EPA 230/1-74-040
JULY, 1974
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
Meat Processing Industry
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
\
-------
ECONOMIC ANALYSIS OF PROPOSED EFFLUENT GUIDELINES
MEAT PROCESSING INDUSTRY
Donald J. Wissman
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 is presently available
in limited quantities through the U. S. Environmental Protection Agency,
Information Center, Ruth Brown, Room W-327, Waterside Mall,
Washington, U. C. 20460
This document will subsequently be available
through the National Technical Information Serv1Ce,
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. This 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.
-------
CONTENTS
I. INDUSTRY SEGMENTS
A. General Description of the Industry
B. Industry Segments
C. Number and Characteristics of Plants
D. Market and Product Concentration
E. Employment
II. FINANCIAL PROFILE OF THE INDUSTRY II-1
A. Sales II-1
B. Distribution of Total Sales Dollar II-5
C. Earnings II-5
D. Industry Annual Cash Flow Position 11-10
E. Ability to Finance New Investment 11-12
III. MODEL PLANTS III-l
A. Types of Plants III-l
B. Sizes of Plants III-l
C. Investment III-5
D. Model Plant Capacity and Utilization III- 11
E. Annual Profits 111-15
F. Annual Cash Flow 111-17
G. Cost Structure of Model Plants III-17
IV. PRICE EFFECTS IV-1
A. The Pricing Process in the Livestock and
Meat Industries IV-1
B. Prices of Raw Material IV-5
C. Finished Product Prices IV-6
D. Expected Price Impact IV-9
V. ECONOMIC IMPACT ANALYSIS METHOLOGY V-l
A. Fundamental Methodology V-l
B. Price Effects V-9
C. Financial Effects V-ll
D. Production Effects V-ll
E. Employment Effects V-12
F. Community Effects V-13
G. Other Effects V-13
-------
CONTENTS
Page
VI. EFFLUENT CONTROL COSTS VI-1
A. Current Status of Effluent Control in Industry VI-1
B. "Typical" Effluent Control Costs VI-3
C. Effluent Control Cost for Model Plants VI-4
VII. IMPACT ANALYSIS VII-1
A. , Price Effects VII- 1
1. Required Price Increase VII-1
2. Expected Price increase VII-3
B. Financial Effects VII-4
1. Pre-tax Net Income VII-4
2. Return on Sales VII-6
3. Return on Invested Capital VII-6
4. Cash Flow VII-6
C. Production Effects VII-13
1. Production Curtailment VII-13
2. Plant Shutdowns Resulting from Pollution
Control Guidelines VII-13
3. Total Production Lost Due to Plant Closures VII-16
D. Employment Effects
VII-17
E. Community Effects VII-18
VIII. LIMITS OF THE ANALYSIS VIII-1
A. General Accuracy VIII-1
B. Range of Error VIII-2
1. Errors in Data VIII-2
C. Critical Assumptions VIII-3
1. Industry Structure VIII-3
2. Price Assumptions VIII-3
3. "Representative" Model Plants VIII-4
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-5
APPENDIX
SELECTED BIBLIOGRAPHY
-------
ANALYSIS OF THE ECONOMIC IMPACT OF
PROPOSED AFFLUENT LIMITATION GUIDELINES FOR
THE MEAT PROCESSING INDUSTRY
PHASE I - INDUSTRY DATA AND ANALYTICAL FRAMEWORK
I. INDUSTRY SEGMENTS
In an earlier study, "Initial Analysis of the Economic Impact of Water
Pollution Control Costs Upon the Meat Industry," completed in November,
1972 for the Environmental Protection Agency by Development Planning
and Research Associates, Inc., (1) preliminary estimates were made of
the impact of water pollution controls proposed at that time.
The purpose of this report is to review new effluent guidelines being pro-
posed by the Environmental Protection Agency, to evaluate the impact of
the new guidelines on the meat processing industry and to update, expand
and improve upon the earlier analysis.
This analysis is concerned with meat processing plants falling in SIC
Code 2013 -- Sausages and Other Prepared Meat Products.
A. General Description of the Industry
The industry includes those establishments primarily engaged in manu-
facturing sausages, cured meats, smoked meats, canned meats, frozen
meats, and other prepared meats and meat specialties, from purchased
carcasses and other materials. Sausage kitchens and other prepared
meat plants operated by packing houses as separate establishments also
are included in this industry. Products processed by establishments
included in this study are:
Bacon, side and sliced Meat extracts
Beef, dried Meat products: cooked, cured, frozen,
Bologna smoked, spiced, and boneless
Boneless meat Pastrami
Calf's foot jelly Pig's feet, cooked and pickled
Canned meats, except baby Pork: pickled, cured, salted, or smoked
foods Potted meats
Puddings, meat
Corned beef Roast beef
Corned meats Sandwich spreads , meat
Cured meats: brined, dried Sausage casings, natural
and salted
1-1
-------
Dried meats Sausages
Frankfurters, canned or not Scrapple
canned Smoked meats
Ham: boiled, boneless, Spreads, sandwich: meat
roasted and smoked Stew, beef and lamb
Ham, canned Tripe
Head cheese Vienna sausage, canned or not canned
Lard
Luncheon meat, canned
The above list of products is also processed by other industries outside
the scope of this study. The most obvious case is meat packing plants
(SIC 2011) which were covered in an earlier report. (2) Similar product
processing utilizing poultry, rabbits, and other small game as raw
material (SIC 2016 and 2017) are excluded as is processing of horses
and large game. SIC 2013 also clearly excludes those purveyors, dis-
tributors, wholesalers and retailers whose processing is primarily
limited to cutting up and resale of purchased fresh carcasses (e.g.
SIC 5047, 5411 and 5421). It is not uncommon for this latter group to
have a minor line of self processed items fitting the SIC 2013 product
descriptions. In some instances, meat markets (SIC 5421) even slaughter
meat animals. Finally., those establishments primarily engaged in canning
meat for baby food and/or other specialty items (SIC 2032) and those
primarily engaged in quick freezing and cold packing specialties (SIC 2037) are
also excluded from this study.
To help place the relationship of SIC 2013 establishments with establish-
ments excluded from this study in the proper perspective, an examination
of 1967 Census of Manufacturing data is useful. Total shipments of sausages
and other prepared meats (primary products) in 1967 were $5, 418 million with
46 percent ($2, 500 million) accounted for by SIC 2013 meat processing
establishments, 53 percent by SIC 2011 meat packing establishments and
1 percent by other establishments (primarily canned specialty plants).
The 46 percent coverage ratio accounted for by SIC 2013 in 1967 repre-
sented a small gain over the 40 percent figure recorded in 1963. Total
value of shipments by meat processing plants (SIC 2013) in 1967 was $3, 008
million of which $2, 500 million of primary product shipments represented 83
percent, $94 million of secondary product shipments represented 3 percent
and miscellaneous receipts of $413 million (mainly contract work on
materials owned by others) represented 14 percent. Industry coverage
and distribution of shipments are pictorially presented in Exhibits 1-1
and 1-2.
1-2
-------
Meat Processors (2013)
46%
Meat Packers (2011)
53%
Exhibit 1-1. Relative Value of Primary Sausage and Processed Mee
Products Shipments by-Four Digit SIC Code Groupings
1-3
-------
Miscellaneous Receipts
14%
condary Products
3%
Primary Products
83%
Exhibit 1-2. Relative Value of Shipments by SIC 2013 by Major
Revenue Categories
1-4
-------
B. Industry Segments
In the draft Development Document (9), North Star has proposed five industry
segments within the Meat Processing Industry. They are as follows:
1. Small plants with less than 6, 000 pounds per day
finished product
2. Large meat cutters (cut and bone only--probably form
and fabricate also)
3. Large sausage plants (sausage, luncheon meats, but no
hams or canned products
«
4. Large sausage and ham plants (no canning)
5. Large canning plants
According to our interpretation of SIC Code 2013, segment (2) belongs in
SIC codes 5047, Wholesale Meat and Meat Products; 5411, Grocery Stores;
and 5421, Meat and Fish Markets; but not 2013 (see general industry,
Chapter I - A).
Segmentation of the industry for the purposes of an economic analysis
follows the pattern established by North Star very closely with the exep-
tion noted above. We have further segmented by size as follows:
Plant Size
X-Small- Small Medium Large
1. Sausage manufacturing X X X X
plants
2. Smoked meats including x X X X
ham
3. Mixed plants including X X X X
sausage & smoked meats
v Y X
4. Canning-plants A A
>6, 000 pounds per day of finished product.
1-5
-------
C. Number and Characteristics of Plants
Only limited information is available on the number and characteristics
of meat processing plants. There are two basic sources of information
on the number and characteristics of plants; they are the Census of
Manufactures and USDA Animal and Plant Health Inspection Service.
Both have distinct limitations for our purposes.
The Federal Inspection Service is required to inspect all meat processing
establishments shipping interstate. Plants are designated as slaughtering,
processing, boning, and separately designated if they process poultry.
Plants, however, are not designated by SIC code. Although all slaughter-
ing plants and poultry processing plants can be separated out, the remain-
ing "processing plants" may be designated by the Census as falling into
any one of the following SIC codes including 2013, 2099 (Food Processing
N.E.C.), 5047, 5411, 5421.
Functional classification of establishments according to the most recent
Directory of Meat and Poulty Inspection includes the following:
No. of Establishments
Process only- 2,426
Bone only 125
Process and bone 885
Total 3,436
!_/
Includes sausage manufacturers, smoked meats, canned meats, soup
companies, baby food manufacturers, ethnic food specialties (Mexican
foods, Chinese foods, Italian foods, etc., in which meat represents
20% or more of product weight), meat distribution, etc.
In addition, a number of establishments may process meats but not ship
interstate and, therefore, may not be Federally inspected. For example,
the American Association of Meat Processors has a membership of
approximately 11,000. Basically these are small, independent processors
who may or may not slaughter, make sausage and similar products or
smoked meats, and/or engage in meat cutting. They may wholesale or
retail at local outlets.
1-6
-------
The Census of Manufactures provides the following information on the
number of meat processing plants (SIC 2013).
Table I-1. Number of meat processing plants, United States, 1954-1967
year Number of Firms Number of Plants
1954 1,254 1,316
1958 1,430 1,494
1963 1,273 1,341
1967 1,294 1,347
1972 NA 1.297.L'
Source: Census of Manufactures
1 / Preliminary
As indicated above, the number of meat processing plants remained
relatively stable over the period 1954-1967. In general, the industry
consists of single plant firms except for the operation of major national
packers which have developed processing plants in multiple locations.
Type of Plants
Products of meat processing plants can be classified into general product
categories as follows:
1. Pork products, processed or cured (not canned or made
into sausage)
2. Sausage and similar products
3. Canned meats
4. Other products (sausage casings and other processed products)
Approximately 50 percent of the plants are identified by the Census as
specializing in one of the above categories. The remaining plants, it can
be concluded, would process more than one of the above categories. The
Census makes the following breakdown:
1-7
-------
Primary Product Classification
Number
Pork products (not canned or sausage)
Sausage
Canned meats
Other
Total
Size
The size structure of the meat processing industry is shown in Table 1-2.
It is significant to note that 47 percent of the plants had less than 10
employees and produce only 3.2 percent of the total shipments. These
correspond to our X-Small model plant category. The average number
of employees per plant in 1967 was 40 and the average value of products
shipped per plant was 2.2 million dollars.
Table 1-2. Size and structure of the Meat Processing Industry (SIC 2013)
1967
Number of
Employees
Establishment
Number Percent
Value of Shipments
Total Plant Average
1 -
5 -
10 -
20 -
50 -
100 -
250 -
500 -
>
4
9
19
49
99
249
499
999
1,000
466
181
167
289
129
104
28
10
1
1,374
Percent
of Total
Shipments
($000,000) ($000)
38.1 81
56.0 309
97.5 584
427.6 1,480
493.8 3,828
853.2 6,613
656.1 23,432
385.4 38,850
D
3,007.7
Not presented for reasons of disclosure.
Further discussion dividing the total 1, 374 meat processing and canning
plants into segments and relating them to the model plants used in the
impact analysis is given in Chapter III Section A and B.
1-8
-------
Location
Distribution of meat processing plants by state, for 1967, is given in
Table 1-3. Processing plants tend to be market-oriented and as a result
numbers of plants are large in such states as New York, Illinois, Cali-
fornia, Pennsylvania, Michigan, New Jersey, Massachusetts and Texas.
Table 1-3. Number of meat processing plants, by state, 1967 '
II
State
I/
Number of Plants, 1967 State
Number of Plants, 1967
Me.
N. H.
Mass.
Conn.
N. Y.
N. J.
Penn.
Ohio
Ind.
m.
Mich.
Wise.
Minn.
la.
Mo.
Neb.
Kans.
5
8
61
25
175
62
95
57
23
127
74
56
22
20
27
11
9
Md.
Va.
N. Car.
S.Car.
Ga.
Fla.
Tenn.
Ala.
La.
Okla.
Texas
Colo.
Wash.
Calif.
Total
20
13
40
8
34
34
26
13
14
14
66
12
11
117
1,374
Source: Census of Manufactures.
1-9
-------
Age of Plants
The median age of plants in the Sausage and Other Prepared Meats
industry (SIC 2013) is 19 years according to a Select Committee on Small
Business, United States Senate (3). In a survey completed in 1971, 16
percent of the 1,472 plants in the industry were surveyed as well as 21
to 32 percent of the firms in related SIC codes. The results are shown
in Table 1-4.
Thirty-four percent of the plants were 10 years or less compared with
. 18 percent for meatpacking plants. Although size of plant was not a
variable considered, it is believed that the newer plants would, generally
speaking, represent larger-sized plants. A total of 24 percent of the
plants surveyed were greater than 30 years old. This may be slightly
deceiving because in common with most food processing plants, meat
processing plants undergo periodic renovation, continuous repair and
maintenance. Equipment items are normally replaced as they wear out or
become obsolete. Also, in recent years more stringent Federal inspec-
tion and concurrent stiffening of state inspection has forced many plants
to remodel. Although the physical building may be greater than 30 years
the age of the equipment configuration would, in most cases, be much less.
Table 1-4. Age of plant in the four meat industries, 1970 (Percent of total)
SIC
Code
2011
2013
4223
5047
Industry
Meatpacking plants
Sausage & other
prepared meats
Food lockers
Wholesale meat and
meat products
10 yrs.
& Under
17.
34.
10.
27.
7
1
7
1
11-20
Yrs.
20.
18.
11.
22.
0
8
3
5
21-30
Yrs.
36.
23.
60.
24.
2
5
2
1
31-40
Yrs.
15.
10.
13.
9.
7
7
2
7
41-50 50 Yrs.
Yrs. & Older
5.3
7.2
2. 1
4.4
5. 1
5.7
2.5
5. 1
Source." Select Committee on Small Businesses, United States Senate,
"The Effects of the Wholesale Meat Act of 1967 Upon Small
Business", Sept. 16, 1971.
1-10
-------
D. Market and Product Concentration
Concentration in the meat processing industry has remained relatively
constant since 1958. Census data shown in Table 1-5 indicates that in
the meat processing industry the largest 50 companies process approxi-
mately 51 percent of the value of shipments. This has remained rela-
tively constant over the past few years. The four largest companies
have accounted for approximately 14 to 16 percent of total shipments
during the same period of time. This is in contrast to a higher degree
of concentration seen in the meat packing plants. There approximately
62 percent of the value of shipments are counted for by the 15 largest
companies. The four largest companies would account for approxi-
mately 30 percent of the value of shipments.
There is a higher concentration in canned meats and processed pork
than in the processing industry totals. Twenty percent of the processed
pork,which includes bacon and hams,was processed by the 4 largest
companies in 1967. Seventy-six percent of the total was processed by
the 50 largest companies during that period.
Canned meats have the highest level of concentration with 33 percent of
the value of shipments processed by the 4 largest companies. The 50
largest companies process 94 percent of the total value of shipments
(it should be, noted here however that there are only 56 companies that
are classified as meat canners).
The pattern for sausage and similar products follows more closely the
industry total in that 55 percent of the total shipments were accounted for
in the 50 largest companies. Twenty-two percent were accounted for in
the 4 largest companies.
Leve 1 of Integration
Horizontal integration is common in the meat packing and meat processing
industries, although the majority of firms by number are single plant
firms. The major firms which have multiple plant operations have ex-
tended their operations horizontally so that they have broad geographical
coverage of plants that are performing the same killing and processing
functions. More specifically, the 4 largest companiesArmour, Morrell,
Swift and Wilson--and the second 4 largest companies--Hormel, High-
Grade, Oscar Mayer and Rath--have established a number of plants
I-11
-------
Table 1-5. Concentration in the meat processing and meat canning industries
Value of shipments
Code Class of products and year
2011 Meatpacking plants products
20116 Pork, processed (not canned or made
into sausage) (see also code 20136)
20117 Sausage, and similar products (not
canned), made in meatpacking plants
V (see also code 20137)
^20118 Canned meats (except dog and cat food)
containing 20 percent or more meats
made in meatpacking plants (see also
code 20136)
2013 Meat processing plant products
20136 Pork, processed or cured (not canned
or made into sausage) not made in meat-
packing plants.
20137 Sausage and similar products (not canned)
not made in meatpacking plants
20138 Canned meats (except dog and cat food)
containing 20 percent or more meat not
made in meatpacking plants (see also
code 20118)
1967
1963
1958
1967
1963
1958
1967
1963
1958
1967
1963
1958
1967
1963
1958
1967
1963
1958
1967
1963
1958
1967
1963
1958
Total
(million
dollars)
14,665.2
11,768.7
11,257.0
1,324.0
1, 176.1
1, 349.0
1,020.7
850.6
836.0
490.4
482.2
406.5
2,593.1
1,798.7
1,494.5
684.0
458.6
472.7
1,265.9
905.6
690.2
366.0
247.9
192.1
Percent accounted for by
4
largest
companies
27
30
33
30
33
37
27
27
28
57
58
62
15
14
16
20'
21
23
22
18
19
33
34
34
8
largest
companies
38
40
44
47
49
56
40
41
39
82
81
83
22
21
24
31
34
36
30
25
25
49
48
48
20
largest
companies
49
50
54
67
66
71
57
56
54
98
98
97
36
35
NA
53
56
58
41
37
36
71
74
75
50
largest
companies
62
62
64
85
82
84
?5
i ->
68
100
100
99
51
50
NA
76
76
80
55
51
51
94
95
96
Source: Census of Manufactures.
-------
throughout the country, some performing killing and processing functions
and others performing only killing or only processing functions. The
present trend in the industry is to construct a new processing plant in a
strategic location such that it can obtain the by-products and meat trim-
mings from a number of slaughter plants located nearby, rather than
have a large meat packing plant with both slaughter and processing
functions. The one centralized processing plant would handle the by-
products in a particular area even though the various plants may all
operate under the same corporate organization. Each plant would nor-
mally operate as a separate cost sector.
Vertical integration can be either forward toward the consumer or back-
ward toward the supplier. Meat packers have traditionally integrated
forward through the wholesaling function. Although there exists at the
same time within the meat industry, independent meat wholesalers and
meat jobbers. In 1963 nearly three-fourths of the meat sold by packers
was handled by retail stores. Half of the packer output went directly to
retailers, the remainder through branch wholesalers and other distrib-
utors. An estimated 35 percent of the red meat moved into consumption
through hotels, restaurants, schools, hospitals, government feeding
facilities and other institutional outlets (4).
Packers have integrated back toward the producer by feeding cattle for
their own account, usually in commercial custom feedlots. Packers
contend that such feeding operations contribute to the efficiency in the
slaughtering operation by providing a regular source of supplies on
Monday mornings before supplies can be obtained or by countering
seasonally short supplies in certain areas. However, cattle feeders
see an upward trend in packer feeding as the shift of livestock feeding
out of traditional agriculture enterprises into a vertically integrated
production process, such has occurred in the broiler industry. They
also fear that packers may use ownership of cattle on feed as a price
hedge or as a device to repress prices as they negotiate for additional
animals in the market. Packer feeding tends to vary with the market
conditions and since 1954 has ranged between 4 and 8 percent of total
fed marketings of cattle. However, if feeding by "associate interests"
including separate feeding by owners, directors, officers, employees,
non-reporting subsidiaries and affiliates of packers as included (packer
fed), cattle may account for 8 to 12 percent of total fed cattle market-
ings (4). A study of packer feeding of cattle published by the Packers
and Stockyards Division, Consumer Marketing Service of USDA in 1966
concluded that feeding of cattle*by packers of associated interests could
have a significant depressive effect on prices of specific markets but
that such feeding would not significantly affect the overall prices in a
competitive market situation.
1-13
-------
E. Employment
Employment in the meat processing industry has been increasing grad-
ually over the past ten years and has resulted in a net increase of all
employees from 48,000 in I960 to 56,000 in 1971 (Table 1-6). Value
added during the same period of time has increased from $6. 00 per pro-
duction man-hour in I960 to $12.24 in 1971.
Although the value added per productioA worker has doubled over the
past ten years, the man-hours worked per production worker has re-
mained constant. In I960 the average worker worked a full 8-hour day,
5-day week {or 2,000 hours per year). In 1971 it has increased slightly
to 2, 029 houre. Average wage per production worker has increased
from $2.26 in I960 to $3.85 in 1971.
Approximately 75 percent of all employees in the meat packing processing
industry are classified as production workers. This is reduced slightly
from the I960 average of 79 percent*
The 40-hour week is typical for most meat processing plants with time
and a half being paid for work beyond the 8-hour day, 40-hour week.
Wage differentials are also generally paid to employees working on late
shifts. In addition, labor contracts generally have provision for mini-
mum work weeks with pay for 36 hours guaranteed whether worked or not
mum
Plants with collective bargaining agreements covering a majority of pro-
duction workers employ over 80 percent of the workers in the meat pro-
cessing industry. Union membership is somewhat higher in plants with
multiplant companies than the single plant firms. The Amalgamated
Cutters and Butchers Workmen of North America, the United Packing
House Food and Allied Workers and the National Brotherhood of Packing-
house and Dairy Workers are the major unions in the industry.
Minority workers play an important role in the meat industry. In a study
by Fogel, "Negro in the Meat Industry" (5), it was pointed out that 18 per-
cent of the blue collar workers in the meat industry are of minority origin.
This includes 12 percent of the craftsmen, 17 percent of the operators,
22 percent of the laborers and 21 percent of the service workers. This
is in centrist to 1.6 percent of the white collar worker* being of minority
group*.
1-14
-------
Table 1-6. Total number of employees and production workers
in the meat processing industry
Year
1960
1965
1966
1967
1968
1969
1970
1971
All Employees
48.4
49.0
48.4
54.4
51.9
51.9
55.2
56.4
Production Workers
38.4
36.6
35.6
40.3
38.8
38.6
40.6
42.1
Source: Annual Survey of Manufactures.
1-15
-------
II. FINANCIAL PROFILE OF THE INDUSTRY
Financial data relating to individual operating plants are not available
in any published form. There are published financial data for the large
publicly held companies but since these are generally widely diversified
corporations, the data do not reflect accurately the meat processing
divisions,nor do they reflect accurately the individual plant operations.
There are various sources of published information which reflect
aggregated information on plant operations. They include the American
Meat Institute (AMI) Financial Facts (6) published annually which has
operating ratios and cost profiles for approximately 40 meat processing
companies; Robert Morris, Statement Studies (7) published annually which
contains operating ratios and cost profiles on 40 sausage and other pre-
pared meat product manufacturers. A third source is Troy's Almanac
of Business and Industrial Financial Ratios which contain operating ratios
derived from IRS data on all meat packing operations (8).
Given the limitation on published information on individual plant oper-
ations, we have used the published aggregate information to provide a
picture of the industry performance and as a check against our model
profiles. Model plant configurations, matched to the size and product
combinations of typical operating plants, have been developed for each
of the segments included in the study and are discussed in the following
chapter.
A. Sales
Total sales in SIC 2013 can be approximated by the value of shipments
data published by the Bureau of Census,, as shown in Table II-1. Total
value of shipments, including intercompany transfer, amounted to
$3,007 million in 1967, the last year complete data are available from
the Census of Manufactures. Value of shipments increased on an aver-
age of slightly over 6 percent per year from 1967 to 1972 with value of
shipments for 1972 at $4, 083 million.
Materials as a percent of the value of.shipments averaged 74.9 percent
during this period; however, a slight variation from this average is
evident in 1971 when the cost of materials dropped to 72.5 percent then
rose to 76.5 percent in 1972. Some of this variation may be explained
in higher raw product cost beginning in 1972.
II-1
-------
Table II-1. Value of shipments, SIC 2013 Sausage and Other Prepared Meats,
1965-1972 (million $)
Year
1965
1966
1967
1968
1969
1970
1971
1972-7
Value of shipments
2,323. 1
2,502.4
3,007.7
3,097.3
3,367.9
3,569.1
3,762.2
4,083.0
Cost of materials
1,721.7
1,888.6
2,261.0
2,324.5
2,556.7
2,648.6
2,729.5
3, 124. 0
Materials as
percent of shipment*
74.1
75.4
75.1
75.0
75.9
74.2
72.5
76.5
Source: 1965-1971: Annual Survey of Manufactures.
1972: Census of Manufactures, advance report.
II-2
-------
Table II-2 presents a breakdown of total shipments by major product
line. Because processed meats are manufactured in SIC 2011, SIC 2013
and other SIC categories, total value of shipments for all processed meats
by all SIC categories is presented to place production in perspective,
especially as it relates to SIC 2013. It should be noted that the Census
reports only major product line by 4-digit SIC code; i.e., pork, pro-
cessed or cured; therefore, individual product lines were allocated on
a percentage basis to the respective SIC codes.
In 1967 SIC 2013 reported total shipments of $3, 007 million. Of this
amount $2, 500 million or 83 percent represented the primary products.
The remainder consisted of secondary products and miscellaneous items.
Twenty-two percent of the total shipments consisted of processed and
cured pork of which bacon and hams were the major components and
nearly equal in dollar amount. Forty-two percent of the total value of
shipments in SIC 2013 was accounted for by sausage and similar products.
Of this amount nearly 40 percent was bologna sausage and smoked pork
sausage, 25 percent was frankfurters and weiners, 15 percent fresh pork
sausage and 8 percent was dry and semi-dry sausage. It is well to note
that only 55 percent of the total sausage produced was manufactured in
plants classified in SIC 2013.
Canned meats amounted to only 10.4 percent of the total value of shipments
in SIC 2013. The total production of canned meats amounted to $856 million
and of that amount only $314 million or 36.7 percent was processed in SIC
2013.
Further detail for total meats processed and canned under Federal in-
spection for 1968-1972 is presented in Appendix Table 1. It is well to
note that these data represent total production under Federal inspection and
may in some cases be accounted for more than once depending on the points
of inspections. Also, this does not include meat processed by non-Feder-
ally inspected plants and includes production from all SIC codes.
II-3
-------
Table II-Z. Industry product analysis - shipments byproduct class and industry, 1967
($ million)
Product
Pork - Processed or cured
Sweet pickled or dried
Smoked pork
Hams & picnics
Bacon
Other smoked pork
Boiled ham
Processed pork N.S.K.
Sausage and similar products
Fresh pork sausage
Dry and semi-dry
Frankfurters and weiners
Other sausage, bologna, lunch
meats,, smoked pork, sausages
Jellied goods
Sausage N.S.K.
Canned meats
Sausage casings
Other processed meat
Total
Fresh meats
Miscellaneous
Total shipments
Meat packing
plants
(SIC 2011)
1,324.0
116.2
465.0
516.6
88.4
90.4
47.0
1,020.7
160.3
84.7
256.5
407.7
53.0
58.4
490.4
25.6
-
2,860.7
11,576.3
1, 139.3
15,576.3
Sausage and other
prepared meats
(SIC 2013)
681.8
59.9
239.4
266.0
45.5
46.6
24.2
1,264.0
198.6
104. 9
317.6
504.9
65.7
72.4
314. 0
57.8
182.8
2,500.4
94.2
412.9
3,007.7
Other
2.2
0.2
0.8
0.9
0.1
0.1
0.1
1.9
0.3
0.2
0.5
0.8
0.1
0.1
52.0
_
1.0
57.1
Total
all industries
2, 008.0
176.3
705.2
783.5
134.1
137.6
71.3
2,286.6
359.2
189.8
574.6
913.3
118.8
130.9
856.4
83.4
183.8
5,418.2
Source; Census of Manufactures.
-------
B. Distribution of Total Sales Dollar
Distribution of the total sales dollar in terms of expenses and earnings
for the meat processing industry is shown in Table II-3.
A characteristic of the meat processing industry is the cost of raw
materials which constitutes a high percentage of total cost ranging from
68 to 70 percent over the three year time period shown.
Wages and salaries constitute about half of all other operating expenses.
Wages and salaries have remained relatively constant over the three
year period shown at 13.1 and 13.6 percent of total sale dollar. Em-
ployee benefits would add an additional 2.6 percent of sales on the labor
bill for a total of 15.9 percent of sales in 1972. The next major ex-
pense category is supplies and containers which averaged 3.3 percent
to 3.8 percent.
According to the financial statements of 43 companies which make up
Table II-3, earnings before tax were at 2. 7 and 2. 8 percent of sales
for 1970 and 1971 but dropped to 1. 3 percent of sales in 1972 largely
because of the price freeze. Likewise, net earnings after tax dropped
from 1. 5 percent of sales to . 6 percent of sales in 1972.
C. Earnings
Although the meat packing industry and the meat processing industry are
characterized by high dollar volumes of sales and low earnings pep
dollar of sales, the meat processing industry, however, can be charac-
terized by slightly higher earnings per dollar of sales than for the meat
packing industry.
Based on analysis of 40 major industry groups by the First National
City Bank of New York in 1972, the meat packing industry ranked 40th
in return on sales and 40th in return on net worth. The industry achieved
a return on sales of 1.0 percent and 7.1 percent return on net worth.
This is in contrast to the average return on sales of 2, 414 manufacturing
companies of 5.0 percent in 1972 and 12.1 percent return on net worth.
There are two sources of financial data on meat processing companies.
The American Meat Institute (6) collects and analyzes on an annual basis
certain financial information concerning the meat industry. Ratios of
earnings to sales, earnings to total assets, and earnings to net worth
II-5
-------
Table II-3. Distribution of total sales dollar, expenses and earnings,
in the meat processing industry, 1970 and 197\±'
Item
Total sales
Cost of raw materials
Gross margin
Operating expenses
Wages and salaries
Employee benefits
Interest
Depreciation
Rents
Taxes!'
Supplies and containers
All other expenses
Total operating expenses
Earnings before taxes
Income taxes
Net earnings
1970
100.0%
69.8
30.2
13.1
2.4
0.3
1.0
0.6
0.3
3.3
6.5
27.5
2.7
1.2
1.5%
Year
1971
100.0%
68.1
31.9
13.6
2.6
0.3
1. 1
0.5
0.4
3.6
7.0
29.5
2.8
1.3
1.5%
1972
100.0%
70.2
29.8
13.3
2.6
0.3
1.0
0.7
0.3
3.8
6.5
28.5
1.3
0.7
0.6
Source: "Financial Facts About the Meat Packing Industry,"
American Meat Institute, annual issues.
2/
Other than social security and income taxes.
II-6
-------
are calculated for sausage manufacturers and other meat processors.
Table II-4 shows these earnings ratios for the meat packing industry
for the period of 1963 through 1972.
The Robert Morris Associates (7) publishes information on an annual
basis which contains an analysis of 40 statements obtained from man
turers of sausage and other prepared meat products. These data are
presented by asset size and also provide key ratios presented for the
upper quartile median and lower quartile (Table II-5). These quartiles
are developed by aligning all the numerical values of a particular ratio
in order of the strongest to the weakest. The figure which falls in the
middle of the list of ratio values is the median. The figure half way
between the median and the best ratio value is the upper quartile. The
ratio halfway between the median and the weakest is the third quartile.
Earnings to Sales
During the period 1963 to 1972, the ratio of earnings to sales for sausage
manufacturers averaged 1.72 percent and earnings of other meat pro-
cessors averaged 1.5 percent. These ratios have remained in a rela-
tively constant rate to 1972 when earnings to sales dropped for sausage
manufacturers from 1.92 to .88 percent. Likewise, earnings dropped
for other meat processors from 1.22 to .31 percent. This resulted
partially from the fact that more than one-fourth or 7 out of 24 of the
other meat processors reported in this group operated at a loss in 1972.
In Table II-3, profits before tax to sales for 40 companies manufacturing
sausage averaged 1.5 percent. Interestingly, in the Robert Morris report
earnings data distributed by size is presented. For plants in the asset size
category of $250,000 to $1 million; profits before tax to sales was .8
percent but increased to 1.9 percent for those companies with assets
between $1 and $10 million.
Earnings to Total Assets
The average earnings to total asset ratios as shown in Table II-2, aver-
age 6.8 percent for sausage manufacturers from 1963 through 1972.
For other meat processors, the average was 5.3 percent for the same
time period. Again we see a sharp drop in earnings to total assets
occurring in 1972. Earnings to total assets for sausage manufacturers
dropped from 7.2 in 1971 to 3.5 for 1972. For other meat processors,
earnings dropped from 5.7 to 1.4 percent in 1972.
II-7
-------
Table II-4. Earnings ratios for meat processing companies, 1959-1971
I/
I
00
Year
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
Average
i /
Earnings
Sausage
manufacturers
.88
1.92
1.92
1.61
1.15
1.98
1.88
1.74
2.15
2.04
1.72
to sales
Other meat
processors
.31
1.22
.84
1.15
1.80
1.98
1.33
.91
1. 16
.84
1.15
Earnings to
Sausage
manufacturers
3.51
7.21
7.77
6.21
4.71
7.75
7.45
6.93
8.57
8.17
6.82
total assets
Other meat
processors
1.40
5.68
4.09
5.66
7.27
7.29
5.20
5.57
5.56
5.70
5.34
Earnings
Sausage
manufacturers
5.48
11.05
12.58
10.53
8.30
13.34
12.52
12.23
13.01
11.81
11.08
to net worth
Other meat
processors
2.39
9.79
7.19
9.07
11.07
11.12
8.46
9.51
8.86
8.88
8.63
_' Source: "Financial
annual issues, 1961-1971
Meat Packing Industry, " American Meat Institute,
-------
Table II-5. Earnings ratio for manufacturers of sausage and other
prepared meat products
No. of
Profit
Profit
Profit
Item 250-
statements
before tax to sales
) upper quoted
before tax/net worth) median quoted
) lower quoted
) upper quoted
before tax/total assets) median quoted
) lower quoted
1,000
11
.8
26.1
6.0
-2.8
7.4
1.6
-1.1
Asset size ($1,000)
1,000-10,000
19
1.9
28.7
12.4
-19.9
11.8
6.8
-3.3
All sizes
40
1.5
35.3
16.2
.9
12.1
5.1
.5
Source: Robert Morris Associates, Statement Studies, 1973 edition.
II-9
-------
This again is compatible with the Robert Morris data which shows the
median before tax profit as a percent of total assets at 5.1 percent for
all sizes. This varies from a low of 1.6 percent for the small size
companies to a high of 6.8 percent of the larger companies. The
earnings distribution for the 40 companies represented in this study
ranged from a low of . 5 percent profit before tax on total assets for
the lower quartile to a high of 12 percent for the upper quartile. This
is shown in Table II-5.
Earnings to Net Worth
The ratio of earnings to net worth for 1963 through 1972 averaged 11.1
percent for sausage manufacturers and 8. 6 percent for other meat pro-
cessors according to the AMI data. The sharp drop of earnings to net
worth for sausage manufacturers from 1971 to 1972 was from 11 percent
to 5. 5 percent, and for other meat processors earnings to net worth
dropped from 9. 8 percent to 2. 4 percent. Profit before tax as a percent
of net worth derived from the Robert Morris statement studies is indi-
cated at 16 percent for the median quartile. This increased to 35
percent for the upper quartile and dropped as low as . 9 percent for the
lower quartile. By size of plant,-the small size plant hit a median quar-
tile earnings of 6 percent to net worth while the larger plants attained
12.4 percent.
There are no definitive studies to indicate earnings for 1973 compared
with 1972 and 1971. However, from our discussions with industry, we
feel that the profit levels for 1973 would be comparable to the profit
levels achieved in 1971.
D. Industry Annual Cash Flow Position
The annual cash flow as used in this report is the sum of earnings after
tax plus depreciation allowances. The American Meat Institute reports
the annual cash flow for a total industry annually since 1947. These data
for 1963 and 1972 are shown in Table II-6. Evaluation of the cash flow
indicates a steady increase in cash flow from $232 million in 1963 to $480
million in 1971. Because of the reduction in earnings from $305 million
in 1971 to $207 million in 1972, the annual cash flow amounted to only $391
million, a drop of nearly 20 percent from the high achieved in 1971.
Depreciation, however, has increased steadily from $115 million in 1963
to a high of $184 million in 1972.
11-10
-------
Table II-6. Annual cash flows, meat packing industry,
1963-1972, millions $
n'i' =
Year
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
Earnings
after tax
207
305
227
187
165
178
117
126
165
117
Depreciation
184
175
165
153
143
J36
128
124
112
115
Cash flow
391
480
392
340
308
314
245
250
277
232
Source: American Meat Institute, "Financial Facts About the
Meat Packing Industry."
II-ll
-------
Annual cash flow as a percent of sales can be estimated from data
published in the AMI Financial Facts (6) and is presented in Table II-7.
Annual cash flow for sausage manufacturers averaged 3.1 percent of
sales for 1970 and 1971 but dropped to 2 percent in 1972. Likewise,
for meat processors, an increase from 1.6 in 1970 to 2.2 in 1971 was
experienced. They then encountered a substantial drop in annual cash
now in 1972, with a decline to 1. 3 percent. Again, this reflects the
reduction in earnings after tax experienced in 1972.
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 more 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 attracting new capital. The industry will
be compared to other 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
11-12
-------
Table II-7. Annual cash flow as a percent of sales,
meat processing industry
Sausage
Earnings
after tax
1972 .88
1971 1.92
1970 1.92
manufacturers Other meat processors
Cash Earnings Cash
Depreciation flow after tax Depreciation flow
1.1 1.98 .31 1.0 1.30
1.2 3.12 1.22 1.0 2.22
1.2 3.12 .84 .8 1.64
Source: American Meat Institute, "Financial Facts about the Meat Packing
Industry."
11-13
-------
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 during an expansionary period.
Furthermore, the money markets play a determining role in new fi-
nancing.
These general guidelines can be applied to the meat processing industry
by looking at general economic data and industry performance over the
recent past.
General Industry Situation
The meat processing industry has maintained a relatively constant pre-
tax profit on sales of approximately 1.7 percent for the last ten years.
The exception to this would be 1972 when profits dropped to .8 percent-
however, it appears that the profit levels for 1973 will be consistent
with the long-term averages. An important consideration here is that
the margin appears to be relatively stable during the 10-year period
1963 through 1972 with the exception of 1972.
The ratio of earnings to net worth for the 10-year period 1963 through
1972 averaged 11.1 percent compared with 8.6 percent for other meat
processors. This is very close to the industry average of 2, 414 manu-
facturing firms of 12. 1 percent return on net worth. Based on this in-
formation, it can be concluded that the profit margins for the meat pro-
cessing industry have been relatively stable over time and have compared
very favorably with the average for all manufacturing companies.
According to the AMI, the present net worth of total assets in 1972 was
64.1 percent for 14 sausage manufacturers and 58.7 percent for 25 other
meat processors for an overall average of 43 firms of 61.3 percent.
This is slightly higher than the 61.0 percent reported in 1971; however
the percentage has been maintained at about 60 percent over the past
few year*.
The Robert Morris study which obtained statement data from bank loan
and credit officers reports a net worth of 40 percent of total assets.
Considering the source of data, one would expect the average firm re-
porting to be more highly leveraged than the average.
11-14
-------
Perhaps a good indication of the availability and source of funds for
added investment in pollution control facilities would be past perform-
ance of the industry in meeting the requirements of the 1967 Wholesome
Meat Act. In a study completed by the Select Committee on Small
Business, United States Senate (3), it was reported that processing
plants relied primarily on self-financing. Forty-nine percent of the
cost of improvements were self-financed and 40.3 percent of the funds
came from private financial institutions. The remaining sources of
funds came from the Small Business Administration, 1 percent; small
business investment companies, 1 percent; and other sources, 4.1
percent.
As may be expected, the very small establishments from 1 to 5 employees
and the larger establishments of over 100 employees relied more on self-
financing than the medium sized groups, 63 percent of the cost of im-
provements of the larger plants and 54 percent of such improvements
for the very small establishments were self-financed. Only 35 percent
of the cost of improvements made by establishments with 6 to 25 em-
ployees were self-financed. Establishments with 26 to 100 employees
financed 49.4 percent of the cost.
The medium sized groups received a very high portion of their funds
from private financial institutions. For those establishments with 6 to
25 employees, 51 percent of their funds came from this source while in
the second group from 26 to 100 employees, 49 percent of the funds
came from private financial institutions. The other two size groups,
the very large and the very small, received a relatively low portion of
their funds from this source. The percentages were 22.6 percent for
the larger establishments and 29.7 percent of the very small establish-
ments. To put these costs into perspective, the average cost per plant
to conform to the wholesome meat act was $50,000, making a total cost
for the industry of $42, 900, 000. A complete distribution by plant size
was not presented.
At the time the survey was taken only 35 percent of the processors be-
lieved that they were not in full compliance with the regulation. This is
in contrast to 47 percent of the packers and the freezer locker pro-
visioners. Of the reasons given for non-compliance, only 21 percent
indicated the corrections were too expensive to comply. This is in con-
trast to 34 percent of the meat packers. Since the average cost of im-
provements for the meat packing plant and sausage and other prepared
meat plants are approximately the same, it would appear that the meat
processors were at that time in a slightly stronger financial position
than the meat packers.
11-15
-------
Capital Expenditure
Capital expenditures in the meat processing industry are compiled on an
annual basis and reported in the Annual Survey of Manufactures (15). In
addition, the American Meat Institute, from a sample of 40 firms in this
industry, compiles the actual expenditure by this representative sample.
These data are shown in Table II-8. Total capital expenditure for the meat
processing industry has expanded greatly from $21 million in 1963 to $63
million in 1971. This amounts to an average of $48, 800 per plant, in-
cluding 466 plants with only 1 to 4 employees. Capital expenditures
have expanded steadily with the exception of 1965 which made a sub-
stantial jump due to increased expenditures required to comply with
Federal and State meat inspection requirements.
On a per plant basis capital expenditures have also increased from 1963
through 1972 from $60,000 per plant to a high of $143,000 in 1972 accord-
ing to a sample of 40 firms reporting to AMI (6). These capital expend-
itures reflect the replacement of worn out or outdated equipment, up-
grading of plants through Federal and State inspection requirements and
to comply with local State and Federal pollution control requirements.
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, with the exception of 1972, a relatively stable
profit margin over the past 10 years. In addition, sales in the industry
have been constantly increasing at a 5 to 6 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.
Many of the larger plants are divisions of major corporations. As in-
dicated in the report of the Committee on Small Business, 63 percent of
the cost of improvements for meeting the provisions of the wholesome
meat act by large plants were self-financed.
11-16
-------
Table II-8. Capital expenditure by the meat processing industry
($1,000)
Year
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
Total industry-
expenditures
SIC 2013
63, 100
74,500
62,600
36,900
30,400
33,300
51,600
29,800
21,400
Per plant -
Actual
143
120
130
100
150
100
100
520
80
60
Deflated
121
106
118
94
146
100
101
539
84
63
i Source: Annual Survey of Manufactures
' Source: Sample of 40 firms provided by American Meat Institute
11-17
-------
Indications are that the industry maintains a solid position of net worth
to total assets. As discussed previously, the 43 firms reporting to
AMI have maintained a ratio of net worth to total assets of greater than
60 percent. Robert Morris reports net worth at 40 percent of total
assets which is the same as reported in Troy's Almanac for 2, 809 meat
packing firms. Troy would include meat packing firms which are re-
ported in the AMI statement of having a lower net worth to total assets
than meat processing companies (53 percent vs 61 percent). Therefore,
it would appear that total industry ratio of net worth to total assets
would fall somewhere between 40 and 60 percent.
New capital expenditures by the industry have been constantly increas-
ing over the past 10 years and averaged 143, 000 dollars per plant for
1972 for the 43 plants reporting in AMI in 1972. The Annual Survey of
Manufactures reported capital expenditures amounting to $48, 700 for
all plants in the industry.
The meat processing industry is in a reasonably sound 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 reason-
able 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 con-
trol equipment.
11-18
-------
III. MODEL PLANTS
The model plant concept was used to develop definitive financial profiles
representative of the different sizes and types of plants that are classi-
fied in SIC 2013, Sausages and Other Prepared Meat Products.
A. Number and Types of Plants
As discussed in Chapter 1, there is a wide variation in the types of
plants classified in SIC 2013. For the purposes of this analysis, we
have characterized the major types as follows:
Sausage manufacturing
Smoked meats including ham
Mixed plants, including both sausage and smoked meats
Meat canning plants.
The Census does not define the number of plants by major product type
for sausage manufacturing, smoked meats and mixed products, although
it does identify 56 canning plants. For a lack of more definitive infor-
mation we have divided the three plant types equally among the remaining
1,318 plants (1,374 total plants - 56 canning plants = 1,318 processing
plants). This distribution is shown in Table III-l.
More specifically, the product mix for each of the above mentioned
plants is discussed in Section O of this chapter.
B. Sizes of Plant
Sizes of the model plants were developed from earlier DPRA reports
(1) as representative of the industry and again confirmed with dis-
cussions with industry personnel.
Model plant sizes are compared with the most recent size structure
of the processing industry in Table III-2. Actual plant sizes based on
number of employees and percent of total shipments are taken from
the 1967 Census of Manufactures (the 1972 Census is not available
in detail at the time of writing). Value of shipments was omitted
from the table as there obviously has been substantial changes since
1967; however, the basic size structure in terms of number of
employees and percent of total shipments should approximate the
current structure. The model plant size profile is shown with the
Census data to provide the reader with an overview of how the model
plants fit into the total industry picture.
III-l
-------
industries by type of plant-i'
X-Small Small Medium
No. % No. % No. %
Meat Processing
Sausage Manufacturing 271 33.4 126 33.4 32 34.0
Smoked Products 271 33.3 125 33.3 31 33.0
Mixed 271 33.3 125 33,3 31 33.0
Total Processing 813 100.0 .376 100.0 94 100.0
Meat Canning NA 42 10
Total plants 813 418 104
Large Total
No. % No. %
12 34.2 441 33.4
12 34.2 439 33.3
11 31.4 438 33.3
35 100.0 1, 318 100.0
4 56 100
39 1,374
Plant numbers based on 1967 Census of Manufactures
-------
Table III-2. Size structure of the meat processing industry
compared with model plant size structure
1967 Census
Model Plant
Percent of
total
No. of employees Number Percent shipments
Establishments
Size Approximate
classifi- number of
cation employees
1 - 9
10 - 19
20 - 49
50 - 99
100 - 249
>250
646
167
289
129
104
39
47.1
12.,1
21.0
9.4
7.5
2.7
3.2
3.2
14.2
16.4
28.4
34.6
X-small
Small
Medium
Large
10
50
150
250
III-3
-------
Production of finished product by pounds per day is summarized below
for the model plant size categories for processed meats.
Pounds finished product
X-Small
Small
Medium
Large
Daily
5
20
100
200
Weekly
. - - - - - / o n riS ...
25
100
500
1,000
Annually
6,250
25,000
125,000
250,000
Operating at 100 percent of capacity.
The size range for the model meat processing plants is estimated to be
as follows.
Pounds finished product-daily
Model plant
5,000 Ibs.
20,000 Ibs.
100,000 Ibs.
200,000 Ibs.
Size range
less than 6,000 Ibs.
6,000 to 40,000
41,000 to 175,000
greater than 175,000
X-Small
Xmall
Medium
Large
Meat canning plants were omitted from the above discussion of size. This
is because the Census does not report size of meat canning plants inde-
pendently but does include them in the industry totals. However, the
Census reported a total of 56 canning plants in SIC 2013 in 1967. We
estimated the size for our modal canning plants direct from discussions-
with industry sources. They are as follows:
Cases of finished product
Daily Annual
Small 3,500 700, 000
Medium 14,118 3,000,000
Large 32,353 8,000,000
The size range for the model meat canning plant is estimated to be as
follows.
Pounds finished product-daily^
Model plant Size range
Small 3,500/lba. less than 7,000 Ibs.
Medium 14, 118 Ibs. 7,000 to 24,000
Large 32,353 Ibs. greater than 24,000
III-4
-------
C. Investment
The estimated replacement costs, book value and salvage for each model
plant in the various classifications and size group are shown in Tables
III-3 through III-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.
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 the improvements in building design now required for Federal,
State and local inspection (sanitary wall construction, heavy installation,
improved refrigeration capacity, etc.) not in the design of older plants
now in operation. 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 estim-
ates provided by industry engineers.
It should be noted that no estimates for transport equipment are included
in the replacement cost estimates. It is assumed that none of the study
plants operate delivery fleets. The prices for raw materials as well as
those for products sold are considered to be f.o.b. the prototype plants
studied.
Based on the type of plant, building costs were estimated at $30.00-
$40.00 per square foot including refrigerated storage. Equipment cost
for sausage and smoked meat plants ranged from $40.00 to $50. 00 per
square foot of plant depending on product mix. Equipment costs for
canning plants run at a slightly higher level averaging about $55.00 per
square-foot. Economies of scale for building and equipment cost on new
plants are rather slight in the meat processing industry. This is due
primarily because the actual processing lines in a large plant are simi-
lar to those in smaller size plants. To increase volume, the engineers
simply add additional lines rather than achieve significant economies of
scale through larger size equipment or more efficient handling system.
Ill-5
-------
Table III-3. Estimated investment capital for mixed plant-sausage and smoked products
X- small
5,000 Ib/day
Replmt. Salvage Book
Plant
Land
Building(including ref)
Sq. ft. 6,
Cost
Equipment
Total
Current as sets
Current liabilities
Net working capital
Total invested capital
20
250
219
313
552
168
84
84
636
20
22
31
73
168
84
84
157
9
107
116
168
84
84
200
Small
20,000 Ib/day
Replmt. Salvage Book
40
17,250
604
863
1,507
650
325
325
1,832
40
60
86
186
650
325
325
511
$1,00(
17
293
310
650
325
325
635
Medium
100,
Replmt.
)_- _
60
60,000
1,800
2,700
4,560
3,250
1,625
1,625
6, 185
000 Ib/day
Salvage Book
60
180
270
510
3,250
1,625
1,625
2, 135
31
231
1,042
1,304
3,250
1,625
1,625
2,929
Large
200,000 Ib/day
Replmt. Salvage Book
100
110,000
3,300
4,950
8,350
6,347
3, 173
3, 174
11,524
100
330
495
925
6,347
3, 173
3, 174
4,099
60
1,591
1,985
3,636
6,347
3,174
3, 174
6,810
-------
Table III- 4. Estimated invested capital for sausage manufacturing plant
X-small Small Medium Large
5,0001b/day 20,0001b/day 100,000 Ib/day 200,000 Ib/day
Replmt. Salvage Book Replmt. Salvage Book Replmt. Salvage Book Replmt. Salvage Book
$1,000
Plant
Land 20 20 9 40 40 17 60 60 31 100 100 60
Building (including ref)
Sq. ft.
Cost
Equipment
Total
Current assets
Current liabilities
Net working capital
Total invested capital
6,250
219
2.81
520
161
81
80
600
22
28
70
161
81
80
150
--
85
94
161
81
80
155
17,250
604
776
1,420
621
310
311
1,731
60
78
178
621
310
311
489
--
263
280
621
310
311
591
60,000
1,800
2,400
4,260
3, 105
1,552
1,553
5,813
180
240
480
3, 105
1,552
1,553
2,033
231
926
1, 188
3, 105
1,552
1,553
2,74.1
110,000
3,300
4,400
7,800
6,063
3,031
3,032
10,832
330
440
870
6,063
3,031
3,032
3,902
1,591
1,764
3,415
6,063
3,031
3,032
6,447
-------
Table III- 5. Estimated invested capital for smoked products plant
X-small Small
Medium
Large
5,000 Ib/day 20,0001b/day 100, 000 Ib/day 200, 000 Ib/day
Replmt. Salvage Book Replmt. Salvage Book Repltnt. Salvage Book Replmt. Salvage Book
Plant
Land
Building (including ref)
Sq. ft. 6,
Cost
Equipment
Total
Current assets
Current liabilities
Net wo rking capital
Total invested capital
i i
i i
i 4
i
oo
20
250
219
250
489
174
88
88
577
20 9 40
17,250
22 -- 604
25 85 690
67 94 1,334
174 174 681
88 88 340
88 88 341
155 182 1,675
40
60
69
169
681
340
341
510
__ti 000
17 60 60
60,000
1,800 180
235 2,100 210
252 3,960 450
681 3,405 3,405
340 1,702 1,702
341 1,703 1,703
593 5,663 2,153
31 100
110,000
231 3,300
810 3,850
1,072 7,250
3,405 6,651
1,702 3,325
1,703 3,326
2,775 10,576
100 60
330 1,591
385 1,544
715 3,195
6,651 6,651
3,325 3,325
3,326 3,326
4,041 6,521
-------
Table HI- 6. Estimated invested capital for meat canning plants
Small
Plant
Land
Building
Sq. ft. (1,000 ft)
Cost
Equipment
Total
Current assets
Current liabilities
Net working capital
Total invested capital
3,500
Replmt.
40
25
875
1,375
2,290
451
226
226
2,516
cases /day
Salvage Book
40
88
138
266
451
226
226
492 1,
25
338
414
777
451
226
226
003
Medium
14, 118 cases /day
Replmt. Salvage Book
60
80
2,400
4,400
6,860
5,412
2,706
2,706
9,566
- $1,000 -
60
240
440
740
5,412
2,706
2,706
3,446
45
680
1,412
2, 137
5,412
2,706
2,706
4,943
32,
Replmt.
110
132
4,000
7,200
11,310
14,350
7, 175
7, 175
18,485
Large
353 cases /day
Salvage Book
110
400
' 720 2,
1,230 3,
14,350 14,
7,175 7,
7,175 7,
8,405 10,
85
964
400
449
350
175
175
624
-------
Book Value of Investment
To achieve an estimate of book value of plant and equipment the approx-
imate age of plant was noted. Based on the age configuration of the meat
processing industry (Chapter I-C-4), X-small and small meat processing
plants were assumed to be constructed in 1953, medium size plants in
1958 and large plants in 1965. Small canning plants were assumed to be
constructed in 1958, medium size in 1963 and large plants in 1965. Re-
placement cost was deflated as well as consideration given technological
change over the age of the plant. Original cost of the model plants was
then estimated given the age of the plant in question. Based on normal
depreciation procedures, i.e. ZO years on buildings and 10 years on
equipment, the book value was then derived. The exception to this pro-
cedure was the consideration given to equipment. In common with most
food processing plants, meat processing plants undergo periodic reno-
vation, continuous repair and maintenance and equipment items are re-
placed as they wear out or become obsolete. In recent years, more
stringent enforcement inspection (FDA) requirements and concurrent
stiffening of state inspection has forced many plants to either undergo
extensive remodeling or to close. Also plants may add new equipment
to keep pace with new technology, i.e. sausage stuffers or automatic
frankfurter processing machines. As a result, we estimated that the
book value of machinery and equipment for the model plants would de-
preciate to about 50 percent of original value, then periodic replacements
result in the book value remaining at that level. Land was included in
book value at the estimated purchase rate.
Salvage Value
The salvage value of processing plants will vary widely from plant to
plant, depending on the age of plant and its condition, and the age of the
equipment and its condition. In many instances the salvage value of old
obsolete plants will be equal to the site value only. If the building is re-
modeled or refurbished for other uses such as a warehouse, the salvage
value of the building may approach 10 or 20 percent of its replacement
cost.
There is a limited market for used machinery and equipment; however,
this is limited to modification of present operating lines or the overseas
market. 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, but the cost of dismantling an old plant is high and value
of used in-place equipment is rather low.
in-10
-------
Since no data are available on actual salvage values for meat processing
and canning plants and only a very limited market exists for used equip-
ment, it is difficult to estimate the salvage value of a plant closed be-
cause of the added costs of water pollution. We are assuming the land
equal to the current market value and that salvage values of buildings
and equipment will approximate 10 percent of replacement value. All
operating capital will be covered intact. The combined value of land,
buildings, equipment and operating capital for each model plant is shown
in following tables.
Operating Capital
Current assets, current liabilities and net working capital are also shown
on the following Tables III-3 through III-6. Current assets were estimated
at 16.4 percent of sales and current liabilities estimated at 8.2 percent
of sales. This represents a current ratio of 2.0 which is compatible with
the current ratio shown in the 1972 American Meat Institute annual report
(2) for 43 meat processing companies of 2. 12.
Current liabilities were estimated from industry performance ratios as re-
ported by the American Meat Institute, Troy's Almanac of Business and
Financial Ratio - 1973 (8) and Robert Morris Associates' Statement Studies
~n). By subtracting current liabilities from current assets we can derive
net working capital. This is estimated at 8.2 percent which is reasonably
close to the rule of thumb for processing operations that WC = (3/52 raw
product cost) + 1/12 annual operating expense).
D. Model Plant Capacity and Utilization
Annual throughput for each of the model processing plants is shown in Table
7 This is based upon 100 percent utilization of plant capacity. Actual plant
operation is based on an average of 85 percent utilization.
duct mixes developed for each of the model plants are based upon the
roximate percentage of the major items produced in the U.S. and tend
tPbe representative of product lines found in most plants. There may be
° me differences in product lines by size of plants, however, sufficient
data has not been obtained to quantify any such trends. As a result it
s assumed that all sized plants within a given segment would have the
W me production patterns. For example, in the sa-usage manufacturing
S.nt a combination of products is used to build the plant financial profile.
This includes 40 percent all meat franks --certainly one of the predominate
items in any sausage plant, 15 percent sliced bologna, 10 percent bulk
III-11
-------
Table III-7. Product mix for various types of processed meat plants
Item
Franks
Bologna sliced
" bulk
Lunch loaf
Fresh pork sausage
Total
Bacon sliced
Hams regular
Hams boneless
Hams picnic
Total
Franks
Bologna sliced
Bologna bulk
Lunch loaf
Fresh pork sausage
Bacon
Hams regular
Hams boneless
Hams picnic
Total
Percent
finsihed wt.
40.0
15.0
10.0
15.0
20.0
100. 0
27.0
42.0
21.0
10.0
100.0
23.0
10.0
10.0
12.5
7.5
10.0
15.5
8.0
3.5
100.0
Volume per day (100% plant capacity
X-Small Small
Sausage
2, 000
750
500
750
1, 000
5,000
1, 350
2, 100
1,050
500
5, 000
1, 150
500
500
625
375
500
775
400
175
5, 000
manufacturing plant
8,000
3, 000
2,000
3,000
4,000
20,000
3moked meats
5,400
8,400
4,200
2, 000
20, 000
Mixed plant
4,600
2, 000
2, 000
2,500
1,500
2,000
3, 100
1,600
700
20,000
Medium
40, 000
15, 000
10,000
15,000
20,000
100,000
27, 000
42, 000
21,000
10,000
100, 000
23,000
10,000
10,000
12, 500
7,500
10,000
15,500
8,000
3.500
100,000
Large
80, 000
30,000
20,000
30,000
40,000
200,000
54,000
84,000
42,000
20,000
200,000
46,000
20,000
20,000
25, 000
15,000
20, 000
31,000
16,000
7,000
200, 000
-------
bologna, 15 percent lunch loaf (actually 1/3 olive loaf, 1/3 pepper loaf and
1/3 pickle and pimento loaf) and 20 percent fresh pork sausage. It is
recognized that many other sausages and processed meats may be pre-
pared in a sausage plant such as various types of franks --all-beef--.
economy or various sausages such as smoked liver sausage, Bratwurst,
Brockwurst, various salamis, etc. ; however, the mixes used should
adequately cover the high volume items.
Likewise, the product mixes for the smoked meat plant are based on
approximate national volumes and maybe considered representative
of a typical uiant. The product mix consists of 27 percent bacon; 42
percent mois>'ura-added hams, bone-in; 21 percent boneless ham
moisture-added; and 10 percent picnic hams.
The produc: mix for the mixed plant consists of both processed
meats and smoked meats of the same proportions used in the above
mentioned oiants. Total volume is the same in the mixed plant with
a daily production of 5, 000 pounds finished product for the X-small
plant and 20, 000, 100, 000 and 200, 000 pounds per day respectively
for the small, medium and large plants.
Because of a lack of published data for wholesale price of the various
product lines ir. a canning plant, i.e. canned hams, luncheon meats,
Vienna sausages, chile con carne, meat stew, tripe, brains, etc., a
slightly different approach was used to develop model plant profiles
in the canning segment. Total sales ingredient cost and various com-
ponents of operat rig costs were obtained directly from plant managers
to construct the model plant profiles. Basically, we found the small
plants manufacture more low price lines such as stews, beans with meat,
etc. compared with higher price lines of luncheon meats, hams, Vienna
sausage, etc. for larger plants. Because of the wide variation in pro-
duct lines, wholesale price per case may range from $4.00 to $40.00
per case.
For the purposes of this analysis all processing plants were assumed to
be operating at 85 percent of plant capacity. It is recognized that a new
well-located meat processing plant may operate at 100 percent of capacity
or even above 100 percent for short periods of time. There is a large
seasonal variation in meat processing and plants may operate at only
75 percent of capacity during the winter months and increase to. 100 per-
cent during the summer months when demand for processed meats is
highest. Basically the processing industry operates on a 5-day a week
basis and at 8 hours per day. This basis, 40 hour weeks, was used in
constructing the throughput for the model plants. On this basis the
III- 13
-------
Table III-8. Daily capacity and estimated throughput for model plants
(finished product)
Type of
Sausage
it
it
ii
Smoked
it
ii
ii
plant
plant
M
M
II
meat plant
ii M
ii M
ii M
Mixed plant
M
ii
1 1
Canning
it
ii
ii
1 1
n
plant
n
n
Size
classification
X-Small
Small
Medium
Large
X-Small
Small
Medium
Large
X-Small
Small
Medium
Large
Small
Medium
Large
Daily
capacity
(pounds)
5,000
20,000
100,000
200,000
5,000
20,000
100,000
200,000
5, 000
20,000
100,000
200,000
50, GOO
212, 000
495,000
Plant
utilization
(percent)
85
85
85
85
85
85
85
85
85
85
85
85
80
85
85
^ ^
Daily
throughput
(pounds)
4,250
17,000
85,000
170,000
4,250
17,000
85,000
170,000
4,250
17, 000
85,000
170,000
42, 000
180,000
420,000
III-14
-------
for the X-small processing plant will amouat to 4,250 pounds of finished
product per day. This will amount to 17,000, 85,000, and 170,000 pounds
of finished product per day for the small, medium and large plants
respectivelyJTable III-8).
Canning plants generally operate on a longer work day basis. We assumed
the small plant would operate on an 8-hour per day basis but the medium
and large plants would operate on a double shift basis. Also, the small
plant was assumed to operate at 80 percent of capacity and the medium
and large at 85. This amounts to actual throughput for 42, 000 pounds
for the small plant, 180, 000 for the medium and 420, 000 for the large.
E. Annual Profits
After tax income, return on sales, both pre-tax and after-tax, and return
on the invested capital, both pre-tax and after-tax, for the various types
and sizes of model plants are shown in Table III-9.
These data were developed from a combination of sources published, un-
published and industry sources. It should be noted at this point that the
model plant profiles were based on average 1973 conditions and no pub-
lished sources of performance data are available at this time. Profit
levels are higher than 1972 published data discussed in Chapter II but
was the consensus of opinion among those we talked with that 1973 was a
better year. Basically, gross profit margins were developed from cost
structures of various profit lines (Table III-ll and 111-12) and estimated
operating costs estimated from previous studies and data in the con-
tractor's file.
Generally, actual profit levels as a percent of sales or invested capital
are higher for larger model plants. This is consistent with published
data and represents a very tight profit picture for the average X-small
and small plant. This is the reason very few, if any, small operations
are being constructed today.
By type of plant, sausage ranks as the most profitable with the mixed plant
second with a return on invested capital ranging from 10 to 12 percent on
the medium and large plants. Small and medium plants in these categories,
however, show a low rate of return on invested capital at 2 to 6 percent.
Ill- 15
-------
Table III-9. Net income, returns on sales and returns on total invested capital for model plants
Type and size of plant
Sausage plant
X -Small
Small
Medium
Large
Smoked meat plant
X- Small
Small
Medium
Large
1 1
HH
V Mixed plant
o- X-Small
Small
Medium
Large
Canning plant
Small
Medium
Large
After -tax
income
($1,0001
5
37
335
661
3
38
260
569
4
19
288
639
-0-
332
1,444
Pre-tax re-
turn on sales
(Percent)
0.7
1.6
3.4
3.4
0.4
1.5
2.5
2.8
0.5
0.6
2.6
3.0
-0-
1.9
2.5
After-tax re-
turn on sales
(Percent)
0.6
1.0
1.8
1.8
0.3
0.9
1.3
1.5
0.4
0.5
1.4
1.6
-0-
1.0
1.3
Pre-tax*
ROI
(Percent)
4.5
9.8 q
r --^
23.1
19.5
2.0
9.6
16.7
15.9
2.7
4.0
19.5
18.7
-0-
12.9
20.6
After-tax*
ROI
(Percent)
3.5
6.3
12.2
10.3
1.6
6.0
8.9
8.4
2.2
3.2
10.4
9.8
-0-
6.7
10.7
-------
F. Annual Cash Flow
Estimated annual cash flow for the types and sizes of plants analyzed
in this study are shown in Table III- 10. 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.
Annual cash flows generally follow the same pattern established by
annual profits; however, some slight differences may be noted. As a
percent of sales, cash flows range from a low of 1.5% to a high of
3.5%. This is a tighter grouping than reflected in the profit figures.
This results from higher depreciation rates among the small plants,
particularly noticeable inthe small canning plant which increases
from a zero level of profit to a cash flow of 3. 5% of sales. Similarly cash
flows as a percent of total invested capital are also more tightly grouped
than after-tax profit on investment. Again, this is the result of lower
book values and higher depreciation rates for the small and X-small
plants.
Bv type of plant sausage plants are still the most profitable when viewed
from an annual cash flow position with an annual cash flow as a percent
of invested capital of 20% on the medium size plant. The reason medium
ajzed plants have slightly higher returns both in annual tax return on
investment and cash flow is because they generally represent an older
plant with a lower book value than the larger and newer plants. Small
and X-small plants with relatively low book values but still having high
rates of depreciation are shown in a slightly stronger position as viewed
by annual cash flow and by return on investment.
G. Cost Structure of Model Plants
Raw Material Costs
Raw material costs were developed from published and unpublished
sources of information and are shown in Tables III-l 1 and 111-12 for the
sausage and smoked product lines. Meat ingredient prices were based
on the average 1973 prices for various types of meat ingredients. For
example, in all-meat franks 90% lean beef trimmings price was used.
For other products, a combination of ingredient prices was used; for
III-17
-------
Table III-10. Annual cash flow for model meat processing plants
Type and size of plant
Sausage plant
X-Small
Small
Medium
Large
Smoked meat plant
X-Small
Small
Medium
Large
Mixed plant
X-Small
Small
Medium
Large
Canning plant
Small
Medium
Large
Annual
cash flow
($1,000)
15
79
543
1,068
14
82
478
995
16
65
516
1,085
96
695
1,756
Cash flow as
percent of sales
(percent)
1.6
2.1
2.9
2.9
1.4
2.0
2.4
2.6
1.5
1.6
2.5
2.7
3.5
2.1
2.0
Cash flow as % &f
total invested capital
(percent)
9.9
13.3
19.8
16.5
7.0
12.9
16.3
14.6
8.7
10.9
18.6
16.6
9.5
14.1
16.5
III- 18
-------
Table III-11 Cost structure for various sausage product lines, average 1973 Midwest prices per
hundredweight
3/
Meat ingredients
Casing
Spices, cereal, salt
Packaging and supplies
Total raw material
4/
Wholesale price-
Manufacturing margin
All meat
franks
12 oz. pkg.
60.00-
2.75
1.75
2.50
67.00
85.00
18.00
Bologna
bulk
No. 1
54. 96
1.49
2.08
1.22
59.75
77.90
18. 15
Bologna
sliced
54.96^
1.49
2.C8
3.50
62.03
98.00
35.97
Fresh pork
sausage links
49.03-/
2.34
1.51
1.67
50.09
80.50
30.41
Sliced
loaf
6 oz. pkg.
64.60-7
1.49
6.48
2.75
75.32
110.00
34.68
- Yield 120 percent.
2/
- Yield 110 percent.
Source: USDA published and unpublished data.
4/
Source: National Provisioner and National Provisioner Green Sheet.
-------
Table 111-12. Cost structure for various smoked product lines; average 1973 Midwest, per cwt.
Meat ingredients-
Spice, salt, etc.
Supplies and packaging
Total raw material
Wholesale price
Manufacturing margin
I/
£ Bacon: Green bellies
^ for slicing.
o
Bacon
fancy sliced
$ 65.70
1. 15 )
4.50 )
71.35
103.68
32.33
= $58.48. Assume
Ham - bone in Boneless ham- Picnic ham-
skinned, cured skinned, smoked skinned, cured
smoked cooked smoked
moisture added moisture added moisture added
$62.44
3.50
65.94
81.54
15.60
yield of 89% for
$ 96.07
3.50
99.57
139.69
0:0.12
derined + 10 percent
$47.71
3.50
51.21
61.41
10.20
for pump - 10 percer
Ham - Bone in: 12-17 Ibs. green ham = 67.44 - assume yield of 108 percent for moisture added ham.
Boneless Ham: 12-17 Ibs. green skinless ham = 67.44 - assume yield of 65 percent to boneless;
boneless to cured assume yield of 108 percent.
Picnic Ham: 4-8 Ibs. @ 51.33. Assume yield of 108 percent.
Source of prices used: USDA published and unpublished data, National Provisioner and National
Provisioner's Green sheets adjusted.
-------
bacon and hams, green belly and green skinless ham prices were used.
Yield relationships were based on generally accepted yield achieved
in the industry and data contained in the contractor's file. Casings,
spices, cereal, salt, packaging and supply costs were then estimated.
Wholesale prices for the various product lines were taken from the
National Provisioner, the National Provisioner Green Sheet or USD A
unpublished data for 1973. They were then converted to f. o.b. plant
prices based in the Midwest.
The manufacturing margins for various sausage product lines range
from $18 Per hundredweight for all-meat franks to a high of $34.68 for
sliced loaf. However, as indicated in Table III- 11, franks consist of
the major portion of the total product line for a typical sausage manu-
facturing plant in that 40% of the product mix is composed of the lower
margin frank. Higher margin products generally compose a smaller
percentage of the total product mix.
A similar situation exists in the cost structure for the various smoked
product lines. Ham, bone-in cured, skinned and smoked with moisture
added has a manufacturing margin of only $15.60. This consists of 42%
of a typical product line. Other higher margin items such as bacon and
boneless skinned hams represent 27 and 21 percent of the average product
line. It is well to note that the type of hams used in this report are
moisture added. According to Federal regulation, a yield of 108% is
allowed on the green ham. However, "moisture-added" must be added
to the package label. The majority of hams processed in the United States
are moisture-added. If no moisture is added, the yield must approximate
100% of green ham weight (Table III-12).
Direct and Indirect Operating Costs
Direct and indirect operating costs were developed on the basis of estim-
ates from published studies updated and adjusted to plant types and size
indicated. They were then checked against current performance data
from industry sources. In the case of meat canning plants, they were
derived directly from discussions with plant managers of various size
canning plants as no published data Were available.
Depreciation and Interest
Depreciation and interest for meat processing plants were based on in-
dicated rates from industry sources and from the Almanac of Business
and Industrial Financial Ratios (8) which developed data from IRS sources.
Published depreciation rates as experienced by plants through 1972 com-
pared very favorably with the depreciation derived from the estimated
111-21
-------
book value of investment as indicated in Tables III-] 3 through III-1 6
Basically, we used a straight line depreciation based on 20-year de-
preciation for plant and a 10-year depreciation for equipment. Interest
costs were estimated from reported industry studies (6), (7) (8).
Revenues
Revenues were estimated on the basis of published and unpublished
wholesale prices for the various product lines adjusted to represent
the f.o.b. plant price located in the Midwest. The X-small plants
were assumed to have a locational advantage compared with the larger
sized plants in that they would market directly to local outlets and
achieve a 2% increase in the realized sales price over the medium
plant. Likewise, the large plant was assumed to have a locational dis-
advantage of 1% as compared with the medium size plant.
Revenues ranged from approximately $1 million for the X-small plants
to a high of $40 million for the large processing plants. Revenues for
canning plants range from $2.8 million on the small plant to a high of
$87. 5 million for the large plant reflecting a greater spread in the size
of canning plants than in meat processing plants.
111-22
-------
Table III-13. Pro forma statement of
income and financial returns for operating models - sausage manufacturing plants
($1000)
X- Small
Daily capacity (pounds)
Annual production (1, 000 pounds)
at 85% of capacity
Sales
Raw material
Meat ingredients
Casings, spices, etc.
Total raw
Direct expenses
Wages and salaries
Supplies and containers
_ Utilities
t <
1 Indirect expenses
<-° Maintenance
Taxes and insurance
Sales, general and administration
Total expenses
Interest
Depreciation
Total cost
Net income before taxes
Income tax
Net income after tax
Cash flow
Annual
5,000
1,063
979
608
49
657
190
25
13
10
6
58
3
10
972
7
1.6
5.4
15.4
Percent
100.0
62.1
5.0
67. 1
19.4
'2.6
1.3
1
.6
5.9
.3
1.0
99.3
.7
. 1
.6
1.6
Small
Annual
20,000
4,250
3,786
2,433
198
2,631
647
102
45
38
23
189
3,675
11
42
3,728
58
21
37
79
Percent
100.0
64.3
5.2
69.5
17.1
2.7
1.2
1.0
.6
5.0
97.1
.3
1.1
98.4
1.6
.6
1.0
2.1
Medium
Annual
100, 000
21,250
18,931
12, 162
989
13, 151
2,840
509
227
189
114
1, 003
18, 033
57
208
18,298
633
298
335
543
Percent
100. 0
64.2
5.2
69.4
15.0
2.7
1.2
1.0
.6
5.3
95.2
0.3
1. 1
96.6
3.4
1.6
1.8
2.9
Large
Annual
200, 000
42, 500
36,972
24, 325
1,979
26, 304
5, 176
1, 017
444
370
222
1,663
35, 196
111
407
35,714
1,258
597
661
1,068
Percent
100.0
65.8
5.3
71. 1
14. 0
2.8
1.2
1.0
.6
4.5
95.2
0.3
1. 1
96.6
3.4
1.6
1.8
2.9
continued
-------
Table III-13. Pro forma statement of income and financial returns for operating models - sausage manufacturing plants
($1000) - continued
Return on investment
Before taxes
After taxes
X-Small
Annual Percent
4.5
3.5
Small
Annual Percent
9.8
6.3
Medium
Annual Percent
23. 1
12.2
Large
Annual Percent
19.5
10. 3
Total invested capital 155 591. 2,741 6,447
-------
Table 111-14. Pro forma statement and financial return for operating models - mixed plants ($1000)
X -Small
Daily production (pounds)
Annual production (1000 pounds)
at 85% of capacity
Sales
Raw materials
Meat ingredients
Casing, Spices, etc.
Total
Direct expense
Wages and salaries
Supplies and containers
Utilities
S
V Indirect expense
Jj{ Maintenance
Taxes and insurance
Sales, General and administration
Total expense
Interest
Depreciation
Total cost
Net incouje before tax
Income tax
Net income after tax
Cash flow
Annual
5,000
1,063
1,024
660
36
696
196
29
10
10
6
59
3
11
1,020
4
.88
3.12
14.12
Percent
100.0
64.5
3.5
68.0
19-0
2.8
1.0
1.0
.6
5.8
.3
1. 1
99.6
.4
.1
.3
1.4
Small
Annual
20, 000
4,230
3, 964
2,641
144
2,785
638
114
48
40
24
198
12
44
3,903
61
23
38
82
Percent
100.0
66.6
3.6
70.2
16.1
2.9
1.2
1.0
.6
5.2
.3
1.1
98.5
1.5
.6
.9
2
Medium
Annual
100,000
21,250
19,818
13,207
720
13,927
3,012
568
238
198
119
991
59
218
19,330
488
228
260
478
Percent
100.0
66.6
3.6
70.2
15.2
2.9
1.2
1.0
.6
5.0
.3
1.1
97.5
2.5
1.2
1.3
2.4
Large
Annual
200, 000
42, 500
38, 702
26,413
1,438
27,851
5,263
1, 139
464
387
232
1,742
116
426
37, 620
1, 082
513
569
995
Percent
100.0
68.3
3.7
72-0
13.6
2.9
1.2
1.0
.6
4.5
.3
1.1
97.2
2.8
1.3
1.5
2.6
continued
-------
Table 111-14.
Pro forma statement and financial return for operating models - mixed plants
($1000) - continued
X-Small
Small
Medium
Large
Annual Percent Annual Percent Annual Percent Annual Percent
Return on invested capital
Before tax
After tax
2.0
1.6
9.6
6.0
16.7
8.9
15.9
8.4
Total invested capital
200
635
2,929
6,810
-------
Table 111-15. Pro forma statement and financial returns for operating models - smoked products ($1000)
X- Small
Daily production (pounds)
Annual production (1000 pounds)
(at 85% of capacity)
Sales
Raw materials
Meat ingredients
Casings, spices, etc.
Total
Direct expense
Wages and salaries
-i Supplies and containers
V Utilities
"-'Indirect expense
Maintenance
Taxes and insurance
Sales, General and adminis.
Total expense
Interest
Depreciation
Tolal cost
Net income before tax
Income tax
Net income after tax
Cash flow
Annual
5,000
1,046
1,073
732
11
743
193
32
14
11
6
54
3
12
1, 068
5
1
4
16
Percent
100.0
68.2
1.0
69.2
18.0
3.0
1.3
1.0
..6
5. 0
.3
1. 1
99.5
.5
. 1
.4
1.5
Small
Annual
20,000
4,250
4, 153
2, 929
43
2,972
664
130
50
42
25
187
13
46
4, 129
24
5
.19
65
Percent
100.0
70.5
1.0
71.5
16.0
3.1
1.2
1.0
.6
4.5
.3
1. 1
99.4
.6
. 1
.5
1.6
Medium
Annual
100,000
21,250
20,765
14,643
217
14,860
2,907
650
249
208
125
934
62
228
20, 223
542
254
288
516
Percent
100.0
70.5
1.0
71.5
14.0
3. 1
1.2
1.0
.6
4.5
.3
1.1
97.4
2.6
1.2
1.4
2.5
Large
Annual
100,000
42, 500
40,552
29, 287
434
29,721
4,988
1,300
487
466
243
1,622
122
446
39, 335
1,217
578
639
1, 085
Percent
100.0
72.2
1
73.2
12.3
3. 2
1.2
1.0
. b
4.0
.3
1.1
97
3
1.4
1.6
2.7
continued
-------
TableIII-15. Pro forma statement and financial returns for operating model - smoked products
($1000) - continued
X-Small
Small
Medium
Annual
Percent Annual Percent Annual
Large
Percent Annual Percent
Return on invested capital
Before tax
After tax
2.7
2.2
4.0
3.2
19.5
10.4
18.7
9.8
Total invested capital
182
593
2, 775
6, 521
-------
Table HI- 16. Pro forma statement of income and financial return for operating model - meat canning plant
($1000)
Small
Daily capacity (cases)
Annual production (1000 pounds)
-Daily
Sales
Raw Materials
Meat ingredients
Other
Total
R Direct Expenses
^, Wages and salaries
"° Supplies and containers
Utilities
Total
Indirect Expenses
Maintenance
Tax and insurance
Sales, general and administrative
Total
Total Expenses
Interest
Depreciation
Total cost
Annual
3,500
10,500
42,000
3,500
1,540
315
1,855
735
402
46
1,183
35
21
290
346
11
105
3,500
Percent
100.0
44.0
9.0
53.0
21.0
11.5
1.3
33.8
1.0
.6
8.3
9.9
.3
3.0
100.0
Medium
Annual
13,725
45,000
17,600
27,000
14, 742
2,916
17,442
3,564
2,889
324
6,777
270
162
1,350
1,782
81
297
26,379
Percent
100.0
54.6
10.8
64.6
13.2
10.7
1.2
25. 1
1.0
.6
5.0
6.6
.3
1. 1
97.7
Large
Annual
32,353
105,000
41,200
70,000
39,690
7,350
47,040
7,420
7,350
840
15,610
700
420
3,360
4,480
210
490
67,830
Percent
100.0
56.7
10.5
67.2
10. 6
10.5
1.2
22.3
1.0
.6
4.8
6.4
.3
.7
96.9
(continued)
-------
Table III- 16. Pro forma statement of income and financial return for operating model - meat canning plant
($1000) - cont'd
Small Medium
Annual Percent Annual Percent
>-
-
LO
0
Net income before taxes
Income tax
Net income
Cash flow
Return on investment
Befor tax
After tax
0 621 2.
0 291 1.
0 320 1.
105 3.0 627 2.
0 12.
0 6.
3
1
2
3
8
7
Large
Annual Percent
2, 170 3. 1
1,035 1.5
1,135 1.6
1,625 2.3
20.4
10.7
Total invested capital
1,003
4,943
10,624
-------
IV. PRICE EFFECTS
A. The Pricing Process in the Livestock and Meat Industries
It is not possible to discuss pricing in the meat processing industry
without consideration of the meat packing industry. Only 55 percent
of the processed meats are produced in the processing industry with
the remainder originating in the packing industry. To the final con-
sumer the two industries can produce identically the same products.
Likewise, raw materials for the meat processing industry are ob-
tained from the meat packing industry and generally follow the same price
trends resulting from the interplay of the various supply and demand factors.
Meat packers and processors are sandwiched between two major
markets--that for livestock or raw materials and that for meat pro-
ducts--and have relatively little price control over either market.
In the words of the National Food Commission:
It is on the basis of expected prices for dressed meat and
on projected margins, that packers usually determine top
prices they can pay for live animals and the quantity they
will need.... For the country as a whole, live animal
prices have been closely related to dresse.d meat prices.
The level of wholesale meat prices also has an important
influence on the level of retail meat prices (4).
The daily price offers and quotations for wholesale meats made by in-
dividual packers and processors usually are based on a current market
price report such as the "National Provisioner Daily Market News
Service," commonly known as the "Yellow Sheet." Individual price
quotations may be a few cents per pound over or under the reported
market prices, depending upon the terms and conditions of sale, but
they go up and down as the "Yellow Sheet" or other market price base
goes up and down. Both the "formula" prices and the daily price offers
by retail food chains and other meat also are based on a market price
quotation such as the "Yellow Sheet."
Packers' price offers for slaughter animals, both in the public markets
and for direct consignment, are based on the current wholesale meat
prices. This market together with anticipated prices of by-products
».^ermines the top price which the packer expects to pay for slaughter
IV-1
-------
livestock. If "runs" are good, he may be able to make his purchases
a bit below his "top" price; if supplies are short, he may have to bid
over this "top" price in order to get his slaughter supply for the day.
Livestock producers watch current market reports and try to go to
the individual markets where and when they will get the highest price,
transport cost and shrinkage considered. Packer buyers and agents
try markets with the lowest prices for slaughter livestock, considering
acquisition transport and shrinkage costs to the plant.
This process of pricing results in a relatively constant relationship be-
tween the prices for live animals and wholesale meat prices. Most of
the variations in the relationships which occur from time to time Can
be explained by current supply-demand conditions.
Price determination in the meat packing and processing industry is pri-
marily the result of the interaction of basic supply and demand conditions.
In fact, the industry meets most of the criteria of competitive markets.
Subject to lags built into the marketing system, there is a definite in-
verse relationship between the supplies and the prices of slaughter live-
stock which carries a corresponding relationship between livestock supply
and meat prices. The cycle patterns are the result of characteristic
cattle and hog production cycles. The cattle cycle extends approximately
10 years from peak to peak and the hog cycle four years.
On the supply side, meat packers are faced with large numbers of in-
dividual livestock producers, no one of whom is large enough to have an
appreciable influence on supplies and who act independently based on
their personal opinions concerning present and future market conditions
and anticipated prices.
On the demand side, the meat packing and processing industries sell to
literally hundreds of independent retail food outlets and supermarket
chains. According to the National Food Commission Report (4), 72 per-
cent of the red meat goes through the retail store, most of which goes
directly from the packer to the retail store with a small portion going
through merchant wholesalers, brokers and agents then to the retail
store. A total of 35 percent moves through the wholesalers with the
largest percentage then moving to hotels, institutions and government.
Of the 72 percent that moves through the retail stores, 81 percent or a
total of 57 percent moves through the major retail chains. This makes
the major chains the predominant power on the marketing end.
These fi ires relate to total red meat distribution and no separate
figures have been developed for prepared meats and sausage products.
However, it can be assumed that the distribution of sausage products
and other prepared meats would follow generally this same pattern as
total red meat distribution.
IV-2
-------
The meat packing and the meat processing industry also meets one other
test of competition. There are no artificial barriers to entry or exit in
the industry. Although capital requirements are high, new firms do
enter the industry, existing firms expand, contract or go out of exist-
ence and the organization structure and ownership of the industry
changes over time. Concentration in the meat processing industry as
well as the meat packing industry has declined since World War II, as new
local and regional firms have emerged and/or expanded. The percentage
of total value of shipments accounted for by the four largest processing
firms has dropped to 15 percent in 1967.
Perhaps a quick overview of the historic consumption levels of red
meats and the rise in meat prices during the past two years would be
useful at this juncture.
Total red meat consumption in the United States expanded sharply
during the past few years until short supplies and high prices reduced
consumption considerably in 1973. Per capita consumption of red
meats totaled 183 pounds in 1969 and increased to 192 pounds by 1971,
nearly a 10-pound per capita increase in three years. Short domestic
upplie* sharply increased prices and decreased consumption in 1973
as shown below.
Per Capita Meat Consumption_3/
Year
1969
1970
1971
1972
1973
Beef
110.8
113.7
113.0
116.0
109.8
Veal
3.3
2.9
2.7
2.2
1.8
Pork
65.0
66.4
73.0
67.4
61.5
Lamb b
mutton
3.4
3.3
3.1
3.3
2.8
Total
red meat
182.5
186.8
191.8
188.9
175.9
Year
1969
1970
1971
1972
1973
Choice. ,
steers
28.60
28.58
30.58
35.75
45.30
Barrows
and gilts
23.77
21.95
18.45
26.68
41.08
Average Retail Price/ Pound-
Beef
96.2
98.6
104.3
113.8
136.0
Pork
74.3
78.0
70.3
83.2
110.0
-i7 Omaha
Seven markets combined
- USDA, LMS
IV-3
-------
This relationship is shown graphically in Exhibit IV-1 for changes in beef
prices and production. The drop in steer and heifer production of 11 per-
cent in 1973 is significant (expressed in per capita terms) accompanied
with an increase in the price of livestock of over 30 percent.
963 1965 1967 1969 1971 1973 1975
Exhibit IV-1. Changes in beef prices and products.
A similar exhibit is provided for changes in hog prices and pork pro-
duction. Pork production on a per capita basis declined approximately
10 percent through 1972 and 1973. Prices rose rapidly in 1972 and
reached a peak in 1973 with an increase of over 60 percent (Exhibit IV-2),
-40
1963 1965 ,,.]9,^.OUI,.!96.'..ci₯,lf71 973 1975
Exhibit IV-2. Changes in hog prices and pork production.
IV-4
-------
Pork cuts and trimmings used in the production of smoked meats and
various types of pork sausages have also followed the upward trend
in price in 1972 and 1973. These prices are summarized below:
Midwest Carlot Trade
Year
1968
1969
1970
1971
1972
1973
Hams
skinned
12-14 Ibs.
39.69
46.96
46.60
40.57
50.62
74. 16
Bellies
10-14 Ibs.
30.37
36.73
35.91
22.84
37.53
58.83
Pork
trimmings
50% lean
21.81
27.64
20.59
18.23
30.40
48.07
Pork
trimmings
80% lean
37.63
44.64
43.55
38.86
50.91
73.02
A major factor in boosting meat prices in recent years has been the
strong underlying consumer demand for meat. Although numerous
factors contribute to rising meat demand, the existence of increasing
demand with increasing prices has been primarily the result of steadily
increasing per capita personal income. In numerous studies it has
been demonstrated that a rising demand for meat resulted from increases
in per capita income. Increasing per capita consumption of meat coupled
with population growth has combined to keep pressure on meat supplies
during the recent years.
B. Prices of Raw Material
Pricing in the meat industry can be described as margin pricing. Live
animal prices are widely quoted by the USDA Market News Service and
private sources on a daily basis. Carcass and primal cut prices can then
be quickly determined from live animal prices through various pricing
formulas. Both the carcass-to-retail price spread for beef and the
wholesale-to-retail spread for pork are essentially fixed spreads in
that an absolute marketing charge is added to the wholesale price (10).
Likewise, in the meat processing industry finished product prices are
tied via a relatively constant manufacturing margin to the raw material
costs. In an earlier study completed by DPRA (11), manufacturing
margins for four major processed meat products, including frank-
furters, bologna, lunch loaf and fresh pork sausage were examined
over time, It was determined that the manufacturing margin for each
Is relatively constant,
IV-5
-------
The price for the predominate raw materials in the meat processing
industry such as domestic bonelsss beef, 90 percent visual lean or 50
percent visual lean, pork trimmings 50 percent lean or 80 percent
lean, hams and bellies are published on a daily basis in nationally
recognized trade journals such as the National Provisioner, the Green
Sheet or Yellow Sheet. Processors purchase the available supply of
these products commensurate with their demand and the relatively
open And competitive market. Generally, one basic price, with the
exception of course for grade, type and location,prevails throughout
the industry and is established on the basis of supply and demand.
Although there are many different types of meat cuts, trimmings and
variety meats such as cheek meat, head meat, lip, lungs, tongues,
livers, hearts, brains, etc., monthly prices for the major components
are presented in Table IV-1. Because of the tremendous increase in
prices over the past five years, we decided to use average prices for
1973 to construct margins for our processing plants. It was determined
that the 1973 basis would be more representative of present conditions
than using a 5-year average as in the earlier studies (1) (2). Also, be-
cause of the price freeze, industry profits for 1972 were abnormally
low and appeared to be out of line compared with earliei years.
C. Finished Product Prices
Prices for finished products are published on a weekly basis in the
National Provisioner's Green Sheet. This reflects the current range of
prices by type of product delivered to the hotel, restaurant and institu-
tional (HRI) trade. Prices for most important products are presented in
Table IV-2. (It should be remembered that these prices reflect the
HRI trade; therefore, we ueed these as a basis for some of our final
product prices but adjusted them to retlect general f.o.b. plant prices.)
For some products a USDA price was used to represent Midwest conditions'
The predominant factor in price making on the distribution side is the
giant supermarket chains which retail approximately 55 percent of the
processed meats. Acting in their own self-interest they will tend to ob-
tain product for as low a price as possible given a certain product and
specifications.
IV-6
-------
Table IV-1. Wholesale dressed meat prices summary, Chicago market
(dollars per 100 Ibs.)
Jan.
Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Yearly
Dom. boneless beef
90% visual lean
50% visual lean
Hams (skinned)
14-17 Ibs.
17-20 Ibs.
Bellies (salted,
skin on)
10-14 Ibs.
14-16 Ibs.
Pork trimmings
50% lean
80% lean
76.19 85.39 93.23 91.67 89.94 88.03 92.42
38.98 44.52 52.95 52.78 54.27 54.79 63.88
103.2 101.22 97.98 99.00 92.57
56.61 54.17 47.92 -- 52.09
55.25 56.46 67.16 63.57 60.09 64.19 74.75 89.56 74.53 75.76 83.30 78.83 70.29
53.71 55.86 65.06 62.08 57.84 63.32 74.32 89.28 73.45 73.75 76.69 73.18 68.21
48.66 44.96 52.56 49.81 51.52 55.80 70.63 89.62 71.20 61.25 61.56 57.51 59.59
48.47 48.68 52.12 49.08 51.73 54.36 69.04 88.79 70.51 60.79 61.11 56.72 59.28
33.67 39.16 49.83 41.66 43.97 48.66 64.25 83.86 57.44 42.62 43.71 39.47 49.03
57.00 64.63 71.06 63.36 69.12 69.26 81.95 96.72 85.93 73.29 75.13 72.57 73.34
Source: USDA Livestock Meat Wool Market News, published weekly.
-------
Table IV-2. Monthly prices for processed and manufactured meat based on hotel, restaurant
and institutional sales
Sliced bacon fancy
Sliced Grade A
Ham, skinned cured
Ham, boneless
Smoked butts
Shoulder, picnic
Canned ham, 8-10 Ibs.
Pork sausage links
Pork sausage patties
or bulk
Smoked liver sausage
Franks, skinless,
fancy all beef
Jan.
95.50
63.75
82.50
135.25
104.75
60.50
121.38
92.50
81.00
69.00
86.50
Feb.
96.00
64.50
85.50
142.25
111.50
62.25
114.50
93.25
82.00
69.88
87.50
Mar.
101.5
67.2
89. 1
149.6
117. 1
65.5
124.7
100.8
89.9
74. 1
92.0
Apr.
97.88
66.50
90.25
153.63
117.25
63.63
127.5
99.25
86.63
72.00
90.50
May
96 . 88
68.50
84.50
150.25
115.00
64.00
123.5
98.25
82.00
71.00
90.00
June
98.0
73.0
84.0
152.0
117.0
66.0
123.0
101.0
83.0
68.0
93.0
July
112.0
92.0
95.0
167.0
131.0
74.0
140.0
108.0
- 97.0
80.0
101.0
Aug.
151.0
121.0
112.0
193.0
148.0
86.0
161.0
1 32 . 0
120.0
108.0
115.0
Sept.
140. 0
106.0
105.0
186.0
137.0
81.0
156.0
116. 0
107.0
108.0
111.0
Oct.
133.0
101.0
99.0
171.0
128.0
81.0
154.0
115.0
101.0
100.0
107.0
Nov.
131.0
97.0
109.0
178.0
128.0
81.0
157.0
116. 0
101.0
95.0
107.0
Dec.
127.0
93.0
106.0
178.0
125.0
75.0
154.0
107.0
91.0
84.0
104.0
Yearly
115.0
84.5
95.0
163.0
123.0
72.0
138.0
107.0
93.5
83.0
99.0
Source: National Provisioner "Green Sheet"
ao
-------
Consumers' responses to increased meat prices will be conditioned by
price elasticity which measures the proportionate change in quantity
taken in response to a proportionate change in price. Two other re-
lationships will also enter in, income elasticity which measures the
change in demand related to changes in disposable income and cross-
elasticity which measures the change in demand associated with changes
in price relationship between various types of meat, beef, pork, etc.,
or between meat and other close substitutes--poultry, eggs, cheese,
etc. Elasticity coefficients have not been developed for processed
meats such as franks, ham, bacon, etc., or for specific cuts of meat
so we must use the elasticities of beef and pork to ascertain the basic
relationships.
Elasticity coefficients for meat products are shown in Table IV-3. In
terms of price elasticity, Section A in the Table, beef and pork are
relatively inelastic with coefficients of less than one. This means
a 1 percent increase in price would be met with a less than 1 percent
decrease in consumption. However, the demand for lamb and veal are
both very elastic with coefficients of -2. 6 and -1.7 respectively.
Price quantity relationships for meat products are further complicated
by cross elasticities. The beef-pork coefficient, for example, in Section
B, indicates that a 1 percent increase in the price of pork would be
associated with a .08 percent increase in the quantity of beef demanded,
indicating a relatively low substitution rate between pork and beef. A
similar substitution rate can be seen between beef and chicken and be-
tween pork and beef.
Income elasticities for most of the meat products indicated are positive
but less than 1. For example, the beef income elasticity coefficient in-
dicates that a 1 percent rise in per capita income would be associated
with a .29 percent increase in per capita consumption of beef. The in-
come elasticity for demand of pork is lower than that for other meats
and is such that a 1 percent increase in per capita income would be
associated with essentially no change in the consumption of pork.
D. Expected Price Impact
The impact resulting from increased cost of stricter effluent standards
on the meat packing industry are higher retail prices, lower profits
for processors, lower profits for slaughterers and reduced consumption.
Because the meat processing industry represents a relatively low per-
cent of the total meat sales and because the meat processor normally
IV-9
-------
Table IV-3. Elasticity coefficients for meat products at the
retail level
Elasticity measurement
A.
B.
C.
Price- elasticity
Cross -elasticity
Inc om e - e la 8 tic ity
Product
Beef
Veal
Pork
Lamb
Chicken
Fish
Beef-pork
Beef-chicken
Beef-fish
Pork-beef
Pork- chicken
Pork- fish
Beef
Veal
Pork
Lamb
Chicken <
Fish
Coefficient
- .64
-1.72
- .41
-2.62
- .77
- .23
.08
.07
< .01
.07
.03
< .01
.29
.59
.01
.57
- .04
- .04
Source: George and King "Consumer Demand for Food Com-
modities in the United States with Projections for
1980," Giannini Foundation Monograph Number 26,
University of California, March 1971.
IV-10
-------
purchases by-products and meat trimmings from the slaughter plant on
a competitive basis, it is doubtful that the incremental increase in pro-
cessing costs would be sufficient to reduce prices all the way back to the
farmer. Additional costs would tend to be passed forward on to the con-
sumer.
The amount of cost increases resulting from pollution control costs that
may be passed through depends on several factors, including the in-
cremental amount the processing 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 increase for large plants than for smaller
plants. Depending on the relative amount of cost increase, this could
have serious impact on the industry structure. If we assume that the
processing plants may successfully pass the incremental cost of pollution
control on to the consumer, the relative amount to be passed on depends
upon the incremental amount of cost incurred by the various size plants,
and the relevant price elasticities. The industry structure suggests
this would be approximately at the point of additional cost incurred by
the large plants. The market would then reach a new equilibrium at
this point. The small and medium size plants would then be able to pass
forward a portion of their increased costs but would be forced by market
competition fo absorb any cost incurred greater than the equilibrium rate.
Depending upon the magnitude of the increased costs, the small and medium
size plants could absorb the remainder 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.
A more specific discussion of price effects resulting from the imposition
of pollution control standards is contained in Chapter VII-A.
IV-11
-------
V. ECONOMIC IMPACT ANALYSIS METHODOLOGY
The following economic impact analysis utilizes the basic industry infor-
mation developed in Chapters I-1V 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. Fundamental 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
Industry
Structure
Industry
Financial
Data
EPA Pollution
Control Costs
Base
Closures
^
Plant Closures
Due to Control
Employment
Effects
Community
Effects
Segmentation
\i
Model Plant
Parameters
Budget
Data
Development
Industry
Pricing
Model
Financial
Analyses
1
Financial
Profiles
Price
Increases
l
Shutdown
Analysis
>
r
Production
Effects
^
t
Foreign
Trade
Effects
*
l£V«*M-M
"N
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; and 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 owner-operator expects that adverse conditions
and consequent losses are temporary. His ability to
absorb short-term losses depends upon his access to
tunds 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 coats, 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 earning
(CV), at the firm's (industry) cost of capital, is greater than the reali-
V-4
!S
-------
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:
NPV = £ AR (l+i)"n
n=l
where
NPV = net present value
A = future after-tax income in n*h year or salvage
value in year t
i = discount rate at cost of capital
n = number of conversion periods, i.e.,
1 year, Z 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. Thege 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-tax income and for the NPV analysis after-
tax cash proceeds. The computation 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
£ = 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 n«t 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 of ownership from one firm to another. In this in-
stance, the opportunity cost (shadow price) of the investment may be
different.
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 charges 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 only 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 nave no salvage value.
The above discussion refers primarily to the NPV analysis. Investment
used in estimating ROI was taken as invested capitalbook value of
assets plus net working capital.
3j. 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 capital was determined for purposes of this study by estimating
performance measures of the industry (6)(7)(8). The weights of the two
respective types of capital for the meat processing industry were
estimated at 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
-------
Debt
Equity
.40
.60
7.0
To determine the weighted average cost of capital, it is necessary to
adjust the before tax cost to after tax costs (debt capital only in this
case). This done by multiplying the costs by one minus the tax rate
(assunned 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
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 tQ, assumed to be
equivalent to 1976
2. After tax cash proceeds taken for years t i to t
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 t
5. Incremental pollution control investment taken in year t
for 1977 standards and year t^ for 1983 standards.
6. Incremental pollution expenses taken for years tj to t
for 1977 standards and years t-j 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 tn.
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 gales.
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
above under Section A and the expected price increase from 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 utilizing 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
repeated.
V-ll
-------
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
Water 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
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 by
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
^ 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 to EPA's technical report for technology
descriptions (9).
A. Current Status of Effluent Control in the Industry
The Development Document (9) outlines the current status of effluent
control now assumed to be practiced in the industry. This information
ie based on the North Star sample of the industries and is presented
in Table VI-1 for information 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
ag the basis of our impact analysis.
VI-1
-------
Table VI-1. Current status of effluent control in the meat processing industry (percent)
Type of treatment
Municipal treatment
Secondary treatment
No discharge
Total
Small
processor
88
0
12
100
Sausage and
luncheon meat
processor
90
10
00
100
Ham
processor
88
8
4
100
Meat
canner
89
11
0
100
Source: Development Document (9)
-------
According to the Development Document no pretreatment requirements
are required to meet the proposed Standards. As a result no additional
cost for those plants disposing into municipal systems was assumed.
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 operation in the future.
Plants now disposing of waste water through secondary treatment facilities
will incur additional costs as described in the following section and it is
to these plants that the impact analysis is directed.
Plants now using land disposal methods such as septic tanks for the
small processor or irrigation systems that tend to be located in arid
regions of the Southwest and California have achieved a "no discharge"
treatment level according to the Development Document and would incur no
additional costs.
B. "Typical" Effluent Control Costs
Incremental investment and operating coats were specified in the Develop-
ment Document for hypothetical "typical" plants in each segment to achieve
indicated performance standards. Typical plants in each sector as de-
scribed by EPA are as follows:
1. Small Processor - Would produce 2, 100 pounds of finished
product per day. May produce sausage, luncheon meats,
ham and other smoked products or any combination of the
foregoing product. They would have a waste water out-
flow of 840 gallons of waste water per day.
2. Sausage and Luncheon Meat Processor - Would produce
105, 000 pounds of sausage and luncheon meat per day.
The estimated waste flow would amount to 120,000 gallons
of waste water per day.
3. Ham Processor - Would produce 73,000 pounds of finished
product (including ham) per day. The estimated waste water
flow would amount to 93, 000 gallons of waste water per day.
4. Meat Canner - Would produce 178, 000 pounds of finished product
including canned meats per day. The estimated waste water
flow would amount to 240, 000 gallons per day.
VI-3
-------
The additional investment required by "typical" plants disposing
through secondary treatment system (as developed by North Star) to
achieve the indicated performance standard is shown in Table VI-2.
Typical plants in the industry .other than the small processors .will need
to add chlorination treatment to their existing treatment system to meet
the BPT limitations. (9)
The BAT limitations may require the addition of some of the following
treatment to existing systems. (9)
Chemical precipitation to remove phosphates and suspended
solids
Ammonia stripping
Sand filter for solids removal
Chlorination
Investment costs and annual operating costs are shown in Table VI-2 for
disposal through irrigation. This is 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.
C. Effluent Control Costs for Model Plants
The effluent control costs provided by EPA were "single point" estimates
in that they applied specifically to a given type of plant with a given pro-
duction volume. Obviously, effluent treatment costs will vary with waste-
flow and, hence, processing volume. Based on discussions with EPA and
North Staj: 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, each of the three large "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 precisely on the line,
it is believed that the fit is acceptable.
Basic operating parameters for "typical" plants developed by North Star
are shown in Table VI-3 compared with the operating parameters for the
DPRA model plants. Incremental investment costs to achieve BPT
standards are relatively low; however, operating costs are very aigh for
the small plant. Because most of the operating costs consist of labor and
overhead for monitoring a control system and the requirements are similar
regardless of the size of the control system, there are large economies of
scale from the small to large plants.
VI-4
-------
Table VI-2. Incremental effluent control costs for "typical" meat processing plants (1971 costs) _'
New Point Source
1977 Standards 1983 Standards Irrigation Standards
Invest- Annual oper- Invest- Annual oper- Invest- Annual oper- Invest- Annual oper-
Subcategory ment ating cost ment ating cost ment ating cost ment ating cost
Small processor 0
Sausage and
luncheon meat 4, 500 20,
processor
Ham processor 4, 000 20,
Meat canner 6, 500 20,
Note: Annual operating cost includes
"Typical" meat processing plants
0 0 0 NA NA 5,000 200
000 316,000 40,000 55,000 600 130,000 20,300
000 297,000 39,100 46,000 1,300 115,000 41,100
000 366,000 43,900 101,000 3,100 190,000 61,400
manpower and burden, supplies, chemicals, power, taxes and insurance dollars.
as defined in the Development Document. This should not be confused with
the model plants as used in this report.
Source: Development Document
-------
Table VI-3. Operating parameters for "typical" and "model" manufacturing plants
Sausage (k lunchmeat
Production: finished product
1, 000 Ib/day
Waste water flow
gal/1, 000 FP
Total water flow (gal)
Ham & smoked meats
Production: finished product
1, 000 Ib/day
Waste water flow
gal/1, 000 FP
Total water flow (gal)
Sausage and smoked meats
Production: finished product
1, 000 Ib/day
Waste water flow
gal/ 1,000 FP
Total water flow (gal)
Canned meats
Production: finished product
1, 000 Ib/day
Waste water flow
gal/1, 000 FP
Total water flow (gal)
EPA
Small
processor Typical X small Small
2.1 105 4.2 17
400 1,150 400 1,150
840 120,750 1,680 19,550
N.A. 73 *. 2 17
1,270 400 1,270
92,929 1,680 21,590
N.A. N.A. 4.2 17
400 1,270
1,680 21,590
.
N.A. 178,000 N.A. 42,000
1,350 - 1,350
204,000 57,000
DPR A
Medium
85
1, 150
97,750
85
1, 270
107, 950
.85
1,270
107,950
176,500
1, 350
238, 000
Large
170
1, 150
195,500
170
1,270
215,900
170
1,270
215,900
411,800
1, 350
556, 000
-------
Incremental investment costs to achieve BAT standards for plants
disposing of waste water into streams range from $240,000 for the
small mixed processing plant to a high of $650, 000 for the large
canning plant. Operating costs range from approximately $35,000
to a high of $50, 000.
Since the cost data provided to DPRA were based on 1971 costs, they
were updated to 1973 levels by using appropriate inflaters (i.e., Index
of Sewage Treatment Plant Construction Cost for investment and the
Implicit Price Inflator for GNP for operating costs).
The incremental adjusted cost estimates to achieve the indicated
standards were obtained through the procedures described above and
are shown in Tables VI-4 through VI-6.
VI-7
-------
Table VI-4.. Effluent Control Cost for "Model" Sausage
Manufacturing Plant (1973 costs)
Effluent
control level
BPT (1977)
BAT (1983)
NSPS
Cost Item X-small
Investment 0
Annual cost
Capital
Depreciation
Operating cost
Total Annualized cost
Investment 0
Annual cost
Capital
Depreciation
Operating cost
Total Annualized cost
Investment 10,000
Annual cost
Capital 1,000
Depreciation 1,000
Operating cost 400
Total Annualized
cost
S mall
3, 000
300
300
21,600
22,200
246,000
24,600
24,600
36, 000
85,200
83, 000
8, 300
8, 300
15,800
32,400
Medium
4,800
480
480
21,600
22,560
345,000
34,500
34,500
43,000
112, 000
144,000
14, 400
14,400
21, 000
49,800
Lar^e
7,300
730
730
21,600
23,06a
433,000
43,300
43,300
48, 000
134,000
211,000
21, 100
21, 100
27,300
69,500
'/I-B
-------
Table VI-5. Effluent control costs for "model" meat canning plants (1973 costs)
Effluent
control level
BPT (1977)
BAT (1983)
NSPS
Cost Item X-small
Investment 0
Annual cost 0
Capital
Depreciation
Operating cost
Total Annualized cost
Investment 0
Annual cost 0
Capital
Depreciation
Operating cost
Total Annualized cost
Investment 10,000
Annual cost
Capital 1,000
Depreciation 1,000
Operating cost 400
Total Annualized cost
Small
3,900
390
390
21,600
22,380
300, 000
30, 000
30, 000
39^000
99, 000
110,000
11,000
11,000
18,000
40, 000
Medium
8,900
890
890
21,600
23,380
470,000
47,000
47,000
50^000
144. 000
250,000
25,000
25,000
29,000
79, 000
Large
20,000
2,000
2,000
21,600
25, 600
650, 000
65,000
65,000
61,000
191,000
500,000
50,000
50,000
46,000
146,000
VI-9
-------
Table VI-6. Effluent control cost for "model" ham, smoked meats and model
mixed manufacturing plants (1973 costs)
Effluent
control level
BPT (1977)
BAT (1983)
NSPS
Cost Item X small
Investment 0
Annual cost
Capital
Depreciation
Operating cost
Total Annualized cost
Investment 0
Annual cost
Capital
Depreciation
Operating cost
Total Annualized cost
Investment 10,000
Annual cost
Capital 1,000
Depreciation 1,000
Operating cost 400
Total Annualized cost 2, 400
Small
3,500
350
350
21,600
22,300
240, 000
24, 000
24, 000
37, 000
85,000
81,000
8, 100
8, 100
16,200
32,400
Medium
5,000
500
500
21,600
22,600
360,000
36,000
36,000
44,000
116,000
148,000
14,800
14,800
21,500
51, 100
Large
7,500
750
750
21,600
23, 100
450,000
45,000
45,000
48, 000
138,000
225,000
22,500
22,500
28,200
73, 200~
VI-10
-------
VII. IMPACT ANALYSIS
The imposition of effluent controls on the livestock slaughtering and meat
packing industry 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 ex-
pected.
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
The role of price effects in the analysis io critical and a complex one.
The meat processing industry can be generalized as having a relatively
low value added and low profit margin in relation to sales. However return
on invested capital is quite favorable. Industry margins have remained rela-
tively constant over the past decade although there have been substantial
changes in the price of raw product and finished product. In addition,
meat packers account for 53 percent of the total shipments of primary
sausage and processed meat products. As a result, the impact of
effluent controls on SIC 2011 cannot be ignored.
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.
VII-1
-------
Table VII-1. Percent price increase required to pay for incremental
pollution control
Plant Type:
Sausage:
X-small
Small
Medium
Large
Smoked Products:
X-small
Small
Medium
Large
Mixed:
X-small
Small
Medium
Large
Canning:
Small
Medium
Large
Level I
above
Baseline
--
.46
. 11
.04
--
.49
. 12
.06
--
.46
. 11
.06
.46
.08
.03
Level II
above
Baseline
--
1.16
.36
.19
--
1.29
.35
.21
--
1. 10
.36
.21
2.05
.30
.15
.
Level II
above
Level I
--
.70
.25
. 15
--
.80
.24
.14
--
.64
.25
. 15
1.59
.22
.12
VII-2
-------
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 by the large plants in all categories amount to
only .03 to .06 percent to achieve BPT. Medium size plants will
incur slightly higher cost which will translate into required price increases
of approximately . 08 to . 12 percent. Small plants would require a price
increase of about .5 percent,which appears rather insignificant but it is
well to point out that the small plants are operating on a very narrow
margin at the present time.
As discussed in Chapter VI, the X-small plants are currently in compli-
ance with disposal through municipal systems or through land disposal.
To achieve the BAT standards, the incremental cost above BPT standards
ranges from . 1 to . 2 percent for large size plants to as high as 1.6 percent
for the small canning plant.
2. Expected Price Increase
The ability of firms incurring increased costs resulting from the impo-
sition of Effluent Control Guidelines to pass these costs through the mar-
ket system is considered to be negligible. Several factors are con-
sidered in reaching this conclusion.
A review of the expected price increases for the meat packing industry
(SIC 2011) which processes 53 percent of the total shipments of sausage
and other prepared meats indicates that a price increase of 0.05 percent
was projected for BPT (2). 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 prices down to the levels expected with BPT treatment.
In the meat processing industry we are again faced with a similar situ-
ation. Here we have an estimated 88 percent of the plants connected to
municipal systems. (Plants linked to municipal systems will not incur
further coats as a result of proposed guidelines.) In isolated instances,
however, municipalities may readjust their rates though, resulting in
higher costs for their users. We are assuming,in general.no additional
costs will be incurred by those plants, currently discharging to municipal
tystems.
VII-3
-------
Considering the production of the meat processing industry including
those plants already discharging to municipal systems, plants repre-
senting approximately 94 percent of the production will not incur addi-
tional cost. Moreover, large plants in the meat processing (SIC 2013)
industry account for approximately 35 percent of production (Table III-l)
Therefore, the large plants that will incur additional costs will account
for only 2 percent of the total production of processed meats.
As indicated above, these plants would require a price increase of only
.04 percent to meet BPT and an additional .15 percent to meet BAT
standards. As a result, 96 percent of the total production will have 0
to minimal increases in the cost of production resulting from the pro-
posed Guidelines.
As a result of the high percentage of production represented by plants
that will not experience higher costs from pollution controls", we con-
clude that the plants incurring higher costs will not be able to effectively
pass these costs forward. There may, however, be isolated cases
where a plant may effectively pass the increased costs forward to the
consumer. This most likely would occur where a firm is marketing on
a local or regional basis.
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) present value of future net income stream.
Profitability impacts include the following:
1. Pre-tax net income
2. 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 meat processing plants is shown in Table VII-2. In general
the imposition of BPT represents a modest reduction of income and BAT
represents a severe reduction of income for small plants--to the point
of altering their net income from a positive to a negative amount.
VII-4
-------
Table VTI-2. Pre-tax net income for model meat processing plants,
BPT and BAT effluent treatment levels,
assuming no price change
Plant Type:
Sausage:
X-small
Small
Medium
Large
Smoked:
X-small
Small
Medium
Large
Mixed:
X-small
Small
Medium
Large
Canning:
Small
Medium
Large
Baseline
($000)
7.0
58.0
633.0
1,258.0
5.0
24.0
542.0
1,217.0
4.0
61.0
488. 0
1,082.0
0.0
621.0
2,170.0
BPT
($000)
7.0
35.8
610.4
1,234.9
5.0
1.7
519.4
1,193,9
4.0
38.7
465.4
1,058.9
-22.4
597.6
2,144.4
BAT
($000)
7.0
-27.2
521.0
1, 123.4
5.0
-61.0
426.0
1,079.0
4.0
-24.0
372.0
944.0
-99.0
477.0
1,979.0
VII-5
-------
For example, the pre-tax net income from a small sausage plant is
reduced from $58, 000 at baseline to $36, 000 with the imposition o*
BPT standards. However, net income is reduced to $-35, 000 with
the imposition of BAT Standards. The small canning plant is the most
severely impacted with a reduction of income to $-22, 000 with BPT
standards and $-103, 000 with BAT. The. impact on medium and large
plants is proportionately less severe with an income reduction resulting
in BAT standards of approximately 15 percent for medium plants and
approximately 10 percent for large.
2. Return on Sales
The after-tax return on sales for model meat processing plants at base-
line BAT and BPT treatment levels is shown in Table VII-3. Basically,
the returns follow the same general pattern as net income. A significant
point is the low after-tax return on sales for all plants. This is
characteristic of the low margins in the industry.
Baseline after-tax returns on sales range from 0 in the small canning
plant to a high of 1.8 on large sausage plants. Profit levels are reduced
to a very narrow margin for small plants with the imposition of BPT
standards with only slight reduction for medium and large plants. BAT
standards depress small plant profits to a negative position with severe
reduction occurring in the small canning plant.
3. Return on Invested Capital
Return on invested capital before and after-tax for model meat processing
plants with alternative effluent treatment levels is shown in Table VII-4.
The meat processing industry normally operates on an after-tax return on
invested capital of approximately 9 to 10 percent. The exception to this
is the X-small and small plants that normally operate with a lower return
on capital.
As shown in Table VII-4, the after-tax return on invested capital drops
to negative values for the small plants as a result of BAT standard.
The small canning plant is placed in a loss situation with the imposition
of BPT standards. Return on Invested capital is reduced by approximatel
2 percent from baseline for medium size plants and by approximately 1
percent for large plants.
4. Cash Flow
Estimated cash flows (after-tax income + depreciation) as a percent of
invested capital (depreciated book value + net working capital) for the
model meat processing plants are shown in Table VII-5. In the baseline
case, cash flows range from 9 to 20 percent with the highest relative
VII -6
-------
Table VTI-3. After-tax return on sales for model meat packing
plants, BAT and BPT treatment levels, assuming no price change
Plant Type:
Sausage:
X-small
Small
Medium
Large
Smoked:
X-small
Small
Medium
Large
Mixed:
X-small
Small
Medium
Large
Canning:
Small
Medium
Large
Baseline
(%)
.6
1.0
1.8
1.8
.4
.5
1.4
1.6
.3
1.0
1.3
1.5
0.0
1.2
1.6
BPT
(%)
.6
.7
1.7
1.8
.4
.1
1.3
1.5
.3
.7
1.3
1.5
- .6
1.2
1.6
BAT
(%)
.6
- .9
1.5
1.6
.4
-1.7
1.1
1.4
.3
- .8
1.0
1.3
-3.0
1.0
1.5
VII-7
-------
Table VII-4.
Rate of return on average invested capital for model meat processing plants,
BPT and BAT treatment levels, assuming no price change
I
oo
Plant Type:
Sausage:
X-small
Small
Medium
Large
Smoked:
X-small
Small
Medium
Large
Mixed:
X-small
Small
Medium
Large
Canning:
Small
Medium
Large
Baseline
(%)
4.5
9.8
23.1
19.5
2.7
4.0
19.5
18.7
2.0
9.6
16.7
15.9
0
12.6
20.4
Pre-tax
BPT
(%)
4.5
6.1
22.3
19.2
2.7
3.2
18.7
18.3
2.0
6.1
15.9
15.6
- 2.2
12.2
20.2
After-tax
BAT
(%)
4.5
- 5.9
18.9
17.5
2.7
-11.6
15.3
16.6
2.0
- 5.0
12.7
14.3
-10.3
9.8
18.8
Baseline
(%)
3.5
6.3
12.2
10.3
2.1
3.2
10.4
9.8
1.6
6.0
8.9
8.4
0
6.5
10.7
BPT
(%)
3.5
4.3
11.8
10.1
2.1
2.6
10.0
9.6
1.6
4.2
8.5
8.2
- 2.2
6.4
10.6
BAT
(%)
3.5
- 5.9
10.1
9.2
2.1
-11.6
8.2
8.7
1.6
- 5.0
6.8
7.5
-10.3
5.2
9.8
-------
Table VTI-5. Estimated cash flow as a percent of average invested
capital for model meat packing plants, BPT and BAT
effluent treatment levels, assuming no price change.
Rant Type:
Sausage:
X- small
Small
Medium
Large
Smoked:
X- small
Small
Medium
Large
Mixed:
X- small
Small
Medium
Large
Canning:
Small
Medium
Large
Baseline
($000)
15.4
79.0
543.0
1,068.0
16.0
65.0
516.0
1,085.0
14. 1
82.0
478.0
995.0
105.0
627.0
1,625.0
(%)
9.9
13.4
19.8
16.6
8.8
10.7
18.6
16.6
7. 1
12.9
16.3
14.6
10.5
12.7
15.3
BPT
($000)
15.4
67.5
532.5
1.056.6
16.0
47.9
505.2
1,074.3
14. 1
71. 1
467.2
984. 1
83.2
615.4
1,614.2
(%)
9.9
11.4
19.4
16.4
8.8
8. 1
18.2
16.5
7. 1
11.2
16.0
14.5
8.3
12.4
15.2
BAT
($000)
15.4
32.0
519.0
1,042.6
16.0
1.2
491.6
1,060.8
14. 1
36.2
453.5
982.2
31.7
601.3
1,598.0
(%)
9.9
5.4
18.9
16.2
8.8
0.2
17.7
16.3
7. 1
5.7
15.5
14.4
3.2
12.2
15.0
VII-9
-------
cash flows occurring in the medium size plants. This is because we
have assumed that medium size plants are older than the large plants (Chap.
Ill) and would have a proportionately lower investment base.
It is significant to note that all cash flows are positive even after the
imposition of BAT standards. They are significantly reduced, however,
for the small plants following the imposition of the BAT standards. The
annual cash flow for medium and large size plants are reduced slightly
and range in the 12 to 19 percent area after the imposition of BAT
standards.
Net Present Value (NPV). Another measure of the financial viability
of a plant is the net present value (NPV) of projected streams of costs and
and revenues. With this measure it is possible to assess the likelihood
of continued plant operation versus closure. By discounting at the cost
of capital /see Chapter V), positive NPV's would indicate the like-
lihood of continued plant operation; whereas negative values indicate
probable plant shutdowns. 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 rein-
vested elsewhere as an alternative to the processing operation.
However, only 10 percent of the estimated replacement cost
of a meat processing plant is assumed recoverable. This
relatively low value is based on little opportunity for use of
equipment outside the industry and low prospects for use as
replacement equipment in existing plants. Also, buildings
are typically older buildings and not well suited for other
use.
2. Revenues and expenses are assumed to remain constant over
time, i.e., ZO years of operation.
3. The after-tax cost of capital for the industry is estimated
at 8. 1 percent (see page V-8).
VII-10
-------
The net present values of model meat processing plants before and after
the imposition of effluent treatment standards are shown in
Table VII-6. All plants have a positive NPV prior to the imposition of
standards. It is well to note that the extra small plants are generally
considered to be in a marginal situation with NPV close to 0. They will
not be subject to increased cost from pollution controls according to the
Development Document.
The imposition of BPT control reduces the NPV of the least profitable
processed meat plants--smoked products--to a negative position and the
NPV of the small canning plant is reduced to -$155,000. This suggests
that the small smoked products plant and definitely the small canning
plant would be forced to close with the imposition of BPT control.
Not only are the NPV's of the plants reduced to well below zero but
also return on investment drops so low that we feel it would be im-
possible for plants to obtain financing. It could be argued that the cost
of BPT standards are largely increased operating costs; thus the small
older plants may continue to operate until large capital expenditures
are required to meet BAT standards. However, because the NPV's
are reduced to well below 0, it would be economically the best choice
to shutdown. The projected closures resulting from BPT are:
Small smoked meat plants - 11 plants
Small canning plants - 5 plants
The small sausage plants and small mixed plants are also severely impacted
with the increased cost required to meet the BPT standards. In this case
we feel they will continue to operate, although at a low profit level until
the BAT standards are imposed, then shut down. Thus, BAT standards
will close the following plants:
Small sausage plants - 12 plants
Small mixed plants - 11 plants
Profits will be reduced in medium and large plants that are required to
incur additional costs resulting from the Standards, however, the costs
will not force plant closures.
VII-11
-------
Table VII-6. Net present values of model meat processing plants before
and after the imposition of BPT and BAT effluent treatment
standards
Plant Type
Sausage:
X- small
Small
Medium
Large
Smoked:
X- small
Small
Medium
Large
Mixed:
X- small
Small
Medium
Large
Canning:
Small
Medium
Large
NPV of
Plant before
Controls
5.4'
161.7
2,628.9
5,229.3
3.5
71.0
2, 156.9
5,093.1
7.7
171.6
1,850.4
4,269.6
34.7
1,846. 1
7,416.9
NPV
of BPT
Controls
_ _./$
(f
-
-110.2
-109. 1
-81.4
-
-154. 1
-127.8
-126.9
_
-113.6
-112.2
-113.7
-190.0
-114.2
-120.4
BPT
NPV of
Plant after
Controls
1 0001
5.4
51.5
2,519.8
5,147.9
3.5
-83. 1
2,029. 1
4,966.2
7.7
58.0
1,738.2
4,155.9
-155.3
1,731.9
7,296.5
NPV
of BAT 1
Controls
-
-256.3
-246.0 '
-290.8
_
-323.0
-254.4
299.5
_
-247.0
-254.4
299.5
-388.3
-312.0
-409.9
T
NPV of
Plant after
Controls
5.4
-205.4
2,273.8
4,857.1
3.5
-406.1
1,774.7
4,666.7
7.7
-189.0
1,483.8
3,856.4
-543.6
1,419.9
6,886.6
VII-12
-------
C. Production Effects
The imposition of BPT and BAT Guidelines are not expected to signifi-
cantly effect the volume of production of processed meats. The im-
pact of BPT and BAT Guidelines will occur principally through the
closure of small plants where volume of production and present profit
levels are such that the incremental costs required to install additional
water'pollution control facilities make the continued operation of these
plants uneconomic. Plants that will be subject to closure account for
a small part of the total industry production (also see Chap. VII. B. 1-5).
1. Production Curtailment
No significant long-run curtailment in total production is expected to
result from the imposition of new water pollution control requirements.
Although aggregate volume data by plant size are not available, value
of shipments in relation to employment in 1967 is available. These
data are related to our model plants and provide an indication of the
total shipment by general size category.
Extra small plants ranging in employment size from 1 to 19 workers
number 813 according to the 1967 Census and account for 6.4 percent
of total production. The second largest category is the small plant
with 418 in number ranging in employment size from 20 to 99. This
category accounts for 30 percent of total production. A decreasing
number of plants are found in the medium and large size categories
with 28 and 35 percent of total volume respectively. Employment size
ranges from 100 to 200 in the medium size plants and over 200 for the
large (Table VII-7).
2. Plant Shutdowns Resulting from Pollution Control Guidelines
A conventional analyses of the firm's 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.
VII-13
-------
Table VII-7. Approximate size structure of the meat processing industry
Size
X- small
Small
Medium
Large
Approximate Number Percent
Establishments Employees of
Number
813
418
104
39
1,374
Percent per Plant
59.2 10
30.4 50
7.6 150
2.8 250
100.0
Total Shipments
6.4
30.6
28.4
34.6
100.0
Also see Table 1-2, III-1 and III-2.
VII-14
-------
Table VII-8. Estimated plant closures resulting from the imposition of effluent control standards
Number
of
Plants
Number on
Municipal Systems
Number Percent
No
Discharge
Estimated
Secondary Plant
Treatment Closures
Number Percent Number
Percent
BPT
BAT
I/
Meat Processing
X- small
Small
Medium
Large
Total
2/
Canning
Small
Medium
Large
Total
Total Sic 2013:
813
376
94
35
1,318
42
10
4
56
1,374
715
334
84
31
1,164
37
9
4
50
88
89
89
89
88.4
89
89
89
89
98
8
2
1
109
0
0
0
0
12
2
2
2
8.3
0
0
0
0
0
34
8
3
45
5
1
0
6
0
9
9
9
3.3
11
11
11
11
0
11
0
0
11
5
0
0
5
0
23
0
0
23
0
0
0
0
It is assumed that plants are divided equally among sausage, smoked meats and mixed.
2/
lack of definitive size information on the meat canning segment, we assume that the size distribution
approximates the total industry with the exception of the X- small plants.
-------
The imposition of the proposed BAT and BPT Standards will impact the
small plants very severely. The estimated shutdown pattern is shown
in Table VII-8. Again, it is well to note that only a small number of
plants are subject to increased costs from the incremental cost of
pollution controls. Plants on municipal systems and plants now achieving
no discharge were assumed to incur no increased costs resulting from the
imposition of Federal Guidelines. As a result, only 9 percent of the small
through large meat processing plants and 11 percent of the meat canning
plants will incur additional costs. _'
As a result of the BPT Standards, plarit shutdowns are projected in two
segments:
All small smoked meat plants - 11 plants
All small canning plants - 5 plants
As a result of the BAT Standards, plant shutdowns are projected in two
additional segments:
All small sausage plants - 12 plants
All mixed product plants - 11 plants
3^ Total Production Lost Due to Plant Closures
Total production lost due to the projected plant shutdowns will be rela-
tively small and can be summarized as a percent of total production as
follows:
Because information is not available on the distribution of sausage,
smoked and mixed processing plants, we are assuming an equal dis-
tribution and shutdown numbers are projected accordingly. Also,
according to the 1967 Census of Manufactures, there are 56 canning
plants. Again, a size distribution is not given. Therefore, we are
assuming a size distribution that approximates the size distribution
of the total industry with the exception of the very small plants.
VII-16
-------
BPT Shutdowns
Total % of Total
Type plants Plant shutdowns % of segment production
Smoked meat plants 439 11 2.4 0.8
Ca nned meat plants 56 5 3. 6.i7 0.5
BAT Shutdowns
Sausage plants 441 12 2.4 0.8
Mixed plants 438 11 2.4 0.8
With the industry operating at approximately 85 percent of capacity,
there should be no problem with other plants absorbing the production
loss due to the above closures. However, impacts may be severe in
short-term local situationsi including a loss of revenue at the community
level and a loss of local jobs.
D. Employment Effects
Total employment in the meat processing industry was reported at
56,400 in the 1971 Annual Survey of Manufactures. An approximate
estimate of 50 employees per small processing plant has been made.
As a result, estimated employment loss amounts to the following:
Total Employment Loss
Smoked meat plants 550
Canned meat plants 250
Sausage plants 500
Mixed plants 550
Employment loss 1 950
Because of the geographical dispersion of plants in the industry and
the size of plants that will 8hut down, the employment impact will be
widely dispersed nationally. Probably the majority of plants that are
«'nno ?8?- 10Cated in 8ma11 citie8 and towns of le" than
25 000 population. As a result, the employment impact on a small town
with an already poor or declining job market could be severe.
There should be no employment impact resulting from production
curtailments by those plants not forced to close*
VII-17
-------
E. Community Effects
Most meat processing plants are located in relatively small communities
where their closure would have a noticeable impact on the economy of the
community and surrounding area.
The closure of a small plant could result in a reduction in payrolls of
over $400, 000 which would be approximately equivalent to 0. 65 percent
of the total payroll of a city of 25, 000 (based on 8, 000 employed workers
earning $8, 000 each). Assuming a multiplier of 3.5, the loss of a small
meat plant could reduce the economic base of the community by as much
as $1,400, 000. A medium size plant would carry an impact of from
$3,000,000 to $5,000,000.
For a city of 8, 000 the loss of a small plant would reduce city payrolls by
5 percent with a corresponding reduction in the economic base of the
community. In addition to the loss in payrolls, the direct loss in pur-
chases of utilities, transportation services, office supplies and other
items by the plant would be felt throughout the community.
Other suppliers, i.e., spice companies, container manufacturers,
equipment manufacturers, etc., are usually located in major metro-
politan areas and in most instances would not be located in the com-
munities where small plant closures would be anticipated.
Other community impacts would be felt in the loss in taxes which would
result from the closure of the plant.
It is impossible to determine precisely the number and location of the
communities where plant closures would occur. However, as shown
earlier in this section, most of these plants are in relatively small com-
munities. Also it is known that over 90 percent of firms in the meat
industry are single-plant firms and approximately 85 percent of the
plants are owned by single-plant firms. In addition, virtually all of
the small communities would have more than a single meat plant. As
a result, it would follow that the number of communities impacted by plant
closures would be close (within 10 percent) to the number of plants
closed.
Given this situation, the number of communities impacted by the estimated
plant closures would be approximately as follows:
BPT - 16 communities impacted
BAT - 23 communities impacted
VII-18
-------
VIII. LIMITS OF THE ANALYSIS
A. General Accuracy
The meat processing industry is complex in terms of the number,
ownership and geographic distribution of firms as well as the sizes
and types of plants.
Detailed data on size distribution by type of plants i.e. sausage manu-
facturing, smoked meats, etc. are not available.
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 published research from universities and
government agencies, previous studies done by the contractor, infor-
mation obtained from operating firms in the meat industry, published
financial performance data and discussions with meat processing con-
sultants, meat plant architects and other knowledgeable individuals.
Published information from the Internal Revenue Service, American
Meat Institute, Robert Morris Associates and other sources of data on
financial ratios and financial performance were used as checks on the
reasonableness of results obtained in the financial analysis of repre-
sentative plants.
Throughout the study, an effort was made to evaluate the data and other
information used and to update these materials wherever possible.
Checks were made with informed sources in both industry and govern-
ment to help insure that data and information used were as reliable and
as representative as possible.
Water pollution control costs were furnished by EPA, Effluent Guide-
lines Division and were derived from costs developed for EPA by North
Star Research Institute. These costs were developed for "typical"
meat processing plants as described earlier in this report. It was
necessary to adapt these coats 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 treat-
ment in the meat processing industry. These assumptions are described
VIII-1
-------
in detail in the "Critical Assumptions" section of this report. The
validity of these assumptions and of the effluent control costs which
result introduce an additional element of uncertainty and possible in-
accuracy.
However, assuming the accuracy of the pollution control costs to be accept-
able, it is believed that the analysis represents a usefully accurate
evaluation of the economic impact of the.proposed effluent guidelines
on the meat processing industry.
B. Range of Error
Different data series and different sections of the analysis will have
different possible ranges of error.
1. Errors in Data
Estimated data error ranges as an average for the industry are as
follows:
1. Information regarding the organization
and structure of the industry, number
location and size of plants, and other
information descriptive of industry
segments
2. Price information for products and raw
materials
3. Cost information for plant investments
and operating costs
4. Financial information concerning the
meat industry
5. Salvage values of plants and equipment
6. Water pollution control costs
7. Plant closures
Error Range
10
± 10
+ 10
+ 20
Unknown
+ 20
VIII-2
-------
C. Critical Assumptions
The complex of types and sizes of meat processing plant processes
involved and effluent control levels and systems proposed to meet
these levels all required the making of a series of assumptions
required to keep the analysis within manageable limits and to specify
"representative" situations which would permit 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 the 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 meat
processors
1. Industry Structure
The meat processing industry is both large and complex in its organi-
zation. A critical factor affecting the analysis is the number and size
of plants. At the time of writing, the detailed Census of Manufactures
for 1972 is not available. There the structure of the industry was largely
based on the 1967 Census with updating through the Annual Survey of
Manufactures and the Preliminary 1972 Census. It is believed the
structure of the industry is similar to that described in the 1967 Census
and because of a lack of more current information the 1967 data were
used.
2. Price Assumptions
Published prices for various meat products are limited. We obtained
some published prices from the Market News Service, and Economic
Research Service of the USDA and from the generally accepted National
J3rovisioner G-reen Sheet. In addition, unpublished prices were obtained
from the USDA and directly from industry sources. As a result, it is
believed that the price series used are generally applicable to the types
of plants and products examined in the analysis.
VIII-3
-------
3. "Representative" Model Plants
No single plant is "representative" of the wide complex of types and
sizes which constitute the meat processing industry. Our categori-
zation of X-small through large plants with.various product lines,
we believe, adequately represents the major types of plants found in
the industry.
The essence of the categorization scheme is to show the various im-
pacts on the different sizes and types of plants. In this effort we feel
the categorization is successful in demonstrating the much greater im-
pact felt by the smaller firms.
4. Water Pollution Control Costs
Data on water pollution control costs were supplied to DPRA by the Effluent
Guidelines Division of EPA. We are not in a position to evaluate these costs
but they were assumed to be reasonably accurate and adjusted through
generally accepted techniques to "fit" our model plants.
5. Current State of Waste Water Treatment in the Industry
Data on waste water treatment in the industry was obtained from the
Development Document and considered to be reasonably correct.
6. Salvage Values
Salvage values of buildings, equipment and land will vary greatly from
one location to another and with the type and condition of structures and
equipment.
In order to avoid problems which would be inherent in attempting to es-
tablish differential salvage values, a set of "standard" assumptions con-
cerning salvage values was developed.
a. Land was salvaged at its 1973 value
b. Buildings and equipment were salvaged at a net amount
equipment to 10 percent of their 1973 replacement value
c. Net operating capital was recovered intact.
VIII-4
-------
7. "Shutdown" decisions
The general purpose of the "shutdown" model is to examine profitability
of the model plants before and after the imposition of effluent limitation
guidelines, to determine the profitability of forced closures which would
result and to calculate the price changes required to cover the added
effluent control costs.
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 meat processing industry.
VIII-5
-------
I BIBLIOGRAPHIC DATA
SHEET
1. Id-port No.
EPA-230/ 1-74-040
3. Recipient's Accession No. 1
i 1 i.le anj >ubuele
Economic Analysis of Proposed Effluent Guidelines for the
Meat Processing Industry
5. Report Date
July 1974
7. Author(«)
Donald J. Wissman
8. Performing Organization Kept.
No.
9. Performing Organization. Name and Address
Development Planning and Research Associates, Inc.
P. O. Box 727, 200 Research Drive
Manhattan, Kansas 66502
10. Project/Task/Work Unit .No."
: Task Order No. 9
IK Contract/Grant No.
Contract No. 68-01-153:
Sponsoring Organization Name and Address
Environmental Protection Agency
Waterside Mall
4th-and M Street, S. W.
Washington, D. C. 20460
13. Type ol Report it Period
Covered
Final Report
14.
16. Abatracta
The economic impact of proposed effluent Guidelines on the Meat Processing 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. Model plants are segmented by size and type. Pricing mechanisms and
price relationships are evaluated. The financial impact of proposed effluent treatment
technology was assessed in terms of prices, industry profiles, volume of production,
employment,* community impacts and international trade.
The imposition of BPT Standards (1977) and BAT Standards (1983) will not have a
serious impact on the industry if control costs and the present level of controls in
the industry are as stated by EPA. An estimated 90 percent of the plants are linked
to municipal treatment facilities and will not incur additional costs resulting from the
17. Key U'ords and Document Analysis. 17c. Descriptors
Water polution, economic analysis, meat processing industry, meat canning industry,
smoked meats, sausage, canned meats, processed meats, supply, prices, variable
costs, fixed costs, fixed investment, discounted cashflow.
17b- Identifiers/Open-Ended Terms
17e. COSATI F;c!J/Cr.iup
02 Agriculture, B-Agricultural economics
05 Behavioral and Social Science
C- economics
18. AvaiijMiity i(junu-ni
IV.
20. ,>c>.ucii>' v
: In lit
21. .... ..i i-
133
22> i rue
-------
16. Abstracts (Continued)
imposition of the proposed Guidelines.
The remaining plants that incur higher costs resulting from the proposed
Guidelines will not be able to pess these costs forward through the marketing
system, as a result they will experience lower profit levels. An estimated
11 small meat processing plants and 5 small canning plants out of 376 and
42 respectively will be forced to close as a result of BPT Guidelines.
An additional 21 small meat processing plants out of a total of 879 will be
forced to close as a result of BAT Standards.
The loss of plants will not reduce production capacity significantly and
existing plants can easily take up the lost volume. The projected plant
closings will result in a loss of 2,000 jobs throughout 40 communities.
-------
APPENDIX
-------
Appendix Table A-l. Meats and meat food products prepared and
processed under Federal inspection, 1968-72
mowers HOT oun.io
Product
Placed In cure -
Boef brisket
B*flf - other
Pork
Booked and / or dried -
Beef
Bacon
Other, eaoked or dried
Cooked oeat -
D«af
Pork * other
Other, cooked necto
Sauaa*,o -
Loaf, head cheeao. chill.
Jellied product
Sliced bacon
Sliced Other I/
Ground beef
Edible tallow
Pork fat -
tendered
Kef Ined
Oleoaargarlna containing «nloal tut
Canoed product - Conerclal I/
Canned product - CoveruRent £/
Total 2/ 3/
i 1968 i
t
t 1.000 Ib.
.t 103.839
.t 125,170
.t 14.598
.t 68.380
.: ' 1.236.06B
.: 294,458
.t 298.680
.t 224.563
.: 123.0*8
.: 97.911
.1 41.78*
.t 610.363
.t 26.265
.1 96.19*
.t 86.395
.: 36.019
.1 18,568
.t 398.419
.t 198,089
.1 1.051.978
.1 461.733
.1 376,633
.: 16 ,640
.t 1.34 ,39*
.t 63 .332
.t 31 ,032
.t 19 .101
.t 32,996
.t 1. 4],3:i
.: 1, 79,791
.1 68.508
.: 106,371
.: 58,418
.1 24*, 549
.: 1*1.636
.: 1*, 859, 504
1H9 :
1.000 Ib.
134.316
99. 766
12.912
64,941
1.310,606
317.281
387.403
100.110
117,811
124.717
33.163
161.353
26.456
61.719
107.718
40,718
37,4*3
432,876
191.829
1.071.671
619,736
011,789
281,805
1,333,*73
747,111
279.181
621.197
293.343
1.132,968
674.031
92,421
38.971
1*7.933
202^608
27,813,191
1970
1.000 Ib.
136.134
11*. JOT
13,137
60,681
1.577.690
197,13*
310,843
113.787
91.093
161,193
33.090
182,183
22.812
84,377
111,990
38,683
49.719
562, 135
190.403
1.113.392
632.380
643.626
273.148
1.436.691
741.171
290.117
709,610
283.912
1,066.570
741,12)
91.407
)5.2B6
988. 7 13
1)0,061
1O.O1
10,03), 777
t 1971
1,000 Ib,
133.931
107.859
11.697
60.01)
1.700.211
199,131
367.05)
171.212
81.A8*
168.007
33.139
19*. 12*
20,289
94.708
1*9.818
38.814
47.229
678.114
203.4*7
1,2*2,684
* 698.078
676.691
278,259
1.556.00*
816,319
363.791
793,484
293.952
1.695.189
1.209.739
803.748
96,*99
43.088
1.138,260
211,517
213.940
31.9*1.120
i 1971
1.000 Ib.
118.377
20.811
60,17*
1.644. 227
269.121
316.021
333,133
38.378
166.4)2
*9.097
189.233
26.947
107.216
149,082
40.111
34.607
738,888
216.384
1.259.618
7*0.071
741. 00 J
283.389
1.487.166
873.1*6
4)2.610
974. 7 110.321
10.60) 18.17!
7.89<
11,801 21.23:
31.411 660,671
7.398 9,69!
4,441
2,OJt
17.176
26,299 1*7.831
42.291 4)7.10;
l a, 7*a
m,6ai
1?) "t\K
t 1971
: 40 oi.: ynAn
" : 40 oi.
: over ;
l.noo l.ood
114.267 123.055
9,3*0 76,600
32.718 717.0*4
.3,219
16.143
14* 2,ft64
19.497 163.739
52.170 2)1.968
12,104 16,1)1
6.901
10.150 16.570
53,970 77.H.660
3.011 7.?03
3.892
1,813
12.67)
14,919 135.4:5
6«.3'i6 470.107
451.3)5
241.316
179.461
1977
40 oi. : v^gmt
or ' 40 ox.
I.MOi l.OW
119.74ft IOJ.770
tO.£bO 71.347
31.787 111.936
3.489
15.131
1.390 31.039
1.985
:i 2.722
2*.664 147.610
64.870 132.312
38*
11.399 17,181
3.81)
10.190 11.284
60.2*8 668.341
3.4i>S 7.756
4.136
1 .880
10. WO
43.011 141.718
70.498 437.073
479.50:
; 120. ii7
19.18)
22B.477
115. M',
altced haa. allced luncheon eeat etc.
rln*. aaoklne, and
pfoaleaa Involved
re than once on
lie Int.
in ad )u a tin*
Kiat Inap«ciioa Dlvleloa, Anltal and Plant Hialth Inspection Service.
-------
SELECTED REFERENCES
-------
SELECTED REFERENCES
(1) DPRA "Initial Analysis of the Economic Impact of Water
Pollution Control Costs Upon the Meat Industry," completed for
the U. S. Environmental Protection Agency, Contract No.
69 01 0766, November 1972
(2) U. S. Environmental Protection Agency "Economic Analysis of
Proposed Effluent Guidelines on the Meat Processing Industry," com-
pleted by Development Planning & Research Associates, Manhattan,
Kansas, 1973
(3) Select Committee on Small Business, United States Senate "The
Effects of the Wholesome Meat Act of 1967 Upon Small Business,"
U. S. Government Printing Office, Washington, D. C., 1971
(4) National Commission on Food Marketing "Organization and Com-
petition in the Livestock and Meat Industry, " U. S. Government
Printing Office, 1966
(5) Walter A. Fogel "The Negro in the Meat Industry, Report No. 12,"
The Racial Policies of American Industry, Published by Industrial
Research, Dept. of Industry, Wharton School of Finance and
Commerce, University of Penn., 1970
(6) American Meat Institute "Financial Facts About the Meat Packing
Industry," 1972 and earlier. Published annually by the Dept. of
Marketing, American Meat Institute, 50 E. Van Buren Street,
Chicago, Illinois
(7) Robert Morris Associates, Annual Statement Studies, Philadelphia,
Pa., 1973 "~ '
(8) Troy's Almanac of Business and Industrial Financial Policies,
1973 Edition ~ ~~
(9) Development Document for Effluent Limitations Guidelines and
Standards of Performance, Meat Processing Industry, prepared by
North Star Research Institute for U. S. Environmental Protection
Agency, January 1974
(10) Richard Crom and Lawrence Duewer, "Effects of Alternative Mar-
keting Margins for Beef and Pork, " Agricultural Economic Report
No. 243, U. S. Dept. of Agriculture, Economic. Research Service,
Washington, D. C. , August 1973
-------
SELECTED REFERENCES (continued)
(11) Donald J. Wissman, "The Feasibility of Manufacturing and
Marketing Sausage Products in the Washington, D. C. Area,"
completed for the Economic Development Administration, U. S.
Dept. of Commerce by Agri Division, Dunlap and Associates,
Manhattan, Kansas, 1970
(12) P. S. George and C. A. King, "Consumer Demand for Food Com-
modities in the United States with Projections for 1980," Giannini
Foundation Monograph Number 26, University of California,
March 1971
(13) U.J. D. C. Census of Manufactures, 1967 and earlier, Bureau of
Census, U. S. Government Printing Office, Washington, D. C.,
1971
(14) U. S. D. C. Preliminary Report, 1972 Census of Manufactures
Industry Service, Meatpacking Plants; Sausages, and other
Prepared Meats, Bureau of Census, U. S. Government Printing
Office, Washington, D. C. , 1974
(15) U. S. D. C. Annual Survey of Manufactures, 1972 and Earlier,
Bureau of the Census, U. S. Government Printing Office,
Washington, D. C., 1974
*U.S. GOVERNMENT PRINTING OFFICE:1974 584-413/7Z 1-3
------- |