EFFICIENT ORGANIZATION OF THE FLUID MILK SUBSYSTEM 0F SPAIN A Disser’mfion ‘Ior II“: Degree OI 941:. I). MICHIGAN STATE UNIVERSITY Eduardo DiezaPatier I976 LIBRARY Michigan Sun: Univeni‘y This is to certify that the thesis entitled Efficient Organization of the Fluid Milk Subsystem of Spain presented by Eduardo Diez-Patier has been accepted towards fulfillment of the re%uirements for P U D 0 degree in Agricultural Economics $.agé : é if? : I‘ ‘1‘... ‘ ' , . - A Major professor Date January 12, l976 . IV ,UD'V‘.. r“""‘1 I - 7" "V e." '1‘ Ir.‘.‘ sw ‘ - F Tue fluid mi 35;;1atedby the gov itfin‘ .‘ I .':‘.dt lens are heir. ::::ect sore of the 5339:, elements of .‘. :SS‘Q‘ . ‘V‘ln GEVQIP ~‘; «0 . n V 1"“? .':’«0“1‘Q ‘L y ; AI“ 2 . t ””313 a“ "‘d alS‘ Q:. U» v- .‘Vse H ~ SEECLCj « :‘ZE tLQ .“ Ohr‘s ‘ :21? ABSTRACT EFFICIENT ORGANIZATION OF THE FLUID MILK SUBSYSTEM OF SPAIN BY Eduardo Diez-Patier The fluid milk subsystem of Spain has been tightly regulated by the government since 1966. Although the regulations are being progressively modified in order to correct some of the maladjustments identified in the sub- system, elements of misregulation still seem to be present. It was hypothesized that the present regulations are lead- ing to the construction of an excessive number of fluid Hulk processing plants which are, with a few exceptions, too small to achieve efficient operation. At the same time, these regulations provide no incentive to extend the system Cf Compulsory hygienization of milk, established in 1966, t0 all the country. The purpose of this study was to provide information ‘UDassist in developing relevant public policy that would lmflp to improve the performance of the fluid milk subsystem Of'Spain and also to assist the participants in their plan- ‘uflg- More specifically, the objectives were: (1) t0 arlalyze the organization of the fluid milk subsystem of 3:23; (2) to deter? ‘* individual plants 23.; (3) to determi 3:26 of fluid milk p 1973-74 marketir. 1:2 optimum interpr tars-.6 finished nil u:o.:yp Ice-us at 0 The dairy 5-,: E;ain were defined at 2:: and import-expo; ... ; - 4 ...::.;tion of both u. :‘H; ‘ ' ‘ ~= ...: milk marge Entrance of the s s .zr, inadequate 0 .‘I‘A' C t . Ah. N; lass/«L. ation, i tired and elexents litarriers to it“; =~ Of Spain. ‘In ' ng‘ 3,”. . ‘ “KC '1’! t0 2. I . v ‘ :trfiaSe Eduardo Diez-Patier Spain; (2) to determine the effects of volume of production in individual plants upon the cost of processing fluid milk; (3) to determine the least cost number, location and size of fluid milk processing plants for Spain both for the 1973-74 marketing year and for 1978; and (4) to deter- mine optimum interprovince price differentials for both raw and finished milk consistent with a minimum cost pattern. The dairy subsector and fluid milk subsystem of Emmin were defined and trends in milk production, consump- tion and import-export activities were reviewed. After a ckmcription of both the structure and government's role in the fluid milk market, a preliminary evaluation of the performance of the subsystem was made. Relative ineffi- ciency, inadequate output levels, lack of sufficient con- sumer information, inadequate fluid milk product mix (fifered and elements of misregulation were found to be the main barriers to improved performance in the fluid milk sub- SYstem of Spain. Based on synthesized costs of in—plant fluid milk Emocessing operations significant economies of size were found to be possible in Spain. The average unit processing (xmt decreased from 3.958 pesetas per liter of fluid milk for’8 plant processing 40,000 liters per day for an eight— hmlr’workday, to 2.789 pesetas per liter for a plant Funcessing 360,000 liters per day for an eight-hour workday, a decrease of about thirty percent, with most of the drop I fit “Hm '1l-Juv- .- n- . “"'I'~ ' rein; in the 40.0004 ieclined about twent‘; Yusing the f 1] rained from the 53:: :iiistribution cos. Egrixlt‘lre, a trans : ::‘:e:, location and s;;:e;ate assembly, Eactual 1973-74 5:; 112:, and the results ..,., .. ‘n 3‘ on... Could be a1 -’I; "‘ n I; ‘~I~ ““‘l-Ner' lecat ~o.* i::air.ed for 1978, 1? Wu . d 5“ \‘ ‘1» N“\ CO ASI‘~Q it. . \.‘t ‘4‘?.E . \ I\ ; b‘ I Ha \‘ A‘:.'.‘e V! yet?- 1“. I \\ ..\ y, Cc I a uh“ \. h L C s 2."; u“cns Eduardo Diez-Patier being in the 40,000-120,000 liters category in which costs declined about twenty—two percent. Using the fluid milk processing costs information obtained from the synthetic firm study and milk assembly and distribution cost data elaborated by the Ministry of Agriculture, a transshipment model was used to estimate the number, location and size of plants thatminimized the aggregate assembly, processing and distribution costs for the actual 1973-74 milk marketings and fluid milk consump- tion, and the results were then compared with the minimum cxmt that could be attained under the existing pattern. (kmimum number, locations and sizes of plants were also cmtained for 1978, based on two alternative cost assumptions. According to the least cost pattern obtained for 1973-74, twenty-two plants, processing a daily average influme of 316,316 liters per plant would have provided Euocessed milk to all consumers at that year's consumption levels at an average cost of 4.07 pesetas per liter. The ElCtual pattern of fifty-seven plants, processing a daily average of 80,975 liters per plant and providing an amount cm Processed milk which was less than two-thirds of the anal milk consumed in fluid form in 1973—74 could have entained a minimum cost level of 4.61 pesetas per liter of EEOCessed milk. A more efficient product use allocation vumld have permitted the attainment, under 1973-74 condi— ticm8, of a unit cost of 4.56 pesetas per liter. Existing remfletions, however, do not allow an optimum flow of messed milk produC' " ‘5” olaoe and wou‘ “I 15‘ mu 5» n :5 :ese minimum cost. For 1978, it :1}; than in 1973-74 2 1331‘. the milk to be :::shygienized in f :grscessed milk ne» Flie'l i: the 1973-74 333 An gtimm {cat average of 4: it: :eeded anoint of The study .3:- fZIEQVi"? toward a alibe We concer.‘ {an . n» It WOUId be “'6“ Eduardo Diez—Patier processed milk products from plants to consumption centers to take place and would not have permitted the attainment of these minimum costs. For 1978, it was projected that 21.5 percent more milk than in 1973-74 will be needed for fluid consumption. If all the milk to be consumed in fluid form by 1978 were to be hygienized in fluid milk processing plants, the increase in processed milk needed with respect to the quantity sup- ;flied in the 1973-74 daily marketing year would be 83.3 per- cmnt. An optimum pattern of twenty—one plants, processing a.daiLy average of 402,855 liters per plant could provide the needed amount of hygienized milk at minimum cost in 1978. The study demonstrated relative economic advantages fOr moving toward a fluid milk processing industry which would be more concentrated and would have a greater capacity. Vmile it would be very difficult to expect the dismissal of aflmost sixty percent of the plants existing in 1974, recom- IIlendations were made which would be helpful in keeping the SubSystem from further deterioration under the present organization. E’FICIENT ( Mir: Departf; EFFICIENT ORGANIZATION OF THE FLUID MILK SUBSYSTEM OF SPAIN BY Eduardo Diez—Patier A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1976 y 9.»; . \ v ”"V‘. ~.h .--:"..I.¢t Y 4333 ozsz-pz. in l V I ‘ v‘ N © Copyright by EDUARDO DIEZ-PATIER l976 TO Maria Rosa H. I—l. I ish to es: :esis supervisors , gatience and helpful frrhis guidance and ‘55irt. I also want ‘l‘s c R 24: PIC.ESSOI, Ms 0 H '..,. ““2; M of entire t0 ra .:s. 3an N. Ferris .uers of my thesis 2“! . - ...r. Keith Olson ACKNOWLEDGMENTS I wish to express my sincere appreciation to my thesis supervisors, Dr. Glynn McBride, for his tolerance, patience and helpful suggestions, and Dr. Stephen B. Harsh, for his guidance and personal interest during this research effort. I also want to thank Dr. Vernon L. Sorenson, my major professor, for his valuable assistance and direction during my entire graduate program. Thanks are also due to Drs. John N. Ferris and Thomas R. Pierson for serving as members of my thesis committee, and to Ms. Pamela Marvel and Mr. Keith Olson for providing invaluable computer assistance. Appreciation is also extended to Dr. Harold M. Riley, chairman of the Department of Agricultural Economics and through him to all the other faculty members for providing me with the opportunity to pursue a doctoral program and for their contribution to its completion. I am also indebted to Drs. Pedro Ballester, Marcial Ialanda and Pedro Caldentey and to Mr. Rafael Jimenez for their cooperation in the process of data collection and for supplying me with very useful information during the plan- ning and development of this research. iii '1 _ I at! eSPe‘ ‘: limes-tigat‘:icmeE care program- 'acseptable ret Fina 1 1y , n (u .-..s and our dauc szfort ;. the brc 1%.... ,: 0::.-ZE\‘. I am especially grateful to the Instituto Nacional de Investigaciones Agrarias of Spain for financing my entire program. It is my sincere hope that they realize an acceptable return on their investment. Finally, I owe most special thanks to my wife Maria Rosa and our daughter Nuria for their contributions to this effort in the broader context of living in which it was realized. iv I ‘ n 7' "".‘J"£) "'3: " . ‘ ,. ‘fnfi‘ rv-VD‘T “9“,;1.-. J . .' I“ «7' TEFI'lfrTS '~“":'“~U\J. .g“ . “F l ‘ \S v r . y “.A a. o— .5- u .‘..'l‘ F" . Al &“‘P‘VUL TABLE OF CONTENTS Page DEDICATION . . . . . . . . . . . . . . . ii ACKNOWLEDGMENTS . . . . . . . . . . . . . . iii LIST OF TABLES . . . . . . . . . . . . . . x LIST OF FIGURES . . . . . . . . . . . . . . xiv LIST OF MAPS . . . . . . . . . . . . . . . xv Chapter I. INTRODUCTION . . . . . . . . . . . . 1 Problem Setting . . . . . . . . . . l Researchable Hypotheses . . . . . . . 4 Research Objectives . . . . . . . . 4 Procedures . . . . . . . . . . 5 Theoretical Background . . . . . . . 6 Subsector Systems and Subsystems Research Concepts . . . . . . . 6 The Organizational Concept . . . . . 9 Efficiency Considerations . . . . . 10 Organization of the Study . . . . . . 13 II. THE DAIRY SUBSECTOR AND FLUID MILK SUBSYSTEM OF SPAIN O O O O O O O O O O O O O 15 Definition of the Dairy Subsector and Fluid Milk Subsystem . . . . . . . 15 Trends in Production, Consumption and International Trade . . . . . . . . 17 Milk Production . . . . . . . . 19 Milk Consumption‘ . . . . . . . . 25 International Trade . . . . 25 Marketing Channels for Fluid Milk and Dairy Products . . . . . . . . . 28 x... :33 Structu of Sp TY? Shi Nu: Mar Prc Bar Yer Governr San Fla Pro. Res Perform Eff Pro Pr Par Out 215 Efficie The ThE Chapter Page Structure of the Fluid Milk Industry of Spain . . . . . . . . . . 30 Types of Products . . . . . 30 Shipments of Fluid Milk Products . . . 32 Numbers and Types of Firms . . . 33 Number of Size Distribution of Plants . 36 Market Shares . . . . . . . . . 36 Product Differentiation . . . . . . 38 Barriers to Entry and Exit . . . . . 40 Vertical Coordination and Integration . 41 Government Regulation . . . . . . . . 42 Sanitary Regulations . . . . . 44 Plant Licensing . . . . . . 45 Producer Prices . . . . . . 45 Resale Prices . . . . . . . . 47 Performance of the Fluid Milk Subsystem . . 47 Efficiency . . . . . . . . . . 48 Progressiveness . . . . . . . . 50 Product Suitability . . . . . . . 51 Participant Rationality . . . . . . 53 Output Levels . . . . . . . . . 53 Misregulation . . . . . . . . . 54 III. METHODOLOGICAL PROCEDURES . . . . . . . . 57 Efficient Organization Within Market Areas . 57 The Theoretical Model . . . . . . . . 63 The Economic Model . . . . . . . 64 The Mathematical Model . . . . . . 64 The Computer Model . . . a . . . 66 The Analytical Procedure . . . . . . . 68 Location and Volume of Cow Milk Production . . . . . . . . 68 Location and Volume of Processed Fluid Milk Consumption . . . . . 69 Designation of the Potential Fluid Milk Processing Plant Sites . . . . 71 Raw Milk Assembly and Transportation Costs . . . . . . . . . . . 72 Fluid Milk Processing Costs . . . . 73 Processed Fluid Milk Distribution Costs . . . . . . . . . . 73 Determination of the Optimum Number, Size and Location of Processing Plants . . . . . . . . . . . 74 Determination of Optimum Price Location Differentials . . . . . 76 vi '5. . I".~r .4- vv 0 Alternat Feasibil ."J. ECONOMIES CF EIECONOMIC Purpose Review c: The Na t Ll of 512 Product Condit Cost Cat Data SO: Estimati Fluid Sizes Esti an Esti Esti Esti Esti E:-: Tote P: SUCUEagjy I OPTIMUV v" ' ‘A }\ .‘V' a M‘~ v .. Estixat Milk. PrCCE- and D Milk Est Es ,4» m: C7 nu e: M m {71 {/7 Chapter Page Alternative Solution Models . . . . . . 76 Feasibility Assumptions . . . . . . . 79 IV. ECONOMIES OF SIZE IN FLUID MILK PROCESSING: AN ECONOMIC ENGINEERING STUDY . . . . . . 81 Purpose and Scope of the Study . . . . . 81 Review of Previous Studies . . . . . . 82 The Nature and Measurement of Economies of Size . . . . . . . . . . . . 85 Product Specification and Operating Conditions . . . . . . . . . . . 89 Cost Categories . . . . . . . . . . 91 Data Source . . . . . . . . . 93 Estimation of Unit Costs of Processing Fluid Milk for Plants of Different Sizes and Lengths of Workday . . . . . 94 Estimation of Buildings, Equipment and Container Costs . . . . . . 94 Estimation of Labor Costs . . . . . 105 Estimation of Utility Costs . . . . 108 Estimation of Packaging Material Costs . 108 Estimation of General and Miscellaneous Expenses . . . . . . . . . . 111 Total Annual Costs and Average Unit Processing Costs . . . . . . . 113 Summary of Results . . . . . . . . . 113 V. OPTIMUM NUMBER, SIZE AND LOCATION OF FLUID MILK PROCESSING PLANTS: AN EXrPOST ANALYSIS . 121 Estimation of Cow Milk Supplies, Fluid Milk Consumption and Milk Assembly, Processing and Distribution Costs, and Designation of Potential Fluid Milk Plant Sites . . . . . . . . . 121 Estimation of Provincial Cow Milk Supplies . . . . . . . . . . 122 Estimation of Provincial Fluid Milk Consumption . . . . 122 Designation of the Potential Fluid Milk Processing Plant Sites . . . . 125 Estimation of Raw Milk Assembly and Transportation‘Costs . . . . . . 129 Estimation of Fluid Milk Processing Costs . . . . . . . . . 130 Estimation of Processed Fluid Milk Distribution Costs . . . . . . . 131 vii {m " 'l‘b— b" "I.fi“"‘ %"a “9" . Empiri Mi Le 0? Compar Loca v-w 1.. IPTIKOM \.".1 A‘g' MILK PROCEI Projec‘ Milk Regai Dist: Poter Chapter Page Empirical Results . . . . . . . 131 Minimum Aggregate Cost of Milk Assembly, Processing and Distribution . . . . . . . . . 132 Least Cost Number, Location and Size of Fluid Milk Processing Plants . . 133 Optimum Flow of Raw Milk from Supply Areas to Plants . . . 133 Optimum Flow of Processed F1uid Milk from Plants to Consumption Centers . 136 Optimum Price Location Differentials . 136 Comparison of Proposed and Actual Location Patterns . . . . . . . . 141 VI. OPTIMUM NUMBER, SIZE AND LOCATION OF FLUID MILK PROCESSING PLANTS: AN EX-ANTE ANALYSIS . 157 Projections of Cow Milk Supplies and Fluid Milk Consumption and Assumptions Regarding Milk Assembly, Processing and Distribution Costs and Designation of Potential Fluid Milk Plant Sites . . . 157 Projection of Provincial Milk Supplies . . . . . . . . . 157 Projected Provincial Fluid Milk Needs . 159 Designation of Potential Fluid Milk Plant Sites . . . . . . . . . 160 Milk Assembly, Processing and Distribution Costs . . . . . . . 163 Empirical Results . . . . . .. . . . 163 MOdel IV 0 O o o o o o o o o . 163 MOdel V o o o o o o o o o o 165 Sensitivity Analysis . . . . . . . . 171 VII. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS . . . 174 Summary . . . . . . . . . . . . 174 Conclusions . . . . . . . . . . . 179 Recommendations . . . . . . . . . 131 Limitations and Needed Research . . . . 185 APPENDICES A. Matrix Format of the Trahsshipment Model Under the Linear Programming Formulation . . 190 B. Estimation of Unit Costs of Processing Fluid Milk: Application of the Budgeting Procedure to Plant I Working Eight Hours Per Day . . . . . . . . . . . 194 viii «.,..fififl S -,-:.MoVe ' {late a Plan .chvAnfi‘QYY‘I . . -- u .4?" V ..'--‘V’J.~:‘.. “‘ . Appendices Page C. Name and Location of Fluid Milk Processing Plants, Spain, 1974 . . . . . . . . . 211 D. Milk Supply Equations . . . . . . . . . 214 BIBLIOGRAPHY O O O O O O O O O I O O O O O 221 ix (U Value of Li\ in 811110: Ranking of E Manufactuz Spain. 197 Multinationg Dairy Ind; Mal Cow Mi ‘39 of Milk. LIST OF TABLES Table Page 1. Value of Livestock and Livestock Products, in Billion Pesetas. Spain, 1972 . . . . . 19 2. Ranking of Dairy Firms Among the 400 Top Manufacturing Firms, by Sales Volume. Spain, 1972 . . . . . . . . . . . . 20 3. Multinational Corporations in the Spanish Dairy Industry, 1974 . . . . . . . . . 20 4. Total Cow Milk Production, Spain, 1959—73 . . 21 5. Use of Milk. Spain, 1972 . . . . . . . . 23 6. Number of Dairy Cows on Farms, by Breeds, Spain. September 1972 and 1973 . . . . . 23 7. Ten Leading Provinces in Milk Production, Spain, 1972 . . . . . . . . . . . . 24 8. Per Capita Consumption of Fluid Milk and Dairy Products. Spain 1965—72 . . . . . 26 9. International Trade in Milk and Dairy Products. Spain 1971—73 (Metric Tons) . . . 27 10. Number of Firms Operating Fluid Milk Processing Plants, by Type of Firm, Spain, March 1974 . . . . . . . . . . 34 11. Companies, Plants and Annual Fluid Milk Sales by Type of Firm, Spain, March 1974 . . . . 35 12. Number of Plants, by Minimum Authorized Processing Capacity, in Liters per Eight-hour Workday, Spain,March 1974 . . . 37 ‘d- p. .5 Au v o .9 b- w 7 .A‘ h“- u-4¢‘ 3r Numb. l ‘5 one; If .x‘ who ~ i. .C v a .C \- d .v x C l t P E .1. S \Q C .3 D. m . 1.. .. . ... hm Table Page 13. Number of Plants, by Actual Processing Capacity in Liters Per Day, Spain, 1974 . . 37 14. Hypothetical Plants' Volumes of Operation, by Types of Package and Length of Work- day, in Liters Per Day, Spain 1974 . . . . 95 15. Land Acquisition and Development and Building Construction Costs and Annual Economic Costs Associated with Them (in pesetas), by Plants, Spain, 1974 . . . . . . . . 98 16. Total Equipment and Auxiliary Services Purchase and Installation Costs (in pesetas), by Plants and Stages, Spain, 1974 . . . . . 100 17. Annual Economic Costs in Pesetas Associated with Equipment Depreciation, Repairs and Maintenance, Interest, Taxes and Insurance, by Plants and Length of Workday, Spain, 1974 . 101 18. Annual Economic Costs in Pesetas Associated with Container Investment Costs, by Plants and Length of Workday, Spain, 1974 . . . . 102 19. Annual Economic Costs in Pesetas, Associated with Durable Assets, by Plants and Length of Workday, Spain, 1974 . . . . . . . . 103 20. Salaries, Wages, Social Charges and TOtal Labor Costs (in Pesetas per year) by Plants and Length of Workday, Spain, 1974 . . 106 21. Annual Utility Consumption Costs (in pesetas), by Plants and Length of Workday, Spain, 1974 . 109 22. Packaging Materials and General and Miscel- laneous Annual Costs (in pesetas) by Plants and Length of Workday, Spain, 1974 . . . . 112 23. Total Annual Processing Costs (in pesetas) by Plants and Length of Workday, Spain, 1974 . . 114 24. Average Unit Processing Costs (in pesetas per liter) by Plants and Length of Workday, Spain, 1974 O O O O O O O O I O O O 115 xi 1:1 ru 0 :1 V“ . u .1 K. t (It nu. 0 Huh :an C. C 'Q. Illlalnll'lu LI Eur.-. h:.. ‘5 n .m- “WV. \ Rm Crtrtsn. DI Ni ‘i .c, P 0 up. hub r. be I b. ‘I Table Page 25. Potential Supplies of Milk for Fluid Use, Spain, 1973-74 0 o o o o o o o o o o 123 26. Milk Needed for Fluid Consumption, by Provinces, Spain, 1973-74 . . . . . . . 126 27. Minimum Aggregate Cost with Different Number of Plants, Spain, 1974 . . . . . . . . 133 28. Optimum Number, Size, and Location of Plants (Model I), Spain, 1973—74 . . . . . . . 134 29. Optimum Flow of Raw Milk from Supply Regions to Plants, in Thousand Liters Per Day (Model I), Spain, 1973—74 . . . . . . . 135 30. Optimum Flow of Finished Milk from Processed Plants to Consumption Centers, in Thousand Liters Per Day (Model I), Spain, 1973974 . . 137 31. Optimum Price Location Differentials Resulting from Solution of Dual (Model 1), Spain, 1973-74 0 O I O O O O O O O O O O 139 32. Provincial Supplies of Milk Destined to Processing for Fluid Consumption and Provincial Demand for Finished Fluid Milk, Spain, 1973-74 . . . . . . . . . 143 33. Optimum Quantity to be Processed by Each Fluid Milk Plant, Spain, 1973074 . . . . . . . 146 34. Optimum Raw Milk Interprovince Flow (Model II) in Thousand Liters Per Day, Spain, 1973-74 . 148 35. Optimum Processed Milk Flow from Surplus to Deficit Provinces (Model II), in Thousand Liters Per Day, Spain, 1973-74 . . . . . 150 36. Optimum Price Location Differentials Resulting from Solution of Dual (MOdel II) ' Spain, 1973—74 0 o o o o o o 152 37. Optimum Raw Milk Interprovince Flow (Model III), in Thousand Liters Per Day, Spain, 1973-74 0 o o o o o o o o o o o o 155 38. Projected Total Milk Production, Spain, 1975-78 . . . . . . . . . . . . . 158 xii “at." r? »{C 7' .c <\ 1,. . V Table Page 39. Provincial Supplies of Milk Available for Fluid Consumption and Provincial Fluid Milk Needs, Spain, 1978 (Projected) . . . . 161 40. Optimum Number, Location and Size of Fluid Milk Plants, Spain, 1978 (Projected) . . . 164 41. Optimum Flow of Raw Milk from Supply Regions to Processing Plants (Model IV), in Thousand Liters Per Day, Spain, 1978 . . . 166 42. Optimum Flow of Finished Milk from Processing Plants to Consumption Centers (Model IV) in Thousand Liters Per Day, Spain, 1978 . . . 167 43. Optimum Number, Location and Sizes of Plants (Model IV), Spain, 1978 (Projected) . . . . 170 A-l. Matrix Format of the Transshipment Model Under the Linear Programming Formulation . . . . 191 B-l. Salaries, Tariff, and Complementary Basis and Work Accident Insurance Rates for Plant I and Eight-hour Workday, in Pesetas/Month, Spain, 1974 . . . . . . . . . . . . 201 B-2. Wages, Tariff, and Complementary Basis and Accident Insurance for Plant I and Eight- hour Workday, in Pesetas/Day, Spain, 1974 . . 202 D-l. Factors Affecting Milk Production, Spain, 1964-74 . . . . . . . . . . . . . 216 xiii - I..=.’ ..‘¢-.e a in nu. Cu LI Stcll 1 .c a Q4 1 MU» h.“ P T To. CN .C 3 1.. T1 LIST OF FIGURES Page Actors, Functions and Institutions in the Spanish Dairy Subsector . . . . . . . . 18 Marketing Channels for Fluid Milk and Dairy Products . . . . . . . . . . . . . 29 Product Transfer Arrangements in the Spanish Dairy Subsector . . . . . . . . 43 Stollsteimer's Model . . . . . . . . . 60 Total Cost Minimization Model . . . . . . 62 Long Run Average Cost Curves for Fluid Milk Plants, Spain 1974 . . . . . . . . . 117 A Basic Model of the Factors Influencing Industrial Location Decisions . . . . . . 128 xiv LIST OF MAPS Map Page 1. Peninsular Provinces, Spain, 1974 . . . . . 70 XV 3W“ II- ' The purpose .., : :ecessary problen 1 (1:: the study wil Kitty and literati: artet Of Scai‘ Eztifin V“. SOI‘je of 2‘: c u 0 v . v I \t“: v. ‘ "erCeivea ‘H Fir ii‘A‘ ‘ PVV USA! “‘1? m. CHAPTER I INTRODUCTION The purposes of this chapter are to provide the necessary problem framework and research objectives from which the study will proceed and to present some of the theory and literature related to them. Problemeetting_ Considering, in a very simplified way, three alter— native methods of organizing the fluid milk market of a country, namely: (1) Open market, without government inter- vention; (2) Partial government intervention; and (3) Total government control, the present organization of the fluid milk market of Spain comes under partial government inter— vention. Some of the reasons for choosing this alternative include the character of the product (eSpecially the perishability, essential nature and peak—load supply condi— tions of the milk), farmers' uncertainty (and fixed assets), their perceived powerless positiOn relative to those with whom they must deal, the need for consumer protection, etc. ! I‘mff' 'M h —..x .‘r. IL. The basic :Plants and 0th 1i regulates milk :25 for the subs which prices to 2:;125 of some pr: aviation is being :rrect some of the .ant chances I Mr N... . 13529 (6), see/is Part IV of 32:?- I'i'vw ' ' ‘ “:\:lenlzation N . I" ‘n. hi~h - - 5 Priority V ‘ P _;....ized milk for «1 processing ca " l R‘ \I \ «9c . w' .al cases Dr The basic administrative regulation of the dairy subsector of Spain is the Regulation of Fluid Milk Process- ing Plants and Other Dairy Industries (5), which defines and regulates milk production, establishes the general norms for the subsector and originally determined the way in which prices to farmers and distribution and selling margins of some processed products were to be set. This Regulation is being prOgressively modified in order to correct some of the typical maladjustments of the subsector. Important changes have been made by Decrees 544/1972 of March 9 (6), 588/1974 of March 15 (8) and 3520/1974 of December 20 (9). Part IV of this Regulation established the compul- sory hygienization of milk in every nucleus of population, with high priority for the more populated ones, assigning to the processing plants the function of providing hygienized milk for local direct consumption.. The minimum daily processing capacity required is 25,000 liters, although in special cases processing plants can be authorized in towns or areas whose daily consumption does not reach this figure.1 It is hypothesized that the present fluid milk processing plants of Spain are, with a few exceptions, too small to achieve efficient operation. At the same time, new transportation technology, changes in marketing channels, 1A5 of March 1, 1974, four plants were operating in these conditions under article 64 of the Regulation, as modified by Decree 544/1972 (6). 32.1 p , _ ’ 'ph' .y'ru ll— 4-331'9d teCh-no l C .:~--=:-ents in th efficiency. The imple :vrec-ver, seems t ezessiye number failing to extend :.. toe countryr fa :2: adjustments 3323;": in order tc S‘;s;.'sten and expa With resoe :2 :a~,, ' utd“ 2 d -tion of 1977-78 (9) ts ‘7 Orlginal Recul IEIEHC es 0f prices improved technology in plant operation, etc., suggest that adjustments in the size of plants could lead to improved efficiency. The implementation of this part of the Regulation, moreover, seems to be leading to the construction of an excessive number of plants while, at the same time, it is failing to extend the system of hygienization of milk to all the country fast enough. It is also hypothesized, then, that adjustments in the number (and size) of plants are needed in order to improve the efficiency of the fluid milk subsystem and expand its capacity. With reSpect to producer prices, on the other hand, the Regulation of the Dairy Marketing Years 1975-76, 1976-77 and 1977-78 (9) that has superseded Part V (Milk Prices) of the original Regulation (5), establishes interprovince dif— ferences of prices based on transportation costs of raw milk as opposed to the previous criterion of interprovince differences based on the real costs of production and the ecological, edaphic and farming characteristics (5) of the different dairy regions. Although, in fact, the present arrangement is considered an improvement with respect to the previous practice, it is hypothesized that the location dif- ferentials as presently computed (without incorporating the costs of processing milk) operate to provide less than optimum milk movements. The basic 2 test, therefo: Hypo-the s: ::‘P~Y t 0 attefiam .ggiziz‘h l..g eXiSt Q 1.,“ w: : v‘ ‘n ' VS Llh \, h. s. bred: \“C‘ ‘ Researchable Hypotheses The basic hypotheses which are considered important to test, therefore, are: Hypothesis No. 1: Most of the present fluid milk processihg plants of Spain are too small to achieve efficient operation. Hypothesis No. 2: The number, size and location of the fluid milk processing plants of Spain do not coincide with the least cost pattern. Hypothesis No. 3: The system of hygienization of milk caarse extended to all the country with a reduction in unit costs through adjustments in the number, Size and location of plants. Hypothesis No. 4: Price location differentials as Presently computed Operate to provide less than optimum milk movements. Research Objectives The scope of the prOposed study will, necessarily, be limited by the available resources. It is believed that the knowledge about both the fluid milk subsyStem and the dairy subsector of Spain must be accumulated over time and, thus, a first objective of this research effort will be simply to attempt to provide a conceptual framework for organizing existing knowledge and to show the nature and importance of the missing information. The general objectives of providing descriptive, diagnostic, predictive or projective and prescriptive infor- mation will include the following: (1) To describe the more important characteristics of the fluid milk subsystem of Spain; (2) To diagnose some of the shortcomings of the guesent system, identifying problems of the participants, Lmexploited opportunities, barriers to improved performance, eUL; (3) To estimate the future economic configuration of :xme significant variables; and (4) To prescribe possible changes leading to improved performance. More specifically, the objectives of the study will be: (1) To analyze the present organization of the fluid Hulk subsystem; (2) To determine the effect of volume of production in individual plants upon the cost of processing fluid milk; (3) To determine the least cost number, size and location of fluid milk processing plants for Spain; and (4) 5R1determine the optimum interprovince differences of puices to milk producers that will produce a least cost flow Cd'milk from the surplus to the deficit provinces in order 11>minimize total transportation and processing costs. Procedures The first step will involve a description of the eXisting systems of organization and control for the fluid Hulk subsystem of Spain, directed toward evaluating its Performance. The second step will involve the realization of an ecOnomic engineering study to estimate the total costs and, through them, the unit costs of processing fluid milk for different plant sizes. The third step will include the construction of a 1-inear programming transshipment model to determine the optimum number, size and location of fluid milk processing plants for Spain. In analyzing this problem, an attempt will be made to minimize the aggregate costs of assembling raw milk, transporting it to the processing plants, process— ing it there and distributing the processed fluid milk products from the plants to the consumption centers. From the results of this model, optimum interprovince price loca— tion differentials that will produce optimum flow patterns of raw and processed milk in order to minimize total costs will be computed. Theoretical Background Some of the theory and literature related to this research is presented in this section in three parts. Subsector Systems and Subsystems Research Concepts The term subsector came into use in 1968 with a paper by Shaffer (65), being elaborated and somewhat modi- fied later (Shaffer 66, 67, 68, 69). A subsector was defined as "the vertical set of activities in the production and distribution of a closely related set of commodities" (66, page 3), and also as "a meaningful grouping of economic activities related vertically and horizontally by market relationships" (68, page 5).2 It differs from an 2However, as Hildreth et al. have pointed out, "linkages within a subsector can be 'market relationships' or a rich assortment of other arrangements, including con— tracts and government rules" (31, page 852). M .. j . .l '1! .r‘ilLi .u‘n' risstry3 as a I 1:: vertical a: ristr' the pro ssrsector, the; In a rece 5:;iies seen. to r. Zzet'fect, Manche sates research I. -; 335 we have 0 sisector researcl tar. as equivalent tetontrary, has stsector studies «Fixation rathe .:::3‘IHL .. cues of Acri the I I ,3 N - (I) 3 Cr I—1 c: (D f'. t b”, ssh: “.v’ers as“) ISL)“ '. ' ‘ulzaa- Ll'fel "-4 industry3 as a unit of study in that a subsector includes both vertical and horizontal relationships, whereas in an industry the production units are related horizontally. A subsector, therefore, may include several industries. In a recent paper, French (24) found that subsector studies seem to mean different things to different peOple. In effect, Manchester, for example, regards the terms systems research and subsector research as being synonymous: "In ERS we have often used the terms systems research and subsector research as synonymous. Therefore, I will regard them as equivalent in meaning" (39, page 6). Shaffer, on the contrary, has a broader View, having suggested that subsector studies are "more of a departure in research organization rather than a departure from traditional approaches of Agricultural Research," adding that "Closely tied to my perception of subsector studies is what I call a systems orientation" (69, pages 333-4). By a systems orientation he simply means "The analysis of problems in the context of the broader system, an analysis which takes into account feedback, sequences and externalities" (67, page 44). What emerges, French says, is a two-dimensional concept: (1) Subsector research systems, "a way of 3An industry has been defined by Bain as consisting of a recognizable group of products which are close substi- tutes to buyers, are available to a common group of buyers, and are relatively distant substitutes for all products not included in the industry (1). :zgazizing researc ‘2 :ethcdelogica l :1: of observatio firework may, in ;::.I: for the accu 51:11:39 of res 12:3." "reveal h _ V '-:;:v~r~ V‘ perta in in sure of the pres ""33 SE‘StED is d 3.6 to ' a Single r. 53::e 0‘ c .rustrat. -...l consis tent w' «sum of the sul organizing research” and (2) Subsector systems research, "a methodological approach in which a subsector is the unit of observation" (24, page 1014). This subsector framework may, in fact, play an important role as a focal point for the accumulation of research results and the structuring of research information systems. This orienta- tion may "reveal holes and duplication of effort, lead to improved planning and have a general synergistic effect on research pertaining to the subsector" (24, page 1020). But before progressing further, a reminder of the nature of the present research effort is in order. A sub— sector system is definitively too broad to become manage- able to a single researcher and would surely become a source of frustration. A more viable research orientation, still consistent with the subsector approach, could be the division of the subsector system into subsystems. Dealing with a subsystem focuses attention in the vertical relation— ships and eliminates the shortcomings of focusing on a single function or level of activity. An appropriate subsystem has been defined by Purcell as "A set of two or more interrelated parts of the total system which exhibits the important characteristics of the total system" (61). Once an appropriate subsystem is identified, therefore, attention can be directed to the development of a methodology which can both isolate and evaluate important economic relationships. The Organizational Concept When interested in the organization of some compo- nent part of the economy, a basic concern is how various kinds of organizations would affect its performance (and that of the economy). A relatively large body of economic theory has developed in the field of Industrial Organiza- tion, which seeks to identify variables which influence economic performance and to construct theories linking it to these variables. The broad descriptive model maintains that performance of a system depends upon the conduct of its participants and this conduct depends, in turn, upon its structure.4 Structure and conduct are also influenced by various basic conditions and there are also feedback effects. The system performance is to be described from the observation of its basic conditions, structure and conduct.5 It is also recognized that many other elements influence structure, conduct and performance at various stages in the production and marketing process. 4Performance is, of course, a multidimensional attribute. Good performance embodies, at least, the follow- ing goals: Efficiency, progressiveness, product suitability, participants' rationality, adequate levels of profits, out- put and promotion expenses, absence of bad externalities, equity, full employment, conservation, absence of unfair methods of competition, good labor relations and absence of misregulation. These performance dimensions may not always be completely consistent with one another; nevertheless, to the extent possible, good performance implies maximum satisfaction of all fourteen goals. 5Conduct, however, is a controversial concept, which is viewed as having various degrees of importance. Most structuralists seem to argue that conduct is too difficult AlthougI 15:51:63 not 5)" :::sis':s of "thE :rgazization is sxxtxe are th atities corposi 1::cr.sist of I: Emulation and efficient organi: 1:11 be preposed iifillbe analyz ~31. clreCtl“; k-it L::l"lnhr~ """" ~Y Consid. ACCOrding 1343;. ‘Log to Suusect ua. :- . . .:S 1‘- I .93 of SYS ter 10 Although Organization and Structure are related, they are not synonymous. The organization of a system consists of "the matrix of power centers through which organization is controlled" (31). The basic dimensions of structure are the number, size and concentration of the entities composing the system. The organizational linkages may consist of markets or other arrangements for decision formulation and power transmission. In this study, a more efficient organization of the fluid milk subsystem of Spain will be proposed and the main consequences of moving toward it will be analyzed. It will not be possible, however, to deal directly with all the aspects of market performance. Efficiency Considerations According to French, most researchable issues per- taining to subsectors involve determining "how various measures of system performance are affected by instruments of change" (24). Of all the aspects of market performance it is considered both desirable and possible to deal with production efficiency in order to measure the consequences of moving toward a particular organization of the fluid milk subsystem of Spain. to deal with and that relationships can be established between structure and performance which make it less imperative to study conduct per se. On the other hand, behaviorists argue that Industrial Organization can do a much better job with a richer model which includes inter- mediate behavioral links. French 1 1:51;: coxplex < Par; at differe :esne increasir and: try or 9 age 3) . The indi {fizient if its :;:;‘;t for any 5: =15 enviromen t " .1; g: ' -. ”st function azure of the de Firm pric -=.:.1'-.re to the e: :05: W ith opti: v i I“ .echnically 9;: Wing sense if i 1’5: mar 81 11 French has also noted that efficiency is a decep- tively complex concept, whose definitions and dimensions "vary at different levels within the market economy and become increasingly complex as we move from the firm to an industry or group and on up to the total system" (23, page 3). The individual firm is considered to be technically efficient if its production function "yields the greatest output for any set of inputs, given its particular location and environment" (23, page 3). The ratio of output obtained with the production function used to output attainable with the best function, given the input combinations, is a measure of the degree of technical efficiency for a firm. Firm pricing (or allocative) efficiency is measured relative to the efficient production function as "the ratio of cost with optimal input proportions to cost with the input proportions actually used" (23, page 4).. A firm may be technically efficient and still be inefficient in a pricing sense if it fails to combine inputs in such a way that marginal revenue products are equal to factor prices. The product of the indices of technical and alloca— tive efficiency is a measure of economic efficiency of the firm (23, page 4). Again, a firm may be both technically and economically efficient for its scale but inefficient with respect to its optimum scale. Optimum scale may also vary with relative factor prices. Me deg ‘50 rtfustrY 51113 5125795: (1) J :2 [2} Full Utj :5 size and loca In analy :i;s‘:ry subsyste :79. efficiency t efficiency are :31 resources wi ‘e-A 1...,,,e of a COI‘pt 1.3C3ti0n 0f IESC “1‘? the industz 352:0:- ' a»...s 1n the s It iS cons 3221‘:ch ' “We Efficie “A. ‘2 Cus,' fwulSkl filllici 1 1E1s- ' . "“|ln lng the re; 12 The degree to which the total marketing system or an industry subsystem (such as the fluid milk subsystem) achieves: (1) Economic efficiency (as above) for all firms; and (2) Full utilization of capacity and advantageous use of size and location economies, is referred to as productive efficiency.6 In analyzing areas of potential cost savings in an industry subsystem, at least two separate facets of produc— tive efficiency become apparent. Two basic areas of inefficiency are the suboptimal use of available and poten— tial resources within firms (existing primarily in the absence of a competitive environment), and the inefficient allocation of resources between the different firms consti- tuting the industry, which manifests itself through.malad- justments in the structure and concentration of firms (57). It is considered that economic research relating to productive efficiency may lead to improved performance of the Spanish fluid milk subsystem. This can be attained by determining the relative efficiency of existing alternative production methods, scale of operations and business prac— tice, and by formulating models of efficient organization within market areas for the subsystem which may serve as aids for planning and policy formulation. 6The degree to which operation of the subsystem under exchange mechanisms generate prices which conform to a competitive standard is referred to as Pricing effi— ciency (12, pages 410-14), which, in this context, is dif- ferent from pricing efficiency for the individual firm (considered above). This res€ 33:35 that will 27531058! to 0? ration was ex; Least ccst, effic :i iistribution fie capacity 0 1; to all consu: it the assenblv, 311:. the subsyst 221:2 total subs: 35’1“?» -""W‘-S separat 13 This research effort attempts to obtain empirical results that will help the fluid milk subsystem of Spain move closer to optima in size and factor allocation. This intention was expressed earlier as a desire to devise a least cost, efficient pattern for milk assembly, processing and distribution that, furthermore, will allow for expansion of the capacity of the present system to provide hygienized milk to all consumers. The study is especially concerned with the assembly, processing and distribution Operations within the subsystem, attempting to optimize the efficiency of the total subsystem (not necessarily each of these operations separately). Organization of the Study Chapter I has provided the objectives of the study and some background information. Chapter II will define the dairy subsector and the fluid milk subsystem of Spain. It will characterize recent levels and trends in domestic production, consumption and international trade in the dairy subsector, describe the structure of the fluid milk market and the role of the government in it, and attempt a preliminary evaluation of the performance of the present system. Chapter III will present the basic design model to be utilized in the analysis and some of the necessary assumptions. m “ t .I n- \."n1 'm‘nb hapter I r.‘"~‘-3Iln" StUd}' 2:15 of proceSSi Links of workdaj Chapter V Xiantial fluid :11 :asnts of EX-post '35 3rd location 1 actual costs . ‘v‘. F! \U .. :I‘Cu the stuc .__ u‘ \s :‘t: - "due-“CY of 1 14 Chapter IV will report the results of the economic- engineering study addressed to the estimation of unit costs of processing milk for plants of different sizes and lengths of workday. Chapter V will present the estimates of cow milk production, fluid milk consumption and milk assembly, pro- cessing and distribution costs and the designation of potential fluid milk plant sites as well as the empirical results of ex—post analyses to determine the optimum number, size and location of plants for 1973-74 and to compare them with actual costs. Chapter VI will present similar ex-ante analyses for 1978. Chapter VII finally, will present the conclusions drawn from the study, and some recommendations to improve the efficiency of the fluid milk subsystem of Spain. 3:: subsector an ‘ezv3n8n 1....erize recen 1:2, ccnsrption pa elytitelly descr. ., -‘. 1 "19 fluid milk I ‘z’:‘\hsh f“"‘o. andce . it“ “5:.CW it ‘15 51:: erbodied in S‘ a'~7..v-"S"bsector of Tr,vr+:k ‘.hxh ‘rdsed 5 39 "fl" 51th , ‘ ' “Oklgh l CHAPTER II THE DAIRY SUBSECTOR AND FLUID MILK SUBSYSTEM OF SPAIN The purposes of this chapter are to define the dairy subsector and the fluid milk subsystem of Spain, to characterize recent levels and trends in domestic produc- tion, consumption and import-export activities and to analytically describe the structure and government's role in the fluid milk market with the aim of evaluating its performance. Definition of the Dairy Subsector and Fluid Milk Sfibsystem The definition of a subsector needs to be carefully composed. If too broad, it could become unmanageable and if too narrow, it would fail to capture the research bene— fits embodied in systems thinking. The definition of the dairy subsector of Spain that is proposed attempts to strike a comfortable compromise. It is definitively too broad to be fully exposed and elaborated in the present research effort, although it is felt that it is necessary to 15 freeze a SUbSi :i-to specify i1 ifzrts, such as ifizitional frar 1' 1..ccr.gruency . The da i ry ‘I.. .. ‘m. ..~ A“; ‘0‘ ~ V i~ .. h... ‘ 41.._‘ ‘ 5L - a;;:::Er ..t, Etch; t ‘ '1. . 1 “ ‘letion of fig. 16 delineate a subsector which is broad enough to be relevant, and to specify it in such a way that independent research efforts, such as this particular study, may plug into the definitional framework with little duplication of effort or incongruency. The dairy subsector of Spain, then, shall include the farm production of milk and some aspects of the major inputs to milk production, especially the feed industry, manufacturing and distribution of specialized dairy equip- ment, artificial insemination and herd health among others; the assembly and processing of milk, including input indus- tries as, for example, the prepack and paper distribution industries as inputs to processed fluid milk products, the manufacturing and distribution of specialized processing equipment, etc.; the distribution, retailing and consumer acquisition of fluid milk and other dairy products; the beef industry, as a user of a major product of dairy farm- ing, etc. It is perhaps obvious that the boundaries of the subsector need to be set quite arbitrarily to make any research manageable. The dairy subsector is, furthermore, influenced by a number of regulations which include minimum, indicative and intervention prices, location differentials, maximum resale prices for certain products, measures of protection to farm milk production, import-export actions, sanitary regulations, plant licensing, etc. Several agencies of different Ministerial Departments (Agriculture, Commerce, :“IJCtCI . F ig u: :5 definition ' The fluid :15: acqu151tior in; 1 -:.‘.'u a‘so be ex: 1::ese proces s e “:"z 4» -1. .o be, sore}: 17 Interior, . . .) are involved in the regulation of the subsector. Figure 1 presents a diagrammatic picture of this definition. The fluid milk subsystem includes farm production and assembly of milk intended for fluid consumption, pasteurization or sterilization of milk, packaging of processed fluid milk, and distribution, retailing and con- sumer acquisition of fluid milk products. The subsystem could also be expanded to include some of the major inputs to these processes. Again, the boundaries of the subsystem have to be, somehow, set to make the research manageable. The relevant regulations and institutions, of course, must also be included. Trends in ProductionLConsumption and‘InternatIonaIVTrade The dairy subsector is a large and vital part of the agricultural sector of Spain. Production of milk made up 23.8 percent of livestock production, or 9.1 percent of total agricultural production in 19727 (Table l). The contribution of milk and dairy products to total agricul- tural production was 35.1 billion pesetas, plus the value of the on-farm consumption, estimated at 7.6 billion pesetas. 7Total agricultural production in Spain in 1972 was 382.1 billion pesetas, in sales at the farm level (43). One peseta equals $0.017. 18 Beef Industry Inputs Feed Equipment Capital AI & Health etc. .+——Minimum Prices Inputs Equipment Packaging Materials Capital etc. Figure 1. Farm Milk ~<——-Price Support Production HImport-Export Actions <——-Location Assembly Differentials Hauling Procurement Sanitation, P . Licensing, etc. roceSSing and Packaging Distribution Wholesaling Retailing H. R. & I. <———Provincial and Local regulation ‘<———Maximum Sell- ing prices Consumption Actors, Functions and Institutions in the Spanish Dairy Subsector. Value of Billion fl Product f.— u ._4 Livestock :N . n u‘due‘i & DEESk‘ ..-.,,:: V'vw + ' ..l..iSuerl 3‘: 3 w91353131 “~— . A I en Hal 'x' 5; ‘3’“: 19 Table 1. Value of Livestock and Livestock Products, in Billion Pesetas. Spain, 1972. Product Value Percentage of Total Livestock 94.3 63.9 Milk 35.1 23.8 Eggs 17.2 11.7 Wool 0.7 0.5 Honey & Beeswax 0.2 0.1 Total 147.5 100.0 Source: Ministerio de Agricultura, Spain. La Agricultura Espanolaren 1972. Ten dairy firms were included among the four hundred top manufacturing firms in 1972 (Table 2). Three multi~ national corporations were present in the dairy industry (Table 3). Milk Production Since 1959 there has been a gradual increase in the quantity of cow milk produced in Spain. Cow milk produc- tion in 1973 reached 4.79 billion liters (52) compared to 2.50 billion liters in 1959 (Table 4).8 Nevertheless, this seems to be a low figure, when the facts that the population of Spain is more than thirty- five million and that she receives a very large number of 8One liter of milk is equivalent to 2.27 pounds or 1.056 liquid quarts. AflE-E! T 55.2 2. Ranking Of ' Manufactur Spain! 1’97 ————-— h: Kraf Coo; .1”.. Ministeri enpresas \_______. -k£ 1 Multinat Industr' . . u“ o A ..4 20 Table 2. Ranking of Dairy Firms Among the 400 Top Manufacturing Firms,by Sales Volume. Spain, 1972. Sales Ranking Firm (million pts.) 20 Nestle AEPA 10,019 110 La Lactaria Espafiola SA 2,272 134 Danone S.A. 1,979 167 CLESA 1,632 247 Kraft Leonesa S.A. 1,027 277 Productos Lécteos Freixas S.A. 949 280 Derivados Lécteos S.A. 921 360 Cooperativa Lechera SAM 671 362 GURELESA 666 382 S.A. LETONA 59S Source: Ministerio de Industria, Spain. Las 400 primeras empresas industriales en 1972. Table 3. Multinational Corporations in the Spanish Dairy Industry, 1974. Participation Firm (Percentage) Spanish Firm NESTLE 100.0 Scdad. NESTLE, AEPA. NESTLE 99.0 Derivados Lacteos, S.A. DANONE 17.0 DANONE KRAFT CO. 100.0 Kraft Leonesas Source: Confederacidn Espafiola de Cajas de Ahorros: ngentario Sogioldgico. 3&4. Total Cow l __— ’f— n n. in: (8111i 1967 Ministe EStadis BOlEt‘. . 21 Estadistica Table 4. Total Cow Milk Production, Spain, 1959-73. Amount Production as a Year (Billion liters) Percentage of 1959 1959 2.50 100.0 1960 2.60 104.0 1961 2.86 114.4 1962 2.89 115.6 1963 3.12 124.8 1964 3.13 125.2 1965 3.28 131.2 1966 3.71 148.4 1967 3.73 149.2 1968 4.01 160.4 1969 4.29 171.6 1970 4.32 172.8 1971 4.26 170.4 1972 4.51 180.4 1973 4.79 191.6 Sources: Ministerio de Agricultura, Spain. Anuario de Agraria, 1972 (1959-72); and Boletin Mensual de Estadistica 2/74 (1973). asitcrs each year a: Ligcc‘uction prevai :fSpain are very su: :1'e0f concern to 1 grins, migration, :egricing system, 2: be negative facto host milk 5: itemilk, and 54.2 r: :ensned as flu The number as :,205,023. “his :3: respect to a Friesians and 676:6 '13. output per C0“ :2»: and feed COR 21.-goods and dua? i‘irage national IT- }iryear in 1973, Milk prodt‘ Titian» : I M‘ fart of I 22 visitors each year are taken into account. This relatively low production prevails despite the fact that some regions of Spain are very suitable for milk production. This is a cause of concern to policymakers.9 A priori, structural problems, migration, limited capacity of existing plants, the pricing system, lack of consumer information, etc. seem to be negative factors with respect to an increased produc- tion. Most milk sold by farmers in 1972 was in the form of whole milk, and 54.1 percent of the milk marketed that year was consumed as fluid milk (Table 5). The number of dairy cows on farms in September 1973 was 1,285,023, which represented an increase of 7.6 percent with respect to a year before. Of these, 934,178 were Friesians and 676,649 were dual purpose cows (Table 6). Milk output per cow was extremely variable depending on breed and feed conditions. The existance of both exclusive dairy cows and dual purpose cows that are milked makes the average national milk output per cow, of about 2,476 liters per year in 1973, next to meaningless. Milk production tends to be concentrated in the Northern part of the country. Oviedo, with 543.67 million 9During the informative session held at the Spanish Parliament on February 3, 1975, for example, the Minister of Agriculture expressed the need to take actions to “adjust" the prices of milk in the short run. In the medium range, he said plans are needed to increase the supply of Hulk, not only to attain self sufficiency but also to form stocks (ABC, February 4, 1975). 2123. Use of Mil Use ___————"'-—— Fllid milk Cheese Condensed mil}; Butter Poviered milk Ethers Fed to calves Total \h ere: Ministeric Estadistic \ ‘ZL‘ «‘48 6| hu‘t‘ber O Septenbe 23 Table 5. Use of Milk. Spain, 1972. Amount Percentage Use (million liters) of Total Fluid milk 2,441.3 54.1 Cheese 557.9 12.3 Condensed milk 232.4 5.1 Butter 214.3 4.8 Powdered milk 152.6 3.4 Others 191.9 4.3 Fed to calves 721.2 16.0 Total 4,511.6 100.0 Source: Ministerio de Agricultura, Spain. Anuario de Estadistica Agraria,_1972. Table 6. Number of Dairy Cows on Farms, by Breeds, Spain. September 1972 and 1973. 1972 1973 Breed Number Percentage Number Percentage Friesians 872,302 45.8 934,178 48.3 Brown Swiss 170,160 9.1 188,177 9.7 Other Breeds 151,514 9.0 162,668 8.4 Total Dairy 1,193,982 63.9 1,285,023 66.4 Dual Purpose 676,649 36.1 649,981 33.6 Total 1,870,631 100.0 1,935,004 100.0 Sources: l972--Ministerio de Agricultura, Spain. Censo de la Ganaderia Egpafio1a, Septiembre 1972; l973--Ministefio deIAngcultura, Spain. BBIetin Mensual de Estadistica 2/74. 1:215, was the lead :gEatzarder with 45 T$L These four 531:: percent of the ;::t'ir.ces that year. ;::mesof Spain : 21?. Ten Leadi 1972. rfilmn Provin \— 1 Oviedc Santa: ‘4.) L090 La Cc: Leon Ponte ViZC; Gercr 9 Maer Oren: Tota \ U, ._ Va. “1 HI fl, Mi niSter Estadic: \; 24 liters, was the leading producer province in 1972, followed by Santander with 450.84, Lugo with 389.8 and La Corufia with 377.14. These four northern provinces contributed almost forty percent of the milk produced in the country‘s fifty provinces that year. Table 7 gives the ten leading producer provinces of Spain in 1972. Table 7. Ten Leading Provinces in Milk Production, Spain, 1972. Total Production Percentage Position Province (Thousand liters) of Total 1 Oviedo 543,675 12.0 2 Santander 450,845 9.9 3 Lugo 389,805 8.6 4 La Corufia 377,147 8.3 5 Leon 245,916 5.4 6 Pontevedra 199,302 ° 4.3 7 Vizcaya 155,716 3.4 8 Gerona 136,496 3.0 9 Madrid 128,504 2.8 10 Orense 110,345 2.4 Total 2,737,751 60.1 Source: Ministerio de Agricultura, Spain. Anuario de Estadistica Agraria 1972. '“ 3325;101:1011 Per capita ,...;:ts have been 1:: of fluid milk assented a forty -051965. Cons Tamas 6.5 Kilogr :trease with respe :terzational tram. N Spain is st ;.:-:'.':ts, althouch «I. are declinin‘: '55 1n 1973 5} 25 Milk Consumption Per capita consumption of fluid milk and dairy products have been increasing since 1965. In 1972, consump- tion of fluid milk was about 85 liters per person, which represented a forty-three percent increase with respect to that of 1965. Consumption of dairy products in the same year was 6.5 Kilogramslo per person, a thirty percent increase with respect to 1965 (Table 8). International Trade Spain is still a net importer of milk and dairy products, although imports, and especially those of fluid milk, are declining (Table 9). Imports of milk and dairy products in 1973 showed an eleven percent decrease with respect to those in the previous year, the sharper decrease being that for fresh milk in which imports were reduced twenty-five percent with respect to those in the previous year and seventy percent with respect to 1971. All of the fresh milk imported came from France.11 loOne kilogram is equivalent to 2.2 pounds. 11Dairy farmers, of course, are opposed to milk imports and in this sense the Livestock Group of the Agricultural Syndical Official Chamber of Lugo, for example, agreed last April to ask for the "immediate discontinuation of milk imports from France" (ABC, April 24, 1975). In any case, self sufficiency in milk production is an important goal to Spanish policymakers and as such it was expressed, fer example, by the Minister of Agriculture at Las Cortes on February 3, 1975 (ABC, February 4, 1975). o.w- m-r c.00a o.m o-oo~ m.om nmaw r.~uu..Jr~.uvHvL.,-nn AmuEprn.nud «an munmvafi (had flvuunwdw~rququa~ AMw.C-IU-H~»A.VN ix» Lphivx PnavdJ..—:...marunyrv $.«U~.~:.,.L F,» mun. a..~0fi.unh.::mur~Av.v VsH u: \f bah-wen lu;~.- ufiv |x‘\‘ 4. | I I . . I , a . I . . I u I A {h Nah DIEI‘ u:---a--.~.V lulu “-.-up.v Ip|.§ uh! u-~‘u.§ I‘l...vfluu pu‘..-.-uu ouo‘u-n-o-u.un.- \f‘IW-vsu Iv--\ lt-dz huuuun 26 .tha so maommmmm musuanoflumm ma .cflmmm .mnsufisowuma mp owhmumflcwz ”monsom o.oma m.w o.mva o.mm mhma o.m~a m.m >.H¢H ~.vm. Hnma c.0HH m.m H.mma m.om onma o.mHH m.m m.vma H.om mmma o.mHH m.m m.~ma m.mh mwma o.oaa m.m «.mma o.mh hmma o.wHH m.m m.~aa 0.5m mmma o.ooH o.m o.ooa m.mm mmma mama mo mmmucmonmm “mamumoaflxv mmma mo mmmucmoumm Anamumoawmv Ham» 0 mm :oflumasmcou muoscoum m mm coHumEsmcou xawz anwmo nonuo .Nhlmoma cflmmm .muonooum muflwa Cam xawz Uwsam mo COHHQESchU muwmmu Hmm .m mflams s s s «on mv meaa Nmo we mvm do coma avw.mo onm.vna hnv haw up. \— a v.2 I CGDLK munuhgvn~ZLH m\U:H0n~Von.h "w dhCamptH EULA”. rt - . a a . . .lll. I'll" ’1 8..th -. US”!— H QOLAVAnvnvL nuUannmEh nunawuwvvnéminn WULO..~XM.~ mwaC.~.:~ - A .-... .... . . . .w-H-v.. u . N:\.. um - I ~.I\~l~.fllll Ii! | .4: I \ -\Q:- n.1n..-.... I.I-.--..un.. \func'A~. . ..... . .én q!‘ u....o~uo..-.-. .-.-..~ sn.-.po 27 .mwma cm mHommmmm casuasoflamm mm .chmm .musuH50flHmd mp oHHmuchHZIIMBIthH .mhma cm maommmmm muspasoaumm ma .sammm .musuasoaumfi mo CaumumwcHZIIHhmH "mousom .mmamwam cuaz maamnmcmm mcaxaa ma consumcmp .mCansuommscmE comm pwxas ou pmcaummp xHaE pmump3omn .mcou mcoa mm. no mcou uuonm oa.a mamswm sou oauume mcom ll , mma.m maa mmm.m mmm.m maa aov.m oma.m moa ~mm.m ommmno aam.a aa amm.a ooa.a ma mma.a aoa.a us- aoa.a “mansm mmh.mm In: mmb.mm mmm.mm m mmm.mm aam.mm sun aa~.mm nxaaz Umnmc3om pmasumcma ma~.oa mama mmo.~a oom.ma mmm mmm.ma amm.h In- amm.s xaaz pmumsom ame.ma maaa ~mm.ma mam.am mama avm.~m oam.ana new ham.mna .xaaz ammum l'P muHOQEH muuomxm muHOQEH muHOQEH muuomxm munOQEH manomEH manomxm muHOQEH umz umz umz mnma thH Ahma DI'III‘ m.AmCOB Ofluumzv mnIHhmH :flwmm .muosponm huwmn cam xawz Ca mGMHB HMGOHumnHmucH .m GHQMB MarkE Milk moves sustages. The ration of raw m j.l:::s,l2 the secc :ffluidmilk or i :i Sue third, fl? '19:" The make Ptti'xts in Spain 4:23am one is PM. nailers and to :ccrIsmer dire< \ 12 The as N ‘0 Plant is :5 gang .“I ~€r takes “6 I H. ‘1'}. :A‘ I 54‘ bh ( [‘ISSQu‘FV 28 Marketing Channels for Fluid Milk and DairyProducEE Milk moves from the farm to the consumer in three main stages. The first involves the assembly and trans— portation of raw milk from the dairy farms to the processing plants,12 the second includes the processing and packaging of fluid milk or its transformation to other dairy products, and the third, finally, involves the distribution of processed and packaged fluid milk and dairy products to the consumers. The marketing channels for fluid milk and dairy products in Spain are fairly simple (Figure 2). The more important one is that from farmers to processing plants, to retailers and to consumers. The farmer to retailer and/or to consumer direct channel is legally restricted to 12The assembly and transporation of raw milk from farm to plant is made in several ways (48). In some cases, the farmer takes his product to the plant by his own means; in other cases, dairymen collectively organize the assembly and transportation (in such cases it is quite normal that the farmers group have its own assembly center to which each farmer takes his product). Milk is transported either in cans or isotermic tanks. Most of the times, however, it is the plant which picks up the milk from farms or assembly centers and transports it in cans or tanks to its receiving room. Finally, in zones where production is widely scattered and output per farmer is low (Galicia, Oviedo, Santander), a "recogedor" gathers the milk of several farmers and takes it to the plant or assembly center for a fee (averaging 0.15 pesetas per liter for 1973). Assembly and transportation costs from farm to plant vary with the dispersion of pro— duction, width of assembly zone, number of pick—ups per day, etc. Assembly costs reached, in the most favorable cases, from 0.20 to 0.25 pesetas per liter and, in the most extreme cmes (Galicia), up to 0.70 pesetas per liter in 1973 (48). WXCQF 32% HCCUIN _ mud .HOQE H _ mIINPIVFEL funu \ \Ivh ‘Ivflh CraflmmCUCLL CWSHL ‘/ g 71! 29 wuo>aamo meow, .muUSpoum wuawo Ucm xaaz panam Mom mamccmau asaumxumz .m madman mamfinmcou , muommmooummm muuomxm _ mcowusuaumcH . a ucmusmumom .amuom .mumaamumm_ mumammmaonz muHOQEH mucusnaaumam; moamusm / / mucmam muamam mcammmooum panam mcausuommscmz munomEH / mxcma mcaaoou \ mHmEHMh auwmn \ snified milk, altr silk. Cooling ' relatively insi- Structure 0 In a recent :girical studies C :22, it is necesse :33: are organized .‘itstry, however, gresents an excell tizzs'nips between Fluid mill; Elie in recent ye IE.“ refrigeration 743?. 0f sterilize lilaiened local IT ‘ . ‘1‘“31‘1 few ki 1‘ hi! “I. ‘1 VL‘ U) the We; V 3' in the a . 30 certified milk, although the latter probably includes some raw milk. Cooling tanks, distributors and home delivery are relatively insignificant. Structure of the Fluid Milk Industry of Spain In a recent paper, Manchester has noted that in most empirical studies of market structure, conduct and perform— ance, it is necessary to compare different industries since most are organized on a national basis. The fluid milk industry, however, is organized on a more local basis and presents an excellent opportunity to study the interrela— tionships between market structure and performance (40). Fluid milk markets in Spain are local in nature. While in recent years improved highways, larger payloads, new refrigeration equipment and the increase in the propor- tion of sterilized milk processed have significantly broadened local markets, most fluid milk is still transported relatively few kilometers due to high transportation costs caused by the weight and volume of the milk relative to value and, in the case of pasteurized milk, to existing regulation, high perishability and the expense of refrigera- tion equipment needed to handle it. Types of Products According to present regulations (5), milk intended for fluid consumption in Spain can be: (1) Natural milk; (2) Certified milk; (3) Hygienized milk; or (4) Sterilized milk. ‘s. o 3“ m VOI‘LME {“REI mO' . 851). .e t m. cert; ‘ 5 “AV? ' if} if” In an ‘m‘.’ 1.; ‘ 12c,e ‘OllOM: ‘vl ‘ u ' ‘ :Eiaié lam; “ V "‘d g Y v r: i. 7‘ filth .. (a) t ..:I:“es' maxi." 3:54 maximn of? e A, . “ .a‘-’ awe I iatural mil erated and igular, conplete a ell ted cows“ (5) - Certified 1': 'py a; v. in. hu- 5 2!. .' ‘ _' W vvvvv 1 nrr‘" en sanit of Agricul ;. which the proces :;s::i'::tion are Si 222321 whi ch guarr “ r of the produ Hygienized .-.::ess of heatinc .:e which insure 7:35 md almost t 31 Natural milk is the "whole product, neither altered nor adulterated and without calostrum, of the hygienic, regular, complete and uninterrupted milking of healthy and well fed cows" (5).13 Certified milk is "that proceeding from licensed (or of proven sanitary conditions) farms, registered in the Ministry of Agriculture (General Directorate of Livestock) in which the processes of production, milking, bottling and distribution are subject to a rigorous official sanitary control which guarantees the innocuousness and nutritive value of the product" (5).14 Hygienized milk is the "natural milk subjected to a process of heating in such conditions of temperature and time which insure the total destruction of the pathogenic germs and almost the totality of the banal flora, without 13The natural milk, when delivered to the consumer or processing plant, must have the following characteristics: Fat, minimum 3.1 percent; Lactose, minimum 4.2 percent; Protein, minimum 3.1 percent; Ashes, minimum 0.65 percent; Nonfat dry matter, minimum 8.2 percent; Macroscopic impurities, maximum degree 1 (of the scale of impurities); Acidity, maximum 0.2 percent (weight of lactic acid per 100 of milk in volume); and Proof of the reductase with blue of metylene, more than two hours ([5], article 6, as modified by [6]). 14Certified milk, when delivered to the consumer must have, in addition to the characteristics of natural milk, the following: Macrosc0pic impurities, degree 0; Acidity, maximum 0.19 percent; Proof of the mycrobian reductase with blue of metylene, more than five hours (5, “ Art. 18). 0“ ”J '.L ‘1' A .-. 51;. enodificatic :21 characteristic 02.1- 2:515 inactivitv c .J“ . . ‘4 v . T55291- ,. ‘ pa‘kaQG—S I, F: w Sterilized IT E“:EC‘.€5 to a proce -..eratire and tine Processed which can be V. “a ‘ Er litEr) in~ Glass bOtt . :;es with Capa E: kiter a“ :5? ”H.f 3‘: ~equier‘iz Md plas lltel- O" “‘1 ethe Char L311: owing dif: '1“! 1k .*9 Der "I ‘ess ‘ s C. 33:4,, 0 t"Adm l .I'S;:5::~.l mili .se' nee: x.‘ Q‘ ‘ '=‘--~, “ii-Ill" ”Ln . .L .‘ y .‘ I ~‘ .S‘t' In ad’: 3“\ ‘Lon 0c M \. ‘I‘ .3 3 L n- _":. .0 p C x :n‘ E)- 2. ~22 1 *Ce .I .E.‘ \ Fh‘ ',-_..‘~. {:1 ‘ P43 A“ re (7: 32 sensible modification of its physiochemical nature, biolo- gical characteristics and nutritive quality" (5).15 Sterilized milk, finally,is the "natural milk subjected to a process of heating in such conditions of temperature and time which insure the destruction of germs and the inactivity of their resistance forms" (5).16 For the purpose of this study, however, only hygienized (pasteurized and sterilized) milk, in which there are processing operations involved, will be considered. Shipments of Fluid Milk Products Processed fluid milk products include pasteurized milk (which can be packaged in glass bottles, plastic bags or paper packages with capacities of one liter, half liter and quarter liter) and sterilized milk (which can be pack- aged in glass bottles and tetraedric and prismatic paper packages with capacities of one liter, half liter and quar— ter liter and plastic bottles with capacities of one and one-half liter, one liter and a half liter). 15Hygienized milk, when delivered to the consumer must have the characteristics given for natural milk, with the following differences: Impurities, degree 0; Acidity, maximum 0.19 percent; Number of colonies per mililiter of milk, less than 100,000; Germs of Escherichia Aerobacter group in 0.1 mililiter of milk, absence; Proof of the phosphatase, negative (5). ' l6Sterilized milk, when delivered to the consumer, must have, in addition to the general characteristics of composition of natural milk, the following: Protein, minimum 3.0 percent; Nonfat dry matter, minimum 8.1 percent; Macroscopic impurities, degree 0; Acidity, maximum 0.19 percent; Alive germs in one mililiter of milk, after incu- bation at 37° and 55°C during 48 hours, absence (5, Art. 30). M T‘ne value of gzcessing plants is 11113; pesetas in t :ffluid nilk produc F135 lilk Processir racially uthorize ii. 9'11? about tw '2255 to have come The form of cm and P€rforr "“53:in fOr EXar. 33 The value of shipments of fluid milk products by processing plants is estimated to have totaled about 37.5 billion pesetas in the 1973-74 marketing year. Shipments of fluid milk products are made from plants classified as Fluid Milk Processing Plants (Centrales Lecheras) and from specially authorized Dairy Manufacturing Plants (5, Art. 64). Only about two percent of the total value is esti— mated to have come from such other plants. Numbers and Types of Firms The form of business organization affects industry conduct and performance in various ways. In the fluid milk industry, for example, large multi-unit firms with geograph- ically dispersed operations may have competitive advantages, as compared with firms operating in only one or a few markets. In addition, corporations and some cooperatives may have advantages over individual proprietorships and partnerships in obtaining capital, e.g., and these may affect their operation. On March 1, 1974, fifty-one firms, operating fifty- eight plants, were engaged in the processing of fluid milk products (Table 10). Only four of these firms could be considered more than local in the scope of their fluid milk operations. These four firms, representing less than eight percent of the total processors, operated almost twenty percent of the plants and accounted for more than thirty 2'15 10- Ember 05' Plants! ” ”a; 1%“ ire 05 Pm Zzgsrations Itigeratives Egtiical Groups pa many owned - r). Lifted Partnershi: feicipal (Leased) its: Associations .311 \— :.r:e: Ministeri Cent rales Ei‘tent of total 3 :mrations . Local pro ":5 t‘. - I “all fifty-s '5‘) n “e Plants and “35' More the r. Parner C’. 34 Table 10. Number of Firms Operating Fluid Milk Processing Plants, by Type of Firm, Spain, March 1974. Firms Plants Operated Type of Firm Number Percent Number Percent Corporations 28 54.9 35 60.3 C00peratives 13 25.4 13 22.4 Syndical Groups 5 9.8 5 8.8 Individually owned 2 3.9 2 3.4 Limited Partnership 1 2.0 l 1.7 Municipal (Leased) l 2.0 l 1.7 Other Associations 1 2.0 l 1.7 Total 51 100.0 58 100.0 Source: Ministerio de Agricultura, Spain. Relacién de Centrales Lecheras. percent of total sales (Table 11). All of them were corporations. Local proprietary single plant firms accounted for more than fifty-six percent of total firms, operated half of the plants and accounted for more than a third of total sales. More than eighty percent were private corporations. Farmer cooperatives and Syndical Groups accounted fOr about thirty—five percent of the firms and operated thirty-one percent of the plants. All of them were single plant operations. Farmer cooperatives and Syndical Groups together accounted for about one—fourth.of total sales. v.Hm $.0H $.h Hm v HUCCwUCZ mnwdflm HQUOR. muUCFuHAH manualnwauatnvnv mdcmfinn meficnwaneCU EIuwrfl ho mvnmxnfi H awndrug. *0 n0~uan-~VUL.JA~ uncut-non turn-'1! In. non~>.-. \f.. 0|.U-o-~ do! 9" two-in... QIu-nnn-n< nun-Id. use-slroi.~ \~\:I‘-IUI.§~.-n..v til uuinfilu.\. 35 .coameaowca amaucmcamcoo scum Honusm can an woumuonmam "condom o.ooa o.ooa o.ooa mm am Hmuoa m.m m.w m.m m m mmsouw HMOflUChm q.ka «.mm «.mm ma ma movaumuomooo mmdouw .m cam mmoou a.a k.a o.~ a a ammauacsz m.a >.a o.m a a coaumwoommm m.~ >.a o.~ a a manmumcuumm emuaEaa m.m a.m m.m a m @6230 saamsea>aeaa a.mm a.ov c.ka am am coaumuomuoo mumumwnmonm amooq v.am m.ma m.n Ha v mcowumnomuoo amGOaumz moamm amuoa mucmam moacmmeou mucmam moacmmeou Ewan mo mama Hmuoe mo ommucoouom cammm .Euam mo «axe an mmamm xawz panda Hmscca paw mannam .mmacmmeoo .vhma scum: .HH Canoe On March 1 : the processing it. Fifty four Flats and the oth aficrized to sell grssent requlatior giants were under The apprc: '4'"? Plants in the Tables 12 and 13, iiri'ot «m. 11 Data on Y is last colunn C :a country of ‘ behavior because fitiéhilk, the We bulk of t Stating regula: Ii} . a a Clty 0r : ;‘ .‘ the I.) 4.3"! u 418 wh Plant, ole 36 Number of Size Distribution of Plants On March 1, 1974, fifty—eight plants were engaged in the processing of milk intended for fluid consumption (54). Fifty four were classified as Fluid Milk Processing Plants and the other four were Dairy Manufacturing Plants authorized to sell pasteurized milk under Art. 64 of the present regulation (5 as modified by 6). Eleven additional plants were under construction at that time. The approximate distribution of Fluid Milk Process— ing Plants in the different size groups is indicated in Tables 12 and 13. Market Shares Data on market shares for the nation, as shown in the last column of Table 11, have limited usefulness, even in a country of the size of Spain, in appraising competitive behavior because the relevant market is not that large. For fluid milk, the size of the market geographically is limited by the bulk of the product. In addition, perishability and existing regulations make the relevant market for pasteurized milk a city or a territory of a few kilometers in radius from the plant, while that for sterilized milk is theoreti- cally the whole country. Data are not available on all competitors within thmerelevant markets. Potential competitors should be ir'lcluded with those physically located in the market. Iflen. Number c Process: ,. 1 1 A '15-! Infih’ .-———————— £55‘lan10,000 LLfihZhOOO :znistooo EQlH-100,000 L£,ll-200,000 ZIJOl-300,000 339313!) 300,001 23m: Munster Centrale éflell. Number In Lit aaaaaaa_ ~1w3~25,000 “lei-50.000 lull-100,000 ~~flil~200,000 iipl’l. n u 34,000 3'3‘13‘333‘1. U‘ 430,000 isehn . 400,0 -, . ..‘;' a“ 3 w. .-_ '5 -.,e: I Blazer: 37 Table 12. Number of Plants, by Minimum Authorized Processing Capacity, in Liters per Eight- hour Workday. Spain March 1974. Volume Number of Plants Percentage Less than 10,000 3 5.2 10,001-25,000 13 22.4 25,001-50,000 23 39.7 100,001-200,000 l 1.7 200,001-300,000 l 1.7 More than 300,001 1 1.7 Total 58 100.0 Source: Ministerio de Agricultura, Spain. Relacién de Centrales Lecheras. Table 13. Number of Plants, by Actual Processing Capacity, In Liters Per Day, Spain 1974, . Velume Number of Plants Percentage 10,000-25,000 10 17.2 25,001-50,000 11 19.1 50,001-100,000 15 25.9 100,001—200,000 13 22.4 (200,001-300,000 ‘7 12.0 300,001—400,000 1 1.7 MOre than 400,001 1 1.7 Total 58 100.0 Sc>urce: Elaborated by the author. f-ricct Differentia‘ M- ,— Product dir :gaseller to indu tar-giistinct fro." insulating himse In this frat-new 32:75, including P fife: noes, brand :2: of services it 13122165 of these fat content, 2125 of container 3335:! Quarter 11‘ 335333 bOttles, ;E:P3Ckage51 E 12:3, etc o adve v. ".1 .. ..:Sdle delive: e to custor PhysiCal 3:; - N' lfihp urthant .....3F1 USEd by :‘fl-ifiu" .alol for i' 1‘:i 1, 3:555 tree I 38 Product Differentiation Product differentiation refers to any action taken by a seller to induce customers to view his product as being distinct from those of his competitors with the end of insulating himself from the actions of these competitors. Within this framework, product differentiation may take many forms, including physical product differences, container differences, branding and advertising and the differentia- tion of services which are accessory to the product itself. Examples of these various forms of product differentiation are fat content, level of non-fat solids, homogeneization, size of container (one and one—half liter, liter, half liter, quarter liter, etc.), packaging material (glass or plastic bottles, plastic bags, tetraedric and prismatic paper packages, etc.), radio, T.V., newspaper, billboards, signs, etc. advertisement, general and in store promotion, wholesale delivery services, hours Open, credit conditions, service to customers, etc. Physical product differences are probably the least important of the various types of product differen- tiation used by fluid milk sellers in Spain. However, potential for increased product differentiation of this type is present, as diet conscious customers will surely increase their demand for low-fat fluid milk products.17 17The sale of sterilized milk or lower fat content is authorized, indicating on the label "low fat" and the fat percentage if between one and three percent, or "skim" if lower than one percent. ?::if;:ation with ‘. 2:55:05 product di: Variations grapeer. more exte :zrsiuction of new asacotpetitive d»; sired the bottle 1113:;ers and redo Scrtant in the e- :"3:."Ca’ : n-uIbL' may aLfC‘ 33:33:35 0f scale- 333‘335 can be ex: “- n I: u. "v {)1 I future a: 3 03 Product '. Advertisi: .- .ykatll'1’e 1y 10'“. 2'39 .M , Intent agenc; . m "N: -~“‘\' :nged - H . m Seal: 3‘3. 1 “35.3 : 311$ I1... ¢Q3I3e taker: “:2 :+ 33 a 10‘” 1+:- TO 5122*; . Q‘3 2“ “ROSS, d6 : 33.33135 t Seen t” ’I , v. §‘ “:11 for PM 39 Fortification with vitamin D could also be used for pur— poses of product differentiation. Variations in container sizes and container types have been more extensively used for differentiation. The introduction of new types of containers has been important as a competitive device. Single service containers, which reduced the bottle return problem for both sellers and consumers and reduced weight and bulk of loads have been important in the expansion of markets. Container policy, moreover, may affect operating costs because of important economies of scale in packaging milk. Higher volume con- tainers can be expected to receive increased attention in the near future among fluid milk sellers in Spain as a means of product differentiation. Advertising in the fluid milk industry of Spain is at relatively low levels, except for generic promotion by government agencies and some advertising by large national firms. One important aspect of brand differentiation observed in Spain is the tendency to keep using the old labels after mergers or changes of ownership of processing firms have taken place. Differentiation of services is also at a low level. To summarize, limitations imposed by sanitary regulations, definition of identity and other legal con- straints seem to make fluid milk products quite homogeneous. Potential for more product differentiation, however, does to exist among v as q o 1-v‘3FIL 1n dete r73 4. .1.“ I. :5 near future - Batters to Entry a ————~—— I Barriers t 0“ t: ' .::.sr.:s of tne r ,_ ‘ 71‘ : 19. fluid milk _ I _~Ap A. ‘ R :8 of size. 2:, cannot be c- are to entry. The effec 21.53, are n k ‘ .. 2ironab. 23“?! may affectir, musing reguir: .. N» “393:3 l{ill be \. hi . I ‘9‘” M ~0 a less- ""‘5'~S between 3:. 118‘3‘ “ I vlkh blona ‘ ( r $030711.” \. 40 seem to exist among fluid milk processors and could be important in determining market conduct and performance in the near future. Barriers to Entry and Exit Barriers to entry and exit are important charac- teristics of the market structure in the fluid milk process— ing industry. The general types of barriers to entry found in the fluid milk market are institutional barriers and economies of size. Product differentiation, on the other hand, cannot be considered at this point an important barrier to entry. The effects of institutional barriers to entry and exist are probably the most important. Some of the barriers to entry affecting the fluid milk industry are plant licensing requirements and product and sanitary ordinances and they will be analyzed in some detail in the next sec- tion. To a lesser extent, established relationships in markets between existing sellers and buyers also constitute an institutional barrier to entry. Economies of size in the processing, distribution aFld promotion of fluid milk products does not seem to con- St:itute an important barrier to entry in Spain at the Pt:esent moment. Although, as it will be shown in Chapter IV, mbuit costs in fluid milk plants decline with increasing Vctolume until an output of 360,000 liters per day is reached, alargenajority 0 2'3; the minimum same 13) . G 22:21:: for this. Economies site other hand, grcmis, but there relationship betw rhution. a . [0“ a .. ‘ ..ai Coordim Accordim :15 Structural a: - .._. ._.:tions that a: »,.~ ”leafy and a‘ i) v :‘q “‘u arrangement: Tet-4,. I "“1 Coordi: ~;:.:nronize the i» ' h " Page 3), , 41 a large majority of the fluid milk plants in Spain are below the minimum size needed for efficient operation (see Table 13). Government regulation would appear to account for this. Economies of size in distribution and promotion, on the other hand, are not well established on empirical grounds, but there does not seem to exist a necessary relationship between size of plant and economies of dis- tribution. Vertical Coordination and Integration_ According to Marion, Vertical Organization refers to the structural anatomy of a subsector and includes "the functions that are performed, the number of stages, the propietary and authority structures, and the institutions and arrangements that are an integral part" (41, page 3). Vertical Coordination, on the other hand, is a process Which refers to "those activities that integrate and Synchronize the functional inputs of subsector members, so that the subsector in total responds to market demands" (41, page 3). Vertical Integration, finally, provides one <>f various mechanisms for "adjusting the scope of functions E>erformed by firms at different stages so that they are in l~ine with the new economic conditions" (41, page 5). Vertical coordination in the dairy subsector of Sipain.is facilitated through producer or cooperative agree- ItT‘ients with handlers of various sorts, government regulation intimation tra ?;;:e 3 displays .. L :2 fairy subsector final) as it n: zazkzeting channel. lntegratic: :rizontal. In t‘r. ...e;ration by p: Tiprccessors int: "Pr-s "nu-1. “1&er S‘dbsecg 2;“ z _ .. 0L Processec .C‘. prevalent ar‘ ~393ration by prl i-‘é‘ztistent. P“ally. ‘40.". has 1635 . “E15 . 1r multi.pl 1‘: in. “Ree Flam Sift!) 1 percent c 42 and information transfer, support measures, and others. Figure 3 displays the most common arrangements existing in the dairy subsector for product transfer (both physical and legal) as it moves through the six functions in the marketing channel. Integration among sellers can be vertical and horizontal. In the first case it can be either forward (integration by producer cooperatives into processing and by processors into the operation of retail stores), or backward (integration by food retailing groups into pro- cessing and even dairy farming). Vertical integration in the dairy subsector of Spain into processing and distribu- tion of processed fluid milk and other dairy products is most prevalent among cooperatives. On the other hand, integration by processors into retailing is practically non-existent. Finally, with respect to horizontal integration (which has less to do with a firm's market power than does vertical integration), eleven plants in Spain were operated by four multi-plant companies in 1974, an average of less than three plants per multiplant company, and less than twenty percent of total processing plants. Government Regulation The Spanish Government regulates the Fluid Milk Subsystem in many ways. The basic administrative regula- tion is the Regulation of Fluid Milk Processing Plants and KEEKCL mm> H 5s~ Mu Awfivou \fi qmznkpmumasa “O'Nsx‘unHwerhWHQ "VZH mmnfl UAM- hm -AUMWI$4V~ MUC-Q ‘II‘||I\.| Hank/H Hug NH nuOA‘VU "VZH mmtndfiu-.m ..:...o~w.~. 3.. ea uv~.~ . .3 n ,....~...~.~Z~ zgv~.~.-.:-.~. v-.! a .‘l‘ ‘ .‘ a A. - (av-<1. 1|- . D‘ r’lI-‘l‘ In 1......W... I. V 1 I} ‘ I In a -!vvn ..->H '-.He¢mmmooo moeomHmBmHo m>Ha¢mmmooo moaomHmemHo mmzmcm oszmmoomm mommmoomm oszmmoomm mommmoomm oneomHmamHo . . . w _ _ _ _ _ . - _ - _ w - _ . - _ m>He¢mmmooo moeomHmemHo m>HeHB¢mmmooo moeomHmemHo m>He¢mmmooo moeomHmBmHo mm2m¢m UZHmmmUQmm mommmoomm UZHmmmoomm \mOmmmuomm wnmzmmmd _ . , - _ 52... -/ x- -/ - r.l QmaémumezH m>HB¢mmmOOU mmmosaomm omczmom onaoooomm azmozmmmozH oneoooomm :22: Dairy Indust: 25;: aspects of g :eiescribed at th 2] Hant Licensin 31:95. in Reaulatic —‘__L_.___ Sanitary 1 :prct ct the PU] 2::e in the diet went in protei metals-especial ave substances , ETelopr-aent of a1 tiling is requi itgnisns to the I: .' l ' .. 41x supphes "Ma-4 “Ln, Parts I g HI (Presery l“?! \é‘c:~r\. ' fifiev,v. ‘eqvlSlt: I. h~‘.‘ "34“2'51' . «ucn halyfe u :‘H l Ru ‘4‘ \4 4 (a) part I." s; 3‘ l . Tu...» ‘Llon of T“, . in every C 44 Other Dairy Industries (5) already mentioned. The four basic aspects of government regulation in Spain that will be described at this point are: (1) Sanitary Regulations; (2) Plant Licensing; (3) Producer Prices; and (4) Resale Prices. Sanitary Regulations Sanitary regulation of milk is based on the need to protect the public health. Milk is of primary impor- tance in the diet, especially for children, given its content in proteins, lipids, carbohydrates, vitamins and minerals--especially calcium. By its own richness in nutri- tive substances, milk is an appropriate medium for the development of all kinds of micro-organisms and special handling is required to avoid transmitting pathogenic micro- organisms to the consumers. The need for sanitary regulation of milk supplies and processing is now universally recog- nized. Parts I (General), II (Milk for direct consumption) and III (Preserved milk) of the Regulation (5) defines the different types of milk and their characteristics as well as the requisites for their production. Changes in this regulation have been made by Decrees 544/1972 (6) and 758/1974 (8). Part IV (Hygienization Plants) established the implantation of the system of compulsory hygienization of milk in every population nucleus, with high priority for i: sure populated I. -. extended to t is: the sanitary Slant Licensing In Spain: 51:15 silk plants fefanctions of ‘ lagical condition Etensino require others of C“. Eteriorly. The issue "I the geographi: 5‘39. Uually, Pi'ticular marke‘ tee Shl 513:3; . “e a barrie \ .v-J 5“ ‘ ““39! Prices Prices : 5:1: L l ' “ed by tn». A At t’n :b'Eu 0n the ,‘xplain th flexed milk "‘3éat) ‘ 45 the more populated ones. This system, however, has not been extended to the whole country. This part also lays down the sanitary conditions required for both plants and equipment. Plant Licensing In Spain, permits are required for the operation of fluid milk plants. Part IV of the Regulation (5) defines the functions of the processing plants, the required techno- logical conditions, the minimum processing capacity, licensing requirements, etc. Eleven articles and parts of five others of the original regulation have been modified posteriorly. The issuance of licenses is generally restricted in the geographical area in which a plant is permitted to serve. Usually, only the plants authorized to serve a particular market are permitted to sell pasteurized milk 18 within it. Such restrictive licensing practices con- stitute a barrier to entry or to market expansion. Producer Prices Prices paid to producers for their milk are also regulated by the government. Originally, Part V (Milk 18At the same time, no major restrictions are imposed on the sale of sterilized milk, which can help to explain the increasingly higher percentage of total processed milk that is sterilized (sixty percent at present) instead of pasteurized. P2395) of the ori :; Plants and 0th _« producer 2' ml: its quality I gcseievery year '“ aihy zones of s: taracteristics" inter to the sp 2 the products i ii created sever 325:5 of product: :rsfer cost be: ‘es superseded b;| iiichwill regul: 1376-77 and 1977- 3: different ma. {Stemming mini: "ismftation f “3 Quality' ind '"‘:entrated nil Mation also Q A” "'- Pb»- . nus‘s' lipo: J- ‘1‘ we: 20 (10 I 1:3“: a I w. «Or the P 46 Prices) of the original Regulations of Fluid Milk Process- ing Plants and Other Dairy Industries (5) dealt with minimum producer prices, pricing of milk in accordance with its quality, etc. Minimum producer prices were pro- posed every year "considering the real costs of production and by zones of similar ecological, edaphic and farming characteristics" (5, page 12697). These criteria ran counter to the specialization of the different provinces in the products in which they had a comparative advantage and created several problems, since the differences in costs of production did not necessarily coincide with the transfer cost between them. This part of the regulation was superseded by Decree 3520/1974 of December 20 (9), which will regulate the dairy marketing years 1975-76, 1976-77 and 1977-78. The new pricing regulation establishes two different marketing periods and the criteria for determining minimum producer prices (based on "interprovince transportation factors"), pricing of milk in accordance with its quality, indicative and intervention prices, location differentials, maximum selling prices for pasteurized and concentrated milk at plant and retail levels, etc. The regulation also establishes measures of protection to milk producers, import coordination, etc. Complementary norms are to be established annually. Decree 3521/1974 of December 20 (10) for example, established the complementary norms for the dairy marketing year 1975—76. U 4 I ‘ gr :. "q ______ Weolesall ragtiated for $03 grices for hygie raieting year h zie Boletin O a::~3:iing to wha Zeceroer 20 (9) . iithdifferent p inst 31 and Se 2m prices w P1385 and plasti sieges and pla £:or glass-bot Perfo \ The Star: .yzzzsh SOCiety :tr.‘ -'~~0man ceo Pe 47 Resale Prices Wholesale and retail resale prices are also regulated for some fluid milk products. Maximum resale prices for hygienized and concentrated milk for the 1975-76 marketing year have been established by an order published on the Boletin Oficial del Estado on January 31, 1975, according to what was anticipated by Decree 3520/1974 of December 20 (9). The country was divided into seven zones with different prices for the two periods (February 1- August 31 and September l-February 29, 1976) and different maximum prices were fixed for pasteurized milk packaged in glass and plastic bottles, tetraedric and prismatic paper packages and plastic bags of different capacities, as well as for glass-bottled concentrated milk. Performance of the Fluid Milk Subsystem The starting fundamental assumption is that what the Spanish society wants from the fluid milk subsystem is good performance. Performance is considered recognizing that a perfectly competitive economy probably cannot be achieved in practice and that even if this were possible, it might not be desirable. Instead of perfect competition, the accepted goal has become "workable" competition. As defined by Markham: "An industry is judged to be workably competitive when, after the structural characteristics of its markets and the dynamic forces that shaped them have »:horoush1Y ‘ ggge that can 1 :zwould resul izsses” (42). Value ju fcxance begin w criteria. Crite fl;ic' milk subsy ;r::'uct suitabil 15215 of output Decision 55.3116 be ef f ici 151 resources w ':=A‘\d’ .w“ 395 among :2 be efficient h. «:gu "‘~‘re:ent Of 1' 48 been thoroughly examined, there is no clearly indicated change that can be effected through public policy measures that would result in greater social gains than in social losses" (42). Value judgements in the appraisal of market per- formance begin with the selection of a set of performance criteria. Criteria that are considered important for the fluid milk subsystem include efficiency, progressiveness, product suitability, participants rationality, adequate levels of output, and absence of misregulation.19 Efficiency Decisions as to what, how much and how to produce should be efficient both in the use of available and poten- tial resources within each firm and in the allocation of resources among different firms. Production is considered to be efficient when maximum output is obtained with minimal resource input. The main standard of production efficiency is the measurement of how well firms in the different vertical v—F 19Other aspects of market performance usually identified are: Adequate levels of profits and promotion expenses, absence of bad externalities, equity, full employment, conservation, good labor relations, absence of unfair methods of competition, etc. Some of these traditional aspects of performance, however, do not seem to be relevant or important in the fluid milk subsystem of Spain. Promotion expenses, for example, are at such low levels that they do not appear to be of major impor— tance in appraising market performance. Externalities, including those involved in solid waste container disposal iii ‘ 1 .coasi2fi1e 1 ’ .J.Oca‘~& .-~ :5 13w ava i azzroa shes -‘ 1 .-‘:hl ~ “ 1-..“..-“8 C '4-L: ”~h‘-n tar-1 3" _‘ "35- An \-‘ -~I- v ‘*1 “avg: “~¢\ 4. .Q . ~"~: f. 5. '~ “Lie I721 .N £2331 st- C i U ”s ~ irv a 21‘“ “Q\F‘v VV‘; ‘ u I".‘ \ ‘ '~ 1: Q ~. I". “‘5 2v - ‘s ‘. ‘« -h \“ ._ ‘5 SL, ~‘T~ ~.‘ ‘ w ”‘1‘“: :1 \~ =5 . ,_- ‘ V r. .\‘ a . \ \3‘ K“ ‘ ‘- ‘. I .Qs‘u ‘\d\: "~‘ -\ N l ” e . ‘ L :\. gr .g“.‘ \ . ~_\;‘ ~“ ‘. ~' g . S.‘ . “L ‘fir‘ ‘ *s‘ #1: & 49 levels of the subsystem approximate the lowest practically attainable real costs for the output they produce and/or distribute. A good static framework for measuring costs and analyzing the production efficiency of individual firms is now available (see French, 23) and methodological approaches to cost measurement are also well established, with economic engineering emerging as the most powerful, effective and widely used method. With respect to the measurement of the production efficiency of an industry as a whole, methods of solving programming problems required to determine optimum numbers, sizes and locations of facilities within market areas have also developed rapidly in recent years. An attempt to measure production efficiency in the fluid milk subsystem will be made in the following chapters, and, therefore, a discussion of this performance dimension will be postponed until Chapter VII. In addition to production efficiency, efficient transfer of goods from producers to consumers is essential for the maximization of satisfaction and resource use. Several standards that are usually accepted are: (1) Price formation and the pairing of buyers and sellers should not be unreasonably costly; (2) price flexibility should not problems and water pollution problems do not seem to warrant study at this time. Conservation of non-renewable resources does not appear to be a performance issue in the fluid milk subsystem either. On the other hand, it was not possible to deal directly with profit levels, equity, full employment and labor relations as facets of market perfor- mance in this study. ,. to avoid e :iesirable stoc} sizzld not be per LS: economic f ac: Exchange Isl-c C ; -.. iluid mil] *3: A u 1 --'~ tits?!) *1 #e; are ESPECtl‘JEIY, up; ilknarket is s ifficiency does 1 . ~§T ‘ a n‘ . " ‘V eness The oper L1 lanoVat ions :5“ A .‘5 anu makin, ““8" (64 I "I \ H’ L N A 3‘4» ably ind. 50 generate costly search for information or inefficient accomodation for uncertainty; (3) prices should be high enough to avoid excess demand and low enough to avoid undesirable stock accumulation; (4) transportation costs should not be persistently and needlessly large; and (5) economic facilities should exist at assembly points (26). Exchange efficiency is rather difficult to appraise in the fluid milk subsystem. Producer and resale prices, for example, are based on minimum and maximum prices, respectively, under government regulation. Since the fluid milk market is strongly regulated by the government, exchange efficiency does not appear to be a major consideration in evaluating performance. Progressiveness The operations of producers in the fluid milk sub- system should be progressive, taking advantage of inventions and innovations for both "increasing output per unit of input and making available to consumers superior new products" (64, page 4). Since the ideal level of progress is probably indeterminable, however, precise evaluation of progressiveness cannot be attained. Nevertheless, some unquantified criteria that could be used to appraise the progressiveness of the fluid milk subsystem are (1) There should be no missinvestment, i.e., "optimum" plant and §;;;_:11€E‘.t Sh 12:5 should . . ,- uupqfi‘ A] ' ‘ - ' I“ ‘ .ovvn 9 eat v‘- ‘ y.‘ :L-per. w; :e.at1'-:elv 1 4 LCIUCt Chi; 51 equipment should be employed, (2) inventions and innova- tions should not be suppressed, (3) there should be adequate diffusion of technological information. Again, the first point will be discussed at a later chapter. With respect to the other aspects, since 1966 a relatively large number of changes in container types and sizes, products and services have been introduced in the fluid milk subsystem and have persisted. They were, in fact, innovations when they were introduced. The "test" of the marketplace, therefore, seems to indicate that the fluid milk subsystem of Spain is fairly progressive, with no indication of suppressed innovations and some evidence of adequate diffusion of technological information. Product Suitability The general quality and kinds of goods produced should strike a balance between the variety and price most desired by consumers. The possibilities that consumers would rather pay higher prices in order to gain improvements in quality or variety or that they might prefer to sacri— fice some of both in order to receive cheaper products are indeed relevant. Several standards derived from this criterion are: (1) sellers should not suppress product inventions nor persistently offer less than maximum quantity available at given costs; (2) worthless or troublesome differences in 1 ~ a- r- ro-n‘ ~ 5 s . , u v ‘ b.-. ..-.'“ ; “P‘- :--:;C-Cu #— W, lWC -Li’i A.. ' ;~--.LL.'1' n ..‘ V c . as . :nb'.£a.L ‘ra‘ - -. :.an arc:; ’Cf‘i ‘ d“. tU" a to€ 1’; s I . ‘:-'. ,- .~,;. ‘ s 1 ~«r( “ t‘ . '- ‘j‘ A , ‘sh“ [‘1‘ ‘ d -‘h" ma .LHE 2:21 at 1 - ‘— r1 ‘4‘. , “‘°~Zere‘ fi7lfi a .; fies i J 2:.3Q “sly ‘ah § \. _\V ‘x. N .‘N f‘.‘ v_‘ .‘ . \ ~ . “‘d \‘ V . .3 V ‘ . 'L.‘ 1 “is . ‘.~A‘ n u ‘5‘. \“ ~ 0‘ 4 : x '2‘“ \l““ x.\l 52 products should not persist without good reasons; and (3) sufficient product variety should be available (26, page 34). Two causes of concern with respect to product suit— ability in the fluid milk subsystem of Spain are: occa- sional frauds and adulteration of products, and production of an amount of sterilized milk which is probably beyond what is needed, at the expense of pasteurized fluid milk products. The most common causes of fines to fluid milk processing firms, periodically announced by the General Directorate of Commercial Information and Inspection of the Ministry of Commerce, are the sale of milk with lower con- tent in protein, nonfat dry matter, etc. than required, or of fluid milk products with glucose, water and other sub- stances added. The proportion of sterilized milk produced, esti- mated at about sixty percent of total processed milk, is considered to be excessive. Weighed against the obvious advantages of sterilized milk products (its long duration and the fact that it needs no refrigeration) are its higher cost and lower quality (specially in terms of flavor, vitamin content, etc.). Although the existence of sterile fluid milk products is considered to be important from the viewpoint of product suitability, these high proportions of sterilized milk produced should not persist. 3.. 14. a. 5 u and p ‘r ,.l_L ,--~ g" -‘_‘~"nu 0 ~ . -;“ r-v‘a l " -ub-'v;0 4“ te f!!! 48; .'..-- ‘. dm.‘ tasd ‘. “-5 ‘2»! .. lré Q a ma ~e sf? 'Q .: +L 5.‘ §.' .- “.' h . Q» 53 Participant Rationality Participant should have a reasonable opportunity to be well informed and should exercise freedom of choice rationally in their own interest. Aids to participant rationality from the viewpoint of information include a common terminology, standard weights and measures, common packaging standards, product descriptions and price posting. At present, there is widespread lack of consumer education with respect to fluid milk products in Spain. Most consumers fail to perceive pasteurized and sterilized milk as different products and, when they are, sterilized milk is generally considered better (basically because of its higher price). Some consumers still boil the processed fluid products they purchase. A certain amount of advertising devoted to informa- tional purposes directed towards helping the consumer to make a reasoned selection among alternatives is essential to the effective working of the fluid milk subsystem. Output Levels Output should be "consistent with a good allocation of resources" (1), and should not be "deliberately restricted so as to raise prices, ensure unjustifiable profits and raise the level of expenditures by consumers" (71). At prese scent of the C .md for: is p1 illiterate rest: 'Ih'lqfi -...::ae in uni‘. U ‘ . "' ‘V ‘ ¥ ‘ —:.€‘.’_.3 “01".- k Governfi :efficiency Sh< Governme -:s briefly des< sizablisbed by I :32: progressive - ‘A -' ‘1 ' Years" in S 54 At present, it is estimated that less than seventy percent of the commercialized milk that is consumed in fluid form is processed. While there is no evidence of deliberate restriction of output, it is considered that the system of hygienization of milk could be easily extended to the totality of fluid milk supply with no increase in unit costs, through appropriate actions. Misregulation Government action or inaction that fosters inefficiency should not exist (71). Government intervention in the fluid milk subsystem was briefly described in a previous section. The Regulation established by Decree 2478/1966 of October 6 (5)20 has been progressively corrected and modified during the last few years" in such a way that it was possible to correct the maladjustments of all kinds that appear with relative frequency in the sector" (7). Critical analyses of some aspects of the regulation of the Spanish milk market have been made recently by Caldentey (13, pages 61-71) and Diez-Patier (21, pages 36—43).21 20It replaced the Decree of April 18, 1952 which provided for the creation of the fluid milk processing plants and the Order of July 31 Of that same year approv- ing the Regulation developed in the previous Decree. 21The establishment of location differentials in producer prices based on real costs of production were probably the main source of criticism. In these two papers, ‘3”! resent in the ;:::essr'ig Cai L;:ers per daj intorizei. '. .:essive nus} ;r::essed mill szgtion; (2) tie an import K 22.-.5? a. 4.l_ ’- I" I J' )- .5._ L I r I I, o —.I (I) n: In .1- l ,rti (l ’1 14;. l 55 The main aSpects of possible misregulation still present in the fluid milk subsystem are: (l) the minimum processing capacity established by the regulation, 25,000 liters per day, seems to be too low to allow efficient operation; yet, even smaller plants are exceptionally authorized. This is resulting in the construction of an excessive number of plants which are unable to supply processed milk to all the country at present levels of con— sumption; (2) the restrictive licensing practices consti- tute an important barrier to entry. Once a plant is estab— lished in a geographical area, it is relatively difficult for a new plant to be authorized; (3) the restrictions with respect to the geographical area in which a plant is per- mitted to sell pasteurized milk causes less than optimum processed milk movements to take place and contribute to an increased production of sterilized milk, beyond the amount that is needed; (4) the establishment of producer price location differentials without taking into account processing costs,contributes to less than optimum milk movements; (5) the establishment of maximum resale prices for regulated products based on processing costs of plants of relatively small capacity (25,000 to 35,000 liters per a system of location differentials based on transportation costs and supply-demand conditions was proposed. Even though these studies dealt with different marketing years and used different sources of data, the results were quite similar. A system analogous to the one proposed in both papers has been established for the first time in the 1975-76 dairy marketing year (9). i; fosters stablisl‘meni Sterilized pI wl'ry-l-s an t ~wa—‘Axu O l a}: “L 1" _.- “30-3, t ‘L :xSSl'CQ in v- 2:::~~., L “”143 be and .mi ‘ V-. "G Present . ( Lilo O .3 J" 56 day) fosters inefficiency in the system; and (6) the establishment of price ceilings for pasteurized milk while sterilized products can be more freely priced is also con— tributing to the increase in sterilized milk produced. Performance Summary The sketchy information available suggests that, on the whole, the fluid milk subsystem of Spain has been pro- gressive in recent years. On the other hand, the fluid milk product mix offered to consumers does not seem to be adequate and lack of consumer information, inadequate out- put levels and elements of possible misregulation seem to be present. While the evaluation of the fluid milk subsystem is no doubt partial and can only be considered as preliminary, there seems to be substantial room for improvement. retical and co LZeStigatec, Resear 4:33 '“Ling subS' C: 03H.,, A 'Ll.3-“.“ a88! ""L. “‘N'Cr' SiZe a: "'9. g - V'K) "'«Cl‘ R. at, u. 1“» We of 3, , ."ct: - “Ailing 0": 34 CHAPTER III METHODOLOGICAL PROCEDURES This chapter presents the basic economic, mathe- matical and computer models underlying the problem to be investigated, and briefly describes the analytical procedure that will be followed. Some of the necessary simplifying assumptions are also stated. Efficient Organization Within Market Areas Research dealing with efficient organization of marketing subsystems generally focuses on the determination of optimum assembly and distribution patterns,and optimum number, size and location of marketing facilities. The overall problem has been tackled basically in two ways. One group of models treats Space as continuous for purposes cm defining Optimal marketing areas for individual plants, While another group assumes discontinuity of space. The continuous approach was first used by Olson (58) in a study of milk assembly. Another early example Cf this approach is the study by Williamson (81), which Euovided a more general spatial equilibrium framework for Plant location. 57 Two CI’L' aiszs in each :::star.t relati fairly heroic a :errain and nor 2:3: facilities :;::.,L'.if‘.g any 3:311: area" (E In the 35 Plant locati 3:319: Circle 1' V ’1‘- -l would find 58 Two crucial assumptions, that uniform marketing exists in each producing area (page 953), and that a constant relationship exists between air and road distances (page 954) were made by Williamson. Under these and other fairly heroic assumptions and “ignoring nonuniformity of terrain and nonuniformity or discontinuity in transporta- tion facilities, assembly costs will be minimized by assembling any given quantity of commodity from a circular supply area" (81, page 954). In the continuous approach, therefore, the problem of plant location is essentially assumed away. Once the market circle is constructed, a single plant firm or indus- try would find its Optimal location at the center of that circle. The multiplant solution for optimal location would be only slightly more difficult. The continuous approach, then, does not seem to be suited for this research, the major difficulty being that supply and demand densities are not uniform and supply and demand areas are not regular and continuous in shape. The alternative to the continuous approach is to group supply and demand areas into a finite number of point locations and to consider some predetermined set of potential plant sites. One of the first studies using this discontinuous approach.was the one by Stollsteimer (74). The Stollsteimer model was developed to answer practically the same questions that this study attempts to answer: "How many plants should we have? Where should our be loca . ,.‘.¢ 5" :‘-~-‘~' the raw flied-I. :czaized? Wha glaz-‘t?’ (74, p i not consid :sts separate :: iistributio Processing cos 3: distributim 4“: 1 VF . as: solution , 32H ,_ . "“5‘~elmer ' s i‘ A. .. shale (One Y“ Eat: vi... “*On I anoth 59 plants be located? How large should each plant be? Where should the raw material processed in each plant be obtained? What customers should be serviced by each plant?" (74, page 631). Stollsteimer's model, however, did not consider assembly, processing and distribution costs separately, but only processing and either assembly or distribution costs (or both as a composite function). The essence of the Stollsteimer model can be expressed graphically as in Figure 4. Total (or plant) processing costs, TPC, and total transportation (assembly or distribution) costs, TTC, are calculated and then added; the lowest point of the total cost curve gives the minimum cost solution. Feur different cases are dealt with in Stollsteimer's paper. These include two cases of economies of scale (one where plant costs are independent of plant location, another where plant costs vary with location) and two similar cases without economies of scale. .Finally, the paper reported the effects of technical change and output expansion on the optimum number, size and location of pear marketing facilities in a fairly homogeneous California pear producing region. The Stollsteimer model was posteriorly modified by Polopolus (59), Chern and Polopolus (l4), Warrack and Fletcher (78) and Ladd and Halvorson (36). Polopolus extended the model to include multiple product plants. Chern and Polopolus substituted a discontinuous plant function for a continuous one, made an explicit distinction TPC+T OWOU PQUOF 60 TPC + TTC TPC Total Cost ~—: TTC L. 1 l l J d 2 3 4 L Number of Plants Figure 4. Stollsteimer's Model. ween plant n «air maximum P ~=:acrty by op t 222338. a who? aEtcllsteicer :33 change in The mai ;:sinatility t :5: functions . f‘rztions one a reel instead . "-u :“ :«nLEd sepa 61 between plant numbers and plant locations, introduced their maximum plant size concept and measured excess plant capacity by optimal solution. Warrack and Fletcher incor- porated a suboptimization technique to solve large prob- lems using the Stollsteimer model, and Ladd and Halvorson presented a procedure for determining the sensitivity of a Stollsteimer model solution and the effects of contin- uous change in the parameters of the minimum cost solution. The main difficulty with Stollsteimer's model is its inability to handle both assembly and distribution cost functions. Where it is necessary to incorporate both functions one approach has been to use a transshipment model instead. King and Logan were among the first to apply this transshipment approach to agricultural marketing in a study of livestock slaughter plant location (34). Assembly, processing and distribution cost functions can be calculated separately with the simplest method available and aggregated in a manner almost identical to the one used by Stollsteimer, as it can be seen in Figure 5. The transshipment model was also extended posteriorly by Hurt and Tramel (32) and Leath and Martin (37). Hurt and Tramel further developed the model to handle more than one plant at each level and more than one final product. Leath and Martin extended the model to include inequality restraints. A procedure for testing the sensitivity of the model to change in cost elements of the model (especially \ LEE. '4‘ \ “'30 F FVUAUL \/.A\3 I 62 TPC + TAC + TDC Total Cost TAC (Assembly) v I TDC (Distribution) L l 1 J l 2 3 4 L Number of Plants Figure 5. Total Cost Minimization Model. ":sessing C Othe ;r::ec‘ures h . e“ In ”-J~-hi.. A Xpe: '97.. . "k “ e the O\7£ 63 processing costs) was developed by Toft, Cassidy and McCarthy (76). Examples of applications of the transship- ment model dealing with fluid milk plant location include a study in Washington by Bobst and Waananen (3) and another in Colorado by Tung, Reu and Millar (77). Other variants Of linear and nonlinear programming procedures have also been used to solve this type of problem. In the case of milk, again, separable programming, for example, has been used in a study Of Optimum dairy plant location in the U-S. by Kloth and Blakley (35). The Theoretical_Mode1 Experience with the models developed to date to solve the overall problem concerning assembly and distribu- tion patterns and number, size and location of plants suggests, as French has pointed out, that "the best choice of method may vary with the characteristics Of the indi- vidual problem" (23, page 93). Considering the scope Of the proposed study and the resources available for it, it was considered that an optimum number, size and location linear programming design model for fluid milk processing plants that will show how a significant part Of the fluid milk subsystem Of Spain might be reorganized to reduce costs and expand output, will provide an acceptable test for the four basic hypotheses that were established in Chapter I. .- ,,.v -'... t‘hcnom iC 1 __;'———-——""" The e 344, DIOCESS i ' Y :2: f tf‘ 99 31’ collection u Ana? Ins \ 3, ...-nirniza ::ber, size for Spain. I: :ai-e to minim. :i transport; “ Ha “ mese Plant .3. :«Z-Zuc+ 64 The Economic Model The economic organization Of a system concerned with processing plants involves the simultaneous considera— tion of three main components Of total cost: (1) The costs of collection from scattered origins to the processing plants; (2) the costs of plant Operation; and (3) the costs of transportation from plant to market (12, page 141). The cost minimization model underlies most plant location analyses aiming to determine an optimum pattern such.that the totality Of specified costs is minimized. The problem here is the determination Of an Optimum number, size and location of fluid milk processing plants for Spain. In analyzing this problem, an attempt will be made to minimize the aggregate costs of assembling raw milk and transporting it to the processing plants, processing it in these plants and distributing the finished fluid milk products to the consumption centers. Figure 5 showed graphically how the minimum cost number Of plants is achieved. The lowest point of the total cost curve, TC, gives the Optimal solution, i.e., the optimum number of processing plants which minimizes the aggregate costs Of assembly, processing and distribution. The Mathematical Model The mathematical model that will be applied is basically the one outlined by King and Logan (34). {JET—z.- " '—«1 Given 2:35;:es a que _:::e:.tial pla: ‘ a 'fl .,:‘Q| v: ”in I I ‘ ‘\— ‘ 65 Given i cow milk production sites, each of which pucduces a quantity Xi of raw milk to be assembled, j potential plant locations, each Of which processes a (pantity Yj, and k consumption centers, each of which con— sumes a quantity Zk' the problem is one Of minimizing total assembly, processing and distribution costs. Algebraically, the transshipment model can be stated as follows: Min TC = Z.X.A.. x.. + Z.P.Y. + 2.2 T. Z . 1.3 13 13 J 3 J :Jlsjk- 3k Subject to: (1) Z. x.. = S. 1 l] 1 (2) Xi xij = zkzjk (3) zkzjk = Dk > (4) Xij 2 0, ij ~ 0 Where: TC = Total Costs. i' = Assembly costs, in pesetas per liter, from 3 production site i to plant j. i' = Quantity of milk, in liters, shipped from 3 province i to plant j. P. = Average processing cost, in pesetas per liter, 3 in plant j. Y. = Quantity of milk, in liters, processed in 3 plant j. T. = Transportation cost, in pesetas per liter, from plant j to consumption center k. in 4'1 )0: I I ‘ma— “ l ‘ . - l .1. “‘1+ Y r .:: Ccmave: The t1 satiation line to find the OE :rk processir asserbly, prOC first describe :2-5ified by 5; area as a poss .3539 97). The 11:11! construc involved. The ma ‘- hiree disti .“u e“- 3" ., ' H .‘\i . 3013+: Vu V 'e .. «.3 e. ‘ Ctjr‘md ‘Joa pa ‘V . £ \‘ “*3 b. 7‘ .~ L FCLSr I“ still «as sz‘i "‘ ~\ \ ‘- - \~“~;C’\ v.‘ \:“N \..c +fl .U ti 66 (D II Supply Of production site i, in liters. U ll k Demand Of consumption center k, in liters. The Computer Model The transshipment model, a special kind Of trans- portation linear programming model, will be used in order to find the optimum number, size and location of fluid milk processing plants by minimizing the combined costs of assembly, processing and distribution. As King and Logan first described it, the basic "transportation model is modified by specifying each production and consumption area as a possible shipment or transshipment point" (34, page 97). The matrix Of the transshipment model is accord- ingly constructed to take into account all activities involved. The matrix to be utilized in this study consists Of three distinct parts with respect to activities involved. The first part refers to raw milk assembly from the produc- tion points tO the fluid milk processing plants. The number 0f activities (columns) Of this part equals the number Of SuPply points times the number of processing plants, m x n. The second part refers to the processing of fluid milk at all the potential fluid milk plants, and the number of aconsumption centers are considered, which gives an lndication Of how the matrix that will be used in the analysis looks. raw milk to be processing p15 '1; each plant: :: be shipp‘ad (4) the aggrec— bation of the milk proces Becaus :atrices invol EEEX II (17) c Agricultural E which is relat rout, will be ?e:sion to APE 68 Iaw'milk to be shipped from each production area to each puccessing plant; (2) the quantity of milk to be processed in each plant; (3) the quantities Of fluid milk products to be shipped from each plant to each consumption point; (4) the aggregate cost Of assembly, processing and distri- bution Of the Optimal solution; and (5) the marginal cost Of milk processing in each plant.23 Because Of the relatively large size of the matrices involved in the analysis, the APEX—I (18) and APEX II (17) computer programs will be utilized. The Agricultural Economics Linear Programming Package (30), which is relatively simple to utilize from the user's view- POint, will be used to input the data and, therefore, con- version to APEX will be necessary. The Analytical Procedure TO generate the data required in the application of the model, the following stepwise procedure will be employed. Eggggion and Volume of Cow .ilfiygroduction The first step involves the designation of cow milk SuPPly areas and of the quantities produced in each area. 23That is, how much the total cost will change if‘ the volume of fluid milk processing in one plant 18 increased by one unit. .. R a- 0.. ‘- 0.!- n — .~ v-"v LI c \D“UV‘ ‘ _ . uni; I I a . nova: QED-V. VI . . m-y- -; synk .\ 2'3: ! I. v‘ \ ‘Aye MAC E ‘- u: 3y- ‘§ 5 A., "'G v“. \ u: a , ‘- A ~ a“. a“. u‘: 69 The forty-seven peninsular provinces of Spain will be con- sfldered as supply areas and the supply Of milk in each Of 'Umme provinces will be considered to be concentrated in one point, since the transshipment model used in the analysis is a point trading model. Each province will be represented by its capital, and milk production will be considered to be concentrated on it. Map I shows the area of study.24 Since the main purpose Of this study is to show a more efficient alternative to the present organization, production (and consumption) in each province will be taken as they are now (production figures from the 1973-74 dairy marketing year will be used), and processing and transporta- tion cost functions will be based on current technology and Prices. Later, an effort will be made to project production and consumption Of fluid milk at the national and provincial 1eVels for 1978, with the Objective of determining the OPtimum number, location and size Of plants on the basis Of the projections. %223§ionand Volume of Processed .lEiQ_Milk Consumption The second step Of the analysis includes the designa- tiOh of the processed fluid milk consumption regions and the \ 24The Balearic and Canary Islands and the towns of Ceuta and Melilla in North Africa will be excluded from the analysis. ‘ I xfi \ N N F~a*-.~ I.E-“1\LN\.\ \ .I \ ( -un|-.: E. uuf .- ll) p.71. >a» ; . \ . K A NH.“ ,r\./UH\ ll. \l I,.i\.Il/i)\(f - - r4.la\ .P l.b./ \ ”hi .9—..~LSHS— l.nv;ld.\.--\ -AHU!\>I\....L d> it \. (l .\l.\\ 70 coaauummu mcowauumh msofiouumm QCO uncmofid< aaocwao> ecz mucmsu O ‘ finance an a .33 some? muowcumw O Heme «mezzo «ucmz moumomu .osasop dw>< mocnfiafiam a caaq>omo m>wwnx Nomrccm . AH ooo.ONH ooo.os ooo.mm ooo.mm ooo.om coo.ON ooo.om m >H ooo.mNN ooo.mmH oom.sm oom.sm ooo.om oom.am oom.Nm ON HHH ooo.omH coo.NOH ooo.am ooo.em ooo.NN ooo.om ooo.Nv mH HHH ooo.mNH coo.HN oom.ov oom.os ooo.vm oom.NN oom.Hm NH HHH ooo.om ooo.am ooo.sN ooo.NN ooo.mm ooo.mH ooo.HN N HHH ooo.omH oom.NN oms.mv oma.ms oom.No ooo.mN oom.sm ON HH ooo.0NH ooo.os coo.mm ooo.mm ooo.om coo.ON ooo.om mH HH ooo.om oom.Nm omN.oN omN.oN oom.sm ooo.mH oom.NN . NH HH ooo.oo ooo.mm oom.NH oom.NH ooo.mN ooo.0H ooo.mH m HH ooo.OOH ooo.om ooo.om ooo.om ooo.ov ooo.mH ooo.mN ON H ooo.om ooo.ma ooo.aN ooo.aN ooo.Nm ooo.NH coo.ON mH H ooo.om ooc.mm ooo.mH ooo.NH ooo.vN ooo.m ooo.mH NH H ooo.os ooo.qN coo.NH ooo.NH ooo.mH ooo.s ooo.OH m H mEDHO> Hmuoe momma mmmao Hmuoe mmmao owummam summon unmam Hmuoa hmpxhoz cowaawumum cmuwusmummm summed cam mmmxomm mo mmmme an .COHumummO mo mmEDHO> .mucmam Hmoflumnuomxm l'l'lllll.’ I? I'll” .vhma cwmmm .mmo mom mumuflq cw .mmcxuoz mo .vH mHnma 96 'Illlvl OOO.OOO OOO.mNm OOO.NON OOO.NON OOO.mNN OOO.OmH OOO.mNN ON H> OOO.ONN OO0.0NO OOO.OHN OOO.OHN OO0.00N OOO.ONH OOO.OOH OH H> OOO.OOm OOO.mHN OOm.NmH OOm.NmH OOO.mNN OO0.00 OOO.mNH NH H> OOO.OON OOO.OHN OOO.mOH OOO.mOH OOO.OmH OOO.OO OOO.OO . O H> OOO.OOO OO0.0mN OOO.mNH OOO.mOH OOO.OmN OOO.OOH OOO.OmH ON > OO0.00e OOO.ONN OO0.00H OO0.00H OO0.00N OO0.0N OO0.0NH OH > OOO.OON OOO.OHN OOO.mOH OOO.mOH OOO.OmH OOO_OO OO0.00 NH > OOO.OON OOO.OOH OO0.0N OO0.0N OOO.OOH OO0.00 OO0.00 O > OO0.00N OOO.msH OOm.NN oomrsO OOO.mNH OO0.0m OOO.mN ON >H OO0.00N OO0.00H OO0.0~ OOO.ON OO0.00H OO0.00 OO0.00 OH >H OSHO> HmuOB Hmmmm mmMHU HMUOB mmMHO Uflummam Sumcmd uflmdm Hmuoe rr. amcxuoz cmuwawumum cmuwudmummm 11.1., ll. 97 meter will be charged for land acquisition. Annual economic costs for this concept consists of interest (8.5 percent per year) and taxes (0.25 percent), and are charged over total land acquisition costs. Uniform construction costs of 8,000 pesetas, per square meter are also charged. Annual economic costs here include depreciation (1.66 percent per year), interest (8.5 percent), and taxes (0.25 percent). Interest costs are charged over average investment value (which is equiva- lent to charging 4.25 percent per year over total invest- ment value), while the other costs are charged over total investment costs. An additional cost of 555.55 pesetas per square meter, finally, is considered for pavement, landscaping, etc. of the non-constructed area. Annual economic costs for this concept are the same as in building construction above. Land acquisition and development and building construction investment costs and annual economic costs associated with them will not vary with the length of Operation. They are summarized, for the six synthetic plants in Table 15. Equipment selection is divided into eleven sections. These include (1) receiving stage, (2) filtration, cooling and refrigeration, (3) skimming and normalization, (4) pasteurization, (5) packaging of pasteurized milk, (6) sterilization (towers), (7) sterilization (UHT), 98 OOO.OOO.O OOO.OmN.O OOO.OOm.sN OOO.OOm.H OOO.OOO.ON OOO.OmO.H OOO.OOO.NH OO0.00m H> OOO.mOm.s OOO.ONm.O OO0.00N.mO OOO.OON.H OO0.000.00 OOO.ONO OOO.OOO.OH OOO.OON .> OOO.ONO.O OOO.ONN.m OOO.OON.mm OO0.00N.H OO0.000.Nm OO0.00N OO0.000.0 OOO.ONH >H OOO.NOO.m OOO.ONO.O OO0.000.00 OO0.00H.H OO0.000.NO OOO.NHO OO0.000.N OO0.00 HHH OOO.mmH.O OO0.0NO.N OO0.00N.ON OO0.00H.H OO0.00N.mm OOO.mNm OO0.000.0 OO0.00 HH oom.sOO.m OOO.OOO.N OOO.OOO.ON OOO.OOO.H OO0.000.mN OOm.smO OO0.000.m OO0.00 H mumoo AwO0.0HO mmHuHHHomm mchmomOcmH mumoo isms.mc umoo sma.ua O acmHm Hmsccd wwwuflawomm Hmcumuxm a unmEm>mm ucmsumm>cH cowuwmwsvod unmeumm>cH \muwuflq Hmuos Hmcuwuxm Hmuoe mmcwtawsm pawn mumoo cowuwmwnvo< OESHO> mumou deduce pawn Hmsch .vhma :Hmmm .mucmam an .Ammumwmm cwc Eons nuw3 teamwoommd mumou oesonoom Hmsccfi can mumoo COOuOSHumGOU mcwpawsm can unmEQon>mn cam cowuflmwuvod wand .mH OHQOB 99 (8) complements, (9) auxiliary services, (10) laboratory and offices, and (11) others. Total equipment and auxiliary services purchase and installation costs, by plants and stages, are shown in Table 16. Some of the annual economic costs associated with equipment purchase and installation will differ when different workday lengths are considered; thus, deprecia- tion charges will be 12.5 percent for plants working eight hours per day, 18.75 percent for plants working 12 hours, 25.00 percent for plants working sixteen hours and 31.25 percent for plants working twenty hours per day, and repair and maintenance charges will be 10, 15, 20 and 25 percent per year for plants working eight, twelve, sixteen and twenty hours per day respectively. On the other hand, interest costs (8.5 percent per year over average invest- ment value or 4.25 percent per year over total investment value), taxes (0.25 percent) and insurance (0.50 percent) charges will be the same regardless of the number of hours of operation per day. Annual economic costs associated with equipment purchase and installation for the six plants and four work- days are shown in Table 17. COntainer costs, finally, include cans (which are considered to be owned by the plants (47 and 53), glass bottles (for both pasteurized and sterilized milk) and returnable baskets (for bottles and plastic packages of pasteurized milk). Annual economic costs associated with 100 OO0.00N.MON OOO.OOO.O OO0.0om.H OO0.000.H OO0.000.NN OO0.00N.m OO..OHO.OO OO0.0n..On OOO.OON.OH OOO.mNm.O OO0.0m0.0H OOO.mHO.OH OOO.OOO.HH OOO.OHH.FN OOO.OHN.H H> OOO..OO.nOH OO0.000.m OO0.00N.H OOO.OOO.N OOO.va.mN OOO.OOO.H OOO.NmH.HH OOO.OOO.OO OOO.NOO.NH OOO.Oom.m OOO.OOH.s OOO.OOO.NH OOO.ONO.N OOO.ONN.OH OOO.OOO.N > OO0.00H.OO OO0.000.H OO0.000 OO0.0mN.H OOO.mNm.qH OO0.000.N OOO.HHs.mH OOO.OOv.mN OO0.0m-.O OOO.msn.N OOO.omm.O OOO.O'H.O OO0.0NH.o OO0.0HH.O ooo.oOO.N >H OO0.000.00 OO0.00m.N OOO.mNO OO0.000.H OOO.mvm.NH OOO.OOO.H OOO.Hms.mH OOO.OO..mN OOO.Omv.o OOO.mNN.N OO0.0mm.H OOO.va.O OOO.NOO.N OO0.0N0.0 OO0.0.0.H _HH OOO.HOO.O5 OO0.000.N OOO.OmN OOO.OOO.H OOO.mON.OH OOO.OON.H OOO.Hns.mH OOO.OO'.mN OOO.OOO.O OOO.OFO.H OOO.Omm.N OOO.O.N.H OOO.m.O.H OOO.OOO.. OOO.OHH.H H. OOO.HNO.HO OO0.00m.H OOO.oom OOO.OmO OOO.msH.O OO0.000 OOO.Hms.mH OO0.0.0.0H OO0.0~N.O OOO.ONO.H OOO.Omm.m OO0.00N.H OOO.va.H OOO.mOH.n ooo.omo.H H Houo... muocuo meoCCO \LOucuon-J meuHHHuD BCOEOHAEOU .51.... mmgo coHuonH. 03mg.“— mfilo LcHunJ coHOOn wcHHoou a ocH>HOUO¢ ace:— nchchMa a Uchsxoma a Iaquumneum cartilage t0~C33u§d uHuesumma nHHaENOz cosauuuHHL coHuQNHHHteum :oHuunHHHuuum vcchxusg mchamed a ocHEEme . , , , , .. ...l‘-.. . 1 14,... .. I I f - In. I . 1 . ..I. I; -1 , . . .vwom Cerium .mvvfium DEG nun—flan >n ..mcuwnea :3 mumou ccHuaHHaumE can. omnibus; meuHPNam >:.H~Hu:< p5,. uceEHavm Hugo... i: wanna. lOl OOO.OmO.OOH OOO.OOO.ONH OOO.NON.OOH OOO.OHm.NN OOO.OON.NON H> OON.Hmm.NHH OOO.Nmm.NO OON.NH~.HN OOO.NOO.Om OO0.000¢mOH > OOO.NOO.OO OOO.Omm.NO OON.ONO.ON OON.OON.ON OOO.OOH.NO >H NON.NOH.mm OOm.ONO.mO smerO0.0N mNO.NON.ON OO0.000.00 HHH NHO.OOO.OO OOO.OON.Om NON.OOO.ON mNN.NHO.NN OOO.HOO.ON HH sOO.mNO.NN Oom.mHO.Hm NHO.NmO.ON mNm.OOO.NH OOO.HNO.NO H ANON.HOO .momc lamp.mmc AOO.NNO mumou acmHm mason om muson ma muse: NH mason m ucmsumw>cH Hmuoa >mcxu03 mo aumcmq .vnma cfimmm .wmcxuos mo numsmq cam mucmHm an .mocwHSmCH cam mmxme .ummumucH .mocmcmucwmz cam mHHQOm .cofiumwomummo ucmEmfisvm SUHB pmumHOOmmfl mmummmm cw mumOU OHEOCOUM deduce .hH magma 102 container costs include depreciation (20 percent), interest (8.5 percent over average investment value or 4.25 percent over total investment value), taxes (0.25 percent) and insurance (0.25 percent), for a total of 24.75 percent per year over total container investment value. Table 18 gives the annual economic costs associated with containers. Table 19 summarizes the annual economic costs associated with the durable assets considered thus far. Table 18. Annual Economic Costs in Pesetas Associated with Container Investment Costs, by Plants and Length of Workday, Spain 1974. Length of Workday Plant 8 hours‘wfi 12 hours 16 hours 20 hours I 1,627,450 2,472,750 3,284,333 4,104,275 II 2,417,166 3,657,812 4,877,683 6,096,354 III 3,668,075 5,547,437 7,396,750 9,745,937 IV 4,892,666 7,298,125 9,754,166 12,192,708 V 9,760,333 14,631,250 19,483,333 24,385,416 VI 12,894,640 21,196,875 29,262,500 36,453,125 103 OO . H OO0.00 N . OON.NHO.NO NO OON.O N ON. ONO.HNO. OON.OON.N NOH.OO OO N . OOO.ON . OOO.NOO. OOO.O . NO NOO.O O OO O HO NN NNN. OOO.NO . ON OOO. ONO.OOO.N HOO.ON O O HHH OOO.OO ONO. OOO.NO . OH mma. Omm.mmo.m mmh.em . o m HHH NNN.OO NHO. OOO NO . NH OO . NOO.NNO. OOO.OO O O HHH N OO0.0N O com. ooo.m . O ave. NHmNNmmNM oemamm ma e HHH OOO.ON NON. OO0.00 . ON NOO.HN . OOH.NHO.N ONO.ON H O HH O NO O . OOO. OH NNO. ONN.OOH. NN NHO.NN OOH.O HH OOH.ON O NOO. OOO.OO . NH OO . NNN.OO . NNO.ON H O HH N NNN.ON N N OOO. OOO.N . O ONO. OON.NNO. ONO.HN mo N HH NNN.NN N OOO. OOO.N . ON OOO.NNO.H NOO.ON OO N H Hmuo mm . com. OH a mum: O OOO.NH NOO.N H Hmucoo u oom.hmo.m NH H: lilil cmemflsqm m mmsa H O u: .OHHOO a mam a .mummm< O coauamam>mo mmcxuoz OHQOHSQ . . . stod summed ucmam OOH; ONOH OH O: pmumaoo .mmm .mm on . mum .mmum cxuog mo mmm CH O numsmq . umoo ONE can mu: . ocoom mam Hmsaqa .O H OHQOO 104 mma. Hamemam mm N oomamv N H mmvawm B mFH OO O OOOsmmws MFmsmmws m NmNsmN mmfl O s o . ONH mNm.mmH. ooo.omm.NmH oo oom.m OH . OOO.OOO. o NON.OOH . om O H> H ONH.OOH NH OO . OOO.O . OH mm N mavammms m N..HmNNh om m H> m OHVsmHH UN 00 s OOONO O NH OO . NNN.NOO. N NON.NHH OO O H> NN . OON.HNO. O NNO.NO ON N H> NNN. N NHN.H ON N > mmMsHmms Omhsm B OO O 0H . NN OON.NOH. OOO.NOO.OO O OON.N > moa mmmsvm NH o N OOONm . NH ON . OOH.OON. OO ONO.OO ON N > v bvm.om m 00 . OOO.O . m cm . mNHOmmN. o vmm.me mo m > m bdmshm h omma OOONONON ON mooammva mmmahm o >H Hmuo OON. ooo.om . ON C Hmucoo OOO.ONO.O NH >H "H1 UCOEQHDUM m -Hr. am > Ililt all a “GOEMHUHHDm h H - ”HHH", a COHUHOHmNVwQ mgV—HOB .ertslet- . .mHsvoa numcmq ucmHm at Gama oUQDCHUCVU o ifnflunu 0H GHQMB 105 Estimation of Labor Costs Labor costs consist of salaries of management Office and laboratory personnel, wages of utility, process— ing and shipping personnel, and social charges to be paid by the processing firm. Management for all six plants includes a general plant manager, engineer(s), Office superintendent and plant superintendent(s). Office personnel include accountant, payroll clerk and clerk-typists, and laboratory personnel include laboratory technicians. Pick up and sales inspec— tors and custodians, finally, are also included in this group. V Utility, processing and shipping personnel are classified into six categories. These include unskilled worker (pe6n), skilled worker (pe6n especializado), specialist of third category, specialist of first category, Official and stoker. Social security and accident insurance annual charges to be paid by the processing plant, finally, include two extra-pays, one benefits pay, social security and labor mutualism and accident insurance. Table 20 gives the total annual labor costs for the six hypothetical plants and four lengths of workday. 106 ONO.NOO.NN NON.ONO.O OOO.HOO.OH NNH.HHO.N ON HHH ONO.ONO.OH OOO.ONN.N OON.ONH.O OOO.ONO.N OH HHH ONN.OHN.OH NOO.NON.O OHN.NHN.O NHN.OOO.N NH HHH OOO.OOH.HH NOH.ONO.O OOO.OON.O NHO.ONN.N O HHH OHO.NON.NH ONH.OON.N ONO.HON.N OON.HON.N ON HH ONO.ONO.OH OHN.NNH.O ONO.HOO.O ONO.OON.N OH HH NHN.OOO.NH NHO.ONN.N OON.OOH.O OOO.OOO.N NH HH OO0.000.0 ON0.0NO.N ONO.NOO.N OON.ONH.N O HH OOO.OHN.OH HNH.NNO.O OON.NOO.O OON.NOO.N ON H OOO.OON.NH NNO.OOO.O OOO.NNN.O NHO.HNO.N OH H ONO.NOO.HH OO0.0N0.0 OO0.000.0 OON.OOO.N NH H NNO.NON.O OHN.NON.N ONO.OOO.N OO0.000.H O H mumou mmmumno mmmms mmflnmamm hmcxuoz ucmHm Hosea Hmaoom numcmq Hmuoe , , annununu-nnunuwgnrnvq-qsnnuupuluuuuuunuunu..- .ONOH chmm .hwcxuos mo sumsmq cam musmam as Annex Hem mmummmm sac mumou nonmq Hmuoe new mmmumnu HmHoom .mommz .mmHumamm .om OHQOB 107 OOO.HOO.OO HOO.OOO.ON OOH.OOO.NN ONO.OOH.O ON H> OHH.NHO.OO OON.HON.NN OOO.ONH.ON OmN.OOO.O OH H> NNN.ONN.OO ONN.OON.OH OHO.NOO.HN OOO.OOO.O NH H> NOO.OHO.HN NOO.OOO.NH ONO.OOO.OH ONO.ONO.N O H> NOO.OOO.OO NOO.ONN.ON OOO.NOO.ON OOO.OON.O ON > OON.NNN.HO NOO.OOO.OH ONN.NOO.ON OOO.NNN.O OH > OON.NON.NN HOO.OHO.NH OOO.HOO.OH OOO.HOO.N NH > ONO.OHO.HN ONO.NO0.0 ONO.ONO.O NNO.OOO.N O > OON.OON.ON OHO.NON.HH ONH.OOO.NH OON.NOO.N ON >H OH0.0N0.0N ONO.HN0.0H OO0.000.HH OOO.NOO.N OH >H ONO.HON.OH OOO.NOH.O OOH.NOO.O ONO.OOO.N NH .>H OON.OON.NH OON.ONO.O OOO.ONN.O ONH.NNO.N O >H wumou mmmhmno mmmmz mmwumamm hmcxuos “swam Momma HONoom numsmq Hmuoa It .pmscwucoo .om OHQOB 108 Estimation of Utility Costs Utility costs include electricity, fuel and water consumption costs. Electricity is needed both for power and light. Fuel is needed to wash cans, bottles and baskets, to pasteurize and sterilize milk and for cleaning purposes. Water is needed to wash cans, bottles and baskets, to refrigerate pasteurized milk and cool steri— lized milk, for steam production, refrigeration of com- pressors and frigorific condensers and for cleaning of plants and equipment. Prices of 1.57 pesetas per hw.h for electricity, 3.35 pesetas per kilogram for fuel and 6.00 pesetas per cubic meter of water (53) will be applied. Annual utility consumption costs for the six plants and four workdays are given in Table 21. Estimation of Packaging Material Costs— Packaging material costs include replacement of broken bottles and purchase of metal caps (for glass bottles), plastic (for bags), paper and non-returnable boxes. The costs of these packaging materials in 1974 were sixty pesetas per thousand metal caps for pasteurized milk, 186.91 pesetas per thousand metal caps for sterilized milk, 0.48 pesetas per plastic package (liter), 1.56 pesetas per paper package (liter) and twelve pesetas per box. Replacement 109 NNO.OOO.HN OOO.ONO.N OOH.HOO.O NOH.NNO.O ON HHH OHN.ONO.NH OOO.NOO.O OON.OO0.0 OOO.HNN.O OH HHH NOO.NOH.NH OOO.NOH.O HON.ONH.O HNN.HHO.N NH HHH OOO.NON.O OOO.NOO.N OHO.OOO.N ONN.OOO.N O HHH NNO.NON.OH OHO.OON.O HON.ONH.O NNN.ONN.O ON HH ONH.NOO.HH OON.HON.N ONO.OOH.O OOO.OON.N OH HH NOO.HOO.O HON.HNO.N HOO.OOO.N HOO.OOO.N NH HH OOO.HOO.O ONH.OOO.H OOO.HNO.N OOO.NNO.H O HH OOO.OOO.O OOO.ONO.N NHO.NHO.O NNN.OOO.N ON H ONO.OOO.N NNN.NOH.N OOH.OON.N OON.OON.N OH H NOO.ONO.O OON.ONN.H OOO.NON.N NOO.NON.H NH H ONH.OOO.N OOO.ONH.H ONO.ONO.H NOO.NOH.H O H Hmuoe “mums Hmsm OuHoHHuomHm Omnxuos pamHm numcmn .ONOH :Hmmm .Omoxuoz Oo aumcmn can muCMHm an .Ammummmm :Ov mumou cowumEDmsou muwawub Hmscad .HN manna 110 ONO.OOO.OO OOO NNO.OO ONO.OOO.NN OOO.OOO.HO NOO.OOO.HN NOO.ONN.HN OON.ONO.ON NHO.OHN.OH OOO.NNO.ON NNO.HNO.ON NON.NON.OO ONO.NNO.OH NON.OOO.OH ONH.OHN.ON ON H> ONO.NON.NO NOO.OOO.NH OOO.OOH.OH OOO.NOO.OH OH H> OON.OON.NN HON.OHN.OH MNN.NON.OH MON.NOO.O NH H> NHO.OOO.HN OOO.OOO.OH NO.NNO.OH OO.ONO.NH O H> NHO.ONN.ON OOO ONO.N NNO.NOO.HH OON.ONO.NH ON > ONN.ONN.NN OOO.OOO O OOH.ONN.O NOO.ONH.OH OH > OON.NOO.NH NOO.NOO.N NON.OOO.OH ONO.ONO.O NH > NOH.OOO.HH HOH.OOO.O NNO.ONO.O OON.HHN.O O > “mums N OHH.O N O OON.O OH >H Hmsm OH.NON.N NH >H huwownuomam h m >H chuoz . nausea ucmHm OmscHucoo .HN m Hams 111 costs for broken bottles were 6 pesetas per unit for pas- teurized (47) and 7.37 pesetas per unit for sterilized (53). Packaging material costs for the six plants and four workdays are summarized in Table 22. There are no real economies Of size in this category, packaging material being a function of the number of liters of milk processed by each plant. Estimation of General and Miscellaneous Expenses This last category includes commercial expenses, advertising, office and laboratory material, inspection and related expenses and miscellaneous expenses. Commercial expenses result from sale to thirty days, and equal number of liters processed per daytime, the average selling price times thirty days times 7.5 percent negotiation costs. Advertising expenses represent 0.10 pesetas per liter of milk (53). Office and laboratory materials are estimated at 0.015 pesetas per liter of milk processed, inspection and related expenses at 0.075 pesetas per liter and miscellaneous expenses at 0.02 pesetas per liter. General and miscellaneous expenses are also summarized in Table 22 for the six plants and four workday lengths. 112 Table 22. Packaging Materials and General and Miscellaneous Annual Costs (in pesetas) by Plants and Length of Workday, Spain 1974. Packaging General and Length Material Miscellaneous Plant Workday Costs Expenses I 8 18,731,529 4,686,000 I 12 28,097,293 7,029,000 I 16 37,463,058 9,372,000 I 20 46,828,822' 11,715,000 II 8 27,710,994 7,026,000 II 12 41,566,491 10,539,000 II 16 55,421,988 14,052,000 II 20 69,277,485 17,565,000 III 8 42,262,558 10,543,500 III 12 63,393,837 15,815,250 III 16 84,525,116 21,087,000 III 20 105,656,395 26,358,750 IV 8 55,411,989 14,058,000 IV 12 83,117,983 21,087,000 IV 16 110,823,978 28,116,000 IV 20 138,529,972 35,145,000 V 8 111,036,072 28,116,000 V 12 166,164,330 42,174,000 V 16 221,552,444 56,232,000 V 20 276,940,555 70,290,000 VI 8 164,235,967 42,174,000 VI 12 246,353,950 63,261,000 VI 16 328,471,934 84,348,000 VI 20 105,435,000 410,539,917 113 Total Annual Costs and Average Unit Processing Costs CF Table 23 summarizes total annual costs for the six plants and four workday lengths. Dividing these total costs by the number of liters processed by each plant and workday length each year, unit costs can be obtained. These are summarized in Table 24. Summary of Results The first objective Of this study was to develop a cost analysis procedure applicable to both present and future fluid milk plants. The procedure utilized (which is illustrated for the first plant and workday in Appendix B) was based on the synthetic plant approach, which can be modified to adjust to a variety of particular circumstances. When using this approach, the plant Operations to be analyzed should be carefully defined and the operating para- meters specified according to the goals of the study. Pro- duction stages and cost categories also need to be desig- nated, adequate data must be found and resource requirements determined. Finally, factor prices must be specified and annual economic costs and unit costs computed. The basic approach used in the study is thought to have sufficient flexibility to allow cost analyses and valid economic com- parisons among different systems. The second objective was to determine unit process- ing costs for the model fluid milk plants operating under 114 NNO.OHO.OOO OO0.000.00H NH0.000.0HO ON0.000.00 OOO.HOO.OO ONH.HHO.NHN ON H> OOO.NOH.NHN OO0.00N.OO ONO.HNO.ONN OOO.NNO.OO OHH.NH0.00 OOO.NON.ONH OH H> NON.HON.NOO OOO.HON.NO OOO.NON.OON OO0.000.HO NNN.ONN.OO ONO.OOO.ONH NH H> OOO.OOO.OON OOO.ONH.NO NOO.ONN.OOH ONN.ONO.ON NOO.OHO.HN OOH.NHN.OO O H> OOO.HHN.NOO OOO.OON.ON OOO.OOO.ONN NON.NON.OO NOO.OOO.OO OHH.ONH.OOH ON > NHO.OHN.NOO OOO.NNN.OO OOO.NOO.HNN ONO.NON.NO OON.NNN.HO NNN.OH0.0HH OH > ONO.NNO.OON OOO.ONH.NO ONN.OOH.OOH OON.OON.NN OON.NON.NN OOO.ONN.NO NH > OOO.NHO.HON OOO.OHH.ON NNO.ONO.HHH NH0.000.HN OHO.NHO.HN NNO.NOO.OO O > ONO.NNO.OON OOO.OOH.ON NNO.ONO.ONH NHO.ONN.ON OON.OON.ON OOO.HOO.NN ON >H OOO.NHO.HON OOO.OHH.ON ONO.NNO.OHH ONN.ONN.NN OHO.ONO.ON OOH.NNN.OO OH >H NOO.ONN.NOH OOO.NOO.HN NOO.NHH.OO OON.NNO.NH ONO.HON.OH ONO.NO0.00 NH >H OO0.0NN.NNH OO0.000.0H OOO.HH0.00 NOH.OOO.HH OON.OON.NH OON.NHO.NN O >H OHO.OOO.NON OON.OON.ON OON.OOO.OOH NNO.OOO.HN ONO.NOO.NN OOH.OOO.OO ON HHH. OHO.NNO.OOH OOO.NOO.HN OHH.ONO.OO OHN.ONO.NH ON0.0N0.0H OON.NHO.NO OH HHH NOO.OOH.NOH OON.OHO.OH NNO.NON.NO NOO.NOH.NH ONN.OHN.OH ONO.HNO.OO NH HHH NOO.ONN.OOH OOO.NOO.OH OOO.NON.NO OOO.NON.O OOO.OOH.HH OOO.OHO.NN O HHH NNO.OOO.ONH OOO.OOO.NH OOO.NNN.OO NNO.NON.OH OHO.NON.NH OO0.000.00 ON HH NON.ONO.OOH OOO.NO0.0H OOO.HN0.00 ONH.NOO.HH ON0.0N0.0H NOH.NN0.00 OH HH OOO.OOO.NHH OOO.ONO.OH HOO.OOO.HO NOO.HOO.O NON.OOO.NH OOH.OOO.ON NH HH NHN.HON.ON OOO.ONO.N OOO.OHN.NN OOO.HOO.O OOO.OOO.O HOO.OOO.ON O HH OOO.NHN.ONH OOO.OHN.HH NN0.0N0.00 OO0.000.0 OO0.0HN.OH NOO.HNO.NO ON H HO0.0NN.OOH OOO.NNN.O OOO.NOO.NN ONO.OOO.N OON.OON.NH NNO OOH.NN OH H ONO.ONN.NO OOO.ONO.N NON.NOO.ON NOO.ONO.O ONO.NOO.HH OON.NNN.ON NH H OHN.OON.NO OO0.000.0 ONO.HON.OH ONH.NOO.N NNO.NON.O ONO.NNN.NN O H Hmuos msowcmHawomH: macflumumz >ua~wuo uonmq muwmm< >mcxu03 ucmam a Hmumcmo mcHomxumm wanmuso :uocwq .xmpxuoz mo numcwq can mucmHm an Ammuwmwm ch .ONOH .cHOaO mumou chOOOOOHO Hmscct HOuON .MN wanna 115 Table 24. Average Unit Processing Costs (in pesetas per liter) by Plants and Length of Workday, Spain 1974. Total Total Length Annual Liters Unit Plant Workday Costs Per Year Costs I 8 57,796,214 14,600,000 3.958 I 12 82,335,024 21,900,000 3.759 I 16 105,335,861 29,200,000 3.607 I 20 125,212,099 36,500,000 3.430 II 8 78,781,313 21,900,000 3.597 II 12 112,648,656 32,850,000 3.429 II 16 145,079,783 43,800,000 3.312 II 20 178,448,937 54,750,000 3.259 III 8 106,236,808 32,850,000 3.233 III 12 153,100,082 49,275,000 3.107 III 16 199,477,615 65,700,000 3.036 III 20 247,505,416 82,125,000 3.013 IV 8 132,320,880 43,800,000 3.021 IV 12 192,736,583 65,700,000 2.933 IV 16 251,478,992 87,600,000 2.870 IV 20 309,827,105 109,500,000 2.829 V 8 251,017,888 87,600,000 2.864 V 12 388,627,538 131,400,000 2.812 V 16 482,219,812 175,200,000 2.752 V 20 592,711,046 219,000,000 2.706 VI 8 366,480,604 131,400,000 2.789 VI 12 542,751,253 197,100,000 2.753 VI 16 713,152,004 262,800,000 2.713 VI 20 880,614,432 328,500,000 2.680 1 116 the conditions that were specified. Unit processing costs were estimated for each of six hypothetical plants and four alternative workdays. The results (which were summarized in Table 24) will be used, in combination with assembly and distribution costs and supply-demand conditions, to determine the least cost number, size and location of fluid milk processing plants for Spain. For the plants analyzed, unit processing costs decreased from 3.958 pesetas per liter of fluid milk processed for plant I processing 40,000 liters daily in eight-hour workdays, to 2.680 pesetas per liter for plant VI, processing 900,000 liters daily in twenty-hour workdays, a decrease of about thirty-two per- cent. For the eight-hour workday, unit costs declined from 3.958 pesetas per liter for plant I processing 40,000 liters per day to 2.789 pesetas per liter for plant VI processing 360,000 liters, a decrease of almost thirty percent, with most of the drop (twenty-three percent) being in the 40,000- 120,000 liters category. The cost-volume information from Table 24 can be used to construct the four long run average cost curves of Figure 6. These four curves reflect the assumption that annual costs of other plants with intermediate capacity will behave in the same way as those Of the plants which 39 . . were analyzed. These curves show that economies of Size 39The long run cost curves developed are more limited in scope than the concept of long run or planning function (operationally defined by Boles in the following way: "For each of a large number of alternative annual 117 vaN z_mDU hwoo m0< 23m 020.. 90.“. va CON CNN 000 000 ovm 00¢ ONV own 00” OVN Oww ONF 00 H H H _ f _ _ H H H H H H _ H H H H H H H H H H H H H H O A> [Oer IIIIIIIIIIIIIIIIIIIII U “"1".” I III-.... I 1. v000$. Om.” buns-IO; .EI ON Ill-II > .II @F nnnnnnn > t: z 5: U m L'f- N :7. a,» U an SUFPIY . . . . . . . . . . . . . 1 Regions N m v m o h m m o H N 2 H m g H 2 N a a E 1. 1...; CONE.) 312 31; 2 . l.ll‘}x3 (1 3. Orense n 4. Pontchdra 272 :72 5. Alava 31 41 I} r). GuipuZCOa 135 135 7. Oviedo 219 153 31 403 :4. Santander 174 236 126 144 161 H41 '3. Vizcaya 227 237 10. Huesca 133 133 ll . 1.0-1 rat-u) 49 49 1;. r11VJrra 166 Inn 11. Teruel 45 43 L3. Zaragoza 92 JR 15. Barcelona 176 94 -70 10. Gerona 251 251 17. Lurida 153 153 18. 'Tarragona 21 21 19. AVila 66 66 20. Burgos 232 232 21. Leon 367 203 570 :2. PalenCLa 120 120 33. Salamanca 96 96 i4. SQGOVld 123 123 23. 3:1zia 35 16 SN. Valladolid 87 H7 27. Zamora 7g. 79 28. Albacete 5 5 2!. Ciudad Real 76 7h 33. Cuenca 0 ii. Guadalajara 30 3” 3:. Madrid 53 365 415 53. Toledo 7: 29 57 158 34. Alicante 23 :3 35. Castellon 18 1“ 56. Murcia 53 53 37. Valencia 38 35 38. Badajoz 724 2:4 1). CJccrus 6 86 180 273 43. Almeria 19 19 41. Granada 38 3M 42. Jaen . 48 4H 43. Malaga H4 ”4 44. Cadiz 64 n4 45. Cordoba 104 24 7 52 197 46. Huelva 30 70 47. Sevilla 133 161 3’4 Total 312 272 219 174 463 135 298 516 519 367 464 597 105 230 240 129 177 197 158 391 “-{N 387 610 136 plant which are consistent with the Optimal solution of Model I. Optimum Flow of Processed Fluid Milk from Plants to Consumption Centers Table 30 gives the optimum flow of processed fluid milk products from the twenty-two plants to the forty-seven consumption centers, as well as the total volume of finished milk shipped by each plant and received by each consumption center. Optimum Price Location Differentials The dual of the above cost minimization programming model would be a problem of pricing the raw and processed milk at each of the provinces to maximize the total returns. The relative prices that would be given in the dual solution are shown in Table 31. By arbitrarily setting the price of raw milk of Province 7 (Oviedo) at the zero level, the other prices are solved relative to it. Two important relation- ships should be noted: (1) Trade will take place between two provinces only if the difference between their prices in isolation is greater than or equal to the total transfer costs involved, and (2) Prices in one province can differ from prices in another by an amount within the range of plus or minus transfer costs without giving rise to milk movements. 137 ll..." Ililll ii vm an Ho 50H we 9v so mm Hm 0mm 00H Vm moH Hm m? mmm OOH mam Ova om 00H mod mm mum Hooch mH~a>om .mm uncouou .HN Mateo .CN conga: .mn comm .mH momcmuo .na . Nonmpcm .0H atom ooosfiu .ma HH pflupmz .vH vm 07 H Ufiuomz .MH Oucooaad .NH m«u:o~m> .HH on Ha nod cooq .OH om mmq HH.m:onoucm .0 am mm? H mconoumm .m mm OOH vM ms muooaumw .m mma :nHummnom com .o moH Hm mmm m Om omoaflm .m we OOH noocmuzmm .v mam oooa>o .m 00H moH muoo>oucom .m hm mmN . MCZuOU ma .H wannzmmumgmuuumeaLgsvszr/sg: a o u u o n o n n o o - o g o n o o c o a n o a ACHWWOUOHQ Q” S d 1 8 V l 1 O 8 Z l N 1 H A S O 9 V d O 1 1 0 e P a n A P O 0 v P a P 0 n I. P A n T. O I n U / 6 T I o 1 I. 1 1 1 1 1 1 A 6 a z u I I. o u a 6 o 9 a u ,6 1 1 I, o 3 e n e 1 s 3 3 a d A 3 u o 3 / A m u o p e P u a .6 a 1 o a 9 e P n e a s o I. p a s 6 e e I o I 1 u. s A u o z A a 1 e u I. o o z n o e P 3 a n // a 9 u u 9 a o P u. e 9 e 1 e m e /// mzonovmv/, p:uEvQ / .v~-mnmd .csmam .AH Hooczv >cc you muzuuq occmzozb :H .mu0ucou cOHuLEsmcou Ou mucwaa pummOUOum 806m xAfiz pozmflcflm mo 3OHL Esefluac .Om wanna 1138 oom.o 6mm v0 mma nod 55H mma mma mm vm oma Nmm nod mm oma mm mom mm mm mod 05 om mm mm Hmuoa Hmm bNm v0 MHHfl>®m .NN mma mma mnoouou .HN boa boa Nflomo .om hen nsfi woman: .mH mNH mma comh .mH ovm mmfi mm . «vacuum .ha omm am ems . Noflmomm .oH moH moH Hmwm UMUDflU .ma hmm NO mhv 5N HH Cwufimz .VH 0H0 «Av mm 05 H bayou: .MH nmm boa oma mucmoaa< .NH V0? Nmm Nm GMUCQHMQ/ .HH h©m Om mm coma 40H mam HH hcoHQOumm .m mam H aconuumm .m mow MNOOMMMN .h mma cmflummnwm cam .@ mow mm omnanm .m vna umvcmucmm .v mam owmfi>o .m mew muom>wucom .N mam manuou M; .H L V V V V V V V V E E E E E E E P. C E Z Z Z Z Z w L 9 9 ... ... H. w .o W. a .L a m. ... a. v. w .o a. m... .L m. w. W S H 3 3 w r 9 v 3 a A w 3 w. L w 9 3 3 v z A s 3ng a n o e 9 e 1 I 9 e e n e I o s n n I. T 9 e o mnemwwooum A a 1 P I a E m 3 P T 1 S T. I p 9 a n q M T I I. I P I. e u u a a e a o 3 o a 1 P u P e I T I A o z 6 9 J 1 C. u I. a e D. I. e 3 e 3 1 e e 1 9 q 9 P I. a o 3 e I u o P I e P a e P P e P P S 2 T. I 3 e 1 O 9 O 8 K. W 8 T u e _ I. 1 e P . e I . woodmom panama ', .nl n, “ casewucoo .Om wafldh 139 Table 31. Optimum Price Location Differentials Resulting from Solution of Dual (Model I). Spain, 1973-74. PrOVince (p.595?! geikliter) (pZEZEEESESrMiiEer) 1. La Coruna 0.32 4.17 2. Lugo 0.23 4.41 3. Orense 0.29 4.51 4. Pontevedra 0.38 4.25 5. Alava 0.22 4.12 6. Guipuzcoa 0.06 4.26 7. Oviedo 0.00 3.92 8. Santander 0.08 4.03 9. Vizcaya 0.19 3.96 10 Huesca 0.48 4.51 11. Logrofio 0.31 4.36 12. Navarra 0.32 4.36 13. Teruel 0.65 4.79 14. Zaragoza 0.48 4.33 15. Barcelona 0.76 4.53 16. Gerona 0.66 4.78 17. Lerida 0.60 4.69 18. Tarragona 0.66 4.77 19. Avila 0.37 4.51 20. Burgos 0.21 4.42 21. Leon 0.12 3.94 22. Palencia 0.25 4.26 23. _Salamanca 0.04 4.44 24. Segovia 0.39 4.47 25. Soria 0.42 4.63 26. Valladolid 0.30 4.27 27. Zamora 0.15 4.28 28. Albacete 0.68 4.86 29. Ciudad Real 0.94 4.11 30. Cuenca 0.57 4.65 31. Guadalajara 0.43 4.37 Table 31. Continued. 140 Province Raw Milk . Processed Milk (Pesetas per liter) (Pesetas per liter) 32. Madrid 0.48 4.23 33. Toledo 0.77 4.40 34. Alicante 0.85 4.60 35. Castellon 0.72 4.78 36. Murcia 0.77 4.81 37. Valencia 0.79 4.61 38. Badajoz 0.57 4.45 39. Caceres 0.48 4.68 40. Almeria 0.71 5.18 41. Granada 0.88 4.76 42. Jaen 1.10 5.14 43. Malaga 0.96 4.91 44. Cadiz 0.90 4.85 45. Cordoba 0.77 4.79 46. Huelva 0.66 4.78 47. Sevilla 0.75 4.54 141 Comparison of Proposed and Actual Location Patterns Model I provided the Optimum pattern Of fluid milk processing plant numbers, locations, and sizes for 1973-74, which would have involved twenty—two plants. Actually, in 1974 there were fifty-seven plants in Peninsular Spain (see Appendix C), which were located in forty of the forty-seven . . 46 peninsular prOV1nces. To compare the optimum pattern obtained from Model I with the optimum that could have been achieved with the actual number, location, and sizes of fluid milk plants existing in 1973-74, two additional models were prepared. The present locational pattern of fluid milk proces- sing plants in Spain was appraised under specific assumptions. In addition to the feasibility assumptions stated in the last section of Chapter III, it was considered that an optimum pattern Of milk assembly, processing, and distribution existed in 1973-74. Model II provided the minimum aggregate costs Of assembly, processing, and distribution and the Optimum flow of raw and finished milk with the sizes and location of plants and provincial supplies of milk which were actually used for processed fluid milk products during the 1973-74 dairy marketing year. Provincial supplies of milk destined 46Almost 30 percent of the plants were located in three provinces. These provinces were Madrid, Barcelona, and Valencia, with seven, six, and four processing plants respectively. 142 to processing for fluid consumption were Obtained from pub— lished data collected by the Ministry of Agriculture (44, 45, 50, and 51). They are shown, expressed in liters per day, in Table 32. TO compute provincial demand for processed fluid milk, total processed fluid milk consumed in 1973-74 in the forty-seven peninsular provinces was allocated to each of them assuming that per capita consumption of processed fluid milk products in provinces in which proces- sing plants are established was homogeneous and that per capita consumption in provinces without milk processing facilities was 60 percent of that in the provinces with processing plants.47 Table 32 also shows the provincial needs for processed fluid milk in 1973-74 under these assumptions. The fifty-seven processing plants Operating in the 1973-74 dairy marketing year were included in the Model. Model III was similar to Model II with the differ- ence that, as in Model I, provincial supplies that could have been destined to processing for fluid use but part of which were actually destined to other uses were considered (see Table 25) instead of provincial supplies actually processed in fluid milk plants in 1973-74. The matrices involved in Models II and III were relatively large, involving 322 rows by 5,415 columns, and 47The provinces without milk processing facilities as of March 1, 1974 were: Albacete, Almeria, Avila, CastellOn, Cuenca, Huelva, and Soria. 143 Table 32. Provincial Supplies of Milk Destined to Proces- sing for Fluid Consumption and Provincial Demand for Finished Fluid Milk, Spain, 1973-74. Daily Supply (Thousand liters) Daily Demand Prov1nce (Thousand liters) 1. La Corufia 274.6 152.3 2. Lugo 77.4 59.0 3. Orense 77.1 69.9 4. Pontevedra 187.5 114.5 5. Alava 71.4 33.6 6. Guipuzcoa 96.4 94.4 7. Oviedo 458.6 148.3 8. Santander 282.3 67.8 9. Vizcaya 192.8 157.1 10. Huesca 88.7 30.4 11. Logrofio 38.6 34.2 12. Navarra 69.9 69.9 13. Teruel 10.0 22.7 14. Zaragoza 89.5 108.0 15. Barcelona 229.3 575.0 16. Gerona 211.3 61.8 17. Lerida 70.1 40.1 18. Tarragona 19.7 63.3 19. Avila 10.0 17.3 20. Burgos 148.0 49.9 21. Leon 408.3 72.4 22. Palencia 20.4 27.5 23. Salamanca 42.9 51.6 24. Segovia 77.1 22.7 25. Soria 20.8 9.4 26. Valladolid 77.2. 62.9 27. Zamora 68.5 33.8 28. Albacete 0.0 30.9 29. Ciudad Real 23.3 71.0 30. Cuenca 0.0 22.7 31. Guadalajara 20.0 18.3 144 Table 32. Continued. Daily Supply Daily Demand Province (Thousand liters) (Thousand liters) 32. Madrid 378.3 602.8 33. Toledo 40.0 62.2 34. Alicante 11.2 133.5 35. Castellon 4.8 35.9 36. Murcia 40.1 128.5 37. Valencia 18.7 258.1 38. Badajoz 30.0 92.2 39. Caceres 104.1 63.3 40. Almeria 0.0 37.4 41. Granada 35.5 105.1 42. Jaen 36.9 87.1 43. Malaga 40.0 119.4 44. Cadiz 45.3 133.0 45. Cordoba 144.6 106.9 46. Huelva 1.3 36. 47. Sevilla 223.7 221.3 Total 4,616.6 4,615.6 145 the APEX-II computer program (17) had to be utilized. A program written by Professor Harsh (28) was utilized to input the Aij's and 81's of these matrices using the Harsh- Black format (30). The Objective values (Cj's) were then added and the whole set Of data was coverted to APEX through a conversion program also prepared by Professor Harsh (29). The least cost solution of Model II involved an aggregate cost Of milk assembly, processing and distribution of 21,489,475 pesetas per day, or 4.61 pesetas per liter. This was 13.2 percent higher than the Optimal solution Of Model I and involved 33.7 percent less processed milk. Model III involved a total cost Of 21,043,627 pesetas per day, or 4.56 pesetas per liter, 12 percent higher than the Optimal solution of Model I. Table 33 gives the Optimal quantities to be processed by each of the existing fifty- seven plants, as Obtained from Models II and III. The Optimum interprovince shipments Of raw milk, in liters per day, Obtained from Model II are shown in Table 34. With respect to the distribution of processed milk, only twelve provinces had excess supplies. After satisfying their own consumption needs these provinces would have shipped processed milk to the thirty—five deficit provinces as shown in Table 35. Plants in the remaining provinces with processing facilities would have shipped all their fluid milk products to their own provinces. Finally, the relative prices Obtained from the solu- tion of the dual Of Model II are shown in Table 36. 146 Table 33. Optimum Quantity to be Processed by Bach Fluid Milk Plant, Spain, 1973-74. .- _...--—_- ._a-.—.- ... ‘ .-__ -...- Plant Location Optimum Daily Number (Province) Processing Capacity (Thousand liters per day) 1 Madrid I 300,000 2 Madrid II 150,000 3 Madrid III 150,000 4 Madrid IV 70,000 I 5 Madrid V 60,000 : 6 Madrid VI 150,000 ' 7 Madrid VII 40,000 I 8 Ciudad Real 40,000 9 Guadalajara 30,000 10 Toledo I 15,000 11 Toledo II 30,000 12 Burgos 30,000 13 Palencia 10,000 14 Segovia 30,000 15 Valladolid 30,000 16 Salamanca 30,000 17 Zamora 15,000 18 Leon 130,000 19 Badajoz 20,000 20 Caceres 10,000 21 Cadiz 50,000 22 Cordoba 90,000 23 Sevilla 100,000 24 Granada 100,000 25 Jaen 15,000 26 Malaga 50,000 27 Alicante 350,000 28 Valencia I 230,000 29 Valencia II 50,000 30 Valencia III 140,000 31 Valencia IV 50,000 147 Table 33. Continued. Plant Location Optimum Daily Number (Province) Processing Capacity (Thousand liters per day) 32 Murcia 20,000 33 Barcelona I 150,000 34 Barcelona II 40,000 35 Barcelona III 220,600 36 Barcelona IV 70,000 37 Barcelona V 40,000 38 Barcelona VI 70,000 39 Gerona 15,000 40 Tarragona 15,000 41 Lerida 15,000 42 Huesca 50,000 43 Zaragoza 100,000 44 Teruel 15,000 45 Logrono 30,000 46 Navarra 60,000 47 Alava 30,000 48 Guipuzcoa 120,000 49 Vizcaya I 140.000 50 Vizcaya II 150,000 51 Oviedo I 80,000 52 Oviedo II 210,000 53 Santander 150,000 54 La Coruna 80,000 55 Lugo 20,000 56 Orense 50,000 57 Pontevedra 80,000 Total 4,615,600 148 T361« 34. Optimum Raw Milk Interprov1nro Flow (Model II) in Thousand Liters Per Day, Spain, 1973-74. ”6‘3 ’0 52.1. r. :8 0., l1 AQCCZ Nil: ’50?! AJA ”333834293322 23:66:12 3613 68233382225886‘3‘365333 266...-..633666.6.22> , N”"’“‘““ ”“22”E”‘ 1‘ PG 1. La Coruaa 174 2. Lugo 77.4 3. Or0n5c 15 12.1 4. PODCCVUdrd 107.5 5. Alava 0. Gu1puzcoa 7. Ov1edo 221.5 8. Santander 9. Vizcaya 10. Huesca ll. LonqunO 12. Navarra 13. Teruel 10 14. Zaragoza 15. Barcelona 16. Gerona 17. Lcrida 18. Tarragona l9. Avila 10 20. Burgos 30 35.5 21. Leon 71.9 10 30 130 166.4 22. Palencia 10.4 10 23. Salamanca 30 17.9 24. Segovia 30 25. Soria 26. Valladolid 47 ' 30.2 27. Zamora 102.5 28. Ciudad Real 23.3 29. Guadadajara 20 30. Madrid 378.3 31. Toledo 8.3 16.7 15 32. Alicante 11. 33. Castellon 4.8 34. Murcia 40. 35. Valenc1a 18.7 36. Badajoz 20 10 37. Caceres 64.1 30 10 38. Granada 35.5 39. Jaen 15 21.9 40. Malaga 40 41. Cadiz ' - 45.3 42. Cordoba 80 64. 43. Huelva 1.3 44. Sevilla 4.7 98.7 35. 10 74.9 Total 920 40 3O 45 30 10 3O 3O 30 15 130 20 10 50 90 100 100 15 50 350 470 Table 34. ' . Continued .rf' rt‘u (Ff. L.‘ I 149 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 29. 30. 31. 32. 33. 34. 35. 36. 38. 39. 40. 41. 42. 43. 44. Total La Coruaa Lugo Orvnse Pontevedra Alava Guipuzcoa Oviedo Santander Vizcaya Heusca LonqunO Navarra Teruel Zaragoza Barcelona Gerona Lerida Tarragona Avila Burgos Leon Palencia Salamanca Segovia Soria Valladolid Zamora Ciudad Real Guadalajara Madrid Toledo Alicante Castellon Murcia Valencia Badajoz Caceres Granada Jaen Malaga Cadiz Cordoba Huelva Sevilla I 23111033 Inqrono Verona llt‘rldl Huesca Tvruol er31 h I r 3 V 73 24. 7) 3U. ) l I 2 3 151,5 Jug; 3H.6 196.3 15 37.7 15 3U 20.8 NJVJIIJ 31. 20 580.6 15 15 15 50 100 15 3O 6O "1"1 a“: I rr—u I11 .1 I TUE ff’ I1—1- rlr‘ 7“ W? N...“ "l‘. l'm'fl—Ltfl'." I n.‘r1.‘—V’LJ "— GUipuzcoa Santander La Coruna Luqo Orense O V 1 IS: L10 Alava Vizcaya 3?. 30 35. 3 37. 38. 9 I) O 20 SO 30 5.1 97.: 150 30 120 290 290 150 80 2O 50 Pontevedra 4(). 80 80 Total 274.0 77.4 77.1 187.5 71.4 96.4 458.6 282.3 102.0 88.7 38.6 69.9 10.0 89.5 229.3 211.3 70.1 19.7 10.0 148.0 408.3 20.4 47.9 77.1 20.8 77.2 122.5 23.3 20.0 378.3 30.0 11.2 4.8 40.1 18.7 30.0 104.1 35.5 36.9 40.0 45.3 144.6 1.3 223.7 4615.6 . w .-—— ILSO «.mo H.mm m.mv o.om m.mm h.n m.mH m.~m m.na >.- ~.om m.H~H m.o~ mm «.mn Hm m.~a n.5H «mace n.m m.~m “mocmucmm .NH ouma>o .HH m.m m.mn mwmouw> .oH m.m moonzmwsu ©.ma momwsm mconoumm m.mm . wucmowad 0v m.om m.mm h.h O.HH v.0m mHUcmHm> HNMQ‘U‘OI‘QG H.0H m.na coma m.> mH>ommm m.HH mumflmamnmso m.m N.®m m.ov m.©a mm Hm N.hH OH Ufiuvmz T. T. T. T. T T T. T moamusm L D L Z A d D H S 3 D 8 D L V m m e W e a e e e n n a o e e I. o A I 1 1 q s 1 m I I a a A 1 P P n I t 9 I 1 B 1 n O T a u T I D. T. e P a T 6 D. e o a a 1 e u o A I o z E. e P e e e b a I I e P o e e I q o P o o 3 I o I. e e z muw3om u a o I e H e u I. a uaodmmo p m. . . .vnumpma .cammm .>mo Mom muwuaq Ucmmsoce CH .AHH Homozv mwoca>oum afloflmmo o» msamusm Scum 30Hm xaflz Ommmwooum EDEHumO .mm wands a 15]. Hmuoe m.nHm m.vM m.oa o.mm m.mn m.mm o.m o.HN m.mH o.m v.m m.v m.m m.mq v.5m H.mn m.moa H.m «.mm o.ov umncmucmm .NH n.H¢H «.Om o.mm m.mn ovmfl>o .HH m.MMH 5.0 o.m o.Hm m.o~ q.o mamonfl> .oH m.mm o.m N.v m.m N.H moousmflzo .m ©.®H MUmODE .m m.mv m.mv MCOHGUHMM .5 93m v.2 99: im 35.32 .o “.HHN mHocmHm> .m o.nm H.v m.mH coon .v m4. . mfl>omwm .m P.HH mumflmamumso .m m.nam o H.mn canon: .H Tu CL CC cc to CL E Z Z Z Z Z z Z Z z Z T. w G w I Y W o w 9 v. m. m. w. I Y T w ”o mmoca>oum W madmhsm d o m m m. m .... m. m. m m. m. m a w m m m U a 5 D 9 I 1 1 I 5 A I m a 1 P 3 u 0 3 a A P 5 9 I. I E O a u D U a s o J 9 m o 6 e o 1 u 1 I. e «M a m w W“ S m w W“ D.. .1. D.. p P u. o e e 9 mumsom m e e afloammo UQDCHHCOU .mm manna 152 Table 36. Optimum Price Location Differentials Resulting from Solution of Dual (Model II), Spain, 1973-74. Province (Pesefizg géikliter) (Piggizzsgng11ter) 1. La Corufia 0.00 5.22 2. Lugo 0.10 4.99 3. Orense 0.16 5.38 4. Pontevedra 0.07 5.37 5. Alava 0.30 4.88 6. Guipuzcoa 0.81 4.85 7. Oviedo 0.38 4.41 8. Santander 0.58 4.62 9. Vizcaya 0.69 4.72 10. Huesca 0.84 5.64 11. Logrofio 0.65 5.26 12. Navarra 0.68 5.08 13. Teruel 0.91 5.45 14. Zaragoza 0.82 5.53 15. Barcelona 1.12 5.16 16. Gerona 1.02 6.45 17. Lerida 0.96 5.99 18. Tarragona 1.02 6.03 19. Avila 0.49 5.73 20. Burgos 0.53 5.11 21. Leon 0.28 4.32 22. Palencia 0.37 4.64 23. Salamanca 0.48 5.71 24. Segovia 0.60 5.57 25. Soria 0.47 5.39 26. Valladolid 0.42 4.65 27. Zamora 0.35 5.49 28. Albacete 0.90 5.52 29. Ciudad Real 0.62 5.10 30. Cuenca 0.83 5.98 31. Guadalajara 0.65 5.62 153 Table 36. Continued. ‘- ——_- Raw Milk Processed Milk Province (Pesetas per liter) (Pesetas per liter) 32. Madrid 0.60 4.64 33. Toledo 0.50 4.81 34. Alicante 1.07 4.88 35. Castellon 0.98 5.26 36. Murcia 0.99 5.09 37. Valencia 1.05 5.09 38. Badajoz 0.32 6.48 39. Caceres 0.25 6.25 40. Almeria 0.58 5.64 41. Granada 0.70 5.80 42. Jaen 0.65 5.49 43. Malaga 0.72 6.19 44. Cadiz 0.58 6.41 45. Cordoba 0.59 5.66 46. Huelva 0.54 6.22 47. Sevilla 0.46 6.61 154 The results obtained from Model III were very similar to those of Model II. The quantities to be processed in each plant and the flow from plants to consumption centers were the same in both Models and only the interprovince flow of raw milk was slightly different, as it can be seen in Table 37. These Models indicate three possible inefficiencies ”m“!!! in the pattern of assembly, processing, and distribution of milk in Spain in 1973-74. The first is that there are too many plants for efficient Operation. With so many plants located within the Peninsula it would appear to be impossible ; for many of them to achieve minimum costs. It is also to be noted that the actual number of plants in Spain is increas- ing, thus compounding the problem. The second possible inefficiency is the relative short distribution radius for the plants. In the actual pattern the radius is presumably even shorter, since most pasteurized milk cannot be shipped to other market areas due to existing regulations. Finally, Model III showed that, although product-use inefficiency was relatively unimportant with the 1973-74 pattern, a better product-use allocation would have per- mitted a modest decrease of about 2 percent in total costs, through a decrease in assembly costs. 155 Table 37. Optimum Raw Milk Interprovince Plow (Model III), in Thousand Liters Per Day, Spain, 1973-74. :32 .. 2% «a :18 on: 3522325222533325552222 £888338§£SS£8888G§£2§§ a m n v m o h m m o 3 S 2 3 m S A a N N 1. La Coruaa 2. Lugo 3. Orense 4. Pontevedra 5. Alava 6. Gu1puzcoa 7. Oviedo 8. Santander 9. Vizcaya 10. Huesca 11. Loqroao 19 12. Navarra 74 13. Teruel 45 14. Zaragoza 92 15. Barcelona 16. Gerona 17. Lerida 8.4 18. Tarragona 21 19. Avila 66 20. Burgos 30 118.6 21. Leon 130 22. Palencia 77 10 23 Salamanca 66 3O 24. Segovia 93 3O . 25. Soria 36 26. Valladolid 57 3O 27. Zamora 15 20 28. Albacete S 29. Ciudad Real 40 36 30. Guadalajara 30 31. Madrid 418 32. Toledo 143 15 33. Alicante 23 34. Castellon 18 35. Murcia 53 36. Valencia 38 37. Badajoz 20 38. Caceres 3O . 10 39. Almeria 19 40. Granada 38 41. Jaen 15 33 42. Malaga 50 34 43. Cadiz 50 44. Cordoba 90 100 7 4S. Sevilla 100 102 Total 920 40 3O 45 30 10 3O 30 3O 15 130 20 10 50 90 100 100 15 50 350 470 2( 156 Table 37. Continued I." a 77m“) r. s I I 1 1'1 I 1." mci't r1 im-Ttmt-unl-mmmt—I ...- "_-l 1: g R, g 1.. lg ‘9 2 . a . 6 6 .. .2 e :1 a o 6 a 6 " a; c m 's o 0‘- Q) o 1. ml 3 «s “U” c: o m g a 2 : a g 6 2 .2: .9 a a E U a s c ’ £8£3§£:3§25556335£ .. 75. U“ :3 :I 9. .. 2 ” .. *2 ~° :. 93% 2 0 £3 1. La Corufia 80 80 2. Lugo 20 20 3. Orense 50 50 4. Pontevedra 80 80 5. Alava 72 72 6. Guipuzcoa 15 120 135 7. Oviedo 218 218 8. Santander 63 150 213 9. Vizcaya 227 227 10. Huesca 50 23 133 11. Loqroao 3O 49 12. Navarra 17 60 15 166 13. Teruel 45 14. Zaragoza 92 15. Barcelona 270 270 16. Gerona 236 15 251 17. Lerida 114.6 15 15 153 18. Tarragona 21 19. Avila 66 20. Burgos 15 163.6 21. Leon 130 22. Palencia 87 23. Salamanca 96 24. Segovia 123 25. Soria . 36 26. Valladolid 37 27. Zamora 35 28. Albacete 5 29. Ciudad Real 76 30. Guadalajara 30 31. Madrid 418 32. Toledo 158 33. Alicante 23 34. Castellon 18 35. Murcia 53 36. Valencia 38 37. Badajoz 2O 38. Caceres 40 39. Almeria 19 40. Granada . 38 41. Jaen 48 42. Malaga 34 43. Cadiz 50 44. Cordoba 197 45. Sevilla 202 620.6 15 15 15 SO 100 15 3O 60 30 120 290 290 150 80 2O 50 80 4,615.6 Total CHAPTER VI OPTIMUM NUMBER, SIZE AND LOCATION OF FLUID MILK PROCESSING PLANTS: AN EX-ANTE ANALYSIS This chapter presents the projections of the basic data needed for the ex-ante analysis and the empirical results obtained from the application of Models IV and V. Projections of Cow Milk Supplies and Fluid Milk Consumption and Assumptions Regarding MilE'Assembly, Processing and Distribution Costs and Designation of PotentiaI Fluid Milk Plant Sites This section presents the procedures used (and the assumptions made) and the estimates obtained for cow milk production, fluid milk consumption, milk assembly, proces- sing and distribution costs, and the designation of potential fluid milk plant sites for 1978. 1 Projection of Provincial Milk Supplies The projections of provincial milk supplies for 1978 were developed as follows. First, national milk production in a given year was hypothesized to be a function of national 157 \. ,7. ll 158 . . . . 48 milk production in the preVious year. Twenty-four obser- vations (from 1951 to 1974) were made and then least square estimates of the regression coefficients were obtained. The equation obtained was: TMILKPRODT = .0183 + 1.0314 TMILKPRODT_1 (.1304) (0.0397) R2 = .9684, 52 = .9670 Total milk production at the national level was then projected for the next four years using this equation. The results are shown in Table 38. Table 38. Projected Total Milk Production, Spain, 1975-78. Year Milk Production Production as a Percentage (Billion liters) of 1975 1975 5.10 100.0 1976 5.28 103.5 1977 5.46 107.0 1978 5.65 110.7 Secondly, in order to determine the projections of total milk production which will be commercialized in 1978, 8Initially, it was attempted to develop a predic- tion model for forecasting annual production of milk in Spain, but lack of response of milk production to variables that were considered important (such as prices of milk and feed, prOportion of Friesian cows, etc.) and rather poor fits made its use inadvisable. The results of this attempt are shown in Appendix D. 159 least square trends in percentage were established for the three main outlets of noncommercialized production (milk fed .to calves, consumed in the farm in fluid form and used in the farm for home manufacturing purposes) and extended to 1978. It was projected that, in 1978, only 8.71 percent of total milk production will be fed to calves, 15.71 percent will be consumed directly in the farm and 4.43 percent will E. be used for home manufacturing purposes, for a total of 28.85 percent of total milk production that will not be commercialized.49 This gives a projected commercialized production of 4.02 billion liters in 1978. i Finally, in order to project commercialized milk production at the provincial level, milk production in each province was divided by total output of Spain and a trend in percentage for each province was again established by least square regression and the trend line was extended linearly to 1978. Table 39 shows the projected daily pro- vincial supplies of milk available for fluid consumption for the forty-seven peninsular provinces of Spain. Projected Provincial Fluid Milk Needs To project fluid milk consumption at the provincial level a trend in per capita fluid milk consumption was 49in 1974 the percentages were 13.20. 15.92, 3.20, and 32.32 respectively for milk fed to calves, consumed as fluid in the farm, manufactured in the farm and non- commercialized. ' 160 again established by least square regression and the trend line was extended linearly to 1978. Per capita fluid milk consumption for that year was projected to be 89.2 liters, or 244.5 c.c. per day. Again, homOgeneous per capita con- sumption throughout the country was assumed. Next, projections of provincial population for 1978 were obtained by extrapolation from the projections made by the III Plan de Desarrollo Economico y Social (60). The projections made under the assumption of indices of medium migratory behavior (1966-70 levels) were used. Provincial fluid milk needs for 1978 are also given in Table 39. These are strictly projections and should be considered as such and are only to be used as broad guidelines. Designation of Potential Fluid Milk Plant Sites The following twenty-two locations (optimal solution for 1973-74) were selected as potential plant sites for the 1978 models: (1) La Corufia, (2) Pontevedra, (3) Oviedo, (4) Santander, (5) Bilbao, (6) San Sebastién, (7) Zaragoza, (8) Barcelona I, (9) Barcelona II, (10) Leon, (ll) Valencia, (12) Alicante, (13) Madrid I, (14) Madrid II, (15) Ciudad Real, (16) Badajoz, (17) Granada, (18) Jaen, (l9) Malaga, (20) Cadiz, (21) Cérdoba, and (22) Sevilla. 161 Table 39. Provincial Supplies of Milk Available for Fluid Consumption and Provincial Fluid Milk Needs, Spain, 1978 (Projected). Daily Potential Daily Fluid Province Supply Milk Needs (Thousand liters) (Thousand liters) 1. La Corufia 1,472 271 2. Lugo 1,036 100 3. Orense 61 104 4. Pontevedra 374 206 C1 5. Alava 47 65 6. Guipuzcoa 188 173 7. Oviedo 1,533 262 8. Santander 518 121 __ 9. Vizcaya 426 291 - I 10. Huesca 139 52 ll. Logrofio 56 60 12. Navarra 187 127 13. Teruel 37 37 14. Zaragoza 83 193 15. Barcelona 285 1,063 16. Gerona 216 112 17. Lerida 272 67 18. Tarragona 8 114 19. Avila 224 45 20. Burgos 184 87 21. Leon 431 122 22. Palencia 151 47 23. Salamanca 145 89 24. Segovia 134 38 25. Soria 63 24 26. Valladolid 128 ' 116 27. Zamora 112 57 28. Albacete 17 82 29. Ciudad Real 73 121 30. Cuenca 0 60 E... F... 162 Table 39. Continued. ~ Daily Potential Daily Fluid Province Supply Milk Needs (Thousand liters) (Thousand liters) 31. Guadalajara 8 30 32. Madrid 258 1,149 33. Toledo 208 106 34. Alicante ' 26 244 35. Castellon 18 ' 99 re 36. Murcia 41 230 h 37. Valencia 47 470 38. Badajoz 279 154 i 39. Caceres 369 107 _‘ 40. Almeria 20 103 i 41. Granada 37 183 42. Jaen 42 147 43. Malaga 87 211 44. Cadiz 62 237 45. Cordoba 275 185 46. Huelva 83 97 47. Sevilla 302 403 Total 10,852 ° 8,460 163 Milk Assembly, Processing and Distribution Costs Two alternative assumptions with respect to the components of total costs were made. In Model IV all costs were considered to be equally affected by inflation, while in Model V the labor component of processing costs was considered to increase by 20 percent more than the other P- costs involved by 1978.50 Empirical Results This section presents the empirical results obtained i from the application of Models IV and V. Model IV The least cost solution of this model was obtained for twenty-one plants, one less than in the 1973-74 solution with respect to which the plant in Jaen was drOpped. Table 40 gives the location and sizes of those twenty-one plants. The largest plant will process 750,000 liters per day and the smallest one 121,000. The average processing volume will be 402,857 liters per day and plant. In com- parison with the 1973-74 results (Model I), all plants 50Wage costs in Spain have been generally low (one- half to two-thirds those of France and one-third those of the U.S.). In 1974 wage increases averaged 25 percent over the preceding year. Meanwhile inflation was about 20 per- cent. It will be assumed that this trend will continue for the next four years. rrajgle 40. Optimum Number, Plants, Spain, 164 Location and Size of Fluid Milk 1978 (Projected). _..__,...__—— __._. _~-.__ plantNmflmr ... Location (Liters per day) 4.... . Size U! \1 10 11 12 13 14 15 16 17 i8 i9 20 21 La Corufia Pontevedra Oviedo Santander Bilbao San Sebastian Zaragoza Barcelona I Barcelona II Leon Valencia Alicante Madrid I Madrid II Ciudad Real Badajoz Granada Malaga Cadiz Cordoba Sevilla Total 371,000 310,000 262,000 121,000 639,000 188,000 349,000 644,000 645,000 430.000 569,000 474,000 755,000 755,000 121,000 261,000 433,000 211,000 237,000 185,000 500.000 8,460,000 165 except the one in Santander increased their processing The twenty-one plants least cost solution involved an aggregate cost of milk assembly, processing and distribu- tion of 34,381,040 pesetas per day or 4.06 pesetas per liter at 1974 prices, a drOp of 0.1 percent in unit costs with respect to 1973-74, but with an 18.2 percent increase in output. Again, processing costs were the highest component of total costs with 23,471,400 pesetas per day or 68.26 per- cent of total costs. By dropping either of the two smallest plants, those in Ciudad Real and Santander, total daily costs would increase by 30,830 or 27,830 pesetas per day, at 1974 levels, respectively. Table 41 gives the optimum flow from the Supply regions to the twenty-one plants, as well tOtal volume of raw milk supplied by each region r"aceaived by each plant, while Table 42 shows the forty-seven as the and optimum flow of processed products from the twenty—one plants to the forty-seven consumption regions as well as the total volume of milk products shipped by each plant and received by each c . . Ons umption region . W This last model differed from the previous one in “he assumption that the labor component of processing costs 7' 166 Taiyjc 41. om 1mum Flow of Raw Milk from Supply Regions to E‘roc7s;51nq Plants (Model IV), in Thousand Liters Per Day, Spain, H78. . V ' o 1" t I I - l I I 'I t ‘ r" '. r "I ' I i I"! 1 ' I I m ’9'. I Irv V'”rrrvac I‘D‘ I"I‘I 21¢=l ‘ 1* ‘ I I ‘1‘. S -"l"l n—m—v- 1h-.' .‘..Ufif.‘"‘ Ifl‘U““.fl"7 "1' "I'. "‘3 ‘ .‘I'Jl ‘ r1 \ i H d H >1 r-< Prev-.1? sing v u .15 ‘5 in L4 '5’) 1‘3 'J H ‘ Plant-3 1: p 41 ~15 c .: c 1 o H H 5.; '3 ; 'c a N n :4 ... u N -: 1:1 u L. > o c O 1‘.) C -‘ H I: : 'U 'U 'c o '0 G .0 .—. \ O O "J 'U '5 (I) 73‘ i; ‘12 E: 15 A —1 an F‘ c ('7‘ N O --4 L) u :1 u 1.] 4': u U E; D U h H '1: =73 -: ‘3 ~ ‘1'! .--~ ~ C d C '4 : L. h L4 U .—4 H '11 '0 :3 ’U 93 .4 "71 h 7' \ 1 c > '1 .. m 1 a c 3 m ... 11 cu +4 4‘) La 40 «1 .7) ‘L' \ .1 a. o m m m N m m > -< >1 5‘. u m o 3‘. u \7 U1 _‘ Supply \ . . - ‘ _ _ , . . 1: Rd 1110115 \\ .4 N M '3 1n \0 r\ m o H N M v u o h a) m D C .—4 .—< r4 .—4 H a—d —1 \l P 1 . x..: (form—1.1 371 371 2, Luau 0 3 . Orense H 4 . l‘nntchdra 111) 3] . 5. Alava 4, 4? 1'). 13:11 rumba 18:9 1W1 7 . 0v 1 odd 2(1.‘ 39 4 30 234 389 1'1 1. 193 H. 8.11". tandox‘ 121 174 ’73 l118 ‘) - ‘v’LZQ‘d'y’J 4:0 420 11’. Hll'.".~1:a 13‘) 13‘) 1 1 - Lug [~50 26 10 51> i J . 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Its volume was absorbed by the two largest plants located in Madrid. Table 43 gives the optimum number, location, and sizes of plants obtained from Model V. The largest plant will now Process 816,000 liters per day. The average processing VOlume will also be 402,857 liters per day and plant. This tWenty-one plants least cost solution will involve an aggre- gate cost, at 1974 prices, Of 34,711,830 pesetas per day or 4.10 pesetas per liter. The minimum cost with twenty-two Plants was 34,754,220 pesetas per day. With respect to the Optimum flow Of raw milk from SuPply regions to plants, there were only minOr changes with reSpect to the Optimal solution of Model IV (Table 41) . Toledo will now ship 121,000 liters per day to Madrid, 32'000 liters to Jaen, and only 54,000 liters to Granada, in addition to 1,000 liters per day to Alicante whereas in MOdel 1v it shipped 48,000 liters to Ciudad Real, 159,000 litears tO Granada and 1,000 liters to Alicante. Ciudad Real will ship 73,000 liters Of raw milk per day to Jaen and Jaen, finally, will send its 42,000 liters daily supply to its own plant. 170 (rajale 43. Optimum Number, Location and Sizes Of Plants (Model IV), Spain, 1978 (Projected). PlantNmflmr Location Size (Liters per day) 110 ll 12 l3 14 15 16 l7 l8 19 20 21 La Corufia Pontevedra Oviedo Santander Bilbao San Sebastian Zaragoza Barcelona I Barcelona II Leon Valencia Alicante Madrid I Madrid II Badajoz Granada Jaen Malaga Cadiz Cordoba Sevilla Total 371,000 310,000 262,000 121,000 639,000 188,000 349,000 644,000 645,000 430,000 569,000 474,000 816,000 815,000 261,000 286,000 147,000 211,000 237,000 185,000 500,000 8,460,000 171 The optimum flow of processed fluid milk products will also be similar to the one for Model IV (Table 42) with only two differences. The two plants in Madrid will supply 121,000 liters of processed fluid milk per day to Ciudad Real and the plant at Jaen will supply its own province with 147,000 liters per day (Granada, of course, will not supply Jaen, but only its own needs and those of Almeria). Sensitivity Analysis As the results from Model V have indicated, a 20 percent increase in the labor component Of processing cost would change the Optimal solution Of Model IV. Although it will not be attempted here to explicitly test the sensi- tivity of the optimal solutions obtained for the models that have been applied, an effort will be made to give a range of stability for the Optimal solution Of Ex-Ante Model IV with respect to processing costs, the largest com- ponent of total costs. Raw milk transportation costs equal 0.001 pesetas per liter and kilometer, while finished milk transportation costs are 0.00252 pesetas per liter and kilometer, for a combined transportation cost of 0.00325 pesetas per liter 51 and kilometer. The two closest plants in the Optimal 51The two plants in Madrid and the two in Barcelona are excluded. Combination of these would result in one plant of 1,510,000 liters per day in Madrid and one of 1,289,000 liters per day in Barcelona. It is considered that no cost reductions can be achieved by combination (partial or total) of these four plants. 172 solution of Model IV, those of Santander and Bilbao, are separated by a distance of 110 kilometers. The plant in Santander and the one in Ciudad Real were the smallest ones in this Optimal solution. If the two plants of Santander and Bilbao were to be combined in one located in Bilbao and processing 760,000 liters per day at a unit cost of 2.74 pesetas per liter of milk, there would be a decrease in F71 processing costs of 33,880 pesetas per day and an increase in transportation costs of 46,851.2 pesetas per day, a net cost increase of 12,971.2 pesetas per day. For this change in the optimal solution to take place, an increase in pro- 4 %’ cessing costs of more than 7 percent will be needed.52 Slightly more than a 7 percent increase in processing costs will be necessary to drOp the plant in Ciudad Real (188 kilometers from Madrid), and similarly for those of San Sebastian (119 kilometers from Bilbao), Pontevedra (122 kilometers from La Coruna), Malaga (133 kilometers from Granada), etc. On the other hand, to have one more plant in the Optimal solution (the one of Jaen will be the first to enter), a reduction in processing costs would be necessary. The activation of the Jaen plant would represent an increase in processing costs of 56,690 pesetas per day with respect to the optimal solution of Model IV and a decrease in transportation costs of 50,760 pesetas per day. A reduction 52Or a reduction of about 7.1 percent in transpor- tation costs. 173 in processing costs of slightly more than 9.5 percent would be needed to make the plant in Jaen viable. The optimal solution Of Model IV, therefore, would be stable even with reductions in processing costs up to 9.5 percent or increases up to 7 percent. Of course, changes in the components of processing costs would also modify the Optimal solution. CHAPTER VII SUMMARY, CONCLUSIONS AND RECOMMENDATIONS This chapter summarizes the results of the study and :h_ presents the main conclusions drawn from it as well as some recommendations that could lead to improved efficiency in the fluid milk subsystem of Spain. Some of the limitations L of the study and possible areas in which further research is g needed are also identified. Summary The first Objective of this research was to analyze the present organization of the fluid milk subsystem of Spain. After defining the dairy subsector and fluid milk subsystem of Spain, trends in milk production, consumption and import-export activities were presented and both the structure and government role in the fluid milk market were described. A preliminary evaluation of the performance Of the fluid milk subsystem suggested that, although the sub- system has been fairly progressive in recent years, there seems to be substantial room for improvement with respect to other performance dimensions, such as product suitability, 174 175 adequate output levels and consumer information, and absence of misregulation. The later analysis also showed that the subsystem is relatively inefficient, with indications of both suboptimal use Of resources within firms and of inefficient allocation of resources between them. The second objective of this study was to determine the effects Of volume of production in individual plants upon the cost of processing fluid milk. An economic engineering study was undertaken to this end. A cost analysis procedure was develOped and applied to each of six synthetic plants and four alternative workday lengths in order to estimate unit processing costs. For the plants analyzed, it was found that unit costs decreased from 3.958 pesetas per liter of fluid milk processed for a plant processing 40,000 liters per day for an eight-hour workday to 2.789 pesetas per liter for a plant processing 360,000 liters per day for an eight- hour workday.53 This was a decrease of almost 30 percent, with most of the drOp (76.6 percent) being in the 40,000- 120,000 liters category in which cost decreased by 22 percent. The main factors affecting unit processing costs were packaging materials, equipment and labor costs. For most of the plants analyzed, the eight-hour workday was most efficient. 53Unit costs for this plant Operating twenty hours per day and processing 900,000 liters would be 2.680 pesetas per liter. ' 176 The third and fourth objectives included the deter- mination of least costs numbers, locations and sizes of fluid milk processing plants for Peninsular Spain and of interprovince price differentials for both raw and finished milk that would be consistent with this optimum. The basic analytical tool used was the transshipment model. The main purpose of this analysis was to determine whether adjustments in sizes and numbers of plants would provide a more efficient pattern for milk assembly, processing, and distri- bution than the prsent one which. furthermore, would allow for expansion of the present fluid milk processing industry to provide hygienized milk to all consumers. The data used for this analysis were provincial raw milk supplies available for fluid milk processing, provin- cial fluid milk consumption data, raw milk unit assembly costs between all supply regions and potential plant sites, fluid milk unit processing costs at each potential plant, and finished milk unit distribution costs between all potential plants and consumption centers. Provincial raw milk supplies were obtained from published data elaborated by the Ministry of Agriculture. Provincial fluid milk con- sumption figures were calculated on the basis of total supplies and pOpulation figures and assuming that per capita consumption of fluid milk products was uniform throughout the country. Raw milk assembly costs and fluid milk distribution costs were also Obtained from secondary data elaborated by the Ministry of Agriculture. Finally, fluid \.‘ 177 milk processing costs were obtained from the study of economies of size conducted as part of this research. Three ex-post (1973-74 dairy marketing year) and two ex-ante (1978 calendar year) models were solved. According to the least cost pattern obtained for 1973-74, twenty-two plants, processing a daily average volume of 316,316 liters Of milk per plant would have provided pro- - cessed milk to all consumers at that year's consumption levels at an average cost of 4.07 pesetas per liter. Pro— cessing costs represented almost 70 percent of unit costs. Optimum location and sizes of plants and optimum flow of raw E and processed milk were also Obtained. Optimum provincial price location differentials for raw and finished milk con- sistent with the minimum cost solution were Obtained from the solution of the dual. The actual pattern of fifty—seven plants, processing a daily average of 80,975 liters per plant and providing an amount of processed milk which was less than two-thirds of the total milk consumed in fluid form in 1973-74, could have attained a minimum average unit cost of 4.61 pesetas per liter of processed milk. The actual cost was equal to or, presumably, greater than this amount. Optimum flow of raw and finished milk and Optimum provincial price location differentials to achieve this minimum aggregate cost under the present pattern Of plant numbers and locations were also Obtained. 178 A more efficient product-use allocation of milk would have permitted the attainment, under 1973-74 condi— tions, Of a unit cost of 4.56 pesetas per liter, as Obtained from Model III, in which provincial supplies of milk that could have been destined to processing for fluid use but part Of which were destined to other uses were considered instead of provincial supplies actually processed for fluid consumption in 1973-74. For 1978, it was projected that 8,460,000 liters of milk per day, a 21.5 percent increase with respect to 1974, will be needed for fluid consumption. The least cost pattern for 1978 would involve twenty-one plants, processing a daily average Of 402,855 liters per plant at a unit cost, in 1974 prices, of 4.06 pesetas per liter, if all costs are assumed to be equally affected by inflation. Processing costs would represent more than 68 percent of unit costs. The Optimal solution was found to be stable even with reduc- tions in processing costs up to 9.5 percent or increases up to 7 percent. If the labor component of processing costs is assumed to increase by 20 percent more than all the other components of aggregate total costs by 1978, the Optimal solution would also involve twenty-one plants, although one of them will be different from the Optimal solution under the previous alternative assumption. 179 Optimum locations and sizes of plants and Optimum flow Of raw and processed milk products were also Obtained for 1978. On the basis of these findings, the four hypotheses established in Chapter I seemed to be confirmed. Most of the existing plants are of suboptimal size, there are too many plants and the system of hygienization of milk could be ”I extended to all the country with a reduction in unit costs through adjustments in the number, location and size of processing plants. In addition, price location differen- l tials as presently computed do not guarantee Optimum milk if movements. Conclusions The major conclusions drawn from this study can be summarized as follows: 1. Relative inefficiency, inadequate output levels, lack of sufficient consumer information, inadequate fluid milk product mix Offered and elements of misregulation seem to be the main barriers to improved performance in the fluid milk subsystem of Spain. 2. Milk prices received by producers have deteriorated considerably during the last few years relative to the prices paid by farmers for their inputs, placing them at 1971 levels. 180 3. Total fluid milk processing costs per unit drop sharply with increased volume up to 120,000 liters per day and continue to decline, although at a slower rate, to a volume of 360,000 liters per day for an eight-hour workday, the most efficient work- day length. 4. Packaging materials, equipment and labor costs, in 5. this order, are the main factors affecting unit milk “ processing costs and, together, make up more than 70 percent of processing costs per unit. 5. When considering assembly, processing and distribu- ‘ tion costs and demand and supply conditions, the minimum efficient plant would have processed 105.000 liters per day in 1973-74. In 1978 the minimum efficient size will be 121,000 liters per day. 6. An Optimum pattern of twenty-two plants would have provided hygienized milk to all consumers Of fluid milk (50.7 percent more than the actual quantity provided) in 1973-74 at a cost per unit 13.2 percent lower than the minimum cost that could have been attained with the actual pattern Of fifty-seven plants.54 7. An improved product-use allocation, with milk avail- able in each province being destined to processing for fluid consumption as the first priority would 54Existing regulations, however, would not have permitted the attainment Of this Optimum pattern. 181 permit a slight decrease in unit costs through a decrease in assembly costs. 8. Twenty-one and one-half percent more milk will be needed for fluid consumption in 1978 than in 1974. If all the milk to be consumed in fluid form by 1978 were to be hygienized in processing plants, the increase in processed milk needed with respect to the quantity supplied in 1973-74 would be 83.3 percent. An Optimum pattern of twenty-one plants could provide the needed amount of hygienized milk at a minimum cost in 1978. Taken as a whole, the research has demonstrated relative economic advantages for moving towards a fluid milk processing industry both more concentrated and with an expanded capacity. While it would be very difficult to expect the dismissal of nearly 60 percent of the plants existing in 1974 some alternative will be needed to keep the subsystem from further deterioration with the present organization. Recommendations This study has focused almost exclusively on the design aspect of efficient area organization. While the general value of the information provided by this type of studies in formulating both private and public goals is widely recognized, "free-market" economists such as French have argued that their results are apt to be "rather sterile 182 in the absence of some central planning authority" (24, page 94). The basis for such planning authority in the fluid milk subsystem is already present in Spain under current regulations, in whose context this study was under- taken. Most of the recommendations to be drawn from this research which, for the most part, come directly from the conclusions outlined in the previous section, are directed to the public agencies to which the development of programs to improve the performance of the fluid milk subsystem is currently assigned, although it is considered that some of them would also be valid under a different arrangement and will also be relevant to management Of fluid milk plants and other participants. 1. The minimum price to milk producers should be increased to correct the progressive deterioration in the relative position of dairymen during the last three years, in which real milk prices received by farmers have dropped almost 11 percent, placing them at 1971 levels. Slack existing in the sub- system could allow some increase in producer prices to be absorbed without a drastic increase in consumer prices. At any rate, higher producer prices seem to be necessary if the country is to become self-sufficient in milk, given the increased needs projected for the near future. On the other hand, if prices are allowed to deteriorate further it is very likely that future supplies will not be 183 sufficient to cover the expected increased demand. 2. The minimum daily processing capacity for an eight- hour workday should be increased up to at least 105,000 liters for plants seeking authorization to enter the processing industry. Although smaller plants could still be exceptionally authorized in special cases as it is presently done, unless special conditions not reflected by the models in this study prevail the construction Of such new small plants should be discouraged. If relatively small plants continue to be authorized at the present rate, this would result in greater ineffi- ciency in the fluid milk industry, making it increasingly unable to supply high quality, pro- cessed milk to all the country at reasonable prices. 3. Existing firms Operating below the 105,000 liters per day level should be provided incentives for consolidation of both plants and markets in order to accelerate the movement towards a more efficient organization of the fluid milk subsystem.55 55Since Optimization Of the efficiency of the total subsystem does not necessarily guarantee that the efficiency Of each of the component parts or participants will be optimized, additional programs might be necessary to avoid adverse economic impact on some participants if the sub- system is tO move toward increased concentration. Such programs might include selective subsidies to affected 184 4. NO restrictions should be imposed with respect to the geographical area in which a processing firm is allowed to sell its product. The elimination of present restrictions on the sale Of pasteurized milk, it is thought, would contribute to a more efficient flow of finished products. Even if no reduction in the number of plants is achieved but Optimum flow of both raw and processed milk are allowed to take place, cost per unit will be only 13.2 percent higher than those to be obtained under an optimum pattern of twenty-two plants. Further— more, elimination Of the existing restrictions would very likely bring about a decrease in the proportion of sterilized milk that is being produced, which would result in an improved efficiency of the sub- system. 5. The system of compulsory hygienization of milk should be extended to all the country. Existing plants should be able to provide processed milk to all consumers, either through longer workdays or expansion, once present restrictions are eliminated. 6. Maximum resale prices should be established for both pasteurized and sterilized milk or for neither of them. This would eliminate another incentive to produce sterilized milk beyond the amount that would participants, increased participation of public companies in the subsystems, etc. 185 be necessary and would contribute to improved efficiency. In the light of the results Of this study, the present system of establishing maximum resale prices, in which costs incurred by plants processing from 25,000 to 35,000 liters per day are used for guidelines, seems to work to the advantage of the larger plants, which is consistent with the need for a more concentrated industry revealed by this research. However, the implications of the present system should be fully understood to avoid inconsistency between this part Of the present regulations and other parts which tend to encourage the building of relatively small plants. 7. Interprovince price differentials for both raw and processed fluid milk should be established in such a way as to minimize aggregate costs involved in milk assembly, processing and distribution. This would also contribute to a more efficient product- use allocation. Failure to do so will contribute to the continuation of a relatively inefficient system and could deprive some consumption areas of adequate supplies. Limitations and Needed Research Some Of the limitations of this study have been suggested throughout its development. However, it is considered necessary to reemphasize some of themaand to 186 to suggest additional areas of research to overcome some of these limitations. This study was undertaken considering the existing decision-making framework and was designed to prOpose changes in the present regulations that could lead to an improved performance. The evaluation of other alternatives (including the absence of any government intervention, the F?- creation of marketing orders or marketing boards or even the total ownership and/or control Of the subsystem by the government) to the present system Of partial government intervention was beyond the SCOpe of the study. However, it if is important that additional alternatives Of organizing the fluid milk subsystem be examined and research in this area should be placed high on the list of priorities. Individual research projects such as this particular study are also Obviously limited by the abilities of existing procedures and the capability of the researcher to include all the relevant variables. This was true in this study, which focused on estimating the numbers, locations, and sizes of fluid milk processing plants that would minimize aggregate costs of assembly, processing and distribution. NO consideration was given to the costs that would be involved in making the changes suggested by the models. Additional work to estimate the actual savings that would occur with respect to the present situation by shifting to the new organization would be an important addition to the results of the study. 187 Analysis in terms of a single commodity is, on the other hand, oversimplified and important relations existing among commodities are ignored. A more comprehensive sub- sector study which could incorporate the present subsystem study should follow. The quality of the data used may also be considered a limitation. The secondary data utilized to estimate pro- Ft vincial supplies and demand may not be entirely reliable. Inaccurate data, Of course, would make questionable the validity of the results obtained. The projected supplies and demand, which were based on past trends may also be of a g, crude nature. Although more elaborate econometric models might be used to improve the projections, there is no reason to believe that more SOphisticated models would improve the quality of the data. A dramatic improvement in the quality Of the data system is fundamental if meaningful research is to be conducted in Spain. Improvement of the results obtained from the models utilized should be straightforward once more accurate supply and demand data are Obtained. Additional work could be done by using available computer Options which could make it possible to include differences in provincial demand and supply functions as a part of the models. The study, moreover, was obviously a static analysis of a subsystem which is evidently dynamic. While the con- sideration of ex-ante models alleviates to some extent the 188 problem, it does not solve it. Further work, both at the conceptual and applied level is suggested. The extent to which milk production is responsive tO producer prices could not be adequately determined with the econometric models used. Given the commitment of the Spanish government to increased milk production and the system of minimum producer prices, information with respect to the expected output with a given level of prices is badly needed. Parametric linear programming, for example, could be used to determine normative supply responses both at the national and provincial levels as an alternative to econo- metric models. Different supply responses in different agricultural regions under an Optimum pricing system could very likely change the geographical distribution of milk production. A different supply pattern could require a pattern of fluid milk plant numbers, sizes and locations different from the one indicated in this study. Similarly, an alternative to the assumption of uniform provincial fluid milk consumption should be found. Household consumption surveys to Obtain cross-sectional data for estimating provincial fluid milk demand would be extremely important since time-series data, even if avail— able, would probably be inadequate. These dynamic adjustments should be simultaneously determined through analyses that incorporate supply and demand functions together with assembly, processing and distribution costs. The supply and demand functions were 189 not estimated in this study whose results, therefore, must be viewed more as an indication of direction Of change rather than a precise specification of an equilibrium posi- tion. Information about both the fluid milk subsystem and the dairy subsector should be accumulated over time. In this sense, this study represents only a beginning contri- bution to the accumulation Of research results that are r“ increasingly needed. APPENDICES APPENDIX A MATRIX FORMAT OF THE TRANSSHIPMENT MODEL UNDER THE LINEAR PROGRAMMING FORMULATION MATRIX FORMAT OF THE TRANSSHIPMENT MODEL UNDER THE LINEAR PROGRAMMING FORMULATION Table A-1, based on hypothetical data, gives an indication Of how the matrix used in the analysis looks. Three supply regions, two plants, and three demand regions are considered. They make up a matrix of fourteen rows by fourteen columns. A, B, and C represent supply areas, D and E proces- sing plants, and F, G, and H demand regions. Row 1, for example, shows that region A can ship the total amount she produces (in this case, less than or equal to 1,000 units, as shown in the columns of restraints) to both processing plants D and E, as figures of one indicate in columns 1 and 2. Exactly which quantity, if any, will be shipped from supply region A to potential processing plants D and B will depend on the relevant costs. Ones also appear in rows four and five (milk equilibrium) under the same columns 1 and 2. Similarly for supply regions B and C. The intersections of columns 7 and 8 with rows 4 and 5, respectively, shows the total amount Of milk to be processed in each plant, which should be equal to the sum of the corresponding quantities shipped to each plant from each 190 191 popcmeo \ >uHucmso asthHHstm xHHE mewwocwm mmHuHommmU ucmHm asHunHHstm.; xmflz OOHHmmom moHuHucmsa \ - \ x. . t x L H 1 x -L 1 v- m- m- m- m- H- m- a- w- H- m- H- m- N- mumoo “Hap ooa .M H H :.«H .l . mconom ooh A H H 0 MH vcoHum25mcoo com A H H m.mHM o u H H H H- m.HH. o u H H H H- OHOHI oom w H m.m. 006 M H m.m _ mucmHm | ,) mchmmooum OmN.H v H O.h \ ome .M H p.61 0 u H- H H H m.m o n H- H H H o.”- omm .w H H O.n / l . N mconQm ems v H H m N - HHmmsm ooo.H v H H 4.H,H Hw>mH oa>e m o m m o a m a m a m a m a COMUMUS muchuumcoo vH MH NH HH 0H m m a o m a m m H LMUII .coHumHsEHcm OCHEEGHOOLO Ham:Hq me» Hope: Hopoz acmEmHmecmuB ocu mo uoEuom xHuumz .HI< mHndB 192 of the supply regions and, thus, a zero balance milk equilibrium appears in the corresponding column of con- straints. Rows 6 and 7 show the plant capacity of processing facility D in a range of greater than or equal to and lesser than or equal to given minimum and maximum plant capacities, as shown in the column of constraints. 'Similarly rows 8 and 9 for plant E. The intersections with columns 7 and 8 give the amount of milk processed in each plant. The intersections Of columns 7 and 8 with rows 10 and 11, respectively, show the total amount of fluid milk products shipped out from each of the plants D and E, which should be equal to the sum Of the corresponding quantities shipped to the consumption centers and, thus, a zero balance processed fluid milk equilibrium appears in the column of restraints, with respect to the processing plants. Row 10 and columns 9, 10, and 11 show the amounts Of processed fluid milk products which can be shipped from plant D to each of the consumption regions F, G, and H. Again, the quantities that will be actually shipped from D to F, G, and H will depend on the relevant cost figures. Similarly for row 11 and the same columns 9, 10, and 11 relative to plant E. Rows 12, 13, and 14 under columns 9, 10, and 11 show the fluid milk products received by consumption regions F, G. and H, respectively, from plant D. Similarly, rows 12, 13, and 14 under columns 12, 13, and 14 for plant E. 193 The quantities of fluid milk products which should be received by these consumption regions should be greater than or equal to the quantities appearing in the column of con- straints for the corresponding row (12, 13, or 14 for F, G, and H, respectively). The last, not numbered, row shows the unit costs of assembly (columns 1 to 6), processing (columns 7 and 8) and distribution (columns 9 to 14). They are expressed as negative numbers, which permits solving the cost minimiza- tion problem as a maximization problem. APPENDIX B ESTIMATION OF UNIT COSTS OF PROCESSING FLUID MILK: APPLICATION OF THE BUDGETING PROCEDURE TO PLANT I WORKING EIGHT HOURS PER DAY ESTIMATION OF UNIT COSTS OF PROCESSED FLUID MILK: APPLICATION OF THE BUDGETING PROCEDURE TO PLANT I WORKING EIGHT HOURS PER DAY Plant I processes 40,000 liters per day working eight hours. Sixteen thousand liters are pasteurized, 10,000 being packaged in plastic bags and 6,000 in glass bottles. Twenty-four thousand liters are sterilized, 12,000 being packaged in tetraedric paper and another 12,000 in glass bottles. Building Costs After Observing actual plants and designs of plants of similar capacity, it is estimated that 5,000 square meters of land are needed for plant I. Total investment costs for this concept are: 2 2 5,000 m x 1,000 pts/m = 5,000,000 pts. And annual economic costs 8.75 percent of this figure, that is, 437,500 pesetas. Of the total land purchased, 3,200 m2 will be actually build (350 for factory, 150 for receiving room, 200 for laboratory and Offices, 150 for the boiler and 194 therefore, 195 investment costs are: 2 2,350 for warehouses and the refrigeration chamber). Total 3,200 m x 8,000 pts/m2 = 25,600,000 pesetas And annual economic costs are 10 percent Of this figure, i.e., 2,560,000 pesetas. The non-constructed area, finally has to be paved, f” landscaped, etc. Total investment costs for this concept are: (5,000 - 3,200) x 555.55 = 1,000,000 pesetas An annual economic costs represent 100,000 pesetas. Total annual economic costs associated with Equipment Costs buildings and land acquisition and development for plant I, are 3,097,500 pesetas (or 0.21 pesetas per liter). The selection of equipment and the associated investment costs for plant I are as follows: Receiving Stage Chain conveyor (for cans). . . . .300,000 Drainer. . . . . . . . . . . . . . 45,000 Automatic can washer (250 cans/ hour . . . . . . . . . . . . . .450,000 .185,000 Receiving Vat (1,000 liters) a . . 70,000 Scale (250 kilograms). . . . . pts. pts. pts. pts. pts. TOTAL RECEIVING STAGE. . . . . . . Filtration, Cooling, and Storage Pump (10,000 liters/hour). . . . . 80,000 .500,000 Purifier (10,000 liters/hour). 1,050,000 pts. pts. pts. 196 Cooling cabinet (10, 000 liters/ hour). . . . . . . . . . . . Five storage tanks (8, 000 liters each). . . . . . . . . . . . . TOTAL FILTRATION & REFRIGERATION S TAGE O O O O O C O O O O O O O Skimming and Normalization Deposit (500 liters) . . . . . . Pump (5,000 liters/hour) . . . . Heater-cooler (5, 000 liters/ hour). . . . . . . . . . . . Skimmer (5, 000 liters/hour). . . Skimmed milk deposit (8, 000 liters). . . . . . . . . . . TOTAL SKIMMING & NORMALIZATION S TAGE . C O O O O O O O O O O O Pasteurization Pasteurizer (5,000 liters/hour). Compressor . . . . . . . . . . . Homogenizer (5,000 liter/hour) Tank pasteurized milk (5, 000 liters). . . . . . . . . Pump (5, 000 liters/hour) . . . . TOTAL PASTEURIZATION STAGE . . . Packaging of pasteurized milk Baskets conveyor . . . . . . Baskets washer (420 units/hOur). Bottles washer (5,200 units/ hour). . . . . . . . . . . . . Bottles conveyor . . . . . . . Filler-closer (5, 000 bottles/ hour). . . . . . . . . . . . . Plastic filler (two units, 1600 liters/hour each) . . . . Compressor (5.5 C.V.). . . . . . Conveyor . . . . . . . . . . . . TOTAL PACKAGING PASTEURIZED MILK . . . . . . . . . . . ; . Sterilization by towers Pump (10,000 liters/hour). . . Sterilizer (6,000 liters/hour) Intermediate deposit (5,000 liters). . . . . . . . . . . . 225,000 .2,500,000 pts. pts. 65,000 50.000 250.000 560,000 500,000 3,305,000 pts. pts. pts. pts. pts. pts. 1,100,000 40,000 .1,750,000 500,000 50,000 1,425,000 pts. pts. pts. pts 0 pts. pts. 100,000 250,000 .1,200,000 200,000 .1,800,000 .1,550,000 45,000 75,000 3,240,000 pts. pts. pts. pts. pts. pts. pts. pts. pts. 80,000 5,896,000 300,000 5,220,000 pts. pts. pts. pts. 197 Baskets chain conveyor. . . . 120,000 pts. Baskets washer (500 units/ hour) . . . . . . . . . . . . . 350,000 pts. Bottles washer (3,000 units/ hour) . . . . . . . . . . . . . 1,500,000 pts. Filler-closer (3,000 units/ hour) . . . . . . . . . . . . . 1,800,000 pts. Bottles conveyor. . . . . . . . 300,000 pts. Automatic inspector . . . . . . . 1,500,000 pts. Continuous sterilizer (3,000 bottles/hour) . . . . . . . . .10,000,000 pts. Exit chain conveyor . . . . . . . 120,000 pts. T TAL STERILIZATION TOWERS. . . . 22,366,000 pts. Sterilization (UHT System) UHI Equipment, complete (3,600 liters/hour). . . . . . . . . 6,500,000 pts. Filler machine (3,600 liters/ hour) . . . . . . . . . . . . . 875,000 pts. Exit conveyor . . . . . . . . . . 75,000 pts. Packer Machine. . . . . . . . . . 100,000 pts. ones' conveyor . . . . . . . . . 300,000 pts. Compressor (10 C.V.). . . . . . . 65,000 pts. TOTAL STERLIZATION UHT. . . . . . 7,915,000 pts. Complements Cleaning Equipment. . . . . . . . 140,000 pts. Pipes and Valves. . . . . . . . 760,000 pts. TOTAL COMPLEMENTS . . . . . . . . 900,000 pts. Auxiliary Services Installations Steam production and distribution. . . . . . . . . . 3,000,000 pts. Fuel. . . . . . . . . . . . . . . 500,000 pts. Frigorific. . . . . . . . . . . . 2,000,000 pts. Water . . . . . . . . . . . . . . 350,000 pts. Electricity . . . . . . . . . . 2,200,000 pts. Compressor. . . . . . . . . . . . 65,000 pts. TOTAL AUXILIARY SERVICES. . . . . 8,115,000 pts. Laboratory and Offices Laboratory. . . . . . . . . . . . 750,000 pts. Office. . . . . . . . . . . . . . 500,000 pts. TOTAL LABORATORY AND OFFICES. . . 1,250,000 pts. 198 Others Equipment transportation, insurance, installation, etc. . 1:500,000 pts. TOTAL OTHERS. . . . . . . . . . . 1,500,000 pts. TOTAL EQUIPMENT INVESTMENT COSTS . . . . . . . . . . . . . 63,631,000 pts. Annual economic costs are 27.5 percent Of these investment costs, that is, 17,498,525 pesetas per year (or F 1.19 pesetas per liter). Container Costs I The number of cans needed for plant I processing 40,000 liters Of milk per day are: 40,000 x 2 x 1.3 40 = 2,600 cans And, at 1,000 pesetas per can, investment costs for cans are 2,600,000 pesetas. The number of glass bottles for pasteurized milk for plant I bottling 6,000 liters Of pasteurized milk per day are: 6,000 x 3.5 = 21,000 bottles. The cost per bottle is 6 pesetas, and investment costs for glass bottles for pasteurized milk, thus, are 126,000 pesetas. Glass bottles for sterilized milk cost 7.40 pesetas per unit and the number needed by plant I is 12,000 x 20 = 240,000, for a total cost of 1,776,000 pts. Returnable baskets for glass bottles cost 80 pesetas/unit. Each basket holds twelve bottles and the 199 number of baskets needed, therefore, is 21,750. Investment costs for this concept are 1,740,000 pesetas. Returnable baskets for plastic packaged pasteurized milk, finally, cost 150 pesetas per unit and plant I needs 26,000 = 2,166. Total cost is, then, 363,000 pts. T Total container investment costs for plant I and an eight-hour workday, therefore, are 6,509,800 pesetas, and F economic annual costs associated with them, which represent g 24.25 percent Of this figure, are 1,627,470 pesetas (or 0.11 E pesetas per liter). j E Durable Asset Costs D" Annual economic costs associated with the durable assets considered thus far for plant I for an eight-hour workday are 22,223,475 pesetas or 1.51 pesetas per liter. Labor Costs Plant I working an eight-hour workday, requires one plant manager, one engineer, one plant superintendent, one Office supervisor, one accountant, one payroll clerk, five clerk typists, two laboratory technicians, two custodians, nineteen unskilled workers (three for the receiving stage, one for pasteurization, four for packaging of pasterized milk, one for presterilization and bottling, one for UHT system, four for boxes, labels, etc. and five for shipping, warehouses, vacation and sick leaves, etc.), four skilled workers (for cooling and filtration stage, presterilization 200 and bottling, boiler, and frigorific installation, respec- tively), two specialists Of third category (one for the receiving stage and another for shipping, warehouses, leaves, etc.), eight Specialists of first category (one for cooling and filtration, one for pasteurization, one for packaging of pasteurized milk, two for presterilization and bottling, one for UHT system, and two for packaging of aseptic milk), one official (frigorific installation) and one stoker (boiler). Tables B—1 and B-2 give the salaries (wages), tariff and complementary basis and accident insurance rates for management, office and laboratory personnel, and for utility, processing and shipping personnel, respectively. For Plant I and an eight-hour workday, total salaries are 165,749 x 12 1.988,988 pesetas per year and total wages are 8,238 x 365 3,006,870 pesetas per year. Social security and accident insurance charges include: (1) two months (or sixty days) of total (take-home) pay (two extra pays), (2) one month Of base salary (or thirty days of base wage)--benefits pay, (3) 41.47 percent of tariff basis, plus 17.47 percent of complementary basis plus 17.47 percent of benefits pay (social security and labor mutualism), and (4) fifteen months (or 455 days) times total amount accident insurance (Accident Insurance). Total social security charges for plant I for an eight hour work- day are 3,207,214 pesetas per year, and total labor costs are 8,203,072 pesetas per year or 0.56 pesetas per liter. .momm>co mOucHume cm mOmNHHHHoumo OLOOH mH mt OHOOHQ Hop coHomcHEHmump OH mumm moHHmUcmomm .cHomm .mHsuHDOHHm< op Oeumumficflz "condom 201 mm.ommm -- -- mme.oH ome.HoH oee.moH oHo.meH Hence mH mo.vom o.m Mme eoH cov.VH vow.WH oom.mH cmHOonso m om.emm o.H ewe -- OO0.0M ome.mm ome.mm umHmse gumHo m em.mm o.H ewe emm.H oHo.m «mm.m qu.e HumHo HHousmm H mm.moH o.H ewe mmo.H oem.o mom.oH ooo.m ucmucaoooa H em.mHH o.H ewe emH.N oem.m emm.HH oeo.m .>Hmmam aoneo H He.eam o.m Hem emm.H oHe.e eem.m cmo.e .>Hma:m ucmHa H NH.equ o.m mom eOm.m «mo.mm eom.em oeo.mm uouommmcH e oo.moe o.m mom -- oeo.eH oom.MH 00m.MH ceHuHceome an m Hm.e~m e.H awe mHe ONO.HH mmm.MH Oem.mH ummchem H mo.mom e.H mme eom.m emo.mH www.mH oem.mH HouomuHo H ucsoee ucmoumm .mHmm mocmuomcH ucopflooa >HODMWHMMQEOO Owwwmwme MMMM” >MMMMm whomwuoo Honeoz -l- I - . III E . ..- ‘.Nll.lll‘l|,”£' ”I" .I- 'IIIOIIIIII II” “HI. .vnma .cHsmm .zucoz\mmuomom :H .>epxuoz noon-ucon Ocm H ucmHm How moumm cocmuomsH usothO< xHOB Ocm memmm >HoucoEOHmEOO one .wwfluse .mmHnOHmm .Hlm OHQOB 202 .momm>cw moucHumHU cw mpmwflafluoumm OLOOH OH mp OHOOHQ Hop coHomcHExouop OH whom moHHmpcmomm .chmm .mwsuHDOHHmfl on OHHmuchHz "mousom mm.mmm I III mod mmn.m mmm.m moo.m kuoe mm mo.> m mom III mmm 0mm omm waoum H vu.w m mom OH mom mmm mvm HMHOHMMO a mm.Ho m mam 05H mvo.m voo.m wmm.H umH umHHmHoomm m mo.e N Nem -- NHm Nee Nee eum ueHHmHommm N oa.va m mom In: new mow mom OOHHme m oo.mMH m mam III omm.v oom.v 00m.v Umaaflxmco om OCSOE¢ ucoouom .mHmm mHmmm mHmmm >mo ommz >Hm coed mac 0. H m on >Hoomuou no. 2 mocmHSmsH ucopHood u «H U U mm.ume H DOB mm .wnoH .chmm .>mo\mmummom :H .umpxnoz usczuucon pcm H OCOHQ Hem itcmusmzH ucmpHOLa O26 mHmmm >LaucoEmHQEoO pco .MMHHOB .mmomz .m-m mance 203 Utility Costs Utility costs include electricity (for power and light), fuel and water consumption costs. Electricity Costs The procedure used to calculate electricity needs for power consists Of listing processing and auxiliary equip— .9 ment consuming electric energy, their power (in C.V.) and working hours per day, and converting this to kw.h through the formula Z(CV x hours) x 0.736 = Total kw.h a For Plant I and an eight-hour workday, these are found on page 204. Daily needs of electricity for light are estimated in 40 kw.h. Total annual electricity needs for Plant I for an eight-hour workday are 760,447.3 kw.h., and total annual electricity costs are 1,193,902 pesetas or 0.08 pesetas/ liter. Fuel Cost One kilogram of fuel supplies twelve kilograms of steam. Steam needs for washing of cans, bottles and baskets are 1.5 kgs. of steam per can, 0.3 kgs. per bottle and 0.5 kgs. per basket (20), i.e., 1500 kgs. of steam/day for cans, 5,400 kgs. for bottles and 1,167 kgs. for baskets, for a total of 8,067 kgs. steam/day for washing of bottles, cans, and baskets. 204 mm.m mm.m N Ho>o>coo be_ HBmDV GONumNHHwHOum mm.m mm.m m ocficoma uwxomm Hemsv COHuONHHHHOum ww.m mm.m N Ho>m>soo .mwxom HBmDV coaumNHHHHoum mw.mH mm.m m mcflcome HOHHHm Hambv :oflumuflawumum mm.meH mm.m we Emumwm Ema HBEDV sowumuwaflumum m N.H m HOmOHOIHOHHHm Hmuwzoav cowumuflaeumum v.N N.N N umcmmB moauuom Hmuw3oav coflumNHHHuoum v.N N.N N Ho>m>coo moauuom Hmum3oev downwawawumum N.N m.o N umnmmz mumxmmm Hmum3oev coflummflawumum v.N N.N N Ho>w>coo mumxmmm Hmum3oev coHumNHHwnmum mo N.H mm HONHHHHmum Hmumzoev GOHHMNHHHumum m.m N.H m mead Hmum3oav sodumufiawumum N.mH N.N o HoHummHmv HomoHOleHHHm HHH: pmuflusmummm mewmmxomm m N.N m Hmmmamv HmmOHOIumHHHm xHHZ pmuwusmummm mcwmmxomm v.N N.H N Hmnmm3 mmauuom xHHz Ummfiusmummm chmmxomm v.v N.N N Honmmz mumxmmm HHH: OONHHsmHmmm mcflmmxomm N.N «.6 N HO>O>COO mumxmmm xawz penausmummm mcwmmxomm «.mm N.m NH HONHcomoeom coHumNHusoummm ooH N.N om HmNHHomummm :oHumuflusoumom ma N.N m mesa cowumuflusmummm v m m.o HoumuHmm Hemommo :Oflumufiameuoz w mcHEEme we m m HmEEme coflumNHHmEHOZ a mcHEEme Nb m m HOHOOOIuwummm coHumNMHmEHOZ w mCHEENxm ov m m mEsm coflumuwamauoz w mcHEEme 0N m m.N muoueuHoa Heme m mcHHooo a eoHumuuHHm mm v m umcHomO mcHHOOO mcHHOOO a coHumuuHHm NH 4 m umHHHHsa mcHHooO e eoHumuuHHm Nm v m mEom mcHHOOU w cowumuuaflm Nm v m Honmmz mcmu mcw>Hmomm m e N Ho>o>coo mcou mcH>Hmoom >m6\musoc .>.O mmwum 205 >m0\usom .>.O mn.o>m.N Humzomv Hmuoe 0N « m coHumNHusoummm muommmumsoo m.mm mm.m OH umHHHm OmNHHHumum em: muommmuasoo SH N.N m.m mHmHHHm OHummHm mHOmmoumEOO oeH OH eH AmewHaeooo . coHumHHmumcH OHEumze coHuospoum Emmum ooe m om mesa :oHum>mHm 000m: eN eN H AmumnEmno oHuHuomHLmo HOOO mchuHso HHN :oHuosooum COHumummHuwom m« OH m xcmu HoumuHo¢ coHuOOOOHm coHumumeHmmm Nb «N m Houomuuxm HH< coHHOSOOHm coHumummHumom Nb «N m mcmm coHuospoum COHOMHOOHumom ONH « om mQEom 039 coHuospoum coHumummHummm eeH 6H m HmHLL OOO.ONC HOmmOHQEOO coHuospoum coHumemHummm «em eH em HmHHL OOO.OGV muommmudeoo 039 coHuooOOHm coHumummHHmmm mH m m smumsm ems mchmmHo mH m m Hmumcwo mchmmHO 0 lli‘,l‘--II;OI 0‘ I. II .1“ ["1 11-1 ucoEQHsUm mmmum ill 4.. "u - .ll‘z‘ .1 I In. I ‘I I‘ll‘llll-‘llllf‘ll014 -’ nl-I It'll V I (1:? ‘-"Illllll ..- 206 Steam needs for pasteurization and sterilization are two kilOgrams of steam per centigrade degree and 1,000 liters (20). Milk is pasteurized at 76°C, but reaches 50°C in recuperating sections; therefore, steam needs for pasteur- izing milk are: 16,000 liters/day x 2 kgs/°C and 1,000 liters x (76-50) 1,000 liters = 832 kgs./day. Steam needs for sterilizing milk are: 24 x 2 x (140-105) = 1,680 kg/day With respect to cleaning, steam consumption for general cleaning are 350 kgs/hour (or 1,050 kgs/day), for i; cleaning of the UHT system they are the same as when ster- ilizing and, for cleaning Of the plant, steam needs are 1,000 kgs/day, for a total Of 2,890 kgs. steam per day for cleaning purposes. Total steam consumption, therefore, is 13,469 kgs/ day and, adding an additional 15 percent for losses, 15,488 kgs/day and 5,653,485 kgs/year. Annual needs of fuel, therefore, are 471,215 kgs. and total annual fuel costs are 1,578,570 pesetas or 0.10 pesetas per liter. Water Costs Water needs for washing of cans, bottles, and baskets are 10 liters per can, 2 liters per bottle, and 3 liters per basket (20). Total water needs for washing containers are: 1,000 cans x 10 l/can + 18,000 bottles x 2 1/bottle + 2,334 baskets x 3 1/basket = 43,002 liters/day. 207 Water needs for refrigeration Of pasteurized milk and cooling of sterilized milk are 3 liters of water per liter of processed milk (20). Total water needs for refrig- eration and cooling of processed milk, therefore, are 120,000 liters/day. Water needs for steam production are 15,689 liters/ day (amount of steam produced per day). F" The needs of water for refrigeration Of compressors ‘ and frigorific condensors are given by the formula: L liters Of water = 1.3 F TZ-Tl y?! where F is the number of frigories and TZ-Tl = 6°C is the difference between temperatures of the refrigeration water at exit and entry. Frigorific needs are divided into two parts, indirect refrigeration (tank of iced water) and direct refrigeration (0°C frigorific chamber). Frigorific needs for indirect refrigeration include refrigeration Of raw milk (receiving stage) and of pasteurized milk, plus losses. To refrigerate milk in the receiving stage the number of frigories needed per day are: 40,000 liters x 1.032 x 0.93 x (25-4) = 806,400 frigories/day (where 1.032 is the density of milk, 0.93 its specific heat and 25 and 4°C the tempera- ture of milk before and after refrigeration, respectively). To refrigerate pasteurized milk the number of frigories needed per day are: 16,000 x 1.032 x 0.93 x (20-4) = 208 245,760 frig/day. Adding 10 percent for losses, frigorific needs for indirect refrigeration are 1,158,376 frig/day. Frigorific needs for direct refrigeration, on the other hand, include: entry of products in the frigorific chamber, air cooling, water condensation, losses through paraments and others (light, losses, etc.). Six centigrade degrees is the maximum allowable temperature of entry of p products (pasteurized milk) and the frigorific needs for this concept are: 16,000 x 1.032 x 0.93 x (6-0) = - 92,137 frig/day. For air cooling, the frigorific needs are: 200 x 0.31 x 30 = 1,526 frig/day (200 cubic meters is the interior volume of the chamber, 0.31 the Specific heat of air and 30°C the maximum exterior temperature). Frigorific needs for water condensation are: 200 x 17.96 X.§£Q_ = 2,191 frig/day (17.96 are the grams of water to cégggnse for cubic meter of air, and 610 kilocalories/kg is the vaporization heat of water). Losses through paraments represent 220 x 6 x 30 = 39,600 frig/day (220 square meters is the exterior surface of the chamber), and others (light, losses, etc.) represent 27,091 (or 20 percent) additional frigories/day, for a total need for the frigorific chamber of 162,545 frigories/day, and total frigorific needs of 1,320.924 frigories/day. Water needs for refrigeration of compressors and frigorific condensors, therefore, are: 1,320,924 x 1.3 = 286,200 liters/day 6 209 Finally, 7,000 liters of water per day are needed for cleaning the general equipment and the UHT system, and 200 liters per 1,000 liters of milk processed (or 8.000 liters per day) for cleaning the plant. Including an additional 10 percent for losses, total water needs for Plant I for an eight-hour workday are 536,652 liters/day or 196,611 cubic meters/year, and annual F1 costs are 196,611 x 6 = 639,666 pesetas or 0.03 pesetas/ liter. Packaging Material Costs # Replacement of broken bottles represent: 3 x 100 6,000 x 3.5 x 6.00 = 1.379,700 pesetas for glass-bottled Pasteurized milk and 3 x 12,000 x 3.5 x 365 x 7.37 = 100 3.389.460 pesetas, for sterilized milk. 105 6,000 X 60 Metal caps costs are 100 x 1,000 x 365 = . . 105 12,000 x 186.91 137,970 for pasteurized mllk and 100 x 1,000 x 365 = 859,599 pesetas for sterilized milk (5 percent added for broken, defective, etc.) Plastic (for bags) costs are: 10,000 x 365 x 0.48 = 1.752,000 pesetas. Paper costs are 12,000 x 265 x 1.56 = 6,832,800 pesetas. Costs for non-returnable boxes, finally, are 12,000 x 365 x 12 = 4,380,000 pts. 12 210 Annual packaging materials costs for Plant I for an eight-hour workday, therefore, are 18,731,529 pesetas or 1.28 pesetas per liter. General and Miscellaneous Expenses Commercial expenses result from sale to thirty days 1L2 = l 620 000 pesetas/ RI 100 ' ' year. Advertising expenses, office and laboratory materials and equal 40,000 x 18.00 x 30 x costs, inspection and related expenses and miscellaneous (including detergents, disincrustants, clothing, shoes, 5, etc.) for plant I are, respectively, 1,460,000 pesetas, 219,000 pesetas, 1,095,000 pesetas, and 292,000 pesetas per year. Total annual general and miscellaneous expenses, therefore, are 4,686,000 pesetas or 0.32 pesetas per liter. Tgtal Annual Costs and Average Unit Processing Costs Total annual costs for Plant I for an eight-hour workday, therefore, are 57,796,214 pesetas and unit costs are 57,796,214 = 3.958 pesetas per liter. 14,600,000 APPENDIX C NAME AND LOCATION OF FLUID MILK PROCESSING PLANTS, SPAIN, 1974 NAME AND LOCATION OF FLUID MILK PROCESSING PLANTS, SPAIN, 1974 Plant .. Number Name Location 1 Centrales Lecheras Espanolas S.A. (CLESA) Madrid H 2 Central Lechera Ganadera S.A. (CALEM) Madrid _ 3 Industrias Lacteas Madrilehas S.A. (ILMASA) Madrid k: 4 Central Lechera de Burgos S.A. (CELEBUSA) Madrid 5 Lechera de Alcala S.A. Alcala de Henares (Madrid) 6 Industrias Lécteas Agrupadas S.A. (ILASA) Coslada (Madrid) 7 Lacteas Reunidas S.A. Alcorcon (Madrid) 8 Lécteas Montagesas S.A. .Ciudad Real 9 COOperativa Lechera Alcarreha Guadalajara 10 Lécteas San Servando S.A. Toledo ll Industrias Lacteas Talavera (ILTA) Talavera de la Reina (Toledo) 12 Central Lechera de Burgos S.A. (CELEBUSA) Burgos 13 Central Lechera Palentina S.A. (CELEPASA) Palencia l4 Cooperativa Central Lechera Segoviana (CELESE) ' Segovia 15 Central Lechera de Valladolid S.A. Valladolid 16 LEDESA Salamanca 211 l7 18 19 20 21 22 23 24 25 26 27 28 29 3O 31 32 33 34 35 36 37 38 39 40 41 212 Grupo Sindical de Colonizacion 3905 (GAZA) Lacteas Montahesas S.A. Central Lechera Agropecuaria Pacense (CLAPSA) Industrias Lacteas Cacereaas S.A. (ILCASA) Cooperativa Ganadera La Merced Cooperativa de Productores de Leche Grupo Sindical de Cononizacion 1434 Unidn Industrial y Agro-Ganadera S.A. (UNIASA) Cooperativa Provincial Agricola de Jaen Cooperativa Lechera Malaguena (COLEMA) Lacteas Levantinas S.A. Central Lechera del Prado S.A. Granja Fdster Industrias Lacteas Cervera S.A. Granja Alarco S.A. Central Lechera Murciana S.A. La Lactaria Espaaola S.A. Productos Lacteos Freixas S.A. Sociedad Anonima Letona Esplotaciones Agricolas Marsal S.L. Centro Lacteo Balcells S.A. Granja Vila Central Lechera Municipal Cooperativa Central Lechera de Tortosa Grupo Sindical de Colonizacion 4250 Zamora Leon Badajoz Caceres Jerez de la Frontera (Cadiz) Cordoba Sevilla Granada Jaen Malaga Alicante Valencia Valencia Valencia Valencia Murcia Barcelona Barcelona Barcelona Barcelona Barcelona Barcelona Gerona Tortosa (Tarragona) Lerida 213 42 Cooperativa Lechera OSCA Huesca 43 Centrales Lecheras Unidas de Zaragoza S.A. (CLUZASA) Zaragoza 44 COOperativa Lechera Los Amantes Teruel 45 Central Lechera Vizcaina S.A. Logrono 46 Cooperativa de Productores de Leche de Navarra (COPELECHE) Pamplona (Navarra) 47 Central Lechera Alavesa S.A. Vitoria (Alava) 48 Centrales Lecheras Reunidas de Guipuzcoa S.A. (GURELESA) San Sebastian (Guipuzcoa) 49 Central Lechera Vizcaina S.A. (ONA) Bilbao (Vizcaya) SO Cooperativa Lechera Beyena Bilbao (Vizcaya) 51 Central Lechera de Gijon S.A. (LAGISA) Gijon (Oviedo) 52 Grupo Sindical de Colonizacion de Integracidn Superior 9608 (CLAS) Siero (Oviedo) 53 COOperativa Lechera SAM Santander 54 UniOn Territorial de COOperativas del Campo _ (UTECO) de La Corufia La Coruna 55 Complejo de Industrias Lécteas de Lugo S.A. (COMPLESA) Lugo 56 UniOn Territorial de COOperativas del Campo (UTECO) de Orense Orense 57 Lacto-Agricola Rodriguez S.A. (LARSA) Vigo (Pontevedra) Source: Ministerio de Agricultura, Spain. RelaciOn de Centrales Lecheras APPENDIX D MILK SUPPLY EQUATIONS ‘M... a’ MILK SUPPLY EQUATIONS Two different prediction models were developed to attempt the forecasting of annual milk production in Spain. In the first model, total milk production was expressed as the output of the number of productive cows times the average milk output per cow. The supply equations (number of exclusive dairy cows, number of dual purpose cows that are milked and milk output per cow) were considered as part of a recursive system and treated without specifying the other equations in the model. Initially, the supply equa- tion for milk was represented as follows: TMPT = (NEDCT) x MOCT with: EQ.1. NEDCT = f(NEDCT_1, DPMT_1, DPFT_1, DPBT_1) EQ.2. NDPCT = g(NDPCT_l, DPMT_1, DPFT_1, DPBT_1) EQ.3. MOC h(PERFRCT, FMPRT, T) T where THP = Total milk production, in million liters. NEDC = Number of exclusive dairy cows, in thousand. 214 215 NDPC = Number of dual purpose cows that are milked, in thousand. MOC = Average milk output per cow, in liters per year. DPM Average price of milk, in pesetas per liter, divided by the index of prices paid by farmers (1965 = 100). DPF = Average dairy ration cost, in pesetas per kilogram, divided by the index of prices paid by farmers (1965 = 100) DPB = Average price of beef, in pesetas per kilogram divided by the index of prices paid by farmers (1965 = 100). PERFRC = Percentage of Friesian cows over total (exclusive and dual purpose) dairy cows. FMPR = Feed-milk price ratio. T = Time Eleven Observations (from 1964 to 1974) were made (see Table C-1) and then least square estimators of the regression co-efficients were obtained. The supply equa- tions were as follows: 30.1. NEDC = 1,186.70 + 0.62 NEDC + 123.86 0p T (1,648.98) (0.14) T-l (60.21) MT'l — 213.72 DPF ~ 6.42 DPB (54.47) T‘1 T-l R2 = 0.9528 R2 describes how well the sample regression line fits the observed data. The coefficients were significantly different from zero, the one for the number of dairy cows in the previous year being least significantly different from zero. 216 .HmmommH Hmum>wmv moHumHOmumm mp HOSmcmz cHuOHom pcm .thH mHHmumd moHumempmm mp OHHMDCN .chmm .musuHsoHHmfi mp OHHmuchHz "mmousom om.m« Neo.H No.0m H«.e Hm.o new HHm.H «emH om.m« MHH.H mH.Hm no.e mm.m 0mm mmN.H memH mN.m« NNo.o HN.«m mo.e me.e HNS m«H.H Nan om.«« moo.H mm.mN em.w Hm.m mHe ««H.H Han om.mm mmo.H mo.mN mm.m Nm.m mom ONo.H oemH om.o« NOH.H eo.Nm mm.m mN.m mmn mNo.H mmmH Nm.mm NoH.H Nm.mN mm.m «m.w men mNm mme MN.mm Nmo.H «N.NN mm.m mm.o own «om emmH mm.mm «wo.H He.om mm.o mm.o N«e H«m mmmH NH.mm meo.H mm.Nm ee.m eN.o omw mNm mmmH m«.nm NOH.H «m.wN «e.o on.m Nmm OHN «mmH HHmuoe Hw>ov oHpmm H.HmX\mumv H.mx\mumv H.Hmm\mumv Hpcmmsocev Hpcmmsocev maoo ToHum moon mo some mo xHHZ mo mzoo mzou CMHmeHm xHHz-Omom OOHHm OOHHm OdHHm omomusd >HHMQ new» mmmpcmouom ©®.umemQ GODOHMOD -( ll '4 - \llll. l l-I-l :- l. llll I. .II l ll ll l .l l|.l| ll!ll l.- OOHMHme Hmso m>HmoHoxm .HH- «mmH .: mam .coH00560Hm HHHz EmcHuomeH< mucuot m .H-O 0Hhme l .ll-lllllll-.l l -l .I v V 0 ll . ll l. l uhllllul )Illl7.lll-.l 1 ll.l|ll II l 217 A second formulation of this equation, with deflated price of milk lagged two years instead of one was also estimated, but the wrong sign appeared on the feed price coefficient; the R2 was 0.9069. EQ.2. NDPC = -405.80 + 0.26 NDPC - 4.50 DPM T (1979.08) (0.41) T’1 (68.05) T'1 + 176.50 DPF ‘ 7.73 DPB (291.93) T l (14.12) T71 R2 = 0.3839 Although the negative sign on the coefficent of milk prices could mean a shift to exclusive dairy cows when favorable prices exist and the positive sign on the coeffie cient of feed prices could show a preference for dual purpose, more rustic, dairy cows when feed prices are high, the slight annual variations of real milk prices (with a minimum producer price set by the government every year) and feed prices (with most of the cereals having also regulated prices) do not seem to support this. Two alter- native formulations Of E0. 2 were estimated with similar results. They were: NDPC = -613.33 + 0.62 NDPC + 11.47 DMP T (936.61) (0.32) T'1 (40.29) T‘2 + 42.88 DFP + 16:84 DPB (109.04) T 2 (10.52) T 2 R2 = 0.6852 218 and NDPCT = -304.01 + 0.38 NDPCT_l + 41.89 DPMT_2 (1193.23) (0.37) (35.00) + 94.14 DPF - 5.59 DPB (159.67) T‘1 (10.25) T'1 R2 = 0.5502 Finally, with respect to milk output per cow the #4 following equation was estimated: EQ.3. MOCT = —24,168.08 + 45.64 PERFRCT + 441.58 FMPRT ' (88,901.28) (79.81) (1016.59) + 11.56 T i (47.44) R2 = 0.4615 Wrong sign appeared on the coefficient of feed-milk price ratio, besides a poor fit. A second equation for milk output per cow was estimated: MOC = -10,912.64 + 54.06 PERFRC - 71.19 DPM T (113,500.21) (97.36) T (168.93) T + 164.70 DPFT + 4.42 T (782.60) (62.04) R2 = 0.4649 Again, wrong signs appeared in the coefficients of prices of milk and feed. When testing this first model for 1974, a year not included in the data series, to project milk production, the estimated supply was 4.60 billion liters, 6.5 percent less 219 than the actual production of 4.93 billion liters. When fitting the equations with the observed data, they consis- tently failed to adequately predict the turning points. In the second model, total milk production in a given year was hypothesized to be a function of the prices Of milk, feed, and beef and the percentage of friesian cows in that year and total milk production in the previous year. The following equation was estimated: TMP = -2.80 - 0.11 DPM + 0.34 DPF + 0.06 DPB T (3.71) (0.21) T T (0.55) (0.6) T - 0.003 PERFRC + 0.932 TMP (0.003) T (0.306) T'1 R2 = 0.9458 with wrong signs appearing in the coefficients of the four main variables. A second analysis gave the equation: TMPT = -O.596 - 0.972 MFPRT + 0.58 DPBT + 0.001 PERFRC (1.284) (1.309) (0.51) (0.029) T + 0.967 TMP (0.270) T"1 122 = 0.9434 Again, wrong signs appeared in the coefficients of milk-feed price ratio and price of beef. The deficiencies of both models are apparent. Lack of response to important variables, such as prices of milk and feed, (probably because of government regulation of prices of milk and most cereals and because of lack of 220 off—farm employment Opportunities); the existence of two types of dairy cows (roughly two-thirds of them being exclusive dairy cows and one-third being dual purpose cows) which, furthermore, are not always consistently defined in different years, the wide differences in milk output per cow between these two groups and the endemically poor time- series data gathered in the country make inadvisable the use of these models to forecast annual milk production. BIBLIOGRAPHY BIBLIOGRAPHY Bain, J. S. 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