I I 71-18,226 HUIE, John Mack, 1938NUMBER, SIZE, AND LOCATION OF BEEF SLAUGHTER PLANTS IN MICHIGAN. Michigan State University, Ph.D., 1970 Economics, agricultural U niversity Microfilms, A X ERO X C o m p a n y f A nn A rbor, M ichigan NUMBER, SIZE, AND LOCATION OF BEEF SLAUGHTER PLANTS IN MICHIGAN By UV John M ? Huie A THESIS Submit:ted -to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1968 PLEASE NOTE: Some pages have indistinct print. Filmed as received. UNIVERSITY MICROFILMS. ABSTRACT NUMBER, SIZE, AND LOCATION OF BEEF SLAUGHTER PLANTS IN MICHIGAN By John M. Huie Michigan's beef industry is faced with changing econom­ ic and institutional forces which suggest a major adjustment in the number, size and location of beef slaughter plants if Michigan plants are to remain nationally competitive. Exist ing plants are small conqpared to plants in major competing areas and compared to potential economies of scale indicated by past studies. Recent national trends indicate major cost advantages to locating slaughter plants in cattle producing areas, while Michigan plants are now concentrated in urban areas. The purpose of this study was to provide information to Michigan beef slaughterers that will assist them in long-run planning of plant facilities; and to aid developsient groups that seek information on their relative competitive position in specific industries. More specifically the objectives were; (1) To review trends and recent developments relating to the number, size and location of beef slaughter plants in the United States, East North Central region and Michigan. (2> To estimate the number, size and location of plants ■in Michigan that will minimize the total cost of cattle assembly, in-plant processing and meat dis­ tribution for projected 1980 cattle production and beef consumption. Some of the major concepts of location theory as well as recent trends and developments in the beef slaughter in­ dustry were reviewed. Cattle marketing and beef consumption projections to 1980 were made for the area covered by this study. Transportation cost functions for live cattle and dressed beef were estimated. The long-run total cost func­ tion for cattle slaughtering in Michigan, was derived by synthesizing costs for five different plants with rated capacities ranging from 20 to 120 head per hour. Based on the synthesized cost of in-plant slaughter plant operations significant economies of scale are possible in Michigan. The average cost per head declined from $11.34 for the 20 head per hour plant to $8.85 for the 120 head per hour plant. Although economies existed for all categories of cost, reduced labor costs accounted for 60 percent of the economies to size. Using the slaughter cost function, and the cattle and beef transportation functions, two models were used to estisiate the nurir^r, size and location of plants that mini­ mized transportation and slaughter costs for the projected 1980 levels of cattle marketings and beef consumption. Using Stollsteister's procedure for estimating the number gonn n. nui« size and location of plants, four plants located at A l m a , Sandusky4 Sturgis and Adrian, Michigan, were indicated in order to minimize total cattle assembly and slaughter costs. Using a linear programming transhipment model which estimated the number, size and location of plants that .minimize cattle assembly, slaughtering and beef distribution costs four plants located at Alma, Sandusky, Lansing and Adrian were specified. Use of the two models made it possible to estisiate the effect of adding beef distribution costs to the results o b ­ tained from the Stollsteimer model. Although the tranship­ ment solution indicated that shifting a plant from Sturgis to Lansing would reduce costs over the Stollsteimer solution the cost reduction of $64,000 was less than 0.3 percent of the system's total cost of $25.5 million. Based on the program used for the Stollsteimer solution, 35 different locational configurations of four plants were within 5 percent of the least cost solution. This indicated the small change in assembly costs incurred by changing the location of 4 plants among 15 potential sites selected for inclusion in the program. Of the 15 potential sites only two, Detroit and Jackson did not appear in any of the 35 locational patterns. The study provided a useful indication of probable future adjustments in Michigan's beef slaughter industry. It suggests the likelihood of fewer and larger firms located closer to major production areas. However, the results were John M. Hui not. sufficiently conprehansive to provide all the informa­ tion needed for specific plant investment decisions. For example, the influence of existing plants in Michigan, interregional factors affecting plant location, seasonal variations in cattle supplies, as well as availability and cost of inputs at specific locations were neglebted. Never theless the results were meaningful and provided a useful addition to the information required for sound, long-run investment decisions. ACKNOWLEDGMENTS I wish to express my sincere appreciation to all mem­ bers of my committee, Doctors Harold M. Riley, Chairman; William J. Kimball; Richard G. Heifner; and David L. Cole for their helpful comments, suggestions and criticisms throughout the development of this study. Special thanks is due Dr. Riley who served as chairman of the committee and Dr. Heifner who assisted in the development and pro­ gramming of the models used. I also wish to acknowledge the financial assistance ob­ tained through a graduate assistantship from the Michigan Agricultural Experiment Station. Without this help it would have been impossible for me to continue my education. Finally, I wish to express deep appreciation to my wife, Emily, and my sons John and Michael for their patience, comfort and understanding throughout my graduate program. TABLE OF CONTENTS Page LIST OF T A B L E S ............................................. vi LIST OF B I G U R E S ...........................................ix Chapter 1: OBJECTIVES AND THEORETICAL CONSIDERATIONS ............................. 1 Introduction ........................................ 1 Objectives .......................................... 2 Procedures .......................................... 3 Major Location Theories ........................... 4 Least-Cost Location Theories ................ 4 Market Area Theories ........................ 8 Interdependence Theories .................... 10 S u m m a r y ............................................... 12 O b j e c t i v e s ...................................... 12 Location Theories ............................. 13 Chapter 2: TRENDS AND RECENT DEVELOPMENTS IN THE BEEF SLAUGHTER INDUSTRY .................. 15 Introduction ........................................ 15 Volume of Commercial Slaughter .................... 16 Number of Slaughter Plants ........................ 20 Size Distribution of Slaughter Plants ........... 29 Concentration of Slaughter Plants ............... 31 Horizontal Plant Specialization .................. 34 Patterns of Entry and E x i t ........................... 37 New Legislation Affecting Beef Slaughtering ... 38 S u m m a r y ............................................... 42 Chapter 3: CATTLE AND BEEF PROJECTIONS, ESTIMATES OF TRANSPORTATION FUNCTIONS, SELECTION OF PLANT SITES AND OUT-OF-AREA SUPPLY P O I N T S ........................................ 44 Introduction ........................................ 44 Cattla Marketing Projections ...................... 45 Number of Cattle M a r k e t e d .......................45 Type of Cattle M a r k e t e d ......................... 52 Beef Consumption Projections ...................... 59 Estimation of Transportation Costs ............... 61 Bstimation of Highway Distances ............. 62 Table of Contents (Cont'd) Page Chapter 3 (con't) Cattle Transportation Rate Function ......... Beef Transportation Cost Function ........... Selection of Plant Sites ...................... Selection of Out-of-Area Supply Point ........... S u m m a r y ............................................ Chapter 4: LONG-RUN COST FUNCTION FOR CATTLE SLAUGHTERING ............................... Introduction ........................................ Estimation of Slaughter Cost F u n c t i o n ........... L a b o r .......................................... Building, Corrals and Parking Area ......... L a n d .......................................... U t i l i t i e s ...................................... I n t e r e s t ........................................ Property Taxes ................................ I n s u r a n c e ........................................ Miscellaneous Supplies and Services ......... Total C o s t ...................................... S u m m a r y ............................................... Chapter 5: NUMBER, SIZE AND LOCATION OF BEEF SLAUGHTER PLANTS ............................ 64 68 70 71 74 76 76 79 81 92 95 97 101 101 103 105 112 116 118 118 Introduction ......................................... Stollsteimer Procedure .............................. 119 The M o d e l ........................................ 119 Empirical Results .............................. 122 129 Transhipment Model ................................... The M o d e l ........................................ 129 Empirical R e s u l t s ................................137 S u m m a r y ............................................... 146 Chapter 6 : SUMMARY, IMPLICATIONS, LIMITATIONS AND NEEDED R E S E A R C H ......................... 148 S u m m a r y ............................. Introduction ................................... 148 O b j e c t i v e s ...................................... 148 Location Theories .............................. 150 Major Trends and Developments in Beef Slaughter Industry ............................ 151 Cattle Marketing Projections ................ 152 Beef Consumption Projections ................. 152 Cattle Transportation Function . . . . . . . 153 Beef Transportation Function ................. 153 Table of Content* (Con't) Page Long-run Total Coat forBeef Slaughtering . . 154 Model R e s u l t s .................................... 155 I m p l i c a t i o n s ........................................ 157 Limitations and Needed Research . 161 LIST OF R E F E R E N C E S ........................................ 166 APPENDICES ............................................... 170 LIST OF TABLES Table 2.1 2.2 2.3 2.4 2.5 2.6 3.1 3.2 3.3 4.1 4.2 Page Commercial Cattle Slaughter, Michigan, Nine Regions and United States, 1950, 1954, 1958, 1962, 1966 .......................................... 17 Number of Slaughter Plants, Michigan, East North Central, West North Central Regions and United States, 1950, 1955, 1960, 1965 . . . . 21 Number of Plants, Number of Head Slaughtered and Volume of Carcass Beef and Veal Slaughtered by Size of Plant, Michigan, 1967...... ............. 23 Average Volume of Cattle Slaughtered per Plant in Federally Inspected Plants, East North Central and West North Central Regions, and United States, 1950, 1954, 1958, 1962 . . . . . . 30 Percent of Cattle Slaughtered by Four Largest and Ten Largest Firms, Michigan, East North Central, West North Central and United States, 1950, 1954, 1958, 1962 ............................. 32 Horizontal Slaughter Plant Specialization: Percent of Federally Inspected Plants Slaugh­ tering Given Combinations of Livestock Species, Michigan# 1966, East North Central Region, United States, 1950, 1954, 1958, 1962 35 Number of Cattle Sold by Areas, and Percent of State Sales, 1949, 1954, 1959, 1964, and Projections to 1980 53 Projections of Number and Percent of Cattle Marketed by Type, Michigan, 1980 .................. 59 Projected Human Population and Consumption of Beef by Areas, 1980 ............................. 63 Number of Workers, Annual Labor Cost Per Worker and Total Yearly Labor Cost by Size of Plant, Michigan, 1968 ...................................... 83 Total and Annual Equipment Costs by Size of Plant, Michigan 1968 ............................... 91 List of Tables (Con't) Table 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Page Building, Corral and Parking Area Requirements and?Costs by Size of Plant, Michigan 1968 . . . . 94 Land Requirements and Costs by Size of Plant, Michigan, 1968 95 Annual Electrical Requirements and Costs by Size of Plant, Michigan, 1968 .................... 96 Annual Water Requirements and Water and Sewage Costs by Size of Plant, Michigan, 1968 99 Annual Natural Gas Requirements and Costs, by Sise of Plant, Michigan, 1968 .................... 100 Total Utility Costs by Size of Plant, Michigan, 1968 100 Interest on Investments by Size of Plant, Michigan, 1968 102 4.10 Property Tax Costs by Size of Plant, Michigan, 1968 104 4.11 Estimating Functions and Cost Estimates for Miscellaneous Supplies and Services, Michigan, 1968 108 4.12 Estimated Costs for Miscellaneous Supplies and Services by Size of Plant, Michigan, 1968 . . . . 110 4.13 Total Annual Cost, Cost Per Head and Cost as a Percent of Total Cost by Type of Cost and By Size of Plant, Michigan, 1968 .................... 113 5.1 Estimated Livestock Assembly and Processing Costs for Beef Slaughtering, by Number of Plants with Specified Locations, Stollsteimer P r o c e d u r e .............................................123 5.2 Estimated Assembly Costs of Plants at Alternative ences in Assembly Costs Stollsteimer Procedure 5.3 for Livestock by Number Locations and Differ­ by Location, .......................... 126 Beef Shipment Patterns by Iteration, Tranship­ ment M o d e l .......................................... 138 List of Tables (Con't:) Table 5.4 5.5 Page Cost: of Cattle Assembly, Slaughtering and Meat Distribution by Program Iteration, Transhipment Model ............................ ..139 Number, Size and Location of Plants and Beef Shipment Patterns, Transhipment Model ............ 141 Appendix Tables 1 Synthesized 40 Bead Per Kill Crew and Annual Costs, 20 and Hour Plants, Michigan, 1968 .......... 170 2 Synthesized Kill Crew and Annaul Costs, 60, 75, and 120 Head Per Hour Plants, Michigan, 1968 * . . 173 3 Synthesized Crew Sizes and Annual Wages for Specified Operations, by Size of Plant, Michigan, 1968 ..................................... 175 Annual Wages and Number of Salaried Personnel by Size of Plant, Michigan, 1968 ................. 176 4 LIST OF FIGURES Figure 1.1 2.1 Page Hotellings1 Market Area M o d e l ................... Location of Licensed Slaughter Plants, Michigan, 1967 12 28 3.1 Outline of Production Areas in S t u d y .......... 46 3.2 Outline of Beef Consumption Areas in Study 60 3.3 Potential Plant Sites in Study ... ................. 72 5.1 Cattle Shipment Pattern for Stollsteimer P r o c e d u r e .............................................125 5.2 Cattle Shipment Patterns for Transhipment M o d e l ................................................. 142 5.3 Beef Shipment Patterns for Transhipment M o d e l ................................................. 143 Chapter 1 OBJECTIVES AND THEORETICAL CONSIDERATIONS Introduction Michigan's beef industry is entering a period in its history when major adjustments in the number, size and loca­ tion of beef slaughter plants are likely to take place. New transportation technology, changes in marketing channels, improved technology in slaughter plant operations, and new institutional requirements suggest these adjustments will be necessary if Michigan plants are to remain nationally competitive. Michigan's present beef slaughter plants are sstall com­ pared to plants in major competing regions. Also, previous economies to size studies suggest that major reductions in slaughter costs are possible by increasing size, and shifting to new technologies.1 Michigan's beef slaughter plants are currently concen­ trated in the Detroit, Flint-Saginaw, and Grand RapidsMuskegon areas. This locational pattern evolved during a -----j------------Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Research fteport Wo. 260 (Berkeley: California Agricultural Experiment Station, Decesfeer 1962). 2 period when location in major population centera was impor­ tant, and buying of livestock by inspection was necessary. In the case of Detroit, the terminal market once provided convenient access to a large supply of livestock and prox­ imity to the municipal market. Comparisons of livestock and meat transfer costs and recent trends in location of slaugh­ ter plants suggest that location in cattle producing areas now provides a cost advantage. Objectives As suggested above, Michigan's beef slaughter industry is being exposed to strong economic pressures to adjust the number, size and location of plants if the industry is to remain viable in the national market. With this situation facing Michigan's beef slaughter industry, it is the objec­ tive of this study to provide information, that will be helpful to industry personnel who must make long-run invest­ ment decisions in plants and equipment. The study should also be useful to state, area, county and municipal develop­ ment groups, who seek information on their relative competi­ tive position for industrial development in specific indus­ tries. More specifically the objectives are: (1) To review trends and recent developments relating to the number, size and location of beef slaughter plants in the United States, East North Central region and Michigan. 3 (2) To estimate the number, size and location of beef slaughter plants in Michigan that will minimize the total cost of cattle assembly, in-plant processing and meat distribution for projected 1980 cattle production and beef consumption. Although not specific objectives within themselves, several major estimates are necessary for the attainment of the second objective. These include (1) an estimate of the long-run cost curves for beef slaughtering in Michigan: (2 ) estimates of transportation cost functions for live cattle and carcass beef: (3) projections to 1980 of cattle marketings and beef consumption by geographic subdivisions of the study area. Procedures The procedures outlined here are used in the study to attain the indicated objectives. No detailed discussion of the procedures seems necessary at this point as this is accomplished in the development of the study. This outline is provided to help the reader understand the total frame­ work within which the thesis is developed and the procedures that are necessary to attain the stated objectives. (1) Review of the major concepts of location theory. (2) Review of the major trends and recent developments in the beef slaughter industry. (3) Projections to 1980 of cattle marketings and beef consumption by geographic divisions of the study area. 4 (4) Estimation of transportation costs for live cattle and carcass beef. (5) Estimation of long-run cost curves for beef slaugh­ tering in Michigan. (6 ) Selection and use of models to estimate the number, size and location of beef slaughter plants that will minimize the combined cost of cattle assembly, slaughtering, and meat distribution. Major Location Theories A brief review of some of the important location theories is included to provide an understanding of the present state of theory in this area but more important, as an aid in understanding the rationale behind the models used in attaining the objectives of this study. Greenhut classifies major location theories into three categories that serve as a useful framework within which to discuss the development of location theory. are; (1) least-cost location theories, These categories (2) market area theories, and (3) interdependence theories.^ Least-cost Location Theoriess The common element of theories in this group, as the name implies, is their concen­ tration on the location of firms at sites where the firm's cost of production is minimized. They generally assume a completely elastic demand function that is not affected by Melvin L. Greenhut, Plyit Location in Theory and in Practice> The Economics of Space, (ChapelHillt University ££ korth Carolina Press, 1954), pp. 1-100. 5 their location decision. Other key assumptions vary de- pending on the specific theory under consideration. One-of the earliest attempts to incorporate a theory of location into the general framework of economics, and probably the most famous location theory, is the theory of Johann Heindrich von Thunen.^ Von Thunen was primarily in­ terested in developing a theory for the location of agricul­ tural production, however, the concepts included in his framework have been widely used in explaining the location of industrial activity as well. Von Thunen assumed an isolated state with a completely homogeneous land surface and a single consuming center. The consuming center, also the center for manufacturing activity, supplies the outlying areas with manufactured goods in exchange for agricultural produce and raw materials. Price differences among locations were explained by differences in transfer costs; this difference being exactly equal to cost of transferring a good between locations. Ag­ r i c u l t u r a l prices tended to be higher near the center, while prices of manufactured goods increased as distance from the oenter increased. The locational advantage of land near the market center gave rise to increased land rents. This meant that the production of high value crops or products with estrsstly high transfer costs would tend to be produced near ----- T--------------Johann Heindrich von Thunen, Per Isolierte Staat in Bosiecluing auf Landwlrtschaft und HaEionaiokonomie (3rd e d . ; Aerlinl Schumacher-Zardilin, ldV5). 6 'the center while products that used land less intensively or could be transferred inexpensively would tend to be located in more remote areas. Another important contribution to least-cost location theories was made by Alfred Weber.^ Weber starts with a given type of firm and obtains the appropriate location for its production. His theory is less restrictive than is von Thunen*s in that it assumes uneven deposits of raw materials and allows more than one consuming center. factors, transportation, Three labor, and agglomerating tendencies, are important in Weber's theory. According to this theory, differences in the cost of production are important primarily in determining the appropriate production region. Weber de­ fines production costs to include raw material costs, in­ cluding assembly of raw materials, labor costs in processing and distribution costs. Agglomerating factors (discussed later) become important in determining a specific location within the region. Under Weber's theory, if transfer costs are considered the only significant factor influencing plant location, then the location that minimizes the total assembly and distribu­ tion costs becomes the site selected. The least-cost site is a function of the product being produced, the factors of production and the effect of the processing activity on the factors. Those materials that lose weight during processing ------- T ---------------------- C.J. Friedrich, Alfred Weber's Theory of the location of Industries, (Chicagol University of Chicago Press, TS7VT. 7 tend to pull the site toward production areas. A weight gaining process, on the other hand, tends to favor locations nearer consumers. Weber, however, realized that for many production processes factors other than transfer costs were also im­ portant. Specifically, he considered differences in labor costs including both wage and productivity differentials. Differences in labor costs among alternative sites must be compared with differences in transfer costs. The objective function, thus, becomes one of minimizing the total cost of labor as well as assembly costs, including raw material prices, and distribution costs. In the final selection process Weber included a third factor, agglomerating forces. These he defined as forces that tend to produce "an 'advantage* or a cheapening of pro­ duction or marketing which results from the fact that pro­ duction is carried on to some considerable extent at one place."1 Included are such factors as improved market out­ lets, economies to size, or the importance of proximity to service industries. He also recognized the existence of high rents in central markets as being a deglomerating force. That is, a force encouraging decentralisation of production. Based on this analysis, Weber divided industries into three categories; those oriented to transportation, those oriented to labor, and third, but much less important, those 1Ibid., p. 126 8 ori«nted to agglomeration. This latter group becomes im­ portant when little difference in transfer or labor costs occur amctng alternative sites. Edgar M. Hoover is also a major contributor to leastcost location theories.* His major contribution has been the inclusion of a wide variety of factors that influence plant locations. Although he suggests the desirability of considering demand conditions as well as cost factors, his work is discussed here because most of it has been within the framework of cost analysis. In addition to the factors considered by Weber, Hoover's inclusion of institutional factors, climate, property taxes, and a much deeper analysis of other costs have improved greatly our understanding of location factors. His major thesis is very similar to Weber's, that is, the location decision is primarily a prob­ lem of substitution among costs. The major difference is Hoover's Inclusion of a wider variety of costs. Market Area Theories: A critical assumption underlying the least-cost location theories is that the firm faces a completely elastic demand curve that is unaffected by the firm's location decision. The "market area" approach points out that demand functions vary among geographic areas and that sellers must consider these differences in their loca­ tion plans. These theories suggest that sellers will locate so as to control a specific segment of the market — ^Edgar M. Hoover, The Location of Economic Activity, (Mew Yorks McGraw-Hill, 1948). 9 ■•paratsd from competition primarily by transfer coats. This approach stresses the importance of selecting the maxi­ mum profit location rather than the least-cost location. Associated with its emphasis on demand conditions, this approach considers monopolistic effects of plant loca­ tions. Selection of plant sites must, according to this school, consider the possibility that certain locations can provide a firm sufficient control over a larger enough mar­ ket to overcome the slightly higher costs associated with that location. Lrosoh's theory is one of the best known theories of this type and will be discussed as an example.^ By assuming a given location of production, uniform population density, and a uniform terrain, Losch concludes that an equilibrium pattern of hexagonal market areas will develop with one plant located at the center of each area. The hexagonal pattern arises from the overlapping of curcular market areas of competing firms. Under perfect competition, each plant's average cost is identical, and due to his assumption of a uniform terrain and population density, distribution costs for all firms are equal. Thus, the competing firms' suirket areas are all of equal size. The shape and relative size of the market area can easily be zx>dified to account for changes in assumptions ~ ^August Losch"] The Economics of Location, trans. by William H. Woglom and Wolfgang t*. Stolper (New Haven: Yale University Press, 1964). 10 regarding population distribution, uniformity of the ter­ rain, or by including a particular pattern of transportation arteries» French, for example, has shown that with a rec­ tangular grid system of roads — a system occurring in most of the midwestern region of the United States — a square market area tilted 45 degrees to the road network provides the area shape that minimizes distribution costs.1 Likewise, if one were to assume different production costs by compet­ ing firms, the market areas for the higher cost forms would be reduced in size while those of the lower cost firms would be expanded. Interdependence Theories; The interdependent approach to the theory of plant location is similar in many respects to the market area theories. It differs primarily in that it assumes freely movable locations and seeks to find reasons for particular locations rather than building a system of locations that meets certain assumptions. This approach stresses the importance of factors that attract and/or repel a firm from the location of competing firms. That is, the factors that cause dispersion or concentration of firms are smphasized. The interdependence approach permits the p o s ­ sibility of competing firms being attracted to the same location, whereas, the market area approach does not permit this possibility. Such factors as concentration of markets, ----- T--------------Benjamin C. French, "Sos« Considerations in EstiaMting Assesibly Cost Functions for Agricultural Processing Opera­ tions# " Journal of Farm Economics, Vol. 42 (No. 4), pp. 771772. 11 the need for special service facilities, low freight rates, the impact of time-of-delivery on sales, or attempts to gain market advantage as seen in Hotellings's model, may encourage the concentration of competing firms. Hotellings' model is an example of forces that attract firms to the same location.1 Although he considers several situations, one will suffice for illustrative purposes. He argues that if two firms are competing for a given market area, and both are mobile geographically, they will each be drawn toward the other in an attempt to expand the market area over which they have a competitive advantage. vantage arises from lower transportation costs. The ad­ Consider the line in Figure 1.1 as a market area with firms A and B each making location decisions within the market. Suppose also that a and b are the present market areas held by firms A and B respectively. Since it is assumed that each firm's unit cost of transferring products are equal, A will have an incentive to relocate as near to B as possible in order to expand his market area. Likewise, B will have am incentive to move as near to A as possible. Thus, they will both have an incentive to locate near the center of the market. Hotellings also shows that total transportation costs for the two firms are minimised by locating at the center of two equal sise market areas, points x and y. This latter config­ uration approaches L o s c h 's market area location pattern. Harold Hotellings, "Stability in Competition," The Economic Journal, Vol. 39, pp. 41-57. 12 <------------------------ Figure 1*1. a x *------------ b ------------ > 1------------ y ------------midpoint Hotellings1 Market Area Model Factors discussed under the least-cost and market area theories of location are those generally recognized as being important in the geographic dispersion of firms. The inter­ dependence theories, however, suggest that firms tend to concentrate in certain locations if, by doing so, their costs are reduced by more than the increase in assembly and distribution costs resulting from the location, or if their market area is increased sufficiently to compensate for the increased costs. Summary Obiactives: Michigan's beef slaughter plants are being exposed to economic pressures that suggest a trend toward fewer, larger and likely relocated plants in Michigan. It is the objective of this thesis to provide data that will be useful to industry personnel who must make long-run invest­ ment decisions, and to state, area and municipal development groups that seek information on their relative competitive position in specific industries. are: The specific objectives (1) To review trends and recent developments relating to the number, size and location of beef slaughter plants in the United States, East North Central region and in Michigan, and (2) To estimate the munber, size and location 13 of beef slaughter plants In Michigan that will minimize the total co*t of cattle assembly, in-plant processing and meat distribution for projected 1980 cattle production and beef consumption. Location Theories t Three categories of location theory are discussed in this chapter, with .mphasis placed on the differences in the three approaches. cost theories, theories. These are: (2) market-area theories, (1) least- (3) interdependence All three groups have made significant contribu­ tions to our understanding of the location of economic activ­ ity. Considerations pointed out by each group are important in location decisions and should be a part of the general theory of location. Practically, however, the importance of a limited number of factors in the location of specific firms may be of such overriding importance that other less critical factors may be eliminated from detailed consideration. In essence, the theories suggest that firms attempt to locate in such a manner that profits are maximized. In the case of least-cost theories demand conditions are not con­ sidered important, except as proximity to the market is con­ cerned. In the latter two cases, market area theories and interdependence theories, conditions underlying both supply and demand become explicitly important. The necessity of considering a wide variety of factors on both the supply and demand sides in the development of a general theory of location is important. However, in an empirical study of a given industry certain factors stay be 14 so important relative to others that useful inferences may be developed by focusing only on a limited number of factors. In beef slaughtering differences in transportation costa among locations is sufficiently critical to warrant concen­ tration on this aspect, as a first step in providing needed information for location decisions. In the following chapters recent trends in beef slaugh­ tering will be discussed, and projections of livestock sup­ ply and beef demand will be provided. Estimates of live­ stock and beef transportation functions and slaughter costs will be made. Finally, these data will be used in models to estimate the number, size and location of beef slaughter plants that will minimize the total cost of livestock assembly, slaughtering and beef distribution. Chapter 2 TRENDS AND RECENT DEVELOPMENTS IN THE BEEF SLAUGHTER INDUSTRY Introduction It is the purpose of this chapter to provide greater understanding of important trends and recent developments affecting the beef slaughter industry. This is necessary in order to understand the reasoning behind some of the assumptions that are incorporated into the models to be used in determining the number, size and location of beef slaughter plants in Michigan. it is not the intent of this chapter to provide a comprehensive review of changes or new developments in the industry but to provide a brief review of some of the more important aspects of the economic envir onsent in which firms will be making plant investment de­ cisions. Because of the limited geographic scope of this study, national trends will be supplmented, when data per­ mits, by East North Central regional trends and trends for the state of Michigan. 16 Volume of Co— rcial Slauqhtar1 The volume of commercial cattle slaughter in the U.S. has increased substantially in recent years. Between 1950 and 1966 the annual number of cattle slaughtered nationally increased from 17,901,000 to 33,727,000, an increase of 88 percent (Table 2.1). was not continuous. However, growth during this period A marked increase occurred between 1950 and 1954 when total commercial slaughter increased by almost 40 percent (18 to 25 million head). A net decline of 6 per­ cent during the '54-'58 period was followed by a 40 percent increase over the next ten years, two-thirds of which occurred during the 1962-66 period. While the volume of cattle slaughter has been increasing nationally at a rather rapid pace the same has not been true for all regions. 2 Between 1950 and 1962 the New England As used here, commercial slaughter refers to slaughter by federally inspected plants and other plants slaughtering a voIusm of 300,000 pounds live weight or more annually. 2 States composing each region are as follows * New England - Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and Connecticut. Middle Atlantic - New York, New Jersey, Delaware, Maryland and Pennsylvania. South Atlantic - West Virginia, Virginia, North Carolina, South Carolina, Georgia and Florida. East North Central - Wisconsin, Michigan, Illinois, Indiana and Ohio. Southeast - Kentucky, Tennessee, Mississippi and Alabama. West North Central - North Dakota, South Dakota, Minnesota, Nebraska, Iowa, Kansas and Missouri. South Central - Oklahosm, Texas, Arkansas and Louisiana. Mountain - Idaho, Montana, Wyoming, Nevada, Utah, Colorado, Arisona and New Mexico. Pacific - Alaska, Washington, Oregon, California and Hawaii. Table 2.1. Coseiercial Cattle Slaughter, Michigan, Nine Regions and United States, 1950, 1954, 1958, 1962, 1966. REGIONS2 South East West MidMoun­ West United AtSouth North North South AtHilth-1 New England lantic Central Central Central tain Coast States lantic East gan Itea and Year Number Slaughtered (1,000) 1950 629 807 1954 1958 712 1962. 714 704 1966 Percent of U.S. Slaughter l9$0 3.5 1954 3.2 19S8 3.0 2.7 1962 1966 2.1 Percent Change ... T5T6-T4 28.3 -11.8 1954-58 1958-62 0.3 - 1.4 1962-66 11.9 1950-66 331 305 258 230 207 1529 2046 1922 1965 1765 781 1391 1184 1197 1428 705 1130 1131 1152 1510 4455 5629 5232 4724 5512 5797 7667 7642 9342 13020 1441 2468 1928 2146 3272 874 1411 1526 2037 3000 1987 2971 2732 3289 4013 17,901 25,017 23,555 26,083 33,727 1.8 1.2 1.1 0.9 0.6 8.5 8.2 8.2 7.5 5.2 4.4 5.6 5.0 4.6 4.2 3.9 4.5 4.8 4.4 4.5 24.9 22.5 22.2 18.1 16.3 32.4 30.6 32.4 35.8 38.6 8.0 9.9 8.2 8.2 9.7 4.9 5.6 6.5 7.8 8.9 11.1 11.9 11.6 12.6 11.9 100.0 100.0 100.0 100.0 100.0 - 7.9 -15.4 -10.9 - 9.9 -37.5 33.8 - 6.1 2.2 -10.2 15.4 78.1 -14.9 1.1 19.3 82.8 60.3 0.1 1.9 31.1 114.2 26.4 - 7.1 - 9.7 16.7 23.7 32.3 - 0.3 22.2 39.4 124.6 71.3 61.4 8.2 -21.9 11.3 33.5 52.5 47.3 127.1 243.2 49.5 - 8.1 20.4 22.0 102.0 39.8 - 5.8 10.7 29.3 88.4 ^Michigan Crop Reporting Service, Michigan Agricultural Statistics (Lansing: Michigan Department of Agriculture and U.S.D.A. Statistical Reporting Service Cooperating, 1951, 1955, 1959, 1963, 1957). 2 See footnote, page 16, for states in each region. ^Willis E. Anthony, Structural Changes in the Federally Inspected Livestock Slaughter Table 2.1. (Continued) Industry 1930-1962, Agricultural Economic* Report No. 83, (Washington: of Agriculture, 1^66), p. 31. U.S. Department ^United States Department of Agriculture, Statistical Reporting Service, Livestock and Meat Statistics, Supplement for 1966 to Statistical Bulletin No. 333, (Washington: U.S. Department of Agriculture, 1967), p. 65. 1966 data not comparable with former years due to inclusion of certain slaughtering in commercial plants for farmers as part of commer­ cial meat production beginning January 1, 1966. 19 region exhibited absolute declines in volume of slaughter. Since 1962, the Middle Atlantic region has also declined in absolute volume of slaughter. The East North Central re­ gion showed slight gains in volume of cattle slaughter, in­ creasing from 4.5 million to 5.5 million head for an increase of 24 percent. The increase was not sufficient, however, to maintain the region's 1950 share of national slaughter. The region's percent of national slaughter continuously declined from 25 percent in 1950 to 16 percent in 1966 (Table 2.1). Of the total national increase in volume of cattle slaughter between 1950 and 1966, three regions; West North Central, South Central, and Mountain; accounted for 71 per­ cent, with the West North Central region alone accounting for 46 percent, of the national increase. Michigan's volume of cattle slaughter showed a substan­ tial gain between 1950 and 1954, increasing from 629,000 head to 807,000 head, an increase of 28.3 percent. Since 1954, however, the reverse has been true. Between 1954 and 1959, a decline of 11.8 percent occurred. Between 1959 and 1962, slaughter volume was relatively stable, but declined 1.4 percent between 1962 and 1966. The overall change be ­ tween 1950 and 1966 amounted to a net increase of 11.9 per­ cent. In spite of the increase in volume slaughtered, Michi­ gan's share of national slaughter has continuously declined throughout the 16 year period to a low of 2.1 percent in 1966. 20 The trends in volume of slaughter by regions of the United States point toward a shift in cattle slaughter away from major consumption centers and from the historical loca­ tion near major terminal markets. Slaughter is declining in absolute terms in the New England and Middle Atlantic areas and in relative terms in the East North Central region. A relative decline since 1962 in the West Coast region has also occurred. The major production areas of the West North Cen­ tral , Mountain and South Central regions, have been increas­ ing both in absolute and relative terms. The shift of slaughter to cattle production regions indicated by this data suggests that if this trend continues in the long run, the volume of regional or state slaughter will, to a consid­ erable degree, be dependent on production of cattle for slaughter from within the area. Number of Slaughter Plants The Statistical Reporting Service estimates indicate a decline in the number of slaughter plants.1 According to their figures, the number of commercial slaughter plants, have been declining at an increasing rate (Table 2.2). Be­ tween 1950 and 1955, a net decline of 21 plants was estimated for the United States. This increased to a decline of 73 plants between *55 and '60 and to 187 between *60 and *65. The same trend appeared in the East North Central region ^United States, Department of Agriculture, Statistical Reporting Service, Number of Livestock Slaughter Plants, March 1, 1965, SRS - 8 , (Washington* U.S. Government Print­ ing Office, 1965), p. 1. 21 Table 2.2. Number of Slaughter Plants, Michigan, East North Central, West North Central Regions and United States, 1950, 1955, 1960, 1965. Year and Plant Class 1950s Federally Inspected Other Commercial 1955s Federally Inspected Other Commercial 1960s Federally Inspected Other Commercial 1965s1 Federally Inspected Other Commercial East West United North North North Michigan Central Central Central States Number of Plants ----- 96 86 182 441 ----- 704 227 931 2,797 ----- 96 86 182 455 ----- 678 204 882 2,762 41 107 108 215 530 1901 615 204 819 2,614 5 108 125 233 570 169 549 243 792 2,387 United States, Department of Agriculture, Statistical Re­ porting Service, Nuadser of Livestock Slaughter Plant s, March 1, 1965, SRS - 9, (Washington: U .i • OovernsentPrinting 6f£ice, 1965), p. 5. Sources Except where noted, Willis E. Anthony, Structural Changes in the Federally Inspected Livestock Slaughter Industry 1^50-1^627 Agricultural Economics fceport No.(Washingtons U.S. Depart­ ment of Agriculture, 1966), p. 61. 22 which showed declines of 26, 52, and 65 for the three periods respectively. Michigan data for 1960 and 1965 also indicated a down turn in number of slaughter plants. The net decline was from 194 in 1960 to 174 in 1965. A significant trend also shown by data in Table 2.2 is the increase in the number of federally inspected plants regardless of the region concerned. The national totals show a net increase of 129 federally inspected plants. In­ creased emphasis on interstate shipment of meat as opposed to livestock shipment has undoubtedly contributed to the increasing number of federally inspected plants as has the tendency for state meat inspection laws to more nearly con­ form to federal standards. Recent legislative action which requires state laws to conform to federal standards will likely increase further the interest in federal as opposed to state inspection. The influence of these institutional changes will be discussed in more detail later. For a closer look at Michigan's beef slaughter industry, data were obtained from the Michigan Department of Agricul­ ture and from the Consumer and Marketing Service, U.S.D.A., on the number of head slaughtered by species from all plants in the state (Table 2.3). Unfortunately, only data for 1967 were available so no trends could be developed. In 1967 there were a total of 202 state or federally inspected plants in Michigan that slaughtered cattle and/or calves. Of these, 198 slaughtered cattle, with 32 slaughter­ ing cattle only, and three slaughtering calves only. A total Table 2.3. Number of Plants, Number of Head Slaughtered and Volume of Carcass Beef and Veal Slaughtered by Size of Plant, Michigan, 1967. Item Cattle . No. of plants Plants as 1 of total? No. of head slaughtered Head as 1 of total? Average mo. of head slaugh­ tered per plant* Volume slaugh­ tered* Average vol­ ume slaugh­ tered per plant* Calves No. of plants Plants as 1 of total No. of head slaughtered Head as 1 of total Average no. of head slaugh­ tered per plant <.56 No. of Beads Slaughtered in Thousands .H-.75".7^-1.5 1.6-3.6 3. l-s.zrs.rc-ir- 16-25 Total 45 68 23 25 13 12 5 7 198 22.73 34.34 11.62 12.63 6.57 6.06 2.53 3.54 100.00 5250 31477 25704 52041 52766 106676 99197 231182 604293 0.87 5.21 4.25 8.61 8.73 17.65 38.26 100.00 117 463 1118 2082 4059 8890 3151 18893 15428 31236 31671 64028 70 278 671 1249 2436 5336 110a 16.42 19839 33026 3052 59539 138758 362703 11908 6b 19823 5C 90.91 4.96 B W A 2118 1915 * W M 1.25 1.13 19 319 « m w —e w M M — • M w M 1832 121 4.13 100.00 165304 169337 97.62 100.00 33061 1399 Table 2.3. Itee (Continued) Ho. of Head Slaughtered in Thouaands <.25 .U -.13 .76-1.5 1.4-3.6 3.1-4.33 5.24-15 15-33' " 25-30 Voltaw slaugh­ tered7 181 Average vol­ ume slaugh­ tered per 2 plant Cattle and/or Calves 0 48 No. of plants Plants as 1 of 24.24 total No. of head 5527 slaughtered Head as 1 of 0.71 total Average no. of head slaugh­ tered per plant 115 Cattle Only Mo. of plants 10d Plants as 1 of total 31.25 No. of head slaughtered 1391 Head as % of total 0.40 Average no. of head slaugh­ tered per plant 139 Total 163 14092 14436 27 2818 119 64 24 24 13 12 6 11 202 32.32 12.12 12.12 6.57 6.06 3.03 3.54 100.00 30917 26884 51344 53373 110878 112423 382284 773630 4.00 3.48 6.64 6.90 14.33 14.53 49.41 100.00 483 1120 2139 4106 9240 18737 34753 3830 5 4 6 32 15.62 12.50 18.75 100.00 B W WW 43968 83604 195273 343955 • 12.78 24.30 56.77 100.00 8794 20901 32546 10749 ■ ■ ■ ■ w w w w WW W W B M W 7e W 21.88 W WWW 19719 WWW W 5.73 M B 2817 WWW Table 2.3. (Continued) Item Volume slaugh­ tered Average vol­ ume slaugh­ tered per plant No. of Head Slaughtered in Thousands <.25 .26-.75 .76-1.5 1.5-3.6 3.1-6.25 6.26-1.5 16-25 26-56 Total 835 ............ 11836 --- 26390 50180 117205 206445 84 ............ 1691 --- 5278 12545 19534 6452 ^Number of plants that reported slaughtering cattle in 1967. 2 Number of plants in each size class as a percent of total number of plants reporting. 3 Number of head slaughtered in each size class as a percent of the total number of cattle slaughtered. Slumber of head slaughtered in each size class divided by number of plants in that size class. Slumber of head slaughtered times average live weight of cattle slaughtered in Michigan in 1966 (1053 pounds) times an assumed dressing, percent of 57. Volume expressed in 1,000's of pounds of carcass weight. ^Volume slaughtered in each size class divided by the number of plants in that size class. Slumber of head slaughtered in each size class times average weight of calves sold in Michigan in 1966 (155 pounds) times an assumed dressing percent of 55. Volume expressed in 1,000's of pounds carcass weight. 3 Number of plants reporting slaughtering cattle and/or calves in 1967. aIncludes plants slaughtering less than 200 head of calves. ^Includes plants slaughtering from 200 to 750 head of calves. °Includes one plant slaughtering less than 6,250 head of calves. ^Includes plants reporting slaughtering less than 750 head of cattle. Table 2.3. (Continued) eIncludes plants reporting slaughtering from 750 to 6,250 head of cattle. Source: Calculated frcn unpublished data supplied by the Michigan Department of Agri­ culture, Meat Inspection Division and U.S. Department of Agriculture Consumer and Marketing Service. Data excluded 37,263 head of cattle and 26,007 head of calves slaughtered in Detroit slaughterhouses during January and February, 1967. 27 of 641,556 head of cattle and 195,344 calves were reported slaughtered during the year for an estimated volume of 385,068,000 pounds of carcass beef and 16,653,000 pounds of veal. The number of plants shown In this data is larger than previous data due to the inclusion of plants slaughtering less than 300,000 pounds live weight. All plants slaughter­ ing less than approximately 285 head of cattle annually would not be classified as commercial slaughter plants and would not be included in former data. The geographic distribution of state licensed slaughter plants and federally inspected plants is shown in Figure 2.1. These include plants slaughtering all species of livestock, except horses, under state inspection as well as plants not yet under state inspection. The concentration of plants in the Detroit area is obvious with 53 plants in a four county area (Macomb, Oakland, Washtenaw and Wayne). Other con­ centrations, though not as pronounced, occur in the SaginawGenessee county area which has 17 plants and in the four county area of Muskegon, Ottawa, Kent, and Allegan with 29 plants. Although not shown, the concentration of volume would be substantially greater due to the larger average size of plants in these areas. The location of Michigan slaughter plants strongly suggests their orientation toward the population centers of the state. activity. Detroit has long been a center for slaughter Plants were originally attracted to Detroit by 28 OTSRO Piyurt 2.1. Location of Lio«n««d 81«ughttr Plant*, Michigan 1987. 29 both the population and the relatively large terminal mar­ ket which served as a major source of livestock. Size Distribution of Slaughter Plants According to A n t hony,^ of the 491 federally inspected cattle-slaughter plants in the U.S. in 1962, 26 percent (128 plants) slaughtered 50,000 head or more; another 26 percent slaughtered between 25,000 and 50,000 head. In 1950 only 16.5 percent of the federally inspected plants were slaughtering in excess of 50,000 head, while only 19.4 percent slaughtered between 25,000 and 50,000 head. one plants slaughtered less than 12,500 head. Forty- On the aver­ age, plants in 1950 slaughtered 31,804 head compared to 41,172 in 1962. Between 1950 and 1962 there was a net de­ cline of 29 plants slaughtering less than 25,000 head and a net increase of 108 plants slaughtering over 25,000 head. Although these figures tend to indicate an increase in the average size of cattle slaughter plants, one should be cautious in making this interpretation. Year to year shifts in the average percent of capacity at which existing plants operate may contribute to the difference. However, it does not seem likely that a difference of 10,000 head on the aver­ age or an increase of 30 percent can all be attributed to differences in the degree to which plants are operating at capacity. ^Willis E. A n t hony, Structural Changes in the Federally Inspected Livestock Slaughter Industry 1956-1962, Agricultur­ al Economics Report Mo. §3, (Washington: U.S. Department of Agriculture, 1966), p. 63. 30 Based on data in Table 2.4, the average number of cattle slaughtered by the 198 plants that slaughtered cattle in Michigan was only 3,052 head. This average reflects the large number of plants that reported slaughtering less than 750 head. The four largest cattle slaughter plants in the state had an average slaughter of 37,905 head in 1967, while the next six largest plants averaged 24,497 head per plant. Of these ten larger plants, eight were specialized cattle slaughtering plants and slaughtered an average of 29,898 head per year. Table 2.4. Average Volume of Cattle Slaughtered per Plant in Federally Inspected Plants, East North Cen­ tral and West North Central Regions and United States, 1950, 1954, 1958, 1962. Year East North Central 1950 37,846 67,056 31,804 1954 44,808 83,027 42,457 1958 39,296 80,791 38,520 1962 35,660 81,581 41,172 Source: West North Central dumber of Head United States Willis E. Anthony, Structural Changes in the Fed­ erally Inspected Livestock ilauqiittr Industry 1950-1962, Agricultural Economics Report No. 83, (Washington: U.S. Department of Agriculture, 1966), p. 62. One of the major interests in the average size of plants relates to the degree to which plants are realising economies of size that exist in cattle slaughtering. estimates suide by previous studies hold under Michigan If 31 condition*, significant economies are possible beyond the average sixes now existing in Michigan.^ Without signifi­ cant increases in the total volume of slaughter, increasing plant sizes will require a drastic reduction in the number of plants. This trend is already underway. Concentration of Slaughter Plants Concentration, as used here, refers to the proportion of total slaughter accounted for by a specified nuadber of firms. In 1950, the four largest cattle slaughtering firms in the U.S. accounted for 51 percent of the U.S. cattle slaughter. The ten largest accounted for 60 percent (Table 2.5). These percentages have been rapidly declining since 1950 and by 1962 the four largest had less than 30 percent of total slaughter, while the ten largest had 40 percent. For the East North Central region, the four largest and ten largest accounted for 50 and 68 percent respectively in 1950. By 1962 the percentages had declined to 30 and 47, slightly higher than for the U.S. In Michigan, the four largest firms (assuad.ng no firm owns more than one plant) slaughtered approx ismttely 25.1 percent of the state's cattle slaughter and the ten largest, 49.4 percent in 1966. These percentages are slightly lower than regional or U.S. estimates for the four plant and ^Samuel H. Logan and Gordon A. King, ltconowd.es of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 2T5 (Berkeleyt California Agricultural Experisient Sta­ tion, December 1962), p. 102. 32 Table 2.5. Percent of Cattla Slaughtered by Four Largest and Ten Largest Firms, Michigan, East North Central, West North Central and United States, 1950, 1954, 1958, 1962. Number of Firms and Year Michigan1 East North Central West North Central United States ------- Four Largest 1950 ---- 50.2 64.6 51 -5 1954 ----- 48.7 58.6 45.2 1958 ----- 40.4 51.2 35.7 1962 25.1 29.8 45.6 29.5 1950 ----- 67.7 82.5 60.2 1954 — ---- 66.1 77.1 55.2 1958 ----- 58.4 70.4 46.2 1962 49.4 46.7 63.0 39.9 Ten Largest Calculated from unpublished data supplied by Michigan De­ partment of Agriculture, Animal Health Division. Source: Except where noted, Willis E. Anthony, Structural Changes in the Federally Inspected Livestock Slaughter Industry 1950-1962T Agricultural Econom­ ics Report W o . 83, (Washington: U.S. Department of Agriculture, 1966), p. 38-40. 33 higher for ten plant concentration for 1962. Anthony presents a distribution of the number of firms by size class for 1950/ 1954, 1958, and 1962. In summing up this distribution he states, "The size distribution of FI (Federally Inspected) cattle slaughter firms has changed between 1950 and 1962 ....The most notable characteristic of change is the rising peak near the center of the distrib­ ution. At the same time, there has been little change in numbers of very small or very large firms. The declining concentration is due to relatively more slaughter by medium size firms. Several factors are believed to have contributed to the decline in the share of the market held by the largest firms. First, consumer acceptance of federal grades as a standard of quality for fresh beef has reduced the ability of the large national packers to differentiate their products. This has made entry of new firms easier and increased the ability of other firms to compete for markets. Second, transportation rate changes and changes in livestock market­ ing channels, especially the reduced importance of terminal markets and the increased importance of direct purchasing have improved the locational advantage of packers located in major production areas. Generally, lower wage rates in production regions have also been suggested as a factor Ills B. Anthony, Structural Changes in the Federally Inspected Livestock Slaughter Industry 1§50-I^j2, Agricul­ tural Ecohemics Report No. 83, (Washington: U.S. Department of Agriculture, 1966), p. 6. Table 2.6. Horizontal Slaughter Plant Specialization: Percent of Federally Inspected Plants Slaughtering Given Combinations of Livestock Species# Michigan, 1966, last Morth Central Region, United States, 1950, 1954, 1958, 1962. Area and Year Cattle Calves Cattle Calves Sheep JfiJ* Cattle Sheep Hogs 5.1 50.3 17.0 28.9 22.9 21.1 12.5 • 1.0 0.9 1.8 12.4 12.5 11.0 17.9 2.7 0.4 0.2 0.5 8.1 8.6 8.4 10.6 38.3 29.9 24.9 14.8 0.7 1.3 1.6 3.9 Sheep Hogs , Michigan^ 1966 11.9 fast Morth Central 1950 1954 1958 1962 1.0 11.3 14.6 22.0 25.0 2.6 0.9 7.4 13.4 19.0 22.4 0.4 0.4 0.8 0.5 - - United States 1950 1954 1958 1962 34 contributing to the ability of plants in production regions to compete with larger packers. Horizontal Plant Specialization Horizontal specialization, defined as the degree to which plants specialize in the slaughtering of single species of livestock, has been increasing in the United States, as well as in most regions of the nation. In 1950, only 16 per­ cent of the nation's federally inspected slaughter plants slaughtered only one species. to 34 percent. By 1962, this had increased During the same period the proportion of plants slaughtering four species declined from 38 to 15 per­ cent (Table 2.6). The East North Central region showed a similar but even more rapid trend toward specialization. In 1962, 46 percent of the plants slaughtered only one species, while only 12 percent slaughtered four species. Almost three-fourths slaughtered less than three species. Michigan appears to be lagging behind both the U.S. and the region, however, the data presented in Table 2.6, are not strictly comparable. Michigan data in this table are not restricted to federally inspected plants. When all plants slaughtering 300 head of livestock or more are con­ sidered, only 17 percent limited their slaughtering to one species, while 76 percent slaughtered three or more species (Table 2.6). Of the six federally inspected plants in the state in 1967, five slaughtered only one species. Table 2.6. (Continued) Cattle Calves Sheep Cattle Calves Hogs 4.5 4.0 2.8 0.6 4.0 17.0 11.3 12.5 10.1 8.9 11.3 11.5 9.2 3.6 17.5 18.7 15.6 17.0 2.1 5.2 3.7 6.2 4.1 1.0 3.7 3.6 24.7 23.7 22.7 28.9 28.1 25.0 24.0 22.9 36.7 22.9 19.3 21.1 45.5 26.8 15.2 12.5 14.9 13.8 13.5 12.5 12.0 11.7 9.4 7.4 10.7 14.2 13.7 13.6 4.6 5.2 6.7 9.2 2.8 1.3 2.0 4.6 16.0 17.7 28.0 22.8 20.5 26.9 28.4 21.9 24.9 34.0 27.2 24.0 Cattle Calves Other Cattle 2Hogs Species No. of Species Slaughtered I " 3" ™ 3 — '4 Michigan* 1966 7.3 25.4 50.3 East North Central 1950 1954 1958 1962 United States 1950 1954 1958 1962 38.3 29.8 24.9 14.8 Calculated from: Unpublished data provided by Animal Health Division, Michigan Department of Agriculture. Based on 177 plants that slaughtered 300 or more head of livestock. Source: Except where noted, computed from: Willis E. Anthony, Structural Changes in the Federally Inspected Livestock Slaughter Industry 1950-1962, Agri­ cultural Economics Report No. t)3, (Washington: U.S. Department of Agricul­ ture, 1966), pp. 68-9. 37 Specialization in cattle slaughtering has been the major factor in the national, regional and state trends to­ ward horizontal specialization. At the national level, 127 or 66 percent of the 193 single species plants were cattle slaughtering plants. were cattle plants. At the regional level, 55 percent In Michigan 21 out of 30, or 70 percent of the single species plants were specialized in cattle slaughtering (Table 2.6). Patterns of Entry and Exit Entry and exit of firms into cattle slaughtering in the United States has been relatively active in recent years. Over two-thirds of the firms operating in 1950 discontinued federally inspected slaughter operations by 1962. On the other hand, over half of the firms with federally inspected plants in 1962 began slaughtering under federal inspection after 1950.1 The East North Central region had an exit ratio of 0.43 and an entry ratio of 0.54. 2 This exit ratio is higher and the entry ratio about the same as the national ratios. One should be reminded that these ratios apply only to the federally inspected plants, and as such do not include the bulk of the firms or plants in the industry. In terms *Ibid., p. 6. Exit ratio is a ratio of the number discontinuing op­ eration during a given period to the total number operating at the beginning of the period. Entry ratio is a ratio of the number entering during a given period to the total number operating at the end of the period. 2 38 of the volume of slaughter, however, the federal plants represented about 78 percent of the commercial livestock slaughter in 1962, and this has been gradually increasing. It is also possible that these figures are biased by the continued operation of slaughter firms as nonfederally in­ spected firms or to the entry of firms as federally inspec­ ted firms that were previously a part of the commercial slaughter industry. The degree to which this affects the ratios is indeterminant. Even with these weaknesses in the data they seem sufficient to indicate a considerable turn over of firms during the 1950 to 1962 period. New Legislation Affecting Beef Slaughtering Although there are many laws and regulations that affect the beef slaughter industry* two recently enacted laws are of particular significance to the future adjust­ ments that are likely to take place in the number and size of beef slaughter plants in Michigan. The first of these, Act 280 of the Public Acts of 1965, known as the Statewide Meat Inspection Act, was enacted by the Michigan legislature in 1965 and became effective January 1, 1966. It requires that, "no person shall estab­ lish, conduct, maintain or operate, a slaughterhouse or edi­ ble rendering establishment without a license from the department."-1 Michigan Department of Agriculture, Meat Inspection Laws Act 280 of 1965 as Amended Regulation*No. 148 (Lansing: Michigan Department of Agriculture) , 19<57, p"I 39 It further states that the Michigan Department of Agri­ culture, "...shall provide for the anti-mortem inspection of all meat animals slaughtered in any slaughterhouse or edible rendering establishment, excepting those meat animals slaugh­ tered under the direct supervision of the United States Department of Agriculture, before they are slaughtered. The Michigan Department of Agriculture must also provide for post-mortem inspection of all meat animals except those slaughtered under federal inspection. The law further re­ quires slaughter establishments to provide adequate facili­ ties, including office space and janitorial service for the state inspectors. The facilities in which slaughtering takes place, including all equipment, must also meet certain conditions to guarantee a sanitary and healthful slaughtering operation. The second act. Public Law 90-201, a federal act, was passed in December, 1967, and is known as the Wholesome Meat Act. Although this act covers a wider variety of items, including packaging and labeling, the major section of the act that is of special interest here pertains to the require­ ment concerning compulsory meat inspection of virtually all meat that enters commercial trade. The act provides for a federal-state cooperative arrangement to strengthen state meat inspection programs. Under this feature of the act, states may obtain financial assistance up to half the cost 1Ibld., p. 2. 40 of the state program, as well as technical assistance to Improve their programs. It also authorises the Secretary of Agriculture to provide immediate inspection to any plant, even if it sells only to intrastate markets, if the plant is believed to be a health hazard and the state fails to inspect it. The act also provides a two year period — December 15, 1969 — to in which states must set up state in­ spection programs equivalent to the federal program or the federal government will assume the inspection responsibility of all plants.^ In effect, this law requires all slaughtering operations to meet federal requirements. Thus, it is expected that many of the larger commercial plants that are not now fed­ erally inspected will seek to obtain federal inspection. Many will be faced with a decision to either update their present facilities or completely rebuild. Those who choose the latter, will no doubt, also be considering the possibil­ ity of relocating. The smaller slaughter firms may be dis­ couraged to the point that they will not continue to operate. Other firms that have slaughter operations only as a part of their total business may be encouraged to discontinue slaughter operations. Differences in requirements between the federally U.S. Congress, House, An Act to Clarify and Otherwise Amend the Meat Inspection Act to Provide for Cooperation with Appropriate ^tate Agencies with Respect to State Meat Inspection Programs, and~for other Purposes, H.R. 12144, 90tn Congress, 1967 , pT 12. 41 inspected and state inspected or non-inspected plants have generally provided a cost advantage to the state and non­ inspected plants. This advantage helped to overcome some of the cost advantages gained by the generally larger fed­ erally inspected plants due to economies of size. This new act however has the potential of eliminating much of this. However, according to Abel P. Davis, vice-president of the American Meat Institute as reported in the National Provi­ sions, "the thing he (the meat packer) is more fearful of is lack of uniformity of c o s t s . T h e i r concern seems to be in the implementation of the act. Davis is reported to have suggested that the most important thing facing the USDA now is how to get the regulation interpreted the same way by all inspectors in all plants. 2 Others have been especially concerned with the ability of small packers to get the financing needed to make the necessary changes in plants and equipment. A resolution has been introduced by Senators Alan Bible and John Sparkman calling upon the Small Business Administration to make a study of the needs for capital by meat processors and packers to meet the requirements of the Act.** It would seem that the effect of these two laws on Michigan's slaughter industry will be to speed up the "Changing Role of Vets in Meat Inspection is Explored,” The National Provlsioner, June 29, 1968, p. 20. 2Ibld., p. 20. 3Ibid., p. 7. 42 reduction in the number of firms and an increase in the size of firms. Also, some relocation of firms is likely to take place as well as the emergence of new firms better able to meet the new requirements. Summary This chapter has briefly outlined some of the major trends and recent developments that will have a bearing on the number, size, and location of beef slaughter plants in Michigan. Total volume of cattle slaughtering is increasing rapidly on a national basis, but Michigan has been contin­ ually reducing its share of national slaughter. The number of commercial slaughter plants has been de­ clining in the United States as well as in Michigan. Major reductions at the national level have been in plants slaughtering less than 2 5,000 head. However, medium size firms have been a major factor in the growth in slaughter while the top ten firms have reduced their share of the market. The geographic distribution of slaughter nationally over time shows a trend toward location in production areas while in Michigan, slaughter plants tend to be located in major urban areas. Horizontal specialization toward single species plants is increasing rapidly with specialized cattle slaughtering plants being the major single species plants. However, most Michigan plants are still highly diversified. 43 Available data suggest that entry and exit into the industry has been relatively active since 1950. Necessary adjustments to new legislation suggests an increase in the rate of growth of federally inspected plants, an increase in specialized slaughtering as processors dis­ continue slaughter operations, and an increased rate of adjustments toward location in production areas both at the national and state level. Chapter 3 CATTLE AND BEEF PROJECTIONS, ESTIMATES OF TRANSPORTATION FUNCTIONS, SELECTION OF PLANT SITES AND OUT-OF-AREA SUPPLY POINTS Introduction The purpose of this chapter is to present the proce­ dures used and the estimates obtained for: 1) Projected volume of cattle marketed by production areas in 1980, 2) projected beef consumption by areas to 1980, 3) transporta­ tion rates for live cattle, 4) transportation costs for car­ cass beef, 5) selection of plant sites, and 6) selection of out-of-area supply points. Before developing these estimates the area to be in­ cluded in the study area should be identified. The geogra­ phic interest of the study is the state of Michigan. However since the Upper Penninsula is not an important source of livestock supply to Michigan plants it was not included in the study area. On the other hand, the importance of the Northern Indiana and Ohio counties as potential suppliers of livestock to Michigan plants warranted their inclusion in the study. The Indiana and Ohio counties included in the study were arbitrarily limited to the most northern eighteen counties east of Porter county, Indiana. Also, by including these out-of-state counties, Michigan's southern 44 45 border counties were not penalized as heavily as would have been the case had they been on the margin of the potential supply area. Counties on the margin of the supply area will normally be omitted from least cost transportation solutions. In the same way the Indiana and Ohio counties are likely to be omitted. Figure 3.1 outlines the geographic area of the study. Cattle Marketing Projections Number of cattle marketed. In early 1964 Michigan State University's College of Agriculture, undertook an intensive, multi-disciplinary study of rural Michigan. The study concentrated on the projection of potentials for rural areas of the state to 1980. Aspects of the state's agricul­ tural production, processing, and marketing activities were considered. Since these projections are available, they are used as a basis for the Michigan projections.^ Since previous state projections for Michigan are used for this study, the major issue pertaining to production of cattle for slaughter in Michigan is one of allocating the projected state cattle marketings to each production area. For the Indiana and Ohio counties a different approach is necessary. The basic cattle production area used in both cases is the county, since county data are readily available. Michigan State University, Project *80 Rural Michigan Now and in 1980 — Highlights and Summary of Project *80, Michigan State University Agricultural Experiment Station and Cooperative Extension Service, Research Report No. 37 (East Lansing: Michigan State University, 1966). 46 MMU Figure 3.1. Outline of Production Areee in Study 47 There are two exceptions, however. The Northwest and Northeast crop reporting districts of the state are each considered as an area. Cattle production in many of these counties is so small that individual county data are not available. Production areas are outlined in Figure 3.1. Several alternative methods for projecting county and district sales for Michigan areas were considered. One possibility considered was calculating for each area (county or district) the average annual percentage change in the number of cattle (except calves) sold between 3.954 and 1964 using U.S. Census of Agriculture data. According to pre­ vious estimates, these two years are peak years in the cattle cycle. By using *54 and *64 data, the influence of the cycle would be minimized. Applying these percentage changes to the county's or district's 1964 sales and multiplying by the number of years to be projected would yield a first approximation of the area's projected sales. In order to assure the sum of the individual projections would agree with the Project '80 state projection, each individual area's projection would need to be multiplied by a ratio of the state projection to the sum of the individual county or dis­ trict projections. This procedure has at least two weaknesses. First, it has the potential of overestimating the increases or de­ creases of counties with small absolute numbers, since small absolute changes yield larger percentage changes. Second, in counties that have heavy dairy populations, the decline in 48 dairy cow numbers reduces the source of supply of dairy steers and would tend to cause this procedure to overesti­ mate the future volume of cattle sold from the county. A second alternative considered was to base projections on the trends in the number of dairy and beef cows on farms. Estimates of calf crop, death losses, replacement rates, the number of calves sold or fed o u t , could be made and the re­ sults projected. However, this procedure does not account for movements of calves and yearlings between counties, during the growing and fattening states of production. Estimates on the inter-county movement of calves for fatten­ ing are not possible with available data and therefore make this procedure infeasible. The final procedure considered, and used, was to cal­ culate each county's or district's cattle sales as a per­ centage of the state's sales for 1949, 1954, 1959, and 1964 using census of agriculture estimates. These estimates were then used to project the area's percent of state sales to 1980 by simple linear regression procedures. This procedure minimizes the importance of the absolute number involved in the first procedure and eliminated the need to estimate intercounty movements of calves for feeding that the second procedure required. It does not overcome the potential tendency for overestimating the volume of cattle available from areas with declining dairy populations. The lack of a strong concentration of counties with declining dairy popu­ lations in any one area of the state will help to minimize 49 -the consequences of overestimating future sales in these counties. Also, there is reason to expect that some of the resources released from dairy production will be transferred to beef cattle and thus provide a compensating trend. Maish and Hoglund made a comparative budget study of beef cow herds in Michigan.^" One of the budget comparisons made was between a 50-cow beef herd and a 22-cow dairy enter­ prise in Southern Michigan. The budgets were developed to simulate the normal resource combinations found on many small dairy farms in the area. Net incomes were $96 to $1314 less on the beef herd operation depending on the efficiency and management assumptions made. The authors point out, however, that if off-farm employment becomes a possibility with the shift to beef production net incomes to the farm family may be substantially higher. At $20 per day only 5 to 66 days of off-farm employment is necessary to equal the loss in farm income by the shift from dairy to beef. To obtain projections of cattle marketings for the ten counties in northern Indiana and eight in northern Ohio that are included in this study a linear peojection of the 1949, 1954, 1959 and 1964 trend in number of cattle (except calves) sold from each county from U.S. Census of Agriculture data was m a d e . L.J. Maish and C.R. Hoglund, The Economics of Beef Cow Herds in Michigan, Michigan State University Agricultural Experiment Station Research Report No. 58 (East Lansing: Michigan State University, 1966), p. 2. 50 Since neither procedure used to project cattle market­ ings took into account trends in urbanization, it seemed necessary to determine if population pressures would require adjustments in cattle projections in some of the urban counties. Fifteen of the counties with major urban centers were individually checked to determine if the projected populations for these areas and the projected cattle pro­ duction appeared inconsistent. Based on the information available, there did not appear to be sufficient inconsis­ tencies to make adjustments in the cattle projections. In 1960, population per square mile exceeded 500 per­ sons in four counties; Wayne, Macomb, Oakland, and Genessee. Three of these sold a smaller percentage of the state's cattle sales in 1964 than in 1959 and are projected to con­ tinue to decline both on a percentage basis and in absolute number. Since Genessee's cattle sales increased during the 1959-64 period, population pressure did not appear sufficient to greatly influence the rate of growth in number of cattle marketed. However, due to the decline between 1949 and 1959, the county's cattle sales projections indicate a continued growth in absolute numbers but a slower rate than the state average. Thus, as a percent of state sales, they are ex­ pected to decline. Population projections to 1980 indicate only to other counties in the state are expected to approach the density 51 of Genessee county by 1980.^ and Kent (Grand Rapids). These two are Ingham (Lansing) Population per square mile in these two counties are projected to approach 549 and 594 respectively compared to Genessee's 1960 density of 583 per square mile. Cattle projections indicate that Kent county is expected to reduce its share of the state's cattle mar­ keting from 1.96 percent or 10,400 head in 1960 to 1.05 percent or 8,900 head in 1980. Ingham county, however, is projected to increase its share from 2.47 percent or 13,100 in 1960 to 3.34 percent of 28,400 by 1980. Although Ingham county's projection is admittedly a substantial increase, it was not believed to be sufficiently unrealistic to warrant an adjustment which would, of necessity, be based on little more than an arbitrary decision to reduce the projection by some percentage factor. As a result of this modest check, no adjustments were made in the cattle projections to account for population pressures. It appeared, from the data available, that in areas where population pressures were expected to be heavy between now and 1980, pressures were already sufficient to have influenced past trends and therefore influence the linear projections. Obviously, this does not prevent the possibility of population pressures being sufficient to re­ duce the rate of growth below the linear projections used Michigan State University, Project '80 Rural Michigan Now and in 1980 -- Highlights and~Sunroary of Project 186, Michigan State University Agricultural Experiment Station and Cooperative Extension Service, Research Report No. 37 (East Lansing: Michigan State University, 1966), p. 75. 52 but they did not appear to be sufficient to reverse the directions of the cattle marketing projections in any of the urban counties. Trends for each production area and projections to 1980/ are presented in Table 3.1. Type of Cattle Marketed: Dairy cattle have been an im­ portant source of cattle for Michigan slaughter plants. The number of dairy cows on farms declined from 715 thousand head in 1960 to 519 thousand in 1968 — thousand or 27 percent. a decline of 196 This decline is not a new trend but does appear to be accelerating. Numbers declined by 3 per­ cent in 1964/ 6 percent in 1965, 8 percent in 1966 and 7 percent in 1967.1 During the 1963 to 1967 period, the number of beef cows two years old or over averaged only 129 thousand or 20 per­ cent of the number of milk cows. However, the number in­ creased up to 1966 when an all-time high of 136 thousand head were estimated to be on Michigan farms. a decline of 20 thousand head has occurred. 2 Since 1966, It seesis likely that part of this decline is explained by a downturn in the cattle cycle that, according to one estimate was at a high in terms of number of cattle on farms January 1, 1965.3 The ^Michigan Crop Reporting Service, Michigan Agricultural Statistics (Lansing, Michigan Department of Agriculture and Statistical Reporting Service, U.S.D.A. Cooperating, 1967), p. 42. 2Ibid. , p. 42. 3Robert L. Rizek, "The Cattle Cycle," Livestock and Meat Statistics, United States Department of Agricu11ure, Economic Research Service, LMS No. 148 (Washington: U.S. Government Printing Office, March 1966), p. 26. Table 3.1. Number of Cattle Sold by Areas, and Percent of State Sales, 1949, 1954, 1959, and 1964 and Projection to 1980.1 1949 Area Michigan 1959 1964 19802 Number 1 of Number 1 of Number 8 of Number1% of Number18 of (thous) state (thous) state (thous) state (thous) state (thous) state 318.6 100.00 Districts Upper Penninsula Northwest Northeast West Central Central East Central Southwest Southern Southeast Counties West Central Lake Mason Muskegon Newaygo Oceana Central Clare Gladwin Gratiot Isabella Mecosta Midland Montcalm Osceola 1954 384.2 100.00 402.3 100.00 530.3 100.00 850.0 100.00 4.3 8.6 18.4 14.4 101.1 132.3 91.3 245.3 234.5 15.8 17.7 18.1 13.2 40.1 41.5 38.2 69.0 65.0 4.96 5.55 5.68 4.14 12.59 13.03 11.99 21.66 20.40 16.0 18.6 20.8 14.6 48.0 51.2 48.9 83.4 82.7 4.16 4.84 5.41 3.80 12.49 13.33 12.73 21.71 21.53 13.4 15.1 16.2 12.5 45.2 53.1 46.7 101.4 98.7 3.33 3.75 4.03 3.11 11.24 13.20 11.61 25.21 24.53 14.8 18.1 22.1 16.0 67.5 77.3 60.8 130.5 123.2 2.79 3.41 4.17 3.02 12.73 14.58 11.47 24.61 23.23 1.2 2.5 1.9 4.4 3.2 0.38 0.78 0.60 1.38 1.00 1.0 3.1 2.6 4.6 3.3 0.26 0.81 0.68 1.20 0.86 0.7 2.3 2.7 3.4 3.4 0.19 0.57 0.67 0.85 0.85 0.7 3.8 3.0 4.9 3.6 0.13 0.72 0.57 0.92 0.68 o.oa 4.5 5.0 2.6 3.5 o.ooa 0.53 0.58 0.31 0.41 6.1 4.1 8.0 6.2 3.4 2.3 5.3 4.7 1.91 1.29 2.51 1.95 1.07 0.72 1.66 1.48 6.6 4.4 9.7 8.8 4.5 2.8 6.7 4.5 1.72 1.15 2.52 2.29 1.17 0.73 1.74 1.17 4.2 2.5 11.1 8.7 4.4 3.2 6.8 4.3 1.04 0.62 2.76 2.16 1.09 0.80 1.69 1.07 4.5 5.7 15.8 17.1 5.2 5.2 8.7 5.3 0.85 1.07 2.99 3.22 0.98 0.98 1.64 1.00 o.oa 4.2 29.3 34.5 7.8 10.1 13.9 4.1 o.ooa 0.50 3.45 4.06 0.92 1.19 1.63 0.49 0.51 1.01 2.16 1.70 11.89 15.57 10.74 28.86 27.59 Table 3.1. (Continued) Area East Central Arenac Bay Huron Saginaw Sanilac Tuscola Southwest Allegan Berrien Cass Kalamazoo Kent Ottawa Van Buren South Barry Branch Calhoun Clinton Eaton Hillsdale Ingham Ionia Jackson St. Joseph Shiawassee 1949 1954 1959 1964 1980 Number I of Number t of Number 4 oF~ Number It o7~ Number It 67“ (thous) state (thous) state (thous)I state I(thous) state (thous)I state 2.1 3.1 11.8 6.3 12.3 5.9 0.66 0.97 3.70 1.98 3.86 1.85 2.5 2.6 15.8 8.0 14.2 8.1 0.65 0.68 4.11 2.08 3.70 2.11 3.1 4.6 17.0 6.5 14.8 7.1 0.77 1.14 4.23 1.62 3.68 1.76 3.4 4.3 28.8 9.4 21.3 10.1 0. 67 0. 81 5.43 1.77 4.02 1.90 6.4 7.6 57.4 11.7 34.2 15.4 0.76 0.89 6.76 1.37 4.02 1.82 7.5 3.2 3.7 5.8 8.3 5.4 4.3 2.35 1.00 1.16 1.82 2.61 1.69 1.35 10.0 5.0 4.9 7.5 8.9 6.6 6.0 2.60 1.30 1.28 1.95 2.32 1.72 1.56 8.8 3.7 6.3 9.4 7.2 6.7 4.6 2.19 0.92 1.57 2.34 1.79 1.67 1.14 12.8 5.3 7.5 10.9 10.4 7.9 6.0 2.41 1.00 1.41 2.06 1.96 1.49 1. 13 19.4 7.5 15.5 21.6 9.0 11.5 6.9 2.28 0.88 1.82 2.54 1.05 1.35 0.81 4.4 5.8 8.3 6.3 7.2 7.2 6.2 8.0 7.3 4.0 4.3 1.38 1.82 2.61 1.98 2.26 2.26 1.95 2.51 2.29 1.26 1.35 5.8 6.5 11.2 7.6 7.8 7.2 7.9 9.2 7.8 5.9 6.5 1.51 1.69 2.92 1.98 2.03 1.87 2.06 2.39 2.03 1.54 1.69 8.5 7.9 9.5 9.9 9.1 8.2 11.2 12.5 12.3 5.1 7.2 2.11 1.96 2.36 2.46 2.26 2.04 2.78 3.11 3.06 1.27 1.79 9.3 9.6 15.2 16.3 12.4 10.8 13.1 16.6 10.2 9.6 7.4 1.75 1.81 2.87 3.07 2.34 2.04 2.47 3.13 1.92 1.81 1.40 20.9 16.4 23.7 34.5 20.7 15.6 28.4 33.5 19.5 17.8 14.2 2.46 1.93 2.79 4.06 2.43 1.83 3.34 3.95 2.29 2.09 1.67 ui * Table 3.1 (Continued) 1319 1954 1959 1964 19802 Number T o T Number F o F Number 4 of Number 4 of Number 14 of (thous) state (thous) state (thous) state (thous) state (thous)1state Area Southeast Genessee Lapeer Lenawee Livingston Macomb Monroe Oakland St. Clair Washtenaw Wayne 5.7 7.6 13.0 4.0 4.5 5.8 6.2 7.1 9.7 1.4 1.79 2.39 4.08 1.26 1.41 1.82 1.96 2.23 3.04 0.44 6.8 8.8 21.0 6.5 4.7 6.0 7.7 8.5 11.3 1.4 a Indiana Dekalb Elkhart Kosciusko LaGrange LaPorte Marshall Noble St. Joseph Starke Steuben Defiance Fulton Henry Lucas Ottawa 1.78 2.29 5.47 1.69 1.22 1.56 2.00 2.21 2.94 0.36 6.6 10.6 30.0 7.6 4.5 8.3 4.7 10.1 15.0 1.3 1.64 2.63 7.46 1.89 1.12 2.06 1.17 2.51 3.73 0.32 9.8 11.8 38.7 9.2 4.1 12.0 6.1 13.6 16.8 1.1 1.85 2.23 7.30 1.73 0.77 2.26 1.15 2.56 3.17 0.21 15.2 1.78 19.7 2.32 96.2 11.32 20.1 2.37 1.9 0.22 23.3 2.74 1.0 0.11 25.1 2.96 31.9. 3.75 0.0 0.00 4.3 7.2 11.7 5.5 6.9 7.7 6.2 4.2 2.6 4.7 5.1 9.6 14.4 7.3 9.2 9.0 8.8 6.8 3.3 5.2 7.1 12.1 19.0 13.7 11.8 9.3 8.6 9.6 2.1 6.5 6.3 13.1 21.7 13.7 12.5 13.9 10.8 8.2 2.1 6.4 9.4 19.6 32.3 24.0 18.8 18.5 14.7 13.9 1.4 8.6 3.5 14.4 7.6 4.2 26.7 9.9 3.8 2.9 5.7 42.6 10.4 4.6 4.4 6.5 49.7 15.0 3.3 3.9 9.8 88.1 20.9 5.4 6.2 2.2 2.4 Ul vi 1 Table 3.1. (Continued) 1954 19802 1949 1964 1959 Number t of Number t of Number t of Number I t of Number It of (thous) state (thous) state (thous) state (thous)1state (thous)|state Area Ohio (con't.) Sandusky Williams Wood GRAND TOTAL4 ^Source: 5.8 6.6 11.6 9.9 7.8 18.0 14.1 10.7 24.4 12.0 15.8 24.3 20.7 23.9 39.6 433.7 546.1 619.0 769.5 1226.2 United States Department of Commerce, or Bureau of the Census, United States Census of Agirculture — Michigan, 1949, 1954, 1959, 1964. 2 Michigan production based on a linear projection of each area's production expressed as a percentage of the state's production. Projected percentages were then multiplied by the 850,000 head state projection from Michigan State University, Project *80 Rural Michigan Now and in 1980 — Livestock and Meat, Michigan Agricultural Experiment Station and Cooperative Extension Service Research Report No. 50, East Lansing: Michigan State University, 1966, p. 3. Projections indicated a negative figure and was thus set equal to zero. Projections indicated less than .005 percent and less than .5 thousand. u ^Indiana and Ohio production based on a linear projection of each area's 1949-1964 pro­ duction as reported by U.S. Bureau of Census, United States Census of Agriculture for the respective states. 4 Excludes Michigan's Upper Peninsula, columns may not add to total due to rounding. u 04 57 increase since 1950 has been considerable. The number of beef cows on Michigan farms in 1950 was only 39 thousand, compared to 166 thousand in 1967.^ Regression analysis of these two opposing trends, using data for the years 1950 to 1967 indicate an average annual decline in dairy cow numbers of over 11,500 and an annual increase in beef cow numbers of approximately 2,600. These trends are reflected in the Project '80 projections for beef 2 and dairy cows 3 on farms. In order to esti­ mate their influence on the production of cattle for slaugh­ ter the following assumptions were made: 1) The number of calves weaned will be 85 percent the number of cows on farms for both dairy and of beef herds. 2) A replacement rate of 25 percent for dairy herds and 2 0 percent for beef breeding stock. 3) All dairy steers will be fed. 4) All dairy heifers not used for replacements will be sold for veal. Michigan Department of Agriculture, Crop Reporting Serv­ ice, and U.S. Department of Agriculture, Statistical Report­ ing Service, Michigan Agricultural Statistics, Lansing: Michi­ gan Department of Agriculture, 1951, pT 28 and 1967, p. 42. 2 Michigan State University, Project *80 Rural Michigan Now and in 1980 -- Livestock and Me a t , Michigan State Univer­ sity Agricultural Experiment S t a t i o n a n d Cooperative Extension Service, Research Report No. 50 (East Lansing: Michigan State University 1966), p. 3. ^Michigan State University, Project '80 Rural Michigan Now and in 1980 -- The Dairy Industry, Michigan State Univer­ sity Agricultural Experiment S t a t i o n a n d Cooperative Extension Service, Research Report No. 45 (East Lansing: Michigan State University, 1966), p. 4. 58 5) All beef steers and heifers, not used for replace­ ments will be fed. 6) Project *80 projections of 350,000 head of beef cows and 450,000 head of dairy cows on farms January 1, 1980. 7) A linear projection of inshipments of feeder cattle based on the 1950 to 1966 period. 8) Project *80 projections of 850,000 head marketed in 1980. Using these assumptions, projections to 1980 of the number and percent of cattle by type were made and are summarized in Table 3.2. These totals in table 3.2 are comparable to the esti­ mates of 650 thousand fed plus nonfed steers and heifers and the 200 thousand cows and bulls which appear in Project '80.1 The significance of these estimates is the projected increase in the volume of fed cattle available for slaughter in Michigan and the corresponding decline in the importance of nonfed cattle. Michigan State University, Project *80 Rural Michigan Now and in 1980 --Livestock and Meat, Michigan State Unlver sity Agricultural Experiment Stationand Cooperative Exten­ sion Service, Research Report No. 50 (East Lansing: Michigan State University 1966), p. 3. 59 Table 3.2. Projections of Number and Percent of Cattle Marketed by Type, Michigan, 1980. Type Number Total all cattle 850,000 100 655,000 77 519,000 61 Beef steers and heifers 289,000 34 Dairy steers 230,000 27 136,000 16 Total non fed cattle 195,000 23 Cull dairy animals 119,000 14 76,000 9 Total fed cattle Instate production Inshipment of feeder cattle Cull beef animals Percent Beef Consumption Projections The first step in projecting beef consumption by areas was to specify points to be used as beef receiving points in the transportation estimates. erations were important. Two interrelated consid­ Since it is assumed that the packing plants will not be breaking carcasses but shipping carcass beef, the receiving points were selected to be representative of regional wholesale distributing points. This reduces the number of beef receiving points one need consider. This reasoning is tied to the idea of regional or urban areas that serve as a hub for retail and wholesale trade (i.e., the concept of trade centers). In the final selection of consumption centers, eleven were chosen and are shown in Figure 3.2. 60 r«Mtr MttSOUt 154-1 WONIMO. mmt.t MIMMf C M w ro fu [Hnw MIS SA U*[t ST, CLAM oak : amo MNNDMN MIJMMftXI WASHTENAW WAYNE CAiHO) H sr joscf’H LK M iff situs* IAKHJTI LENAWEEI SONMC TON ILUCAS tltM HMll scuiwa KEY I. 2 ■ 3. 4. T raverse C ity A lpena C ad iliar S ag i riaw Figure 3.2. 5. Grand Rapids 6. L ansing 7. D e tr o it 8. Kalanaxoo 9. Jackson 10. South Band 11. Toledo Outline of Beef Consumption Areas in Study. 61 The projection of consumption for each area in Michigan was developed from population and per capita consumption projections from Project *80 reports.^ this data. Table 3.2 presents It should be noted that these projections do not take into account differences in consumption among areas due to differences in income, place of residence, nationality and other factors that may influence consumption. For counties in Northern Indiana and Ohio that are in­ cluded in the study, the following procedures were used. First, state population projections were obtained from cur­ rent population reports of the United States Bureau of the Census. Second, the percent of the state's population residing in each county for the four census years, 1930, 1940, 1950, and 1960 were calculated. A linear regression equation for each county was calculated and the percentage projected to 1980. These percentages were then multiplied by the projected state population. Finally, the same per capita consumption as used in Michigan was applied to the population projections. Consumption estimates for each area are presented in Table 3.2. Estimation of Transportation Costs An important part of the models used to estimate the number, size and location of beef slaughter plants in this 1--------------------- Michigan State University, Project *80 Rural Michigan Now and in 1980 -- Highlights and Summary of Project *80, Michigan State University Agricultural Experiment Station and Cooperative Extension Service, Research Report No. 37 (East Lansing: Michigan State University, 1966), p. 75-6. 62 study is the transportation rates applicable to live cattle and carcass b e e f . Cattle must be assembled from the produc­ tion areas for slaughter and carcasses distributed to the consumption regions for breaking and distribution. Estimation of Highway Distances: In estimating trans­ portation costs between production areas, plant sites, and consumption centers, one must determine the distances be­ tween production areas and plant sites and between plant sites and consumption areas. With 65 production areas, 15 potential plant sites and 11 consumption areas, this in­ volves determining a total of 1140 distances. Although it would be possible to estimate these distances directly from a state highway map a different approach was taken. Heifner and Greig,^ had previously selected 435 points in Southern Michigan and estimated the relationship between highway mileage and air distances, and highway mileage and a rectangular coordinate system of point identification. Air mileage and rectangular distances proved to be equally satisfactory in predicting highway mileage for Michigan. Since one of the computer routines used later had already been programmed for use of rectangular distances, this method was selected. Using a common point of origin due west of the south­ west corner of the state, east-west and north-south ^Unpublished material made available by Richard G. Heifner and W.S. Greig, Assistant and Associate Professors, Agricultural Economics Department, Michigan State University, respectively. Table 3.3. Projected Human Population and Consumption of Beef by Areas, 1980. ■..... . ■ .... j Projected . Projected Beef Consumption Steer 6 Heifer-5 Cow 6 Bull4 Population Total^ (100 pounds) (100 pounds) (100 pounds) (number) Area 1. Traverse City 2. Alpena 93,900 89,205 135,850 23,475 112,680 35,750 171,600 75,810 19,950 95,760 3. Cadillac 143,000 79,800 4. Bay City 686,400 652,080 171,600 823,680 1,028,900 977,455 1,234,680 526,700 500,365 257,225 131,675 6,253,400 718,100 5,940,730 682,195 1,563,350 179,525 7,504,080 861,720 372,000 353,400 93,000 446,400 10. South Bend 782,100 742,995 195,525 938,520 11. Toledo 894,000 849,300 223,500 1,072,800 11,578,300 10,999,385 2,894,575 13,893,960 5. Grand Rapids 6. Lansing 7. Detroit 8. Kalamazoo 9. Jackson TOTAL 632,040 Michigan projections from: Michigan State University, Project '80 Rural Michigan Now and in 1980 -- Highlights and Summary of Project *80, Michigan State Univer­ sity Agricultural Experiment Station and Cooperative Extension Service, Research Report No. 37 (East Lansing: Michigan State University, 1966), p. 75. See text for South Bend and Toledo projection procedures. ^Ibid., p. 76. ^Based on an estimated per capita consumption of 95 pounds. 4 Based on an estimated per capita consumption of 25 pounds. 5 Based on an estimated per capita consumption of 120 pounds. 64 coordinates were measured on a map to the nearest millimeter and a conversion factor of 1.071 miles per millimeter used to estimate distances between points. Cattle Transportation Rate Function: The cattle trans­ portation rate function, as well as the beef transportation cost function discussed in the next section are based on current transportation technology. To the extent that new technology lowers these rates a given plant can assemble livestock from and distribute beef to larger areas without increasing total costs. This will tend to increase the size of plants and may have significant influence of the inter­ regional distribution of slaughtering. At least two possi­ bilities for decreasing costs appear to be worth mentioning. First, there seems to be some likelyhood that a second trailer behind a tractor-trailer rig may become legal in many states. Secondly, significant reductions in air freight rates appear to be a matter of time. However, the inability of making realistic estimates of these costs with present information made it necessary to restrict transportation estimates to present technology. To estimate the cost of transporting cattle, interviews to obtain actual rates were conducted with "for hire" truckers in Michigan. A list of truckers was obtained from the Michigan department of Agriculture. In order to help assure that truckers who moved a significant volume of live­ stock were contacted, only those who had three or more trucks licensed were contacted. Also, because of the 65 concentration of livestock in the lower peninsula and the relatively small volume of livestock that are transported from the Upper Peninsula to markets in the lower Peninsula, truckers from the U.P. were not contacted. Finally, since the list of truckers included auction markets and local sales yards, these were eliminated from consideration. The rationale was that livestock hauling is a sideline business with many of these firms and that much of it was for service of their regular customers rather than being an important part of their business activity. This elimination process left a list of thirty-eight truckers. Rates were obtained through telephone interviews with 32 of these truckers. Rates for both straight trucks and semi-trailer trucks were recorded. An estimate of the size of truck was obtained by asking the number of 1100 pound steers that make up a full load. In most cases, weight capacity and/or length of bed was also obtained. Although the desired rate structure for our purposes was on a hundred weight basis no attempt to force this on the truckers was made. In many cases the rates used were on a loaded mile basis. When this was the normal method of quoting rates they were recorded and later converted to a hundredweight basis. Also, for those who normally charged on a hundredweight basis, no forced step function was im­ posed. The interviewee was free to establish the bounds of each step. The rates quoted on a loaded mile basis were converted 66 to a rate per hundred pounds by dividing the rate per loaded mile by the capacity of the truck, measured in hundred weights, and multiplying by the median distance of 25 mile steps (12.5, 37.5, etc.). In a few cases, usually for short distances, rates were quoted on either a per load or per head basis. In these instances, the weight per head was assumed to be 1100 pounds and the capacity weight of the truck or the number of head making up a full load times 1100 pounds per head was used in estimating costs per hundredweight. Before running the regression analysis, the mean rate for each step was calculated and plotted against the median value of each step. This was accomplished to obtain some idea of the relationship that existed so that an appropriate functional form could be selected for the regression analysis. Based on this plot, a linear function was chosen. For use in this study, distances of less than 20 to 30 miles are unimportant since one of the assumptions of the models used is that costs for assembly of cattle within a production region does not vary between regions, and are therefore set equal to zero. Since the rates for semi- trailer trucks were lower for all distances above approxi­ mately 28 miles, only this rate function was used in esti­ mating transportation costs. The two regression equations obtained from the regres­ sion analysis were: 67 For straight: trucks: Y ■ 6.92332 + (2.28342) .29122X (.01671) R 2 ■ .8078 For semi-trucks: Y - 9.81571 + (1.21093) .18571X (.00717) R 2 - .8449 Where Y = cost in cents per hundred pounds live weight X * one-way mileage () - standard errors of the coefficients By dividing the equation through by the dressing percentage they can be converted to rates on a carcass weight equiva­ lent. Assuming a dressing percentage of 57 these equations become: For straight trucks: Y = 12.15098 + .51091X For semi-trucks: Y * 17.22054 + .32581X Where Y * cost in cents per hundred pounds carcass weight equivalent X “ one-way mileage It should be pointed out explicitly that the above cost does not include an estimate of the costs due to shrinkage of animal tissue, bruising or other damage to the livestock during transit. For the distances included in this study, tissue shrinkage was not felt to be a Major cost item and loss due to bruising or other damage is difficult to estimate and is thought to be more of a function of the loading and unloading facilities and care taken during the loading and unloading process than of distance traveled. Nevertheless it should be recognized that these costs are real and that adding these costs would increase the value of the intercept in the linear function, if not the slope. 68 Thus, the transportation cost function used may be assumed to be a slight underestimate of the transfer cost function. Beef Transportation Cost Function: A different approach was taken in estimating the meat transportation function. Since most of the carcass beef is transported by packerowned and operated truck fleets, a cost function seemed more appropriate. In a recent study by Kerchner the cost of transporting packaged milk by truck was estimated by syn­ thesizing the cost of operating a tractor-trailer unit with a payload capacity of 35,000 pounds of milk.* It was assumed that the primary use of a large refrigerated semi­ trailer for hauling packaged milk would be to haul milk from a processing plant to a central distribution center. 2 Like­ wise, in this study it is assumed that meat will be deliver­ ed from the plant to primary distribution centers, such as district warehouses. cass beef — It is further assumed that only car­ sides and quarters — would be hauled. All breaking is assumed to be accomplished by the wholesaler or retailer. Size of truck and refrigeration requirements in this study were judged to be similar enough to the equipment normally used to haul meat so that, with minor adjustments, cost estimates were believed to be appropriate for meat x--------------------- Orval Kerchner, Costs of Transporting Bulk and Pack­ aged Milk by Truck, United States Department of Agriculture, Marketing Research Report No. 791 (Washington: U.S. Govern­ ment Printing Office, 1967), p. 14. 2Ibid., p. 1. 69 hauling. An adjustment for weight of load seemed necessary. Johnson reported that the actual weight of beef carcasses hauled in refrigerated trailers with a 36,000 pound capacity ranged from 28,439 pounds to 32,024 pounds with an average weight of 30,041 pounds.^ Based on this study it was assumed that the weight of meat hauled by this size truck would average 30,000 pounds. Kerchner estimated costs per hundredweight for distances ranging from 5 miles to 1600 miles. 2 poses, distances up to 205 miles were used. For our pur­ Although a few potential distances for meat transportation in this study would be beyond this distance, Kerchaner's next step was 400 miles and involved the use of two drivers which seemed unnecessary for distances involved in this study. Kerchner*s estimated costs per hundredweight were multiplied by a factor of 1.1667 (35,000 * 30,000) to account for differences in average weight per load and a least squares regression analysis used to estimate the costdistance relationships. The following equation was obtained: Y « 7.0799 + .1813X (.2548) (.0023) R 2 - .9979 ------- x--------------------- H.D. Johnson, R.F. Guilfoy, and R.W. Penney, Transpor­ tation of Hanging Beef by Refrigerated Rail Cars and Piggy­ back Trailers, United States Department of Agriculture, Marketing Research Report No. 485 (Washington: U.S. Govern­ ment Printing Office, 1961), p. 22. 2 Orval Kerchner, Costs of Transporting Bulk and Pack­ aged Milk by Truck, Unitecl States Department of Agriculture Marketing Research Report No. 791 (Washington: U.S. Govern­ ment Printing Office, 1967), p. 18. 70 Where Y = cents per hundredweight of beef X * one-way mileage () * standard errors of the coefficients Selection of Plant Sites Several factors were considered in the selection of potential plant sites for inclusion in the models. The distribution of sited throughout the middle and southern portion of Michigan should be sufficient to include all major beef producing areas and major consumption areas. The three present major beef slaughtering areas of the state should be included to determine if they are represented in the final solution. The distribution of sites should also be sufficiently widespread to be sure that no marginal sites appear in the final solution. However, as indicated by French, a square market area tilted 45 degrees with the plant located in the center of the square minimizes the dis­ tribution (assembly) costs of a plant, given the rectangular road system which exists in Michigan.1 This being true, some potential sites on the borders of the area included in this study can be eliminated without fear of eliminating a potentially lower cost site. Because of their importance as consumption centers, two sites, Detroit, Michigan and Toledo, Ohio, both border sites, were included. It should be stressed, at this point, that the plant Benjamin C. French, "Some Considerations in Estimating Assembly Costs Functions for Agricultural Processing Opera­ tions," Journal of Farm Economics, Vol. 42 (No. 4, 1960), p. 771. --------------------------- 71 sites selected are not the only acceptable sites available but are chosen to be representative of an area surrounding the specified location. In most cases the sites included are sufficiently close so that each site represents a relatively small area, see Figure 3.3. Differences in wage rates, availability of land, zoning regulations, availabil­ ity and rates for water, electricity, and other utilities are considerations that must be evaluated in determining specific site selections within the area. The detailed study required for this is considered to be beyond the bounds of this study. The models and estimating procedures used in this study are sufficiently precise to indicate the areas in the state where slaughter activity should be concentrated, given the objective function of cost minimization, but are not suffi­ ciently precise to differentiate accurately between sites located within a given area. Selection of Out-of-Area Supply Point For this study it is assumed that the volume of slaugh­ ter in Michigan in 1980 will be a function of Michigan's production of cattle for slaughter. Therefore, all inship­ ments into Michigan to meet the projected excess demand for meat will be in the form of carcass beef. Trends developed in Chapter II provide the rationale for this assumption. The major argument against this assumption is the seasonal variability of livestock marketing. 72 ntsouc isu LAM IOSCEOLA iCLAflf re lWAt NASHTCNAW IWAVMK VAN B tlFl N r ST JOStfH LUCAS UKWffi Figure 3.3. MMil Potential Plant Sites in Study. 73 This variability is likely to force slaughter plants to import some livestock during months when Michigan marketings are low. In the development of the transhipment model it is necessary that total supply be equal to or greater than total demand. Since Michigan's projected production plus the production of the 18 out-of-state counties, will supply only 53 percent of the projected demand, it is necessary to select out-of-state areas from which the projected inship­ ments will originate. Since no estimates are presently available of the volume of inshipments of meat from various out-of-state points a different method of determining these points was necessary. Fortunately, a previous study provides a basis for selection. Crom presented a simulated interregional model of the cattle-meat economy using projected 1975 pro­ duction and demand conditions. Assuming slaughter capacity in each region was fully utilized his base solution mini­ mized livestock and meat transportation and slaughter labor costs. He also developed solutions involving various changes in the transportation rate structure, distribution of pro­ duction and consumption, and absences of slaughter capacity restrictions. The solution obtained by removal of slaughter capacity restriction is of special interest here because this solu­ tion provides the possibility of shifting slaughter capacity to minimize the combined transportation of livestock and 74 meat:, and slaughter labor costs. This solution provided a savings of $36.75 million or 17 percent: in transportation costs over -the base solution. An increase in labor costs of $1.8 million resulted in a net savings of $35 million annually.1 In -this solution, only one interregional ship­ ment of live cattle occurred. Thus, the solution amounted to the assumption of all cattle being slaughtered in the region where they were produced. Under this solution, all of the Michigan inshipment was beef and all originated in Iowa. Based on these results, it was assumed for this study that all out-of-area shipments of beef originated in Iowa. This chapter presents the methods used for estimating most of the data used in later chapters to obtain the num­ ber, size and location of beef slaughter plants within the study area that minimized the combined costs of slaughtering, and transporting live cattle and carcass beef. Projections of cattle marketings to 1980 indicate a total of 1.2 million head of cattle in the study area. Estimates of cattle mar­ ketings by areas for 1980 are presented in Table 3.1. Beef consumption projections totaled 1.4 billion pounds in 1980. Projections of beef consumption by areas were presented in Table 3.2. The estimated transportation rate for live cattle was: Richard Croro, Simulated Interregional Models of the Livestock-Meat Industry, UniteJ [1•18] or WD where: 1.33 W _ . LA WD " Detroit wage in 1968 W LA = Los Angeles wage in 1961 .248 - The percent (expressed as a decimal) increase in average hourly wages for all manufacturing indus­ tries in Los Angeles between April 1961^ and April 19684 Samuel H . L o g a n and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report N o . 260 (Berkeley: California Agricultural Experiment Station, December 1962), p. 5 0 . 2U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings (Washington: U.S. Government Printing Office, June 1961), Vol. 7, No. 12, p. 94. 3Ibid., June 1961, p. 39. Ibid., June 1968, p. 94. 88 .509 = The ratio of the percent change in average wages between April, 19611 and April, 19682 in the meat packing industry in the U.S. to the percent change in average wages for all manufacturing for the same period.3*4 1.18 - The ratio of average Detroit wages in all manu­ facturing industries in April 19685 to the aver­ age Los Angeles wages for the same industries.® For labor requirements and salaries applied to each size plant see Appendix Table 4. In addition to wages, labor costs include costs for vacation pay, sick leave, group health and welfare plans, and pensions and retirement funds for labor covered by union contracts. It is assumed that any employer costs associated with these items for salaried employees are in­ cluded in their salary. Social security, taxes and unem­ ployment insurance are included in miscellaneous supplies and services. Guidelines for estimating these costs were 7 obtained from a union contract. According to union repre­ sentatives, these items are standard across all contracts in Michigan. Vacation time varies with the length of employment as follows: 1Ibid., June 1961, P- 33. 2Ibid., June 1968, P- 82-3. 3Ibid., June 1961, P. 30. 4Ibid., June 1968, P- 78. 5Ibid., June 1968, P- 95. 6Ibid., June 1968, P- 94 . 7Amalgamated Meat Cutters and Butcher-Workmen of North America, 1967-1970 Agreement Great Markwesten Packing Company with Amalgamated Meat Cutters and Butcher-frorkmen of North America Local 630 AFL - C.I.0-, p p . 13-21. 89 One year or more of service - 40 hours (1 week) Three years or more of service - 80 hours (2 weeks) Ten years or more of service -* 120 hours (3 weeks) Fifteen years or more of service - 160 hours (4 weeks)1 Two weeks jf paid vacation per employee per year was used in this study. Each employee received 32 hours (4 days) sick leave per year with pay at the regular hourly rate. This leave is cumulative at its entirety and upon completion of the contract period must be paid for by the employer. 2 Employer contributions to the Union's group health and welfare fund is $120 per employee per year.1 For the pension and retirement fund, the employer must contribute a total of $208 per employee per year effective June 1, 1968.* For a detailed breakdown of total labor requirements and cost per plant by operation, see Appendix Tables 1, 2, 3 and 4. Data in Table 4.1 summarizes these costs for each size plant. Equipment: Equipment requirements for each synthesized plant are specified in the Logan and King study.^ However, 1Ibld., p. 15. 2Ibid., p. 13. 3Ibid., p. 19. 4Ibid., p. 21. 5Sanuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research feeport No. 260 (Berkeley: California Agricultural Experiment Station, December 1962) f p. 129-30. 90 at the request: of the manufacturers, only total equipment costs are published.^ Contacts with manufacturers indicated that no major changes in technology since 1961, had occured, thus no changes in equipment requirements were made. Recent equipment cost estimates from a manufacturer were obtained from Purdue University. 2 The costs obtained were total costs by size of plant for kill floor, refrigeration, and office equipment. The prices quoted were f.o.b. Chicago prices and excluded taxes and installation costs. Through contacts with industry personnel involved in the contracting of equipment installation, an "average" figure used in estimating installation costs of 30 to 33 percent of the equipment cost was obtained. percentage was used in this study. equipment prices added. a 4 percent The larger To the f.o.b. Chicago Michigan sales tax was also No attempt was made to estimate freight costs due to the minor significance of this cost relative to the total costs of the equipment. Total investments in equip­ ment, including tax and installation may be found in Table 4.2. In order to estimate the annual cost of equipment, it would be desirable to estimate the average salvage value and average length of life for each piece of equipment. The salvage value could then be deducted from the purchase price 1Ibid., p. 72. Through correspondence with Mr. Terry Roe, Graduate Assistant, Agricultural Economics Department, Purdue Univer­ sity, West Lafayette, Indiana. 2 91 Table 4.2. Total and Annual Equipment Costs by Size of Plant, Michigan, 1968. Balance for Plant Size in Average Annual Cost of Salvage Depre­ No. of head Length Depre­ Value per hour Equipment ciation of Life ciation (dollars) (dollars)(dollars) (years) (dollars! 20 112,600 8,600 107,500 12. 5 8,600 40 167,900 13,000 160,200 12 .0 13,400 60 268,800 20,700 256,300 12 .3 20,800 75 308,400 23,700 294,100 12.3 23,900 120 480,800 37,000 458,500 12 .8 35,820 Source: Cost of Equipment - Allbright-Nell Co., Chicago, Illinois. Includes f.o.b. plant price plus installation cost estimated to be 33 percent of kill floor and refrigera­ tion equipment cost for each plant. In­ stallation estimation procedure obtained from Omaha Manufacturing and Engineering Company, Omaha, Nebraska. Salvage Value - 10 percent of equipment cost, ex­ cluding installation cost and sales tax. Balance for Depreciation - Cost of equipment plus 4 percent sales tax, plus installation cost minus salvage value. Average Length of Life - Calculated from Logan and King, see text for procedure. Annual Depreciation - Balance for depreciation divided by average length of life. All figures rounded to nearest $100. 92 of -the equipment: and -the remaining depreciable balance depreciated over the life of the equipment. Due to the lack of detailed coat data on each piece of equipment, this approach was not possible. of Logan and King was relied upon. Again, the work The annual depreciation for equipment reported by Logan and King for each plant was divided into the total balance to be depreciated.^ This yielded an "average" length of life for the equipment speci­ fied for each plant. Also, for each size plant, the salvage value was assumed to be 10 percent of the equipment cost excluding installation cost. Using these two sets of figures - average length of life for the equipment and salvage value - annual deprecia­ tion costs for equipment for each plant was estimated. Estimates are recorded in Table 4.2. Building, Corrals and Parking A r e a : ing cost data from Logan and King California build- 2 was adjusted to Michigan 3 prices in 1968 by using data from Architectural Record. Historical building costs for all building types are com­ pared over time for 21 major cities in the United States in­ cluding Detroit and Los Angeles. Each city's index is based 1--------------------- Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 260 (Berkeley: California Agricultural Experiment Station, December 1962), p. 72. 2Ibid., p. 75. 3 W.F. Dodge, Cooperation, "Building Cost Indexes and Indications," Architectural Record, Vol. 143, pt. 1 (March 1968), p. 89. 93 on 1941 averages for -that: city, so direct comparisons of costs among cities based on the cost indexes are not pos­ sible. However, beginning in March, 1963, a cost differen­ tial which can be used to compare costs between cities is published. Logan and King estimated building costs from a pub­ lished meat industry report (source not given) and verified these costs for the Los Angeles area through discussions with architects and industrial engineers in the Los Angeles area.1 In order to adjust these costs to current prices, they were multiplied by 113 percent, the increase suggested by the Los Angeles indexes published in Architectural Record. 2 Secondly, costs were adjusted to Detroit prices by multiplying current Los Angeles costs by 111 percent, based on cost differentials for March, 1968 from Architec­ tural Record.^ Building and corral requirements and costs, including a 5 percent architectural fee, are presented in Table 4.3. Although Logan and King did not include parking area requirements in their cost estimates, they are estimated for this study. For details on space requirements for ----- T---------------Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 260 (Berkeley: California Agricultural Experiment Station, December 1962), p. 59. 2 W.F. Dodge, Cooperation, Building Cost Indexes and Indications," Architectural Record, Vol. 143, pt. 1 (March 1968), p. 89. 3Ibid. Table 4.3* Building,Corral and Parking Area Requirements and Costs by Size of Plant, Michigan, 1968. Plant Size in No. of head per hour Building Require­ ment (sq.ft.) Corrals (sq.ft.) Corral Gates (No.) Length of Fencing (feet) Parking Require­ Total1 ment Cost (sq.ft.) (dollars) Depreciation per year2 (dollars) 20 10,111 9,313 34 1,107 12,580 243,000 9,720 40 19,367 17,813 68 2,037 23,800 380,000 15,200 60 27,295 26,313 102 2,977 33,320 549,000 21,960 75 31,591 32,813 128 3,687 37,740 644,000 25,760 120 46,852 51,913 204 5,777 56,780 978,000 39,120 ^See text for procedures on cost estimates. Total cost excludes land costs which are included in another section. Cost rounded to nearest $1,000. 2 Depreciation assumes a 25 year life and zero salvage value. 25 years. Total cost divided by Source: All requirements taken from Samuel H. Logan and Gordon A. King. Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 260 (Berkeley: California Agricultural Experiment Station, December 1962), pp. 62-4. 95 parking the reader is referred to the next section on land. Total parking area requirement are listed in Table 4.3 for completeness. An estimated cost of 32 cents per square foot of paving was obtained from contractors in Lansing, Michigan. Total costs for parking are included in the total cost figure by size of plant in Table 4.3. The annual costs for improvements were estimated by assuming a 25 year life (a figure commonly used in the in­ dustry) , a straight line depreciation policy, and zero salvage value.1 Annual depreciation costs may be found in Table 4.3. Land: Land requirements were estimated by adding to­ gether building, corrals and parking area requirements, and are listed in Table 4.4. Building and corral requirements were taken from Logan and King. 2 Parking area requirements were estimated by assuming a parking space for each employee plus 10 percent for visitors and business associates. Re­ quirements per space were based on 9 by 18 foot spaces and 24 foot roadways. In addition to the roadway between park­ ing lanes, a 24 by 60 foot roadway for every 20 parking spaces was added for access roads. The resulting 342 square feet per space was rounded to 3 40 square feet. Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 260 (Berkeley: California Agricultural Experiment Station, December 1962), p. 74. ^Ibid., p . 67. 96 Table 4.4. Land Requirements and Costs by Size of Plant, Michigan, 1968. Land Requirements Plant size in Building No. of head per hour Area Land Cost Total Per Corral Parking Land Area Area s q .ft . Total Area feet------------ ---dollars--- 20 10,111 9,313 12,580 32,004 .60 19,202 40 19,367 17,813 23,800 60,980 o VO • 36,588 60 27,295 26,313 33,320 86,928 .55 47,810 75 31,591 32,813 37,740 102,144 .55 56,179 120 46,852 51,913 56,780 155,545 .50 77,772 Source: Building and corral requirements from Smauel H. Logan and Gordon A. King. Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 2^6 {Berkeley: California Agricultural Experiment Station, December 1962), p. 67. Parking area requirements based on space for 110 percent of the number of employees and 340 square feet per space. Costs per square foot estimated from discussions with Ingham County, Michigan tax equilization director. 97 Land costs were estimated from information obtained from the Ingham County, Michigan tax equilization director. Land was assumed to be industrial land adjacent to a major urban area (Detroit excluded) with all utilities provided to the site. Minimum highway frontage and no rail siding requirements were also assumed. Based on this description, a range of 35 to 60 cents per square foot was obtained. One of the major variables in the cost was the size of the tract, with small tracts commanding a higher price. For this reason, the cost per square foot was assumed to vary from 50 to 60 cents per square foot depending on size. This variation, although admittedly arbitrary, appeared to be more realistic than a constant cost figure. Land cost esti­ mates may be found in Table 4.4. Utilities: Annual utility requirements were assumed to be the same as reported by Logan and King.^ These are reported in Table 4.5 through 4.8. Cost estimates, reported in Tables 4.5 through 4.8, were calculated from rate schedules obtained from a major Michigan utility company or from the city of Lansing. The rate schedules used are included as footnotes to the tables and will not be repeated in the text. Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 2 60 (Berkeley: California Agricultural Experiment Station, December 1962), pp. 80-88. Table 4.5. Annual Electrical Reguirements and Costs by Size Plant, Michigan, 1968. Average Billing Total Plant size Yearly Monthly Demand Monthly Monthly Monthly Demand Energy Electrical Electrical in head Electrical per Reguirements Requirements Month per hour Charge Charge Cost --------- ---------- -dollars-----------kwh---------kw 505 631 741,118 61,760 1,136 20 247 40 60 1,325,052 75 2,344,991 120 3,660,790 1,908,987 110,421 159,082 195,416 305,066 442 636 782 1,220 823 1,107 1,069 1,507 1,895 1,319 1,954 1,827 3,146 2,842 4,796 2,614 Total Yearly Electrical Cost 13,632 22,840 31,368 37,752 57,552 Source: Electrical requirements obtained from Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 260 (Berkeley: California Agricultural Experiment Station, December 1962), p. 84. Billing demand estimated to be 4 k.w. for every 1,000 kwh, from Logan and King, Economies of Scale in Beef Slaughter Plants, p. 83. Electrical rates obtained from Consumers Power Company, Jackson Michigan. Commer­ cial and Industrial Primary Service Contract D was used. Rates were effective on or after April 27, 1967. The following rate schedule was applied: Demand charge: Energy charge: 2.55 per kw for the billing demand 1.70 per kw for the billing demand 1.45 per kw for the billing demand 1.30 per kw for the billing demand 1.20 per kw for all billing demand first 100 kw of next 300 kw of next 1600 kw of next 18,000 kw of over 20,000 kw of 1.05$ per kwhfor the first 50,000 kwh .90$ per kwhfor the next 180 kwh per kw of billing demand .75$ per kwhfor the next 1,000,000 kwh's .68$ per kwhfor the next 1,500,000 kwh’s .60$ per kwhfor the excess Table 4.6. Plant size in head per hour Annual Water Requirements and Water and Sewage Costs by Size of Plant, Michigan, 1968. Water Requirements Annually Monthly (100 cu.ft.) (100 cu.ft.) Monthly water costs Gross Net (dollars) (dollars) Annual Net Annual Net Water costs Sewage costs (dollars) (dollars) 20 40 1,140 2,281 13,684 186 167 2,004 1,503 27,367 369 332 3,984 2,988 60 3,421 496 619 4,464 4,272 551 688 5,952 75 41,051 51,268 7,428 5,571 120 6,842 82,102 1,099 989 11,868 8,901 Source: Water requirements from Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report Bo. 260 (Berkeley: California Agricultural Experiment Station, December 1962), p. 85. Requirements are 36.2 cubic feet per head slaughtered. Rates obtained from Board of Water and Light, Lansing, Michigan. Rates effective December 1, 1960. Rates obtained were as follows: 40 cents per 100cu.ft. for the first 500 cu.ft. used per month. 20 cents per100 cu.ft. for the next 4500 cu.ft. used per month. 16 cents per100 cu.ft. for all over 5,000 cu.ft. used per month. A minimum charge of $1.00 per month plus the above demand charge is included in the monthly gross cost. Net cost equals 90 percent of gross. Annual requirements and costs are 12 times the monthly costs. Sewage costs were obtained from Article II, Rates and Charges for City Services Sec. 27-33, City of Lansing, Michigan. The rate is 75 percent of the net water bill. 100 Table 4.7. Annual Natural Gaa Requirements and Costs by Size of Plant:, Michigan, 1968. Plant size in head per hour 20 40 60 75 120 Monthly Gas Requirements (cu. ft.) 222,600 342,720 443,520 524,160 806,400 Costs Monthly (dollars) 178 271 349 411 629 Annual (dollars) 2,136 3,252 4 ,188 4,932 7,548 Source: Requirements from Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. £60 (Berkeley: California Agricultural Experiment Station, December 1962), p. 88. Rates from Consumers Power Company, General Commer­ cial and Industrial Service (open or3Ter rate "B**) . This rate was specified as follows: Commodi ty Charge: 82.60 per month which shall include 300 cu. ft. 15.30$ per 100 cu.ft. for the next 1,700 cu.ft. 10.50$ per 100 cu.ft. for the next 10,000 cu.ft. 7.73$ per 100 cu.ft. for all over 12,000 cu.ft. Table 4.8. Total Utility Costs by Size of Plant, Michigan, 1968. Plant size in head per hour 20 40 60 75 120 Source: Electricity Water 13,632 2,004 22,740 3,984 31,368 5,952 37,752 7,428 57,552 11,868 From Tables 4.5 through 4.7. Sewage 1,503 2,988 4, 464 5,571 8,901 Natural Gas 2,136 3,252 4,188 4,932 7,548 Total 19,275 32,964 45,972 55,683 85,869 101 Interest: Interest on investments in land, buildings, and other improvements, and equipment represents an impor­ tant cost to firms even if internal sources of financing are used due to the interest foregone on the money invested. For this study, an annual rate of interest of 6 percent was used. This rate was applied to the initial investment in land and to the total salvage value of the equipment. For investments in depreciable items including buildings, other improvements, and depreciable balance of equipment, the average outstanding value of the property was assumed to be half of the depreciable balance and was used as the base to which the interest rate was applied. Annual interest costs are found in Table 4.9. Property Taxes; Taxes on land, improvements, inventory and equipment in Michigan are established by school districts and vary considerably among districts. From discussions with Ingham county's tax equilization director, a rate of $43 per $1000 of assessed value was used. Assessed value was set at 50 percent of the current market price. For land and salvage value of equipment, both nondepre­ ciable items, the full tax rate was applied to 50 percent of the initial cost of the items. However, for depreciable improvements and depreciable balance of equipment, the above tax rate was applied to half the average outstanding non­ depreciated value. Assuming a straight line depreciating policy, this means the tax rate was applied to 25 percent of the depreciable balance. This procedure yields an Table 4.9. Interest on Investments by Size of Plant, Michigan, 1968. Plant Size in No. of Head per Hr. Average Investments Improvements Equipment Land Salvage Value of Equipment Interest on Average Total , Investments Investment per Year^ 20 121,500 53,750 19,202 8,600 203,100 12,200 40 190,000 80,000 36,588 319,700 19,200 60 274,500 120,150 47,810 13,000 20,700 471,200 28,300 75 322,000 147,050 56,179 548,900 120 489,000 229,250 77,772 23,700 37,000 32,900 50,000 Source: 833,000 Rounded to nearest $100. Improvements - 50 percent of total cost from Table 4.3. Equipment - 50 percent of depreciable balance from Table 4.2. Land - Total land cost from Table 4.4. Salvage value - Table 4.2. Average Total Investment - sum of columns 1-4. Interest on Investment - 6 percent of average total investment. 103 estimate of the average tax paid on depreciable improve­ ments and equipment. An estimate of taxes on inventories was not inlcuded. The yearly tax cost based on these assumptions and rates is given in Table 4.10. Insurance: Insurance on buildings, equipment and in­ ventory of cattle and beef are normally carried by most packing plants. An attempt was made to obtain an estimate of this cost from a major insurance company in Michigan. Building and equipment investments and inventory estimates by size of plant were furnished to the company and they agreed to furnish the estimates. However, even after follow- ups were made, no estimates were obtained. Since the cost of this item in other studies has been less than half of one percent of the total, it was decided to increase the cost estimates from Logan and King by an arbitrary 20 percent. This is to reflect increases in building and equipment costs and probably increase in rates since 1961. It should be noted that the rates used by Logan and King do not include insurance on inventory. The costs used by size of plant are as follows: Plant Size in head per hour Total Annual Insurance Cost 20 $1818 40 2738 60 4150 75 4826 120 7205 Table 4.10. Property Tax Costs by Size of Plant, Michigan, 1968. Average Average Assessed Assessed Assessed Plant size in Assessed Improvement Salvage Equipment No. of head per hour Value Land Value Value Value 20 9,601 60,750 4,300 26,875 Total Assessed Valuer101,500 Annual Tax 2 Cost 4,364 18,294 95,000 6,500 40,005 159,800 6,871 137,250 10,350 64,075 235,600 75 23,905 28,080 161,000 73,525 274,500 120 38,886 244,500 11,850 18,500 10,131 11,804 114,625 416,500 17,910 40 60 Rounded to the nearest $100. 2 Tax rate is $43 per $1000 assessed value. Source: Assessed land value - 50 percent of total from Table 4.4. Assessed improvement value - 25 percent of total cost from Table 4.3, i.e., 50 percent of half the depreciable balance. Assessed salvage value - 50 percent of salvage value of equipment from Table 4.2. Assessed equipment value - 25 percent of balance for depreciation. Total assess value - sum of col. 2-5. 105 Miscellaneous Supplies and Services;^ This category of costs includes eight, sub-groups that together make up a significant portion of the total cost of operating a beef slaughter plant. Considerable variability in most of these costs would be expected among firms. Nevertheless, the im­ portance of the costs make it necessary to include them in the totals. A brief discussion of each cost included in this cate­ gory follows. Repair and Maintenance includes both fixed and variable costs for repair and maintenance to all buildings and equip­ ment. As used here, the fixed component refers to costs that would be incurred even if the plant were not operating. Variable costs refers to costs that result from use of the facilities and vary with the intensity of use. is made to estimate these separately. No attempt According to Logan and King "...the plant is generally operating at some level the year around and the firm has little means of estimating how much of the expense results because of the time factor and how much results from the wear and use factor. 2 Future institutional requirements may force firms to install anti-pollution devices to reduce air pollution. Also in many areas waste disposal requirements fox large plants may require plant investments in disposal systems which would likely increase costs for larger firms with requirements that exceed the capacity of local municipalities. This potential cost is not estimated in this study. 2 Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report N o . 260 (Berkeley: California Agricultural Experiment Station, December 1962), p. 89. 106 Killing and supply costs include items related to the killing operation itself. Such things as shrouds, soap, shroud pins, neck skewers, shroud laundry, ink, and towels are included. Logan and King, suggest that the relatively low coefficient of determination obtained in their estimate of this item is due to the lack of standard accounting procedures in defining killing costs.* Office costs include dues and subscriptions to maga­ zines and, trade journals, miscellaneous supplies such as pencils, tags, postage, auditing, and credit expenses, and service to office machines. Investment in office equipment is included in equipment cost estimates. Social security, unemployment insurance and state licenses represent another sub-group in this category of costs. 2 The present rate of employer contribution to social security is 4.4 percent of an employee's wages up to a maxi­ mum of $4 800. The maximum contribution of $211 was applied 3 to the total number of workers employed by each plant. The unemployment insurance in Michigan varies among firms depending on their historical record of employment, and past contributions. The more stable their employment record, the lower the rate. The contribution rate ranges 1Ibid., p. 93^ Workmen's compensation insurance of approximately 5 percent of a firm's annual payroll was not included in the estimates. 3 This estimate has now increased to 4.8 percent of the first $7800; an increase of $163 per employee. 2 107 from 0.0 percent to 4.6 percent for 196 4 and subsequent: years.^ In the absence of information pertaining specifically to the experience of present meat slaughtering firms in Michigan, the maximum rate applicable to new employers was used in this study. According to the Michigan Employment Security Commission, "A newly liable employer --- pays con­ tributions at a rate which cannot exceed 2.7 percent for the first four years.** 2 Also, the rate applies only to the first $3600 in wages paid to each employee during a calendar year.3 Thus, for this study, $97 (2.7 percent of $3600) per employee was used. In addition to the above items, the state of Michigan requires all slaughter plants to pay a license based on their volume of operation. Currently, any plant slaughtering over 10,000 animals per year must pay a flat fee of $1,000 per ye a r . Telephone expenses are self explanatory. For a firm of this type, they often represent a significant cost item and will vary with the size of the firm's supply and market area, as well as volume of slaughter. A linear function regressed against yearly slaughter was estimated by Logan and King, (see Table 4.11). Michigan Employment Security Commission, Employer *s Handbook, (Lansing: Michigan Department of Labor, 1967), pi 12. 2Ibid., p. 13. 3Ibid., p. 9. Table 4.11. Estimating Functions and Cost Estimates for Miscellaneous Supplies and Services, Michigan, 1968. Logan and King Estimates* Dependent variable r Repair and Maintenance - Constant terra Regression* coefficient Michigan Estimates Constant term Regression* coefficient .339 .114 0 .356 7,361 .120 .051 Killing supplies .505 $7,010 Office supplies .883 .049 3,740 Taxes and Licenses .987 $3,561 $2,084 .299 1,000 Telephone Delivery and Selling .9412 $1,126 $8,032 .269 1,126 .269 .212 8,435 .223 .781 2 3084 Feed - .100 0 .100 Buying - .050 0 .052 Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 266 (Berkeley: California Agricultural Experiment Station, December 1962), p. 90. 2 Except where noted obtained by multiplying Logan's and King's estimates by 1.05 which represents the increase in prices of industrial commodities based on the average wholesale price indexes for 1961 and 1967, U.S. Department of Labor, Bureau of Labor Statistics, Wholesale Price Indexes (Washington: U.S. Government Printing Office, September 1962, Jan. 1968). 3 Regression coefficients are dollars per head of annual slaughter except where noted. 4 Social security unemployment insurance and state license. cient is per employee. Regression coeffi­ 109 Delivery and selling costs are limited to supplies such as twine, butcher paper, tags, ink, and laundry of drivers* coats. Truck transfer costs and labor costs for sellers are estimated elsewhere. Feed costs for animals in the holding pens were esti­ mated from plants that did not have cattle feeding opera­ tions . Buying costs include all nonsalary buying costs. One would expect a large variability of this factor for plants of the same size due to differences in the geographic area of their supply, the mix of marketing outlets used, the variability of seasonal supply in the vicinity of the plant, and many other factors. Also, data on these buying cost items are not easily obtained. The average cost for the observations obtained were used by Logan and King (see Tables 4.11 and 4.12). Each of the above eight cost items were considered separately in deciding how to adjust the costs for current Michigan conditions. It was decided that an appropriate procedure would be to inflate California's estimates by using the average annual 1961 1 and 1967 2 wholesale price index for industrial commodities. However, three items were not adjusted by this procedure, for these the following pro­ cedures were used. U.S. Department of Labor, Bureau of Labor Statistics, Wholesale Price Indexes (Washington: U.S. Government Printing Office, Sept. 1962), p. 4. 2Ibid., Jan. 1968, p. 5. Table 4.12. Estimated Costs for Miscellaneous Supplies and Services by Size of Plant, Michigan, 1968. Plant size Repair in No. of and head per Mainten­ Killing Office hour Supplies Supplies ance Soc. Sec. Delivery Unemploy­ ment and and License Telephone Selling Feed Buying i 13,457 11,897 5,668 ]1,164 11,294 16,864 3,780 1,966 40 26,914 16,433 7,596 20,712 21,462 25,284 7,560 3,931 60 40,370 20,969 9,523 27,412 31,631 33,723 11,340 5,897 75 50,418 24,356 10,963 31,108 39,223 40,017 14,162 7,364 120 80,741 34,577 15,307 46,816 62,135 59,011 22,680 11,794 Source: See text for procedures and Table 4.11 for estimating equations. no 20 Ill For telephone service, the same cost figure was used. It was assumed that although rates may have changed signi­ ficantly , any rate difference for long distance calls would be overshadowed by differences in distances of calls, and number of calls made between firms. Since no procedure for estimating these latter disturbances in the estimating pro­ cedure seemed feasible, no change was made in telephone costs. Feed costs for animals in holding pens represent a very small part of the total cost of operation, accounting for less than 7 percent of the miscellaneous supplies and serv­ ices category. Thus, no attempt to estimate these costs directly was made. Feed prices exhibit considerable geogra­ phic and seasonal variability as well as variability among years. Finally, since Logan and King did not present suffi­ cient detail to estimate the type of feed generally used in California, or more importantly, the prices used, it is impossible to adjust differences in this cost item. As a result of these factors, feed costs were assumed to be identical to Logan and King*s estimate (see Tables 4.11 and 4.12). The third item in this category adjusted separately was costs for taxes and licenses. In this study only social security and unemployment taxes and state licenses, were included. State laws that imposed state taxes also make the taxing of slaughter plants by local governmental units illegal. This does not, of course, pertain to property taxes 112 covered elsewhere. Data in Table 4.11 summarizes the stimating equations used. Total cost estimates for all eight items by size of plant are listed in Table 4.12. Total C o s t : Total and average annual costs by size of plant are presented in Table 4.13. Economies of size are significant throughout the range of plant sizes considered. Average costs declined from $11.34 per head in the smallest plant to $8.85 per head in the largest plant. Savings in labor costs were the most significant cost item contributing to lower costs as plant size increased. Labor costs de­ clined from $7.84 per head in the smallest to $6.34 per head in the largest plant. The reduction of $1.50 in labor costs per head accounted for 60 percent of the total reduction of $2.49 per head as the size of plant increased from 60 to 120 head per hour. No category of costs showed dis-economies to size within the range studied. Labor accounted for about 70 percent of total annual costs (Table 4.13). The variation was from a low of 69 per­ cent for the smallest plant to 73 percent for the 60 head per hour plant. Labor costs for the largest plant accounted for 72 percent of the total. These are slightly higher than those presented in Logan and King. ranged from 67 to 70 percent.^ Their percentages This difference reflects ^Samuel H. Logan and Gordon A. King, Economies of Scale in Beef Slaughter Plants, Giannini Foundation Research Report No. 266 (Berkeley: California Agricultural Experiment Station, December 1962), p. 102. Table 4.13. Total Annual Cost, Cost per Head and Cost as a Percent of Total Cost for Beef Slaughter Plant Operations by Type of Cost and by Size of Plant, Michigan, 1968. Plant Size in Head Per Hour Labor 20 40 60 75 120 20 40 60 75 120 20 40 60 75 120 Source: 296,552 565,580 829,124 973,184 1,438,410 7.84 7.48 7.31 6.87 6.34 69.18 71.97 72.65 72.32 71.66 Depreciation Misc. Improve-j Equip­ Property Supplies ments 1ment Interest tax Utilities Insurance 6 Serv. Cost in Dollars 9,720 8,600 15,200 13,400 21,960 20,800 25,760 23,900 39,120 35,820 12,200 19,200 28,300 32,900 50,000 4,364 6,871 10,131 11,804 17,910 428,649 785,845 1,141,197 1,345,668 2,007,395 1,818 2,738 4,150 4,826 7,205 76,090 129,892 180,865 217,611 333,061 0.26 0.20 0.19 0.18 0.17 Cost per Head in Dollars 0.23 0.12 0.32 0.51 0.44 0.18 0.25 0.09 0.41 0.18 0.25 0.09 0.17 0.23 0.39 0.08 0.16 0.22 0.08 0.38 0.05 0.04 0.04 0.03 0.03 2.01 1.72 1.59 1.54 1.47 11.34 10.40 10.06 9.49 8,85 2.27 1.93 1.92 1.91 1.95 Cost as a Percent of Total 1.02 2.01 4.50 2.85 1.72 2.44 0.87 4.20 1.82 2.48 0.89 4.03 1.78 2.45 0.88 4.14 1.78 4.28 2.49 0.89 0.42 0.35 0.36 0.36 0.34 17.75 16.53 15.85 16.17 16.60 100.00 100.00 100.00 100.00 100.00 Property Tax: Table 4.10. Utilities: Table 4.8. Insurance: Page 103. Misc. Supplies & Services: Table 4.12. 19,275 39,964 45,972 55,683 85,869 Total Annual Cost Property Tax: Table 4-10. Utilities: Table 4-8. Insurance: Page 106. Misc. Supplies & Services: Table 4-12. 114 -the relatively greater increase in labor costs compared to other items since the Logan and King study was completed. The following total cost function was obtained through linear regression analysis of the cost data: Y = $153,895 (37,530) + $8.2982X (.2774) whe r e : Y * total annual costs and X ** number of head slaughtered annually () * standard error of the coefficients R 2 = .9955 In order to evaluate the above estimating equation it was used to estimate the expected cost in Michigan plants that had been previously studied by Wissman.1 Wissman estimated the total in-plant cost of slaughter­ ing beef for three plants varying in size from an annual slaughter of 13,232 to 34,380. Assuming 2080 hours of oper­ ation per year, as was the case in the estimates presented in this study, the three plants had an average output of 6.4, 11.1 and 16.6 head per hour. Although these plants are all smaller than the synthesized plant sizes used in this study and all the cost data in Wissman's study are for 1963-64, the comparison has some usefulness in evaluating the esti­ mates obtained in this study. Estimates using the two --------------------- Donald J. Wissman, Comparative Costs of Slaughtering Cattle in Michigan Packing Plants, Agric. Econ. Report too7 T5 (East Lansing: Department of Agricultural Economics, Michigan State University, May 1965), p. 28. 115 studies for each plant are as follows: Annual Slaughter in No. of Head 13,232 23,080 34,380 Average Cost Per Head Wissman From Above Equations' $15.40 $19.93 14.47 14.97 12.19 12.77 Based on these comparisons it would seem that for ex­ tremely small plants the estimating equation will likely overestimate actual costs. However, for the larger plants the equation does appear to provide reasonable estimates. If we were to inflate Wissman*s estimates to account for an inflated price level then our estimates would be lower than Wissman*s. Some of this difference would be expected due to difference in the technology of existing as opposed to the synthesized plants. Also the synthesized plant data assumes a constant rate of output while actual plant opera­ tion data reflects increased costs associated with operating plants at varying levels of output. Although other cost comparisons with studies conducted in other areas could be made, a detailed analysis of factor costs used in those studies is required to make any meaning­ ful comparisons. Wage rate differences are especially important in making interregional cost comparisons. For example, Logan and King^ estimates for the 120 head per hour plant was $7.28 per head compared to $8.85 per head for the estimates given in this report. The difference is due to Samuel H. Logan, Economies of Scale in Cattle Slaugh­ tering Plants, Report prepared for the National Commission on Food Marketing, December 1965, p. 9. 116 differences in input prices used since -the same level of technology is assumed. A study by Franzmann and Kuntz in 1965 reported per head slaughtering costs in Oklahoma rang­ ing from $6.74 to $7.23.^ In their study wage rates in­ creased with the size of firm. This resulted in disecono­ mies beyond a 60 head per hour plant. The generally lower wage rates in Oklahoma in 196 5 compared to the wages used in this study account for most of the difference in slaugh­ ter costs. Labor cost per head in Oklahoma ranged from about $2.25 to $2.75 less than the Michigan costs used in this study. Based on these cost comparisons it was concluded that cost function derived in this study was realistic and ade­ quate for the purposes of this analysis. However, the estimates are biased downward slightly by the omission of workmen's compensation and the low rate assigned to social security payments. Summary This chapter presents the requirements and cost of slaughtering beef in Michigan for five different plant sizes. The presentation is divided into the following major cost categories: (1) labor, corrals and parking area, (2) equipment, (4) land, (3) buildings, (5) utilities, (6) John R. Franzmann and B.T. Kuntz, Economies of Size in Southwestern Beef Slaughter Plants, Bulletin Mo. B-648 (Stillwater: Oklahoma Agricultural Experiment Station and USDA cooperating, April, 1966), p. 24. 117 interest, (7) property tax, and (8) miscellaneous supplies and services. Economies of size were found in all cost categories with labor accounting for 60 percent of the $2.49 per head reduction in costs as the size of plant increased from 20 to 120 head per hour. The total cost function obtained from fitting a linear equation was: Y = $153,895 + 8.2982X, where Y is the total annual cost and X is the number of head slaughtered annually. This equation was then used to estimate average costs for Michigan plants on which estimates from accounting data had previously been made. Although differences in time, plant size, and technology limited their usefulness, the compari­ sons made tended to support the estimates of this study. Chapter 5 NUMBER, SIZE AND LOCATION OF BEEF SLAUGHTER PLANTS Introduction The purpose of this chapter is to present the transpor­ tation models used and the results obtained in determining the number, size and location of beef slaughter plants that minimizes the combined cost of livestock assembly, slaughter of cattle and distribution of beef to consuming areas. Data presented in chapter three and four were used in the devel­ opment of the results obtained. Two models were selected for use in estimating the number, size and location of plants. Two were used in or­ der to make comparisons between the results obtained. Due to the estimating procedures used it cannot be shown mathe­ matically that the result obtained in either case actually is the least cost solution. To the extent that the models supported each other added reliance on the estimates was provided. Secondly, differences in the models made it possible to get some idea of the influence of beef shipments on the location of plants. The first model considers only cattle shipments and slaughter costs while the second also includes beef shipments. Finally, results from the first model made it possible to make certain assumptions regarding 118 119 cattle shipments in the second model which significantly re­ duced the size of the problem. Stollstelmer Procedure The M o d e l : The initial model used in estimating the number, size and location of beef slaughter plants in Michigan employs a procedure proposed by Stollsteimer. The objective function in this model, as used in this study, is that of minimizing the combined cost of cattle assembly and slaughter, assuming economies of scale exist and that slaughter costs do not vary among plant locations. This corresponds to Stollsteimer's Case 1.^ Mathematically, the model can be stated as follows: 2 Minimize: J TC - Z P .X . (JLk ) j-1 3 I J L. + I Z X.j Cjj L K i=l j-1 X3 13 k (Total cost — processing cost + assembly cost) with respect to plant numbers (jaC-Ana Aln IteaH lonlot term Ooo-aA-Am am looteoU lonlot mm too ifOng lfAttte Alyon CoAlllao lorCity •atrole Lnaln Crate Jachan lalnaaaa laal folate focal m m late Pint bantu* urn 14.44* 11.2401 44,7471 M.7471 77.PI71 77.7172 14.477* M.477* 7A.4M9 74.4143 49.107) 41.147) 41.1)49 49.9)49 114.4MI 110.AMI M.AA79 M.4073 20.4477 29.4477 17.AJM 1M.21M 244.MM 34.1941 34.1341 14.1122 21.4744 117.4919 1)4.2144 IM.2A44 IM.Ml) 100.1213 •l.M7J_ IP.2AM M.tAU 1AM.AAM A.A41) 11*3.41)4 loan! >»»»*■« 14.41)1 14.41)1 M.1A9I 47.AUA 77.7172 IM.fllA 1M.9110 lA.teot 1.M17 If.MM 17.1301 M.74IA M.7414 A1.471A 110.AMI 172.13)9 4M.9U2 4M.9212 44.2171 11.0)11 ».)M9 M.ttt) 34.0143 14.14)7 M.M17 4)4.17)4 214.71A7 140.1212 144.132) 1M.2104 11*3.41)4 flirt leanttoo lM.il74 121.2)74 14.1032 1A.M71 44.172) ft.IMA U0.M41 201.0041 749.34)7 743.3417 141,131) 141.9)9) )10.137) 11.MM IA.MM 114.4104 74.114) 131.1411 144.4314 111.1104 11*3.4114 Onrrh (martaa 144.Mil .AMI M.1MI 174.4134 140.7141 144.7141 tM.MM 110.AM1 119.22*9 71A.3A4A 724.3444 li.MM 14.4040 310.4424 214.4104 71.124) 131.141) 144.4323 1M.1104 1143.41)9 Plfth Itaratin 4.7427 M.10U U4.3031 Lll.UB 141.Ml) 141.139) IM.MA* 110.AMI 211.224) 719.3044 724.34*4 U.39)7 214.4104 71.324) Ul.144) 144.4)23 1M.2I04 11*3.41)4 IA.MM J17.42M Float* on nfMNUi by afcifanu (m looM m , too. 138 Ain Soglon Im AoH ante m m Pilot lonlat AArln •onfeM UflTfU folate AaMte-Aen Hotel. la LIto Holfht Iquivalaata) Table 5.4. Cost of Cattle Assembly, Slaughtering and Meat Distribution, by Program Iteration. Transhipment Model. Costs Second Iteration Third Iteration Fourth Iteration Fifth Iteration Intra-area Costs Livestock Assembly Cost $2,288,390 $2,557,093 $2,567,266 $2,565,382 Slaughtering Cost* 11,708,232 10,948,108 10,808,191 10,790,053 Meat Distribution Cost 1,337,443 1,445,547 1,456,903 1,459,059 $15,334,065 $14,950,748 $14,832,360 $14,814,494 10,782,391 10,702,210 10,702,207 10,669,421 $26,116,456 $25,642,958 $25,534,567 $25,513,915 Total Meat Distribution Cost Total Cost 139 Inter-area Costs Slaughtering costs have been adjusted based on the number of plants and the volume of slaughter at each plant in the solution of each iteration as opposed to the unit costs actually included in the iteration. Costs therefore represent the cost of the solution to each iteration. 140 fifteen sites in the second iteration (see Table 5.3). Total costs, based on the solution of the second iteration and with processing costs adjusted to the number of plants indicated by the solution, was $26,116,000 (Table 5.4). The final iteration yielded a total cost of $25,514,000, a reduction of $602,000 or 2.3 percent. Intra-area costs (total costs less cost of out-of-area beef shipments to con­ sumption regions) declined by $519,000 or a decline of 3.4 percent. As expected, as plant numbers declined assembly and distribution costs increased while slaughter costs de­ creased . The final solution is summarized by data in Table 5.5 and Figures 5.2 and 5.3. The volume of slaughter at the four plants and the pattern of beef shipments to consumption regions can be seen in Table 5.5. The four plant sites re­ maining in the final solution were Alma, Sandusky, Lansing, and Adrian. Converted to number of head, assuming an aver­ age weight of 1053 pounds per head, the annual slaughter volume for each plant was approximately as follows: Alma 172,000 head Sandusky 154,000 head Lansing 208,000 head Adrian 692,000 head Total 1,226,000 head When compared with the results of the previous model, Lansing replaced Sturgis as a plant location. are responsible for the shift. Two factors First the inclusion of beef Table 5.5. Number, Size and Location of Plants and Beef Shipment Patterns, Transhipment Model. Consumption Region Plant Location Out of Alma Sandusky Lansing Adrian Area -------- million pounds live weight equivalents----- Traverse City 6.7626 Alpena 12.5057 30.1052 Detroit 19.2684 30.1052 16.8000 Cadillac Bay City Total 16.8000 144.5051 144.5051 161.9593 Lansing 108.3404 728.5846 371.6202 110.8841 1370.5045 110.8841 216.6104 216.6104 78.3263 78.3263 Kalamazoo 151.1683 151.1683 South Bend 164.6525 164.6525 Toledo 188.2104 188.2104 1145.8938 2437.0352 Grand Rapids Jackson Total 181.3730 161.9593 219.2245 728.5846 142 Figure 5.2. Cattle Shipment Patterns for Transhipment Model. 143 [Hwr CHiWYMN w tts o t* H A tfltV uii BfN/ll (>««*«> isu e OTSEGO IKALKASM Kt*CO« MOM MANlSTFF ClAAC OCEANA m m «o m WMBUftCM r AUMMZOO z sr.ioscnt »•mum MMU OUT -OF-AAM Figure 5.3. Beef Shipment Patterns for Transhipment Model 144 distribution costs within the study area and second the influence of inter-area shipment of beef from a southwest­ erly direction. The concentration of population north and east of Sturgis was sufficient, when combined with the lower cost of meat inshipment to the southwest, to shift the loca­ tion of this plant. Cattle supply areas were generally consistent with ex­ pectations, given the plant locations and volumes slaugh­ tered at each plant (see Figure 5.2). As was true in the previous model, the least cost solu­ tion resulted in the allocation of an extremely large volume of slaughter at Adrian. The 6 92,000 head to be slaughtered is over three times the size of the largest plant considered in the synthesis of costs in the previous chapter. The result is due to the assumption that the linear total cost function obtained is representative for all plant sizes. It should be pointed out that, based on the cost func­ tion used, the major economies of size are obtained by the largest synthesized plant. The per head slaughtering cost curve is asymptotic to a value of $8.30 which is only 55 cents below the per head slaughtering cost of the largest plant considered. However, of major concern here is the possibility of significant diseconomies when annual slaugh­ ter volume approaches 700,000 head. No synthesized cost data is now available for plants of this size in the study area. Thus, of necessity, it was assumed that the cost function obtained was applicable. 145 It is also worth noting that even when the number of plants increases the volume of cattle allocated to the Adrian plant remains much higher than the largest synthesized plant. The second iteration of the transhipment model allocated production to ten plants. An annual volume of 595,000 head was to be slaughtered at Adrian. If disecono­ mies at extremely large plants do in fact exist then some difference in plant locations and plant sizes would be ex­ pected. Although the exact influence cannot be estimated from the above data without changes in the models used it seems likely that additional plants would be suggested in the Adrian area including south and east of Adrian. Some shifting of other plant locations might also be expected. Since one cannot show mathematically that the solution obtained is a true optimum, several alternative solutions were rerun after the above solution was obtained. In these iterations only assembly and distribution costs were con­ sidered. This was done because the allocation of cattle between plants does not affect the total cost of the solu­ tion . The same number and location of plants as obtained re­ mained the least costly. However, there was a shift of production from Adrian to Lansing of approximately 96 million pounds of live cattle. The second least costly solution shifted the Lansing plant to Kalamazoo. transportation coats by $43,368. This increased A shift in plant locations to the locations suggested by the Stollsteimer procedure 146 resulted in an increase of $64,000 over the least costly solution. This change involved a shift of one plant from Lansing to Sturgis. Using the transhipment model the least costly location of three plants increased transportation costs by $361,200 while the least costly five plant solution showed a decline in costs of only $2,024. When the increase in processing costs due to the additional plant are considered the four plant solution remained the least costly by about $152,000. Summary This chapter presented two models, the estimating pro­ cedures used, and the empirical results obtained in esti­ mating the number, size and location of beef slaughter plants that met the objective function of each model. The first model employed the Stollsteimer procedure for estimating the number, size and location of plants that minimizes the total assembly plus slaughtering cost, assuming economies of size exist. The results of this model indicate that four plants located at Adrian, Sturgis, Alma and Sandusky meet the minimum cost objective. $13,098,000. Total cost was However, a total of 35 other configurations of four plant locations were within 5 percent of the minimum cost configuration. Also, the location of five plants, one at Alma, Sandusky, Ionia, Adrian, and South Bend resulted in a cost increase of only $70,000, while reducing plant numbers to three (Saginaw, Adrian, and Sturgis) increased costs by only $62,000. 147 The second model used had as the objective function minimization of assembly, slaughtering and meat distribu­ tion. This model not only included meat distribution within the study area but also inshipment of beef to meet the excess demand in the area. The final estimate obtained indicated four plants located at Adrian, Lansing, Alma and Sandusky. The primary difference compared to the previous model was the replacement of the Sturgis plant by one in Lansing. Total costs were $25,514,000 of which $10,699,000 were for inshipment of beef from outside the study area. Intra-area costs were $14,814,000. Total transportation costs were increased by $64,000 when the transportation costs of the four plant solution of the Stollsteimer model were estimated using the transhipment program. 148 Chapter 6 SUMMARY, IMPLICATIONS, LIMITATIONS AND NEEDED RESEARCH Summary Introduction: Michigan's beef slaughter industry is faced with economic and institutional pressures which are increasing to a point where major adjustments in the number, size and location of beef slaughter plants are likely to be required if Michigan firms are to remain competitive. Pres­ ent firms are small compared to firms in major competing areas. Existing firms tend to be located in major urban areas, while recent trends in beef slaughter location and transportation costs suggest that location near cattle supplies can reduce costs significantly. Also, new meat inspection legislation will require considerable investment in many existing plants if they are to remain in operation. Objectives: The purpose of this study is to provide information that will be useful to industry personnel who must make adjustment decisions; and to state, area and local development groups who seek information on their relative competitive position for industrial development in specific industries. (1) More specifically the objectives were: To review the trends and recent developments rela­ tive to the number, size and location of beef slaughter 149 plants in the United States, East North Central region and Michigan. (2) To estimate the number, size and location of beef slaughter plants that will minimize the total cost of cattle assembly, in-plant processing and meat distribution for pro­ jected 1980 cattle production and beef consumption. Three major tasks were involved in the process of ob­ taining the second objective. These were: (1) to estimate the long-run total cost curve for beef slaughtering in Michigan; (2) to obtain estimates of transfer cost functions for live cattle and carcass beef; and (3) to project to 1980 cattle marketings and beef consumption by geographic sub­ divisions of the study area. The procedures used in the attainment of these objec­ tives can be divided into six relatively distinct steps. These were: (1) A review of the major concepts of location theory (2) A review of the major trends and recent develop­ ments in the beef slaughter industry (3) Projections to 1980 of cattle marketings and beef consumption by geographic areas (4) Estimation of transportation rates for live cattle and carcass beef (5) Estimation of the long-run total cost curve for beef slaughtering in Michigan (6) Selection and use of models to specify the number, size and location of beef slaughter plants that will 150 minimize the combined cost of cattle assembly, slaughtering and meat distribution. The following summary follows the procedural steps out­ lined above. Location Theories: Major location theories can be meaningfully categorized into three groups: (1) least-cost location theories, (2) market area theories, and (3) inter­ dependence theories. The least-cost theories concentrate on the cost of production. They generally assume that the firms demand function is perfectly elastic and unaffected by the firms' location decision. Early theories in this group were relatively restrictive in terms of the costs in­ cluded as well as the nature of the geography being con­ sidered. For example, Von Thunen assumed an isolated state with a completely homogeneous land surface and a single consuming center.^ Weber, however, included more than one consuming center and uneven deposits of raw materials. Transportation, 2 labor and agglomerating tendencies are the three most important location factors in Weber's theory. Finally, Hoover emphasized the importance of a wide variety of factors which affect costs including climate, property taxes and institutional factors.^ Johann Heindrich Von Thunen, Per Isolierte Staat in Beziechung auf Landwirtschaft und Nationalokonomie T3rd ed.j Berlin: Schumacher Zardilin, 1875). 2 C.J. Friedrich, Alfred Weber's Theory of the Location of Industries, (Chicagol University of Chicago Press, 1962). ^E.M. Hoover, The Location of Economic Activity, (New York: McGraw-Hill, 1946) .------------------------------ 151 The market area and interdependence theories differ from the first due mainly to their inclusion of demand factors. They stress the importance of location at points which maximize profits rather than minimize costs. The possibility of affecting the level and elasticity of the firms demand function is an integral part of these theories. The interdependence theories differ from the market area theories in that they admit the possibility of firms being attracted to the same location where as the market area theories do not. Although it would be appropriate to consider all cost differences and differences in demand conditions that may exist among sites, it was not felt to be an empirically realistic approach for this study. Locational advantages were determined solely on the basis of differences in trans­ portation costs, given the distribution of cattle and con­ sumption of beef. Major Trends and Developments in Beef Slaughter Industry: An analysis of major trends in beef slaughtering indicated that although the total volume of cattle slaughtered annually is increasing nationally, Michigan is not maintaining its share of the national volume. The number of slaughter plants have been declining both nationally and in Michigan. Nation­ ally major reductions have been in plants slaughtering less than 25,000 head annually. Over time the geographic distribution of slaughter plants nationally shows a trend toward location in major production 152 areas, while in Michigan plants are highly concentrated in major urban areas. Other major developments influencing the future of Michigan's beef slaughter industry include the trend toward single species plants, relatively active entry and exit of firms into the industry and new neat inspection legislation that requires all plants to meet the minimum requirements of the federal meat inspection laws. Cattle Marketing Projections: Previous cattle projec­ tions to 1980 for Michigan were used as a basis for the individual production projections within the state. For each production area cattle marketings as a percent of the state's marketings for 1949, 1954, 1959, and 1964 as re­ ported by the U.S. Census of Agriculture were regressed over time to obtain a projection of each area's share of total marketings in 1980. These percentages were then multiplied by the projected state total. Production in each of the eighteen counties in northern Indiana and Ohio which were included in the study was projected by linear regression based on U.S. Census of Agriculture data for 1949, 1954, 1959, and 1964. This approach was selected since no state projections for thses states were available. The total projected volume of cattle marketed in the study area was 1,226,000 head, 850,000 of which was in Michigan. Beef Consumption Projections; Estimates of beef con­ sumption were based on previous projections of per capita consumption and population for the study area. A per capita 153 consumption of 12 0 pounds and a total population of 11,578,300 was used. This yielded an estimated consumption of 1,389.4 million pounds of beef. Cattle Transportation Function: A sample of 32 commer­ cial livestock truckers were interviewed by phone to obtain transportation rates for live cattle. and semi-trucks were obtained. Rates on both straight Since rates for semi-trucks were less for all distances over about 28 miles, only the semi-truck rates were used. The rate function obtained through regression analysis was: Y « 9.81571 + .18571X (1.21093) (.00717) R 2 - .8449 where Y ** cost in cents per hundred pounds live weight X - one-way distance () * standard error of the coefficients Beef Transportation Function: Since most packing com­ panies own their truck fleets for meat deliveries a cost function was used rather than a rate function. A recent study conducted by the U.S.D.A. reported operating cost of a refrigerated tractor-trailer unit. Since the truck sizes and refrigeration requirements were judged to be very similar, costs from the previous study were adjusted for difference in weight and applied to this study. The regression equation obtained was: Y - 7.0799 + .1813X (.2548) (.0023) E 2 - .9979 154 where Y * cents per hundred weight of beef X ~ one-way distance () = standard error of the coefficients Long-run Total Cost for Beef Slaughtering: A modified economic engineering approach to cost estimates were taken in estimating the long-run total cost for beef slaughtering in Michigan. Physical input-output requirements for five on-the-rail plants with hourly capacities of 20, 40, 60, 75, and 120 head per hour were obtained from a recent California study. Factor input prices were estimated for present supply-demand conditions in Michigan. No attempt was made to adjust prices among locations within the study area but rather to obtain a representative price for each input. By synthesizing the total costs for each input and summing these, an estimate of the total cost of operating each plant at its rated output was obtained. These five cost figures were then regressed on annual output and the following total cost function obtained: Y - 153,895 + 8.2982X (37,530) (.2774) R 2 - .9955 where Y * total annual cost in dollars X ■ number of head slaughtered annually () ■ standard error of the coefficients Costs per head ranged from a high of $11.34 for the smallest to a low of $8.85 for the largest plant. The cost per head based on the above total cost function has a mini­ mum value of approximately $8.30 per head as reflected by 155 the second coefficient in the function. Savings in labor costs were the major contribution to the lower per unit cost as size increased. They declined from $7.84 to $6.34 or by $1.50 per head as plant capacity increased from 20 to 120 head per hour. Model Results: Two models were established as a basis for estimating the number, size and location of beef slaugh­ ter plants. The first model had as its objective function the minimization of cattle assembly and slaughter costs with no consideration for meat distribution or inshipment of meat from outside the study area. The second model included these two latter factors. Before the models were developed, 15 potential plant sites were selected for inclusion in the models. Considera­ tion of local conditions were not included because it was believed that these conditions were subject to change and that potential sites should not be eliminated from consider­ ation based on existing situations. The estimating procedure for the first model followed that suggested by Stollsteimer. The solution which mini­ mized the total assembly and slaughtering cost resulted in the location of a plant at the following locations with the indicated annual volume of slaughter: Alma Sandusky Adrian Sturgis - 295,613 169,932 449,735 310,875 head head head head Total costs for this solution was $13,09 8,000, of this $10,790,000 was slaughter cost and $2,307,000 was for assembly 156 of livestock. It is significant that 35 different configurations of four plant sites resulted in assembly costs within 5 percent of the least cost locations indicated above. Also the least cost three plant solution resulted in an increase of only $62,000 or 0.4 percent in total costs while the five plant solution increased total costs by $70,000 or 0.5 per­ cent. Thus, although the four plants at the above locations resulted in the least cost, numerous alternatives are very near the least cost solution. This suggests that factors not included here would likely affect total costs more than the small differences in costs indicated between these al­ ternatives (see Table 5.2). The second model, a transhipment model, was estimated through an iterative, linear programming procedure similar to the process used by Logan and King in connection with a transportation model.^ The final solution of this model also indicated that four plants minimized total costs. Three of the plants were at the same locations as indicated by the previous model, while Lansing replaced Sturgis as a plant site. The sites in the final solution and annual volume slaughtered were as follows: Alma Sandusky Lansing Adrian - 172,000 154,000 208,000 692,000 head head head head Samuel H. Logan and Grodon A. King, "Size and Location Factors Affecting California's Beef Slaughtering Plants," Hilgardla, Vol. 36 (December 1964). 157 Minimized total costs for this model was $25,514,000. Of this, $10,699,000 represented the cost of shipping meat from outside the area. Intra-area costs were $14,814,000. It is important to point out that in both models the volume of cattle slaughtered at some locations exceeded the largest size plant in the cost estimates. cially true in the transhipment model. This was espe­ However, since no other data was available it was assumed that the cost func­ tion obtained was applicable. In the transhipment model the volume of cattle allocated to the Adrian plant remained ex­ tremely high even when a larger number of plants were located so as to minimize costs. An annual volume of 595,0 00 head was shipped to the Adrian plant in the results of the second iteration of the transhipment model. This iteration minimized costs with ten plants. If significant diseconomies exist in slaughter costs above the plant sizes studied then more than one plant in the Adrian area, separated so as to minimize the transporta­ tion cost would be suggested. Implications The overall purpose of this study was to provide infor­ mation to Michigan beef slaughterers that will assist them in long-run planning of plant facilities and to assist development groups that seek information on their relative competitive position in specific industries. In view of the economic and institutional forces 158 affecting the competitive position of Michigan's beef slaughter industry, many of the present firm's owners and managers are or soon will be faced with new investment decisions. Where major investments are necessary to up date plants to meet new legislative requirements an alter­ native that will often be considered is the construction of a completely new plant. When this becomes a feasible alter­ native to existing firms, the possibility of relocation will also be a consideration. The data presented here provides valuable information on volume-cost relationships in slaugh­ ter plant operations under Michigan conditions, cattle transportation costs, beef delivery costs, projections of cattle supply and beef consumption and an indication of the areas of the state where location will minimize the trans­ portation costs. With respect to the transportation minimization aspect, one must remember that it does so only if other plants are located at the specified sites and at the specified volumes of production. This seriously reduces the direct applica­ tion of the results of the transportation models to an in­ dividual firm's location decision. However, in a competitive system it does indicate the direction toward which plant locations are likely to evolve. To the extent that the models developed do reflect the combined decisions of firms over time, they provide a glimpse of some of the important com­ petitive relationships that firms will face in the future. Based on the estimates of economies to size, large 159 plants are able to produce at significantly lower costs than are smaller plants. Critical to the validity of this conclusion is the assumption that factor costs, especially wage rates, are the same for all plants and that management is able to attain the potential economies suggested by the data. In practice one of the cost advantages of small plants in the past has been their ability to obtain labor at rates significantly below rates paid by larger plants. bower wages coupled with the potential for small plants to meet the demand of specialized markets may be sufficient to'keep sortie small plants in operation. However, this potential should be studied carefully by the individual plant management before making long run decisions. The cost data presented is valuable not only in making plant size and location decisions but also in comparing the cost of present operations against those presented here. If care is taken to assure that cost data on existing opera­ tions provide comparable cost estimates the total cost esti­ mates of this study can be used to evaluate the efficiency of present operation. In making such comparisons a detailed analysis of the individual cost items should be made in order to remove the influence due to factor price differences. Although a detailed study of factor prices at specific locations considered is needed, the cost data presented will be useful to firms making cost comparisons between Michigan and other potential slaughtering locations. In making these comparisons the time at which factor prices, especially 160 labor, are obtained is important since absolute costs per unit are trending upward. Subject to some important limitations discussed later, state-wide industrial development groups are here provided with data that suggests the general areas of the state where new or expanding beef slaughter operations should be en­ couraged. It is the interest of state-wida development groups to aid industry in making the necessary adjustments to remain viable and competitive. Possibly even more impor­ tant than location, the data suggests that a few large firms would result in the least total use of the state's resources. Thus, unless special conditions not reflected by the models in this study prevail the construction of new small high cost plants should be discouraged. Local development groups are interested in developing the resources of their local area. The data here provides an indication of the general areas of the state where beef slaughtering has a competitive advantage given the limita­ tions of the factors considered. In general, areas not in­ dicated in the solutions obtained by this study or adjacent to these areas should be extremely cautious before encourag­ ing or supporting the development of beef slaughtering in their area. (This in effect eliminates only the northern part of the lower peninsula.) Here it should be reemphasized that the locations specified in the study are intended to be representative of an area not a specific location. Special input coat advantages, especially for labor, access to a 161 specific market, or other conditions can change the results obtained, but the reasons should be studied carefully before investments are made. For those locations in or near an area specified by the study, a competitive advantage appears to exist, providing the input prices used are representative, the physical re­ quirements of the plant are available, and the projections of cattle supplies and beef demands are realized. For these areas a detail study of the local input prices would be valuable. Also the effect of existing plants on the competi­ tive position of a new plant should be evaluated. This would show a strengthening or weakening of the area's advantage depending on the results of the study. As a part of this detail cost study, the actual availability of utilities, adequate transportation access, and zoning restrictions would need to be considered. If not available, consideration should be given to the feasibility of providing the needed services in the event a plant location became a possibility. Limitations and Needed Research Several limitations of this study have been suggested throughout its development, however, it was felt that these should be reemphasized and some suggested research to over­ come these limitations should be indicated. Individual research projects are always limited by the abilities of existing procedures and the capability of the analyst to incorporate all the needed variables. In this 162 study the procedures focused on an estimate of the number/ size and location of beef slaughter plants that would mini­ mize total assembly/ slaughter and distribution costs of the projected 1980 cattle production in the study area. No con­ sideration was given to the influence of existing plants/ to the costs involved in making the changes indicated by the models/ or to the savings that would occur over the present situation by shifting to the new organization. Additional work to estimate the effect of existing plants on the solu­ tions would be an important addition to the results of this study and should, in the author's opinion/ be placed high on the list of priorities for future research relating to livestock marketing. Another important limitation of this study is the omission of the influence of seasonal variations in the marketing of cattle in the area. Estimates were based only on the total volume of annual slaughter. This would suggest that over and under capacity will exist during some periods as supply fluctuates. An estimate of the short run cost curve would help identify the influence of variations in output on per unit slaughter costs. An analysis of the cattle procurement practices and problems of existing firms including the location and volume of inshipments by time periods within the year would supplement the analysis pre­ sented as well as make it possible to estimate the influence of cattle as well as meat inshipments on the number, size and location of plants. 163 The results obtained were based on projections of cattle production and beef consumption by geographic sub­ divisions of the study area. The nature of the analysis used suggests a long-run equilibrium condition and as such would be based on expected supply and demand conditions. Imperfect foresight of these conditions is a limitation but one which cannot be easily overcome. The procedures used for making the projections suggest a continuation of past trends in each area. These trend- were based on a limited number of observations. Although it is not expected that significant shifts would occur more detailed information on past trends for each area would improve the projections ob­ tained and increase the reliability of the results. Present programs and computer capacity made it necessary to limit the number of supply, processing and consumption regions. This means that either the total geographic area considered must be restricted, as was the case in this study, or the individual sub-areas must be relatively large as is the case in most national models. When an area smaller than the nation is considered, problems arise in determining the exact geographic area to be included. This decision can, in and of itself, influence the results, especially if plant locations result near the border of the area being studied. For instance it seems quite clear that the inclusion of parts of Indiana and Ohio in the present study resulted in the selection of different plant sites in Michigan that would have been selected if the Indiana and Ohio counties had been excluded. 164 One alternative would be the Inclusion of Indiana, Ohio, Illinois and Michigan into a four state regional model. This would not eliminate the influence of the selection of the study area boundaries on the results but would help minimize the influence of this decision on the location of plants in or near Michigan. It would, however, increase the size of the supply and consumption areas that would have to be included and thus reduce the precision with which trans­ portation costs could be measured. Cost data in this study is believed to be the best available without extremely detailed evaluation of each item considered. Due to the importance of labor costs, which represent about 70 percent of the total costs, additional work to verify the estimates obtained here would be worthshile. Although the estimates used here were obtained from union contracts or direct estimates from union representa­ tives the limited experience of local union officials with on-the-rail plants suggest that some variation from the costs used might be expected from either wage rate differences or due to differences in productivity. The results of the models used indicated the establish­ ment of some plants considerably larger than those considered in the cost data. This suggests a need to verify the assump­ tion that the total cost function used is representative for larger firms. During early work on this project an attempt was made to obtain input-output data on a larger plant but it was not available at that time. 165 Actual transportation rates between points often differ depending on the volume of traffic, the possibility of backhauling and other factors. These differences were not considered in this study but could have an influence on plant locations. A study which would reveal the extent and nature of these differences would make it possible to in­ clude them in future studies. Finally, additional work might be done on developing procedures which would make it possible to include into the models differences in demand and supply functions among geographic regions within the area. LIST OF REFERENCES LIST OF REFERENCES Amalgamated Meat: Cutters and Butcher-Workmen of North Amer­ ica . 1967-1970 Agreement, Great Markweatern Packing Company) Detroit: Local 630 AFL-CIO. Anthony, Willis E. Structural Changes in the Federally Inspected Livestock Slaughter Industry, 1950-1962. U.S. Department of Agriculture, Agricultural Economics Report No. 83, Washington, D.C.: U.S. Government Printing Office, 1966. Black, Guy. "Synthetic Method of Cost Analysis in Agricul­ tural Marketing Firms." Journal of Farm Economics, Vol. 37 (May, 1955), 270-751 Crom, Richard. Simulated Interregional Models of the Livestock-Meat Industry"! U .S . Department of Agriculture, Agricultural Economics Report No. 117. Washington, D. C . : U.S. Government Printing Office, 1967. Dodge, W.F. Corporation. "Building Cost Indexes and Indi­ cators." Architectural Record. Vol. 143 (March, 1968), 89. Franzmann, John R. and Kuntz, B.T. Economies of Size in Southwestern Beef Slaughter Plants" Oklahoma Agricul­ tural Experiment Station Bulletin No. B-648. Still­ water: University of Oklahoma and U.S.D.A. Cooperating, 1966. French, B.C. "Some Considerations in Estimating Assembly Cost Functions for Agricultural Processing Operations." Journal of Farm Economics. Vol. 42 (November 1960), 767 78 - " -------------------------------------------------------------- French, B. C . , Sammet, L.L., and Bressler, R.G. "Economic Efficiency in Plant Operations with Special Reference to the Marketing of California Pears." Hilgardia, Vol. 24 (July, 1956). Greenhut, Melvin L. Plant Location in Theory and In Practice: The Economics of Space. Chapel Hill: University of North Carolina Press, 1956. 166 167 Hoover, Edgar M. The Location of Economic Activity. York: McGraw-Hill Book C o . , 1948. Hotillings, Harold. "Stability in Competition." Journal, Vol. 39 (March, 1929) 41-57. New Economic Hunt, Verner G. and Tramel, Thomas E. "Alternative Formula­ tions of the Transhipment Model." Journal of Farm Economics. Vol. 47 (August 1965), 763-73. Johnson, H.D., Guilfoy, R.F. and Penney, R.W. Transportation of Hanging Beef By Refrigerated Rail Cars and Piggyback " Trailers. U.S. Department of Agriculture, Marketing Research Report No. 485. Washington, D.C.: U.S. Government Printing Office, 1961 Kerchner, Orval. Costs of Transporting Bulk and Packaged Milk by Truck" U.S. Department of Agriculture, Market­ ing Research Report No. 791, Washington, D.C.: U.S. Government Printing Office, 1967. Logan, Samuel H. and King, Gordon A. Economies of Scale in Beef Slaughter Plants. Giannini Foundation Research Re­ port No. 260. Berkeley: California Agricultural Experiment Station, 1962. Logan, Samuel H. and King, Gordon A. "Size and Location Factors Affecting California's Beef Slaughtering Plants." Hilgardia. Vol. 36 (December 1964). Larch, August. The Economics of Location. Translated by William H. Woglom with this"assistance of Wolfgang F. Stolpu. New Haven: Yale University Press, 1964. Maich, L.J. and Hoglund, C.R. The Economics of Beef Cow Herds in Michigan. Michigan Agricultural Experiment Station Research Report No. 58. Lansing: Michigan State University, 1966. Michigan Department of Agriculture, Meat Inspection Laws, Act 280 as Amended, Regulation N o . 148. Lansing: Allied Printing, T967. Michigan Department of Agriculture, Crop Reporting Service, and U.S. Department of Agriculture, Statistical Report­ ing Service, Michigan Agricultural Statistics. Lansing: Michigan Department of Agriculture, l95l through 1967. Michigan Department of Labor, Employment Security Commission. Employer'a Handbook. Detroit: Michigan Department of Labor, 1967. 168 Michigan State University. Project f80 Rural Michigan Now and in 1980 - Highlights and Summary of Project '66. Michigan Agricultural Experiment Station ana Cooperative Extension Service Research Report No. 37. East Lansing: Michigan State University, 1966. Michigan State University. Project 180 Rural Michigan Now and in 1980 - The Dairy~Industry. Michigan Agricul­ tural Experiment Station and Cooperative Extension Service Research Report No. 45. East Lansing: Michigan State University, 1966. Michigan State University. Project 180 Rural Michigan Now and in 1980 - Livestock~and M e a t . Michigan Agricultural Experiment' Station and Cooperative Extension Service Research Report No. 50. East Lansing: Michigan State University, 1966. “Changing Role of Vets in Meat Inspection is Explored." National Provisioner. June 29, 1968. Orden, Alex. "The Transhipment Problem." Vol. 2 (April, 1956), 276-85. The Management Science, Rizek, Robert L. "The Cattle Cycle." Livestock and Meat Situation. U.S. Department of Agriculture, Economic Research Service, LMS-148. Washington D.C.: U.S. Government Printing Office, March. Schneidau, R.E. and Havlicek, Joseph, Jr. Labor Productivity in Selected Indiana Meat Packing Plants^ Indiana Agri­ cultural Experiment Station Research Bulletin No. 769. West Lafayette: Purdue University, 1966. Stollsteimer, John F. "A Working Model for Plant Numbers and Locations." Journal of Farm Economics, Vol. 45 (August, 1963), 631-45” Stollsteimer, John F . , Bressler, R.G., Jr. and Bales, J.N. "Cost Functions from Cross Sectional Data - Fact or Fantasy?" Agricultural Economics Research, Vol. 13 (July 1961). U.S. Congress. House. An Act to Clarify and Otherwise Amend the Meat Inspection Act to Provide for Cooperation with Appropriate State Agencies with Respect to State Meat Inspection Programs and for otltier Purposes"! H.R. 12144, 90th Congress, 1967. U.S. Department of Agriculture, Statistical Reporting Service. Livestock and Meat Statistics. U.S. Department of Agriculture Supplement for 1966 to Statistical Bulletin No. 333. Washington, D.C.: U.S. Government Printing Office, 197. 169 U.S. Department of Agriculture, Statistical Reporting Serv­ ice. Number of Livestock Slaughter Plants March 1 , 1965. U.S. Department of Agriculture Statistical Reporting Service Bulletin SRS-8. Washington, D.C.: U.S. Government Printing Office, 1965. U.S. Department of States Census 1559, U.S. Commerce, Bureau of the Census, United of Agriculture - Michigan 1949, 1954, 1964.------------------- — Department of Commerce, Bureau of the Census, Current Population Reports, Population Estimates, Series P. “25. Not 326, 19^6. U.S. Department of Labor, Bureau of Labor Statistics. Employ­ ment and Earnings, Washington, D.C.: U.S. Government Printing Office, June 1961; June, 1968. U.S. Department of Labor, Bureau of Labor Statistics. Whole­ sale Price Indexes. Washington, D.C.: U.S. Government Printing Office, September 1967. Von Thumen, Johann Heindrich. Per Isolierte Statt in Bezlchung auf Landwirtschaft und NationalokonomTe. 3rd e d . Berlin: Schumacher-Zardilin 1875. Weber, Alfred. Theory of the Location of Industries. Trans­ lated with an introduction and notes by Carl J. Friedrich. Chicago: University of Chicago Press, 192 8. Wirner, Robert N. "Estimated Optimum Interregional Competi­ tion and Location Patterns in the Southern Cattle Slaughtering Industry in 1975." Unpublished Ph.D. dissertation, University of Tennessee, 1967. Wissman, Donald J. Comparative Costs of Slaughtering Cattle in Michigan Packing Plants. Agricultural Economics Report No. 10. East Lansing: Michigan State University, 1965. APPENDICES Appendix Table 1. Synthesized Kill Crew and Annual Cost, 20 and 40 Head Per Hour Plant, Michigan, 1968. Wage Rate Operation______________ Wage Unit Kill, remove head, and wash head Drive, pen, knock Shackle, hoist stick, scalp head Tag, cut off head, dehorn, wash head 170 Remove hide, eviscerate, split and scribe skin leg, punch, gam, saw off, skin gam and punch, rip and point tail Transfer from bleed­ ing to skinning rail, remove udder or pizzle, mark aitch bone Skin leg and saw off, split aitch bone Drop bung Turn round and flank both sides to naval Skin fell, rump and pull tail Output Per Hour in Number of Head 4S~ No* of Yearly No. oi Yearly Workers Wage Workers Wage $2.50 hour .67 2.05 head .67 2.50 hour 2.05 head 1.00 5,200 2.00 20,052 .67 1.00 5,200 .50 1.00 10,026 1.00 10,026 14,685a 9,485 2.05 head .50 2.05 2.05 head head .50 .50 2.05 head .50 9,485 1.00 10,026 1.00 10,026 1.00 10,026 9,485 2.05 head .50 Appendix Table 1. (Continued) Output Per Hour in Number of Head *26 Rate Unit head No. of Workers ' 1 ~ Yearly No. of Wage____ Workers .50 " T C Yearly Wage 1.00 10,026 1.00 10,026 i 9,485 head .50 head 1.00 9,485 2.00 20,052 head hour 1.00 .50 9,485 9,485 3.00 .25 30,078 10,026 head head head hour hour 1.00 .50 .50 1.00 .50 9,485 1.00 .75 1.00 1.00 1.00 10,026 - 9,485 5,200 - 10,026 5,200 5,200 Carcass finishing Scale High and low wash High and low shroud 2.50 2.50 2.90 hour hour hour .50 1.00 .50 5,200 5,200 1.00 2.00 2.00 5,200 10,400 10,400 Others Utility and relief Tripe work-up 2.50 2.50 hour hour 1.00 1.00 5,200 5,200 1.00 2.00 5,200 10,400 171 Wage Operation______________ Wage Skin and remove front feet, raise and tie weasand, clean neck both $2.05 sides Mark and saw brisket, rim over right and 2.05 lift brisket Turn shank, clean rosette, mark neck 2.05 and drop hide Skin sides, high 2.05 and low back Transfer to flat rail 2.50 Eviscerate (Paunch 2.05 trunk 20-40) 2.05 Split 2.05 Trim bruises Remove passed viscera 2.50 Scribe and trim neck 2.50 Appendix Table 1. Operation Offal work-up Head work-up TOTAL (Continued) Wage Wage $2.50 3.25 - Rate Unit hour hour - Output Per Hour in Number of Head 20 40 , i Yearly No. of NO. Of Yearly Workers Wage Workers Wage .50 1.00 $5,200 $ 6,760 .50 2.00 13,520 17.00 132,810 32.00 251,562 Yearly wages are computed by assuming 2,080 hours per year (260 days at 8 hours each) including 8 holidays for wages given on a per-hour basis. For the piece rate workers the rated output of the plant per hour is assumed and divided by the number of piece rate workers required to arrive at an hourly output per worker. This was then multiplied by the wage rate and the number of workers required for each operation. aOne worker at $2.05/head and one at $2.50/hour. Source: Requirements taken from Samuel H. Logan and Gordon A. King, Economies of Scale in Slaughter Plants, Giannini Foundation Research Report No. Berkeley:California Agricultural Experiment Station, 1962. p. 123-27. Appendix Table 2. Synthesized Kill Crew and Annual Cost, 60, 75 and 120 Head Per Hour Plants, Michigan, 1968. Output Per Hour in N-mber of Head 86 Wage Rate Operation___________________ Wage Unit Kill, remove head, and work head Drive, pen cattle and knock $2.50hour Shackle, hoist, stick 2.05 head scalp, head Tag, cut off, dehorn and 2.50 hour wash head Remove head, eviscerate, split and scribe Skin legs, punch gams, rip and point tail Transfer from bleeding conveyor to skinning conveyor Remove, shackle, skin legs, cut off Remove udder or pizzle, mark aitch bone Drop bung Split aitch bone Turn round and flank both sides to naval Skin fell, rump both sides, pull tail Skin, remove front feet, raise and tie weasand Open and turn shanks, clean necks " ~ 75 126 ~ ' No. of Nearly No. of Yearly No. of Yearly Workers Wage Workers Wage Workers Wage $5,200 2.00 $10,400 3.00 $15,600 3.00 31,950 3.00 35,505 5.00 58,135 1.00 5,200 2.00 10,400 3.00 15,600 1.00 2.05 head 2.00 21,300 2.00 23,670 4.00 46,508 2.50 hour 1.00 5,200 1.00 5,200 2.00 10,400 2.05 head 1.00 10,650 2.00 23,670 3.00 34,881 2.05 2.05 2.05 head head head .50 10.650 1.00 10.650 .50 1.00 1.00 1.00 11.835 11.835 11.835 1.00 2.00 1.00 11.627 23,254 11.627 2.05 head 2.00 21,300 2.00 23,670 3.00 34,881 2.05 head 2.00 21,300 2.00 23,670 3.00 34,881 2.05 head 2.00 21,300 1.50 35,505 3.00 34,881 2.05 head 1.00 1.50 2.00 23,254 10,650 Appendix Table 2. (Continued) Operation Nark and saw brisket Rim over brisket, both sides Skin rosettes and neck Low back High back Eviscerate Saw rump and loin, backs and chuck Scribe and trim bruises Wage Rate Wage Unit $2.05 head Output Per Hour in Number of Head 120 75 60 No. of Yearly No, of Yearly No. of Yearly Workers Wages Workers Wages Workers Wages .50 $10,650 1.00 $11,835 1.00 $11,627 21,300 10,650 10,650 21,300 1.00 2.00 1.00 1.00 2.00 11,835 2.00 23,670 3.00 11,835 2.00 11,835 2.00 23,670 3.00 23,254 34,881 23,254 23,254 34,881 1.00 1.00 10,650 10,650 1.00 1.00 11,835 11,835 2.00 2.00 23,254 23,254 hour hour hour 2.00 2.00 2.00 10,400 2.00 10,400 3.00 10,400 2.00 10,400 15,600 10,400 2.00 4.00 4.00 10,400 20,800 20,800 hour hour hour hour hour hour 2.00 2.00 1.00 2.00 3.00 1.00 10,400 10,400 5,200 13,520 15,600 5,200 2.05 2.05 2.05 2.05 2.05 head head head head head .50 2.00 1.00 1.00 2.00 2.05 2.05 head head Carcass finishing Scale and tag High and low wash High and low shroud 2.50 2.50 2.40 Other Utility and relief Remove passed viscera Operate hide puller Head work-up Tripe work-up Offal work-up 2.50 2.50 2.50 3.25 2.50 2.50 TOTAL Source: - - 10,400 4.00 20,800 10,400 2.00 10,400 5,200 1.00 5,200 20,280 5.00 33,800 20,800 7.00 36,400 10,400 10,400 2.00 44.00 $362,720 53.00 $459,425 83.00 $722,188 2.00 2.00 1.00 3.00 4.00 2.00 Requirements taken from Samuel H. Logan and Gordon A. King, Economies of Scale in Slaughter Plants, Giannini Foundation Research Report No. 260, Berkeley: California Agricultural Experiment Station, 1962, p. 123-27. Appendix Table 3. Synthesized Crew Sizes and Annual Wages for Specified Operations, by Size of Plant, Michigan, 1968. Output Per Hour in Number of Head 26 "46 75 120 Hourly No. of Annual No. of Annual No. of Annual No. of Annual No. of Annual Wage Workers Wages Workers Wages Workers Wages Workers Wages Workers Wages 2.70 $22,464 4 5 8 $28,080 8 $44,936 12 $67,404 $44,936 ' Opera­ tion Cooler Dock Foreman Order clerk Checkers 3.20 2.70 2.70 Maintenance Foreman 3.50 Gang leader 3.30 Workers 2.50 Yardmen 2.50 Clean-up> 2.50 TOTAL 1 6,650 - - - - - - 1 1 6,864 5,200 1 1 5,200 5,200 $51,584 9 w ' 1 6,656 1 6,656 1 6,656 1 6,656 2 1 11,232 5,616 2 1 11,232 5,616 2 1 11,232 5,616 2 2 11,232 11,232 1 7,280 1 7,280 1 7,280 1 7,280 - - - - - - - - 4 20,800 5 26,000 6 31,200 9 41,800 2 2 10,400 10,400 2 3 2 4 10,400 20,800 3 5 15,600 26,000 18 $100,464 23 10,400 15,600 $127,720 25 $138,120 35 $187,204 Annual wages based on number of workers times 2080 hours per year (260 days at 8 hours per day) times hourly wages. Source: Requirements taken from Samuel H. Logan and Gordon A King, Economies of Scale in Slaughter Plants, Giannini Foundation Research Report No. 260, Berkeley: California Agricultural Experiment Station, 1962, p. 39. Hourly wages synthesized from unpublished data obtained from Amalgamated Butchers and Meat Cutters of North America, Local 630, Detroit, Michigan. Appendix Table 4. Annual Wages and Number of Salaried Personnel by Size of Plant, Michigan, 1968. Annual Cost Per Worker Operation Office Switchboard $ 6,900 Payroll, acct. payable 10,000 General 8,600 Credit manager, live­ stock payable 12,000 General ledger, office 13,800 manager Phone, billing and posting 6,900 General ledger, credit, acct. payable 12,100 Buying and Selling Buyers 13,800 13,800 Sellers Management . General manager Senior buyers Sales manager? * Plant superintendent Asst. Plant Superin­ tendent* Total Annual Cost 23,300 16,000 16,000 17,300 No. of Workers and Annual Cost by Plant Size in Head Per Hour 20 46 66 75 120 _a 1 - 1 1 1 1 1 1 1 1 1 1 2 3 1 1 1 2 1 1 1 2 2 2 3 1 1 - - - - 1 2 2 3 5 5 5 6 7 9 1 1 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 - - 17,300 - $93,700 $178,200 1 1 1 $314,400 $314,400 $453,500 Appendix Table 4. (Continued) aDashes indicate the position is not utilized as specified* ^Salary rate is assumed to increase with size of plant as follows: 20 head, $23,300; 40 head, $25,800; 60 and 75 head, $28,300; 120 head, $30,800. Salary rate is assumed to increasd with size of plant as follows: 40 head, $16,000; 60 and 75 head, $19,000; 120 head, $21,000. 3 Salary rate is assumed to increase with size of plant as follows: 60 and 75 head, $17,300; 120 head, $19,000. 4 Salary rate is assumed to increase with size of plant as follows: 60 and 75 head, $17,300; 120 head, $19,000. Source: Requirements taken from: Samuel H. Logan and Gordon A. King, Economies of Scale in Slaughter Plants, Giannini Foundation Research Report No. 260, Berkeley: California Agricultural Experiment Station, 1962, p. 127. For cost estimate procedure, see text.