
4.4
5.4
3.3
Average expenditures
per plant?/
($1.000)
73. 1
73.8
48.5
33.2
31.8
36.9
38.4
21.6
25.0
23.3
35.0
26.0
23.6
32.7
21.6
_{_/ 1971 Annual Survey of Manufactures
2/ Based upon number of establishments in 1967 of 588
3/ 1972 data t'rom 1972 Census of Manufactures
II-8
-------
III. MODEL PLANTS
A. Types of Plants
Two types of plants, the batch system and the continuous system, are
basic to the rendering industry.
Batch rendering is a cooking and moisture-evaporation operation per-
formed in a horizontal steam jacketed cylindrical "cooker" equipped
with an agitator. It is referred to as a dry rendering process because
the raw material is cooked with no addition of steam or water and because
the moisture in the material is removed from the cooker by evaporation.
It is a batch process because it follows the repetitive cycle of charging
with raw material, cooking under controlled conditions, and finally
discharging of the material. Average process time per cooker charge
is approximately two hours. Plant capacity is a function of the number
of "cookers" and these usually range from 3 to 10.
Continuous rendering systems represent a relatively new technology and
most of these systems ha-ve been introduced within the past five years.
A continuous system has the ability to provide an uninterrupted flow of
material. Other advantages claimed for the continuous system are:
improved quality control; better confinement of odor and fat aerosol
particles within the equipment, thereby requiring less cleanup; less
space; and less labor for operation and maintenance. Continuous systems
permit increased throughput and sometimes can facilitate the consoli-
dation of two or more plants. Seldom are continuous systems used for
very small operations of independent Tenderers, although some are used
by small on-site processors.
The model plants used in this analysis reflect both batch and continuous
process systems.
B. Sizes of Plants
The value of shipments of independent Tenderers in 1967 was $557.9
million (7). This gives an average for the 588 firms of $948.8 thousand.
Using the average weighted price of 5. 3 cents per pound of inedible
tallow and meat meal and tankage results in 19.8 million pounds of final
III-l
-------
product per firm in 1967. This average weighted price is calculated on the
basis of 60 percent inedible tailow at 5. 6 cents per pound and 10 per cent
meat meal and tankage at 3. 7 cents per pound.
The total value of shipments in 1971 was $865.9 million which results in ship-
ments per firm in 1971 of $1, 473, 000. Applying the average 1971 price of
6< per pound (60 percent inedible tallow at 7 cents per pound and 40 percent
meat meal and tankage at 4. 6 cents per pound) indicates shipments of
24. 5 million pounds of finished product per average firm in 1971 (8).
The criterion for defining size of plant is the hourly raw product capacity.
For the batch process, three sizes of model plants were used for the
analysis, and these were designated small, medium and large. The small
batch plant has a raw product input capacity of 4, 650 pounds per hour.
The medium plant has an input capacity of 11, 760 pounds of raw product
per hour. The large plant has the capacity to process 29,400 pounds of
raw product per hour. Normally a plant is operated at 100 percent of
capacity when operating. Processing capacity can be expanded by increasing
thr number of hours operated (see Page III-5).
Annual sales of the model batch process plants for 1971-1972 were: (1) small plant
$252, 000; (2) medium plant $882, 000; and (3) large plant $2, 200, 000.
Two sizes were used for the continuous rendering process. These
were designated medium and large. The medium plant can process
14, 285 pounds of raw product per hour while the large plant can proce'ss
a raw product input of 35, 700 pounds per hour. Annual sales of the model
continuous process plants for 1971-1972 were $1,080,000 for the medium
size and $2, 690, 000 for the large size.
C. Investment and Assumptions
1. Source of Data
Since there were no published data for individual firms within the
rendering industry, a synthesis was derived from composite industry
statistics found in the Census of Manufactures, Annual Survey of Manu-
factures, 1967, Enterprise Statistics, interviews with equipment
suppliers, consulting engineers, and the National Renderers Association.
2. Age of Plants
The 1971-1972 period was taken as the year of operation of the model
plants. Severe price distortions occurred in 1972-1973 and it was felt
the later period would not reflect the true relationships which exist
within the industry.
III-2
-------
The age of the batch process plants was estimated at 1 3 years. Buildings
were depreciated over a 30-year period, whereas equipment was
depreciated over a 12-year period. Equipment was depreciated to 50
percent of its original cost and it was assumed additional investment
and modernization over the years would maintain the book value of the
equipment at 50 percent of the original cost.
The age of the continuous process plants was estimated at 2 years. The
majority of installations of the continuous plants have been made within
the past five years. The buildings were depreciated on a 30-year basis
with equipment being depreciated on a 10-year basis.
3. Exclusion of Mobile Equipment for Assembling Raw Product
Particular attention should be directed to the fact that mobile equipment
and employees for operation of this equipment bave been excluded from
the model plants. However, a charge has been included for the pro-
vision of this function. The charge includes allowance for normal return
on investment, wages and other normal operating expenses associated
with this function. Some Tenderers have contracts with sources of raw
material, and regular daily truck routes are used to collect the raw
product. Independent collectors also provide this function. It was felt
that the salvage value of this sector of the rendering plant would differ
considerably from the actual rendering operations. Therefore, a
separate cost factor was derived for transportation of raw product.
The number of employees in the transportation of raw product normally
equals or exceeds the other production employees. This factor reduces
the wages and salaries for the model plants, but is offset by the higher
transportation cost. The major portion of transportation cost would be
reflected in value added for the firm or industry.
4. Wages
Wage rates for production workers were calculated at $4. 00 pe r hour with
hours worked per year of 2, 167. The average wage in 1971 for the industry
was $3. 51 and it was estimated to increase to the $4. 00 per hour rate.
5. Price of Final Product
The price of final product varies quite widely for the rendering industry.
The price variation for recent years are shown in Table III-l. A high
degree of interdependence exists between the prices of high protein
ingredients used as livestock and poultry feed supplements. The shortage
of fish meal in 1972-1973 caused prices of inedible tallow and meat meal
HI-3
-------
Table IH-1. Comparative average prices of inedible tallow, 50 percent meat and bonemeal,
fish meal and soybean meal, 1965-1973
1965-66 1966-67
Tallow, Prime -1 7,3 5,5
(^ per pound)
50% Meat & Bonemeal -^ 105,30 94,00
(// per ton)
Fish Meal -l 146.40 119.90
Imported East Coast
($per ton)
Soybean Meal -' 89,60 86.30
49-50% solvent
Decatur, $ per ton
1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 June 1973
4.6 5.8 7.5 7.6 6.4 12.8 16. 8 i/
2/
88.80 91.60 106.80 95.60 111.25 -- 395.00-
118.25 156.75 178.00 173.20 172.70 -- 570.00
84.30 82.50 86.60 84.30 98.20 -- 450.00
!' Source: The Feeds Situation
2/ Estimated
—' Source: U.S. Fats and Oils Statistics
-------
to rise dramatically. It was felt the most recent price structure re-
flecting a stable relationship in the industry was 19*71-1972. Using a
weighted average of $128. 00 per ton (6.4
-------
The medium and large batch process plants are assumed to be on a 10-hour
day, operating 250 days per year. The small batch process plant is assumed
to be operating 8 hours per day, 250 days per year. Most of the small
batch plants would be located in the more rural areas. The continuous process
model plants are assumed to be operating 10 hours per day, 250 days per year.
Processing capacity can be increased by extending the hours per day as
well as the days per year. However, 10 hours oer day and 250 days per
year seems to be the minimum desirable utilization rate for allocation
of investment overhead.
E. Annual Throughput
Yield of raw product varies according to the type and quality of material
and processing. A yield of 45 percent by weight was assumed for the
small batch plant and 50 percent for the medium and large plants. It
was assumed the medium and large plants would be more urban and
would, on the average, have slightly higher quality of raw product.
The major output of independent Tenderers is inedible tallow and meat
and bone meal. Using quoted prices and total sales for the industry,
it was estimated that the value of shipments of the model plants would be
55 percent from inedible tallow and 45 percent from meat and bone meal.
Annual throughput of the model plants is summarized in Table III-2.
The small hatch plant is assumed to be operating 8 hours per day, 250
days per year. The small batch plant has a daily input of 37, 000 pounds
per day or 9. 3 million pounds per year. A yield of 45 percent results
in 4. 2 million pounds of finished product annually (55 percent inedible
tallow and 45 percent meat and bone meal). The medium and large batch
plants are assumed to be operating 10 hours per day, 250 days per year.
The medium batch plant processes 29. 5 million pounds of raw product
with a resultant 14.7 million pounds of finished product annually. The
large batch plant has an input of 73. 5 million pounds which yields an
annual finished product of 36. 8 million pounds. The medium and large
continuous process plants are assumed to be operating 10 hours per day,
250 days per year.
The medium continuous process plant has an annual input capacity of 36
million pounds of raw product based upon 250 days per year operation.
A yield of 50 percent gives annual finished product of 18 million pounds.
The large continuous process plant has a raw product input of 89 million
pounds annually with a resultant finished product of 44. 6 million pounds.
Ill-6
-------
Table lll-i. Input-output of model plants in the meat by-products
inedible rendering industry
Raw Product
(OOO's) Ibs/hour
Ibs/day
Ibs/year
Finished Product—
(OOO's) Ibs/hour
Ibs/day
Ibs/year
Hours/day
Days/week
Weeks/year
Yield (Average)
Small
4.65
37
9,300
2.1
16.8
4,200
8
5
50
45%
Batch
Medium
11.76
118
Z9, 500
5.88
58.8
14,700
10
5
50
50%
Continuous
Large
29.4
294
73, 500
14.7
147
36,800
10
5
50
50%
Medium
14. 3
143
36,000
7. 15
71.5
18,000
10
5
50
50%
Large
35.7
357
89,000
17.0
179
44, 600
10
5
50
50%
— Finished Product: 55% inedible tallow and 45% meat and bone meal.
III-7
-------
F. Annual Profits
After-tax income, return on sales, both pre-tax and after-tax, and return
on invested capital, both pre-tax and after-tax, for various types and
sizes of model plants are shown in Table III-3.
It should be noted that the model plant profiles were based on average
1971-1972 conditions and no published sources of performance data are
available. Industry sources indicated this time frame was a "good"
year for the rendering business—perhaps slightly above the average
for profits. However, the rendering industry is characterized by wide
swings in profitability resulting from the major changes which occur in
final product prices. The major upswing in the 1972-1973 time period
provided inflated earnings that probably resulted in an all-time high for
profits. However, it was felt this unusual profit performance in 1972-
1973 was not representative of the industry.
Generally, industries with widely fluctuating profit margins must maintain
a higher average return on investment than those with a higher degree of
stability. The R. O. L must reflect an adequate margin for risk and un-
certainty if sufficient capital is to be supplied to maintain modern
efficient facilities. TBe actual profit levels as a percent of sales on
invested capital are higher for the larger and more modern plants. The
small batch plants represent a larger portion of the rural Tenderers
who provide a necessary sanitary service particularly in the disposal
of dead inedible carcasses. These are the more marginal operations,
and the low after-tax R. O. I. makes modernization difficult to accomplish.
The differences in age of plants' profitability can be seen in pre-tax return
on sales. The differences are minimized somewhat when one analyzes
R. O. I. The narrowing of differences in R. O. I. reflects the lower book
value of the older plants and of course less depreciation having been
taken by the newer continuous process plants.
G. Annual Cash Flows
Estimated annual cash flow for the types and sizes of plants analyzed in
this study are shown in Table III-4. Cash flow as calculated is the sum
of after-tax income plus depreciation. It is shown in absolute dollars as
well as a percent of sales and as a percent of total invested capital.
As a percent of sales, cash flows range from a low of 3. 9 percent to a
III-8.
-------
Table III-3. Net income, returns on sales and returns on total invested capital for model plants
Type and
size of plant
Batch process plants
Small
Medium
Large
Continuous process plants
Medium
Large
After-tax
income
($000)
5.0
18.6
42.0
51.0
125.0
Pre-tax
return on sales
(percent)
2.6
2.7
3.1
8.0
8. 1
After-tax
return on sales
(percent)
2.0
2.1
1.9
4.7
4.6
Pre-tax*
R.O.I.
(percent)
5.8
11.0
13.7
15.2
20.5
After-tax*
R.O.I.
(percent)
4.5
8.5
8.4
9.0
11.7
Return on total invested capital by financial statement method.
-------
Table III-4. Annual cash flows for model rendering plants
Type and
size of plant
Batch process
Small
Medium
Large
Continuous process
Annual
cash flow
($000)
16.0
38.6
86.0
'Cash flow as
percent of sales
(percent)
6.3
4 4
3.9
Cash flow as
percent of total
investment
(percent)
14.2
!7.6
17.1
Large
219.0
9.0
8.1
17.3
Z0.5
IH-10
-------
high of 9 percent. The higher cash flows as a percent of sales for the
newer continuous process plants are a function of the higher investment
costs resulting in considerably higher actual annual depreciation charges.
Cash flows when considered as a percent of total investment are much
more tightly grouped. The narrower range reflects the lower investment
base for the older plants. Another factor narrowing the differences is the
difference in income tax as a percent of pre-tax earnings. The small
firm with less than $25, 000 income would be at an assumed rate of 22. 5
percent whereas, earnings in excess of $25, 000 are assumed to be taxed
at the 48 percent rate.
The small batch process plant remains in an unfavorable competitive, cash
flow position in relation to the larger rendering operations.
H. Value of Assets
The estimated replacement costs, book value and salvage for each model
plant in the different classifications and size group are shown in Tables
III-5 and HI-6. Separate estimates are shown for land, building and
facilities, installed plant and equipment. In addition, current assets,
current liabilities and net working capital are shown.
The investment costs for storage wore not included in engineering
estimates for the medium and large plants. The amount and cost of
storage would be a function of raw material pickup and processing
procedures as well as the finished product material handling procedures
(i.e., sacked or bulk) and inventory policies. Therefore, investment
costs would be understated somewhat for these sizes of plants.
1. Replacement Values
The plant replacement cost estimates reflect current construction costs
of the general design under which the plants would be built today. They
reflect technological advances in processing equipment that may not be
included in many of the existing plants. In other words, the cost estimates
reflect replacing the prototype plants the way they would be built today.
These costs were based upon estimates provided by industry engineers.
It should be noted that no estimates for transport equipment are included
in the replacement cost estimates. A separate item for transportation is
included in raw material costs to provide for raw material pickup. It
was felt mobile equipment represented a totally different problem for
maintenance and for salvage purposes.
111-11
-------
Table III-5. Estimated investment capital for model batch process rendering plants
Land
Building
Sq. ft.
Cost
Equipment
Total
Current assets
Current liabilities
Net working capital
Total invested capital
Small
4,650 Ibs/hr
Replmt. Salvage Book
Medium
12,000 Ibs/hr
Replmt. Salvage Book
Large
30,000 Ibs/hr
Replmt. Salvage Book
ZO
20
10
(2,000 sq. ft.)
50 5 15
200 20 67
270 45 92
42 42 42
21 21 21
21 21 21
291 66 113
30
-$1,000-
30 15
(3, 150 sq. ft.)
79 8 22
331 33 110
440 71 147
144 144 144
72 72 72
72 72 72
512 143 219
40
40 20
(8.000 sq. ft.)
200 20 58
734 73 244
974 133 322
360 360 360
180 180 180
180 180 180
1, 154 313 502
-------
Table III-6. Estimated invostmcnl capit;il lor mocK'1
continuous process rendering plants
L.a nrl
Build in>_;
Sq. fl.
Cost
Equipment
Tntai
Current Assets
Current Liabilities
Net working capital
Total invested capital
1
14,
Re pi nit
30
(3
tfl
513
624
178
89
89
713
Vleriium
400 Ibs/hr
. Salvage
30
, 240 sq. ft
20
128
178
178
89
H9
267
Book
C I
•Mi
27
67
382
476
178
89
89
565
Koplml
( 1 a n
40
(5
125
950
1, I 15
440
220
220
1, 335
La r go
, 000 lh.s/|,r
. Salvage
40
, 000 sq. fl.
31
238
309
440
220
220
529 1,
Book
36
103
708
847
440
220
220
067
III- 1 3
-------
Economies of scale for building and equipment costs for new plants exist
ir. both the batch and continuous process rendering plants. The highest
i ost per i, 000 pounds of raw product input per hour is for the small
batch process plant and amounts to $58.06. This cost decreases to $36.67
for the medium and $32.47 for the large batch process plants. New plant
and equipment investment costs for' medium and large continuous process
plants are $43. 33 and $30. 97 respectively.
f il •-> building rn^y approach 10 or 20 percent of its replacement
cost.
There is u limited market for used machj.nery and equipment; however,
this is limited to modification of present operating lines or the overseas
markcl Virtually all new plants would begin with all new equipment. As
a result, used equipment may be purchased at 10 to 50 percent of re-
placement cost, bul the cost of dismantling an old plant is high and value
o' used in-place equipment is rather low.
T.I1- 14
-------
Since no data are available on actual salvage values for inedible rendering
plants and only a very limited market exists for used equipment, it is
difficult to estimate the salvage value of a closed plant because of the
added costs of water pollution. We are assuming the land equal to the
current market value and the salvage values of batch process building
an.d equipment will approximate 10 percent of replacement value. Since
the continuous process buildings and equipment are relatively new,
salvage value has been estimated at 25 percent of replacement cost.
All operating capital will be recovered intact. The combined value of
land, buildings, equipment ^nd operating capital for each rrodel plant
is shown in Tables III-5 and 6,
I. Cost Structure
The cost structure for the model rendering plants is contained in
Tables III-7and III-8. Major items are discussed below.
1. Raw Product
Raw product for off-site Tenderers is acquired by regular daily truck
routes to pick up fat and bone trimmings, meat scraps, bone and offal,
blood, feathers and entire animal carcasses from a variety of sources.
These sources include butcher shops, supermarkets, eating establish-
ments, slaughterhouses and meat packing plants, farmers and ranchers.
In some cases contracts with these suppliers provide for a somewhat
stable supply for the Tenderer and a source of income to the supplier.
Raw product cost, as well as yield, varies considerably according to the
type of material. Fat gives the best yield and can yield as much as 70
percent tallow and 10 percent meat scraps (3). The cost of fat to the ren-
derer during the first quarter of 1974 was 5 to 6 cents per pound, f. o.b.
slaughterhouse in Manhattan, Kansas. Bones yield approximately 50
percent meat and bone meal. The cost of bones on a basis similar to
that of fat was 1-2 cents per pound. Viscera yield is much lower and
more variable, and cost f. o. b. slaughterhouse was 5/10 to 6/10 cents
per pound. Raw product ingredient cost approximated 50 percent of the
sales dollar of the model plants.
Transportation for assembling raw product represents a major cost
factor for total raw material cost. The transportation costs include
labor, fuel, maintenance, taxes, insurance, depreciation and other
miscellaneous costs associated with the operation of this type of function
as well as return on investment. Total transportation costs for the
model plants ranged between 20 and 22 percent of the sales dollar.
Ill-15
-------
It is estimated that the laboi and fuel portion of transportation represents
approximately 10 percent of the sales dollar. The rural Tenderer has
greater mileage per pound of raw product, but generally the labor rate
is somewhat lower than for the urban renderer with shorter routes.
2. Operating Costa
Derivation of both direct and indirect operating costs was based upon a
synthesis of several sources. Direct labor was estimated from census
data averages for the industry and discussions with industry representatives.
Allowance was made for personnel involved in raw product pickup to be
included in the transportation item. Utilities were calculated directly
on a per hour basis. Supplies and containers were estimated from allied
industries. The container portion of this* cost would vary considerably
depending upon whether or not final product was shipped bulk. According
to industry sources, the major portion of output is shipped bulk. •
Repairs and maintenance are estimated at 1. 3 to 1.6 percent of sales,
and seem to be compatible with another standard approach of using 3-5
percent of the cost of equipment. The eight-tenths to one percent appears
adequate to cover taxes (other than income) and insurance. The 5. 4 to
7. 1 percent for general and administrative expense approximates those
averages for allied industries and in the absence of published data on
this specific industry are assumed to be reasonable approximations.
3. Depreciation and Interest
Depreciation was calculated directly from original costs and ranged
from a low of 2. 0 percent of sales in the large batch plant to 4. 3 percent
on the medium continuous process plant. The lower percentage for the
batch plants reflect the lower original costs and the 12-year depreciation
schedule on equipment as contrasted to the newer continuous process
plants where higher costs resulted from inflation and a 10-year depreciation
schedule was followed.
Interest was estimated at three-tenths of one percent of the sales dollar.
4. Cost Relationships
Total raw material costs range from 70. 9 percent to 73. 9 percent of the
sales dollar for the medium and large plants. These costs include the
total costs for the transportation function but exclude the variable costs
of supplies, containers and utilities. When adjustments are made for
these items, the costs of materials approximate the 66 percent for the
industry in 1971 as shown in Section II-B. The total raw material cost of 67. 6
III-16
-------
Table III-7. Pro forma income statements for batch process model plants
Small
Hourly raw material input
Daily raw material input
Annual output finished product
Sales
Raw material cost
Material
Transportation
Total
Direct c: ;
JLabor
SUJT lies and containers
Utilities
Tola]
Indirect .
Repairs & maintenance
Taxes & insurance
General & admin.
"otal
Total expense
Interest
Depreciation
Total cost
Net income B. T.
Income tax
Net income A.T.
Cash flow
Total invested capital
R.O.I, before taxes
R.O.I, after taxes
4,6:
37
4,200
Annual
($1,000)
252
117
52
169.5
18
9
12
39
4
2
20
26
233.5
1
11
245.5
6. 5
1.5
5.0
16
113
5.8%
4.5
JO Ibs.
, 000
,000
Percent
100
46.3
20.6
66. -3
7. 1
3.6
4.7
15.4
1.6
0.8
8.0
10. 4
•92. 7
0. 4
4. 3
97.4
2.6
0.6
2.0
6.3
Medium
11,760 Ibs.
118, 000
14, 700, 000
Annual
($1,000)
882
450
187
637
48
30
39
117
11
7
63
81
835
3
20
858
24
5.4
18.6
38.6
219
11.0%
8.5
Percent
Large
29, 400 Ibs.
294, COO
36,800,000
Annual
Pei cent
($1,000)
100
51.0
21.2
72.2
5.5
3.4
4.4
13.3
1. 3
0.8
7. 1
9.2
94.7
0.3
2.3
97.3
2.7
0.6
2. 1
4.4
2,200
1, 155
470
1,625
97
66
94
257
30
17
150
197
2,079
8
44
2, 131
69
Z7
42
86
502
13.7%
8.4
100
52.5
21.4
73. 9
4.4
3.0
4.3
11.7
1.4
0.8
6.8
9.0
94. 5
0.4
2.0
96.9
3. 1
1.2
1.9
3.9
III- 17
-------
Table III-8. Pro forma income statements for continuous process model plants
Hourly raw material input
Daily raw material input
Annual finished product
Sales
Raw material cost
Material
Transportation
Total
Direct Cost
Labor
Supplies fa containers
Utilities
Total
Indirect Cost
Repairs fa maintenance
Taxes and insurance
General fa admin.
Total
Total Expense
Interest
Depreciation
Total cost
Not income B. T.
Income tax
Net income A.T.
Cash flow
Total invested capital
R.O.I, before taxes
R.O.I, after taxes
Medium
14,300
143.000
18,000,000
Annual
($1,000)
1,080
541
225
766
25
32
36
93
16
9
58
83
94Z
5
47
994
86
35
51
98
565
15. Z
9.0
Ibs.
Percent
100.0
50.1
Z0.8
70.9
2.3
3.0
3.3
8.6
1.5
0.8
5.4
7.7
87.2
0.5
4.3
92.0
8.0
3.2
4.7
9.0
Large
35,700
357,000
44,600,000
Annual I
($1,000)
2,683
1,362
566
1.928
51
81
86
218
40
26
146
212
2,358
12
94
2,464
219
94
125
219
1,067
20.5
11.7
Ibs.
-"erceni
100. 0
50.8
21.1
71.9
1.9
3.0
3.2
8.1
1.5
1.0
5.4
7.9
87.9
0.5
3.5
91. 9
8.1
3.5
4.6
8.1
111-18
-------
percent for the small batch plant is 4 to 6 percent less than the larger plants.
The lower cost is attributed to the lower quality of raw product. The small
batch plants would usually have a higher percentage of "dead" stock.
Production labor varies from 7. 1 percent for the small batch plant down to
1. 9 percent for the large continuous process plant. However, if labor
for raw product acquisition is included, these percentages are estimated to
double for the small plant to triple for the large continuous plant. Given
these adjustments, the direct labor compares with the 7. 9 percent average
for the industry in 1971.
Total indirect costs range from 7. 7 to 9. 4 percent. Total expense before
interest and depreciation then ranges from 88. 8 to 94. 6 percent.
HI-19
-------
IV. PRICE EFFECTS
A. ll£w Mats rial
Raw material processed by the inedible rendering industry consists
of discarded animal a,id poultry materials such as fats, bones, hides,
feathers, blood, offal and "dead stock," Supply sources for these
raw materials are bufc1.i^r shops, supermarkets, restaurants, poultry
processors, slaughterhouses, meat packing plants, farmers and
ranche rs.
Approximately one-third of the inedible rendering output is produced by
''captive" Tenderers owned primarily by the slaughtering and meat packing
companies. The raw materials used by the "captive" Tenderers are not
subject to the competitive market place as are those materials used by the
independent Tenderers. For this reason, the "captive" Tenderers are
enabled to plan production efficiently without having to cope with the
uncertainties of supply in a competitive market.
The independent Tenderers sometimes enter into contracts with suppliers,
and then have regular truck routes for the pickup of raw materials. This
procedure provides some assurance of a regular supply of raw material
input. The contracts also have a tendency to stabilize prices for the
contract period.
The more stabl^ relationship between raw material costs and finished
product prices accrue an advantage to the Tenderer during up markets,
but can create a hardship during a period of declining prices.
Considerable competition, exists between Tenderers for the limited supply
of raw materials. In fact, the independent renderers look upon their sup-
pliers as their "customers." For the urban renderers, both price and
non-price competition i-. keen in order to have adequate supplies for •
efficient operations. While the rural Tenderers may not'be subjected to
the degree of price cotaptcilioii expe ri^ncc _i u) Lie uiCn.i reside<.eio,
they are confronted with other problems. Usually the rural Tenderers
have a lower quality product (i.e. , dead stock) and longer routes for
pickup.
Actual prices, as well as changes in prices paid for raw materials, are
difficult to determine since this is closely guarded information within .
the industry. Variables influencing the prices paid by the Tenderers would
be type of product, quantity, continuity of supply, competition and prices
of final product. Since raw product prices are relatively low, they do not
IV-1
-------
fully reflect changes in prices of final product. Ae a result, margins
fluctuate to a considerable extent as the industry experiences fluctu-
ations in prices of final product. There is a tendency for deterioration
in quality of the final product due to the repeated handling and exte'nded
storage of the final product which precludes lengthy storage or geographic
shifts in supply, thereby contributing to the inelasticity of supply.
The rural renderers probably have less flexibility to make cost adjust-
ments in raw product than the urban renderers. The reasoning for this
is the fact that the rural Tenderer is operating from a lower base price
associated with lower yield product, and therefore downward adjustments
would be more limited. An example of this situation is where dead stock
are picked upas a service without payment. If charges were made to the
owner of the dead stock, it might be more feasible to make disposition
of the dead stock on the farm and thereby create a health hazard.
It is concluded that major shifts in the prices of raw product are unlikely.
The changes that do occur are more likely to be reflected in the urban
areas for the higher quality raw product.
The National Renderers Association has estimated the amount of raw
product processed by the independent renderers for the past three years
to be between 10 and 12 billion pounds. Supply is very inelastic and is
primarily a function of the amount of livestock and poultry processed
in the United States.
B. Finished Product
The renderer sells his products on the open commodity market where com-
petition is keen and the law of supply and demand prevails. Prices of
inedible tallow and meat and bone meal have experienced wide fluctuations
in price over the past years with accentuated price movements during the
oast two years.
Table IV 1 shows the utilization of inedible tallow and grease for the
years 1958 through 1971. The export market accounts for the largest
single sector with Western Europe and Japan being large consumers.
Actual tonnage shipped to the export market has remained relatively stable
for the past 10 years. Animal feeds have displaced soap as the second
most important use for inedible tallow. However, tight supplies and
high prices stifled use in soap and animal feeds during 1973. Use of
tallow in animal ieeds is highly elastic and responds readily to changes
in price.
IV-2
-------
Table IV-i. Inedible tallow and grease: utilization, by-products,
Year
1970 U
1969
1968
1967
1966
1965
1964
1963
1962
196J
1960
1959
1958
Soap
616
601
637
631
665
649
690
660
688
702
732
735
732
Animal
Feeds
1, 140
1,093
1,061
990
972
855
714
861
774
73Z
443
439
476
Fatty
Acids
568
610
585
576
547
575
530
478
433
402
351
391
353
Lubricants
and
similar
oils
. 'II1 -4 f. \
89
97
98
89
98
107
102
91
78
79
70
80
66
Other
21-1
3ZO
289
291
283
208
203
230
151
177
151
162
182
Total
Domestic
2.628
2,721
2,670
2,577
2, 565
2, 393
2,239
2,320
2, 124
2,093
1,745
1,806
1,808
Export
2.242
1,896
2.240
2,222
1,975
2, 127
2,399
1,874
1,595
1,805
1.696
1,462
1, 115
-' U. S. Fats and Oils Statistics, 1950-1971
-------
The price of inedible tallow tripled from the fall of 1972 tr> reach an
all-time high of 24 cents per pound in August of 1973. The season
average was approximately 13.8 cents per pound. An overall world:
fats and oils shortage and rising prices for all major fats and oils
were major factors behind the sharp increases. Tallow prices in the
first quarter of 1974 were averaging around 17 cents per pound, about
double that of the previous year. However, they were down sharply from
the record 24 cents per pound in August, 1973.
Although the supply of-animal fat is quite inelastic, the production of
vegetable oils will undoubtedly respond to the high price levels and be-
come a depressant in the future of high prices in the world fats and
oils market.
Meat meal is used primarily as a high protein feed supplement and has
a high cross-elasticity with fish meal and soybean meal. The price of
meat meal in June, 1973, reached $395 per ton which was more than
triple the price of a year earlier. At the same time the price of soybean
meal soared from $1Q9 per ton in October, 1972 to over $400 per ton in
June of 1973. The price relationship of meat meal to other high-protein
feed supplements is shown graphically in Exhibit IV-1.
Part of the dramatic increase in prices of high-protein feed supplements
resulted from the sharply reduced supply of fish meal from Peru.' It
was estimated that Peru would produce not more than 3 million tons of
fish meal in 1973, which was down from normal production of 10 million
tons. Under favorable conditions, experts believe anchovy concen-
trations will return:to normal in 2 years, and the 1974 catch could reach
7-8 million tons. Devaluation of the dollar also contributed to greater
export demand, putting further upward pressure on prices.
Production of soybeans in 1973 was a record 1.567 billion bushels, around
300 million bushels above the previous year. Soybean supplies for 1973/74
marketing year were a record 1.6 billion bushels which were about a fifth
above the previous year. Many uncertainties persist as to the production
and price behavior for the current year. Many of the uncertainties stem
from the world-wide energy crisis which will have an effect on both pro-
duction and consumption.
Overall it can be expected that the supply of other high protein supplements
will respond to favorable prices and the increased supply will be a de-
pressant to the price structure.
IV-4
-------
Exhibit IV-1
$ PER 1C
400
200
0 •
300
150
0 -
600
300
0 •
400
200
0 -
HIGH-PROTEIN FEED PRICES
"X-OKA
>% in"
IUI
• ».-••.
4IX-M
IMPWS
-*««— «^
SOTBt/l
-*
COTTONS
— -+S*
N MEAL
/
/'
•EO MEAl
/-.A
r
-
-
-
-
-""°""
"****+*'
— 1 — L.,l_,
»sr COASI
i i i
FISH
MEAIA
/
_^S
i i i
-
-
SOt-CMCACO
^*~*-n^
MEAT
MEAl
-
-
0'*'0'»)OI«IOJ«IOItJOI»l
!969 1970 ,97, ]972 ]073 19?4
TIAl BCGINMNC OC10MI
Source: Feed Situation, August. 1973.
IV-5
-------
While the relationship between raw product prices and finished product
prices have been extremely favorable to the rendering industry during
the past year, declining finished product prices will narrow the profit
margins in the rendering industry. A profit squeeze is a distinct possi-
bility for those firms that have bid up the prices of raw product.
C. Expected Price Impact
The impact resulting from increased cost of stricter effluent standards
on the independent rendering industry are lower profits for renderers
and to a limited extent lower returns to the suppliers of raw product.
It is very doubtful that the increased cost could be passed forward to
final product price where a high degree of cross-elasticity exists be-
tween the Tenderer's final product and alternate products.
The amount to be absorbed or passed back to suppliers depends on
several factors, including the incremental amount the rendering plants
will be required to pay for pollution controls. Also, the incremental
cost increase will be subject to economies of scale. Therefore, stricter
standards would result in a smaller incremental unit cost for large plants
than for smaller plants. The larger plants appear to be in a more favor-
able position to pass a greater portion of their costs back than the small
rural plants. Depending upon the magnitude of the increased costs, the
small plant would be forced to absorb the major portion of the pollution
abatement cost in the form of reduced profits, operate temporarily on
their built-up reserves with eventual closure or shut down immediately.
IV-6
-------
V. ECONOMIC IMPACT ANALYSIS METHODOLOGY
The following economic impa-ct analysis utilizes the basic industry infor-
mation developed in Chapters I-IV plus the pollution abatement technology
and costs provided by Environmental Protection Agency. The impacts
examined include:
Price effects
Financial effects
Production effects
Employment effects
Community effects
Other effects
The impact analysis will not be a simple sequencial analysis but rather
will be composed of a number of interacting steps. The schematic of the
analytical approach is shown in Exhibit V-l. Because of the fundamental
importance of potential plant shutdowns (financial and production effects)
relative to the other impacts, a disproportionate amount of time will be
devoted to the plant closure analysis.
The fundamental aspect of the impact analysis is similar to that normally
done for any capital budgeting study of new investments. Simply
stated, the problem is one of deciding whether a commitment of time or
money to a project is worthwhile in terms of the expected benefits derived.
The decision in this case is complicated by the fact that benefits will accrue
over a period of time and that in actuality no analyst is sufficiently clair-
voyant or physically able to reflect upon all of the required cost and benefit
analysis information which relates to projections of the future. In the face
of imperfect and incomplete information, the industry segments were reduced
to money relationships insofar as possible and the key non-quantifiable fac-
tors were incorporated into the analysis to modify the quantified data. The
latter process is particularly important in view of the use of model plants
in the financial analysis. In practice, actual plants will differ from the
model, and these differences must necessarily be considered in any
interpretation of analytic data reflecting the behavior of model plants.
A. Fundamenf'-.l Methodology
Much of the underlying analysis regarding price, financial, and production
effects is applicable to all other impact effects. Consequently, the-
case methodology described here is conceptually integrated and the specific
impact interpretations are discussed under their appropriate headings.
V-l
-------
Industry
Structure
Industry
I
Segmentation
Model Plant
Parameters
Industry
Financial
Data
^
Budget
Data
• Development
* ,
Industry
Pricing
EPA Pollution
Control Costs
Base
Closures
Plant Closures I
'1 Due to Control
1
Employment
Effects
I
Community
Effects
Model
Financial
Analyses
Financial
Profiles
Price
Increases
A
Shutdown
Analysis
V
Production
Effects
\f
Foreign
Trade
Effects
X
•^~^™^""
•*
•\
Exhibit V-l. Schematic of impact analysis of effluent control guidelines.
V-2
-------
The core conceptual data used in this analysis are the physical and financial
characteristics of the various industry segments as projected on the basis
of model plants. The estimated cash flows for these model plants are
summarized in Chapter III.
The primary factors involved in assessing the financial and production
impact of pollution control are profitability changes; ana these, in turn,
are a function of the cost of pollution control and the ability to pass along
these costs in higher prices. In reality, of course, closure decisions are
seldom made on the basis of well defined common economic rules; such
decisions invariably include a wide range of personal values, external
forces such as the ability to obtain financing, or the role of the production
unit in an integrated larger cost center. Such non-economic variables
include but are not limited to the following conditions and are generally
characteristic of proprietorships and closely held enterprises rather
than publicly held corporations.
1. Production units may lack sufficient financial accounting
data. This is especially likely to occur among small,
independent operators who do not have effective cost
accounting systems.
2. Production units may be so old and fully depreciated
that management has no intention of replacing or
modernizing them. Production continues only so long
as it covers labor and materials costs and/or until
the equipment becomes inoperative.
3. Marginally productive units may be acquired by new
ownership that can reevaluate existing assets or that
can absorb temporary low returns with the expectation
of eventual acceptable profit returns.
4. Production unit ownership may have value as psychic
income. Such ownership, may answe r personal
values that are great enough to override rational
economic decisions.
5. The production unit, if part of a larger economic entity,
may (1) use raw materials produced in another plant
within the firm that must have an assured market or
(2) supply intermediate products to another unit within
the firm. When the profitability of the second operation
offsets the losses in the first plant, the unprofitable
operation may continue indefinitely because the total
. enterprise is profitable.
V-3
-------
6. The owne r-opera tor expects that adverse conditions
and consequent losses are temporary. His ability to
absorb short-term losses depends upon his access to
fundsj through credit or personal resources not
presently utilized.
7. There are very low (approaching zero) opportunity
costs for the fixed assets and for the owner-operator's
managerial skills and/or labor. As long as the operator
can meet labor and materials costs, he will continue to
operate. He may even operate with'gross revenues below
variable costs until he has exhausted his working capital
and credit.
8. The value of the land on which the plant is located is
appreciating at a rate sufficient to offset short-term losses;
funds are available to meet operating needs and opportunity
costs of the owner-operator's managerial skills are low.
While these factors are present in and relevant to business decisions,
it is argued that common economic rules are sufficient to provide useful
and reliable insight into potential business responses to required invest-
ment and operating costs in pollution control facilities.
The following discussion presumes investment in pollution control
facilities. However, the rules presented apply to on-going operations.
In the simplest case, a plant will be closed when variable expenses (Vc)
are greater than revenues (R) since by closing the plant, losses can be
avoided.
A more probable situation is where VC R, but Vc < R leads to an estimate of plants that should be
closed over some period of time if revenues do not increase. However,
the timing of such closures is difficult to predict.
The next level is where TCc< R. So long as TCc< R it is likely that
plant operations will continue so long as the capitalized value of earnings
(CV), at the firm's (industry) cost of capital, is greater than the reali-
V-4
-------
able value (S) of sunk plant investment. If S> CV or CV - S> O, the firm
could realize S in cash and reinvest and be financially better off, assum-
ing reinvesting at least at the firm's (industry) cost of capital.
Computation of CV involves discounting the future earning flows to
present value through the discounting function:
n=l
where
NPV = net present value
A = future after-tax income in ntfl year or salvage
value in year t
i = discount rate at cost of capital
n = number of conversion periods, i.e.,
1 year, 2 years, etc.
'It should be noted that a more common measure of profitability is
return on investment (ROI) where profits are expressed as a percent of
invested capital (book value), net worth or sales. These measures
should not be viewed so much as different estimates of profitability as
compared to present value measures but rather an entirely different
profitability concept.
The data requirements for ROI and NPV measures are derived from the
same basic financial information although the final inputs are handled
differently for each.
1. Returns
For purposes of this analysis, returns for the ROI analysis have been
defined as pre-tax and after-lax income and for the NPV analysis after-
tax cash proceeds. The compulation of each is shown below:
Pre-tax income = (R-E-I-D)
After-tax income = (1 - T) x (R - E - I - D)
V-5
-------
where
T = tax rate
R = revenues
E = expenses other than depreciation and interest
I = interest expense
D = depreciation charges
Interest in the cash proceeds computation is omitted since it is reflected
in the discount rate, which is the after-tax cost of capital. Depreciation
is included in the NPV measure only in terms of its tax effect and is then
added back to obtain cash flow.
A tax rate of 22 percent on the first $25,000 income and 48 percent on
amounts over $25,000 was used throughout the analysis. Accelerated
depreciation methods, investment credits, carry forward and carry back
provisions were not used due to their complexity and special limitations.
2. Investment
Investment is normally thought of as outlays for fixed assets and working
capital. However, in evaluating closure of an on-going plant with sunk
investment, the value of that investment is its liquidation or salvage value
(opportunity cost or shadow price). \J For this analysis, sunk investment
was taken as the sum of liquidation value of fixed assets plus net working
capital (current assets less current liabilities) tied up by the plant (see
Chapter II for values). This same amount was taken as a negative
investment in the terminal year.
The rationale for using total shadow priced investment was that the cash
flows do not include interest expenses with interest charges reflected in
the weighted cost of capital. This procedure requires the use of total
capital (salvage value) regardless of source. An alternative would be to
use as investment, net cash realization (total less debt retirement) upon
liquidation of the plant. (In the single plant firm debt retirement would
— This should not be confused with a simple buy-sell situation which
merely involves a transfer oi ownership from one firm to another.
In this instance, -the opportunity cost (shadow price) of the invest-
ment may lake on a different value.
V-6
-------
be clearly defined. In the case of the multi-plant firm, delineation of
debt by plant would likely not be clear. Presumably this could be reflected
in proportioning total debt to the individual plant on some plant parameter
such as capacity or sales. ) Under this latter procedure, interest and
debt retirement costs would be included in the cash flows.
The two procedures will yield similar results if the cost of capital and
interest charces are estimated on a similar basis. The former procedure,
total salvage value, was used as it gives reasonable answers and simpli-
fies both computation and explanation of the cash flows and salvage values.
Replacement investment for plant maintenance was taken as equal to
annual depreciation, which corresponds to operating policies of some
managements and serves as a good proxy for replacement in an on-going
business.
Investment in pollution control facilities will be from estimates provided
by EPA. Only incremental values will be used, to reflect in-place
facilities and orJy the value of the land for control will be taken as a
negative investment in the terminal year, i.e., pollution control equip-
ment is assumed to have no salvage value.
The above discussion refers primarily to the NPV analysis. Investment
used in estimating ROI was taken as invested capital--book value of
assets plus net working capital.
3. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U. S. business. It
provides both a measure of a firm's actual performance as well as its
expected performance. In the latter case, it is also called the cost of
capital. In this analysis the cost of capital is defined as the weighted
average of the cost of each type of capital employed by the firm, generally
its equities and interest bearing liabilities. There is no methodology that
yields the precise cost of capital, but the cost can be approximated within
reasonable bounds.
The cost of lapital was determined for purposes of this study by estimating
performance measures of the industry. The weights of the two respective
types of capital for the independent rendering industry were estimated
nt 40 percent debt and 60 percent equity. The cost of debt was assumed
to be 7.0 percent. The cost equity was determined from the ratio of
earnings to net worth at 11.08 percent.
V-7
-------
To determine the weighted average cost of capital, it ie necessary to
adjust the before tax coat to after tax coats (debt capital only in this
case). This done by multiplying the costs by one minus the tax rate
(assumed to be 48 percent).
Weighted average after tax cost of capital
Before tax After tax Weighted
Item Weight cost Tax rate cost cost
.48 3.6
11. 1
Debt
Equity
.40
.60
7.0
4. Construction of the Cash Flow
The cash flow to be used in the analysis of BPT (Best Practicable Tech-
nology) and BAT (Best Available Technology) effluent control and will
be constructed as follows:
1. Sunk investment (salvage market value of fixed assets
plus net working capital) taken in year t ^ assumed to be
equivalent to 1976
2. After tax cash proceeds taken for years t j to tn
3. Annual replacement investment, equal to annual current
depreciation taken for years t, to t .
4. Terminal value equal to sunk investment taken in year tn.
5. Incremental pollution control investment taken in year to
for 1977 standards and year t^ for 1983 standards.
6. Incremental pollution expenses taken for years tj to tn
for 1977 standards and years t? to tn for 1983 standards
if additive to the 1977 standards.
7. Replacement investment taken in year tn on incremental
pollution investment in BPT on assumption of life of
facilities as provided by EPA.
V-8
-------
8. No terminal value of pollution facilities to be taken in year t_.
Land value will probably be assumed to be very small and/or
zero, unless the costs provided indicate otherwise.
The length of the cash flow will depend upon the life of the pollution control
technology provided by EPA. It is anticipated that the length of the cash
flow will be equal to the life of control equipment specified for 1983
installation.
Construction of the cash flows for analyzing new source standards will be
similar to BPT and BAT, excepting plant investments, costs and returns
will be based on current values as if being built now.
B. Price Effects
As shown in Figure V-l, price and production effects are interrelated
with each having an impact upon the other. In fact, the very basis of
price analysis is the premise that prices and supplies (production) are
functionally related variables which are simultaneously resolved, thus
the feedback loop shown in Figure V-l.
Solution of this requires knowledge of demand growth, price elasticities,
supply elasticities, the degree to which regional markets exist, the
degree of dominance exerted by large firms in the industry, market
concentration exhibited by both the industry's suppliers of inputs and
purchasers of outputs, organization and coordination within the industry,
relationship of domestic output with the world market, existence and
nature of complementary goods, cyclical trends in the industry, current
utilization of capacity and, exogenous influences upon price determination
(e.g., governmental regulation).
In view of the complexity and diversity of factors involved in determination
of the market price, a purely quantitative approach to the problem of
price effects will not be feasible for this study. Hence, the simultaneous
considerations suggested above will be made. The judgment factor will
be heavily employed in determining the supply response'to a price
change and alternative price changes to be employed.
As a guide to the analysis of price effects, the estimated required price
increase to leave the model plant as well off after the investment in
pollution control facilities as before, will be computed. The required
price increase can be readily computed using the NPV analysis
V-9
-------
described above, but dealing only with the incremental pollution cash flow
and sales.
Application of the above NPV procedure to pollution control costs will
yield the present value of pollution control costs (i.e., investment plus
operating cost less tax savings excluding interest expenses). Given this,
the price increase required to pay for pollution control can be calculated
as
(PVP) (100)
P = (1-T) (PVR)
where:
P = required percentage increase in price
PVP = present value of pollution control costs
PVR = present value of gross revenue (sales)
starting in the year pollution control
is imposed
T = tax rate appropriate following imposition
of pollution control
The next step would be to evaluate the required price increases against
expectations regarding the ability to raise prices. As pointed out above,
this will be a function of a number of factors. .In cases where a few
large plants represent the bulk of production, their required price
increase will likely set the upper limit. For the products in this study,
other factors will be overriding. These include expected price changes
for basic fertilizer materials due to future supply-demand conditions
and impacts such as pollution control, as well as the declining consump-
tion of these products per se. From this analysis, which.will be quantita-
tive, an initial estimate of expected price increases would be made.
Following this, the initial shutdown analysis (production curtailment)
will be made. The decrease in production will be evaluated in light of
impact on prices and if warranted by production decreases, the expected
price increase would be revised upward.
V-10
-------
C. Shutdown Analysis
The basic shutdown analysis would be based upon the technique described
r/oove under Section A and the expected price increase :rcm the preceding
step.
Based on the results of the NPV analysis of model plants, likely closures
would be identified where NPV < O. Segments or plants in the industry
would be equated to the appropriate model (on interpolation) results.
Mitigating items, such as association with a complex, captive raw
material sources, unique market advantages and existing in place controls
and ability to finance new non-productive investment would be factored
in quantitatively to obtain an estimate of likely closures. If BAT costs
differ from BPT costs, closure estimates would be required for each
condition. It is recognized that the use of model plants to represent an
industry is imperfect and that not all of the relevant factors can be included
in the models. In other words, for any given model plant one would expect
to find some actual plants with profits lower and some higher than shown
for the model plant. In a statistical sense, one can describe this phen-
omenon via distribution functions. By examining various financial
publications, the standard deviation of net profit as a percent of sales
can be estimated or approximated.
The methodology employed implicitly assumes that the model plant rep-
resents the median plant for the distribution and that there will be a
different standard deviation for each plant.
Furthermore, the procedure implies that the standard deviation will be
larger for the more profitable industry segments. By utilising the net
present values calculated under alternative effluent treatment assumptions,
the standard deviations described above, and the assumptions that plants
with a negative net present value will be forced to close, the percentage
of firms closing in each industry segment can be readily estimated through
accepted statistical techniques.
The impact of these closures would be evaluated as the next step (see
Figure V-l). If production impacts were of sufficient magnitude, the
expected prices would be re-evaluated and the shutdown analysis is
repented.
V - \ \
-------
D. Production Effects
Potential production effects include changes of capacity utilization rates,
plant closures and stagnation of industry growth. Plant closures may be
offset in total or in part by increases in capacity utilization on the part
of plants remaining in operation. Expected new production facilities
would be estimated. The end result would be estimated production under
the conditions presumed for the above closure analysis.
The estimated production under these expectations would feed back into
the price analysis to verify or revise expected price changes.
E. Employment Effects
Given the production effects of estimated production curtailments,
potential plant closings and changes in industry growth, a major consider.
ation arises in the implications of these factors upon employment in the
industry. The employment effects stemming from each of these produc-
tion impacts in terms of jobs lost will be estimated using the model plant
information.
To the extent possible,the location of closed plants, the major employee
classification involved and potential for re-employment will be
evaluated.
F. Community Effects
The direct impacts of job losses upon a community are immediately
apparent. However, in many cases, plant closures and cutbacks have
a far greater impact than just the employment loss. These multiplier
effects will be reflected in evaluating payroll losses and income multi-
pliers .
G. Other Effects
Other impacts such as direct balance of payments effects will also be
included in the analysis. This will involve qualitative analyses.
V-12
-------
VI. EFFLUENT CONTROL COSTS
V.'ater pollution control costs used in this analysis were furnished by
the Effluent Guidelines Division of the Environmental Protection
Agency from materials developed in part for the Environmental Pro-
tection Agency by North Star Research Institute. These basic data
were adapted to the types and sizes of plants specified in this analysis.
Three effluent guidelines were considered:
BPT - Best Pollution Control Technology Currently
Available, to be achieved by July 1. 1977
BAT - Best Available Pollution Control Technology
Economically Achievable, to be achieved bv
July 1. 1983
NSPS - New Source Performance Standards, apply to
any source for which construction starts after
the publication of the proposed regulations for
the Standards
A technical document describing the recommended technology for achiev-
ing the three guidelines will be published as a separate report by EPA.
To avoid duplication and possible confusion, no technical descriptions '
of BPT, BAT and NSPS guidelines are given in this report. The inter-
ested reader is referred toEPA's technical report for technology
descriptions. /
A. Current Status of Effluent Control in the Industry
The Development Document (5) outlines the current status of effluent
control now assumed to be practiced in the industry. This information
is based on the North Star sample of the industries and is presented
in Table VI-1 for iniormation purposes. There are no other recent
publications with reliable estimates of the proportion of the meat plants
which dispose of waste water through the various types of treatment
facilities. As a result, the data as presented in Table VI-1 was used
as the basis of our impact analysis.
VI-1
-------
Table VI-1. Current status of rendering plants by waste treatment practices
IS)
Plant size
Batch plants
Small
Medium
Large
Total Batch
Continuous
Plants
Medium
Large
Total continuous
Total Plrnts
Discharge to
municipal
system
No.
55
95
11
161
45
19
T4
225
%
34. 1
59.0
6.9
100,0
70.3
29.7
100.0
50.0
No discharge;
irrigation or
evap. pond
No.
94
11
1
106
6
1
7
113
%
88. 7
10.4
0.9
100.0
85.7
14.3
100. 0
25. 1
Treatment with
discharge into
waterway
No.
61
29
3
93
14
5
19
112
%
65.6
31.2
3.2
100. 0
73.7
26.3
100. 0
24. 9
Total number
of plants
in industry
No.
210
135
15
360
65
25
90
450
%
58.3
37.5
4.2
100.0
72.2
27.8
100. 0
100.0
-------
No pretreatment requirements are assumed in the Development Docu-
ment and as a result no additional cost for those plants disposing into
municipal systems was considered. It may be noted, however, that
individual plants may face an increase in surcharges imposed by the
local municipal treatment facility resulting in increased cost of oper-
ation in the future.
Plants now disposing of waste water through secondary treatment
facilities will incur additional costs as! described in the following section
and i: is to these plants that the impact analysis is directed.
Plants now using land disposal methods such as irrigation systems or
evaporation ponds that tend to be located in arid regions of the South-
west and California have achieved a "no discharge" treatment level
according to the Development Document. As a result, these systems
will incur no additional costs under the proposed standards. These
methods are provided as a lower cost alternative to meet the proposed
standards. Use of this method is dependent upon land availability and
meeting all requisite Federal, State and Local regulations. If some
form of primary treatment is required prior to discharge (and possibly
some secondary treatment), the cost would increase substantially through
land disposal methods.
B. "Typical" Effluent Control Costs
The additional investment and operating costs required of a "typical"
plant, in each size plant group, to achieve indicated performance
standards were specified in the Development Document. Typical plants
in each size group, as defined by EPA, are as follows:
1. Small: A "small" plant would have a raw material pro-
cessing range of less than 100, 000 pounds per day with
a corresponding average of 37, 000 pounds processed
per day. The average waste water flow rate would be
5, 300 gallons per day.
2. Medium: The "medium" plant would have a raw material
processing range of 100,000 to 250,000 pounds per day,
with an average of 168, 000 pounds per day. The average
waste water flow rate would be 24, 000 gallons per day.
VI-3
-------
3. Large: The "large" plant would have a raw material
processing range exceeding 250, 000 pounds per day.
with an average of 530, 000 pounds per day. The
average waste water flow rate would be 76, 000 gallons
per day.
The additional investment required by "typical" plants to achieve the
indicated performance standards is shown in Table VI-2. (These costs
are based on whatever 50 percent of the plants in a particular category
will incur to meet the proposed standards). The estimate of the cost
of achieving BPT limitations is based on the following assumptions: (5)
80 percent of the small plants with treatment systems will
need to install pumps and piping to recirculate waste water
to the barometric condensers.
50 percent of all plants with treatment systems will need
to add an aerobic lagoon or the equivalent.
50 percent of all plants with treatment systems will need to
install chlorination.
The BAT limitations will require the following additions to the existing
treatment systems, over and above the BPT limitations. (5)
90 percent of all plants with treatment systems must add sand
filters, or the equivalent.
50 percent of all plants with treatment systems will have to
make capital improvements in their primary treatment
facilities.
12 percent of all plants with treatment systems will have to
eliminate direct blood drainage to the sewer and recover it
in their product streams.
20 percent of all plants with treatment systems will have to
install ammonia stripping equipment.
Investment and annual operating costs are shown in Table VI-2 for dis-
posal through irrigation. Irrigation is provided as a lower cost altern-
ative to meet the proposed standards. Use of the irrigation method,
however, is dependent upon land availability and meeting all requisite
Federal, State, and Local regulations.
VI-4
-------
Table VI-2. Incremental effluent control costs for "typical"
independent rendering plants (1971 costs) —
1977 Standards
Plant
size
Small
Medium
Large
Invest-
ment
26,500
27,000
5Z.OOO
1
Annual oper-
ating cost
11,900
12,200
14.000
Total
Annualized
cost
16. 500
16,200
21,600
1983 Standards
Invest-
ment
53,000
85,000
119,000
Annual oper-
ating cost
25, 100
27,300
31, 300
Total
Annualized
cost
40,300
48,200
62,600
Irrigation
New Point Source Standards
Small
Medium
Large
5.
14,
37,
000
000
000
500
700
230
1,
3,
7,
500
500
600
38,
78,
133,
000
000
000
14,
18,
24,
700
800
100
20,
30.
44,
500
600
100
Source: Development Document
~ "Typical" independent rendering plants as defined in the Development
Document. This should not be confused with the DPRA "model" plants
as used in this report.
VI-5
-------
C. Effluent Control Costs for Model Plants
The effluent control costs provided by EPA were "single point" estim-
ates in that they applied specifically to a given type of plant with a
given production volume. Obviously, effluent treatment costs will
vary with wasteflow and, hence, processing volume. Based on dis-
cussions with EPA and North Star Research Institute personnel, DPRA
estimated investment and annual treatment cost data for alternative
plant sizes. These estimates were made by assuming that, for a given
treatment level, both investment and operating costs were a function of
quantity of wasteflow. Given that assumption, the three "typical" plants
were plotted on a graph and a smooth curve was drawn to "fit" the points.
Although the points representing the "typical" plants do not fall pre-
cisely on the line, it is believed that the fit is acceptable.
Basic operating parameters for model rendering plants developed by
DPRA are shown in Table VI-3. Incremental investment costs to
meet the proposed BPT Standards shown in Table VI-4 range frr m
$28, 500 for the small batch plant to a high of $36, 000 for the lai ge
continuous plant. Because of the nature of monitoring the syste n,
there are large economies of scale in operating costs from the small
to the large plants. Operating costs range from $12,800 for the small
batch plant to $14, 500 for the large continuous plant.
Incremental investment costs to achieve BAT Standards for plants dis-
posing of waste water into streams range from $57, 100 for the small
batch plant to a high of $118, 400 for the large continuous plant. Oper-
ating costs range from approximately $27, 000 to a high of $32, 000.
VI-6
-------
Table VI-3. Operating parameters for DPRA model independent rendering plants
Pounds raw material
processed per day
Waste water flow gal/—'
1, 000 Ib RP
Average waste water
flow gal /day
Small
37,000
143
5,300
Batch Plants
Medium
118,000
143
16,874
Large
Z94.000
143
42, 042
Continuous
Medium
143,000
143
20, 449
Operation
Large
357, 000
143
51. 050
_
The constant 143 gallons per 1,000 pounds of raw product processed is based on the assumption
of implementation of proper in-plant water management in the small and medium plants which
can be readily accomplished without capital expenditures.
-------
Table VI-4. Incremental effluent control costs for independent rendering
oo
Effluent Control
Level
BPT (1977)
BAT (1983)
New source
standards
Irrigation
system only
Batch Plants
Cost Item
Investment
Annual Cost
Capital
Depreciation
Operating cost
Total Annual cost
Investment
Annual Cost
Capital
Depreciation
Operating cost
Total annual cost
Investment
Annual cost
Capital
Depreciation
Operating cost
Total annual cost
Investment
Annual cost
Capital
Depreciation
Operating cost
Total annual cost
Small
28,500
1,200
2.850
12,800
16,850
57,000
2,300
5, 700
"27, 000
35,000
40,900
1. 700
4,090
15.800
21,590
5,400
220
540
540
1, 300
Medium
29, 100
1,200
2,910
12,900
17,010
80,200
3,200
8,020
28.400
39,620
63,700
2,600
6,370
18.500
27,470
11,300
460
1, 130
750
2,340
Large
35,000
1,400
3, 500
14, 100
19,000
111,900
4,500
11, 190
30,700
46,390
108,700
4,400
10. 870
23,000
17,570
24,700
1,000
2,470
320
3,790
Continuous Operation
Pla nt s
Medium
29. 100
1,200
2,910
12,900
17, 010
86. 100
3,500
8,610
28,700
40,810
79, 100
3,200
7.910
19,400
30,510
12,900
520
1,290
750
2,560
Large
36,000
1,500
3,600
14,500
19,600
118,400
4,800
1 1 , 840
31,500
48, 140
118,400
4,800
11,840
24. 100
40, 740
29,000
1,200
2,900
320
4,420
-------
Table VI-4. Incremental effluent control costs for independent rendering (Continued)
Effluent Control
Level
Percolation and
evap. pond
Cost Item
Investment
Annual cost
Capital
Depreciation
Operating coot
Total annual coat
Small
15,000
600
1,500
810
2,910
Batch Plants
Medium
11,300
460
1, 130
1.600
3. 190
Continuous Operation
Plants
Large
50,600
2,000
5,060
2,700
9.760
Medium
32,300
1,300
3,230
1,600
6, 130
Large
56.500
2,300
5.650
2,800
10,750
-------
VII. IMPACT ANALYSIS
The imposition of effluent controls on the independent rendering in-
dustry will have both direct and indirect impacts on the industry, on
consumers, on its suppliers and on communities in which plants are
located. An analysis was made, for specified effluent control levels,
in both quantitative and qualitative terms, of the impacts which are
expected.
The following types of impacts have been analyzed:
A. Price Effects
B. Financial Effect
C. Production Effects
D. Employment Effects
E. Community Effects
F. Balance-of-payment Effects
A. Price Effects
Considerable competition exists among Tenderers for the limited supply
of raw products. Urban Tenderers face both price and service compe-
tition whereas rural Tenderers may not be subjected to the degree of
price competition experienced by urban Tenderers. However, they have
a lower quality product (i.e. , dead stock) and longer routes and more
costly pickup. On the demand side, the renderer sells his product on
the open commodity market where competition is keen and prices are
set through the prevailing supply and demand conditions.
As a result of these existing pricing conditions (and further elaborated on
in Chapter V), the renderer is faced with a difficult situation in terms of
his ability to pass increased costs forward to the consumer or backward
to the suppliers of raw product. In addition, approximately 22 percent of
the total volume of rendered products are processed in the meat packing
industry in on-site plants. These factors will be further discussed in the
following section.
VII-1
-------
1. Required Price Increase
For the segment of plants that are now discharging wastes through some
type of secondary treatment system, the price increases required to pay
for incremental pollution control facilities are shown in Table VII-1.
These price changes were calculated as a percent of sales, where a*21-
year cash flow was used. Both treatment costs and revenues were dis-
counted back to year zero prior to calculating the percentage increase
required. This increase indicated the change necessary to keep the Net
Present Value of the plant constant.
The price increases were calculated from the wholesale selling prices
f. o.b. plant stated in the description of the model plants (Chapter III).
Price increases required to meet BPT Standards range from 0.6 percent
for the large continuous plant to a high of 5.6 percent for the small plant.
Price increases required by the medium size plants will range from 1.3 '
to 1. 7 percent.
A major price increase is required to achieve BAT Standards. An in-
cremental .8 percent is required by the large plants but the small plants
will require an additional 7. 1 percent to achieve the Standards. Thus,
to achieve the BAT above the baseline will require a price increase of
1.5 percent for large plants, 2.8 to 3.9 for medium size plants and 12.7
percent for the small Tenderers.
2. Expected Price Increase
The ability for firms incurring increased costs resulting from the impo-
sition of Effluent Control Guidelines to pass these costs through the market
system either forward or backward is considered to be negligible. Several
factors are considered in reaching this conclusion.
According to the Development Document, plants linked to municipal systems
will not incur increased costs. As pointed out earlier, however, munici-
palities may readjust their rates resulting in higher costs for their users.
We are assuming no additional costs will be incurred by those plants
resulting from the imposition of the Standards.
Plants achieving no discharge into a waterway through irrigation or evapo-
ration ponds are also assumed to incur no additional cost to meet the pro-
posed Standards.
VII-2
-------
Table VII-1. Percent price increase required to pay for incremental pollution control
Type and size
of plant
Batch:
Small
Medium
Large
Continuous:
Medium
Large
BPT
above
baseline
5.57
1.7Z
.67
1.25
.64
BAT
above
baseline
12.67
3.85
1.48
Z.76
1.53
BAT
above
BPT
7. 10
2. 13
.81
1. 51
.89
-------
It is estimated that 50 percent of the plants dispose of waste water
through municipal systems and an additional 25 percent have achieved
a no discharge level (Table VI-1). Based upon the size distribution of
the plants disposing of waste water through these two methods, we
estimate that they would account for 78 percent of the total production
by this industry or 61 percent of the total rendered products.
A review of the expected price increases for the meat packing industry
(SIC 2011) which processes 22 percent of the total shipments of rendered
products indicates that a price increase of 0.05 percent was projected
for BPT (5). This was considered too small to be traced through the
market system.
The estimated price pass-through resulting from BAT Standards was
judged unlikely to prevail in the long-run. About 55 percent of the meat
packing plants are connected to municipal sewers. Except for possibly
a few isolated areas, the competitive powers of those plants connected
to municipal systems that will incur no additional costs should be sufficient
to hold margins down to the levels expected with BPT treatment.
As a result of the combination of product produced in the independent
rendering industry that will not incur increased costs and that produced
in the meat packing industry, a total of 82 percent of all rendered pro-
ducts will be produced in plants incurring no increased costs.
In addition to the above, the renderer sells his products on the open commod-
ity market where no one seller can affect price, and where competition from
other products that can be used as substitutes is keen. Therefore, we con-
clude that those plants incurring higher costs resulting from pollution con-
trols will not be able to effectively pass these costs forward.
The ability of the renderer to pass his increased cost backward to the
supplier of raw materials is also limited. This is especially true of the
small renderer located primarily in rural areas. The reasoning for this
is the fact that the rural renderer is operating from a lower base price
associated with lower yield product, and therefore downward adjustments
would be more limited. An example of this situation is where dead stock
are picked up as a service without payment. The vnlue of final product
from a $1, 000 pound carcass is estimated at about $34. 00. With ren-
dering cost of $10. 00 and pick up costs ranging fi om $15. 00 to $25. 00,
there is very little margin left. If charges were made to the owner of
the dead stock, it might be more feasible to make disposition of the dead
stock on the farm and thereby create a health hazard.
VII-4
-------
In the urban areas, the competitive factor on raw material acquisition
would prevent effective backward price pass through.
As a result of the high percentage of production represcnicd by plants
that will not experience higher costs from pollution controls and other
factors discussed above, we conclude that the plants incurring higher
costs will not be able to effectively pass these costs either forward to
the consumer or backward to the supplier of the raw material.
B. Financial Effects
Two primary types of analyses were completed to assess the financial
impacts of the proposed pollution control costs on the model plants' (1)
profitability and (2) the present value of future net income stream.
Profitability impacts include the following:
1. Pre-tax net income
Z. After-tax return on sales
3. Pre-tax rate of return on invested capital
4. After-tax rate of return on invested capital
5. Annual cash flow
1. Pre-tax Net Income
The impact of alternative effluent treatment levels on pre-tax net income
for model rendering plants is shown in Tabi VII-2. The imposition of
BPT Standards severely reduces net income in the small conventional
batch plants from 6, 500 to a negative $10, 400. The pre-tax net income
of the medium sized batch plants is also reduced to a very low level but
remains positive. The net incomes for large batch plants and for the
continuous type plants are reduced, but not to the critical point as for
small and medium size batch plants.
BAT Standards further depress profits to the extent that medium size
batch plants would be operating in a loss position. Large conventional
plants have annual profits reduced to $3,000 from an estimated baseline
position of $69,000.
VII-5
-------
Table VII-2. Pre-tax and after-tax income for model independent rendering plants,
assuming no price change ($1, 000)
Type and size
of plant
Batch:
Small
Medium
Large
Continuous:
Medium
Large
Pre-
Baseline
6.
24.
69.
-
86.
51.
5
0
0
0
0
•tax income
BPT
-10.
7.
50.
69.
199.
4
0
0
0
4
BAT
-45.
-32.
3.
28.
154.
4
6
6
2
5
After-tax income
Baseline
5.
18.
42.
219.
125.
0
6
0
0
0
BPT
-10.
5.
32.
42.
110.
4
4
4
-,
1
BAT
-45. 4
-32.6
2.8
21.2
86.8
0-
-------
2. Return on Sales
The after-tax return on sales for model rendering plants at alternative
treatment levels is shown in Table VEI-3. Basically, the returns follow
the same general pattern as net income. A significant point is the low
rate of after return on sales for the batch type plant of approximately
2 percent and the higher rate of about 5 percent on the new continuous
process plants. This, we feel is consistent with general industry per-
formance.
After tax income is reduced to a negative - 4. 1 percent of sales for the
small plant with the imposition of BPT Standards. For the medium size
plant, income is reduced to 0.6 percent. Incomes for the large size
batch plant and continuous plants are reduced but not seriously with the
imposition of BPT standards.
BAT Standards reduces the medium eize conventional plant to negative
levels and the large plant to a 0. 1 percent. Profits on continuous plant
operations are reduced by more than 50 percent after the imposition of
BAT Standards.
3. Return on Invested Capital
Return on invested capital before and after tax for model rendering plants
with alternative effluent treatment levels is shown in Table VU-4. After
tax income as a percent of invested capital is shown ranging from 4 to 8
percent for batch type plants and 9 to 12 percent for continuous plants.
The small plant follows a similar trend that we have seen in the meat
processing industry as well as the leather tanning and other industries;
that is, the return on invested capital is substantially lower for the small
plant than for the medium and large plants.
As shown in Table VII-4, the after-tax return on invested capital drops to
a negative value for the small plant with the imposition of BPT Standards.
For medium plants it drops to a 2.5 percent after-tax. Profits on the
large batch plant and continuous process medium and large plants are re-
duced. However, after-tax profits still remain about 8 percent.
The imposition of BAT Standards severely reduces the profits of the
medium size batch plant to a negative position. Profits in the large
batch plant are reduced to an after-tax rate of .6 percent. After-tax
income is reduced to 4 percent and 8 percent respectively for the con-
tinuous medium and large plant.
V1I-7
-------
Table VII-3. Pre-tax and after-tax return on sales for model independent rendering plants,
assuming no price change
Type and size
of plant
Batch:
Small
Medium
Large
Continuous:
Medium
Large
Pre-tax
Baseline
2.6
2.7
3. 1 '
8.0
8.2
income
BPT
4. 1
0.5
2.3
6.4
7.3
After-tax income
BAT
-18.0
- 3.7
.2
2.6
5.8
Baseline
2.0
2.1
1.9
4.7
4.7
BPT
-4. 1
.6
1.5
3.9
4.1
BAT
-18.0
- 3.7
. 1
2.0
3.2
oa
-------
Table VII-4. Pre-tax and after-tax rate of return as a percent of average invested capital
for model independent rendering plants, assuming no price change
<
Type and size
of plant
Batch:
Small
Medium
Large
Continuous:
Medium
Large
Pre-tax
Baseline
5.8
11.0
13.7
15.2
20.5
income
BPT
- 9.2
3.2
10.0
12.2
18.7
After-tax income
BAT
-40.2
-14.9
0.7
5.0
14.5
Baseline
4.4
8.5
8.4
9.0
11.7
BPT
- 9.2
2.5
6.5
7.5
10.3
BAT
-40.2
14.9
.6
3.8
8. 1
-------
4. Cash Flow
Estimated cash flows (after-tax income plus depreciation on invested
capital for the model rendering plants) are shown in Table VII-5. In the
baseline case cash flows range from 14 to 21 percent with the highest
cash flow attributed to the large continuous processing plant.
After the imposition of BPT Standards, all cash flows remain in a posi-
tive position, although the cash flow for small plants is reduced to 3 per-
cent of invested capital.
The annual cash flow for the large batch plant and continuous processing
plants ranges from 12 to 18 percent following the imposition of the BAT
Standards. Cash flows for small and medium size plants are reduced to
negative values.
5. Net Present Value (NPV)
Another measure of the financial viability of a plant is the net present
value (NPV) of projected streams of cost and revenues. With this measure,
it is possible to assess the likelihood of continued plant operation versus
closure. By discounting future cost and revenue stream at the estimated
cost of capital (see Chapter V-Section A-3). positive NPV's would indicate
the likelihood of continued plant operation whereas negative values would
indicate probable plant shutdown. To complete this analysis, the following
assumptions were made:
1. Existing plants have sunk investments but they presumably
could be scrapped or salvaged and the salvage value reinvested
elsewhere as an alternative to the processing operations.
we assumed the salvage value of the batch type operations at
10 percent of, the replacement cost. This relatively low value
is based on little opportunity for use of the equipment outside
the industry and low prospects for use as replacement equipment
in existing plants. With the newer type continuous operations
we used 25 percent of the replacement cost. It is assumed
that this equipment which is newer would have more opportunity
for use in other plants. Land was considered at the current
valuation.
VII-10
G
-------
Table VII-5. Estimated cash flow on average invested capital for model independent rendering
plants, BPT and BAT treatment levels, assuming no price change
Type and size
of plant
Batch:
Small
Medium
Large
Continuous:
Medium
Large
Baseline
($000)
16
38.6
86
98
219
(%)
14.2
17.6
17. 1
17.3
20.5
BPT
($000)
3.5
28.3
79.9
92. Z
207.7
(%)
3. 1
12.9
15.9
16.3
19.5
BAT
($000)
-28.7
-4.6
58.0
76.8
189.4
(%)
-25.4
-2. 1
11.6
13. 6
17.8
-------
2. Revenue and expenses are assumed to remain constant over
time ;i.e., 20yearsofopcration.
3. The after-tax cost of capital for the industry is estimated
at 8. 1 percent (see Chapter V-Section A-3 for description
of after-tax cost of capital). The net persent value of model
rendering plants before and after the imposition of altern-
ative effluent treatment standards are shown in Table 7II-6.
All plants have a positive net present value prior to the im-
position of standards. It is well to note that the small plants
have a relatively low net present value before the imposition
of controls and they are considered to be in a marginal
situation.
The imposition of BPT controls reduces the NPV of the small batch plants
to a negative position of approximately -$100, 000. This suggests that the
small plant would not be able to bear the cost of the BPT controls ar,d •
would be forced to shut down. (It is well to note at this point the net
present value of control costs are higher for the small plants than for the
larger plants. This is due to tax considerations involved in computing
net present value. ) For example a large plant taxed at the . 48 percent
tax rate for income greater than $25, 000 will have a tax saving of $0. 48
per $1. 00 of pollution control expenses or a net cost of $0. 52. A small
plant with a net income of less than $25, 000 will have an effective tax
rate of $0. 22 percent; as a result the net cost to the plant will be $0. 78
on incurred pollution control cost of $1. 00.
The imposition of BAT Standards reduces the net present value of small
plants even further. It also reduces the medium size plant to a negative
of $148, 000. This suggests that the medium size plants would not be
able to incur the cost of the BAT Standards.
C. Production Effects
The imposition of BPT and BAT Standards will cause serious production
effects in the rendering industry. Plants most seriously impacted are the
small and medium size plants primarily located in rural areas. In many
cases the pick-up routes of these plants may cover a radius of 150 to
200 miles. With only one plant serving the area the closure of such a
plant by the imposition of pollution control standards will result in
a serious disruption of service to the livestock farms, local slaughtering
VII-12
-------
Table VII-6. Net present values of model independent rendering plants before and after
the imposition of BPT and BAT effluent treatment standards
i
i—*
UJ
Type and size
of plant
Batch:
Small
Medium
Large
Continuous :
Medium
Large
NPV of
Plant before
controls
($000)
39.5
150.2
347.4
463.6
1, 118.4
NPV of
BPT
controls
($000)
-136.7
-114.9
-90.6
-79.8
-92.5
BPT
NPV of
Plant after
controls
($000)
-97.2
35.3
219.7
383.8
1,025.9
BAT
NPV of
BAT
controls
($000)
-174.4
-183.3
-134.3
-109.5
-129.7
NPV of
Plant after
controls
($000)
-271.6
-148.0
85.4
274. 3
896.2
-------
houses, retail stores and others that provide meat scrape, trimmings
and carcasses in the rural area that are served by the rendering industry.
Coverage of such pick-up routes may, in some cases, be accomplished
by existing plants located in relatively close proximity. In many cases,
however, it is expected that coverage of long pick-up routes, particularly
in low population areas and service to individual farms may not be econ-
omically viable for remaining plants if distances to the plant are considerable.
1, Production Curtailment
No significant long-run curtailment in total production resulting from the
imposition of increased water pollution control requirements is expected.
If plants continue to operate it is highly unlikely that they would reduce
volume to meet the proposed standards.
It is currently estimated that the industry is operating at an approximate
capacity of 85 percent. Therefore, it is theoretically possible that the
existing industry could cover the production loss from plant shutdowns
with little problem. However, the problem is the spatial dispersion of
the raw material sources that may make it uneconomical for plants sur-
viving the BPT and BAT Standards to cover territories vacated by the
closing plants.
The size distribution and percent of total production accounted for by
each segment is summarized below:
Size No. of Plants Volume of Production
Small 210 lfe-6
Medium 200 53.5
Large 40 29.9
Total 450 100.0
It is estimated that there are approximately 90 continuous operation
plants in existence today. Of this number, 25 are estimated to be large
and 65 in the medium size category.
VII-14
-------
2. Plant Shutdowns Resulting from Pollution Control Guidelines
A conventional analyses of the firm profitability including absolute
reduction in income as well as net profits as a percent of sales and as
a percent of invested capital was used to appraise the firm ability to
recover capital expenditure in pollution control equipment. The NPV
analysis was used to view the present value of the future earnings of
the firm with and without the imposition of pollution controls. This
present value is then compared with the present salvage value of the
firm. If the present salvage value of the firm is greater than the present
value of future earnings with the imposition of controls a shutdown sit-
uation is suggested. By using both the conventional analysis and the
NPV analysis it is believed a clearer picture of the firms financial
picture can be obtained.
The imposition of the proposed BPT Standards will impact the small and
medium size plants that dispose of their wastewater into waterways very
severely. The small plants will be impacted to the point of shutdown.
This will include 61 of the 210 small plants and will account for 4.8 percent
of the total production of the industry (Table VII-7). Medium size plants
will incur serious financial damage resulting in limited ability to finance
new pollution control facilities if required. However, most of the increased
costs are in terms of operating cost which will not require financing.
The imposition of the proposed BAT Standards will seriously impact the
conventional batch type medium plants to the point of shutdown and ser-
iously impair the financial position of the large conventional plants. It
may be possible that even some of the large plants with lower profits
will not be able to finance the needed investment and be forced to close
down. We are not projecting any shutdowns at this point, however. We
are projecting 29 medium size plants (all medium plants discharging into
waterways with the exception of the continuous operations plants). It is
estimated that these 29 medium size plants account for 7.8 percent of
the total production in the industry.
The plant shutdown can be summarized as follows: Percent Loss of
Plant Shutdown Total Production
Size No. of Plants BPT BAT BPT BAT
Small 210 61 0 4.8 0
Medium 200 0 29 0 78
Large 40 00 0 0
VII-15
-------
Table VII-7. Estimated plant closures resulting from the effluent control standards
Number on
Total municipal
Plant size Plants system
Batch Plants
Small 210 55
Medium 135 95
Large 15 11
Total Batch 360 161
Continuous
Plants
No discharge: Treatment with Estimated Total
irrig. or evap. discharge into plant closures plants
pond waterway BPT BAT remaining
94 61 61 0 149
11 29 0 29 106
_I _1 0 0 15
106 93 61 29 270
Medium 65
Large 25
Total Conti-
nuous 90
Total Plants 450
45
12
64
225
7
113
14
19
112
0
_0
0
61
0
_0
0
29
65
25
90
360
-------
As discussed earlier, the industry has the production capability to
absorb this lost production. However, because of the spatial dis-
persion of the raw material supplies and the plants projected for
closure, severe local problems will be encountered.
D. Employment Effects
Total employment in the independent rendering industry has declined
from 14,600 employees in 1958 to 10.000 in 1972 (7, 8). The closure
of an estimated 61 plants resulting from BPT Standards and 29 medium
size plants resulting from BAT Standards will have approximately the
following overall impact on employment.
Employees Dislocated
Closures resulting from No. & Size of Plant Per Plant Industry"
BPT Standards 61 sm^ll 10
BAT Standards 29 medium 27
Because of the geographical dispersion of plants in the indusf ,- inc. the
size of plants that are likely to close down, the employment impact will
be generally dispersed nationally. Most likely, the majority of the plants
that are forced to close will be located in small cities and towns of less
than 25,000 population.
Although the average number of employees per plants is relatively low,
the impact on a small town may be significant.
A further complication will result from the relatively unskilled
status of at least 80 percent of the workers. Because most of the plants
that will close are in rural areas and small towns where in many cases
the job market is poor or declining, new employment for the displaced
workers will be scarce. There will be very little opportunity for displaced
workers to find comparable jobs in the existing plants.
VII-17
-------
E. Community Effects
As previously discussed, many of the small plants that will be forced
to close are located in rural areas. The impact to communities will be
a loss of jobs, loss of economic base and, possibly the most severe,
a loss or serious decline in the service provided by the rendering plant.
The closure of a plant could result in a reduction in payrolls of $80, 000
and $270,000 for small and medium sized plant respectively. This would
approximate 1. 6 to 4. 3 percent of the total payroll of a small rural
community of 2, 500 (based on 625 employed workers earning $8, 000
each). Assuming a multiplier of 3.5, the loss of a small or medium size
plant could reduce the economic base of the community by as much as
$280,000 to $950,000.
The major impact of the closure of the small and medium size plants would
be the loss of service to the raw material collection area. In most rural
areas pick up coverage is provided by only one plant. It will be uneconomical
in many cases for surviving plants to extend their pick up routes. If they
did extend their coverage to the impacted areas, the quality of service
would most likely deteriorate. Not only would it take longer to respond
to farmer calls,but also the frequency of pick up would be reduced to offset
the added cost of additional miles.
It is impossible to determine precisely the number and location of the com-
munities where plant closures would occur. However, a high proportion
of these plants are in small rural communities. Also, among the small
and medium size plants nearly all are family owned single plant firms.
Given the above information we estimate the number of communities
impacted by the estimated plant closures to be approximately as
follows:
BPT - 61 communities
BAT - 29 communities.
F. International Trade
International trade plays a vital role in the marketing of inedible tallow
and grease. In 1970 46 percent of the total production was exported.
The estimated impact from the imposition of BPT and BAT Standards
on .the rendering industry will have only very slight impact on our inter-
national trade and balance of payment.
VII-18
-------
There are no projected price increases resulting from the imposition of
controls. As a result the competitive position of the U.S. in international
trade should not be changed.
VII-19
-------
VIH. LIMITS OF THE ANALYSIS
A. General Accuracy
There is a tremendous lack of published information regarding the inde-
pendent rendering industry. Ninety-five percent of the firms are pri-
vately held and publish no annual reports. The National Renderers Assoc-
iation, an active trade organization, does not collect any type of financial
information on the member companies nor do they publish financial results
of a limited number of firms such as the American Meat Institute. Financial
information obtained from the Internal Revenue Service and published in
Troy's Almanac of Business and Industrial Financial Ratios is aggregated
with all meat packing and meat processing firms and provide little insight
into the financial structure of the industry.
Financial information concerned with investments, operating costs and
returns was not available for individual plants or firms. As a result,
the financial aspects of the impact analysis were, of necessity, based
on synthesized costs and returns for "representative" types and sizes
of model plants. These costs and returns were developed from a variety
of sources including information obtained from industry sources, equipment
supplieis,plant architects, University sources and other knowledgeable
individuals.
Water pollution control costs were furnished by EPA, Effluent Guide-
lines Division and resulted from costs developed for EPA by North Star
Research Institute. These costs were developed for "typical" rendering
plants as described earlier in this report. It was necessary to adapt
these costs to the types:'and sizes of model plants used in this analysis.
This adaption process required the making of assumptions and adjustments
related to these data which are critical to the impact analysis. In addition,
it was necessary to make specific assumptions regarding the current status
of effluent disposal and treatment in the meat processing industry. These
assumptions are described in detail in the "Critical Assumptions" section
of this report. The validity of these assumptions and of the effluent con-
trol costs which are imposed on the model plants introduce an additional
element of uncertainty and possible inaccuracy.
However, given the accuracy of the pollution control costs to be accept-
able, it is believed that the analysis represents a usefully accurate eval-
uation of the economic impact of the proposed effluent guidelines on the
meat processing industry.
VIII- 1
-------
B. Range of Error
Different data series and different sections of the analysis mil have
different possible ranges of error.
1. Errors in Data
Estimated data error ranges as an average for the industry are as
follows:
Error Range
1. Information regarding the organization
and structure of the industry, number
location and size of plants, and other
information descriptive of industry
segments + 15
2. Price information for products and raw
mate rials + 20
3. Cost information for plant investments
and operating costs _f 15
4. Financial information concerning the
meat industry + 20
5. Salvage values of plants and equipment + 20
6. Water pollution control costs Unknown
7. Plant closures + 20
C. Critical Assumptions
Because of an almost total lack of any published information on the
independent rendering industry (the exception is the Census of Manu-
factures ; however, marine fats and oils are also included in the same
SIC code but not addressed in this report) a series of assumptions had
to be made. This was necessary to keep the analysis within manage-
able limits and to develop "representative" plants which would permit
vm-z
-------
further development of industry-wide impacts. These assumptions fall
into seven general areas.
1. Assumptions regarding industry structure
2. Assumptions concerning raw material and product prices
3. Assumptions concerning "representative" model plants
4. Assumptions concerning water pollution control costs
5. Assumptions concerning current status of effluent disposal
systems in use by the industry
6. Assumptions concerning the salvage value of plants and
equipment.
7. Assumptions concerning "shutdown" decisions of the inde-
pendent renderers.
1. Industry Structure
A critical assumption affecting the analysis is the number and size of
independent rendering plants. At the time of writing the detailed Census
of Manufactures for 1972 is not available. The Census data is further
limited by the inclusion of marine fats and oils processors. Thus the
industry structure had to be developed from the 1967 Census data plus
the added knowledge of the National Renderers Association. It is believed
the industry as described is reasonably close to the existing situation.
Various checks and cross checks performed tend to enforce this view.
2. Price Assumptions
Published prices for final products were obtained from the USDA
Fats and Oils Situation (2) (4) and the USDA Feed Situation (10). Raw
product prices are not obtained by any statitiscal office and had to be
obtained through direct industry contacts.
Because of the tremendous variability in product prices during the past
year, we felt that 1973 was atypical. Since we did not have sufficient
information to construct a profile over time for the operation of the industry,
we determined that 1972 was a more "normal" year. As a result, we
based our "model" plant financial profiles on that year.
3. "Representative" Model Plants
No single plant is "representative" of the types and sizes of plants which
constitute the independent rendering industry. Our categorization of
small through large for conventional batch rendering plants and
medium through large for the newer continuous processing plants, we
believe, adequately represent the major types of plants found in the
industry.
vm-3
-------
The essence of the Categorization scheme is to show the various impacts
on the different si^es and types of plants. In this effort we feel the
categorization is successful to demonstrate the much greater impacts
felt by the smaller firms.
4. Water Pollution Control Costs
Data on water pollution control costs were supplied to DPRA by the Ef-
fluent Guidelines Division of EPA. We are not in a position to evaluate
these costs but they vrer« assumed to be reasonably accurate and adjusted
through generally accepted techniques to "fit" our model plants.
S. Current State of Waste W^ter Treatment in the Industry
Data on waste water treatment in the industry was obtained from the
Development Document -vid considered to be reasonably correct.
6. Salvage V-Uuec
Salvage values of buildings, equipment and land will vary greatly from
one location to another i-nd v/ith tbe type and condition of structures and
equipment.
In order to avoid prc rlems wbici: would be inherent in attempting to
establish differential salvage values, a set of ''standard" assumptions
concerning salvage values was developed.
a. Land was salvaged nt its 1973 value.
b. Buildirgs and eauspment for conventional plants were
salvaged at a net amount equipment to 10 percent of
their 1972 replacesnent value.
c. Continuous process plants were salvaged at 20 percent
of their 1972 replacement value.
d. Net operating capital T»as recovered intact.
7. "Shutdown" Decisions
The general purpose cf ;he "shutdown" model is to examine profitability
of the model plants before and after the imposition of effluent limitation
guidelines, to determine the likelihood of forced closures which would
result and to calculate the price changes required to cover the added
effluent control costs.
vm-4
-------
The model required assumptions relative to numerous factors.
These assumptions are described in detail in previous sections of this
report. Assumptions used, while arbitrary, were made in accordance
with estimates of conditions prevailing in the independent rendering
industry.
vm-5
-------
SELECTED REFERENCES
-------
SELECTED REFERENCES
(1) William Prokoff, National Rende rcrs Association. Personal
communication.
(2) USDA , U.S. Fats and Oils Statistics, Economic Research Service.
1950-1971.
(3) Interview with Dr. Don Kropf, Department of Animal Science and
Industry, Kansas State University.
(4) USDA, Fats and Oils Situation, Economic Research Service,
Feb., 1974.
(5) Development Document for Effluent Limitation Guidelines and
Standards of Performance, Off-site Rendering Industry prepared
by North Star Research Institute for U. S. Environmental Pro-
tection Agency, April 1974.
(6) U. S. Environmental Protection Agency, "Economic Analysis of
Proposed Effluent Guidelines on the Meat Processing Industry,"
completed by Development Planning and Resea rch Associates,
Manhattan, Kansas, 1973.
(7) USDC, Census of Manufactures 1967, Bureau of U.S. Census,
U. S. Government Printing Office, Washington, D. C. , 1971.
(8) USDC, Preliminary Report 1972 Census of Manufactures Industry
Series, Bureau of Census , U. S. Cove rnment Printing Office,
Washington, D. C. 1974.
(9) USDC, Annual Survey of Manufactures 1972 and Earlier, Bureau
of the Census, U. S. Government Printing Office, Washington,
D. C., 1974.
(10) USDA, Feed Situation, Economic Research Service, Feb. 1974
and earlier.
-------
BIBLIOGRAPHIC DATA '• lU-poii No. 2.
SHEET EPA-230/1-74-040
Economic Analysis of Proposed Effluent Guidelines for the
Independent Rendering Industry.
7. Author(s)
Donald J. Wisaman and Raymond J. Coleman
9. Performing OiganUatioa Name and Address
Development Planning and Research Associates , Inc.
P. O. Box 727, 200 Research Drive
Manhattan, Kansas 66502
12. Sponsoring Organization Name and Addicss
Environmental Protection Agency
Waterside Mall
4th and M Street, S. W.
Washington. TV C~ 204f,0
3. Recipient'i Accession No.
5- Kepotc Dale
July, 1974
6.
8. Performing Organization Kept.
No.
10. Project/ Task/fork Unit .No.
Task Order No. 9
II. Contract/Grant No.
Contract No. 68-01-153
13. Type or Repou & HerioJ
Covered
Final Report
14.
IS. Supplemental y Notes
16. Abstracts
The economic impacts of proposed effluent guidelines on the independent rendering
industry are assessed. The analysis includes classification and description of types
of firms and plants; financial profiles, investments and operating costs and profits
for selected model plants. Plants are segmented by size and type including:
batch rendering and continuous process. Pricing mechanisms and price relationships
are evaluated. The financial impact of proposed effluent treatment technology was
assessed in terms of prices, industry profits, volume of production, employment,
community impacts and international trade.
The imposition of BPT Standards (1977) and BAT standards (1983) will have a serious
impart on the industry if control costs and the present level of control in the industry
are a- stated by EPA. An estimated 50 percent of the plants are linked to municipal
7. Key -o.-^s anj Document .\iuiysis. I/O. Descriptors
Water pollution, economic analysis, independent rendering industry, meat meal and
.ankage inedible tallow, supply prices, variable costs, fixed cost, fixed investment,
chj counted cash flow.
17b. Idenr ifiers/Optn-Endej Terms
02
I7e. CO>ATI F;c!
'8. Avji.jou.ty it
02 Agriculture, B-Agricultural economics
05 Behavioral and Social Sciences,
C-Economics
>«:». ..r«r*. 1.1.1** ' I
20.
r\ri
21. .«j. .-I
103
-------
16. Abstracts (Continued)
treatment facilities and will not incur additional costs resulting from the
imposition of proposed Guidelines. The remaining plants will not be able
to pass their increased costs through the marketing system and will exper-
ience a reduction of profits. An estimated 61 of 210 small batch plants
will be forced to close upon imposition of BPT Standards and 29 medium
size batch plants will close upon imposition of BAT Standards
The loss of plants will reduce production capacity by 4.8 percent from tte
imposition of BPT Standards and 7.4 percent from BAT Standards. Existing
plants can theoretically pick up the lost volume but becau;»e of th< spacial
dispersion of the smaller plants service to some rural communities will
be substantially reduced. Approximately 1,400 employees located.in 90
communities will be directly effected.
------- |