Final Report
The Economic Impact of the Cost of Meeting
Federal Water Quality Standards on the
Wines and Distilled Spirits Industries
ENVIRONMENTAL PROTECTION AGENCY
Washington, D. C.
This report is of a proprietary nature and intended solely
for the information of the client to whom it is addressed.
January 5, 1973

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-51
INITIAL ANALYSIS OF THE ECONOMIC IMPACT
OF WATER POLLUTION CONTROL COSTS UPON
THE WINE AND DISTILLED SPIRITS INDUSTRIES
The study is one of a series commissioned by the Environ-
mental Protection Agency to provide an initial assessment of the
economic impact of water pollution control costs upon industry,
and to provide a framework for future industrial analysis.
For the purpose of this initial analysis, the water pollution
control requirements were assumed to be those developed in 1972
as effluent limitation guidance by the EPA Office of Permit Pro-
grams. Costs were developed by the EPA Economic Analysis
Division on the basis of treatment technologies assumed necessary
to meet the effluent limitation guidance.
Because of the limitations of time and information avail-
able, these studies are not to be considered definitive. They
were intended to provide an indication of the kinds of impacts to
be expected, and to highlight possible problem areas.
This document is a preliminary draft. It has not been
formally released by EPA and should not at this stage be con-
strued to represent Agency policy. It is being circulated for
comment on its technical accuracy and policy implications.
PROPERTY OF
ENVIRONMENTAL PROTECTION AGENCY
II3UARY RESIGN X
1200 SIXTH AVENDE
SEATTLE, WASH. 301 Oli

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BOOZ . ALLEN PUBLIC ADMINISTRATION SERVICES, Inc. 1025 Connecticut Avenue, N.W.
Washington D C 20036
(202) 293-3600
January 5, 1973
Mr. Lyman Clark
Environmental Protection Agency
Waterside Mall
Room 3234-A
401 M Street, S.W.
Washington, D.C.
Subject: Study of The Economic Impact of The Cost of Meeting Federal
Water Quality Standards on The Wines & Spirits Industries
Dear Mr. Clark:
We are pleased to submit our final report on the Wines and Spirits
Industries. The report is divided into two parts as follows:
Part A--Wine Industry
Part B--Distilled Spirits Industry
In addition, there are two appendixes included in this submission.
They offer general descriptions that should acquaint a reader with each
industry such that he can better appreciate the report itself.
Very truly yours,
a subsidiary of BOOZ • ALLEN & HAMILTON Inc

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PART A
THE WINE INDUSTRY

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TABLE OF CONTENTS
Page
Number
LETTER OF TRANSMITTAL
I. INDUSTRY SEGMENTS	1
II.	PRICE EFFECTS	4
III.	FINANCIAL PROFILES	8
IV.	POLLUTION CONTROL REQUIREMENTS	12
V.	IMPACT ANALYSIS	15
VI.	LIMITS OF THE ANALYSIS	17

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INDEX OF EXHIBITS
Following
Page
I. PRICE PROGRESSION FOR WINES PER GALLON
II. POTENTIAL WINE PRICE INCREASES TO
COVER WATER POLLUTION ABATEMENT
ANNUAL COSTS
III. PRICE INCREASE TO COVER POLLUTION
ABATEMENT COST OF BRANDY AND
DISTILLED WINE PRODUCERS
IV. ESTIMATED PRODUCTION COSTS FOR ONE
GALLON TABLE WINE
V. ESTIMATED PRODUCTION COSTS FOR ONE
GALLON FORTIFIED WINE	10
VI. ESTIMATED PRODUCTION COSTS FOR
BEVERAGE BRANDY	10
VII. STANDARD WASTES AND PRODUCTION
LEVELS BY INDUSTRY SEGMENTS	12
VIII.
COSTS OF TREATMENT ALTERNATIVES
FOR WINERIES
13

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I. INDUSTRY SEGMENTS

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I. INDUSTRY SEGMENTS
The wine industry can be classified by segment in several
ways. Segment classifications used in this study are as follows:
Geographical segmentation
Western wineries--primarily in California
Eastern wineries --primarily in New York
State
Western wineries differ from Eastern
wineries in:
Types of grapes used
Water usage rates
Types of wines produced
Waste disposal methods available
Product segmentation
Table wines both still and sparkling (and
for the purpose of this study including both
grape wines and the small but growing
production of fruit wine)
Distilled wines including brandy and
fortified dessert wines such as port,
vermouth, and sherry
Finally, the wine industry is divided according to the size
of the winery. Adjustments were made to data supplied by EPA to
reflect the longer crushing period that appears to be standard for
the industry: 60 days for wines; 90 days for brandy rather than
the 30 days suggested by EPA. The following table displays the
quantities of crushing capacity used to segment the wine industry
into three size categories.
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Daily Average
Crushing Capacity
	(tons)	
Annual Average
Production Capacity*
	(gallons)	
Winery
Size
Table/Fortified Brandy
Wine
Small
Medium
Large
200
600
1, 000
80,000 29,023
240, 000 87,069
400,000 145,116
1. THE TYPICAL U. S. WINERY IS LOCATED IN CALIFORNIA,
PRODUCES TABLE WINES AND IS SMALL
U. S. wineries are geographically concentrated in California where
240 or 56 percent of the nation's 437 wineries are located. Another 38
are in New York State.
With rare exceptions, all wineries produce table wines; approximately
45 percent bottle distilled wines, but only 66 distill brandy. The wastes
peculiar to distilled wines are produced at the winery where grapes c.re
distilled for brandy. Often brandy purchased from one winery is used in
another winery to fortify wine. Thus, all distilled wine bottled by New York
State wineries contains California brandy. Most of the wineries that distill
brandy also produce table wine making it difficult to classify a particular
winery by type of wine.
Of the 437 wineries, 39 are large, another 40 are medium-sized;
the rest are small. Though many of the small wineries are privately owned;
some of them are controlled by large firms which deliberately keep them
small for marketing (prestige) reasons. The large wineries account for
most of the wine produced; for instance, Gallo in its four large wineries
produces one-third of all the wine consumed in the United States.
Assuming, in the case of table and fortified wines, 10 pounds of
grapes crushed for each gallon of wine produced; in the case of
brandy, 43 pounds of grapes crushed for each proof gallon brandy
produced.
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2. SMALL WINERIES MAY HAVE DIFFICULTY RAISING CAPITAL
FOR WATER TREATMENT SYSTEMS
Many wineries are small regardless of location or product. Some
of these wineries have difficulty raising capital to invest in a water pol-
lution control system, especially if the least expensive control alterna-
tives are not available and not an option open to them.
The small winery can be compared with a small local business. It
is often a family operation with unsophisticated recordkeeping techniques
producing a product that is locally or regionally distributed. If required
capital is not availabe from the market it can be expected that such wineries
could become acquisition targets for larger firms. It is highly unlikely that
any such wineries will be allowed to stand idle. Wine production is far too
profitable for this to occur.
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II. PRICE EFFECTS

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II. PRICE EFFECTS
1. THE RETAIL PRICE CLASS OF WINE FOR OFF-PREMISES
CONSUMPTION IS ESTABLISHED BY THE BRAND OWNER
The brand owner selects the price class when it establishes
the price (F.O.B.) to wholesalers and to monopoly states. Based
on knowledge of freight charges, state taxes, local taxes, if any,
and markup, the brand owner can calculate the approximate retail
price of the brand. The price progression used for a typical low-
priced table wine in New York State is shown on Exhibit I, follow-
ing this page.
The price progression shown is typical of that for an open
state with freight a large variable. In this connection, the cost of
shipping wine to the large eastern markets from California approxi-
mates the cost of shipping it from Europe. The state tax per gallon
varies from California's low of $.01 to $1.10 in Tennessee. Im-
ported wine is usually shipped already bottled, labeled, and cased.
The importer must figure the same price progression as the
winery, with the addition of the customs duty--37. 5 cents per
gallon. The importer is often his own wholesaler as are the
California wineries within their own high consumption state.
Ranges of taxes applicable to wines are shown below:
Wine
Type
Excise
Tax
Fortified $ .67
Sparkling
Carbonated
(17% or
more)
Table
3. 40
2. 40
. 17
New York
Tax
$ . 10
. 53
.26
. 10
Open States
Taxes
20 - 3.08
20 -
10 -
3. 08
1. 50
Duty
$ .02 - $2. 50 $ .21 - $1.00
1.17
1.17
.375 - .625
The price progression in control states is simpler. The state
board (Liquor Commission) buys directly or through brokers from
vintners and importers, adds freight charges, adds the markup
(the markup formula often is a percentage plus a flat amount per
bottle) and sells retail.
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EXHIBIT I
Environmental Protection Agency
PRICE PROGRESSION FOR
WINES PER GALLON
Winery Cost^/	$0. 87
Winery Markup	1.11
Advertising^/	0. 09
Bottling and Packaging.!^	0. 43
Federal Excise Tax	0. 17
F. O. B. Price	2. 67
Freight^	0.30
New York State Tax	0. 10
Wholesaler's Cost	3.07
Wholesaler's Markup (25%)^^	.77
Retailer's Cost	3.84
Retailer's Markup (50%)^/	1. 92
Retail Price (rounded)
per gallon	5. 80
per bottle, i.e., fifth	1.20
a/Assumes winery is large California plant
b/Average, 1971
cl Estimated
d/Range 5% to 45%
e/Range 34% to 50%

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The control states buy wine and spirits at the vendor's lowest
price. Producers and importers are bound by each state to an agree-
ment which provides that no vendor may sell a listed brand to any cus-
tomer in the United States at a price lower than that to the state. The
agreement is called in the trade, the Des Moines Warranty. Each
control state purchase order states: "In accepting this order we
warrant that the price charged is the lowest tax paid price F. O. B.
offered any purchaser for the same merchandise. " Thus, each of
the 18 states pays the same price and that price is usually lower
than to open state buyers. In this way a margin is created in open
states for timely "specials", i. e., vendor discounts to wholesalers.
Without this margin, prices to control states would automatically
drop whenever a vendor discounted to wholesalers in open states.
Some trade sources believe that the large volume states may "revolt"
and overthrow the Des Moines Warranty system. In fact,
Pennsylvania has initiated suit to do this.
The retail markup for on-premises consumption of wine is high
to cover tavern or restaurant operating expenses. A typical bottle of
table wine which retails for $1. 95 would cost the retailer $1. 30 and
would be sold for on-premise consumption for $4 or more.
Wine prices have been rather erratic but rising for the past 15
years. For example, California Clarets and Burgundies are up 42%,
while New York State Clarets and Burgundies are up 24% and some
prices have nearly doubled.
2. IN SELECTED INSTANCES TABLE WINE PRICES MAY
INCREASE BY AS MUCH AS 22 PERCENT TO COVER
WATER POLLUTION ABATEMENT COSTS
Exhibit II, following this page, shows estimated price
increases for an average bottle of table wine to cover water pollu-
tion abatement costs. Price increases shown reflect the assumption
that winery cost increases will be marked up by wholesalers and
retailers. The highest cost pollution control alternative (Alternative
E) has not been considered in detail as it permits achievement of
standards which exceed ELG* guidelines.
As indicated in Exhibit II, small wineries could be required
to pass on a total price increase of 22 percent to fully cover pollu-
tion abatement costs under control Alternative D. Interviews with
^Effluent Limitation Guidance (1972)--prepared by the Office of
Permit Programs, EPA.
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senior marketing executives indicate that the market could absorb
a price increase for table wines of this magnitude. The factors
leading to this conclusion are as follows:
Overall demand for wine is considered to be
highly inelastic to price. Elasticities do exist,
however, between price classes.
A price increase of 22 percent or $0. 26 for a
bottle of wine retailing at $1.20 does not change
the price class of the wine. It is estimated that
a price increase of $0. 50 - $0.55 would be re-
quired for a price class change.
Protection from substitution within the price
class is provided by consumer brand preference
which should not be seriously jeopardized by a
$0.26 price increase.
In the event that a price increase did move a given
wine into the next higher price class, marketing
executives contacted felt that a reorientation of
the brand image through advertising would pro-
tect sales in the current strong wine market.
In addition to the demand factors outlined above, the evidence
is strong that wine producers could absorb some cost increases
without passing them on. Using production cost figures contained
in Chapter III, it is estimated that small winery after tax profit mar-
gins may be as high as 20 percent of sales. If a high cost small
winery were to pass on only one-half of pollution abatement costs of
$0. 70 per gallon in the form of price increases, profit margins
would be reduced to approximately 13 percent of sales, which is
significantly higher than for U. S. industry as a whole.
3. PRICE INCREASES TO COVER POLLUTION ABATEMENT
COSTS FOR DISTILLED WINES COULD BE AS HIGH AS
20 PERCENT
Exhibit III, following this page, shows estimated price increases
required to cover water pollution abatement costs for producers of
brandies and distilled wines.
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Price increases for brandies of up to 5. 3 percent (Alternative D)
to cover pollution abatement costs and markups should be readily-
absorbed by the market without significantly affecting consumer de-
mand or brand preference.
The situation for distilled wines with required price increases
for a high cost producer of about 20 percent parallels that described
for table wines. Demand inelasticities and consumer brand prefer-
ences should allow market absorption of such a price increase.

The following chapter presents industry financial profiles.
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FINANCIAL PROFILES

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III. FINANCIAL PROFILES
This chapter presents the costs of producing and bottling
wine by segment, i.e.', small, medium, and large producers.
While every attempt has been made to identify clearly all assump-
tions and suppositions made in assembling these cost data, the
chapter is best understood after having read Chapters I and II and
the Appendix which give a general overall description of the
industry.
In addition, the chapter contains little data on such items as
are typically contained in a financial profile, including:
Annual profits before taxes
Annual cash flow
Market (salvage) value of assets
These data were not available on a plant-by-plant basis for the
industry and not meaningfully available on even a firmwide basis.
An estimated cash flow for table wine wineries has been included,
however, to illustrate the methodology of estimating cash flows
and because data on table wine markup were available and thought
to be reasonably reliable.
Major producers operate several plants of varying size.
Most wineries are either privately held or a part of a larger corpo-
ration which consolidates its winery(ies) operation into its financial
st atements.
In the few instances where individual plant data are available,
it appears to be unwise to generalize from the data. However, it
is known, and can be seen from the cost estimates shown in this
chapter, that profits in the wine industry appear to be higher than
the average of all U. S. industries.
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1. PRODUCTION COSTS FOR TABLE WINES RANGE FROM
$1. 34 TO $1. 68 PER GALLON
Estimated table wine production costs for small, medium,
and large wineries are presented in Exhibit IV, following this
page. These estimates are based on the following:
Cost of grapes is based on average price per ton
of $83. 80 for Western wineries and $125 for
Eastern wineries with a yield of 200 gallons of
wine per ton. Grape prices are based on 1971
California average prices and 1971 New York
concord grape prices
Labor costs reflect estimated average hourly wages
of $3. 97 for winery workers with an additional 20%
for fringe benefits spread over a 2, 064 hour work-
ing year. Labor costs per gallon of output are
based on average output per production worker of
41, 962 gallons reflecting 1970 wine industry out-
put and employment levels. Productivity in small
wineries is assumed to be approximately 8% lower
than average and in large wineries 9% higher than
average.
Depreciation estimates are based on capital in-
vestment requirements of $3. 00 per gallon of
annual wine capacity depreciated over 2 0 years
straight line.
Overhead and utilities costs (operating costs)
are assumed to be approximately equal to such
costs per proof gallon of distilled spirits (see
Part B).
Average estimated bottling costs at $0. 50 per
gallon are based on information obtained during
interviews with industry sources. The range
of cost per gallon from small to large wineries
is assumed to be $0.06 per bottle ($0. 47-$0. 53)
reflecting economics available in volume bottle
purchases and captive production.
Exhibit IV (2), following Exhibit IV (1), displays an esti-
mated cash flow for production of a low-priced table wine.
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EXHIBIT IV (1)
Environmental Protection Agency
ESTIMATED PRODUCTION COSTS FOR
ONE GALLON TABLE WINE
Plant
ItemX^Size	Small	Medium	Large
Western Wineries
Grapes
$0.
42
$0.
42
$0.
42
Labor a/
0.
25
0.
23
0.
21
Depreciation
0.
15
0.
15
0.
15
Operating Costs
0.
12
0.
11
0.
09
Bottling
0.
53
0.
50
0.
47
Total Costs
$1.
47
$1.
41
$1.
34
Eastern Wineries
Grapes
$0.
63
$0.
63
$0.
63
Labor a/
0.
25
0.
23
0.
21
Depreciation
0.
15
0.
15
0.
15
Operating Costs
0.
12
0.
11
0.
09
Bottling
0.
53
0.
50
0.
47
Total Costs
$1.
68
$1.
62
$1.
55
a/ Includes all production labor: crushing, fermenting, warehousing
and bottling.

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EXHIBIT IV (2)
Environmental Protection Agency
ESTIMATED CASH FLOW FOR WINERIES
PRODUCING TABLE WINE
Small	Medium	Large
W ine ry	Winery	Winery
Winery Markup*	$0.98	$1.04	$1.11
on Cost (Pre-Tax
Profit/Gallon)
After-Tax Profit
(50%)	$0.49	$0.52	$0,555
Depreciation	0.15	0. 15	0. 150
Cash Flow/Gallon	$0.64	$0.67	$0,705
Annual Capacity
(Gallons)	80,000	240,000	400,000
Annual Cash Flow** $51,200	$160,800	$282,000
* Assumes markup for small and medium wineries equals large
winery markup (Exhibit 1) less production cost differential from
large wineries (Exhibit IV (1)).
**Annual cash flow assumes the total winery production is in table
wines. In reality, most wineries produce a mix of table wines
and fortified. Many also produce brandy.

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2.	PRODUCTION COSTS FOR FORTIFIED WINES RANGE
FROM $1. 14 TO $1. 30 PER GALLON
Estimated fortified wine production costs for small, medium,
and large wineries are presented in Exhibit V, following this page.
These estimates are based on the following:
Grape costs, according to industry sources,
account for 20% of production costs. Grape costs
are low because the cheapest grapes are used in
making fortified wine--a product largely produced
for the "proof-per-penny market.
Other production costs are assumed to be equal
to those for table wine production.
3.	PRODUCTION COSTS FOR BRANDY RANGE FROM $6. 04
TO $9.41 PER 80 PROOF GALLON
Estimated production costs for beverage brandy are shown in
Exhibit VI, following Exhibit V. Estimates are based on the
following assumptions:
The cost of grapes is based on 1970-71 average
California prices for Grenach, Mission, and
Thompson grapes, at $400, $72, and $54 per ton
respectively. Brandy is assumed to be a blend
of equal parts of these three grapes with a yield
of 47 proof gallons per ton.
Labor costs are based on average hourly wages
in the wine industry, as stated above. Accord-
ing to industry sources, 9 men are needed to
operate a brandy distillery regardless of its
size, with an additional force (10 in a small plant,
15 in a medium, and 20 in a large one) for bot-
tling and warehousing during a 90-day peak pro-
duction period.
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EXHIBIT V
Environmental Protection Agency
ESTIMATED PRODUCTION COSTS FOR ONE
GALLON FORTIFIED WINE
Plant
Item \ Size
Small
Medium
Large
Grapes
$0. 25
$0.
25
$0. 25
Labor a /
0. 25
0.
23
0. 21
Depreciation
0. 15
0.
15
0. 15
Operating Costs
0. 12
0.
11
0. 09
Bottling
0. 53
0.
50
0. 47
Total
$1. 30
$1.
24
$1. 14
a/Including distilling, warehousing, and bottling costs (See
distilling, warehousing and bottling.

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EXHIBIT VI
Environmental Protection Agency
ESTIMATED PRODUCTION COSTS
FOR BEVERAGE BRANDY
Plant
Item\ Size
Small
Medium
Large
Grapes
$3.
72
$3. 72
$3. 72
Labor
4.
28
1. 56
1. 01
Depreciation a/
0.
27
0.27
0.27
Operating Costs a/
0.
18
0. 16
0. 13
Cooperate
0.
52
0. 52
0. 52
Insurance
0.
01
0. 01
0.01
Bottling Supplies
0.
43
0. 40
0. 38
Distilling Costs/proof gallon
9.
41
6. 64
6. 04
Evaporation and Soakage
+2.
35
+ 1. 66
+1. 51
Adjusted Distilling Costs/




per 100 proof gallon
11.
76
9. 30
7. 55
per 80 proof gallon
9.
41
7.44
6. 04
a/including distilling, warehousing and bottling costs. See
~ Exhibits VIII and IX.

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Brandy production resembles bourbon produc-
tion, therefore, operating, insurance, and de -
preciation costs and evaporation/soakage losses
are assumed to be the same as those for bourbon
described in Part B, Chapter III.
Cooperage costs are based on a cost of $25 for
a new oaken barrel with a 48-gallon capacity.
4. WINERY (PLANT) SALVAGE VALUE IS DIFFICULT TO
ESTIMATE
The value of a winery rests more in its goodwill (brand
name ownership, quality reputation, and profitability of operation
and/or ownership of vineyards) than in its physical plant. As
such, salvage of wineries, as physical plants, is estimated to be
slight. As mentioned previously in this chapter, industry sources
indicate that plant investment is about $3.00 per gallon of annual
output. In other words, a new, small (80,000 annual gallon)
plant would require an investment of $240,000. The wineries most
likely to be sold for salvage are older, less efficient, well or
fully depreciated plants. The salvage value of a winery without
associated goodwill and/or vineyard land is moot.
The following chapter discusses pollution control require-
ments and costs.
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POLLUTION CONTROL REQUIREMENTS

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IV. POLLUTION CONTROL REQUIREMENTS
The assessment of economic impact is based on EPA estimates
of standard crushing capacity and standard raw waste load for each
segment of the wine industry and on EPA cost estimates for water
treatment alternatives. In order to develop a cost of water pollution
control per unit output, it was necessary to estimate annual out-
put for each segment of the industry. The estimates of annual
output for wines used in the study are based on a 60-day crushing
season in the case of table and distilled wines and a 90-day crushing
season in the case of brandies.
Cost estimates supplied by EPA are based on a 1971 study
conducted by the Associated Water and Air Resources Engineers
(AWARE), Inc. of Nashville, Tennessee: "industrial Waste Sur-
vey of the Wine Industry. " Raw data on which AWARE's reports
were based were not available. From AWARE's report, it is
evident that small samples were used to describe the industry as
a whole (only three wineries in the case of suspended solids).
Even if such limited samples represent a major portion of production,
the data obtained has obvious limitation, especially when used to
describe segments within the industry, i. e. , small, medium, and
large plants.
The information on the treatment alternatives available to the
industries is also limited to that provided by EPA. However, in
the course of the research, industry sources indicated that most
plants have some water treatment system in operation. While
existing systems may not meet ELG* standards, it is possible
that they can be improved to meet EPA guidelines at a cost per
plant less than EPA's estimates. The technology—and thus the
costs--of water pollution control is changing rapidly. For in-
stance, Taylor's Winery uses a new chilling-refrigeration system,
unlike any of those described in EPA alternatives, which significantly
reduces the volume of water required per gallon wine produced.
Standard raw waste loads, production capacity, and Bio-
logical Oxygen Demand (BOD) load for small, medium, and large
wineries are summarized in Exhibit VII, following this page.
These data have been used as given.
^Effluent Limitation Guidance (1972)--prepared by Office of Permit
Programs, EPA.
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1. COST ESTIMATES REFLECT APPLICATION OF STANDARDS
CONTAINED IN ELG GUIDELINES
Wineries are assumed to be required to meet ELG guidelines
during the peak operating periods. This assumption is contrary to
the understanding among some segments of the industry that stand-
ards refer to annual averages. If this were the case, a plant which
does not meet standards during the peak season could stop polluting
the water all together for a few weeks per year by shutting down; on
average, they would meet ELG standards and a costly treatment
system for the peak season effluents would be unnecessary.
2. FOUR OF THE SEVEN TREATMENT ALTERNATIVES
OUTLINED BY EPA MEET ELG GUIDELINES
The costs of these alternatives are shown in Exhibit VIII,
following this page. These alternatives were supplied by EPA
and include:
Alternative "D"--85% of cooling water is segre-
gated and waste water is screened. Activated
sludge digestion is used. BOD effluent would
be approximately: 0. 15 pounds per ton for table
wines; 0. 23 pounds per ton for distilled wines
including regular and stillage wastes.
Alternative "E"--85% of cooling water is segre-
gated and waste water is screened. Activated
sludge and sand filtration are used. BOD effluent
would be approximately: 0. 1 pound per ton for
table wines; 0. 11 pound per ton for distilled wines,
including regular and stillage wastes.
Alternative "F"--85% of cooling water is segre-
gated. Wasted water is screened, equalized and
discharged to municipal systems. Cost includes
assumed municipal surcharge of $0.20 per 1,000
gallons and $0. 03 per pound of BOD. BOD efflu-
ent is zero.
Alternative "G"--85% of cooling water is segre-
gated and disposed of in streams or irrigation
systems; waste water is screened; and land
disposal is used. BOD effluent is zero.
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While the initial investment cost of Alternative "F" is, in
all cases, the least of the four alternatives, EPA estimates that
that the annual operating and maintenance costs of that system are
high relative to the total capital investment—even exceeding that
investment in the case of large distilled wine plants. Furthermore,
EPA has recently suggested pretreatment at the plant may be
necessary to meet ELG standards, using Alternative F . Using
the least expensive system, EPA estimates the annual cost per
plant would increase $18, 000 to $64, 000, depending on the size and
type of the plant.
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V. IMPACT ANALYSIS

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V. IMPACT ANALYSIS
1. WATER POLLUTION ABATEMENT REQUIREMENTS
SHOULD CAUSE LITTLE ECONOMIC DISRUPTION IN THE
WINE INDUSTRY
As indicated in Chapter II, while the incremental costs of
water pollution abatement may lead to retail price increases of
20 percent or more for small wineries, the nature of the consumer
market for wine should make it possible to obtain such price in-
creases without serious impact on product sales.
The capital investment required in wineries for water pollu-
tion abatement, however, is very large in relation to total winery
investment. Industry sources indicate that average capital invest-
ment in plant and equipment per annual gallon of wine capacity is
approximately $3.00. Capital investment in water pollution abate-
ment equipment for a small winery may run as high as $2. 88
(Alternative D) per annual gallon of wine capacity, equal to 96
percent of basic winery investment. This accounts in large
measure for the high annual cost of pollution abatement. Because
capital requirements may be so large, it is possible that small
independent producers will be unable to raise the required funds.
In such cases it can be expected that these producers will become
targets for acquisition by large financially entrenched firms. The
wine industry is too profitable and rapid growing to expect that
wineries will be allowed to stand idle for lack of capital.
2. SPECIFIC IMPACTS SHOULD BE MINIMAL OR
NONEXISTENT WITH THE POSSIBLE EXCEPTION OF
BALANCE OF PAYMENTS
As reflected in the above comments, specific economic im-
pacts on employment and suppliers should be virtually unnoticeable.
The consumer will be affected, of course, in that he will have to
pay a higher price for wine. As indicated in Chapter II, however,
such prices should be well within the tolerance of consumer.
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3. WINE IMPORT LEVELS DEPEND ON SEVERAL FACTORS
NOT NECESSARILY RELATED TO PRICE
At the present time, imported wine accounts for about 13
percent of domestic wine consumption. Import market share is
expected to increase to 20 percent of apparent consumption over
the next several years, primarily due to:
Rapidly expanding demand for wine is exceeding
domestic production capacity. This gap is
expected to widen somewhat over the next
several years.
Imported wines are competitive with domestic
wines on the East Coast across most price
classes. Wines produced and marketed on the
West Coast have a very significant transportation
cost advantage which is large enough to protect
them from imports.
Within a given price class imported wines compete with
domestic wines on the basis of consumer brand preference which
is a function of relative prestige (a relative advantage for
European, especially French wines) and taste. Price increases
for domestic wines of the magnitude indicated in Chapter II
should not significantly alter existing consumer preferences for
reasons similar to those detailed in prior discussions of domestic
price-demand relationships. It should also be noted that cost/
price increases for imported wines are a possibility as pollution
abatement requirements are imposed in exporting countries.
Because of strong demand, then, import market shares
should increase over time. However, price increases related
to pollution abatement should not be a significant causative factor.
The following chapter discusses study limitations.
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LIMITS OF THE ANALYSIS

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VI. LIMITS OF THE ANALYSIS
The analysis of the economic impact of the cost of water
pollution controls on the wine industry is as comprehensive as
possible within the limits imposed by time, available level of
effort, and accessible data.
1. CONCLUSIONS DEPEND ON CONTINUED WINE INDUSTRY
PROSPERITY
The conclusion that the wine industry will be able to meet
water pollution abatement requirements without significant economic
displacement depends on a continuing strong consumer demand for
wines. As indicated in previous chapters and the Appendix, the
probability of continued demand growth for wine is high. In addi-
tion, the industry is dependent on continued large crops of grapes.
Massive crop failure and/or destruction of vineyards would, of
course, destroy the prosperity of the industry.
2. ESTIMATES OF WATER POLLUTION ABATEMENT COSTS
PER BOTTLE OF WINE MAY BE HIGH
Output of small, medium and large wineries may be greater
than indicated in data supplied by EPA. A comparison of known
domestic wine production with production computed using EPA capa-
city estimates for wineries of each size indicates that overall capacity
may be underestimated, even allowing for the production of industry
grants which are not typical of large wineries. This variance could
lie in the length of the crushing season assumed, the diversity of
products produced in a single winery or in the accuracy of available
statistics or the number and size of producing wineries. In addition
the use of grape concentrate, which is not accurately reported, could
increase actual winery production beyond that indicated by crushing
capacity or crushing season length.
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3. DATA SUPPLIED BY EPA HAVE BEEN ASSUMED TO
BE ACCURATE
Water pollution abatement cost estimates supplied by EPA
have been assumed to be accurate. Possible sources of inaccuracy,
other than that discussed above, are as follows:
Possible inaccuracy in the costs of treatment
alternatives for a specific winery type. As
indicated in Chapter IV, cost estimates are based
on a very limited sample size.
Possible omission of treatment alternatives
presently technologically possible, such as use
of production processes which significantly reduce
water needs.
Evaluation of the above factors requires additional research
which is beyond the scope of this study.
4. WINE PRODUCTION COST ESTIMATES IN CHAPTER HI,
SHOULD BE USED WITH CAUTION
The production cost estimates for small, medium and large
wineries were prepared on the basis of very limited data at the
specific request of EPA. While these estimates probably represent
the best that can be done without direct access to producer supplied
figures it should be noted that the existence of cost factors not
considered in the estimates shown is likely. Accordingly, these
estimates should not be interpreted as definitive and significant
variances in actual costs are possible in specific cases.
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5. SEVERAL QUESTIONS REMAIN UNANSWERED
In order to improve on the accuracy of the analysis and
provide a more complete picture of the wine industry, attention
should be given to conducting a more complete survey of wineries
to establish a better picture of:
Winery production capacities and output
Water pollution control measures currently in
effect
Winery capital investment and production costs (if
producers are willing to provide such data)
Winery BOD loadings
Available water treatment alternatives and costs
Additional questions which remain unanswered are as follows:
Some wineries have indicated a problem in the
cost of providing the laboratory and the technical
staff necessary to monitor a water pollution con-
trol system. For a small winery, this problem is
especially critical and the cost of contracting with
outside laboratories appears prohibitive. What are
the real costs of this problem and what options are
available ?
To date, there has been no objection to the land dis-
posal techniques used by the California wine indus-
try. But community awareness of pollution prob-
lems is growing; populations are expanding into the
countryside where they are affected by the order of
land disposals; the number of wineries is growing
and, thus, increasing the volume of waste products
to be disposed. It has been suggested that local
authorities access to a sewage system or prohibiting
land disposal and disposal and dispersal into streams
and irrigation systems. Is this a possibility? What
will be the consequences?
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The firm is a more important unit than the plant
in the economic decisions of this industry. How
many firms are involved in the nation's 437
wineries? This question is difficult as most
firms are privately held.
In wineries producing brandy and wine, what
percent of the grapes crushed are used for each
product ?
What role does grape juice concentrate play in
the production process of a winery? How does
its use affect the processing season ? The costs
of wine ? Does the water pollution caused in
making of grape concentrate cause a significant
portion of the wine industry's water pollution
even though the pollution associated with grape
concentrate may occur at a nonwinery?
EPA assumes no cost of thermal water pollution
in wine making. Is this a valid assumption?
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PART B
THE DISTILLED SPIRITS INDUSTRY

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TABLE OF CONTENTS
Page
Number
EXECUTIVE SUMMARY	i
I. INDUSTRY SEGMENTS	1
II. PRICE EFFECTS	4
III.	FINANCIAL PROFILES	6
IV.	POLLUTION CONTROL REQUIREMENTS	l1
V. IMPACT ANALYSIS 13
VI. LIMITS OF THE ANALYSIS	15

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INDEX OF EXHIBITS
Following
Page
I. TYPICAL PRICE PROGRESSION FOR
DISTILLED SPIRITS PER CASE OF 12 FIFTHS	4
II. PRICE INCREASES REQUIRED TO COVER
WATER POLLUTION ABATEMENT COSTS
FOR BOURBON AND VODKA DISTILLERS	5
III. ESTIMATED DISTILLING COSTS FOR
BOURBON PER 80 PROOF GALLON	7
IV. ESTIMATED WAREHOUSING AND BOTTLING
COSTS FOR BOURBON PER 80 PROOF GALLON 8
V. ESTIMATED PRODUCTION COSTS FOR
BLENDED WHISKEYS	8
VI. ESTIMATED PRODUCTION COSTS FOR
NEUTRAL SPIRITS	8
VII. ESTIMATED PRODUCTION COSTS FOR GIN	8
VIII. ESTIMATED PRODUCTION COSTS FOR VODKA	9
IX. ESTIMATED CASH FLOW FOR SPIRITS	10

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INDEX OF EXHIBITS (Continued)
Following
Page
X. STANDARD WASTES AND PRODUCTION
LEVELS BY SIZE OF DISTILLERY	11
XI. COSTS OF TREATMENT ALTERNATIVES
FOR DISTILLERIES
11

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I. INDUSTRY SEGMENTS

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I. INDUSTRY SEGMENTS
For the purpose of this study, the EPA classification of
distilled spirits producers according to size was used:
Distillery
Size
Daily Average
Crushing Capacity
(bushels)
Daily Average
Production Capacity5''
(proof gallons)
Small
Medium
Large
2, 000
6, 000
20, 000
10, 182
30, 545
50,909
The products produced by this industry include:
Spirits distilled from grain including whiskey,
bourbon, gin, vodka, and rye
Spirits distilled from molasses and other sugar
cane products, i.e., rum
Spirits distilled from herbs, fruits, flowers, or
other real and imitation flavorings, i.e., cordials
and liqueurs
EPA does not classify distilleries by the type of products
distilled, but a classification along these lines would be helpful in
analyzing the effluents of particular distilleries for the following
reasons:
Rum distillery wastes are very different from
grain distillery wastes. The effluent is said to
resemble crude oil. Treatment alternatives for
grain spirits are not applicable.
^Assumes 56 pounds per bushel and 11 pounds of grain used per
proof gallon of spirits produced; 260 operating days per year.
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A few of the large distilleries concentrate on the
production of neutral spirits which are sold to
other plants for rectification and bottling.
Approximately a fifth of the distilleries authorized
to produce grain beverages also are authorized to
produce industrial alcohol. Baker's yeast is the
primary product of at least one authorized grain
beverage distillery. In such plants, wastes from
the production of industrial alcohol or yeast are
the primary sources of pollution in the effluent,
and water treatment systems would have to be
adopted to these specific wastes.
Thus, this report discusses primarily grain distilleries
which produce alcohol for human consumption.
1. THE TYPICAL U. S. DISTILLERY IS LOCATED IN
KENTUCKY, PRODUCES A GRAIN SPIRIT --USUALLY
BOURBON--AND IS SMALL BUT CONTROLLED BY A
LARGE FIRM
Kentucky is the site of over half the U.S. distilleries.
Bourbon distilled from corn and other grains is the primary
product. Of 72 distilleries in operation in the United States in-
cluding the Virgin Islands and Puerto Rico, eight distill both
grain and fruits. Plants distilling only fruit brandy are con-
sidered to be a segment of the wine industry and are discussed in
Part A. Only a few isolated rum distilleries are located in the
continental U.S. ; most are in Puerto Rico and the Virgin Islands.
The wastes from rum are very different from those of grain
spirits. Molasses, a by-product of the sugar industry, is the
raw product of rum production.
Of the 72 U.S. distilleries, 24 are large; 14 are medium-
sized; 34 are small. Fifty-five are owned or controlled by one
of the large firms in the industry. Four of these major firms:
Distillers' Corporation Seagrams, Schenley Industries, National
Distillers, and Hiram Walker, account for almost 80% of U.S.
production. Many of the small distilleries are owned by a large
firm; as in the case of wineries, the larger firm deliberately
keeps some of the distilleries it controls separate for marketing
(prestige) purposes.
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2. THERE IS NO SIGNIFICANT DIFFERENCE IN THE
ECONOMIC IMPACT OF WATER POLLUTION CONTROLS
AMONG THE VARIOUS SIZES OF DISTILLERIES
For most distilleries of all sizes, water pollution abatement
costs will not be a major problem. Most small distilleries are
owned by large firms and produce spirits that are distributed
nationally. Therefore; sources of capital for pollution abatement
equipment should not be a problem for small distilleries. Some
distilleries may be closed as the spirits industry continues to
consolidate. Water pollution abatement costs may be a factor--
but not the primary factor--in such closures.
The following chapter discusses price effects.
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II. PRICE EFFECTS

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II. PRICE EFFECTS
1. THE RETAIL PRICE OF DISTILLED SPIRITS IS
ESTABLISHED IN A MANNER SIMILAR TO THAT
FOR WINE
As is the case in wine, the distiller establishes the price
class of its brands through the price to wholesalers or state
liquor commissions. Exhibit I, following this page, shows the
price progression from distiller to consumer in New York for
blended and straight whiskeys. The initial price of blends is less
because neutral spirits require no aging. But traditionally, the
distillers' markup for blends is higher so the consumer's price
for blends and straights is about the same. In most locations the
progression of markups from distiller to retailer is well known
and in the past has tended to remain generally stable. There is
strong evidence, however, that retailer markup maintenance is
breaking down where regulations permit due to the growth of high
volume retail outlets and competition from wines. However,
New York State maintains a minimum resale price which is 12%
over retailer cost and California vigorously enforces Retail Fair
Trade Minimum prices. Thus, the distiller can 'control minimum
retail prices in these two states in addition to the monopoly states.
The Des Moines Warranty is effective in maintaining a
single low price F.O.B. to the control states. In the price progres-
sion detailed for a typical open state, New York, the F.O.B. price
for a typical blend and typical bourbon whiskey was $37. 54 per
case of fifths. The necessity for maintaining a margin for dealing
in the open states implies that the control states will buy for less
than $37. 54 at all times. Note that Pennsylvania, the largest
buyer of distilled spirits in the world, cannot bargain for a better
price than Idaho. The markup on delivered cost varies from
Mississippi's 17% to Oregon's 87. 5%. Most of the control states
add various other charges (flat amounts or additional percentages
per bottle or case) to arrive at the per package selling price.
Prices for distilled spirits have risen only moderately
since 1955. An examination of the New York prices in 1955 and
1972 reveals an average increase of 25% in prices of typical
brands of 10 domestic distilled spirits.
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EXHIBIT I
Environmental Protection Agency
TYPICAL PRICE PROGRESSION FOR DISTILLED
SPIRITS PER CASE OF 12 FIFTHS
Proof
Whiskey.!!:^
Neutral Spirits^/
Warehousing
Rectification Tax
($0. 30 per proof
gallon)
Federal Excise Tax
($10. 50 per proof
Straight
Bourbon
80
$ 2. 13
0. 85
Blended a/
Whiskey Gin
80
$ 1. 44
0. 96
0. 30
0. 57
90
Vodka
80
$1. 17 b/ $ 1. 00 b/
gallon)
Bottling & Packaging.!^
20.
16
20.
16
22.
68
20.
16
1.
59
1.
59
1.
59
1.
59
Advertising c 1
1.
00
1.
00
1.
00
1.
00
Distiller's Total Cost
25.
73
25.
33
26.
44
23.
75
Distiller's Markup
11.
81
12.
21
5.
99
5.
68
F. O. B. Price
37.
54
37.
54
32.
43
29.
43
Freight d/
2.
00
2.
00
2.
00
2.
00
New York State Tax
2.
50
2.
50
2.
50
2.
50
Wholesaler's Cost
42.
04
42.
04
36.
93
33.
, 93
Wholesaler's Markup
(20%)	8. 40	8.40	7.38	6. 78
Retailer's Cost	50.44	50.44	44.31	40. 71
Retailer's Markup
(30%)	15.13	15.13	13.31	12.21
Retail Case Price	65. 57	65. 57	57. 60	52. 92
Retail Bottle Price	$5.55	$ 5.55	$4.80	$ 4.41
- Not Applicable
a/Blended whiskey is 35% straight whiskey; 65% neutral spirits;
we assume the straight whiskey is aged
b/Include cost of processing
c/1971 average
d /Estimated
el Assumes distillery is large plant
Source:

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Price stability in the market for distilled spirits has been
maintained by various economic and social changes. Domestic
whiskey prices have not been raised as much as they might have
been due to the strong competitive pressure from Scotch and
Canadian Whiskey and gin, rum, and vodka. The imported and
white whiskey brand owners were motivated to hold prices down
to solidify and enlarge their recent gains. High annual rates of
gain in apparent consumption of distilled spirits allowed all seg-
ments of the industry to absorb cost and tax increases and yet
remain profitable. Also, spirits prices have been held in check
by the growing preference for wine.
2. PRICE INCREASES REQUIRED TO COVER WATER
POLLUTION ABATEMENT COSTS OF DISTILLED
SPIRITS PRODUCERS SHOULD NOT EXCEED ONE
PERCENT
The estimated retail price increases required by bourbon
and vodka distillers to cover water pollution abatement costs in-
cluding provision for wholesalers' and retailers' markups, are
shown in Exhibit II, following this page.
The maximum estimated price increase required does not
exceed one percent. Price increases of this magnitude could be
passed on to consumers with no noticeable effect on sales.
The following chapter discusses the industry's financial
profile in terms of production costs.
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PAGE NOT
AVAILABLE
DIGITALLY

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FINANCIAL PROFILES

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III. FINANCIAL PROFILES
The chapter presents the estimated costs of producing and
bottling distilled spirits by segment, i.e., small, medium, and
large producers. While every attempt has been made to identify
clearly all assumptions and suppositions made in assembling
these.cost data, this chapter is best understood after having read
Chapters I and II and the Appendix which give a general description
of the industry.
Major producers operate several plants of varying size.
While four firms control almost 80 percent of the production (and
10 firms over 90 percent), the firms will not divulge any operating
data about the many plants they operate. In addition, the major
producers have diversified producing consolidated financial state-
ments which reveal nothing about individual plant operations.
In the few instances where individual plant data are available,
it appears to be unwise to generalize from the data. However, as
in the wine industry, profits in the spirit industry appear to be
higher than the average of all U.S. industries. It is known that the
distilled spirits industry has approximately two-thirds of its
assets in inventory; a six to seven years' supply of current annual
consumption. Since aging beyond four years is unnecessary for
product requirements and unwise due to cost implications, con-
ceivably a reduction in inventory would release capital for other
purposes.
The data used in this chapter have been gathered by the study
team from a variety of sources including Department of Labor
statistics, industry sources, and IRS industry taxation reports.
The study team then collated the various elements of production
cost estimates in the aggregate production cost estimates for the
several types of spirits displayed in the chapter.
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1. PRODUCTION COSTS FOR BOURBON RANGE FROM $1. 90
TO $2.09 PER 80 PROOF GALLON
Estimated bourbon production costs for small, medium, and
large distilleries are presented in Exhibit III, following this page.
These estimates are based on the following assumptions:
The cost of grain is based on the average 1970
prices for corn of $1. 47 per 56-pound bushel
and freight costs from Chicago to Louisville of
$0. 345 per hundred weight. Material inputs
consist of a mash of 75% corn, 25% barley, with
a yield of 182 proof gallons per ton.
Labor costs reflect 1970 average annual earnings
of U.S. distillery workers of $7, 683 with an ad-
ditional 20% for fringe benefits. Labor costs per
gallon of output are based on average output per
production worker of 11, 725 gallons, reflecting
1970 industry output and employment levels.
Based on information from industry sources, 20%
of labor is allocated to distilling, 35% to ware-
housing, and 45% to bottling.
Depreciation estimates are based on total capital
investment requirements of $0.27 per annual
proof gallon capacity depreciated over 20 years,
straight line. Overhead and utility costs (opera-
ting costs) are estimated to be $0. 10 per
proof gallon. Operating costs are assumed to be
9% higher than average in small distilleries; 22%
lower than average in large distilleries.
Cooperage cost estimates are based on $25 per
57. 5 proof gallon barrel, for small and medium
distilleries, and $22 per barrel for large dis-
" tilleries which make their own barrels.
Distilling costs are adjusted for feed grain re-
covery at a profit of $0.17 per proof gallon.
This profit reflects an estimated cost of $0,017
per pound feed recovered, a recovery rate of
33%, and the 1972 FOB Atchison Kansas price
for distiller's feed grain (32% protein) of $0,065
per pound.
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EXHIBIT III
Environmental Protection Agency
ESTIMATED DISTILLING COSTS FOR BOURBON
PER 80 PROOF GALLON
Plaint
Item
Small	Medium	Large
Grain/proof gallon $0.33	$0.33	$0.33
Labor	0. 16	0. 16	0. 16
Depreciation	0. 12	0. 12	0. 12
Operating Costs	0. 12	0. 11	0.09
Cooperage	0.43	0.43	0. 38
Distilling Cost/
proof gallon	1.16	1.15	1.08
Distillers' Feed
Profit	-. 17	-. 17	-. 17
Evaporation &
Soakage Loss	+. 28	+.21	+. 20
Adjusted Distilling
Cost/proof gallon 1.27	1.19	1.11
Adjusted Distilling
Cost/80 proof
gallon	1.02	0.95	0.89
Warehousing &
Bottling a/	1.07	1.04	1.01
Total Production
Cost/80 proof
gallon	2.09	1.99	1.90
a/See Exhibit IV.

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Distilling costs are adjusted for a four-year
aging period during which 20% of the volume is
lost through evaporation and soakage.
Warehousing and bottling costs are outlined in
Exhibit IV, following this page.
2.	PRODUCTION COSTS FOR BLENDED WHISKEYS RANGE
FROM $1.74 TO $1.86 PER 80 PROOF GALLON
Estimated blended whiskey production costs are presented
in Exhibit V, following Exhibit IV. These estimates are based on
the following assumptions:
The product is blended from 35% bourbon and 65%
neutral spirits. Neutral spirits are made from
the least expensive grain of acceptable quality
available. Assumed costs are 10% less than those
for bourbon.
Other costs of neutral spirit production are pre-
sented on Exhibit VI, following Exhibit V. Such
costs are assumed to be similar to those of pro-
ducing bourbon.
Bourbon is assumed to be aged prior to rectifica-
tion. A rectification tax of $0.30 per proof gallon
is added.
3.	PRODUCTION COSTS FOR GIN RANGE FROM $1.15 TO $1.25
PER 90 PROOF GALLON
Estimated gin production costs are presented in Exhibit VII,
following Exhibit VI. These estimates are based upon the following
assumptions:
Neutral spirits production costs are those pre-
sented in Exhibit VI.
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EXHIBIT IV
Environmental Protection Agency
ESTIMATED WAREHOUSING AND BOTTLING
COSTS FOR BOURBON PER 80 PROOF GALLON
Item \ Plant Size	Small	Medium	Large
Warehousing
Labor	$0.28	$0.28	$0.28
Depreciation	0.07	0. 07	0. 07
Insurance	0. 01	0.01	0. 01
Maintenance &
Utilities	0.03	0.03	0.03
Ad Valorem Tax	0. 05	0. 05	0. 05
Total Warehousing
Cost:
per proof gallon	0.44	0.44	0.44
per 80 proof gallon	0.35	0.35	0.35
Bottling
Labor	$0.36	$0.36	$0.36
Depreciation	0. 08	0. 08	0.08
Supplies	0.43	0.40	0.38
Maintenance	0. 03	0.02	0.01
Total Bottling Cost:
per proof gallon	0. 90	0.86	0.83
per 80 proof gallon 0.72	0.69	0.66
Warehousing & Bottling
Cost per 80 proof
gallon	1.07	1.04	1.01

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EXHIBIT V
Environmental Protection Agency
ESTIMATED PRODUCTION COSTS OF
BLENDED WHISKEYS
Plant
Item Size	Small	Medium	Large
Cost of Bourbon a/	$0.60	$0.57	$0.54
Cost of Neutral
Spirits b/	0. 53	0. 52	0. 50
Rectification Tax	0. 30	0. 30	0. 30
Bottling Costs c/	0. 90	0.86	0. 83
Cost of Blended
Whiskey:
per proof gallon	2. 33	2. 25	2. 17
per 80 proof gallon 1.86	1.80	1.74
a I 35% of the adjusted distilling cost and warehousing cost producing
a proof gallon of bourbon (see Exhibits III and IV).
bI 65% of the adjusted distilling cost of producing a proof gallon
of neutral spirits (see Exhibit VI).
c/ Assumed to be equal to the bottling costs for bourbon (see Exhibit IV).

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EXHIBIT VI
Environmental Protection Agency
ESTIMATED PRODUCTION COSTS FOR
NEUTRAL SPIRITS
Plant
Item X Size	Small	Medium	Large
Distilling
Grain	$0.30	$0.30	$0. 30
Labor	0. 16	0. 16	0. 16
Depreciation	0. 12	0. 12	0. 12
Operating Costs	0. 12	0. 11	0.09
Distilling Cost/
proof gallon	0. 70	0. 69	0. 67
Distillers' Feed
Profit	-0.17	-0.17	-0.17
Adjusted Distilling
Cost (per proof
gallon)	0. 53	0. 52	0. 50

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EXHIBIT VII
Environmental Protection Agency
ESTIMATED PRODUCTION COSTS
FOR GIN
Item
Plant
Size
Small
Medium
Large
GIN
Neutral Spirits a/	$0.53	$0. 52	$0. 50
Processing	0.06	0.05	0. 04
Bottling Costs b/	0. 80	0.77	0. 74
Cost of Gin
per proof gallon	1.39	1.31	1.28
per 90 proof gallon	1.25	1.18	1.15
a / See Exhibit VI.
b/ See Exhibit IV.

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The cost of passing the vapors of the neutral
spirits through a column (gin head) which con-
tains flavor yielding juniper berries, orange
peels, and other fruits is estimated to average
$0. 046 per gallon- with a range of $0. 060 for
small plants to $0,040 for large plants to reflect
processing.
Bottling costs are assumed to be equal to those
for bourbon.
4. PRODUCTION COSTS FOR VODKA RANGE FROM $1.08 TO
$1.18 PER 80 PROOF GALLON
Estimated production costs are presented in Exhibit VIII, following
this page. These estimates are based on the following assumptions:
Neutral spirits production costs are those pre-
sented in Exhibit VI.
The cost of processing vodka, the vapors of the
neutral spirits are passed through charcoal to
remove impurities. Costs are assumed to be
equal to those of processing gin.
Bottling costs are assumed to be equal to those
for bottling bourbon.
*Source: Impact of the Distilled Spirits Production Tax on Kentucky's
Economy (Report T-556, prepared for Kentucky Chamber of Com-
merce by Charles B. Garrison, Spindletop Research Center,
Lexington, Kentucky, November, 1965), estimates adjusted for
inflation.
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EXHIBIT VIII
Environmental Protection Agency
ESTIMATED PRODUCTION COST FOR VODKA
Plant
Item Size	Small	Medium	Large
Neutral Spirits	$0.53	$0.52	$0.50
Processing	0.04	0.03	0.02
Bottling Costs	0.90	0.86	0.83
Cost of Vodka:
per proof gallon	1.47	1.41	1.35
per 80 proof gallon	1.18	1.13	1.08

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5. VERY LITTLE RUM IS PRODUCED IN THE CONTINENTAL
UNITED STATES
Most of the rum consumed in the United States is produced in
Puerto Rico, the Virgin Islands and Hawaii, the majority being dis-
tilled at the Bacardi plant in Puerto Rico. Information on the pro-
duction costs of rum distilling is limited. Neither the Department
of Treasury's Bureau of Alcohol, Tobacco, and Firearms (BATF)
nor the Distilled Spirits Institute collect data as they do for other
distilled spirits. The Federal Excise Tax of $10. 50 per proof gallon
is collected not at the distillery but at the continental port of entry.
The local governments of Puerto Rico and the Virgin Islands have
regulatory agencies patterned after the BATF. Much of the molasses
used in Caribbean rum production is imported from South America
where it is a by-product of the sugar industry. It appears that
wages in the rum industry are lower than those for other parts of
the distilled spirits industry. Occasionally, British Virgin
Islanders are the production workers, in which case, their wages
are very low.
6. ESTIMATED CASH FLOW IS SHOWN ON EXHIBIT IX,
FOLLOWING THIS PAGE
# # '\< ^
The following chapter discusses pollution control
requirements.
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POLLUTION CONTROL REQUIREMENTS

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IV. POLLUTION CONTROL REQUIREMENTS
Pollution abatement capital investment and annual cost esti-
mates used in this study were provided by EPA. The data supplied
by EPA are based on the 1971 AWARE Study "Industrial Waste Sur-
vey of the Distilled Spirits Industry. " Cost estimates based on the
AWARE data should be used with caution as the base-data source
was a limited survey of only 12 of the 72 U. S. distilleries.
Many distilleries have existing water treatment plants. If
these existing facilities could be improved to meet ELG* guidelines,
costs might be less than those estimated by EPA.
Not reflected in the estimates used in this study is the
lack of technology for treating rum distillery wastes. Treat-
ment alternatives suited for grain distilled spirits wastes are not
applicable to rum. EPA is sponsoring a pilot treatment project at
the Bacardi plant in Puerto Rico, but progress apparently has been
limited and chances are slim for a solution that is economically
and technologically feasible for the entire rum industry in time to
meet the ELG deadline.
1. WATER POLLUTION ABATEMENT COST ESTIMATES ARE
BASED ON STANDARDS CONTAINED IN ELG GUIDELINES
Estimated standard raw waste and BOD loads for small,
medium, and large distilleries are summarized in Exhibit X,
following this page.
Distilleries are assumed to operate 260 days per year and
to be required to meet ELG standards at peak operating periods.
2. FOUR ALTERNATIVES OF SEVEN OUTLINED AND SUPPLIED
BY EPA WOULD MEET ELG GUIDELINES
The cost of these four alternatives for small, medium, ?nd
large distilleries are shown on Exhibit XI, following Exhibit X.
^Effluent Limitation Guidance (1972)--prepared by the Office of
Permit Programs, EPA.
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BOD effluents after treatment for each alternative recycled
are as follows:
BOD
Level
11. 5--Alternative D
5. 5--Alternative E
0. 0--Alternatives F and G
Alternative F may require pretreatment. Using the least expensive
pretreatment system, EPA estimates annual cost per plant would
be increased by $16,000 to $44,000 depending on the size of the
plant. It noted that while Alternative G is the cheapest and also
reduce BOD effluents to 0.0 after treatment various factors may
preclude its choice. The scope of this study has precluded in-
vestigating or even identifying these factors.
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V. IMPACT ANALYSIS

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1.
V. IMPACT ANALYSIS
POLLUTION ABATEMENT COST IMPACTS WILL BE
MINIMAL
The small magnitude of price increases required to pass on
water pollution abatement costs to consumers (one percent or
less) indicates that there will be little if any adverse economic
impact on the distilled spirits industry. Distilled spirits producers
are generally large, profitable, and financially sound; accordingly,
they should have adequate access to the required capital to install
needed pollution abatement equipment by 1977.
2. THE CLOSING OF SOME DISTILLERIES IS POSSIBLE
REGARDLESS OF WATER POLLUTION ABATEMENT COSTS
At present, there are 36 firms operating 72 distilleries.
The trend, for the last 20 years at least, has been to close smaller,
less efficient distilleries. There are several reasons behind this
trend.
The production of spirits is a relatively simple
process; there is little need for many distilleries
each producing unique products.
The industry currently has excess production
capacity. Inventories on hand are sufficient
for six-seven years at current consumption
levels. Four year inventories would be adequate.
The closing of small distilleries, if this occurs, should
serve to bring production into line with present and anticipated
demand. For most of the distilleries potentially affected, it is
noted that inventories on hand would continue to produce revenues
for five or more years after new production ceases, thus
minimizing immediate impacts.
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It is further noted that while the industry does have excess
capacity, producers remain profitable and downward pressure on
prices is minimal.
3. THE BALANCE OF PAYMENTS WILL NOT BE AFFECTED
BY POLLUTION COSTS TO ANY MEASURABLE EXTENT
Since estimated price increases due to pollution abatement
are expected to be below one percent, there should be little impact
on domestic versus imported spirits competition. The competition
centers on Scotch and Canadian blended spirits versus American
straights (i.e., bourbon) and blends. The white whiskies--gin and
vodka--appear to be largely immune from material competition
from imports because they are produced so inexpensively in this
country that imports cannot compete on price. U.S. producers
have responded to Scotch and Canadian competition by initiating
production of light and blended light whiskey which is made
similarly to Scotch and Canadian whiskies; has a similar "light
taste; and is less expensive to the consumer. The light whiskies
have only recently been introduced and, as yet, have not been
widely accepted in this country. The small anticipated price rises
due to pollution abatement costs, however, should not weaken their
edge in price competition with imports.
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VI. LIMITS OF THE ANALYSIS

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VI. LIMITS OF THE ANALYSIS
The very small (one percent) apparent impact of water
pollution abatement costs on the industry strongly indicates that
economic impacts would be minimal. Nevertheless, there are
some analytical limitations which should be kept in mind.
1. ESTIMATES OF WATER POLLUTION ABATEMENT COSTS
FOR THE DISTILLED SPIRITS INDUSTRY MAY BE LOW
Estimates of distillery production capacity supplied by EPA
may be overstated. This is based on a comparison of distilled spirits
output with capacity estimated using EPA figures. The variance may
be due to the fact that industry overcapacity exists, indicating that
estimated capacity should exceed production, however, further re-
search would be required to resolve this. Other sources of error
could be in estimates of mashing capacity.
2. EPA SUPPLIED DATA HAVE BEEN ASSUMED TO BE
ACCURATE
As is the case with wineries, pollution abatement cost data
have been assumed to be accurate. Possible sources of inaccuracy
in addition to distillery capacity estimates are as follows:
Inaccuracy in cost estimates for specific treatment
alternatives as applied to specific distilleries
Possible omission of technologically feasible treat-
ment alternatives
It should be noted, however, that even if pollution abatement
costs estimates were low by a factor of ten average retail price
increases to cover such costs would be on the order of only one
percent.
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3. PRODUCTION COST ESTIMATES IN CHAPTER III SHOULD
BE USED WITH CAUTION
Production cost estimates for distilleries contained in
Chapter III were prepared in response to a specific EPA request.
These estimates are based on limited data and should be viewed
as "best estimates" only. Because no actual operating data were
used in preparing the estimates, significant variances in actual
costs are a possibility.
4. POLLUTION PROBLEMS OF RUM DISTILLERIES HAVE
NOT BEEN ADDRESSED
The technology for dealing with wastes generated by rum
distilleries is underdeveloped, causing some doubt regarding the
possibility of meeting ELG guidelines. According to the Puerto
Rican Rum Producers' Association, the current EPA research
project at Bacardi will only scratch the surface of the problem.
Producers, while cooperative, indicate that they are at a loss as
to what can be done. Additional investigation of this problem is
an urgent need.
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