March 2005
Economic Impact Analysis:
BSE Rulemaking
Final Report
Contract No. 53-3A94-03-12, Delivery Order 3
Prepared for
Ron Meekhof
USDA/FSIS/RDDS
Mail Stop 112
300 12th St. SW
Washington, DC 20250-3647
Prepared by
Mary K. Muth
Robert Beach
Shawn Karns
Catherine Viator
RTI International
Health, Social, and Economics Research
Research Triangle Park, NC 27709
RTI Project Number 08893.001
RTI Project Number
08893.001
Economic Impact Analysis:
BSE Rulemaking
Final Report
Contract No. 53-3A94-03-12, Delivery Order 3
March 2005
Prepared for
Ron Meekhof
USDA/FSIS/RDDS
Mail Stop 112
300 12th St. SW
Washington, DC 20250-3647
Prepared by
Mary K. Muth
Robert Beach
Shawn Karns
Catherine Viator
RTI International*
Health, Social, and Economics Research
Research Triangle Park, NC 27709
*RTI International is a trade name of Research Triangle Institute.
Contents
1
2
Introduction
1-1
1.1
Background ........................................................... 1-1
1.2
Project Objective.................................................... 1-2
1.3
Organization of the Report....................................... 1-3
Cattle Slaughter Industry Profile
2.1
2-1
Supply Characterization of the Cattle Slaughter
Industry................................................................ 2-1
2.1.1 Stages of Production ..................................... 2-1
2.1.2 Production Inputs for Cattle Slaughter
Plants ......................................................... 2-4
2.1.3 Production Outputs of Cattle Slaughter
Plants ......................................................... 2-5
2.1.4 Supply Elasticities......................................... 2-9
2.2
Demand Characterization of the Cattle Slaughter
Industry...............................................................2-10
2.2.1 Consumption ..............................................2-10
2.2.2 Demand Elasticities .....................................2-11
2.3
Industry Organization ............................................2-12
2.3.1 Number of Plants and Companies ..................2-12
2.3.2 Market Power..............................................2-12
2.4
Market-Level Data .................................................2-15
2.4.1 Prices ........................................................2-15
2.4.2 Beef Trade .................................................2-17
2.4.3 Use of 2002 as the Baseline Year for the
Analysis .....................................................2-20
2.5
References ...........................................................2-21
iii
3
Estimates of Costs Associated with the BSE
Interim Final Rules
3.1
3-1
Cost Estimation Overview ........................................ 3-2
3.1.1 Regulations Included and Requirements of
the Regulation ............................................. 3-2
3.1.2 Methods of Data Collection ............................ 3-3
3.2
Types of Costs ....................................................... 3-7
3.2.1 General Categories of Costs Associated with
the BSE Regulations ..................................... 3-7
3.2.2 Changes in Plant Processes and Practices for
Removal and Disposal of SRMs ....................... 3-9
3.2.3 Changes in Practices Associated with
Handling Nonambulatory Disabled Cattle ........3-10
3.2.4 Changes in Practices Associated with Testand-Hold Provisions for Healthy Cattle
Tested for BSE ............................................3-12
3.3
Summary of FSIS Cost Estimates ............................3-14
3.4
Plant-Level Cost Estimates for the BSE Interim
Final Rules ...........................................................3-17
3.4.1 General Assumptions Used in Estimating
Plant-Level Costs.........................................3-17
3.4.2 Assumptions for Each Processing Step ............3-19
3.4.3 Assumptions for Other Plant-Level Costs.........3-29
3.4.4 Summary of Plant-Level One-Time Costs
and Per-Head Ongoing Costs.........................3-31
4
3.5
Industrywide Cost Estimates for the BSE Interim
Final Rules ...........................................................3-38
3.6
References ...........................................................3-40
Methodology for Economic Impact Analysis
4-1
4.1
EIA Methodology Overview ...................................... 4-1
4.2
Conceptual Approach .............................................. 4-5
4.2.1 Characterization of Affected Markets ............... 4-5
4.2.2 Supply ........................................................ 4-9
4.2.3 Demand .....................................................4-10
4.2.4 Baseline and With-Regulation Market
Equilibrium .................................................4-11
4.2.5 Social Costs................................................4-11
4.3
Operational Model .................................................4-13
4.3.1 Model Variables...........................................4-14
4.3.2 Domestic Supply of Beef and Veal..................4-16
iv
4.3.3 Foreign Supply............................................4-18
4.3.4 Domestic Demand .......................................4-19
4.3.5 Export Demand ...........................................4-19
4.3.6 Baseline Scenario ........................................4-20
4.3.7 Incorporation of Compliance Costs .................4-20
4.3.8 Solving for Market Equilibrium With
Regulation..................................................4-21
5
4.4
Sensitivity Analysis................................................4-22
4.5
References ...........................................................4-22
Economic Impact Model Results
5.1
5-1
References ............................................................ 5-7
Appendixes
A
Interview Materials ................................................. A-1
B
Instructions for Using the Beef Slaughter FacilityLevel Model ........................................................... B-1
v
Figures
vi
Figure 2-1
Typical Slaughter Process at Beef Slaughter Plant............... 2-3
Figure 2-2
Value of Cattle Hide, per 1,000-lb Steer ............................ 2-8
Figure 2-3
Per Capita Meat Consumption, 1990–2001 (lbs) ................2-11
Figure 2-4
HHI Values for Slaughter Facilities, 1980–2001 .................2-13
Figure 2-5
Meat Retail Prices, 1998–2002 ($/lb)...............................2-16
Figure 2-6
Wholesale Meat Prices, 1998–2002 ($/lb).........................2-17
Figure 2-7
Livestock Farm Prices, 1998–2002 ($/lb) .........................2-18
Figure 2-8
Volume of Beef Trade, 2000–2002 (1,000 lbs) ..................2-19
Figure 2-9
Value of Beef Trade, 2000–2002 ($1,000)........................2-19
Figure 3-1
Summary of Requirements of the FSIS BSE Interim Final
Rules Included in the Analysis ......................................... 3-4
Figure 3-2
Handling of Nonambulatory Cattle, Carcasses, and Offal.....3-12
Figure 3-3
Anticipated Handling of Healthy Cattle Selected for BSE
Testing .......................................................................3-13
Figure 4-1
Overview of Facility-Level Economic Impact Analysis
Model .......................................................................... 4-3
Figure 4-2
Market Linkages in Production of Beef and Veal.................. 4-7
Figure 4-3
Market Equilibrium Without and With Regulation ...............4-12
Figure 4-4
Economic Welfare Changes for a Regulation that
Increases the Cost of Production: Consumer and
Producer Surplus Changes .............................................4-13
Figure 4-5
Theoretical Supply Function for Product j at Facility i .........4-17
Tables
Table 2-1
Average Weight of Cattle at Federal Plants, 2002 ............... 2-4
Table 2-2
Plant Inventories and Slaughter Volumes for Federal
Plants that Slaughtered Cattle in FY 2002.......................... 2-4
Table 2-3
Input Factor Shares at Beef Slaughter Plants ..................... 2-5
Table 2-4
Labor and Energy Rates and Respective Indices and
Total Beef Cost Index, by State, 2002 .............................. 2-6
Table 2-5
Steer and Cow By-Products and Values as Reported by
USDA, 2002.................................................................. 2-9
Table 2-6
Supply Elasticities for Cattle ...........................................2-10
Table 2-7
Demand Elasticities for Meat ..........................................2-12
Table 2-8
Known Companies Owning Multiple Beef Slaughter
Plants .........................................................................2-13
Table 2-9
Retail Prices for Meat, Based on Scanner Data ($/lb) .........2-16
Table 2-10
Volume of Beef Trade by HTS-6 Code, 2000–2002
(1,000 lbs) ..................................................................2-20
Table 3-1
Characteristics of Plants Interviewed for the Cost
Analysis ....................................................................... 3-6
Table 3-2
Typical Process and Practice Changes in Cattle Slaughter
Plants in Response to the FSIS BSE Interim Final Rules ......3-11
Table 3-3
Summary of the PRIA Per-Head Midpoint Cost Estimates
for the SRM and Nonambulatory Disabled Cattle Interim
Final Rule ....................................................................3-15
Table 3-4
Average Slaughter Volumes, by Age of Cattle and Plant
Size ............................................................................3-18
Table 3-5
Assumptions Associated with Nonambulatory Disabled
Cattle by Plant Size.......................................................3-22
Table 3-6
Assumptions Associated with Determining Age of Cattle
Using Dentition ............................................................3-23
Table 3-7
Assumptions Associated with Segregation of Cattle and
SRMs, by Plant Size ......................................................3-25
vii
viii
Table 3-8
Weight of SRMs per Head ..............................................3-26
Table 3-9
Assumptions Associated with Vertebral Bone-In Cuts .........3-28
Table 3-10
Assumptions for Lost Value of By-Products, by Age of
Cattle .........................................................................3-29
Table 3-11
Assumptions Associated with Written Plan Modifications,
by Age of Cattle ...........................................................3-30
Table 3-12
Assumptions Associated with Additional Monitoring and
Verification Activities .....................................................3-31
Table 3-13
Summary of Plant-Level Capital Equipment and Other
One-Time Costs Associated with the Interim Final Rules .....3-32
Table 3-14
Summary of Per-Head Ongoing (Variable) Costs
Associated with the Interim Final Rules ............................3-36
Table 3-15
Summary of Midpoint Industrywide Capital and Other
One-Time Cost Estimates Associated with the Interim
Final Rules...................................................................3-39
Table 3-16
Summary of Midpoint Industrywide Ongoing (Variable)
Costs Associated with the Interim Final Rules ...................3-40
Table 3-17
Summary of Midpoint Total Industrywide Costs
Associated with Interim Final Rules .................................3-40
Table 4-1
Variables Used in Market Model ......................................4-15
Table 5-1
Baseline Characterization of U.S. Beef and Veal Market,
2002............................................................................ 5-2
Table 5-2
Summary of Market-Level Impacts of Regulation, 2002....... 5-3
Table 5-3
Summary of National-Level Industry Impacts of
Regulation, 2002 ........................................................... 5-4
Table 5-4
Distribution of Social Costs Associated with Regulation,
2002............................................................................ 5-5
Table 5-5
Capacity and Compliance Costs Comparisons for Small
and Large Companies, 2002 ............................................ 5-6
Table 5-6
Capacity and Compliance Costs Comparisons for Very
Small, Small, and Large Plants, 2002 ............................... 5-6
Table 5-7
Summary of Small Business Impacts of Regulation, 2002 .... 5-6
Table 5-8
Summary of HACCP Size Impacts of Regulation, 2002......... 5-8
1
Introduction
In September 2003, the U.S. Department of Agriculture’s Food
Safety and Inspection Service (USDA, FSIS) contracted with
RTI International (RTI) to assist in estimating the costs of the
Bovine Spongiform Encephalopathy (BSE) rulemaking and to
develop an operational model to estimate the economic effects
of the rulemaking. Initial efforts under the contract focused on
regulatory options that FSIS was considering in fall 2003. After
the discovery of a BSE-infected cow in the United States in
December 2003, FSIS published four BSE interim final rules in
January 2004; the analysis under this contract was
subsequently altered to focus on the new regulations.
The analysis presented
in this report focuses
on federally inspected
cattle slaughter plants.
In a subsequent
analysis, we will
analyze the effects of
the BSE regulations on
beef processing-only
plants.
This report describes the process RTI followed in developing
estimates of the costs of the interim final rules and an
operational facility-level model designed to estimate the
economic effects of the BSE rule on cattle slaughter operations.
We collected data for the analysis through primary and
secondary data sources, including detailed interviews with
industry participants. This method provided a structure for
obtaining data from individuals knowledgeable about production
practices in the industry within a relatively short time frame.
1.1 BACKGROUND
BSE is a slowly progressive degenerative disease that affects
the central nervous system of adult cattle. Scientific and
epidemiological studies have linked variant Creutzfeldt-Jakob
Disease (vCJD), a chronic and fatal neurodegenerative disease
that affects humans, to the consumption of beef products
contaminated with the BSE agent. Until December 2003, BSE
1-1
Economic Impact Analysis: BSE Rulemaking
had never been detected in the United States despite 19 years
of active surveillance for the disease. After the discovery of a
cow with BSE in Canada in May 2003, FSIS had already
determined that it should expedite the development of certain
regulatory measures to address human exposure to materials
that could contain the BSE agent. After the discovery of a cow
with BSE in the United States in December 2003, FSIS issued
four interim final rules in response.
The four interim final rules, which were published in the Federal
Register on January 12, 2004, and became effective
immediately, include the following:
ƒ
Prohibition of the Use of Specified Risk Materials (SRMs)
for Human Food and Requirements for the Disposition of
Nonambulatory Disabled Cattle (pp. 1862–1874),
ƒ
Bovine Spongiform Encephalopathy Surveillance
Program (p. 1892),
ƒ
Meat Produced by Advanced Meat/Bone Separation
Machinery and Meat Recovery Systems (pp. 1874–
1885), and
ƒ
Prohibition of the Use of Certain Stunning Devices Used
to Immobilize Cattle During Slaughter (pp. 1885–1891).
The analysis described in this report focuses primarily on the
first regulation. This regulation defines SRMs as follows:
ƒ
brain, skull, eyes, trigeminal ganglia, spinal cord,
vertebral column, and dorsal root ganglia (DRG) of
cattle 30 months of age and older and
ƒ
tonsils and distal ileum of the small intestine of all
cattle.
The remaining three regulations focus on subsets of the
industry and thus are addressed to a lesser extent in this
report.
1.2 PROJECT OBJECTIVE
The objective of this delivery order is to assist FSIS in
conducting a regulatory impact analysis of the BSE interim final
rule concerning the use of SRMs from beef cattle and the
handling of nonambulatory disabled cattle. Specifically, RTI
developed estimates of the costs associated with the interim
final rules, developed an economic impact analysis model, and
used the model to estimate the economic effects of the
1-2
Section 1 — Introduction
regulation on consumers and producers of beef. In conducting
the analysis, RTI worked with FSIS to ensure, to the extent
possible, that the analysis would satisfy the Office of
Management and Budget’s (OMB’s) most recent guidelines for
regulatory impact analysis (OMB, 2003).
1.3 ORGANIZATION OF THE REPORT
This report is organized as follows. Section 2 provides a brief
industry profile of cattle slaughter operations in the United
States and includes secondary data used to develop the
economic impact analysis model. Section 3 describes the
regulatory requirements and associated cost estimates for the
interim final rule included in the analysis. Section 4 presents
the economic impact analysis methodology. Section 5 presents
the results of the economic impact analysis model using the
cost estimates presented in Section 3. Finally, Appendix A
includes the interview guide used to collect information from
industry on the costs of the BSE interim final rules. Appendix B
provides basic instructions for running the model and altering
both the parameters and the cost estimates contained in the
model.
1-3
2
Cattle Slaughter
Industry Profile
RTI compiled data characterizing the beef slaughter industry to
provide a better understanding of the industry and for specific
uses within the facility-level model. The model uses data from
the most recent update of the Enhanced Facilities Database
(EFD) on the affected plants and companies in addition to data
from secondary sources. This section provides an abbreviated
profile of the cattle slaughter industry with specific information
used in the model interspersed throughout the section.
2.1 SUPPLY CHARACTERIZATION OF THE
CATTLE SLAUGHTER INDUSTRY
For the purposes of the model, we consider three beef and veal
markets: beef from fed steers and heifers, which is generally
USDA quality graded;1 beef from cows and bulls, which is not
quality graded; and veal or meat from young calves. As
explained in the section below, these three cattle markets have
different production stages, produce different types of product,
and respond differently to price changes.
2.1.1
Stages of Production
Cattle producers, typically small and geographically dispersed,
wean calves when they weigh approximately 400 pounds. A
small portion of calves are slaughtered as veal. Many cow−calf
operations retain cattle until they are between 500 and 750
pounds, adding weight with grass and roughage. From there,
the production processes for steers and heifers versus cows and
bulls differ.
1
In 2004, 92.5 percent of beef from steer and heifer slaughter was
quality graded (USDA/AMS, 2005b).
2-1
Economic Impact Analysis: BSE Rulemaking
Steers and heifers move to feedlots where they are typically fed
a concentrated diet of corn rations, reaching a market weight
range between 1,000 and 1,300 pounds. Thus, steers and
heifers are referred to as “fed cattle” within the model. Fed
cattle produce a more marbled cut of beef, which consumers
prefer for taste.
Cows occasionally move through feedlots, but they more often
move directly to slaughter plants from dairy farms and beef
cow−calf operations. Cows, eating grass and forage, produce
leaner meat that is mixed with steer and heifer trimmings to
produce ground beef (McDonald et al., 2000). Thus, cows and
bulls are referred to as “nonfed cattle” in the model.
Cattle are transported from the farm or feedlot to slaughter
plants, where FSIS inspectors perform ante-mortem
inspections, the cattle are slaughtered, FSIS inspectors perform
post-mortem inspections, and carcasses are fabricated into cuts
or further-processed products. Figure 2-1 displays the process
that is followed at a typical beef slaughter plant.
Beef plants typically specialize in slaughtering either steers and
heifers or cows and bulls. Steer and heifer slaughter plants are
geographically concentrated in the Great Plains area, where
three-fourths of feedlots are located. Cow and bull slaughter
plants are geographically concentrated in the northern half of
the United States near dairy operations, including Wisconsin,
New York, and Minnesota. In addition to the geographic
differences, two factors contribute to plant slaughter
specialization—different animal shapes require different sizes or
settings for slaughter line equipment and different animals also
produce different meat products (McDonald et al., 2000).
Table 2-1 highlights weight differences between the cattle
types. The dressing percentage (dressed weight divided by live
weight) is higher for steers and heifers than for cows and bulls
because a larger portion of their carcasses is usable.
Weight data are important for the facility-level model because
slaughter volumes are reported on a per-animal basis, while
price and trade data are reported on a per-pound basis. We
used the weight data to convert all data into a carcassequivalent animal basis.
2-2
Section 2 — Cattle Slaughter Industry Profile
Figure 2-1. Typical Slaughter Process at Beef Slaughter Plant
RECEIVING
PACKAGING
MATERIALS
RECEIVING LIVE CATTLE
STUNNING/BLEEDING
HEAD/SHANK
REMOVAL
SKINNING
EVISCERATION
SPLITTING
VISCERA
PROCESSING
TRIM RAIL
FINAL WASH
CHILLING
STORAGE
PACKAGING
MATERIALS
VARIETY MEATS
PRODUCTION
PACKAGING/LABELING
FINISHED PRODUCT
STORAGE (COLD)
SHIPPING
Source: U.S. Department of Agriculture (USDA)/Food Safety and Inspection Service (FSIS). September 1999.
“Generic HACCP Model for Beef Slaughter.” Available from http://www.fsis.usda.gov/OPPDE/nis/outreach/
models/HACCP-13.doc.
In fiscal year (FY) 2002, 608 federally inspected plants
slaughtered bulls and cows, 676 plants slaughtered steers and
heifers, and 232 plants slaughtered veal and calves (see
Table 2-2).2 In addition, 869 state-inspected plants (853 very
small plants and 16 small plants) slaughtered some meat
species in FY 2002, but data are not available to determine
which species and the total number of animals slaughtered.
Because the cost and revenue effects of the interim final rule
differ depending on the age of cattle slaughtered,
disaggregating the model into three markets facilitated
imposing the appropriate cost estimate for each type of facility.
2
Note that some plants slaughtered multiple types, so the total
number of establishments slaughtering cattle is less than the sum
of the plant numbers indicated here.
2-3
Economic Impact Analysis: BSE Rulemaking
Table 2-1. Average
Weight of Cattle at
Federal Plants, 2002
The dressing percentage for
steers/heifers and veal/calves
is over 60 percent but less
than 50 percent for cows/bulls.
Average Live Weight
(lbs)
Cattle Type
Average Dressed
Weight (lbs)a
Steers/heifers
1,275
803
Cows/bulls
1,100
517
Veal/calves
310
190
a
Dressed weight means the amount used for primary muscle meat cuts.
Steers/heifers and cows/bulls source: U.S. Department of Agriculture
(USDA)/Agricultural Marketing Service (AMS). 2005c. Various issues.
“USDA Market News, By-product Drop Value Reports.” Available from
www.ams.usda.gov/mnreports/nw_ls441.txt.
Veal/calves source: U.S. Department of Agriculture (USDA)/National
Agricultural Statistics Service (NASS). March 2003. “Livestock Slaughter
2002 Summary.” Available from http://jan.mannlib.cornell.edu/reports/
nassr/livestock/pls-bban/lsan0303.txt.
Table 2-2. Plant Inventories and Slaughter Volumes for Federal Plants that Slaughtered
Cattle in FY 2002
Although many establishments slaughter cattle in only one age category, others slaughter cattle in multiple age
categories.
Bulls and Cows
Size
Number of
Plants
Volume
Steers and Heifers
Number of
Plants
Volume
Veal and Calves
Number of
Plants
Volume
Very small
473
174,682
521
152,860
176
109,502
Small
115
3,218,222
121
3,160,244
56
924,045
Large
20
2,393,078
34
22,304,769
0
0
608
5,785,982
676
25,617,873
232
1,033,547
Total
Source: RTI International. 2003. Enhanced Facilities Database. Research Triangle Park, NC: RTI.
2.1.2
Production Inputs for Cattle Slaughter Plants
The primary input at a beef slaughter facility is the live animal.
In addition, plants use a mixture of labor, energy, and capital
equipment to produce final products. MacDonald et al. (2000)
estimated the proportion of these costs relative to total costs at
a typical beef slaughter plant, shown in Table 2-3.
For the facility-level model, we reproportioned the factor shares
noted in Table 2-3 to exclude meat and capital equipment,
because these are accounted for elsewhere in the model. We
collected state-level data on labor rates (hourly wages) for
employees in the food and kindred products industry and on
energy (electricity) rates. We transformed these data sets into
2-4
Section 2 — Cattle Slaughter Industry Profile
Table 2-3. Input Factor
Shares at Beef Slaughter
Plants
The cost of the live animal is
86 percent of the cost of
production in beef slaughter
plants.
Cost Category
Factor Sharea
Labor
0.06
Meat (live animal)
0.86
Materials
0.06
Capital equipment
0.03
a
Total may not add to 1.0 due to rounding.
Source: MacDonald, J., M. Ollinger, K. Nelson, and C. Handy. February 2000.
“Consolidation in U.S. Meatpacking.” USDA/ERS Agricultural Economics
Report No. 785. Washington, DC: USDA.
an overall cost index, using the reproportioned labor and
materials factor shares. The facility-level model uses the cost
index to assign typical costs to plants based on their
geographical location. Table 2-4 details the labor and
electricity data and the overall beef cost index.
2.1.3
Production Outputs of Cattle Slaughter Plants
The primary output of cattle slaughter plants is the beef meat
obtained from the animal carcass. Some plants sell whole or
half carcasses, but most break carcasses down into boxed beef,
ground beef, and more processed products. In the 1960s,
fabricated beef accounted for only 9 percent of the value of
shipments from beef slaughter plants, but that number
increased to approximately 99 percent by 2004 (USDA/AMS,
2005a). Lower transportation costs for boxed beef rather than
for whole carcasses contributed to this trend.
By-Products
As indicated in Table 2-1, only a percentage of the animal can
be used as beef cuts (i.e., dressing percentage). The
remainder of the animal—by-products—is processed into
human food, livestock feed, and other products used in the
industrial sector. Three main categories of by-products are
produced: variety meats, rendered products, and hides.
Variety meats include organs that can be processed into human
food, and rendered products include tallow and bonemeal that
are processed into products such as pet food. Hides are the
most valuable by-product, constituting approximately 60
percent of total by-product value. Figure 2-2 shows the hide
value and its proportion of total by-product value from 1998 to
2003.
2-5
Economic Impact Analysis: BSE Rulemaking
Table 2-4. Labor and Energy Rates and Respective Indices and Total Beef Cost Index, by
State, 2002
The input shares used to calculate the cost index were derived from estimates in McDonald et al. (2000).
State
Hourly Wages
($/hour)a,b,c
Hourly Wage
Index
(average = 100)
Electricity
Revenue
(cents/kWh)
Electricity
Revenue Index
(average = 100)
Beef Cost
Index
AL
9.54
73.00
3.9
76.00
74.45
AK
18.31
140.09
7.7
150.06
144.91
AZ
9.25
70.78
5.3
103.29
86.50
AR
9.25
70.78
4.2
81.85
76.13
CA
15.27
116.84
8.7
169.55
142.33
CO
11.80
90.25
4.4
85.75
88.07
CT
14.01
107.21
7.7
150.06
127.94
DE
14.87
113.75
4.2
81.85
98.32
FL
13.42
102.69
5.3
103.29
102.98
GA
11.81
90.35
4.0
77.95
84.35
HI
18.31
140.09
10.7
208.52
173.19
ID
11.92
91.20
4.6
89.64
90.45
IL
12.69
97.07
5.6
109.13
102.90
IN
13.77
105.37
4.0
77.95
92.11
IA
14.79
113.18
4.0
77.95
96.14
KS
12.67
96.94
4.6
89.64
93.41
KY
13.25
101.41
3.1
60.41
81.58
LA
10.57
80.83
4.4
85.75
83.21
ME
11.59
88.68
3.8
74.05
81.61
MD
15.33
117.26
3.9
76.00
97.30
MA
14.25
109.01
8.2
159.80
133.58
MI
14.27
109.17
4.9
95.49
102.55
MN
13.51
103.36
4.2
81.85
92.95
MS
10.74
82.20
4.4
85.75
83.92
MO
13.32
101.93
4.5
87.70
95.04
MT
13.26
101.44
4.1
79.90
91.02
NE
12.47
95.44
3.9
76.00
86.04
NV
12.39
94.78
7.3
142.26
117.75
NH
18.31
140.07
8.9
173.44
156.21
NJ
14.22
108.79
7.5
146.16
126.86
NM
10.93
83.62
4.7
91.59
87.48
(continued)
2-6
Section 2 — Cattle Slaughter Industry Profile
Table 2-4. Labor and Energy Rates and Respective Indices and Total Beef Cost Index, by
State, 2002 (continued)
State
a
Hourly Wages
($/hour)a,b,c
Hourly Wage
Index
(average = 100)
Electricity
Revenue
(cents/kWh)
Electricity
Revenue Index
(average = 100)
Beef Cost
Index
NY
13.78
105.41
4.9
95.49
100.61
NC
11.05
84.51
4.7
91.59
87.93
ND
12.13
92.81
4.0
77.95
85.62
OH
15.18
116.16
4.7
91.59
104.28
OK
11.29
86.39
3.8
74.05
80.42
OR
13.07
100.01
5.0
97.44
98.76
PA
15.06
115.19
5.8
113.03
114.15
RI
14.13
108.11
7.8
152.01
129.34
SC
9.70
74.18
3.9
76.00
75.06
SD
13.23
101.25
4.6
89.64
95.63
TN
13.62
104.19
4.3
83.80
94.33
TX
9.88
75.62
4.8
93.54
84.29
UT
12.43
95.07
3.8
74.05
84.90
VT
13.28
101.63
7.9
153.95
126.94
VA
13.42
102.67
4.1
79.90
91.66
WA
14.30
109.38
4.2
81.85
96.07
WV
11.39
87.16
3.8
74.05
80.82
WI
13.83
105.83
4.4
85.75
96.11
WY
12.66
96.88
3.6
70.16
83.95
Average
13.07
100.00
5.1
100.0
100.0
December 2002 data are preliminary.
b
The following states did not have wage data: CO, CT, DE, MS, NM, NV, RI, SD, and WY. We calculated wage
rates for these states using the average of neighboring states.
c
Wages for Alaska and Hawaii were not available; we used the highest figure among the other 48 states for AK and
HI.
Hourly wages source: U.S. Bureau of Labor Statistics. 2002. “Series Report—Employment, Hours, and Earnings
from the Current Employment Statistics Survey (National).” Series ID CEU3231161106. Available from
http://data.bls.gov/cgi-bin/srgate. Accessed on September 10, 2003.
Electricity source: U.S. Energy Information Administration. March 2003. Electric Power Monthly. DOE/EIA-0226
(2003/03). Available from http://tonto.eia.doe.gov/FTPROOT/electricity/epm/02260303.pdf.
2-7
Economic Impact Analysis: BSE Rulemaking
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
%
$
Figure 2-2. Value of Cattle Hide, per 1,000-lb Steer
0
0
1998
1999
2000
2001
2002
2003
Year
Value of Hide ($)
Proportion of Total By-Product Value (%)
Source: National Cattlemen’s Beef Association. 2003. Cattle and Beef Industry Statistics, Table 6-6. Centennial,
CO. Available from http://www.beef.org/documents/NCBA_STATS_Nov2003.xls.
Table 2-5 shows a list of steer and cow by-products with their
average weight and value. Slaughter and meat-packing
facilities either process their own by-products or send them to
renderers. In the past, the rendering industry consisted of
primarily independent renderers, but it is now becoming
vertically integrated with the packing industry.
Approximately 70 percent of by-product volume is rendered by
slaughter plants (Cook, 2004). Independent renderers often
process by-products from various animal species, but those
aligned with packers process only those by-products of the
species that is slaughtered on-site. Thus, the volume of
“mixed-species” by-products is declining as independent
renderers lose market share (Sparks, 2001).
By-products with mammalian protein cannot be used as cattle
feed because this practice has been identified as the primary
means by which BSE is spread. Feed bans, enacted in 1997 by
the U.S. Food and Drug Administration, prevent use of
mammalian protein in cattle feed.
2-8
Section 2 — Cattle Slaughter Industry Profile
Table 2-5. Steer and Cow By-Products and Values as Reported by USDA, 2002
Plants receive approximately $96 in by-product revenue for a typical steer weighing 1,275 lbs and approximately
$74 for a typical cow weighing 1,100 lbs.
Steers
Weight
(lbs/cwt)
By-Product
Cows
Value ($/cwt)
Weight
(lbs/cwt)
Hide
5.05
4.91
Tallow, edible
1.20
0.18
Tallow, packer bleachable
4.50
0.62
3.68
0.44
Tongues
0.26
0.31
0.32
0.37
Cheek meat, trimmed
0.32
0.22
0.43
0.38
Head meat
0.13
0.05
0.14
0.11
Oxtail
0.16
0.21
0.20
0.27
Hearts, regular, bone-out
0.38
0.09
0.46
0.11
Lips, unscalded
0.11
0.09
0.13
0.05
Livers, gall off
0.96
0.22
0.90
0.17
Tripe, scalded edible
0.65
0.12
1.06
0.21
Tripe, honeycomb bleached
0.15
0.10
0.14
0.09
Lungs, inedible
0.47
0.01
0.86
0.04
Melts
0.14
0.01
0.15
0.01
Meat bonemeal
3.70
0.30
10.71
0.88
Blood meal
0.60
0.10
0.73
0.12
18.78
7.54
24.53
6.76
Total
4.62
Value ($/cwt)
NA
3.51
NA
NA: Not applicable
Source: Schraler, Mike, USDA Market News. Personal communication with Catherine Viator, RTI. November 18,
2003.
2.1.4
Supply Elasticities
RTI searched EconLit, Agricola, and AgEconSearch databases
and various publications from USDA’s Economic Research
Service to obtain estimates of domestic and import supply
elasticities. In addition to obtaining own-price domestic supply
elasticities, we also obtained input supply elasticities for each
individual market (listed in Table 2-6). The economics
literature does not report import supply elasticities; therefore,
we used assumed values based on the assumption that import
supply is likely much more elastic than domestic supply.
2-9
Economic Impact Analysis: BSE Rulemaking
Table 2-6. Supply
Elasticities for Cattle
Both output and input supply
elasticities are relatively
inelastic.
Steers and
Heifers
Cows and Bulls
Veal and
Calves
Output supply for
beefa
0.3
0.3
0.3
Input supply for
live cattle
0.6
1.1
0.4
Import supply for
beef
1.0
1.0
1.0
Elasticity Type
a
Assumed output supply elasticities used in the model varied by plant size as
follows: Very Small: 0.3, Small: 0.2, and Large: 0.1.
Sources: Buhr, B.L. and H. Kim. 1997. “Dynamic Adjustment in Vertically
Linked Markets: The Case of the US Beef Industry.” American Journal of
Agricultural Economics 79(February):126-138.
Brester, G. and M. Wohlgenant. 1997. “Impacts of the GATT/Uruguay Round
Trade Negotiations on US Beef and Cattle Prices.” Journal of Agricultural and
Resource Economics 22(1):145-158.
2.2 DEMAND CHARACTERIZATION OF THE
CATTLE SLAUGHTER INDUSTRY
In characterizing the demand for cattle slaughter, we
considered consumption of beef relative to other meat and
poultry and how this consumption responds to price changes.
2.2.1
Consumption
Beef consumption from 1990 to 2001 ranged from a low of 61
pounds per capita in 1993 to a high of 64.5 pounds in 2000.
Some experts attribute increasing beef consumption over the
past 5 years to popular protein-based diets and to an increasing
number of “beef convenience” products. More than 500 new
beef convenience products were introduced in 2002 alone,
when frozen and heat-and-serve beef sales reached $1.5 billion
(Duhigg, 2003).
Many consumers prefer beef to other meats, evidenced by
higher consumption levels, but chicken and pork consumption
follow closely behind (see Figure 2-3). Beef producers are
primarily concerned about competition from the poultry market,
because poultry consumption has increased by 10 pounds per
capita since 1990. Turkey, veal, and lamb consumption has
remained constant since 1990.
2-10
Section 2 — Cattle Slaughter Industry Profile
Figure 2-3. Per Capita Meat Consumption, 1990–2001 (lbs)
70
Meat Consumption, lbs
60
50
40
30
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Beef
Veal
Pork
Lamb and Mutton
Chicken
Turkey
Source: U.S. Department of Agriculture (USDA)/Economic Research Service. 2003a. “Food Consumption (per
Capita) Data System.” Available from http://www.ers.usda.gov/data/foodconsumption/DataSystem.asp?
ERSTab=3.
2.2.2
Demand Elasticities
Using the same sources as described in Section 2.1.4, we also
obtained estimates of the own-price and cross-price elasticities
of domestic demand and export demand. Specifically, we
obtained the following:
ƒ
own-price demand elasticity for beef (broken out by the
different cattle markets) and
ƒ
cross-price demand elasticity between different types of
beef.
Table 2-7 lists demand elasticities for the three cattle markets.
For own-price demand elasticities, we treated elasticities for
Choice beef as a proxy for elasticities for beef from steers and
heifers and elasticities for Select beef as a proxy for elasticities
for beef from cows and bulls. Because veal elasticities were
unavailable, we assumed values based on the premise that veal
should have less elastic demand elasticities compared to other
types of meat. We did not find estimates of the export demand
elasticity for beef; therefore, we used an assumed value of
−1.0.
2-11
Economic Impact Analysis: BSE Rulemaking
Table 2-7. Demand
Elasticities for Meat
Meat From
Veal and
Calves
Cows and
Bulls
Steers and
Heifers
–0.3
–0.6
–0.4
Cross-price demand
for beef from steers
and heifers
0.2
0.3
—
Cross-price demand
for beef from cows
and bulls
0.1
—
0.3
Cross-price demand
for veal
—
0.1
0.2
–1.0
–1.0
Elasticities of demand for beef
are inelastic.
Elasticity Type
Own-price demand
for beef
Export demand for
beef
–1.0
Source: Lusk, J., T. Marsh, T. Schroeder, and J. Fox. 2001. “Wholesale
Demand for USDA Quality Graded Boxed Beef and Effects of Seasonality.”
Journal of Agricultural and Resource Economics 26(1):91-106.
2.3 INDUSTRY ORGANIZATION
The U.S. cattle slaughter industry has become increasingly
concentrated, integrated, and aligned with other segments of
the cattle industry. This section explores these trends in more
detail.
2.3.1
Number of Plants and Companies
The 2002 EFD lists 620 cattle slaughter plants owned by 591
companies. Of these companies, at least 11 own more than
one beef slaughter plant included in the facility-level model
(see Table 2-8 for a list of these companies).
2.3.2
Market Power
Based on the Herfindahl-Hirschman Index3 (HHI), cattle, hog,
and sheep slaughter facilities became increasingly concentrated
over the 1980s and 1990s (see Figure 2-4). The increase in
the HHI for the hog industry was gradual over time, but the
cattle and sheep slaughter industries experienced a
concentration spike in the late 1980s and early 1990s.
3
2-12
The Herfindahl-Hirschman Index equals the sum of each firm’s
squared percentage share of total commercial slaughter.
Section 2 — Cattle Slaughter Industry Profile
Table 2-8. Known Companies Owning Multiple Beef Slaughter Plants
Half of the companies listed are classified as small companies by the Small Business Administration.
Small Business
Administration
Classification
Employmenta
10
No
124,000
Cargill Inc.
6
No
97,000
ConAgra Foods, Inc.
6
No
89,000
Smithfield Foods, Inc.
5
No
41,000
Rosen Diversified
3
No
2,200
Farmland National Beef Packing Co.
2
No
4,100
Brown Packing Company, Inc.
2
Yes
200
Black River Custom Packers
2
Yes
43
Mountain Meat Packing Company
2
Yes
17
Hampton Meat Processing
2
Yes
34
Stoltzfus Market
2
Yes
18
Number of
Beef Plants
Name
Tyson Foods, Inc.
a
Employment figures represent company-wide employment, including facilities that do not slaughter cattle.
Source: RTI International. 2003. Enhanced Facilities Database. Research Triangle Park, NC: RTI.
Figure 2-4. HHI Values for Slaughter Facilities, 1980–2001
2,000
HHI Values
1,750
1,500
1,250
1,000
750
500
250
0
1980
1985
1990
1995
1996
1997
1998
1999
2000
2001
Year
Cattle
Hogs
Sheep/Lambs
Source: U.S. Department of Agriculture (USDA)/Grain Inspection, Packers and Stockyards Administration (GIPSA).
2003. “Packers and Stockyards Statistical Report: 2001 Reporting Year.” Tables 27-32. Available from
http://www.usda.gov/gipsa/pubs/stat01/stat01.htm.
2-13
Economic Impact Analysis: BSE Rulemaking
Concentration levels for the cattle and sheep industry have now
leveled to HHI values of less than 1,400, within the range of
“moderate concentration” as defined by the U.S. Department of
Justice and the Federal Trade Commission.4 Contributing
factors to increased concentration trends at cattle slaughter
facilities include greater technological advancement, allowing
for greater efficiency; changes in labor relations, reducing wage
premiums once seen in large plants; and geographic shifts and
concentration in cattle feeding (McDonald et al., 2000).
In addition to becoming highly concentrated, the slaughter
industries are now more vertically integrated. Many companies
that own cattle slaughter plants also own companies within
other segments of the beef supply chain, including rendering
and further meat processing. Some slaughter facilities only
supply beef to processing facilities owned by the same
company.
Cattle slaughter facilities can also align themselves with the
cattle production stage through marketing arrangements such
as the following:
4
2-14
ƒ
Packer fed cattle—packers own cattle for 2 or more
weeks prior to slaughter that were fed in the packer’s
own facility or fed for the packer in an operation owned
by another firm (i.e., custom fed);
ƒ
Forward contracts—contracts with sellers at either a
fixed or base price entered into 2 or more weeks prior to
slaughter; or
ƒ
Marketing agreements—an oral or written agreement
between a packer and a seller in which the seller agrees
Increasing market concentration in the beef and pork packing
industries has led to a large body of research to determine whether
meat packers are exerting market power in the purchase of
livestock or in the sale of meat products. These concerns have
continued during the past decade, a time period in which operating
income (gross income from sales minus total operating expenses)
for the 40 largest packers has ranged between an average of 1.2
and 3.7 percent of gross income (USDA/GIPSA, 2003). In a review
of both Structure-Conduct-Performance (SCP) studies and New
Empirical Industrial Organization (NEIO) studies, Azzam (1998)
concluded that many studies have found no evidence of market
power or have found statistically significant but small departures
from competitive conduct in the meat industries. More recent
studies have stated or confirmed this general conclusion (e.g.,
Ward [1999]; Muth and Wohlgenant [1999a]; Muth and
Wohlgenant [1999b]; Wohlgenant [2001]; Paul [2001]; Love et al.,
[1998]).
Section 2 — Cattle Slaughter Industry Profile
to ship all or part of its slaughter cattle to the packer
when the cattle are ready for slaughter, and price is
determined at or after slaughter.
Three main incentives exist for these arrangements: reduced
costs, enhanced risk management, and cattle and beef quality
(Hayenga et al., 2000). In 2001, 43 percent of all cattle
slaughtered in the United States were procured through these
types of marketing arrangements (GIPSA, 2003).
2.4 MARKET-LEVEL DATA
In our discussion of market-level data, we compare prices of
beef to other meats and poultry, examine imports and exports
of beef products, and end with an explanation of 2002 as the
baseline year for the economic analysis described in later
sections.
2.4.1
Prices
Figure 2-5 depicts nominal retail and wholesale meat and
poultry prices and livestock farm prices from 1998 through
2002. At the retail level, beef and pork prices trended
upwards, while poultry prices remained stable over the 5-year
period. Also, retail beef and pork prices were more than double
retail poultry prices.
Under the Livestock Mandatory Reporting Act of 1999, USDA
publishes retail prices for various meat products using scanner
data collected from product barcodes. Scanner data indicate
that prices for all meats, with the exception of veal and
chicken, fell from 2001 to 2002 but then rose in 2003 (see
Table 2-9).
Figures 2-6 and 2-7 display nominal wholesale and farm-level
prices, respectively, from 1998 through 2002. We obtained
wholesale prices for the three beef markets from various ERS
Livestock, Dairy, and Poultry Outlook reports. Boxed beef
cutout values were used as a proxy for steer and heifer prices,
values for beef from canner-cutter cows were used as a proxy
for cow and bull prices, and values for veal carcasses were used
as a proxy for veal prices. Wholesale veal and lamb prices are
three times higher than ungraded beef, pork, chicken, and
turkey. Graded beef from steers and heifers trended upwards
from a low of $1.07/lb in 1998 to a high of $1.19/lb in 2001. It
appears that the price of beef from cows and heifers fell
2-15
Economic Impact Analysis: BSE Rulemaking
Figure 2-5. Meat Retail Prices, 1998–2002 ($/lb)
Retail prices were unavailable for veal and lamb.
3.50
3.00
$/lb
2.50
2.00
1.50
1.00
0.50
0.00
1998
1999
2000
2001
2002
Year
Beef
Pork
Chicken
Turkey
Sources: U.S. Department of Agriculture (USDA)/Economic Research Service (ERS). July 2004b. Red Meat
Yearbook. Washington, DC: USDA.
U.S. Department of Agriculture (USDA)/Economic Research Service (ERS). Livestock, Dairy, and Poultry
Outlook. Various issues. Available from http://www.ers.usda.gov/publications/ldp/.
U.S. Department of Agriculture (USDA)/Economic Research Service (ERS). August 2004a. Poultry Yearbook.
Washington, DC: USDA.
Table 2-9. Retail Prices
for Meat, Based on
Scanner Data ($/lb)
USDA began to report prices
using meat scanner data in
January 2001.
2001
2002
2003a
Beef
$3.02
$2.97
$3.21
Veal
$4.94
$5.12
$5.28
Pork
$2.65
$2.56
$2.60
Lamb
$4.26
$4.23
$4.62
Chicken
$1.70
$1.70
$1.76
Turkey
$1.53
$1.48
$1.49
Product
a
Figures for 2003 represent January through November. December prices were
not yet available.
Source: U.S. Department of Agriculture (USDA)/Economic Research Service.
2003b. “Retail Scanner Prices for Meat.” Available from http://www.ers.
usda.gov/data/MeatScanner/default.asp?ERSTab=3.
2-16
Section 2 — Cattle Slaughter Industry Profile
Figure 2-6. Wholesale Meat Prices, 1998–2002 ($/lb)
2.50
$/lb
2.00
1.50
1.00
0.50
0.00
1998
1999
2000
2001
2002
Year
Beef (steers and heifers)
Beef (cows and bulls)
Beef (veal and calves)
Pork
Lamb
Chicken
Turkey
Sources: U.S. Department of Agriculture (USDA)/Economic Research Service (ERS). Various issues. Livestock,
Dairy, and Poultry Outlook. Available from http://www.ers.usda.gov/publications/ldp/.
U.S. Department of Agriculture (USDA)/Economic Research Service (ERS). July 2004b. Red Meat Yearbook.
Washington, DC: USDA.
U.S. Department of Agriculture (USDA)/Economic Research Service (ERS). August 2004a. Poultry Yearbook.
Washington, DC: USDA.
drastically in 2001; however, only 1 month of data was
available for 2001 from the ERS Livestock, Dairy, and Poultry
Outlook, so this may not be an accurate representation.
2.4.2
Beef Trade
The United States has had until recently a favorable trade
balance in beef, both in terms of volume and value, although
the difference between exports and imports has narrowed since
2000 (see Figures 2-8 and 2-9). The International Trade
Commission (ITC) reports aggregated trade volumes for all beef
and veal; thus, we cannot determine the amount of beef traded
within individual cattle markets (steers and heifers, cows and
bulls, and veal). However, we assumed most imports are
higher-quality cuts from steers and heifers rather than lowerquality cuts from cows and bulls.
2-17
Economic Impact Analysis: BSE Rulemaking
Figure 2-7. Livestock Farm Prices, 1998–2002 ($/lb)
1.20
1.00
$/lb
0.80
0.60
0.40
0.20
0.00
1998
1999
2000
2001
2002
Year
Steers and Heifers
Sheep
Cows and Bulls
Lamb
Veal and Calves
Chicken
Hogs and Pigs
Turkey
Sources: U.S. Department of Agriculture (USDA)/National Agricultural Statistics Service (NASS). March 2003.
“Livestock Slaughter 2002 Summary.” Available from
http://jan.mannlib.cornell.edu/reports/nassr/livestock/pls-bban/lsan0303.txt.
U.S. Department of Agriculture (USDA)/National Agricultural Statistics Service (NASS). No date. Agricultural
Charts and Maps, Agricultural Prices, Prices Received by Farmers, Cattle, US. Available from
http://www.usda.gov/nass/aggraphs/priceca.htm.
U.S. Department of Agriculture (USDA)/Economic Research Service (ERS). Various issues. Livestock, Dairy, and
Poultry Outlook. Available from http://www.ers.usda.gov/publications/ldp/.
U.S. Department of Agriculture (USDA)/Economic Research Service (ERS). August 2004a. Poultry Yearbook.
Washington, DC: USDA. Tables 92 and 156.
Table 2-10 displays trade volumes prior to the discovery of BSE
in North America. Immediately following the BSE discovery in
December 2003, more than 20 countries banned all beef
imports from the United States. Because of this, exports
declined dramatically in 2004. Some countries are now easing
their restrictions, allowing boneless beef from cattle under 30
months of age (USDA/FSIS, 2004).
The greatest quantity of beef imports is from boneless, frozen
meat. However, it is not clear if this is from primary meat cuts
or trimmings. Table 2-10 offers a more detailed breakdown of
beef products that are traded.
2-18
Section 2 — Cattle Slaughter Industry Profile
Figure 2-8. Volume of Beef Trade, 2000–2002 (1,000 lbs)
We downloaded trade data using HTS–6 codes.
Thousands of lbs
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2000
2001
2002
Year
Imports
Exports
Source: U.S. International Trade Commission. Interactive Tariff and Trade DataWeb. Available from
http://dataweb.usitc.gov/. Accessed October 22, 2003.
Figure 2-9. Value of Beef Trade, 2000–2002 ($1,000)
We downloaded trade data using HTS–6 codes.
Dollars (thousands)
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2000
2001
2002
Year
Imports
Exports
Source: U.S. International Trade Commission. Interactive Tariff and Trade DataWeb. Available from
http://dataweb.usitc.gov/. Accessed October 22, 2003.
2-19
Economic Impact Analysis: BSE Rulemaking
Table 2-10. Volume of Beef Trade by HTS-6 Code, 2000–2002 (1,000 lbs)
HTS-6
Code
Imports
Description
2000
2001
Exports
2002
2000
2001
2002
11,561
9,371
7,182
23,847
18,255
10,730
20120 Meat of bovine animals,
cuts with bone-in (fresh)
195,012
198,871
178,609
74,787
57,535
59,162
20130 Meat of bovine animals,
boneless, fresh or chilled
534,649
604,362
697,236 833,053 814,168 851,778
117
104
5,369
4,110
20110 Carcasses and half
carcasses of bovine
animals, fresh
20210 Carcasses and half
carcasses of bovine
animals, frozen
20220 Meat of bovine animals,
cuts with bone-in (frozen)
20230 Meat of bovine animals,
boneless, frozen
20610 Offal of bovine animals,
edible, fresh or chilled
13,380
14,901
4,653
3,951 173,445 207,832 210,558
1,337,789 1,360,538 1,288,900 865,621 608,342 677,391
15,133
15,104
20621 Tongues of bovine animals,
edible, frozen
2,445
20622 Livers of bovine animals,
edible, frozen
20629 Offal of bovine animals,
edible, NESOI, frozen
454
16,504
41,289
35,238
17,746
2,403
7,521 190,547 148,156
56,739
2,097
1,654
1,921 224,531 225,583 202,168
56,316
61,991
51,685 459,679 402,413 320,541
Source: U.S. International Trade Commission. Interactive Tariff and Trade DataWeb. Available from
http://dataweb.usitc.gov/. Accessed October 22, 2003.
The top export markets for U.S. beef (prior to the BSE
discovery in the United States) were Japan, Mexico, Canada,
and the Republic of South Korea, accounting for more than 81.6
percent by volume during 2000 (National Cattlemen’s Beef
Association, 2003). Beef from Canada, Australia, and New
Zealand accounted for 87 percent of U.S. beef imports by
volume.
2.4.3
Use of 2002 as the Baseline Year for the Analysis
We chose a baseline year prior to the discovery of BSE to
analyze the effects of the costs of the regulations on the
industry independent of effects of domestic consumer and
foreign importer reactions to the discovery of BSE in the United
States and in Canada. Our baseline year of 2002 was chosen
2-20
Section 2 — Cattle Slaughter Industry Profile
because it was a typical year, with no extreme price
movements. Furthermore, the data in the most recent update
of the EFD are for fiscal year 2002.
2.5 REFERENCES
Azzam, A.M. 1998. “Competition in the U.S. Meatpacking
Industry: Is it History?” Agricultural Economics
18(1998):107−126.
Brester, G., and M. Wohlgenant. 1997. “Impacts of the
GATT/Uruguay Round Trade Negotiations on US Beef
and Cattle Prices.” Journal of Agricultural and Resource
Economics 22(1):145−158.
Buhr, B.L., and H. Kim. 1997. “Dynamic Adjustment in
Vertically Linked Markets: The Case of the US Beef
Industry.” American Journal of Agricultural Economics
79:126−138.
Cook, Tom, National Renderers Association. Telephone
interview with Mary Muth and Catherine Viator, RTI
International. May 5, 2004.
Duhigg, Charles. September 15, 2003. “The Bull about the
Beef: Has the Atkins Diet Really Transformed the
American Economy?” Available from
<http://slate.msn.com/id/2088210>.
Hayenga, M., T. Schroeder, J. Lawrence, D. Hayes, T. Vukina,
C. Ward, and W. Purcell. 2000. “Meat Packer Vertical
Integration and Contract Linkages in the Beef and Pork
Industries: An Economic Perspective.” Available from
<http://www.econ.iastate.edu/faculty/hayenga/AMIfullr
eport.pdf>.
Love, H.A., D.M. Burton, K.C. Raper, and C.R. Shumway.
October 1998. “Empirical Monopsony Market Power
Measurement in Beef Packing.” Paper presented at the
Consolidation in the Meat Sector conference,
Washington, DC.
Lusk, J., T. Marsh, T. Schroeder, and J. Fox. 2001. “Wholesale
Demand for USDA Quality Graded Boxed Beef and
Effects of Seasonality.” Journal of Agricultural and
Resource Economics 26(1):91−106.
MacDonald, J., M. Ollinger, K. Nelson, and C. Handy. February
2000. “Consolidation in U.S. Meatpacking.” USDA/ERS
Agricultural Economics Report No. 785. Washington,
DC: USDA.
2-21
Economic Impact Analysis: BSE Rulemaking
Muth, M.K., and M.K. Wohlgenant. 1999a. “A Test for Market
Power Using Marginal Input and Output Prices with
Application to the U.S. Beef Processing Industry.”
American Journal of Agricultural Economics
81(August):638−643.
Muth, M.K., and M.K. Wohlgenant. 1999b. “Measuring the
Degree of Oligopsony Power in the Beef Packing
Industry in the Absence of Marketing Input Quantity
Data.” Journal of Agricultural and Resource Economics
24(2):299−312.
National Cattlemen’s Beef Association. 2003. Cattle and Beef
Industry Statistics, Table 6-6. Centennial, CO.
Available from <http://www.beef.org/documents/
NCBA_STATS_Nov2003.xls>.
Paul, C.J.M. 2001. “Market and Cost Structure in the U.S. Beef
Packing Industry: A Plant Level Analysis.” American
Journal of Agricultural Economics 83(1):64−76.
RTI International. 2003. Enhanced Facilities Database.
Research Triangle Park, NC: RTI.
Schraler, Mike, USDA Market News. Personal communication
with Catherine Viator, RTI. November 18, 2003.
Sparks Companies, Inc. June 2001. “The Rendering Industry:
Economic Impact of Future Feeding Regulations.”
Prepared for The National Renderers Association.
Available from <http://www.renderers.org/
economic_impact/index.htm>.
U.S. Bureau of Labor Statistics. 2002. “Series Report—
Employment, Hours, and Earnings from the Current
Employment Statistics Survey (National).” Series ID
CEU3231161106. Available from <http://data.bls.gov/
cgi-bin/srgate. Accessed on September 10, 2003>.
U.S. Department of Agriculture (USDA)/Agricultural Marketing
Service (AMS). March 16, 2005a. Market News Service.
Personal communication with Catherine Viator, RTI
International.
U.S. Department of Agriculture (USDA)/Agricultural Marketing
Service (AMS). 2005b. “National Summary of Meats
Graded.” Available from
<http://www.ams.usda.gov/lsg/mgc/
Reports/mncy04.pdf>.
2-22
Section 2 — Cattle Slaughter Industry Profile
U.S. Department of Agriculture (USDA)/Agricultural Marketing
Service (AMS). 2005c. Various issues. “USDA Market
News, By-product Drop Value Reports.” Available from
<http://www.ams.usda.gov/mnreports/nw_ls441.txt>.
U.S. Department of Agriculture (USDA)/Economic Research
Service (ERS). 2003a. “Food Consumption (per Capita)
Data System.” Available from
<http://www.ers.usda.gov/data/foodconsumption/
DataSystem.asp?ERSTab=3>.
U.S. Department of Agriculture (USDA)/Economic Research
Service (ERS). 2003b. “Retail Scanner Prices for Meat.”
Available from <http://www.ers.usda.gov/data/
MeatScanner/default.asp?ERSTab=3>.
U.S. Department of Agriculture (USDA)/Economic Research
Service (ERS). August 2004a. Poultry Yearbook.
Washington, DC: USDA.
U.S. Department of Agriculture (USDA)/Economic Research
Service (ERS). July 2004b. Red Meat Yearbook.
Washington, DC: USDA.
U.S. Department of Agriculture (USDA)/Economic Research
Service (ERS). Various issues. Livestock, Dairy, and
Poultry Outlook. Available from
<http://www.ers.usda.gov/publications/ldp/>.
U.S. Department of Agriculture (USDA)/Food Safety and
Inspection Service (FSIS). September 1999. “Generic
HACCP Model for Beef Slaughter.” Available from
<http://www.fsis.usda.gov/OPPDE/nis/outreach/models/
HACCP-13.doc>.
U.S. Department of Agriculture (USDA)/Food Safety and
Inspection Service (FSIS). 2004. “Library of Export
Requirements.” Available from <http://www.fsis.
usda.gov/OFO/export/explib.htm#cr_cron>.
U.S. Department of Agriculture (USDA)/Grain Inspection,
Packers and Stockyards Administration (GIPSA). 2003.
“Packers and Stockyards Statistical Report: 2001
Reporting Year.” Tables 14, 27-32. Available from
<http://www.usda.gov/gipsa/pubs/stat01/stat01.htm>.
U.S. Department of Agriculture (USDA)/National Agricultural
Statistics Service (NASS). March 2003. “Livestock
Slaughter 2002 Summary.” Available from
<http://jan.mannlib.cornell.edu/reports/nassr/livestock/
pls-bban/lsan0303.txt>.
2-23
Economic Impact Analysis: BSE Rulemaking
U.S. Department of Agriculture (USDA)/National Agricultural
Statistics Service (NASS). No date. “Agricultural Charts
and Maps, Agricultural Prices, Prices Received by
Farmers, Cattle, US.” Available from
<http://www.usda.gov/nass/aggraphs/priceca.htm>.
U.S. Energy Information Administration. March 2003. Electric
Power Monthly DOE/EIA-0226 (2003/03). Available
from <http://tonto.eia.doe.gov/FTPROOT/electricity/
epm/02260303.pdf>.
U.S. International Trade Commission. Interactive Tariff and
Trade DataWeb. Available from <http://dataweb.
usitc.gov/>. Accessed October 22, 2003.
Ward, C.E. February 1999. “Packer Concentration, Captive
Supplies and Their Impacts: A Review.” Paper
presented at the Consolidation in the Meat Sector
Conference, Washington, DC.
Wohlgenant, M.K. 2001. “Marketing Margins: Empirical
Analysis.” Handbook of Agricultural Economics, Volume
1B: Marketing, Distribution, and Consumers, B.L.
Gardner and G.C. Rausser (eds.), pp. 934-970. New
York: Elsevier.
2-24
3
Estimates of Costs
Associated with the
BSE Interim Final
Rules
In this section, we provide an overview of the cost estimation
The cost analysis focuses
on federally inspected
slaughter establishments,
which account for 99
percent of U.S. cattle
slaughter volume.
process and a description of the types of costs incurred by
cattle slaughter plants as a result of the BSE interim final rules.
The cost analysis focuses on federally inspected slaughter
establishments, which account for 99 percent of U.S. cattle
slaughter volume.1 In addition, the cost analysis uses 2002 as
the baseline year for the analysis for consistency with the
economic impact analysis model. By using 2002 as the
baseline, the model and the cost estimates are based on the
We used 2002 as the
baseline year for the
analysis because
market conditions in
2003 were affected
substantially by the
BSE finding in Canada
in May 2003; thus,
2003 was not a typical
year for the industry.
most recent typical year in the cattle slaughter industry prior to
the market disruptions that occurred as a result of the
discovery of a BSE-infected cow in Canada in May 2003 and in
the United States in December 2003. Furthermore, we
assumed that costs of all changes needed to comply with the
interim final rules are in fact attributable to the BSE interim
final rules, although some plants may have made some initial
changes in response to the Canadian case.
1
Processing establishments that receive carcasses also incur costs
because they must remove SRMs (i.e., dorsal root ganglia and
remnants of spinal cord) in the production process. According to
the FSIS survey of meat and poultry slaughter establishments, 97.9
percent of plants that slaughter cattle 30 months of age and older
remove the body of the vertebral column in cattle they slaughter
(Cates, Karns, and Viator, 2005). Thus, for the purposes of
estimating the total costs of the interim final rules, we treated these
activities as having occurred at the slaughter establishment in
which the animal was originally handled.
3-1
Economic Impact Analysis: BSE Rulemaking
After describing the assumptions on which the cost estimates
are based, we provide plant-level and industry-level estimates
of the costs of changes that plants have made in response to
the regulations. We developed these cost estimates in the
format needed for use in the economic impact analysis model
described in Section 4.
3.1
COST ESTIMATION OVERVIEW
The discovery of a cow infected with BSE in the United States in
December 2003 prompted a number of new regulations by
several agencies responsible for animal and human health,
including the Animal and Plant Health Inspection Service
(APHIS), FSIS, and FDA. As noted below, our analysis focuses
primarily on the costs of prohibiting use of SRMs for human
food and requirements for disposing of nonambulatory disabled
cattle. Our method of data collection, which included
conducting a series of interviews with industry trade
associations and affected plants and contacting producers of
slaughter equipment, was designed to collect targeted
information within a short time frame.
3.1.1
Regulations Included and Requirements of the
Regulation
On January 12, 2004, FSIS published four interim final rules in
response to the U.S. discovery of a cow infected with BSE
(Federal Register, Vol. 69, No. 7). These rules, which became
effective immediately, include the following:
2
3-2
ƒ
Prohibition of the Use of Specified Risk Materials (SRMs)
for Human Food and Requirements for the Disposition of
Nonambulatory Disabled Cattle (pp. 1862–1874)
ƒ
Bovine Spongiform Encephalopathy Surveillance
Program (p. 1892)2
ƒ
Meat Produced by Advanced Meat/Bone Separation
Machinery and Meat Recovery Systems (pp. 1874–1885)
ƒ
Prohibition of the Use of Certain Stunning Devices Used
to Immobilize Cattle During Slaughter (pp. 1885–1891)
The surveillance program is conducted by USDA’s APHIS, but FSIS
requires that carcasses from healthy cattle selected for BSE testing
be held until test results are obtained.
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
The analysis presented here focuses on the first regulation but
we also describe changes associated with the second
regulation. We did not focus on the third regulation on
limitations to Advanced Meat Recovery (AMR)3 because FSIS
analysts previously estimated the costs of this regulation. The
fourth regulation, the ban on certain stunning devices, is not
expected to have a substantial cost impact because these
devices were no longer in use.
Although we did not include the cost effects of the AMR
regulation within our analysis, some of the plants that we
interviewed offered anecdotal information related to the effects
of the AMR regulation. For example, one plant that slaughters
only older cattle determined that its AMR system provided no
benefit if the plant could no longer use the AMR system for
vertebral columns. It converted from an AMR system to
manual deboning overnight, expending $8,600 in labor and
electrical rewiring costs and losing the residual value of the
AMR machinery.
Figure 3-1 details the specific requirements of the SRM and
surveillance program regulations addressed in the cost analysis.
In the SRM rule, FSIS identified the following cattle materials as
SRMs:
3.1.2
ƒ
brain, skull, eyes, trigeminal ganglia, spinal cord,
vertebral column,4 and DRG of cattle 30 months of age
and older and
ƒ
tonsils and the small intestine (including the distal
ileum) of all cattle.
Methods of Data Collection
RTI developed an interview guide, based on discussions with
FSIS, to facilitate discussions with plants regarding the costs
they incurred in response to the interim final rules. Rather than
ask for a total summation of costs, the interview guide breaks
down various cost components and also asks for information
3
FSIS banned the use of AMR systems on skulls or vertebral column
bones from cattle 30 months of age and older (69 FR 1874). AMR
systems use high pressure to remove small particles of meat tissue
from the bone.
4
Requirements for vertebral column exclude the vertebrae of the tail,
the transverse processes of the thoracic and lumbar vertebrae, and
the wings of the sacrum.
3-3
Economic Impact Analysis: BSE Rulemaking
Figure 3-1. Summary of Requirements of the FSIS BSE Interim Final Rules Included in the
Analysis
Nonambulatory Disabled Cattle
Nonambulatory disabled cattle presented for slaughter must be condemned. Nonambulatory
disabled cattle are livestock that cannot rise from a recumbent position or that cannot walk
because of injury or illness. Condemned cattle must be killed by the establishment but may not
be taken into the establishment.
Age of Cattle
Certain by-products (SRMs) of cattle 30 months of age or older are prohibited for use as human
food. Agency personnel will determine the age of cattle using documentation or dental
examinations, if documentation is not available or is questionable.
SRM Segregation and Disposal
Establishments must ensure that SRMs are removed completely from the carcass, segregated
from edible products, and disposed of in an appropriate manner.
Vertebral Bone-In Cuts
The presence of spinal cord and DRG in vertebral bone-in cuts from cattle 30 months of age or
older is prohibited.
Written Plans
Establishments that slaughter cattle or that process the carcasses or parts of cattle must
develop, implement, and maintain written procedures for the removal, segregation, and
disposition of SRMs. The establishment will incorporate such procedures into its HACCP plan, its
SSOPs, or other prerequisite program.
Record Keeping
Establishments must maintain daily records sufficient to document the implementation and
monitoring of procedures for the removal, segregation, and disposition of SRMs. Records must
be retained for at least 1 year.
BSE Surveillance Program
FSIS is no longer applying the mark of inspection to the carcasses and parts of cattle that are
selected for BSE testing by APHIS until the sample is determined to be negative (referred to as
“test and hold”).
that we subsequently used to characterize typical plant
responses. Based on typical plant responses, we then
developed estimates of the costs of changes associated with the
interim final rules. A copy of the interview guide is included as
Appendix A.
After developing the interview guide, we contacted several
trade associations for the beef, meat, and rendering industries
to seek comments on the interview guide’s content and their
perspective on the effects of the regulations. We conducted
telephone interviews with representatives from the
ƒ
3-4
American Association of Meat Processors (AAMP),
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
ƒ
American Meat Institute (AMI),
ƒ
National Association of Meat Processors (NAMP),
ƒ
National Cattlemen’s Beef Association (NCBA), and
ƒ
National Renderers Association (NRA).
In selecting beef slaughter plants to interview, we consulted
with FSIS District Managers to obtain their suggestions and
selected a cross-section of plants based on their Hazard
Analysis and Critical Control Point (HACCP) size, geographical
location, and proportion of types of cattle slaughtered (i.e., fed
vs. nonfed). Between May and July 2004, we visited two plants
to pretest the interview guide and then conducted telephone
interviews with eight plants.5 Table 3-1 provides general
characteristics of the plants we interviewed. We conducted two
of the interviews with company representatives at the corporate
level who provided data on multiple plants.
In addition to primary data collection efforts, we reviewed
previous studies that analyzed the cost effects of BSE
regulations. The NCBA estimates the annual economic effect of
the new FSIS and APHIS BSE regulations will be between $182
and $277 million (or $27 to $41 per head) (Doud, 2004a,
2004b). The NRA estimates the annual economic impact of
potential FDA feed bans will be between $100.14 million and
$1.519 billion, scenarios range from a ban on feeding animal
protein to ruminants to a complete ban on feeding animal
proteins to all farmed animals (Sparks Companies, 2001).
Because these analyses focus on BSE regulations of other
agencies, most of the information in the analyses was not
directly relevant to the cost analysis presented in this section.
We also used the data presented by FSIS in the Preliminary
Regulatory Impact Analysis (PRIA) for the BSE regulations to
assist with our cost estimates. In particular, we used FSIS’s
estimates of the value of SRMs that can no longer be used for
human consumption (see Section 3.3).
5
We limited the number of interviews to avoid having to obtain OMB
clearance, which takes a substantial period of time, prior to the
interviews.
3-5
We obtained information from two plant contacts during the interview guide pretest and from eight plant or company contacts after the pretest.
Characteristic
#1
#2
#3
#4
#5
#6
#7a
#7b
#8
#9
#10a
#10b
1
1
1
1
1
1
1
4
1
1
3
8
VS
VS
VS
S
S
S
S
L
L
L
S
L
93.7%
97.2%
84.3%
7.8%
0.0%
0.0%
0.3%
83.5%
100.0%
23.8%
100.0%
100.0%
6.3%
2.8%
15.7%
92.2%
100.0%
100.0%
99.7%
16.5%
0.0%
76.2%
0.0%
0.0%
Number of days per week
operated
5
5.5
4
5
5
5
5
5
5.4
5−6
5
5
Number of cattle slaughter
lines
1
1
1
1
1
1
1
1
1
1
1
1
Number of cattle slaughter
shifts
1
1
1
1
1
1
1
1
2
1
1
2
Number of fabrication lines
1
1
1
1
1
1
1
4−6
1
1
0
1
Number of fabrication shifts
1
1
1
2
1
1
2
2
2
2
0
2
Number of plants
a
HACCP size
Steers and heifer share of
slaughter
Cow and bull share of
slaughter
b
c
0
0
0
0
0
0
0
0
—
100.0%
2.5%
Yes
Yes
No
No
No
No
No
No
No
No
No
Yes
Plant has on-site edible
rendering
No
No
No
No
No
No
No
Yes
Yes
No
No
Yes
Plant has on-site inedible
rendering
No
No
No
No
Yes
No
No
Yes
Yes
Yes
Yes
Yes
Proportion of carcasses
shipped prior to fabrication
—
Plant receives meat prior to
fabrication
a
HACCP sizes are as follows: VS = very small (1−9 employees or less than $2.5 million in annual sales), S = small (10−499 employees), L = large (500 or more
employees)
b
Carcasses are shipped prior to fabrication by customer request.
c
Carcasses are shipped prior to fabrication for one customer of the plant.
Note: Responses for #7a and #7b and for #10a and #10b were from company headquarters that responded for multiple plants. Small plants are represented
in the “a” column, and large plants are represented in the “b” column.
Economic Impact Analysis: BSE Rulemaking
3-6
Table 3-1. Characteristics of Plants Interviewed for the Cost Analysis
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
3.2
TYPES OF COSTS
In this section, we describe the general categories of costs of
typical changes in plant practices and processes associated with
the interim final rules. We focus in particular on the costs
associated with the SRM and nonambulatory disabled cattle
interim final rule that affect slaughter establishments under
FSIS’s jurisdiction. However, processing plants that receive
cattle carcasses from cattle 30 months of age and older also
incur costs to remove and properly dispose of vertebral
columns and DRG under the SRM and nonambulatory disabled
cattle interim final rule.6
3.2.1
The general categories
of costs associated with
the interim final rules
include
• one-time noncapital
expenditures,
General Categories of Costs Associated with the BSE
Regulations
The costs of changes associated with the interim final rules can
be generally classified as follows:
ƒ
One-time noncapital expenditures. These costs
include labor expenses and consulting fees associated
with reassessing and modifying a plant’s HACCP plan,
sanitation standard operating procedures (SSOPs), or
prerequisite program plan.7 In most cases, plants
appear to have addressed the requirements of the
interim final rules in their prerequisite programs, but
some plants have altered their HACCP plans.
ƒ
One-time capital equipment expenditures. These
costs include the costs of purchasing and installing new
capital equipment within the plant to address the
requirements of the BSE regulations. In making capital
equipment changes, plants have also in some cases
modified the layout of the plant. For the interim final
rules, capital equipment expenditures are associated
with changes such as modified practices for handling of
nonambulatory disabled cattle, dentition, segregation of
cattle by age, and handling of vertebral bone-in cuts for
cattle 30 months of age or older. When using capital
equipment expenditure estimates in developing per-unit
• one-time capital
equipment
expenditures,
• ongoing (or variable)
expenses, and
• lost value of
materials no longer
used for human food.
6
In Section 3.5, we calculate total industrywide estimates of the costs
of the regulations. In calculating these estimates, we multiply
number of head slaughtered by the per-head costs of compliance;
thus, we calculate total costs for all head slaughtered regardless of
whether the costs are actually incurred at the slaughter
establishment or at a processing establishment that receives
carcasses.
7
Companies that own multiple plants might have developed modified
plans for all plants at corporate headquarters.
3-7
Economic Impact Analysis: BSE Rulemaking
costs associated with the regulation, we annualized the
costs over the expected useful life of the equipment to
develop an annual cost estimate. This annualization
accounts for the fact that once a plant adds additional
capital equipment, it will incur costs for replacing that
capital equipment on a periodic basis throughout its
operation.
ƒ
Ongoing (or variable) expenses. Ongoing costs are
the costs that generally vary by the number of cattle
slaughtered in the plant. These costs generally include
labor and material expenses associated with additional
processes conducted within the plant. In addition, the
costs of disposing of SRMs are another type of ongoing
cost associated with the interim final rules.
ƒ
Lost value of SRMs. For plants that previously sold
materials that are now classified as SRMs, they incur
losses associated with no longer being able to sell these
materials for human consumption. In compiling the cost
estimates, we treated the lost value of SRMs (i.e., the
difference between the value of SRMs used in human
food and value of SRMs used in inedible rendering) as an
additional category of ongoing costs associated with the
regulations.
Whether each of these cost categories affects an individual
Plants that slaughter only veal calves will incur costs of only
Because of data and
resource limitations, it is
not possible to
characterize the precise
changes implemented in
each individual plant that
slaughters cattle;
therefore, we
characterized the changes
we believe have or will be
implemented in a typical
plant of each plant type
and size.
two types—reassessment of their written plans and the lost
value of small intestines if the plant was previously using small
intestines for human consumption. In contrast, plants that
slaughter steers and heifers will incur costs in all categories
because at least some steers and heifers will likely be classified
as 30 months of age and older using dentition. In general,
plants incur losses associated with removal and disposal of
SRMs only for cattle that are 30 months of age and older (with
the exception of small intestines for cattle and calves of all
ages). However, not all plants previously sold materials from
cattle that are 30 months of age and older that are now
classified as SRMs for human food.
Because of data and resource limitations, it is not possible to
characterize the precise changes implemented in each
individual plant that slaughters cattle; therefore, we
characterized the changes we believe have or will be
implemented in a typical plant of each plant type and size.
Based on this typical characterization, we then identified the
3-8
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
costs attributable to those changes. In some cases, we
assumed that a very small plant might address a specific
requirement solely through changes that affect labor usage at
the same time that we assumed a large plant might address the
same requirement through changes in capital equipment usage.
3.2.2
Our analysis assumes
that plants
slaughtering only cows
and bulls will treat all
animals as 30 months
of age and older to
avoid the costs
associated with
segregation activities
throughout the
slaughter process.
Changes in Plant Processes and Practices for Removal
and Disposal of SRMs
Plants have implemented or will implement a number of
changes in practices to comply with SRM removal and disposal
requirements. The types of practices depend on whether a
plant slaughters steers and heifers or cows and bulls. Plants
that slaughter only veal calves will have to implement lesser
changes such as removing and disposing of small intestines if
they were previously using small intestines in human food. We
assumed that plants that slaughter only cows and bulls treat all
cattle as 30 months of age and older to avoid the need for
additional practices such as dentition and segregation of cattle
by age.8 According to the results of the FSIS meat and poultry
slaughter survey, 69.9 percent of plants that slaughter only
cows and bulls treat all cattle as 30 months of age and older
(Cates, Karns, and Viator, 2005). By treating all cattle as 30
months of age and older, plants avoid many of the steps that
would be necessary if they instead chose to try to recover
certain by-products of the occasional animal that was less than
30 months of age (e.g., a first calf heifer that was culled).
We assumed that plants that slaughter steers and heifers will
use dentition to determine the age of each animal because
plants and trade associations noted that documentation of age
is not yet generally available to plants, and results of the FSIS
meat and poultry slaughter survey indicate that 73.4 percent of
plants that slaughter cattle in multiple-age categories use
documentation to determine age (Cates, Karns, and Viator,
2005).9 Generally, in any group of steers and heifers, some
cattle will appear to be 30 months of age or older based on
8
Some plants slaughter fed cows and bulls and thus likely have
different practices than those that slaughter culled cows and bulls.
For the purposes of the analysis, we do not separately identify
differences in practices for these types of establishments.
9
The survey results also indicate that 80.5 percent of plants that
slaughter only steers and heifers use dentition to verify age of
cattle.
3-9
Economic Impact Analysis: BSE Rulemaking
dentition even if all animals are less than 30 months of age.10
Thus, we assumed that all plants that slaughter steers and
heifers must segregate carcasses by age and follow specific
practices to ensure that all SRMs are properly removed and
Some sources indicate
that few slaughter
plants ship whole or
half carcasses; thus, all
SRMs are removed
prior to shipping to a
processing plant for the
majority of shipments
(Miller and Rasor,
2004). Processing
plants that do not
receive cattle parts
with vertebral columns
may address SRMs in
their prerequisite
programs and thus
make few changes.
disposed of from some proportion of cattle slaughtered in the
plant.
Table 3-2 outlines typical process or practice changes that
slaughter plants are implementing in response to the SRM
removal and disposal requirements. Some plants may be
implementing additional measures, but we assumed for the
purposes of the analysis that these measures are either not
typical or do not have substantial cost implications when
considered on a per-head basis. In plants that slaughter only
steers and heifers (or slaughter mixed ages of cattle), some
practices apply to all cattle slaughtered in the establishment,
and others apply only to cattle that are 30 months of age and
older. In plants that slaughter only cows and bulls, practices
apply either to no cattle slaughtered or to all cattle slaughtered.
3.2.3
Changes in Practices Associated with Handling
Nonambulatory Disabled Cattle
According to the interim final rule, nonambulatory cattle that
arrive at a slaughter plant must be euthanized, tested for BSE,
and disposed of. As indicated in Figure 3-2, a nonambulatory
bovine that arrives at an establishment might not be presented
for slaughter, in which case the bovine is transported off the
10
3-10
Estimates of the proportion of steers and heifers that will appear to
be 30 months of age or older based on dentition range from 1 to 5
percent (Hodges and Seward, 2004). More specifically, the results
of the FSIS meat and poultry slaughter survey indicate that 40.3
percent of plants estimate that less than 1 percent of fed steers or
heifers are treated as 30 month of age and older based on
dentition, 25.4 percent of plants estimate 1 to 2 percent, 14.3
percent estimate 3 to 5 percent, and the remainder estimates 6
percent or more (Cates, Karns, and Viator, 2005). In addition,
research underway at the U.S. Meat Animal Research Center
(MARC) indicates a small percentage of those cattle that are
marketed between 27 and 36 months of age would be improperly
classified (Shackelford et al., no date).
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
Table 3-2. Typical Process and Practice Changes in Cattle Slaughter Plants in Response to
the SRM Removal and Disposal Requirements
Although plants will adopt their own individual process and practice changes, we based our cost estimates on the
most typical practices in the industry.
Steer and Heifer Plantsa
Process or Practice Change
Applies to Cattle
Less than 30
Months
Using methods to prevent brain seepage (e.g.,
plugging skull or supporting head)
Using dentition to determine age of cattlec
•
Applies to Cattle
30 Months and
Older
Cow and Bull
Plantsb
•
•
•
Using separate equipment (or sanitizing equipment
between age groups) for head removal
•
Marking, tagging, or inking carcasses of cattle 30
months of age or olderd
•
Segregating and disposing of small intestinese
•
•
•
Segregating, denaturing, and disposing of skulls,
eyes, and trigeminal ganglia
•
•
Using separate carcass splitting saw (or sanitizing
the saw between age groups)
•
Removing spinal cord before or after carcass
splitting and disposing of spinal cordf
•
Segregating carcasses by age in the cooler prior to
fabrication
•
Removing the vertebral column (excluding the
vertebrae of the tail, the transverse processes of
the thoracic and lumbar vertebrae, and the wings
of the sacrum)
•
•
Segregating, denaturing, and disposing of vertebral
column and DRG
•
•
Fabricating alternative cuts instead of t-bones,
porterhouse steaks, bone-in rib roasts, and blade
roasts
•
•
•
a
Includes plants that slaughter steers and heifers or plants that slaughter a combination of ages.
b
Based on information provided in the industry interviews, we assumed that plants that slaughter only cows and
bulls treat all animals as 30 months of age or older.
c
We assumed that all plants use dentition to determine age of cattle because records to verify age are rarely
available.
d
Alternatively, a plant that slaughters mostly older cattle might tag the younger cattle for segregation.
e
We assumed that plants dispose of small intestines in their entirety and do not separately dispose of the distal
ileum.
f
Some plants may also use a router to remove dura mater associated with the spinal cord after removing the spinal
cord. However, dura mater is not classified as an SRM.
3-11
Economic Impact Analysis: BSE Rulemaking
Figure 3-2. Handling of Nonambulatory Cattle, Carcasses, and Offal
Nonambulatory or
dead bovine arrives at
establishment
Ambulatory bovine
arrives at the
establishment and
becomes
nonambulatory
Bovine is not
presented for
slaughter (e.g.,
remains on truck)
Bovine is euthanized,
skinned, quartered,
and sampled for BSE
testing
ƒ On-site outside of
establishment
ƒ Off-site
Inedible rendering
Carcass and offal
storage while waiting
for test results
ƒ On-site refrigerated
trailers
ƒ Off-site
Test results
received
(negative)
Landfill
Incineration
premises. However, industry representatives indicate that
plants will often, as a courtesy, euthanize and dispose of
nonambulatory cattle that arrive at the establishment. In many
cases, the slaughter plant does not own or does not take
ownership of nonambulatory disabled cattle. When asked
about the proportion of nonambulatory disabled cattle that are
injured versus ill, all of the plant managers interviewed
concurred that the majority are injured. The very small plants
stated that almost 100 percent were injured rather than ill, and
the small and large plants said between 66 and 98 percent are
injured.
Ambulatory cattle that arrive at a plant may become
nonambulatory at some point prior to or following ante-mortem
inspection. In most cases, these cattle will be treated in the
same manner as cattle that arrived at the plant in a
nonambulatory state. At either an on-site location outside of
the establishment or at an off-site location such as an inedible
rendering plant, plant personnel euthanize, skin, and cut the
carcass into quarters for disposal. A sample of brain tissue may
also be taken for BSE testing. The carcass and offal are stored
on-site in a refrigerated trailer or off-site until test results are
received. Upon receiving negative test results, the carcass and
offal are disposed of through inedible rendering, landfill, or
incineration.
3-12
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
3.2.4
Changes in Practices Associated with Test-and-Hold
Provisions for Healthy Cattle Tested for BSE
Based on the BSE Surveillance Plan developed by USDA’s
APHIS (released on March 15, 2004), a sample of adult cattle
(cows and bulls) from 40 plants will be tested for BSE. FSIS’s
BSE surveillance program regulation requires plants to test and
hold carcasses and offal from cattle selected for testing until
test results are obtained. Thus, plants will incur costs
associated with holding carcasses and offal for cattle selected
for the APHIS surveillance plan. APHIS estimates that the 40
plants from which the animals are being selected account for 86
percent of all adult cattle slaughtered. APHIS planned to select
and test cattle under the plan over a 12- to 18-month period;
however, the testing program had not begun as of early 2005.
Although the nature of test-and-hold practices at cattle
slaughter plants has not yet been established, our discussions
with industry representatives indicated that plants were
generally expecting to implement one of two general types of
practices. As indicated in Figure 3-3, once a bovine is selected
for testing, plants may either have the bovine slaughtered in its
own establishment or ship it to a surrogate plant for slaughter.
Figure 3-3. Anticipated Handling of Healthy Cattle Selected for BSE Testing
3-13
Economic Impact Analysis: BSE Rulemaking
In either case, the plant or its surrogate will hold the carcass
and offal from the bovine until test results are obtained. Once
negative test results are obtained, the carcass and offal would
be either fabricated and processed or disposed of. If a plant
disposes of the carcasses or offal, the methods of disposal
would include inedible rendering, landfill, or incineration. Plant
representatives stated that they are more likely to dispose of
carcasses and offal the longer they wait for BSE test results
because materials may begin to degrade in quality. For cattle
that are shipped to a surrogate plant for slaughter, the original
plant sells the bovine to the surrogate plant at a discounted
price. Because the purpose of using a surrogate plant is to be
able to retain the value of the animal, tested carcasses are
most often used in fabrication. However, offal from tested
bovines at a surrogate plant may be processed or disposed of.
Because healthy cattle testing would be conducted for a
Because healthy cattle
testing would be
conducted for a relatively
short period of time and
would affect a relatively
few number of plants in
the industry if it occurs,
we did not include the
costs of handling these
cattle in our final cost
estimates for the BSE
interim final rules.
relatively short period of time and would affect a relatively few
number of plants in the industry if it occurs, we did not include
the costs of handling these cattle in our final cost estimates for
the BSE interim final rules. For plants affected by healthy
cattle testing, some may incur minimal costs if they choose to
simply store tested carcasses in a segregated location within
their own coolers. However, if cooler space is limited, or if the
carcass degrades in yield and quality while awaiting test
results, the costs may be significant even for plants that choose
to store tested carcasses. Plants that ship cattle to a surrogate
plant for slaughter reported that they will incur discounts of
approximately $200 per head in addition to administrative and
record-keeping costs. Finally, plants that dispose of cattle
through incineration, inedible rendering, or landfill incur costs
that include the entire lost value of the animal in addition to the
costs of disposal.
3.3
SUMMARY OF FSIS COST ESTIMATES
In developing estimates of the costs associated with the SRM
and nonambulatory disabled cattle interim final rule, FSIS
identified the lost value associated with SRM material (net of
the value of the material in alternative uses); the costs of
disposing of SRM materials; and the change in production costs
3-14
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
associated with written plan development, SRM removal and
disposal, SRM segregation, and handling of nonambulatory
disabled cattle. As indicated in Table 3-3, some plants may
incur lost product values from the following cattle parts:
ƒ
Brains from cattle 30 months of age and older.
Only some plants used brains in edible products prior to
the interim final rule. To provide brains on the market,
plants must now use brains from younger cattle.
ƒ
Spinal cords from cattle 30 months of age and
older. Prior to the interim final rule, spinal cords were
used only in edible rendering or were exported. Spinal
cords from older cattle can now only be used in inedible
rendering.
ƒ
Bone-in cuts from the vertebral column of cattle
30 months of age and older. Bone-in cuts include
t-bone steaks, porterhouse steaks, rib roasts, and other
cuts from the vertebral column. FSIS’s analysis
assumes that 83 percent of the bone-in cut weight
(63.75 of 77 pounds of bone-in cuts) can be recovered
without the vertebral core.
ƒ
Skull, eyes, and trigeminal ganglia of cattle 30
months of age and older. With the restrictions on use
of skull, eyes, and trigeminal ganglia, plants can no
longer sell market heads from older cattle.11 Plants can
recover cheek meat, head meat, and tongues from older
cattle through hand deboning provided that the plant
uses a method to prevent brain seepage following
stunning.
ƒ
Small intestines from all ages of cattle. Small
intestines include the potentially infective distal ileum.
With the restrictions on use of small intestines in edible
products, plants can no longer process small intestines
for human consumption.12 In particular, they cannot
produce trepas and sausage casings from the small
intestines.
11
Based on the results of the FSIS meat and poultry slaughter survey,
27.9 percent of cattle slaughter plants sold market heads from
cattle 30 months of age and older in 2003 (Cates, Karns, and
Viator, 2005).
12
Based on the results of the FSIS BSE and trimmings survey
administered to the Inspectors-in-Charge (IICs) at plants that
slaughter cattle in 2002, 66.2 percent of plants sold small intestines
for use in human food (USDA/FSIS, 2002).
3-15
FSIS used these estimates to develop its industrywide cost estimates for the interim final rules.
$/Head
Product or Process
Brains
Number of
Affected
Establishmentsa
Affected
Cattleb
$/lb
lbs/Head
Lost Value
Less
Alternative
Use Value
Disposal
Costs
Change in
Production
Costs
64
5.0%
$0.453
1.00
$0.453
–$0.030
$0.020
–$0.100
1,594
100.0%
$0.300
0.38
$0.114
–$0.011
$0.008
$0.076
17
2.3%
$0.250
4.00
$1.000
–$0.120
$0.080
–$0.240
3,388
2.0%
$2.217
77.00
$170.709
–$169.575
$0.265
$9.240
Skull, eyes, TGG
(market heads)
88
0.8%
$0.363
16.25
$5.899
–$4.200
$0.205
$1.800
Small intestines
47
48.0%
$0.370
11.00
$4.070
–$0.330
$0.220
–$0.770
Tonsils
17
46.0%
$0.250
2.50
$0.625
–$0.075
$0.050
–$0.150
SRM segregation
3,388
100.0%
—
—
—
—
—
$0.250
Written plans
3,388
100.0%
—
—
—
—
—
$0.016
3,388
100.0%
—
—
—
—
—
$0.659
$182.870
–$174.341
$0.848
$10.781
$501.600
–$24.000
$32.000
$45.600
Spinal cords
Edible rendering
Bone-in cuts
Monitoring
Total per head
c
Nonambulatory cattle
1,595
0.6%
$1.320
380.00
a
Establishment numbers include some or all slaughter and processing plants depending on the product or process.
b
In some cases, percentage of affected cattle differs for lost value versus disposal and increased production costs, but differences are not noted here.
c
Net costs are summed across all SRMs; however, many plants did not use all SRMs prior to the interim final rule.
Assumptions and notes:
Yields are for a 1,250-pound animal.
Disposal costs are 2 cents per pound for product sent to landfill, and alternative use values are 3 cents per pound for product used in inedible rendering.
Spinal cords are no longer used in human food, but few plants were selling spinal cord for human food prior to the interim final rules.
Eight-three percent of bone-in cut weight can still be recovered without vertebral core (63.75/77 pounds).
Thirty-seven percent of meat (cheek meat, head meat, tongue) can still be recovered with hand deboning (6/16.25 pounds).
Changes for vertebral bone-in cuts include hand-deboning of cuts.
Small intestines include lost value of trepas and casings.
Tonsils were not used for human food prior to the interim final rule; currently, tonsils can also not be used in edible rendering.
Each plant conducts an additional 8 hours of monitoring per year for the regulations.
Nonambulatory disabled cattle value is derived assuming that 800 pounds per animal will be used in inedible rendering.
Economic Impact Analysis: BSE Rulemaking
3-16
Table 3-3. Summary of the PRIA Per-Head Midpoint Cost Estimates for the SRM and Nonambulatory Disabled Cattle Interim
Final Rule
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
ƒ
Tonsils from all ages of cattle. Prior to the interim
final rule, tonsils could not be used as meat but could be
used in edible rendering. With the restrictions on use of
tonsils, they can now only be used in inedible rendering.
However, few plants used tonsils in edible rendering
prior to the rule.
For each of the products, FSIS calculated the lost value of the
material, adjusted the lost value for revenue that may be
obtained through alternative use of the material, added the
costs of disposal, and added the change in production costs
associated with use or removal of the material. In addition to
the specific lost value of materials, the analysis also included
SRM segregation costs, development of written plans, and
monitoring processes. Some of FSIS’s estimates apply only to
particular plants based on their practices prior to the interim
final rules. If a plant was affected by each of these changes,
then the net cost of the interim final rule would be an estimated
$8.53 per head. In addition, the FSIS analysis assumes that
plants lose an estimated $477.60 per head in revenue for
nonambulatory disabled cattle that cannot be slaughtered (net
lost value).
3.4
PLANT-LEVEL COST ESTIMATES FOR THE
BSE INTERIM FINAL RULES
Using the estimated lost by-product values in FSIS’s analysis
and information from the industry interviews, we developed
estimates of the plant-level costs associated with the SRM and
nonambulatory disabled cattle interim final rule. We based
these estimates on assumptions regarding each step of the
slaughter and fabrication process that plants might change in
response to the interim final rule and then developed estimates
of the associated capital equipment, other one-time costs,
ongoing costs, and lost by-product values associated with these
changes. In developing the cost estimates, we based the
estimates on a per-head basis to facilitate use of the estimates
in the economic impact model (see Section 4).
3.4.1
General Assumptions Used in Estimating Plant-Level
Costs
In this subsection, we outline our general assumptions used in
estimating plant-level costs of the interim final rules. These
3-17
Economic Impact Analysis: BSE Rulemaking
assumptions include those for typical operating schedules,
wage rates, and slaughter volumes. We refer to these general
assumptions throughout the discussion of plant-level cost
estimates.
Based on information obtain from the plant interviews, we
assumed for the analysis that the typical number of hours of
operation per year is similar across all plant sizes. The
equation for estimating the number of hours plants operate per
year is as follows:
8 hours per shift * 1 shift per day
= 8 hours per day * 5.5 days per week
= 44 hours per week * 50 weeks per year
= 2,200 hours per year
We obtained average wage rates, including benefits, for the
baseline year of 2002 from the U.S. Department of Labor
(2004). These rates are for the private manufacturing sector in
general because rates specific to the meat slaughter industry
are not reported.13 The average wage rates with benefits are
assumed to be as follows:
ƒ
HACCP manager: $38.92 per hour
ƒ
production worker: $15.71 per hour
Using slaughter volumes obtained from the EFD, we calculated
average slaughter volumes by age of cattle and by plant size
(see Table 3-4). As a consistency check, we calculated the
number of head per hour and found the values to be consistent
with typical numbers of head per hour reported during the
interviews.
13
3-18
For comparison, Meat & Poultry magazine reports median total
annual cash compensation of $66,000 without benefits for HACCP
managers in 2002 (Troxel-Hellmer and Nunes, 2004). This equates
to $30.00 per hour without benefits for 2,200 hours of work per
year. If benefits equal 25 percent of wages, the total hourly wage
with benefits would be $37.50. Meat & Poultry magazine does not
report salaries for production workers.
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
Table 3-4. Average
Slaughter Volumes, by
Age of Cattle and Plant
Size
These averages were used in
the cost estimate calculations.
Plant Size
Veal
Very small
Steers
and
Heifers
Average
No. of
Average
Head per
Volume
Cows and
Hour
(All Ages)
Bulls
622
293
369
1,300
0.6
Small
17,112
26,118
27,985
71,000
32.4
Large
0
656,023
119,654
776,000
352.6
Source: RTI calculated based on data in the EFD using data for FY2002.
3.4.2
Assumptions for Each Processing Step
For each of the following processing steps associated with the
interim final rules, we describe our assumptions for estimating
the costs of compliance:
Because our analysis
focuses on costs
incurred by slaughter
establishments, we do
not separately estimate
the costs of
requirements for
handling
nonambulatory
disabled cattle on cattle
producers. Cattle
producers are not able
to sell cattle that are
nonambulatory
disabled (including
those with acute
injuries) and thus lose
the value of the animal
and must pay disposal
costs.
ƒ
handling of nonambulatory disabled cattle,
ƒ
dentition for determining age,
ƒ
segregation of cattle and SRMs,
ƒ
disposal of SRMs,
ƒ
fabrication of vertebral cuts, and
ƒ
lost value of by-products.
For each processing step, plants may incur capital equipment
costs, ongoing annual costs, or both. Plants either use existing
capital equipment or have, in some cases, purchased new
capital equipment.
Handling of Nonambulatory Disabled Cattle
Whether plants incur costs associated with handling of
nonambulatory disabled cattle depends on what type of cattle
are slaughtered at the plant, the size of the plant, and when
ownership of the animal typically changes.14 For some types of
plants, the method of pricing cattle also affects who incurs
these costs.
Plants that slaughter steers and heifers typically will not bear
costs associated with nonambulatory disabled cattle.
14
According to the results of the FSIS BSE and trimmings survey, 51.8
percent of plants slaughtered nonambulatory cattle prior to the
interim final rules (USDA/FSIS, 2002). However, it is unclear
whether the terms used in the survey are consistent with the terms
used in the interim final rule.
3-19
Economic Impact Analysis: BSE Rulemaking
Procurement departments at these plants are cautious in their
purchasing decisions, and they have told their producers not to
bring nonambulatory disabled cattle to the plant. Therefore,
either none arrive at the facility, or the plant does not bear the
loss when it does arrive because grade and yield (grid) pricing
is used.15
Very small plants that slaughter cows and bulls typically do not
assume ownership of the animal prior to its arrival at the plant.
Those interviewed said their customers call the plant before
they transport the animal to slaughter. At this time, plant
managers alert their customers of the new rule banning
nonambulatory disabled cattle. Therefore, we assumed that
very small plants that slaughter cows and bulls no longer
purchase or accept nonambulatory disabled cattle and thus do
not incur ongoing costs associated with these cattle.16
However, we assumed plants have the necessary capital
equipment to handle for the occasional case that might occur.
Small and large plants that slaughter cows and bulls do receive
nonambulatory disabled cattle, despite their efforts to avoid
them. Travel distances are typically greater for cows and bulls,
and older animals are more susceptible to injury during travel.
Thus, these plants might incur costs associated with handling
nonambulatory disabled cattle.
Capital Equipment Cost Assumptions. Cow and bull plants
require the following equipment to handle and haul
nonambulatory disabled cattle:
ƒ
15
Knives, aprons, and hooks for handling
nonambulatory disabled cattle. Many smaller plants
manually disassemble (remove head, skin, and quarter)
nonambulatory disabled cattle outside of the plant.
Once disassembled, they dispose of the remains of the
cattle by either landfill or inedible rendering. Typical
costs for each set of knives, aprons, and hooks for
In grid pricing, prices paid for cattle are based on the characteristics
of the carcass. If the animal is not slaughtered, no carcass is
produced; therefore, it cannot be priced.
16
Prior to the interim final rules, some plants specialized in
slaughtering downer cattle (primarily cows and bulls). These plants
have subsequently shut down or reorganized their operations;
however, we do not have any data on the numbers of these types
of plants.
3-20
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
manual disassembly range from $54 to $80. We
assumed a small plant would have one set on hand and
a large plant would have two sets.
ƒ
Equipment for hauling nonambulatory disabled
cattle. A typical very small plant uses a chain and sled,
and a typical small or large plant uses a forklift for
handling nonambulatory disabled cattle. Typical costs
for a chain and sled are approximately $300, and typical
costs for a forklift are $5,000 to $9,000. We assumed
plants already have this equipment in the plant,
although some plants might choose to have segregated
equipment for nonambulatory disabled cattle.
Ongoing Cost Assumptions. Cow and bull plants will incur
ongoing costs with the arrival of each nonambulatory disabled
bovine. Plants we interviewed stated that a nonambulatory
disabled bovine requires approximately 2 hours of labor. This
involves removing the bovine from the trailer or pen and
euthanizing and skinning the bovine. The plants also incur
disposal costs. Most plants send nonambulatory disabled cattle
to inedible rendering plants that charge an average pickup fee
of $50. Plants that send nonambulatory disabled cattle to a
landfill may incur even higher disposal costs.
Summary of Assumptions. Table 3-5 presents estimates of
the number of nonambulatory disabled cattle received on an
annual and weekly basis, based on typical volumes reported
during our plant interviews and a summary of the cost estimate
assumptions. We assumed these estimates refer to cattle that
would have passed antemortem inspection prior to the interim
final rules because plants we interviewed said that nearly all
nonambulatory disabled cattle are injured rather than ill. We
calculated the proportion of nonambulatory disabled cattle in
relation to the number of cows and bulls slaughtered and then
distributed the costs by this proportion to obtain the per-head
cost increase by plant size.
3-21
Economic Impact Analysis: BSE Rulemaking
Table 3-5. Assumptions Associated with Nonambulatory Disabled Cattle by Plant Size
These estimates apply to plants that slaughter cows and bulls and assume nonambulatory cattle would have
passed ante-mortem inspection prior to the interim final rule.
Plant Size
Very Small
Small
Large
Number of nonambulatory disabled cattle arriving at plant
Low
None purchased or
accepted
100 per year
(2 per week)
100 per year
(2 per week)
Midpoint
None purchased or
accepted
750 per year
(15 per week)
2,000 per year
(40 per week)
High
None purchased or
accepted
1,500 per year
(30 per week)
4,000 per year
(80 per week)
Number of nonambulatory disabled cattle arriving as a proportion of total cows and bullsa
Low

100/27,985 = 0.004
100/119,654 = 0.001
Midpoint

750/27,985 = 0.03
2,000/119,654 = 0.02
High

1,500/27,985 = 0.05
4,000/119,654 = 0.03

Capital equipment costs
Dedicated knife, apron, hooks
($54–$80 per set)
b
Labor costs

2 hours per nonambulatory disabled bovinec
Disposal costsb

$50 per nonambulatory disabled bovine
a
We assumed for the analysis that most nonambulatory disabled cattle are cows and bulls because cattle in other
age categories are much less likely to become nonambulatory disabled and because plants are unlikely to incur
the costs associated with their handling.
b
Estimates are assumed to be the same for all plant sizes.
c
To determine the per-head labor costs, we multiplied the number of hours per head by the average wage rate for
production employees and then multiplied by the proportion of nonambulatory disabled cattle relative to the total
number of cows and bulls.
In estimating labor
costs throughout the
analysis, we assumed
that plants could not
simply reallocate
existing employees to
conduct activities
associated with
complying with the
rule.
Dentition for Determining Age
Plants typically conduct dentition for determining whether cattle
are 30 months of age or older for steers and heifers.17 Veal
calves, by their definition, are under 30 months, so there is no
need for dentition. Furthermore, most cows and bulls are 30
months and older, so most plants assume that all are over 30
months when they are presented for slaughter and treat them
accordingly. Plant managers said it is not worthwhile to expend
resources to determine a cow’s or bull’s age because the value
17
3-22
After the interim final rules were published, the USDA Market News
Service began to report discounts for cattle 30 months and older
(including those determined by dentition). Weekly values have
ranged from $35 to $50 per cwt (carcass weight), which translates
to an approximate discount of $175 to $250 per head for a 500pound cow or bull carcass.
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
of by-products plants would be able to salvage is very small,
and plants would have to incur costs associated with
segregating by age.
Capital Equipment Cost Assumptions. We assumed that
plants did not typically purchase additional capital equipment
for conducting dentition activities.
Ongoing Cost Assumptions. We assumed that dentition
examinations require approximately 1 minute per head.
Workers who conduct dentition activities might also plug holes
in the skull following stunning to prevent leakage of brain
material; thus, the time estimate also includes these activities.
Using the labor estimates presented in Section 3.4.1, this
equals labor costs of $0.26 per head.
Summary of Assumptions. Table 3-6 summarizes the
assumptions related to costs for dentition in steer and heifer
slaughter plants.
Table 3-6. Assumptions
Associated with
Determining Age of
Cattle Using Dentitiona
These estimates apply to
plants that slaughter steers
and heifers.
Labor costs
1 minute per head ($0.26 per head)
a
Estimates are assumed to be the same for all plant sizes.
Segregation of Cattle and SRMs
If the age of cattle can be determined prior to slaughter (e.g.,
through oral or written documentation), plants will segregate
the cattle in the pens and slaughter the older cattle after
slaughtering younger cattle. If the age of cattle cannot be
determined prior to slaughter, which is typically the case,
plants will mark carcasses by age after slaughter.
Plants may use the
following types of
dedicated equipment
for cattle 30 months of
age and older:
• knives,
• spinal cord remover,
and
• carcass-splitting saw.
Capital Equipment Cost Assumptions. Most plants have
purchased additional capital equipment to remove SRMs. All
plants use color-coded knives to remove SRMs from cattle 30
months and older, and larger plants have also purchased
equipment such as spinal cord removers and dedicated splitting
saws. SRMs are then stored in color-coded bins for disposal.
The types of capital equipment that plants have purchased for
segregation purposes include the following:
3-23
Economic Impact Analysis: BSE Rulemaking
ƒ
Dedicated knives. Plants that slaughter both younger
and older cattle have purchased a second set of knives
to allow for use of dedicated knives on cattle 30 months
of age and older. Plants use color coding or some other
system to distinguish knives to be used on older cattle.
The cost of an individual knife ranges from $28 to $36.
Based on information from plant interviews, we assumed
that very small plants require 2 additional knives, small
plants require 10 additional knives, and large plants
require 20 additional knives.
ƒ
Spinal cord remover. We assumed that very small
and small plants typically use a specialized type of knife
to remove spinal cords from cattle 30 months of age and
older at a cost of approximately $100. Furthermore, we
assumed larger plants have installed vacuum systems
for removing spinal cords (which they may use for all
ages of cattle or only for cattle 30 months of age and
older). The typical cost of a vacuum spinal cord
remover ranges from $2,500 to $3,000. With the
addition of the vacuum system (20 hp pump, tank, and
control panel), the total cost of the system typically
ranges from $20,000 to $25,000. Spinal cord removers
have a useful life of 5 to 7 years in many operations, but
they may have a substantially shorter useful life in the
highest volume plants. With the exception of plants that
only slaughter veal calves, the cost of a spinal cord
remover applies to all plants.
ƒ
Carcass-splitting saw. A typical very small plant uses
a single carcass-splitting saw on all ages of cattle and
sanitizes the saw between different ages of cattle. A
typical small or large plant purchases a separate
carcass-splitting saw to use on cattle 30 months of age
and older. The cost of a carcass-splitting saw ranges
from $2,300 to $3,300 for a saw that can split 65
carcasses per hour (small plants) or from $4,700 to
$5,200 for a saw that can split 150 carcasses per hour
(large plants). Carcass-splitting saws have a useful life
of 20 to 40 years if not in constant use (small plants) or
a useful life of 4 to 5 years if in constant use (large
plants).
Although some plants may have added cooler capacity to allow
for segregation of cattle by age, we assumed that a typical
plant has sufficient cooler capacity for segregation activities.
Thus, we did not include capital equipment costs for expanding
the cooler.
3-24
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
Ongoing Cost Assumptions. Plants incur additional ongoing
costs for both labor and materials in segregating cattle and
SRMs. In terms of labor usage, very small plants added
responsibilities to existing employees, while small and large
plants hired additional employees.
In terms of materials usage, plants of all sizes now purchase
ink stamps or color-coded tags to mark carcasses that are from
cattle 30 months of age and older.18 These identifiers must
remain with the cattle throughout the slaughter process, so
that SRMs are properly segregated. Plants also plug the skulls
after stunning to prevent seepage of brain material. Costs for
these materials are estimated at $0.05 per head for ink stamps,
$0.01 per head for tags, and $0.30 per head for corks. One
plant manager that sells half carcasses stated that marking
carcasses can be a difficult process because each of his
customers requires a different identification stamp.
Summary of Assumptions. Table 3-7 summarizes the capital
and ongoing costs incurred by plants that segregate cattle and
SRMs.
Table 3-7. Assumptions Associated with Segregation of Cattle and SRMs, by Plant Size
These estimates apply to plants that slaughter steers and heifers.
Very Small
Small
Large
Capital equipment purchases
Low
Dedicated knives
Spinal cord remover
Carcass-splitting saw
$56
$100
$2,300
$280
$20,000
$4,700
$560
$20,000
$4,700
Midpoint
Dedicated knives
Spinal cord remover
Carcass-splitting saw
$64
$100
$2,800
$320
$22,500
$4,950
$640
$22,500
$4,950
High
Dedicated knives
Spinal cord remover
Carcass-splitting saw
$72
$100
$3,300
$360
$25,000
$5,200
$720
$25,000
$5,200
30 minutes per head
$7.86 per head
Three new hires
$1.46 per head
Eight new hires
$0.36 per head
Labor costs
Materials costs
Ink for stamps ($0.05 per head), tags ($0.01 per head), and corks ($0.30 per head)
18
We assumed that plants mark cattle 30 months of age and older, but
some plants might instead mark cattle that are less than 30 months
of age.
3-25
Economic Impact Analysis: BSE Rulemaking
Disposal of SRMs
Plants dispose of SRMs by sending them to an inedible
rendering plant or to a landfill. Inedible rendering is more
common, so our cost assumptions are based on this practice.19
Some independent renderers pay beef slaughter plants for
SRMs, while others charge a fee for pickup services. Many
plants have on-site inedible rendering facilities; thus, market
prices or costs of disposal for SRMs are not known. We
assumed that the costs for inedible rendering are the same for
all plant types and sizes.
If plants disposed of SRMs through inedible rendering prior to
the regulation or they did not pay for pick up of inedible
rendering materials, then the additional costs of disposal
associated with the regulation are zero. Thus, we did not
include costs of disposal for the low- and medium-cost
estimates. Based on FSIS’s estimate, we used 2 cents per
pound as the high-cost estimate for disposal.
These costs were multiplied by the average weight of SRMs per
head, detailed in Table 3-8. For veal and steers and heifers
under 30 months, only the small intestines and tonsils are
considered SRMs, totaling an estimated 13.5 pounds per head.
For cows and bulls and for steers and heifers 30 months of age
and older, SRMs account for an estimated 31.1 pounds per
head (excluding the weight of SRMs associated with the
vertebral column).
Table 3-8. Weight of
SRMs per Head
These estimates are based on
the midpoint values presented
in FSIS’s preliminary
regulatory impact analysis.
SRM
Brain
Spinal cord
Weight per Head (lbs)
1.0
0.4
Skull, eyes, and trigeminal
gangliaa
16.2
Small intestines
11.0
Tonsils
Totalb
2.5
31.1
a
If heads are deboned to use cheek meat, the weight of the SRMs associated
with the head is approximately 10 pounds.
b
Excludes the weight of SRMs associated with the vertebral column (addressed
in the next section).
19
3-26
One plant that we interviewed sent SRMs to a landfill; the remaining
plants sent SRMs to inedible rendering.
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
We also assumed in our estimates that current methods for
removing inedible rendering materials are adequate to meet the
requirements of the interim final rule. Larger plants have
conveyer systems to remove materials for inedible rendering.
Currently, plants put all materials destined for inedible
rendering on the conveyer without segregating by age of the
cattle from which the materials were removed.20
Fabrication of Vertebral Cuts
Plants that slaughter cows and bulls or steers and heifers 30
months and older are no longer allowed to produce vertebral
bone-in cuts from these cattle.21 Although most cattle 30
months of age and older are deboned, some steers and heifers
will appear to be 30 months of age and older based on
dentition; thus, plants are not permitted to produce vertebral
cuts from these animals. In addition, some plants slaughter fed
cows and bulls from which they previously produced vertebral
bone-in cuts. According to the results of the FSIS meat and
poultry slaughter survey, half or more of plants slaughtering
cattle 30 months of age and older produced bone-in cuts from
these cattle in 2003 (Cates, Karns, and Viator, 2005).22
Capital Equipment Cost Assumptions. None of the plants
we interviewed said they purchased new capital equipment for
fabricating vertebral bone-in cuts. Other plants may have
purchased saws for removing the vertebrae in the thoracic and
lumbar regions. Because this practice does not appear to be
typical, we have not included the costs of this equipment in this
analysis.
Ongoing Cost Assumptions. Ongoing costs associated with
fabrication of vertebral cuts from cattle 30 months of age and
20
If FDA requires in the future that plants segregate inedible rendering
material by age of cattle, plants would incur substantial costs in
reconfiguring the plant to add an additional inedible rendering
conveyer system.
21
Plants may still produce vertebral bone-in cuts that contain the
vertebrae of the tail, the transverse process of the thoracic and
lumbar vertebrae, and the wings of the sacrum.
22
Specific estimates are as follows: 49.5 percent produced short-loins,
52.5 percent produced bone-in or standing rib roasts, 56.5 percent
produced blade or chuck roasts, 57.1 percent produced porterhouse
steaks, and 60.4 percent produced t-bone steaks from cattle 30
months of age and older (Cates, Karns, and Viator, 2005).
3-27
Economic Impact Analysis: BSE Rulemaking
older include additional labor expenses for hand-deboning and
the lost value of meat that cannot be recovered. Labor
requirements have increased with the more time-consuming
task of cutting around the vertebral column. We assumed that
these additional labor costs are the same for all plant sizes.
The lost value of bone-in meat cuts represents a significant cost
to plants that slaughter cows and bulls or steers and heifers
over 30 months of age. These plants have adjusted by
producing cuts without the bone (e.g., New York strip steak
instead of t-bone steak). Although the boneless cuts weigh less
than the bone-in cuts, their higher per-pound value may offset
the loss. However, plants we interviewed estimated that the
lost value of bone-in meat cuts is in the range of $25.00 to
$35.00 per head. Thus, we used $0.00 as the low lost value
estimate, $17.50 (half of $35.00) as the midpoint estimate,
and $35.00 as the high estimate.
The ongoing assumptions associated with vertebral bone-in
cuts are detailed in Table 3-9.
Table 3-9. Assumptions
Associated with
Vertebral Bone-In Cuts
Labor Costsa
Low
These estimates apply to
plants that slaughter cows and
bulls or steers and heifers 30
months and older.
Plants only produced boneless cuts before
the interim final rules ($0)
Midpoint
15 minutes of labor = $3.93 per head
High
30 minutes of labor = $7.86 per head
a
Lost Value of Meat Cuts
Low
Plants only produced boneless cuts before
the interim final rules ($0)
Midpoint
$17.50 per head
High
$35.00 per head
a
Estimates are assumed to be the same for all plant sizes.
Lost Value of SRM By-Products
As indicated in Section 3.3, plants can no longer use or sell
certain SRM by-products for human consumption. Instead,
they must send them to inedible rendering or to a landfill.
To determine the cost implications associated with the lost
value of SRM by-products, we obtained values and costs from
the FSIS preliminary regulatory impact analysis. For each by-
3-28
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
product, we included lost value, subtracted alternative use
value, and added disposal costs. We assumed costs are the
same for all plant sizes, as indicated in Table 3-10. The low
estimate assumes that plants did not sell any SRM by-products
prior to the interim final rule, and the high estimate assumes
that plants sold all possible SRM by-products.23 The midpoint
estimate is the midpoint value between $0.00 and the total
value of all possible by-products that can no longer be sold.
Table 3-10. Assumptions for Lost Value of By-Products, by Age of Cattlea
These estimates were developed using the estimates for lost value of by-products in FSIS’s preliminary analysis.
Veal and Steers and Heifers
Under 30 Months
Cows and Bulls and Steers and Heifers
30 Months and Older
Low
Plant did not produce
by-products
$0
Plant did not produce byproducts
$0
Midpoint
Midpoint value
$2.28
Midpoint value
$3.51
High
Small intestines
$3.96
Small intestines
$3.96
Tonsils
$0.60
Brain
$0.44
$4.56a
Spinal cord
$0.11
Skull, eyes, and TGG
$1.90
Tonsils
$0.60
Total
Total
$7.01
a
These lost values exclude the lost values associated with vertebral bone-in cuts (see Table 3-9 for these
estimates).
b
The remaining by-products from cattle of this age can still be sold.
3.4.3
Assumptions for Other Plant-Level Costs
In addition to the capital equipment and operating expenditures
detailed above, plants are expending resources to review and
modify their written plans; perform monitoring and verification
activities; and, in some instances, make other capital
equipment changes. These other types of plant-level costs are
described below.
23
Based on the results of the FSIS meat and poultry slaughter survey,
9.4 percent of plants that slaughter cattle of any age sold small
intestines in 2003. In addition, 27.9 percent used market heads,
6.7 percent used brains, 1.4 percent used eyes, 1.3 percent used
spinal cords, and 11.9 percent used vertebral columns from cattle
30 months of age and older in products for human consumption
(Cates, Karns, and Viator, 2005).
3-29
Economic Impact Analysis: BSE Rulemaking
Written Plans Modification
The costs associated with modifying a plant’s written plans are
one-time costs. Once the plans associated with BSE are
written, reviewed, and implemented, plants generally do not
review the plans again until the next regularly scheduled
review.
Table 3-11 shows our assumptions for estimating the costs of
modifying written plans based on the plant interviews. Most
plants slaughtering steers and heifers or cows and bulls
reviewed their HACCP plan, SSOPs, and prerequisite plans and
made modifications to one of these. Veal plants of all sizes
reviewed their written plans but generally did not need to make
any changes unless they were selling small intestines (which
are now prohibited). We base the cost estimates on the hourly
wages for a HACCP manager to represent average hourly costs
of a combination of workers that might include the plant
manager, a HACCP manager, and quality assurance technicians.
In addition to using plant or company employees, some plants
hired outside consultants to assist in reviewing and modifying
plans.
Table 3-11. Assumptions Associated with Written Plan Modifications, by Age of Cattle
Written plan modification requires plant personnel time, consultant time, or a combination of both.
Plant Size
Type of Slaughter
Very Small
Veal
Small
Large
HACCP manager for 1 hour
Steers and heifers
(all ages)
HACCP manager for 2
hours and hiring a
consultant ($500)
HACCP manager for 20
hours and hiring a
consultant ($750)
HACCP manager for 40
hours and hiring a
consultant ($1,000)
Cows and bulls
HACCP manager for 2
hours and hiring a
consultant ($500)
HACCP manager for 20
hours and hiring a
consultant ($750)
HACCP manager for 40
hours and hiring a
consultant ($1,000)
Monitoring and Verification Activities
All plants slaughtering steers and heifers or cows and bulls are
required to monitor and verify activities associated with the
interim final rule. Based on information from the interviews,
we assumed monitoring and verification activities require 0.1
minute (6 seconds) per procedure per head. We further
3-30
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
assumed that this estimate of required time is approximately
the same across all plant sizes.
Table 3-12 presents our assumptions for the number of
procedures monitored and verified and their associated costs.
Examples of procedures that plants monitor and verify include
the following: dentition, dehorning, head dropping, head
hooking, tonsil trimming (short tonguing), small intestine
removal, split saw sanitation and washing, spinal cord removal,
miss-split carcass handling, processing equipment sanitizing
and washing, and SRM disposal. According to the FSIS meat
and poultry slaughter survey results, 46.3 percent of cattle
slaughter plants implemented one to two additional procedures
in response to the interim final rule, 26.5 percent implemented
three to four additional procedures, and 11.3 percent
implemented five or more additional procedures (Cates, Karns,
and Viator, 2005). These results imply that plants monitor
different combinations of these procedures or that some plants
might have monitored some of these procedures prior to the
interim final rule.
Table 3-12.
Assumptions Associated
with Additional
Monitoring and
Verification Activities
These estimates apply to
plants that slaughter steers
and heifers (of all ages) and
cows and bulls. Estimates are
the same across all plant sizes.
Number of Procedures
Monitored and Verified
Estimated Labor
Cost per Head
Low
1
$0.03
Midpoint
3
$0.08
High
5
$0.13
Other Possible Capital Equipment Changes
In addition to the capital equipment changes outlined in Section
3.4.2, plants might have made other capital equipment
changes. For example, some plants altered the length of the
chain on the slaughter line to allow for additional activities to
occur (e.g., dentition) or altered the chain to allow railing out of
cattle that are 30 months of age and older for separate
handling. Some plants now conduct the head deboning process
online rather than on a table to prevent cross-contamination.
Some plants also have built additional pen space to hold cattle
for segregation by age prior to slaughter. Furthermore, some
3-31
Economic Impact Analysis: BSE Rulemaking
plants added additional cooler capacity to have sufficient space
to segregate carcasses from cattle 30 months of age and older
prior to fabrication. The extent to which plants have made
these changes and the range of costs for making these changes
are currently uncertain and assumed to be highly variable;
thus, costs for these changes are not included in our estimates.
3.4.4
Summary of Plant-Level One-Time Costs and Per-Head
Ongoing Costs
Tables 3-13 and 3-14 summarize the capital equipment and
one-time costs at the plant level and the ongoing costs on a
per-head level, respectively.24 Plants that slaughter steers and
heifers incur higher one-time costs than other plant types
because of segregation and dentition costs. Large plants that
slaughter steers and heifers face the highest one-time costs,
with a midpoint estimate of $30,647. Across all sizes of plants
that slaughter steers and heifers, the largest one-time cost is a
spinal cord remover.
As Table 3-14 indicates, midpoint estimates of ongoing costs of
the interim final rules range from $2.28 to $33.50 per head,
depending on cattle type and plant size. Of all very small
plants, those that slaughter steers and heifers 30 months and
older incur the highest ongoing costs. Of all small and large
plants, those that slaughter cows and bulls incur the highest
ongoing costs. The lost value of meat cuts associated with
vertebral bone-in cuts is the largest ongoing cost for plants that
slaughter cows and bulls or steers and heifers 30 months and
older.
24
3-32
Plants that discount cattle that are 30 months of age and older may
recoup some of the costs incurred because of the regulation by
discounting these cattle when purchased from the producer. For
the purposes of this analysis, we examined the effects of the costs
without making an adjustment for the methods in which plants
might “pass along” the costs to other segments of the industry.
Table 3-13. Summary of Plant-Level Capital Equipment and Other One-Time Costs Associated with the Interim Final Rules
One-time costs include written plan development (e.g., HACCP, SSOPs) and new capital equipment.
Very Small Plants
Steers and Heifersa
Veal Only
Type of Cost
Cows and Bulls Only
Midpoint
High
Low
Midpoint
High
Low
Midpoint
High
$39
$39
$39
$578
$578
$578
$578
$578
$578
—
—
—
—
—
—
—
—
—
ƒ dedicated knives
—
—
—
$56
$64
$72
—
—
—
ƒ spinal cord remover
—
—
—
$100
$100
$100
$100
$100
$100
ƒ carcass-splitting sawb
—
—
—
—
—
—
—
—
—
$39
$39
$39
$734
$742
$750
$678
$678
$678
Written plan development
Capital equipment
nonambulatory disabled cattle
ƒ knives, apron, hooks
Capital equipmentsegregation
Total per Plant
(continued)
3-33
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
Low
Small Plants
Steers and Heifersa
Veal Only
Type of Cost
Cows and Bulls Only
Low
Midpoint
High
Low
Midpoint
High
Low
$39
$39
$39
$1,528
$1,528
$1,528
$1,528
$1,528
$1,528
—
—
—
—
—
—
$54
$67
$80
ƒ dedicated knives
—
—
—
$320
$360
ƒ spinal cord remover
—
—
—
$20,000
$22,500
ƒ carcass-splitting sawb
—
—
—
$2,300
$39
$39
$39
$24,108
Written plan development
Midpoint
High
Capital equipment
nonambulatory disabled cattle
ƒ knives, apron, hooks
Capital equipmentsegregation
Total per Plant
$280
—
—
—
$25,000
$20,000
$22,500
$25,000
$2,800
$3,300
—
—
—
$27,148
$30,188
$21,582
$24,095
$26,608
(continued)
Economic Impact Analysis: BSE Rulemaking
3-34
Table 3-13. Summary of Plant-Level Capital Equipment and Other One-Time Costs Associated with the Interim Final Rules
(continued)
Table 3-13. Summary of Plant-Level Capital Equipment and Other One-Time Costs Associated with the Interim Final Rules
(continued)
Large Plants
Steers and Heifersa
Veal Only
Type of Cost
Midpoint
High
$39
$39
$39
—
—
—
—
—
ƒ dedicated knives
—
—
—
$560
ƒ spinal cord remover
—
—
—
ƒ carcass-splitting sawb
—
—
—
$39
$39
$39
Written plan development
Low
High
Low
$2,557
$2,557
$2,557
$2,557
—
$108
$134
$160
$640
$720
—
—
—
$20,000
$22,500
$25,000
$20,000
$22,500
$25,000
$4,700
$4,950
$5,200
—
—
—
$27,817
$30,647
$33,477
$22,665
$25,191
$27,717
$2,557
Midpoint
$2,557
Midpoint
High
Capital equipment
nonambulatory disabled cattle
ƒ knives, apron, hooks
Capital equipmentsegregation
Total per Plant
a
The estimates for steers and heifers apply to plants slaughtering steers and heifers only or steers and heifers in addition to other ages of cattle.
b
We assumed that plants slaughtering only veal or only cows and bulls do not require a separate carcass-splitting saw.
3-35
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
Low
Cows and Bulls Only
Ongoing costs include labor costs, materials, and value of lost products.
Very Small Plants
Steers and Heifers Under 30
Months
Veal
Type of Cost
Low
Steers and Heifers 30
Months and Older
Cows and Bulls
Midpoint
High
Low
Midpoint
High
Low
Midpoint
High
Low
Midpoint
High
Nonambulatory disabled cattle
ƒ Labor
—
—
—
—
—
—
—
—
—
—
—
—
ƒ Transportation and
disposal
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$0.26
$0.26
$0.26
$0.26
$0.26
$0.26
—
—
—
ƒ Labor
—
—
—
$7.86
$7.86
$7.86
$7.86
$7.86
$7.86
—
—
—
ƒ Materials
—
—
—
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.00
$0.00
$0.27
$0.00
$0.00
$0.27
$0.00
$0.00
$0.62
$0.00
$0.00
$0.62
ƒ Labor
—
—
—
—
—
—
$0.00
$3.93
$7.86
$0.00
$3.93
$7.86
ƒ Lost value of meat cuts
—
—
—
—
—
—
$0.00
$17.50
$35.00
$0.00
$17.50
$35.00
Monitoring and verification
—
—
—
$0.03
$0.08
$0.13
$0.03
$0.08
$0.13
$0.03
$0.08
$0.13
Lost value of by-products
$0.00
$2.28
$4.56
$0.00
$2.28
$4.56
$0.00
$3.51
$7.01
$0.00
$3.51
$7.01
Total Per Head
$0.00
$2.28
$4.83
$8.51
$10.84
$13.44
$8.51
$33.50
$59.10
$0.39
$25.38
$50.98
Dentition
ƒ Labor
Segregation
Disposal
Vertebral bone-in cuts
(continued)
Economic Impact Analysis: BSE Rulemaking
3-36
Table 3-14. Summary of Per-Head Ongoing (Variable) Costs Associated with the Interim Final Rules
Table 3-14. Summary of Per-Head Ongoing (Variable) Costs Associated with the Interim Final Rules (continued)
Small Plants
Steers and Heifers Under 30
Months
Veal
Type of Cost
Low
Steers and Heifers 30
Months and Older
Cows and Bulls
Midpoint
High
Low
Midpoint
High
Low
Midpoint
High
Low
Midpoint
High
Nonambulatory disabled cattlea
—
—
—
—
—
—
—
—
—
$0.13
$0.94
$1.57
ƒ Transportation and
disposal
—
—
—
—
—
—
—
—
—
$0.20
$1.50
$2.50
—
—
—
$0.26
$0.26
$0.26
$0.26
$0.26
$0.26
—
—
—
ƒ Labor
—
—
—
$1.46
$1.46
$1.46
$1.46
$1.46
$1.46
—
—
—
ƒ Materials
—
—
—
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.27
$0.00
$0.00
$0.27
$0.00
$0.00
$0.62
$0.00
$0.00
$0.62
Dentition
ƒ Labor
Segregation
Disposal
$0.00
$0.00
Vertebral bone-in cuts
ƒ Labor
—
—
—
—
—
—
$0.00
$3.93
$7.86
$0.00
$3.93
$7.86
ƒ Lost value of meat cuts
—
—
—
—
—
—
$0.00
$17.50
$35.00
$0.00
$17.50
$35.00
Monitoring and verification
—
—
—
$0.08
$0.13
$0.03
$0.08
$0.13
$0.03
$0.08
$0.13
Lost value of by-products
$0.00
$2.28
$4.56
$2.28
$4.56
$0.00
$3.51
$7.01
$0.00
$3.51
$7.01
Total Per Head
$0.00
$2.28
$4.83
$4.44
$7.04
$2.11
$27.10
$52.70
$0.72
$27.82
$55.05
$0.03
$0.00
$2.11
(continued)
3-37
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
ƒ Labor
Large Plants
Steers and Heifers Under 30
Months
Veal
Type of Cost
Low
Steers and Heifers 30
Months and Older
Midpoint
High
Low
Midpoint
High
Low
Midpoint
High
Cows and Bulls
Low
Midpoint
High
Nonambulatory disabled cattlea
ƒ Labor
—
—
—
—
—
—
—
—
—
$0.03
$0.63
$0.94
ƒ Transportation and
disposal
—
—
—
—
—
—
—
—
—
$0.05
$1.00
$1.50
—
—
—
$0.26
$0.26
$0.26
$0.26
$0.26
$0.26
—
—
—
ƒ Labor
—
—
—
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
—
—
—
ƒ Materials
—
—
—
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.36
$0.00
$0.00
$0.00
$0.00
$0.27
$0.00
$0.00
$0.62
$0.00
$0.00
$0.62
ƒ Labor
—
—
—
—
—
—
$0.00
$3.93
$7.86
$0.00
$3.93
$7.86
ƒ Lost value of meat cuts
—
—
—
—
—
—
$0.00
$17.50
$35.00
$0.00
$17.50
$35.00
Monitoring and verification
—
—
—
$0.03
$0.08
$0.13
Lost value of by-products
$0.00
$2.28
$3.51
$7.01
Total Per Head
$0.00
$2.28
$27.01
$53.43
Dentition
ƒ Labor
Segregation
Disposal
$0.27
Vertebral bone-in cuts
a
$0.03
$0.08
$0.13
$0.03
$0.08
$0.13
$4.56
$0.00
$2.28
$4.56
$0.00
$3.51
$7.01
$4.83
$1.01
$3.34
$5.94
$1.01
$26.00
$51.60
$0.00
$0.47
Costs associated with nonambulatory disabled cattle are proportioned over all cows and bulls received at a typical plant that slaughters cows and bulls.
Economic Impact Analysis: BSE Rulemaking
3-38
Table 3-14. Summary of Per-Head Ongoing (Variable) Costs Associated with the Interim Final Rules (continued)
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
3.5
INDUSTRYWIDE COST ESTIMATES FOR THE
SRM AND NONAMBULATORY DISABLED
CATTLE INTERIM FINAL RULE
To compute industrywide cost estimates associated with the
SRM and nonambulatory disabled cattle interim final rule, we
multiplied per-plant costs by the number of plants in 2002 (for
capital equipment and other one-time costs) and per-head
costs by the number of cattle slaughtered in 2002 (for ongoing
costs). Tables 3-15 and 3-16 present the resulting
industrywide capital expenditures and annual ongoing costs by
plant size.
Table 3-15. Summary of Midpoint Industrywide Capital and Other One-Time Cost Estimates
Associated with the Interim Final Rules
The majority of these costs are incurred by plants that slaughter cattle of mixed ages.
Very Small
Small
Veal only
Per-plant costs
$39
$39
Number of plants
3
45
Total costs
$117
$1,755
Steers and heifers (including combination of ages)a
Per-plant costs
$742
$27,148
Number of plants
439
102
Total costs
$325,738
$2,769,096
Cows and bulls only
Per-plant costs
$678
$24,095
Number of plants
3
13
Total costs
$2,034
$313,235
Total industrywide capital
equipment costs
$327,889
$3,084,086
Large
Total
$39
0
$0
—
48
$1,872
$30,647
33
$1,011,351
—
574
$4,106,185
$25,191
2
$50,382
—
18
$365,651
$1,061,733
$4,473,708
a
Plant numbers include plants slaughtering any quantity of steers and heifers. We assume that all plants that
intend to slaughter only steers and heifers will also slaughter some cattle 30 months of age and older because
dentition will indicate that some steers and heifers are in the older age category.
Table 3-17 summarizes the total costs associated with the
interim final rule by plant size. The estimated total annual cost
of $309.2 million includes annualized capital expenditures and
annual ongoing costs of labor, materials, and lost value of
product.25 In comparison, the FSIS analysis estimates the
25
The estimated total annual cost in this section is less than the
estimated total annual cost in Section 5 because these estimates
are based on slaughter volumes as reported in the ADRS. ADRSreported slaughter volumes were adjusted to NASS-reported
slaughter volumes in the economic impact analysis model described
in Section 5.
3-39
Economic Impact Analysis: BSE Rulemaking
Table 3-16. Summary of Midpoint Industrywide Ongoing (Variable) Costs Associated with
the Interim Final Rules
Approximately half of the costs are incurred for cows and bulls, although they make up less than 20 percent of the
slaughter volume.
Very Small
Small
Veal
Per-head cost
$2.28
$2.28
Number of heada
104,843
914,359
Total industrywide costs
$239,042
$2,084,739
Steers and heifers (under 30 months)b
Per-head cost
$10.84
$4.44
Number of heada
159,278
3,382,573
Total industrywide costs
$1,726,574
$15,018,624
Steers and heifers (30 months of age and older)
Per-head cost
$33.50
$27.10
8,383
178,030
Number of heada
Total industrywide costs
$280,831
$4,824,613
Cows and bulls
Per-head cost
$25.38
$27.82
157,158
3,488,811
Number of heada
Total costs
$3,988,670
$97,058,722
Total industrywide
ongoing costs
$6,235,117
$118,986,698
Large
Total
$2.28
0
$0
—
1,019,202
$2,323,781
$3.34
23,879,898
$79,758,859
—
27,421,749
$96,504,057
$26.00
1,256,837
$32,677,762
—
1,443,250
$37,783,206
$27.01
2,610,041
$70,497,207
—
6,256,010
$171,544,599
$182,933,828
$308,155,643
a
We adjusted the number of head slaughtered as reported in Animal Disposition Reporting Service (ADRS) so that
the number of head in each category matches the number reported by NASS for 2002.
b
We assumed 95 percent of all steers and heifers slaughtered are under 30 months.
Table 3-17. Summary of Midpoint Total Industrywide Costs Associated with Interim Final
Rules
Total annual costs of the interim final rules are an estimated $323.8 million.
Very Small
Small
Large
Total
$327,889
$3,084,086
$1,061,733
$4,473,708
$79,969
$752,180
$258,947
$1,091,096
Annual ongoing costs
$6,235,117
$118,986,698
$182,933,828
$308,155,643
Total annual costsb
$6,315,086
$119,738,878
$183,192,775
$309,246,739
Capital equipment costs
Annualized capital
equipment costsa
a
We assumed capital equipment is replaced every 5 years on average, annualized using a 7 percent interest rate.
b
Total annual costs equal annualized equipment plus annual ongoing costs.
annual total industrywide costs of the SRM regulation at $99.9
to $136.6 million. FSIS’s estimates include the exclusion of
SRMs from use in the human food supply ($35.6 to $36.7
million), segregation of SRMs ($0.8 to $1.0 million), the
prohibition of nonambulatory disabled cattle ($35.6 to $71.3
3-40
Section 3 — Estimates of Costs Associated with BSE Interim Final Rules
million), and modifications of written procedures and recordkeeping requirements ($27.6 million).
3.6
REFERENCES
Cates, S.C., S.A. Karns, and C. Viator. 2005. Unpublished
results of the FSIS meat and poultry slaughter surveys.
Research Triangle Park, NC: RTI International.
Doud, G. 2004a. “BSE Economics.” Washington, DC:
National Cattlemen’s Beef Association.
Doud, G., National Cattlemen’s Beef Association.
Teleconference with Mary Muth and Catherine Viator,
RTI International, Research Triangle Park, NC. April 15,
2004b.
Hodges, J., and S. Seward, American Meat Institute.
Teleconference with Mary Muth and Catherine Viator,
RTI International, Research Triangle Park, NC. March 31
2004.
Miller, J., and A. Rasor, National Animal Meat Processors.
Teleconference with Mary Muth and Catherine Viator,
RTI International, Research Triangle Park, NC. April 14,
2004.
Shackelford, S.D., P.M. Wahlmeier, R.W. Ellis, J.L. Kuehn, S.M.
Kappes, and M. Koohmaraie. No date. “Evaluation of
the Accuracy of Dentition for Assessing Whether or Not
Cattle were Greater than 30 months of Age.” Clay
Center, NE: U.S. Meat Animal Research Center.
Sparks Companies, Inc. June 2001. “The Rendering Industry:
Economic Impact of Future Feeding Regulations.”
Prepared for the National Renderers Association.
Memphis, TN: Sparks Companies, Inc.
Troxel-Hellmer, M. and K. Nunes. May 2004. “Payroll Profile:
Annual Salary and Benefits Study Reveals Compensation
Trends.” Meat & Poultry 50(5):18-28.
U.S. Department of Agriculture (USDA)/Animal and Plant Health
Inspection Service (APHIS). March 15, 2004. “APHIS
BSE Surveillance Plan.” <http://www.aphis.used.gov/
lpa/issues/bse/BSE_Surveil_Plan03-15-04.pdf>.
U.S. Department of Agriculture (USDA)/Food Safety and
Inspection Service (FSIS). 2002. Unpublished results of
the BSE and trimmings survey. Washington, DC: FSIS.
3-41
Economic Impact Analysis: BSE Rulemaking
U.S. Department of Labor, Bureau of Labor Statistics.
“Employer Cost for Employee Compensation.” Data
extracted July 27, 2004.
3-42
Methodology for
Economic Impact
Analysis
4
The economic impact
analysis methodology
incorporates marketlevel data, facility-level
data, and compliance
cost estimates into a
modeling framework
based on
microeconomic theory.
The primary objectives of this economic impact analysis are to
estimate the costs to society associated with the BSE Interim
Final Rules issued by FSIS and the distribution of those costs
among producers and consumers. As described in Section 3,
these rules will require establishments in the cattle slaughter
industry to modify their production processes and will increase
production costs. It is important to recognize that directly
affected facilities are likely to respond to this change in the
market environment by modifying their production rate and/or
altering their input mix. The impacts of these adjustments on
equilibrium prices and quantities will result in the compliance
costs being at least partially transmitted to other entities
through market relationships. To develop estimates of the
social costs of the rules and their distribution, we constructed a
facility-level behavioral model that simulates producer and
consumer responses to changing market conditions. This
section of the report describes the quantitative model as well as
the underlying economic theory.
4.1
EIA METHODOLOGY OVERVIEW
As discussed in Section 1.2, this report provides estimates of
the economic impacts of FSIS regulations prohibiting the use of
SRMs from beef cattle for human food and requiring
nonambulatory disabled cattle presented for slaughter to be
condemned. Executive Order (EO) 12866 requires regulatory
agencies to conduct a comprehensive analysis of the economic
4-1
Economic Impact Analysis: BSE Rulemaking
benefits and costs of significant regulatory actions.1 In
addition, the Regulatory Flexibility Act (RFA) and Small
Business Regulatory Enforcement and Fairness Act (SBREFA)
require regulatory agencies to consider the economic impacts of
regulatory actions on small entities. The methodology used for
this analysis is consistent with standard microeconomic theory
and was designed to comply, to the extent possible given data
and resource limitations, with OMB’s most recent guidelines for
regulatory impact analysis (OMB, 2003).
We developed a facility-level model that uses a behavioral
approach to analyze the responses of producers and consumers
in a market setting (see Figure 4-1). Specifically, this approach
explicitly recognizes that the owners of the affected plants can
and will make adjustments such as changing production rates
or altering input mixes that will affect the market environment
in which they operate. As producers change their production
levels in response to regulation, consumers are typically faced
with changes in prices that lead them to alter their consumption
levels. Producers and consumers face incentives to adjust
production and consumption until reaching a new market
equilibrium at prices where quantity supplied and demanded
are equal in all markets.
The economic impact analysis incorporates the cost estimates
The economic impact
analysis incorporates the
cost estimates provided in
Section 3 into a market
framework to evaluate
equilibrium facility- and
company-level production
impacts and market-level
changes in equilibrium
prices and output.
provided in Section 3 into a market framework to evaluate
equilibrium facility- and company-level production impacts and
market-level changes in equilibrium prices and output. The
changes in price and production from the market-level impacts
are used to estimate the distribution of social costs between
consumers and producers associated with the regulations on
the cattle slaughter industry. In essence, this approach models
the expected reallocation of society’s resources in response to a
regulation.
An economic impact analysis of a regulatory action should
assess the effects of regulatory alternatives at the facility,
company, market, and societal levels to provide a
comprehensive examination of the expected impacts. The
1
4-2
OMB guidance under EO 12866 stipulates that a full benefit-cost
analysis is required when a regulatory action is expected to have an
annual effect on the economy of $100 million or above.
Section 4 — Methodology for Economic Impact Analysis
Figure 4-1. Overview of Facility-Level Economic Impact Analysis Model
This figure summarizes the types of linkages included in the economic impact analysis model used for the FSIS BSE
regulations.
4-3
Economic Impact Analysis: BSE Rulemaking
model used for this analysis of FSIS BSE regulations provides
an integrated, conceptually coherent economic framework that
generates the following key outputs for each of these levels:
4-4
ƒ
Facility-Level Effects. The model predicts changes in
production, revenue, compliance costs, production costs,
and employment resulting from the FSIS regulations
based on a model of profit-maximizing behavior. These
changes were calculated for all facilities included in the
model. In addition, facilities may alter the age
distribution of cattle purchased for slaughter or may
close the entire plant following implementation of the
regulation. Thus, the model also reports estimates of
changes in input mix and facility closures.
ƒ
Company-Level Effects. The model computes
company-level effects by identifying the ownership of
each plant and aggregating the financial effects at each
plant up to the company level. Key company-level
variables reported by the model include the compliance
cost burden, impacts on profitability, and impacts on the
financial viability of affected companies. To address the
requirements of the Regulatory Flexibility Act and the
Small Business Regulatory Enforcement and Fairness
Act, it is necessary to estimate changes in costs,
revenues, profitability, employment, and business
closures separately for large and small businesses to aid
in determining the relative burden on small businesses.
Thus, the model provides summary statistics for
company-level impacts for all companies, as well as
broken down by company size.
ƒ
Market-Level Effects. The model simulates changes in
the market equilibrium prices and quantities, including
estimates of changes in production by supply source
(i.e., different types of domestic slaughter
establishments, imports) and changes in consumption
by demanders (i.e., domestic use, exports). Marketlevel results are presented by HACCP size category (very
small, small, and large plants) and by size of business
(small and large), where applicable. Estimates of effects
on imports and exports are based on assumed or
estimated elasticities of export demand and import
supply. The model translates simulated changes in
product prices as a result of the regulations into changes
in import and export quantities using these trade
elasticities.
ƒ
Societal-Level Effects. The model calculates social
costs for use in a benefit-cost analysis of the
regulations. The social costs component of the model
Section 4 — Methodology for Economic Impact Analysis
uses the market adjustments in price and quantity to
calculate the aggregate change in welfare and the
distribution of the social costs of the regulation using
applied welfare economics principles. The aggregate
measures of social cost include consumer and producer
surplus changes.
4.2
CONCEPTUAL APPROACH
As noted earlier, implementing regulations on cattle slaughter
will affect the costs of production in the industry. These costs
will vary across facilities depending on the inputs and
production processes used prior to the regulations. Facilitylevel production responses to these increases in production
costs, in combination with consumer responses, will determine
the market impacts of the regulations. This section provides a
description of the basic economic theory underlying the
development of supply and demand curves for affected
products and the influence the regulations have on production
and consumption decisions.
4.2.1
Characterization of Affected Markets
In the broadest sense, all markets in the economy are directly
or indirectly linked. Thus, the rule will affect all commodities
and markets to some extent. However, that does not imply
that all market linkages need to be modeled to examine the
impacts of a rule. The appropriate level of market interactions
to be included in an economic impact analysis is determined by
the total cost of the regulation, the number of industries
directly affected by the regulatory requirements, the
importance of directly affected industries as suppliers of inputs
to other industries, and the ability of affected firms to pass
along regulatory costs in the form of higher prices. The larger
and more widespread the impacts are expected to be, the more
markets that should be included in the analysis.
Alternative approaches for modeling interactions between
economic sectors can generally be divided into three groups:
ƒ
Partial equilibrium model—Individual markets are
modeled in isolation. The only factor affecting the
market is the cost of the regulation on facilities in the
industry being modeled; there are no interactions with
other markets.
ƒ
General equilibrium model—All sectors of the economy
are modeled together, incorporating effects between all
4-5
Economic Impact Analysis: BSE Rulemaking
sectors included in the model. General equilibrium
models operationalize neoclassical microeconomic theory
by modeling not only the direct effects of control costs
but also potential input substitution effects, changes in
production levels associated with changes in market
prices across all sectors, and the associated changes in
welfare.
ƒ
Multimarket model—A subset of related markets is
modeled together, with sector linkages, and hence
selected interaction effects, explicitly specified. This
approach represents an intermediate step between a
simple, single-market partial equilibrium approach and a
full general equilibrium approach. This technique has
most recently been referred to in the literature as
“partial equilibrium analysis of multiple markets” (Berck
and Hoffmann, 2002).
Although general equilibrium models offer more comprehensive
estimates of economy-wide impacts, they generally do so at the
expense of providing detailed results for individual sectors of
the economy. In addition, these models require substantial
time and resources to develop.
Because the scope of the regulatory action being analyzed is
Because the scope of the
regulatory action being
analyzed is sector specific
and is not expected to
substantially affect
overall economic activity
in the United States, we
used a multimarket
partial equilibrium model
to estimate the impacts.
sector specific and is not expected to substantially affect overall
economic activity in the United States, we used a multimarket
partial equilibrium model to estimate the impacts. Determining
the specific markets to be included in the model requires
identifying the products most affected by the regulations and
characterizing the directly affected industry, as provided in
Section 2. This information is used to identify key market
linkages and select the appropriate level of aggregation based
on characteristics of the products, markets, and regulations,
subject to data availability.
Because meat production accounts for the majority of the value
of output of the cattle slaughter industry, it is the focus of the
model. Loss of revenue from by-products was incorporated as
a regulatory cost to the industry.2 For the purposes of the
model, the primary outputs of the cattle slaughter industry
were divided into three markets:
2
4-6
An alternative approach would be to model the markets for the byproducts themselves; however, data to characterize these markets
are extremely limited.
Section 4 — Methodology for Economic Impact Analysis
ƒ
beef from fed steers and heifers,
ƒ
beef from cows and bulls, and
ƒ
veal.
As described in Section 2.1, there are important differences
between these three markets. Thus, disaggregating the output
of the cattle slaughter industry at this level in the market model
enabled us to more accurately simulate regulatory impacts on
the industry. Figure 4-2 shows the market linkages between
live cattle inputs and beef and veal consumption. Because of
data limitations, the model used for this analysis does not
differentiate between whole cuts, ground products, and
processed meats.
Figure 4-2. Market Linkages in Production of Beef and Veal
Beef and veal production was divided into three markets: beef from fed steers and heifers, beef from cows and
bulls, and veal.
4-7
Economic Impact Analysis: BSE Rulemaking
While the markets for fed beef, nonfed beef, and veal are
assumed to be different, meat products within each of these
markets are assumed to be homogenous because of limited
data availability at a more disaggregated level. In addition,
markets for beef and veal were assumed to be national in scope
(as opposed to regional markets). Thus, each of the three
submarkets included in the model has a single national
equilibrium price for that market.
Although all three markets have their own equilibrium price and
quantity in the model, there are some linkages between them.
Because there is some substitution between these products on
the demand side, the prices of all three products were included
in the demand functions for each individual product. This
enabled us to capture substitution between beef products by
buyers in response to relative price changes. There may also
be some substitution of other meats (e.g., pork, poultry,
seafood) for beef. However, inclusion of these substitution
effects would likely have little effect on model results for this
regulation while substantially complicating the model.
Substitution on the supply side could theoretically be included
as well (i.e., plants could substitute production of one output
for another as relative input and output prices change).
However, information was insufficient to adequately reflect
these changes in output. Also, many of the plants specialize in
only one of these products and are unlikely to begin producing
multiple products in response to the small changes in relative
price expected under these regulations.
The cattle slaughter industry is moderately concentrated, but
profits remain relatively low, and several recent studies have
concluded either that there is no evidence of market power in
the industry or that any departure from competitive conduct in
the meat industries is small (see Section 2.3). Therefore, we
assumed that prices and quantities are determined in perfectly
competitive markets for beef from fed cattle, beef from nonfed
cattle, and veal based on the intersection of the market supply
and demand curves. Under this condition, buyers and sellers
take the market output price as given when making their
production and consumption choices.
In addition, the market for live cattle purchased by the cattle
slaughter industry was assumed to behave competitively due to
the large number of small cattle producers. However, unlike
4-8
Section 4 — Methodology for Economic Impact Analysis
the beef market, which was assumed to be national in scope,
the market for live cattle was assumed to be much more
localized because of limits on efficient transportation distance
for live cattle. Thus, state-level prices were used for the cattle
inputs.
4.2.2
Supply
After critical review, we determined that the level of detail of
After critical review, we
determined that the level
of detail of facility and
compliance cost data
available is sufficient to
support a facility-level
characterization of
domestic supply.
facility and compliance cost data available is sufficient to
support a facility-level characterization of domestic supply.
Cattle slaughter facilities augment fixed factors of production
(e.g., plant and equipment) with variable factor inputs (e.g.,
materials and labor) to produce beef and veal outputs. These
fixed factors are the source of diminishing marginal returns,
hence, increasing marginal costs. Therefore, each supply
segment (beef from fed cattle, beef from nonfed cattle, veal)
can be characterized by an upward-sloping supply curve.
In addition to impacts on domestic producers, regulation of the
U.S. cattle slaughter industry will have impacts on foreign
producers. Foreign imports will tend to become more attractive
to U.S. consumers as they become cheaper relative to domestic
production because of higher regulatory costs in the United
States. A single supply curve was used to represent total
imports supplied by all foreign producers.
The supply function relates the quantity of a good supplied as a
function of its price and other factors, such as the price of
inputs, the price of substitute outputs, and technological
factors. Because of data and resource limitations, factors other
than the product’s price are held constant. Therefore, the focus
of the supply function specification is to establish the
quantitative relationship between price and quantity supplied in
the affected market. The supply function is that portion of the
marginal cost curve bounded by zero and the facility’s technical
capacity. The facility owner is willing to supply output
according to this schedule as long as the market price is high
enough to cover average variable costs. If the market price
falls below average variable costs, then the firm’s best
response is to cease production because total revenue does not
cover total variable costs of production. In this scenario,
producers lose more money by operating than by shutting
down. Market-level supply functions can be viewed as the
aggregate sum of the supply functions of all individual suppliers
4-9
Economic Impact Analysis: BSE Rulemaking
in the market. The change in market supply in response to
price then is the sum of all suppliers’ responses to price.
An important measure of the magnitude of supply response to a
change in market price is the price elasticity of supply, which is
equal to the percentage change in quantity supplied divided by
the percentage change in price. Empirical estimates of the
supply elasticity were used for large plants because data from
those plants were used to estimate the elasticities available in
the literature. There were no available estimates of supply
elasticities identified in the literature specifically for small and
very small plants. Based on professional judgment, small and
very small plants were assumed to be less responsive to
changes in price than large plants. In all three output markets
modeled, large plants were assumed to have a supply elasticity
of 0.3, small plants have a supply elasticity of 0.2, and very
small plants have a supply elasticity of 0.1.3,4 Because data on
import supply elasticities were very limited, we used assumed
values for these parameters. The values chosen were 1.0 in all
three output markets.
4.2.3
Demand
Consumption choices are a function of the price of the
commodity, income, prices of related goods, tastes, and
expectations of the future. In this analysis, we considered how
these choices change in response to higher prices resulting
from regulation, holding nonprice variables constant. The
domestic demand equation accounts for cross-price effects
between the three outputs modeled, as mentioned above.
Export demand for each of the three outputs was modeled as a
function of own-price only.
The model assumes downward-sloping demand curves in all
output markets (i.e., the quantity demanded of a good falls
when its price rises), consistent with the law of demand. Thus,
increases in the prices of beef and veal due to regulation are
expected to result in a decrease in consumption, other things
3
Because the live cattle input is assumed to be used in fixed
proportions to the output, supply was modeled as a function of net
price, which is calculated as the output price on a carcass basis
minus the price of live cattle. Thus, these supply elasticities reflect
the proportionate change in quantity supplied for a change in net
price.
4
Model users have the option of modifying all of the default elasticity
estimates in the model.
4-10
Section 4 — Methodology for Economic Impact Analysis
being equal. Domestic demand for beef and veal in each of the
three markets defined above was modeled using elasticity
estimates from the literature (see Table 2-7). Because of very
limited data on export demand elasticities, an assumed value of
−1.0 was used for all three output markets.
4.2.4
Baseline and With-Regulation Market Equilibrium
As shown in Figure 4-3(a), baseline equilibrium market price
and quantity (P*, Q*) in each market are determined by the
intersection of the downward-sloping market demand curve
(DM) and the upward-sloping market supply curve (SM). The
market supply curve is the horizontal summation of individual
supply curves of all domestic facilities that produce a given
product and the import supply curve.
Under regulation, the cost of production increases, which leads
to an upward shift in the supply curve for each affected facility.
For these rules, all domestic cattle slaughter facilities are
expected to have nonzero costs. Therefore, the unaffected
portion of the supply curve represents import supply. Facilitylevel supply shifts include both variable and capital (fixed) costs
and are applied to each plant depending on its size and
location. As a result, the market supply curve shifts upward
from SM to SM´, as shown in Figure 4-3(b). At the new
equilibrium, price has increased from P* to P´, and market
output has declined from Q* to Q´. The net change in market
output reflects changes in output across all facilities in the
industry. Depending on the relative magnitude of compliance
costs across plants, selected facilities with low compliance costs
may actually increase production.
4.2.5
Social Costs
The net benefit of a regulatory action is traditionally measured
by the change in economic welfare that it generates.
Generally, regulatory impacts are distributed between
consumers and producers. Consumers experience welfare
impacts due to changes in market prices and consumption
levels, while producers experience welfare impacts resulting
from changes in profits corresponding to changes in production
levels and market prices.
4-11
Economic Impact Analysis: BSE Rulemaking
Figure 4-3. Market Equilibrium Without and With Regulation
P
P
Sa
P*
+
P
Su
P*
SM
= P*
DM
Q
qa
Q
qu
Indirectly Affected
Affected Facilities
Q
Q*
Market
a) Baseline Equilibrium
P
S′a
P
Sa
P′
+
P*
P
Su
P′
P′
P*
= P*
SM′
SM
DM
q′a
qa
Affected Facilities
Q
qu
q′u
Q
Indirectly Affected
Q′
Q* Q
Market
b) With-Regulation Equilibrium
Consumer surplus derived from consumption of a good is the
difference between the maximum price consumers are willing to
pay for that good and the actual price paid. Consumer surplus
in a market is measured as the area under the demand curve
and above the market price of a product. Similarly, producer
surplus is the difference between the minimum price producers
are willing to accept for a good and the price they actually
receive. It is measured as the area above the supply curve and
below the market price. These areas represent consumers’ net
benefits of consumption and producers’ net benefits of
production, respectively.
4-12
Section 4 — Methodology for Economic Impact Analysis
As illustrated in Figure 4-4, following a shift in the supply curve
from SM to SM′, area A is the loss in consumer surplus, and area
B – C is the net change in producer surplus associated with a
regulation that increases the costs of production. The net cost
associated with this regulation in terms of economic welfare is
then the sum of these areas [–A + (B – C)] or area D in
Figure 4-4(c). However, it is important to emphasize that this
measure does not reflect the benefits that accrue to beef and
veal consumers from increased food safety.
Figure 4-4. Economic Welfare Changes for a Regulation that Increases the Cost of
Production: Consumer and Producer Surplus Changes
4.3
OPERATIONAL MODEL
To develop quantitative estimates of economic impacts, the
conceptual model described above was operationalized using
MS Excel© spreadsheet software. The purpose of this model is
to provide a structure for analyzing the market adjustments
expected to result from the FSIS regulations being analyzed.
Given compliance costs for each category of affected facilities,
the model determines a new equilibrium solution in each
market modeled. Our general methodology for constructing the
model was as follows:
1. Identify and characterize the most significantly affected
products and markets (beef from fed cattle, beef from
nonfed cattle, veal), as described in Section 4.2.1.
2. Collect baseline data to characterize each of the plants
that slaughter cattle (and the companies that own them)
4-13
Economic Impact Analysis: BSE Rulemaking
using the EFD and a variety of secondary sources (see
Section 2).
3. Develop a mathematical simulation of baseline
conditions in key markets based on construction of
facility-level marginal cost curves derived from a
Generalized Leontief profit function.
4. Calibrate the model to match economic relationships
observed in the beef production industry prior to
imposing the regulations.
5. Input the direct costs of complying with the regulation
(size of the supply shift) for each facility (using values
presented in Section 3).
6. Develop a mathematical simulation that embodies the
expected economic reasoning of producers and
consumers in the market in establishing equilibrium
prices and quantities.
7. Impose the supply or demand shift estimates in the
mathematical simulation to determine the postregulatory equilibrium prices and quantities and
estimate the responses of affected products, plants,
companies, and markets.
8. Aggregate estimated effects by size of the company to
assess the effects on affected small businesses.
9. To address uncertainties in the model and to consider
regulatory alternatives, conduct sensitivity analyses of
the model assumptions (e.g., elasticity estimate
assumptions).
Following a summary of the variables used in the model
equations, we describe key components of the spreadsheet
model below.
4.3.1
Model Variables
Table 4-1 summarizes the key variables used in the model
equations for ease of reference.
4-14
Section 4 — Methodology for Economic Impact Analysis
Table 4-1. Variables
Used in Market Model
Variable
Description
β
Multiplicative calibration factors in domestic supply
functions
ε
Supply elasticities
γ
Additive calibration factors in domestic supply function
η
Demand elasticities
τ
Multiplicative calibration factors in demand functions
µ
Multiplicative calibration factors in import supply functions
π
Profit
ai
Price of live animal for facility i based on state
A
Affected production (incur compliance costs)
ci
Per-carcass equivalent cost of compliance
D
Demand
dom
Domestic
F
Fed cattle (steers and heifers—assumed to produce graded
beef)
i
Facility
Ii
Cost index for facility i based on state
k
Proportion of cattle 30 months of age or older
M
Imports
N
Nonfed cattle (cows and bulls—assumed to produce
ungraded beef)
n
Number of establishments
P
Price per carcass-equivalent unit (value of products
derived from carcass)
q
Submarket quantity (facility-level output on import supply)
in carcass-equivalent units
Q
Market quantity in carcass-equivalent units
S
Supply
U
Unaffected production (incur no compliance costs)
V
Veal calves
X
Exports
4-15
Economic Impact Analysis: BSE Rulemaking
4.3.2
Domestic Supply of Beef and Veal
The market supply of beef and veal in each of the three defined
submarkets is defined as
Q
Sj
S
S
j
= qdom
+ qMj =
n
∑ qiS
i=1
j
S
+ qMj ,
j = F,N, V ,
(4.1)
S
S
where Q j is the market quantity supplied for product j; q j
denotes quantity supplied from a submarket, with subscripts for
domestic (dom), import (M), and domestic facility (i) sources; n
is the number of facilities; and F, N, and V represent fed beef,
nonfed beef, and veal, respectively.
Producers have some ability to vary output in response to
changes in production costs. Supply functions, coupled with
data on market prices, can be used to simulate each facility’s
optimal production rate, including zero output (shutdown).
Because there is insufficient facility-level data to
econometrically estimate these functions, we instead calibrated
facility-level supply functions to match baseline output. The
functional form selected to represent producer behavior is the
commonly used Generalized Leontief profit function, from which
the supply function can be derived.5
The specification of a facility’s profit function for each product
using the Generalized Leontief functional form is as follows:
π ij = γ ij (P j - aij ) + βij Iij (P j - aij ) + θijIij ,
j = F,N, V ,
(4.2)
where Pj is the output price for beef and by-products for
j
i
produce product j; a is the price of live cattle used to produce
product j at facility i (based on the state in which facility i is
located); I is the variable proportion input for product j
produced by facility i (characterized by a cost index described
below); and γ, β, and θ are model parameters.
By applying Hotelling’s lemma to this profit function, the
following general form of the supply function for product j at
facility i is obtained:
1
2
βij 
Iij
j
qij =
=
γ
+

 ,
i
2  (P j - aij ) 
∂P j


∂πij
5
4-16
j = F, N, V
(4.3)
For additional details, see Chambers (1988) for a discussion of the
Generalized Leontief functional form (pages 172−173).
Section 4 — Methodology for Economic Impact Analysis
j
i
where q is the number of cattle for output market j that are
slaughtered by facility i. The theoretical restrictions on the
model parameters to ensure upward-sloping supply curves are
j
j
γ ≥ 0 and β < 0.
i
i
Figure 4-5 illustrates the theoretical supply function for product
j represented by Eq. (4.3). The upward-sloping supply curve is
specified over a productive range with a lower bound of zero
2
 βj 


i
I j and
that corresponds to a shutdown price equal to
 2 γj  i
 i
an upper bound given by the productive capacity of the facility
j CAP
)
i
(q ,
j
i
j
β
i
that is approximated by the supply parameter γ . The
curvature of the supply function is determined by the
parameter.
Figure 4-5. Theoretical Supply Function for Product j at Facility i

 *
 P j − aj 
i




2
 β ij  j

 I
 2γj  i
 i
qij *
j, CAP
γ ij = qi
j
The β parameter is related to facility i’s supply elasticity for
i
product j, which can be expressed as
∂q ij
ε ij =
qij
∂(P j − aij )
=
∂q ij
∂(P j − aij )
•
(P j − aij )
qij
.
(4.4)
(P j − aij )
Taking the derivative of the facility supply function (Eq. [4.3])
with respect to price yields
4-17
Economic Impact Analysis: BSE Rulemaking
1

βij  (Iij ) 2
=− 
3
4 
∂(P j − aij )
j
j 2
−
(P
a
)
i



.


∂q ij
Multiplying this expression by
for the supply elasticity:
(P j − aij )
q ij
(4.5)
results in the expression
1
2
βj 
Ij
ε ij = − i j  j i j  .
4qi  (P − ai ) 
(4.6)
j
i
By rearranging terms, we can solve for β as


Ij
βij = −4qijε ij  j i j 
 (P − a ) 
i 

−
1
2
.
(4.7)
j
Values for the β parameter for each facility were then
i
j
computed using Eq. (4.7), assuming that ε is equal to the
i
market supply elasticity for each product for the facility’s size
class (large, small, very small)6 and using the methodology
described in Section 2.1.2 to calculate the variable production
j
cost index, I .
i
j
i
The remaining supply function parameter, γ , approximates the
productive capacity of each facility and varies across products.7
This parameter does not affect the facility’s production
responsiveness to price changes (unlike the β parameter).
j
Thus, the parameter γ is used to calibrate the model so that
i
each facility’s supply equation replicates the baseline
production data for that facility.
4.3.3
Foreign Supply
The import supply function was characterized using a CobbDouglas functional form defined as
6
Theoretically, supply elasticities could be estimated for each product
for each facility. However, we did not have sufficient data or
resources to develop econometric estimates.
7
If facility-level data on productive capacity were available, then γ
j
i
could be set equal to facility capacity for each product and Eq. (4.3)
j
i
used to solve for the value of β that calibrates the model to
replicate baseline production data. However, these data were not
available for use in calibration or to verify the accuracy of the
j
i
calculated γ parameters.
4-18
Section 4 — Methodology for Economic Impact Analysis
( )
j
j
qm
= µm
Pj
j
εm
,
(4.8)
j
where qm is the carcass-equivalent quantity of imports for
j
product j, Pj is the U.S. market price for product j, εm is the
j
import supply elasticity for product j, and µm is a multiplicative
parameter that calibrates the supply function for each product
to replicate the observed level of imports in the baseline.
4.3.4
Domestic Demand
The domestic demand equations account for cross-price effects
between beef from fed cattle, beef from nonfed cattle, and
veal. The demand functions are specified as
F
FN
FV
N
NF
NV
V
VF
VN
F
F η
N η
F
qD
(P V )η
dom = τ dom (P ) (P )
N
N η
F η
N
qD
(P V )η
dom = τ dom (P ) (P )
V
V η
F η
V
qD
(P N )η
dom = τ dom (P ) (P )
(4.9)
(4.10)
(4.11)
D
j
where qdom
is domestic demand for fed beef (F), nonfed beef
(N), and veal (V), respectively; the τ parameters are
multiplicative calibration factors; and the η parameters are
demand elasticities where a single superscript denotes the ownprice elasticity and two superscripts denote the cross-price
elasticity between those two products.8
4.3.5
Export Demand
Similar to domestic demand, export demand for beef and veal
is expressed using a Cobb-Douglas functional form as follows:
D
ηXj
qX j = τ Xj (P j )
(4.12)
D
where q X j is the carcass-equivalent quantity of exports for
j
product j, Pj is the U.S. market price for product j, ηm is the
j
export demand elasticity for product j, and τm is a multiplicative
parameter that calibrates the demand function for each product
to replicate the observed level of baseline exports.
This specification assumes that there are no cross-price effects
between the three different exported products due to lack of
8
The cross-price elasticity is a measure of the change in quantity
demanded for a product in response to a change in the price of
another product. Negative values for cross-price elasticities
indicate the goods are complements, positive values indicate they
are substitutes, and a cross-price elasticity of zero implies that the
products are neither complements nor substitutes.
4-19
Economic Impact Analysis: BSE Rulemaking
data on cross-price elasticities. Also, these products are likely
to be destined for different regions of the world and may not be
all that substitutable for one another within a given export
region. In addition, we assumed that there were no cross-price
effects between domestic and export demand.
4.3.6
Baseline Scenario
After developing the supply and demand curves, we calibrated
the model to ensure the empirical specification of the supply
curve intersects the empirical specification of the demand curve
at baseline equilibrium market prices and quantities. In
addition, we calculated a fixed cost component for each facility
to calibrate baseline profit margins to the average value for
meat packing firms of 2.15 percent (USDA GIPSA, 2004).
These costs are assumed not to vary with output and do not
change under our regulatory scenarios. These calibrated
functions represent the baseline scenario in the market prior to
implementing the regulation.
4.3.7
Incorporation of Compliance Costs
When the BSE regulation is implemented, production costs will
increase for affected domestic cattle slaughter plants. We
applied the compliance cost shifts to the domestic supply
curves developed for each facility, leading to a new market
equilibrium by simulating economic decisions of producers and
consumers in the market.
Because costs at a given facility that slaughters steers and
heifers differ between cattle that are determined to be 30
months or older and those that are determined to be younger
than 30 months, supply of steers and heifers in these two age
groups was calculated separately.9 The annual compliance
costs estimated for each facility for each product produced at
j
that facility, ci, will enter the supply function as a change in net
price. Thus, the supply function shown in Eq. (4.3) becomes
1
qij, ≥ 30
9
4-20

2
Iij

= k j γ ij + k jβij  j
 (P − aij ) − c ij, ≥ 30 
(4.13)
As described in Section 3, we assumed that plants that slaughter
cows and bulls treat all cows and bulls as 30 months of age and
older; thus, we did not segment the supply function by age for cows
and bulls.
Section 4 — Methodology for Economic Impact Analysis
for cattle 30 months and older (denoted by a subscript of ≥30),
where k is the proportion of cattle used to produce product j
that are 30 months or older.
For cattle younger than 30 months, the supply function
becomes
1
qij, < 30
4.3.8

2
Iij
 . (4.14)
= (1 − k j )γ ij + (1 − k j )βij  j
 (P − aij ) − c ij, < 30 
Solving for Market Equilibrium With Regulation
The algorithm used to determine the new market equilibrium in
the spreadsheet model is as follows (Depro and Thomas
[2003]):
1. Introduce the supply shift (i.e., impose compliance
costs).
2. Use the supply function specification to recalculate the
market supply in each market. Excess demand exists at
the initial equilibrium price.
3. Determine new prices using a price revision rule, similar
to one described in Kimbell and Harrison (1986). Prices
increase when excess demand exists, decrease when
excess supply exists, and remain unchanged when
supply and demand are equal based on the following
0.1
calculation:
 quantity demanded 


revised price = previous price 

 quantity supplied 
4. Recalculate market supply with new prices, and compute
market demand in each market.
5. It is possible that the regulation may induce a producer
to shut down operations rather than incur the costs of
compliance. Because closures affect the equilibrium
solution, the model algorithm checks for closures on
each iteration. The method used in the model to
simulate firm closure decisions is to calculate the
profitability of producing each product at each facility. If
the total revenue derived from a product is less than the
total cost of producing it, then the facility will stop
j
producing that product in the model ( q i =0). If a facility
stops producing all products that it produced in the
4-21
Economic Impact Analysis: BSE Rulemaking
baseline based on this criterion, then that facility shuts
down altogether.
6. Compare supply and demand in each market. If
equilibrium conditions are not met, reopen all facilities
that closed under Step 5 and determine a new set of
prices (Step 3). Repeat until market convergence is
obtained (i.e., the difference between supply and
demand is zero).
Once the model converges, it generates tables of results
summarizing the estimated impacts of the regulations.
Section 5 summarizes the simulated economic impacts of the
FSIS BSE rules analyzed.
4.4
SENSITIVITY ANALYSIS
As with any analysis, many underlying assumptions influence
model results. Thus, it is important to examine the impact of
varying parameters and model assumptions on the conclusions
of the economic impact analysis. This enables an examination
of the relative importance of different model assumptions and
permits generation of a plausible range of economic impact
estimates. The market model allows users to modify market
inputs, elasticities, proportions of cattle that are 30 months or
older, and fixed and variable compliance costs. In addition to
enabling sensitivity analysis for a given regulation, the model
can be used to compare any number of regulatory alternatives
by altering the size of the supply shifts or the types of
establishments affected by the regulation.
4.5
REFERENCES
Berck, P. and S. Hoffmann. 2002. “Assessing the Employment
Impacts of Environmental and Natural Resource Policy.”
Environmental and Resource Economics 22:133−156.
Chambers, R.G. 1988. Applied Production Analysis: A Dual
Approach. New York: Cambridge University Press.
Depro, B.M., and A. Thomas. 2003. “Complementing Chalk
and Talk: The Case of the Walrasian Auctioneer.”
Economic Research Network Educator.
<http://papers.ssrn.com/abstract=390780>.
Kimbell, L.J., and G.W. Harrison. 1986. “On the Solution of
General Equilibrium Models.” Economic Modeling
3:197−212.
4-22
Section 4 — Methodology for Economic Impact Analysis
Office of Management and Budget (OMB). 2003. “Regulatory
Analysis: Memorandum for Heads of Executive Agencies
and Establishments.” OMB Circular A-4, revised
September 17, 2003.
U.S. Department of Agriculture (USDA)/Grain Inspection,
Packers and Stockyards Administration (GIPSA). 2004.
“Packers and Stockyards Statistical Report: 2002
Reporting Year.” GIPSA SR-04-1. Available from
<http://www.usda.gov/gipsa/pubs/stat02/stat02.htm>.
4-23
5
Economic Impact
Model Results
In this section, we present the results of the economic impact
analysis model using the cost estimates for the
SRM/nonambulatory disabled cattle interim final rule. Results
are presented for the beef markets labeled as follows:
ƒ
fed beefprimarily from steers and heifers under 30
months of age;
ƒ
nonfed beefprimarily from cows and bulls but also
from steers and heifers 30 months of age and older as
determined by dentition; and
ƒ
vealfrom veal calves.
As noted in previous sections, the baseline year of the analysis
is 2002. We describe the contents of each table in the
remainder of this section.
Table 5-1 presents the baseline data used in the model for each
of the three beef markets. All data are on a per-carcass basis.
Market prices for each carcass represent the wholesale value of
the meat derived from an average animal and the wholesale
value of the edible by-products. Average dressed weights were
assumed to be 803 pounds for steers and heifers, 517 pounds
for cows and bulls, and 190 pounds for veal calves and other
calves. Per-pound values for beef and veal were obtained from
2002 Census data (U.S. Department of Commerce, 2004). The
per-pound beef and veal values were obtained using the
following NAICS codes:
ƒ
Steers and heifers: NAICS 3116111331 Fresh and
frozen beef subprimal and fabricated cuts packaged in
plastics (boxed beef), not canned or made into sausage,
made in slaughtering plants.
5-1
Economic Impact Analysis: BSE Rulemaking
Table 5-1. Baseline Characterization of U.S. Beef and Veal Market, 2002
Fed Beef
(Steers and Heifers)
Nonfed Beef
(Cows and Bulls)
Veal
(Veal and Calves)
$1,493.33
$611.86
$421.74
28,864,999
6,256,010
1,019,202
Exports
2,033,431
280,738
190,976
Imports
2,526,236
348,776
237,259
Market price ($/CE)a
Market quantity (CE/year)
Domestic production
a
Market price is constructed based on the value of meat and by-products. Values for plants in Alaska were
multiplied by 1.35 to adjust for price differences such that all plants in Alaska have nonnegative profits in
baseline.
Note: CE = carcass equivalent.
ƒ
Cows and bulls: NAICS 3116111551 Fresh and frozen
boneless beef, including hamburger, not canned or
made into sausage, made in slaughtering plants.
ƒ
Veal: NAICS 3116114111 Fresh and frozen whole
carcass and half carcass veal, not canned or made into
sausage, made in slaughtering plants and NAICS
3116114121 Fresh and frozen primal, subprimal,
fabricated cuts, and boneless veal, not canned or made
into sausage, made in slaughtering plants.
Average by-product weights (including hides) were assumed to
be 239 pounds for steers and heifers, 269 pounds for cows and
bulls, and 57 pounds for veal calves and other calves. Perpound values for by-products were obtained from USDA
Mandatory Price Reporting data (Schrader, 2003).
Domestic production represents the summation of plant-level
slaughter volumes in FSIS’s ADRS adjusted to be equivalent to
slaughter volumes reported by NASS. By default, the model
assumes that 5 percent of steers and heifers will be classified
as 30 months of age and older by dentition; these cattle appear
in the nonfed beef column. (Note that users may alter this
assumption in the model.) Exports and imports were obtained
from the U.S. International Trade Commission (ITC) on a perpound basis and converted to a carcass equivalent basis for the
purposes of the model using average dressing percentages.
Table 5-2 presents a summary of the market-level impacts of
imposing the costs of the interim final rule. For each of the
markets, baseline values and with-regulation values are
5-2
Section 5  Economic Impact Model Results
Table 5-2. Summary of Market-Level Impacts of Regulation, 2002
Changes from Baseline
With
Regulation
Absolute
$1,493.33
$1,511.57
$18.24
1.2%
Market output (CE/year)
31,391,235
31,493,565
102,330
0.3%
Domestic production
28,864,999
28,936,481
71,482
0.2%
Exports
2,033,431
2,008,900
–24,531
–1.2%
Imports
2,526,236
2,557,085
30,849
1.2%
$611.86
$628.01
$16.15
2.6%
Market output (CE/year)
6,604,786
6,525,848
–78,938
–1.2%
Domestic production
6,256,010
6,167,868
–88,142
–1.4%
Exports
280,738
273,521
–7,217
–2.6%
Imports
348,776
357,979
9,203
2.6%
$421.74
$424.40
$2.66
0.6%
Market output (CE/year)
1,256,461
1,258,649
2,188
0.2%
Domestic production
1,019,202
1,019,897
695
0.1%
Exports
190,976
189,781
–1,195
–0.6%
Imports
237,259
238,753
1,494
0.6%
Baseline
Percent
Fed Beef (Steers and Heifers)
Market price ($/CE)
Nonfed Beef (Cows and Bulls)
Market price ($/CE)
Veal Calves
Market price ($/CE)
Note: CE = carcass equivalent.
compared to calculate absolute and percentage changes. The
greatest market price increase occurs in the nonfed beef
market because the costs of regulation are highest for this
category. In addition to the direct effects of imposing the costs
of the regulation, indirect effects also occur because of
substitution among types of cattle slaughtered at packing
plants and types of beef purchased by consumers. These
substitution effects occur in response to changes in relative
prices among the three beef and veal types.
Table 5-3 presents total changes in revenues, costs of
production (including regulatory costs), and operating profits
(revenue less calculated costs of production). It also presents
total operating product typesthe sum of the number of
5-3
Economic Impact Analysis: BSE Rulemaking
Table 5-3. Summary of National-Level Industry Impacts of Regulation, 2002
Changes from Baseline
Baseline
Beef and veal revenues
($/year)
With Regulation
Absolute
Percent
$47,362,906,814
$48,045,980,008
$683,073,195
1.4%
—
$306,905,855
$306,905,855
$32,130,923,016
$32,189,517,449
$58,594,432
0.2%
2.15
2.78
0.63
—
1,144
1,094
–50
–4.4%
Operating slaughter
operations (#)
620
611
–9
–1.5%
Employment (FTEs)
77,716
75,644
–2,072
–2.7%
Costs ($/year)
Regulatory compliance
Beef and veal production
Operating profits (%)a
Operating product types (#)
a
Operating profits in baseline are calibrated to be equivalent to operating income reported for the 40 largest meat
packing firms in 2002 (USDA/GIPSA, 2004). A value specifically for beef packing firms was not reported.
Note: FTEs = full-time equivalents.
products produced at each plantand the number of operating
slaughter plants and calculated full-time equivalent employees.1
Because the model estimates that plants will switch some
production from the nonfed beef to the fed beef and veal
markets, which have higher value, total revenues and operating
profits are estimated to increase slightly after imposing the
costs of the interim final rule. However, nine plants are
predicted to close relative to a 2002 baseline and 50 product
lines (that is, slaughter of fed cattle, nonfed cattle, and veal)
are predicted to close.
Table 5-4 presents the distribution of consumer and producer
surplus in each of the three markets. Consumer surplus is
estimated to decrease in each of the three markets because of
higher market prices. Producer surplus, which is equivalent to
the change in operating profits in Table 5-3, is estimated to
increase in each of the three markets. This increase occurs for
two reasons. In the nonfed beef market, revenue increases
when production decreases slightly because demand for nonfed
beef is inelastic. In the fed beef and veal markets, substitution
of production from nonfed beef to these product types
increases revenue received from higher-value products. In all
1
5-4
Total cattle slaughter plants presented in this table exclude plants
that slaughtered fewer than 50 animals in 2002.
Section 5  Economic Impact Model Results
Table 5-4. Distribution
of Social Costs
Associated with
Regulation, 2002
Stakeholder
Change in Value ($)
Consumer surplus, total
–$682,681,579
Fed beef consumers
–$573,341,690
Nonfed beef consumers
–$106,001,048
Veal calves consumers
–$3,338,842
Producer surplus, total
$317,572,908
Fed beef producers
$391,922,800
Nonfed beef producers
–$74,645,584
Veal calves producers
Total surplus
$295,691
–$365,108,672
markets, increases in revenue are greater than increases in
production costs, thus causing an increase in operating profits
even after accounting for the costs of the interim final rule.
The remaining tables provide comparisons of the results by the
size of the companies that own the plants and HACCP plant size
(very small, small, and large). We classified companies as
large if they had 500 or more employees across all operations.
By this criterion, 572 companies slaughtering beef cattle and
veal calves are classified as small, and 17 are classified as large
(see Table 5-5). Large companies produce 84 percent of the
volumes but incur a relatively smaller percentage of the total
compliance costs. Comparing by HACCP plant size, 449 plants
are very small, 136 are small, and 35 are large (see Table 5-6).
Large plants produce 77 percent of production but incur a
smaller percentage of the total compliance costs. In
comparison, very small plants produce only 1 percent of
production and incur 2 percent of the total compliance costs.
Table 5-7 presents the equivalent of Table 5-3 but includes only
plants owned by small businesses. For small businesses,
revenues are estimated to increase because production
decreases and demand is inelastic. However, operating profits
are estimated to decrease because increases in revenue are not
large enough to compensate for higher production costs and
the costs of complying with the interim final rule. Almost all of
5-5
Economic Impact Analysis: BSE Rulemaking
Table 5-5. Capacity and Compliance Costs Comparisons for Small and Large Companies,
2002
Company
Size
Number of Number of
Companies Facilities
Production
(CE/year)
Total Compliance Costsa
Share of
Facilities
Total
Share
Total
Share
Small
572
579
93%
5,856,213
16%
$107,717,474
35%
Large
17
41
7%
30,283,998
84%
$201,554,685
65%
589
620
100%
36,140,211
100%
$309,272,158
100%
Total
a
Compliance costs represent premarket adjustments (i.e., the cost incurred prior to production volume alterations
and plant closures).
Note: CE = carcass equivalent.
Table 5-6. Capacity and Compliance Costs Comparisons for Very Small, Small, and Large
Plants, 2002
Total Compliance Costsa
Share of
Facilities
Very Small
449
72%
429,662
1%
$6,315,779
2%
Small
136
22%
7,963,773
22%
$119,763,610
39%
Large
35
6%
27,746,776
77%
$183,192,770
59%
620
100%
36,140,211
100%
$309,272,158
100%
Plant Size
Total
a
Production (CE/year)
Number of
Facilities
Total
Share
Total
Share
Compliance costs represent premarket adjustments (i.e., the cost incurred prior to production volume alterations
and plant closures).
Note: CE = carcass equivalent.
Table 5-7. Summary of Small Business Impacts of Regulation, 2002
Changes from Baseline
Baseline
Beef and veal revenues
($/year)
With Regulation
Absolute
Percent
$4,578,275,344
$4,627,141,178
$48,865,834
1.1%
—
$105,757,755
$105,757,755
$5,856,213
$5,794,744
–$61,469
–1.0%
2.15
1.53
–0.62
—
1,086
1,038
–48
–4.4%
579
571
–8
–1.4%
12,646
11,647
–999
–7.9%
Costs ($)
Regulatory compliance
Beef and veal production
Operating profits (%)
Operating entities
Product types
Slaughter operations
Employment
5-6
Section 5  Economic Impact Model Results
the predicted plant and product line closures due to the
regulation occur for small businesses.2
Finally, Table 5-8 presents the equivalent of Table 5-3 broken
down by very small, small, and large plant sizes. For very
small and small plants, results are comparable to those for
small businesses because the vast majority are owned by small
businesses. In comparison, all large plants are owned by large
businesses.
5.1 REFERENCES
Schrader, M., U.S. Department of Agriculture. November 13,
2003. Personal communication with Catherine Viator,
RTI International.
U.S. Department of Commerce, Economics and Statistics
Administration, U.S. Census Bureau. September 2004.
“Animal (Except Poultry) Slaughtering: 2002.” 2002
Economic Census: Manufacturing. EC02-311-311611.
Washington, DC: U.S. Department of Commerce.
U.S. Department of Agriculture (USDA)/Grain Inspection,
Packers and Stockyards Administration (GIPSA). 2004.
“Packers and Stockyards Statistical Report: 2002
Reporting Year.” GIPSA SR-04-1. Available from
<http://www.usda.gov/gipsa/pubs/stat02/stat02.htm>.
2
Also some facilities have closed because they slaughtered only
downer cattle prior to the interim final rule and thus can no longer
operate without a change in the types of cattle slaughtered.
5-7
Economic Impact Analysis: BSE Rulemaking
Table 5-8. Summary of HACCP Size Impacts of Regulation, 2002
Changes from
Baseline
Plant Size
Baseline
With Regulation
Absolute
Percent
Very Small
Beef and veal revenues ($/year)
$391,045,709
$396,300,534
$5,254,826
1.3%
—
$6,261,993
$6,261,993
$296,674,998
$296,097,005
–$577,992
–0.2%
2.15
2.01
–0.14
—
Product types
848
846
–2
–0.2%
Slaughter operations
449
449
—
0.0%
3,060
3,053
–7
–0.2%
$7,837,440,941
$7,938,288,347 $100,847,406
1.3%
—
$117,716,374 $117,716,374
$5,686,925,476
$5,669,843,336 –$17,082,140
Costs ($)
Regulatory compliance
Beef and veal production
Operating profits (%)
Operating entities
Employment
Small
Beef and veal revenues ($/year)
Costs ($)
Regulatory compliance
Beef and veal production
Operating profits (%)
–0.02
–0.3%
2.15
2.13
—
Product types
244
197
Slaughter operations
136
128
–8
–5.9%
13,992
12,985
–1,007
–7.2%
$39,134,420,164
$39,711,391,127 $576,970,963
1.5%
—
$182,927,488 $182,927,488
Operating entities
Employment
–47 –19.3%
Large
Beef and veal revenues ($/year)
Costs ($)
Regulatory compliance
Beef and veal production
$26,147,322,543
$26,223,577,107
$76,254,565
0.3%
2.15
2.92
0.77
—
Product types
52
51
–1
–1.9%
Slaughter operations
35
34
–1
–2.9%
60,664
59,606
–1,058
–1.7%
Operating profits (%)
Operating entities
Employment
5-8
Appendix A:
Interview
Materials
Economic Effects of the FSIS Bovine Spongiform Encephalopathy (BSE) Rules
PROJECT DESCRIPTION
USDA’s Food Safety and Inspection Service (FSIS) contracted with RTI International to assist in
the economic analysis of the Bovine Spongiform Encephalopathy (BSE) interim final rules for
handling of specified risk materials (SRMs) and for disposition of non-ambulatory disabled cattle.
These rules were published in the Federal Register on January 12, 2004. As part of the analysis,
we are collecting information through industry interviews on the types of changes and the costs of
changes that cattle slaughter plants are making to comply with the rules. We will use the
information from the interviews to document the effects of the rules on slaughter plants and to
provide information for estimating the industry-wide costs of the SRM rule.
We are requesting your participation in an individual discussion for this project. In conducting
the discussion, we will use an interview guide that contains questions related to the following:
•
•
•
•
•
•
•
•
characteristics of your plant
age distribution of cattle at time of slaughter
modifications to HACCP plans, SSOPs, and prerequisite programs (and associated
record-keeping systems)
disposition of non-ambulatory disabled cattle
identification and handling of cattle identified as being 30 months of age or older
segregation and disposal of SRMs
changes in processes for vertebral bone-in meat cuts derived from cattle identified as
being 30 months of age or older
changes in processes for edible and inedible rendering
RTI is an independent, not-for-profit research organization located in Research Triangle Park,
North Carolina. Please note that the sources of any information provided to RTI will be kept
confidential, will not be identified in our report, and are not subject to access under the Freedom
of Information Act. Your responses will be aggregated with other responses in our report to
FSIS. In addition, we will provide a copy of the report so that you may ensure that we have
maintained your confidentiality.
For more information, please contact:
Mary Muth, Ph.D.
RTI International
3040 Cornwallis Road
Research Triangle Park, NC 27709-2194
E-mail: muth@rti.org
Phone: 919-541-7289
Additional information about this project may be obtained from FSIS by contacting:
Ron Meekhof, Ph.D.
Principal Economist
USDA/Food Safety and Inspection Service
300 12th Street SW
Washington, DC 20250
E-mail: Ronald.Meekhof@fsis.usda.gov
Phone: 202-690-1816
A-1
Interview Guide
Effects of the BSE Regulations on Cattle Slaughter Operations
The following questions relate to the effects of the following interim final rules published in the
Federal Register, Vol. 69, No. 7, on January 12, 2004:
•
•
Prohibition of the Use of Specified Risk Materials for Human Food and Requirements
for the Disposition of Non-Ambulatory Disabled Cattle (pp. 1862–1874)
Bovine Spongiform Encephalopathy Surveillance Program (p. 1892)
Specified risk materials (SRMs) include the following:
•
•
brain, skull, eyes, trigeminal ganglia, spinal cord, vertebral column, and dorsal root
ganglia (DRG) of cattle 30 months of age or older
tonsils and distal ileum of the small intestine of all cattle
In discussing the effects of the rules on your operations and operating costs, we are interested in
making comparisons before and after publication of the interim final rules.
1. Characteristics of the plant
•
How many days or half-days per week (or per year) does the plant operate?
_________________________________
•
How many cattle slaughter lines operate in the plant?
_________________________________
•
How many cattle slaughter shifts per day does the plant operate?
_________________________________
•
How many fabrication lines operate in the plant?
_________________________________
•
How many fabrication shifts per day does the plant operate?
_________________________________
•
What categories of cattle are slaughtered (steer and heifers, cows and bulls, calves
and veal calves)?
_________________________________
•
What is the approximate volume of cattle slaughtered (on a daily, weekly, or annual
basis) for each of the categories of cattle?
_________________________________
A-3
•
Approximately what proportion of cattle carcasses are shipped prior to fabrication?
_________________________________
•
Do you receive carcasses, boxed beef, or sub-primals for fabrication?
_________________________________
•
Do you have on-site edible or inedible rendering operations?
_________________________________
2. Disposition of non-ambulatory disabled cattle
The interim final rule states that non-ambulatory disabled cattle presented for slaughter must
be condemned. Non-ambulatory disabled cattle are livestock that cannot rise from a
recumbent position or that cannot walk because of injury or illness. Condemned cattle must
be killed by the establishment but may not be taken into the establishment.
•
How have you changed your policies with regard to accepting non-ambulatory cattle
for FSIS-inspected slaughter?
_____________________________________________________________________
_____________________________________________________________________
•
What is your estimate of the number of non-ambulatory disabled cattle that arrive at
the establishment on a daily or weekly basis?
_____________________________________________________________________
_____________________________________________________________________
•
Has this number changed since the interim final rules were published?
_____________________________________________________________________
_____________________________________________________________________
•
What is your estimate of the proportion of non-ambulatory disabled cattle that are
injured versus not injured when they arrive at the plant?
_____________________________________________________________________
_____________________________________________________________________
A-4
•
How do you dispose of non-ambulatory disabled cattle that arrive at the
establishment?
_____________________________________________________________________
_____________________________________________________________________
•
How do you dispose of the remains of cattle that become non-ambulatory disabled
after arriving at the establishment (for example, in the yards or chutes)?
_____________________________________________________________________
_____________________________________________________________________
•
•
What are the costs of euthanizing, transporting, and disposing of the remains of nonambulatory disabled cattle from the premises?
ƒ
Capital equipment costs? ______________________
ƒ
Other one-time costs? ______________________
ƒ
Variable costs (labor, energy, materials)? ______________________
What is the difference in value (or the discount) for an average non-ambulatory
disabled bovine animal compared to an average ambulatory bovine animal by market
class?
_______________________________________________________________
_______________________________________________________________
•
How do the discounts for non-ambulatory disabled cattle compare to those prior to
the SRM interim final rule?
_____________________________________________________________________
_____________________________________________________________________
•
Who bears the loss in value when a non-ambulatory disabled animal arrives at the
plant?
_____________________________________________________________________
_____________________________________________________________________
•
Are you aware of any industry-wide changes in marketing practices associated with
the FSIS rule condemning non-ambulatory disabled cattle presented for slaughter?
_____________________________________________________________________
_____________________________________________________________________
A-5
3. Age distribution of cattle
The interim final rule prohibits for use as human food certain by-products (SRMs) of cattle
30 months of age or older. Agency personnel will determine the age of cattle using
documentation or, if documentation is not available or is questionable, using dental
examinations.
•
What method is used for determining the age of cattle slaughtered at this
establishment (dentition or documentation)?
_____________________________________________________________________
_____________________________________________________________________
•
If you use documentation, what kind of documentation do you use?
_____________________________________________________________________
_____________________________________________________________________
•
If multiple methods are used, what proportion of cattle do you verify age using
documentation versus dentition?
_____________________________________________________________________
_____________________________________________________________________
•
Since publication of the interim final rules, have your costs increased for determining
and verifying age, and by how much have they increased?
_____________________________________________________________________
_____________________________________________________________________
•
Have discounts for cattle 30 months of age or older changed as a result of the interim
final rules? If yes, what is the change in the discount?
_____________________________________________________________________
_____________________________________________________________________
•
Based on your records, what proportion of steers and heifers slaughtered by your
establishment are 30 months of age or older (or are treated as 30 months of age or
older based on dentition)?
_____________________________________________________________________
_____________________________________________________________________
A-6
•
Based on your records, what proportion of cows and bulls slaughtered by your
establishment are typically younger than 30 months?
_____________________________________________________________________
_____________________________________________________________________
•
Have you changed or will you change your practices regarding the acceptance of
cattle 30 months of age or older as a result of the FSIS rule?
_____________________________________________________________________
_____________________________________________________________________
4. Holding carcasses that have been tested for BSE
FSIS is no longer applying the mark of inspection to the carcasses and parts of cattle that are
selected for testing by APHIS for BSE until the sample is determined to be negative.
•
If a carcass must be held while awaiting BSE test results, what costs will you incur
per day for additional holding time while you await test results?
_____________________________________________________________________
_____________________________________________________________________
5. Segregation of cattle and SRMs
The interim final rule requires that establishments ensure that SRMs are removed completely
from the carcass, segregated from edible products, and disposed of in an appropriate
manner. SRMs are identified as the following: brain, skull, eyes, trigeminal ganglia, spinal
cord, vertebral column, and dorsal root ganglia (DRG) of cattle 30 months of age or older
and tonsils and distal ileum of the small intestine of all cattle.
•
Does your plant slaughter cattle in multiple age groups (less than 30 months or 30
months of age or older)? If no, skip to Question 9.
_____________________________________________________________________
_____________________________________________________________________
•
Does your establishment treat all cattle as 30 months of age or older, even when some
cattle are younger than 30 months of age? If yes, skip to Question 9.
_____________________________________________________________________
_____________________________________________________________________
A-7
•
Do you try to segregate cattle by age group (less than 30 months or 30 months of age
or older) prior to slaughter?
_____________________________________________________________________
_____________________________________________________________________
•
If cattle are not segregated prior to slaughter, what methods are used to segregate or
mark carcasses and by-products by age during each stage of the process (slaughter,
cooling, transportation of carcasses, fabrication)?
_____________________________________________________________________
_____________________________________________________________________
•
What types of processes or methods are used to segregate SRMs during slaughter,
fabrication, and further processing?
_____________________________________________________________________
_____________________________________________________________________
•
•
What are the costs of these segregation processes?
ƒ
Capital equipment costs? ______________________
ƒ
Other one-time costs? ______________________
ƒ
Variable costs (labor, energy, materials)? ______________________
Are you been able to fill orders for materials now designated as SRMs by using
materials from cattle less than 30 months of age (for example, brains from cattle less
than 30 months of age)?
_____________________________________________________________________
_____________________________________________________________________
A-8
6. Disposal of SRMs
•
Once SRMs are segregated, what types of procedures are employed to ensure they are
properly disposed of (Note: if products are declared inedible, they must be
denatured)?
_____________________________________________________________________
_____________________________________________________________________
•
Where do you dispose of SRMs (for example, on-site rendering, off-site rendering,
landfill, or other)?
_____________________________________________________________________
_____________________________________________________________________
•
Do you pay to dispose of SRMs? If so, how much? Have these costs increased since
publication of the interim final rules?
_____________________________________________________________________
_____________________________________________________________________
•
Are rendering firms requiring documentation of the age of the cattle for products
being rendered? If yes, what costs are associated with providing this documentation?
_____________________________________________________________________
_____________________________________________________________________
7. Changes in processes for vertebral bone-in meat cuts from cattle 30 months of age
or older
The interim final rule prohibits the presence of spinal cord and DRG in vertebral bone-in
cuts from cattle 30 months of age or older.
•
Prior to the interim final rule, did you use cattle 30 months of age or older to produce
bone-in cuts such as t-bone steaks, rib roasts, porter house steaks, and neck soup
bones?
_____________________________________________________________________
_____________________________________________________________________
A-9
•
Are you currently or will you be employing measures to remove the vertebral core or
body from the vertebrae column to produce bone-in cuts from cattle 30 months of age
or older?
_____________________________________________________________________
_____________________________________________________________________
•
•
What costs are associated with removal of the core of the vertebral column?
ƒ
Capital equipment costs? ______________________
ƒ
Other one-time costs? ______________________
ƒ
Variable costs (labor, energy, materials)? ______________________
Is there any loss in value of meat cuts from which the core of the vertebral column
has been removed? If yes, what is the approximate percentage reduction in value?
_____________________________________________________________________
_____________________________________________________________________
8. Development or modification of HAACP plans, sanitation standard operation
procedures (SSOPs), or other prerequisite programs
The interim final rule requires establishments that slaughter cattle or that process the
carcasses or parts of cattle to develop, implement, and maintain written procedures for the
removal, segregation, and disposition of SRMs. The establishment shall incorporate such
procedures into its HACCP plan or in its SSOP or other prerequisite program.
•
Are the plant’s written procedures for removal, segregation, and disposition of SRMs
incorporated into (a) the HACCP plan, (b) SSOPs, (c) other prerequisite program, or
(d) a combination of these?
_____________________________________________________________________
_____________________________________________________________________
•
Who developed these written procedures (in-house at the plant, corporate
headquarters, or third party outside consultant or university specialist)?
_____________________________________________________________________
_____________________________________________________________________
A-10
•
If the written procedures were developed in-house at the plant, what type of plant
employee developed them?
_____________________________________________________________________
_____________________________________________________________________
•
How many total personnel hours did it require to develop these written procedures,
and/or what was the total cost to develop these written procedures?
_____________________________________________________________________
_____________________________________________________________________
•
Do you know whether the same types of written procedures are employed at other
plants owned by the same parent company?
_____________________________________________________________________
_____________________________________________________________________
9. Changes in monitoring and verification for removal, segregation, and disposition of
SRMs
The interim final rule requires that establishments maintain daily records sufficient to
document the implementation and monitoring of procedures for the removal, segregation,
and disposition of SRMs. Records must be retained for at least 1 year.
•
What types of procedures are monitored during receiving, slaughter, fabrication, and
further processing to ensure proper removal, segregation, and disposition of SRMs?
_____________________________________________________________________
_____________________________________________________________________
•
How frequently are these procedures monitored (on a per-shift, per-day, or per-week
basis)?
_____________________________________________________________________
_____________________________________________________________________
•
How much employee time is required (on a per-shift, per-day, or per-week basis) to
monitor activities? What type of employee does the monitoring?
_____________________________________________________________________
_____________________________________________________________________
A-11
•
If verification is required based on your plans, how frequently do you conduct
verification activities?
_____________________________________________________________________
_____________________________________________________________________
•
How much employee time is required to conduct verification activities? What type of
employee does the verification?
_____________________________________________________________________
_____________________________________________________________________
10.
Changes in processes for edible rendering operations (for plants with edible
rendering)
•
Do you handle cattle 30 months of age or older differently now than prior to the
interim final rules?
_____________________________________________________________________
_____________________________________________________________________
•
What changes, if any, have you made to eliminate the incorporation of SRMs in
edible rendering?
_____________________________________________________________________
_____________________________________________________________________
•
11.
If you have made changes in the edible rendering process, what are the costs of these
changes?
ƒ
Capital equipment costs? ______________________
ƒ
Other one-time costs? ______________________
ƒ
Variable costs (labor, energy, materials)? ______________________
Other effects of the SRM interim final rule on costs
•
Are there any other cost effects (occurring now or expected in the future) as a result
of the SRM rule that we have not discussed above?
___________________________________________________________________
___________________________________________________________________
A-12
Appendix B:
Instructions for
Using the Beef
Slaughter FacilityLevel Model
Instructions for
Using the Beef
Slaughter FacilityLevel Model
In this appendix, we provide a brief overview of the model,
provide instructions for selecting the model inputs and
modifying the data used in the model equations, and describe
the model’s output.
B.1 AN OPERATIONAL OVERVIEW OF THE
MODEL
Users have the option of
running the model with
the existing industry data
and compliance costs or
modifying any of the cost
estimates or the default
values.
The beef slaughter facility-level model is a stand-alone program
and thus can be run directly from a diskette or from your hard
drive. The model contains a characterization of the beef
slaughter industry for the baseline year 2002 and estimates of
the costs of compliance with the SRM/nonambulatory disabled
cattle interim final rule. Users have the option of running the
model with the existing industry data and compliance costs or
modifying any of cost estimates or the default values. When
users run the model, it generates estimates of the market-level
effects of the regulation.
The model was developed in Microsoft Excel with Visual Basic
components. It contains 11 tabs, or worksheets: Interface,
Model Inputs, Market Inputs, Market Data, Baseline, With
Regulation, Parameters, Control Costs, Cost Index, Company
Level, and EIA Tables. The Baseline, With Regulation,
Parameters, Control Costs, and Company Level sheets contain
confidential information about beef slaughter plants; use
discretion when opening these sheets.
B-1
Economic Impact Analysis: BSE Rulemaking
B.2 RUNNING THE MODEL
To run the beef slaughter facility-level model, open the Excel
file BSE FLM.xls. The file will open to the “Interface”
worksheet (see Figure B-1). The left side of the Interface
worksheet details the steps needed to run the model, and the
right side provides links to the model results.
Step 1: Set Model to
Baseline
Step 2: View or Modify
Default Settings
(Optional)
Cells highlighted in
yellow can be modified;
cells that are not
highlighted contain
formulas and are
therefore locked.
To start using the model, you must first ensure that the model
is set to the baseline. This step resets the model to baseline
conditions without any imposed compliance costs. To set the
model to baseline:
ƒ
Click the Set to Baseline button.
ƒ
When the pop-up window indicates that the model is in
baseline, click OK.
The data used in the model were collected from various primary
and secondary sources. These data are used as the model’s
default settings. To view or modify the default settings, select
any of the buttons listed under Step 2. The optional buttons
are the following:
ƒ
View Market Inputsallows you to view or modify
wholesale prices and quantities and farm prices for the
three beef markets.
ƒ
View Elasticitiesfor the three beef markets, allows
you to view or modify own-price supply and demand
elasticities, import and export elasticities, and crossprice demand elasticities.
ƒ
View Proportionsallows you to view or modify the
proportion of steers and heifers that are assumed to be
classified as 30 months of age and older.
ƒ
View Costsallows you to view or modify capital and
variable costs by plant size and/or by age of cattle. You
can also view or modify the discount inputs (i.e.,
equipment life and discount rate).
These buttons direct you to the appropriate location within the
model. Cells highlighted in yellow can be modified; cells that
are not highlighted contain formulas and are therefore locked.
To modify any of the default settings, click in the appropriate
cell and type over the existing data. Dollar signs and commas
will be automatically inserted as appropriate.
To return to the Interface screen, click on the Return to
Interface link located on each worksheet.
B-2
Figure B-1. The Interface Screen for the Beef Slaughter Facility-Level Model
Appendix B — Instructions for Using the Beef Slaughter Facility-Level Model
B-3
Economic Impact Analysis: BSE Rulemaking
Step 3: Run the Model
Step 4: View the
Model Results
Once the settings are complete, you are ready to run the model
as follows:
ƒ
Click the Run Model button.
ƒ
When the pop-up window appears indicating the model
has reached equilibrium, click OK.
After running the model, you may view the model results tables
by either of the following methods:
ƒ
Click on the output table names on the Interface screen.
ƒ
Click on the tab Model Output Tables.
Instructions for printing or saving results are provided in
Section B.3.
B.3 MODEL RESULTS
As noted above, the results of the model appear in the Model
Output Tables sheet. The output tables include the following:
1. Baseline Characterization of U.S. Beef and Veal Market:
2002
2. Summary of Market-Level Impacts of Regulation: 2002
3. Summary of National-Level Industry Impacts of
Regulation: 2002
4. Distribution of Social Costs Associated with Regulation:
2002
5. Capacity and Compliance Costs Comparisons for Small
and Large Companies: 2002
6. Capacity and Compliance Costs Comparisons for Very
Small, Small, and Large Plants: 2002
7. Summary of Small Business Impacts of Regulation:
2002
8. Summary of HACCP Size Impacts of Regulation: 2002
We formatted the tables so that they can be copied directly into
an economic impact analysis report. The tables display
estimated effects of the rule on revenues, profitability, and
employment under both baseline and “with-regulation”
scenarios. Tables 5 and 7 present results by size of business
and can be used in addressing the requirements of the Small
Business Regulatory Enforcement Fairness Act of 1996
(SBREFA), which mandates analysis of regulatory impacts on
B-4
Appendix B — Instructions for Using the Beef Slaughter Facility-Level Model
small businesses. Tables 6 and 8 present results by plant size
(very small, small, and large).
In addition to printing
or saving the model
results, you may also
print or save the input
sheets.
To print the output tables, follow these steps:
ƒ
Click File, then Print.
When the Print window opens:
ƒ
Select All in the Print Range frame
ƒ
Select Active Sheets in the Print What frame
ƒ
Click OK
The spreadsheet will print in landscape setting.
Instead of printing the model results, you may wish to save
them into another Excel spreadsheet. To do this, follow these
steps:
ƒ
Click Edit
ƒ
Click Move or Copy Sheet.
ƒ
When the Move or Copy window opens, select (new
book) under the To Book: drop-down arrow and check
the Create a Copy box.
ƒ
Click OK.
To return to the Interface worksheet, click on the Return to
Interface link located below each table.
B-5