MEMORANDUM
Eastern
Research
Group,
Inc.
110
Hartwell
Avenue
Lexington,
MA
02421
Date:
June
4,
2003
To:
James
Covington,
EPA
From:
Colleen
Campbell
and
Cal
Franz,
ERG
Re:
Meat
and
Poultry
Products
Industry
Economic
Impact
Analysis
1.
INTRODUCTION
ERG
projected
economic
impacts
on
the
Meat
and
Poultry
Products
(
MPP)
industry
based
on
costs
received
from
Tetra
Tech
on
May
27,
2003
and
weights
received
from
Westat
on
April
10,
2003.
The
attached
tables
show
the
results
of
these
analyses.
Table
1
contains
total
and
average
compliance
costs.
Tables
2
and
3
present
the
results
of
the
closure
analysis
for
both
the
facility
and
company
levels.
Table
4
contains
the
Altman
ZN
results,
and
Table
5
shows
the
sales
test
results.

In
reviewing
these
results,
note
that:

C
The
total
number
of
facilities
in
each
class
or
subcategory
is
not
equivalent
to
the
number
of
facilities
analyzed.
Many
of
the
facilities
did
not
provide
financial
data
in
their
survey
for
adequate
analysis.
Additional
facilities
were
determined
to
be
baseline
closures.
 
Subcategory
A
through
D:
out
of
39
facilities,
21
were
not
analyzed
due
to
lack
of
data.
 
Subcategory
K:
out
of
118
facilities,
84
were
not
analyzed
due
to
lack
of
data.
Therefore,
impacts
as
a
percent
of
total
facilities
may
be
somewhat
misleading
due
to
the
large
number
of
facilities
that
could
not
be
analyzed
in
each
subcategory.

C
For
cost
annualization
and
the
closure
analysis,
a
6.6
percent
discount
rate
was
used
if
facilities
did
not
provide
a
usable
discount
rate
in
their
survey
data.
The
6.6
percent
discount
rate
is
a
weighted
average
of
the
discount
rate
data
provided
in
the
surveys.
If
the
facility
provided
a
reasonable
discount
rate
in
their
survey
data,
then
that
value
was
used
to
run
the
impact
analysis.

2.
SUMMARY
OF
RESULTS
2.1
National
Costs
The
difference
between
the
May
27
total
pretax
annualized
costs
and
the
April
11
version
ranges
from
a
decrease
of
$
7
million
for
Option
2
to
an
increase
of
$
5.5
million
for
Option
4.
In
subcategory
A
through
D,
pretax
annualized
costs
were
little
changed
for
Option
2.5
(
1
percent),
Option
2.5
+
P
(
0.5
percent),

1
and
Option
4
(
5
percent),
but
decreased
over
40
percent
for
Option
2
and
about
15
percent
for
Option
2
+
P.
In
Subcategory
K,
pretax
annualized
costs
increased
11
percent
for
Option
2.5
+
P
and
4
percent
for
Option
4,
but
decreased
for
Option
2.5
(
23
percent),
Option
2
+
P
(
6
percent),
and
Option
2
(
27
percent).

C
Total
pretax
annualized
costs
of
the
rule
range
from
$
13
million
under
Option
2
to
$
131
million
under
Option
4.

C
Although
costs
generally
increase
with
each
option,
the
costs
for
Option
2
+
P
exceed
those
for
Option
2.5.

C
Cost
per
facility
is
consistently
larger
for
subcategory
A
though
D
($
127,000
to
$
1.2
million)
than
for
subcategory
K
($
71,000
to
$
707,000
respectively)

2.2
Closure
Analysis
The
closure
analysis
using
this
most
recent
set
of
costs
results
in
an
increase
in
facility
closures
under
Option
4
and
an
increase
in
company
level
closures
under
Option
2
+
P
and
Option
2.5
+
P.

C
7
facilities
employing
over
4,500
workers
are
projected
to
close
under
Option
4
in
subcategory
K,
all
are
poultry
first
processors.
These
closures
account
for
6.4
percent
subcategory
K
facilities.

C
One
poultry
company
is
projected
to
close
under
Option
2,
Option
2.5
and
Option
4.
The
poultry
company
that
is
projected
to
close
did
not
provide
facility
level
financial
information,
therefore
the
facilities
owned
by
this
company
could
not
be
analyzed.

C
Facilities
projected
to
have
a
negative
NPV
of
net
income
under
at
least
3
of
5
forecasting
methods
prior
to
regulatory
costs
are
called
 
baseline
closures .
 
In
subcategory
A
through
D
there
are
two
baseline
closure
 
In
subcategory
K
there
are
10
baseline
closures.

2.3
Altman
ZN
Analysis
C
In
the
baseline,
the
Altman
ZN
analysis
shows:
 
7
red
meat
companies,
and
8
poultry
companies
are
considered
financially
healthy.
 
1
red
meat
company,
5
poultry
companies,
and
3
mixed
companies
are
in
the
indeterminate
range
for
financial
health.
 
1
red
meat
company,
and
1
mixed
meat
companies
are
considered
financially
stressed.

C
Under
Option
4,
the
Altman
ZN
score
for
one
poultry
company
changed
from
financially
healthy
to
indeterminate.

2
C
2.4
Sales
Test
The
results
of
the
sales
test
are
as
follows:

In
Subcategory
K:
 
Under
Option
2.5
+
P
pretax
costs
exceed
1
percent
of
revenues
for
4
of
118
facilities.
 
Under
Option
4
pretax
costs
exceed
1
percent
of
revenues
for
17
of
118
facilities
and
7
of
118
incur
post­
tax
annualized
costs
exceeding
1
percent
of
revenues.
 
No
facilities
incur
costs
exceeding
3
percent
of
revenues.

3.
ADDITIONAL
INFORMATION
A
short
description
of
the
method
used
for
each
component
of
the
impact
analysis
is
presented
below.

3.1
National
Costs
The
costs
are
annualized
using
the
facility
specific
real
discount
rate
(
if
its
in
the
range
from
3
percent
to
19
percent)
or
the
industry
average
6.6
percent
real
discount
rate,
and
then
totaled
by
subcategory
using
facility
weights.
Average
compliance
costs
are
also
calculated
by
subcategory
and
process
class.

3.2
Closure
Impacts
The
closure
analyses
use
five
separate
forecasting
assumptions
to
project
1997
to
1999
facility
and
company
net
income
survey
data
over
the
16
year
project
life.
The
present
value
of
the
earnings
under
these
assumptions
is
compared
to
the
present
value
of
compliance
costs
to
determine
closure
impacts
at
both
the
facility
and
the
company
level.
If
projected
preregulatory
net
income
is
positive
under
3
of
5
methods
but
projected
post­
regulatory
net
income
is
negative
under
at
least
3
of
5
methods,
then
the
facility
or
company
is
projected
to
close.

3.3
Altman
ZN
The
Altman
ZN
analysis
looks
at
a
weighted
average
of
five
indicators
of
financial
health
at
the
company
level
and
determines
the
financial
status
of
each
company
according
to
its
calculated
score.
Companies
receiving
scores
greater
than
2.9
are
considered
financially
healthy.
Those
with
scores
less
than
1.23
are
considered
in
danger
of
bankruptcy,
and
all
companies
receiving
scores
between
those
two
values
are
considered
indeterminate.

3.4
Sales
Test
The
sales
test
compares
pre­
and
post­
tax
annualized
compliance
costs
to
annual
facility
revenues.
The
results
indicate
the
number
of
facilities
with
compliance
costs
that
exceed
1
percent
and
3
percent
of
sales.

3
Table
1
Total
and
Average
Compliance
Costs
by
Subcategory
and
Option
Total
Costs
($
000)
Average
Costs
($
000)

Total
in
Class
Cost
Type
Option
2
Option
2
+
P
Option
2.5
Option
2.5
+
P
Option
4
Option
2
Option
2
+
P
Option
2.5
Option
2.5
+
P
Option
4
Subcategory
A
through
D
39
Capital
$
6,646
$
36,385
$
67,885
$
86,118
$
104,090
$
170
$
933
$
1,741
$
2,208
$
2,669
O&
M
$
4,328
$
31,996
$
5,071
$
33,320
$
37,459
$
111
$
820
$
130
$
854
$
960
One
Time
$
64
$
64
$
979
$
979
$
979
$
2
$
2
$
25
$
25
$
25
Post­
tax
Annualized
$
3,037
$
23,089
$
8,986
$
27,875
$
31,418
$
78
$
592
$
230
$
715
$
806
Pre­
tax
Annualized
$
4,951
$
35,574
$
12,359
$
42,004
$
47,627
$
127
$
912
$
317
$
1,077
$
1,221
Subcategory
K
118
Capital
$
18,856
$
65,644
$
74,219
$
99,509
$
299,178
$
160
$
556
$
629
$
843
$
2,535
O&
M
$
6,485
$
32,604
$
8,417
$
35,372
$
52,852
$
55
$
276
$
71
$
300
$
448
One
Time
$
32
$
32
$
1,278
$
1,278
$
1,298
$
0
$
0
$
11
$
11
$
11
Post­
tax
Annualized
$
6,656
$
29,683
$
13,321
$
34,743
$
65,400
$
56
$
252
$
113
$
294
$
554
Pre­
tax
Annualized
$
8,333
$
38,999
$
16,329
$
45,492
$
83,368
$
71
$
330
$
138
$
386
$
707
Table
2
Summary
of
Projected
Facility
Closure
Impacts
by
Subcategory
and
Option
Option
2
Option
2+
P
Option
2.5
Option
2.5+
P
Option
4
Total
Baseline
Facilities
not
Variable
in
Class
Closure*
Analyzed**
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Subcategory
A
through
D
Facilities
39
2
21
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
9,303,506
CBI
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
48,114
CBI
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Subcategory
K
Facilities
118
10
84
0
0.0%
0
0.0%
0
0.0%
0
0.0%
7
6.4%

Revenues
($
000)
$
4,023,230
$
1,584,596
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
CBI
CBI
Employees
112,491
13,258
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
CBI
CBI
*
Baseline
closures
are
facilities
projected
to
have
a
negative
NPV
under
at
least
3
of
5
forecasting
methods
prior
to
regulatory
costs.

**
Facilities
not
analyzed
due
to
a
lack
of
survey
data.

***
Pending
further
direction
from
EPA
the
7
facilities
that
process
both
red
meat
and
poultry
have
been
included
in
subcategory
A­
D.
Table
3
Summary
of
Projected
Company
Closure
Impacts
by
Meat
Type
and
Option
Option
2
Option
2+
P
Option
2.5
Option
2.5+
P
Option
4
Total
Baseline
Variable
in
Class
Closure*
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Red
Meat
(
Subcategories
A
through
I)

Companies
9
1
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
29,949,011
NA
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
80,755
NA
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Poultry
(
Subcategories
K
and
L)

Companies
13
6
0
0.0%
1
7.7%
0
0.0%
1
7.7%
1
7.7%

Revenues
($
000)
$
15,455,223
$
3,398,090
$
0
0.0%
CBI
CBI
$
0
0.0%
CBI
CBI
CBI
CBI
Employees
136,000
31,192
0
0.0%
CBI
CBI
0
0.0%
CBI
CBI
CBI
CBI
Mixed
Companies
4
0
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

Revenues
($
000)
$
89,439,473
$
0
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%
$
0
0.0%

Employees
184,834
0
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%

*
Baseline
closures
are
companies
projected
to
have
a
negative
NPV
under
at
least
3
of
5
forecasting
methods
prior
to
regulatory
costs.
Table
4
Altman
Z'
Results
by
Meat
Type
Option
Number
of
Companies
with
Z'
Score**

Less
than
2.9;

Meat
Type
Greater
than
2.9
Greater
than
1.23
Less
than
1.23
Baseline
Red
Meat
7
1
1
Poultry
8
5
0
Mixed
0
3
1
Post
Regulatory
Incremental
Change
(
Relative
to
Baseline)*

Option
2
Red
Meat
0
0
0
Poultry
0
0
0
Mixed
0
0
0
Option
2+
P
Red
Meat
0
0
0
Poultry
0
0
0
Mixed
0
0
0
Option
2.5
Red
Meat
0
0
0
Poultry
0
0
0
Mixed
0
0
0
Option
2.5+
P
Red
Meat
0
0
0
Poultry
0
0
0
Mixed
0
0
0
Option
4
Red
Meat
0
0
0
Poultry
­
1
1
0
Mixed
0
0
0
*
Numbers
indicate
the
number
of
companies
with
Altman
Z
scores
changing
from
one
category
to
another.

**
Altman
Z
scores
greater
than
2.9
indicate
a
financially
healthy
company;
scores
less
than
1.23
are
in
danger
of
bankruptcy;
scores
less
than
2.9
but
greater
than
1.23
are
indeterminate.
Table
5
Facilities
with
Annualized
Costs
Exceeding
Specified
Percentage
of
Revenues
by
Subcategory
and
Option
Facilties
with
Annualized
Costs
Exceeding
Specified
Percentage
of
Revenues
Option
2
Option
2+
P
Option
2.5
Option
2.5+
P
Option
4
Percent
Compliance
Total
of
Revenues
Costs
in
Class*
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Number
Percent
Subcategory
A
through
D
1%
Pre­
tax
39
0
0%
0
0%
0
0%
0
0%
0
0%

Post­
tax
39
0
0%
0
0%
0
0%
0
0%
0
0%

3%
Pre­
tax
39
0
0%
0
0%
0
0%
0
0%
0
0%

Post­
tax
39
0
0%
0
0%
0
0%
0
0%
0
0%

Subcategory
K
1%
Pre­
tax
118
0
0%
0
0%
0
0%
4
3.3%
17
14.3%

Post­
tax
118
0
0%
0
0%
0
0%
0
0%
7
6.4%

3%
Pre­
tax
118
0
0%
0
0%
0
0%
0
0%
0
0%

Post­
tax
118
0
0%
0
0%
0
0%
0
0%
0
0%

*
21
facilities
in
Subcategory
A
­
D
and
84
facilities
in
Subcategory
K
did
not
provide
revenue
data.
