(\<Ch\\}€5

SEPTEMBER 1965

Marketing New England Poultry

7. Economics of Broiler Feed Mixing
and Distribution

By CLARK R. BURBEE, EDWIN T. BARDWELL
and ALFRED A. BROWN

AGRICULTURAL EXPERIMENT STATION

UNIVERSITY OF NEW HAMPSHIRE

DURHAM, NEW HAMPSHIRE

in cooperation with

Agricultural Experiment Station, University of Massachusetts

and

Marketing Economics Division

Economic Research Service

United States Department of Agriculture

^

LTION BULLETIN 4M

SEPTEMBER 1965

Marketing New England Poultry

7. Economics of Broiler Feed Mixing
and Distribution

By CLARK R. BURBEE, EDWIN T. BARDWELL
and ALFRED A. BROWN

AGRICULTURAL EXPERIMENT STATION

UNIVERSITY OF NEW HAMPSfflRE

DURHAM, NEW HAMPSHIRE

in cooperation with

Agricultural Experiment Station, University of Massachusetts

and

Marketing Economics Division

Economic Research Service

United States Department of Agriculture

This is part of a Northeast Regional Project, IVEM-21 "Adjust-
ments Needed in Marketing Northeastern Poultry Products," a co-
operative study involving Agricultural Experiment Stations in the
Northeast Region and supported in part by regional funds and funds
from the Economic Research Service, United States Department of
Agriculture.

Preface and Acknowledgements

This bulletin is the seventh in a series being issued by the
Agricultural Experiment Station, University of New Hampshire,
in cooperation with the Agricultural Experiment Station, Uni-
versity of Massachusetts, and the Economic Research Service,
United States Department of Agriculture.

The series is concerned with various aspects of poultry
marketing in New England. Previous publications in the series
with their New Hampshire Experiment Station Bulletin numbers
are: 1. Characteristics of the Processing Industry (444), 2. Eco-
nomies of Scale in Chicken Processing (450), 3. Capital Accumu-
lation Potential of Broiler Growers (475), 4. Structure and Per-
formance of the Assembly System (476), 5. Effects of Firm Size
and Production Density on Assembly Costs (482), 6. Economies
of Scale in Hatching and Cost of Distributing Broiler Chicks
(483), and 8. Effects of Firm Size and Production Density on
Spatial Costs for an Integrated Broiler Marketing Firm (485).
Two companion reports published by the Agricultural Experi-
ment Station, University of Massachusetts, are Freight Rates
on Feed, Central Territory Origins to New England and Middle
Atlantic States (508) and Freight Rates and the Eastern Poultry
Industry (533).

The objectives of this study are to determine the costs of
mixing ])roiler feed and economies associated with size of feed
mixing firms. Also determined are the costs of delivering the feed
and how these costs are affected by changing 1) firm size (vol-
ume), 2) delivery density (tons per square mile), and 3) dis-
tance.

The authors appreciate the cooperation of the mill operators
who provided information .and data on input-output relation-
ships and costs; also those manufacturers and suppliers of mill-
ing equipment who furnished data on specifications, capacities
and costs. The authors acknowledge the assistance received from
William F. Henry and other members of the Resource Economics
Department, University of New Hampshire, and George B, Rog-
ers, Marketing Economics Division, Economic Research Service,
United States Department of Agriculture.

TABLE OF CONTENTS

Page

SUMMARY AND CONCLUSIONS 3

I. INTRODUCTION 5

II. OBJECTIVES 6

III. METHOD AND PROCEDURE 6

Method 6

Procedure 7

IV. ECONOMIES OF SIZE IN FEED MANUFACTURING 8

Feed Manufacturing Process 8

Labor Inputs and Costs 11

Investment and Costs for Feed Manufacturing Facilities 15

Ownership Costs 19

Administrative and Supervisory Personnel Costs 22

Utility Costs 22

Other Costs 26

Economies of Size 30

Short-Run Average Costs 31

V. COST OF BULK FEED DISTRIBUTION 31

Procedure 31

Bulk Feed Distribution Operation 35

Feed Distribution Model 35

Investment 38

Feed Distribution Costs 41

VI. TOTAL COST FOR FEED MANUFACTURING AND DISTRIBUTION 48

Effect of Density Level 4^

APPENDIX 52

A. Determination of Feed Mill Capacities and Outputs 52

B. Poultry Feed Formulations 55

C. Major Equipment Items for Eight Model Mills 56

D. Short-Run Average Costs 57

2

Summary and Conclusions

The highly competitive nature of the broiler industry is forcing
New England firms to place increased attention on adjustments to reduce
unit broiler feed costs. Two possibilities for unit cost reductions are
available. They are: (1) to increase the scale of the feed manufacturing
plant to obtain any economies of size that may exist and (2) to increase
the density of poultry production around the feed mixing plant to re-
duce unit distribution costs.

Economies of size are determined by using economic-engineering
procedures. This method was used in a study of eight mills varying in
capacity from 20.9 tons to 348.4 tons per eight-hour day (5,434 to 90,577
tons annually) . Of the total tonnage, 85 percent is broiler feed. Each
mill was restricted, moreover, to the manufacturing of five basic formu-
lations: two in crumble form for broilers and three in mash and pellet
form for birds in breeding flocks.

Substantial economies of size exist in feed manufacturing. With the
model mills operating at their designed capacities, average cost decreases
from $8.59 a ton for the smallest mill to $4.01 a ton for the largest mill.
Most of the economies accrue from unit reductions in labor costs, build-
ing and equipment ownership costs, and administrative personnel costs.

There is evidence that further economies of size exist since average
cost is still decreasing for the larger capacity mill models. Furthermore,
the model mills are not of sufficient capacity to utilize certain types of
existing equipment which would provide additional reductions in unit
cost.

Distribution costs for direct delivery of bulk feed from mill to farm
using 12-ton capacity trucks are determined for six of the eight model
mills. Poultry production density is assumed at three different levels
which are equivalent to distributing feed at the rate of 1.31, 6.55, and
32.73 tons per square mile per year. A model was developed and with
various assumptions, conditions, and relationships, the physical inputs
were determined. Standardized costs were applied to the input quanti-
ties to determine the distribution cost for each firm at each density level.

With poultry production density at the 6.55-ton level, an increase
from 5,434 to 90,577 tons per year in the volume distributed increases
the average cost from $2.44 to $3.98 a ton. At lower density levels, the
average cost increases rapidly, while at higher levels it increases at a
slower rate.

Increasing density for any of the six firms reduces distribution costs
substantially. For any given increase in density, the absolute value of the
reduction in cost increases with firm size and volume. Increasing density
from 6.55 to 32.73 tons per square mile per year reduces the average dis-
tribution cost S.53 a ton for the smallest firm and $1.76 a ton for the
largest firm.

Increasing the distance between the mill and a poultry production
unit location, with other variables constant, increases the distribution
cost. For each added road mile between the two locations, the estimated
distribution costs increases 4.89 cents a ton.

Combining feed manufacturing and distribution costs provides in-
formation on the least-cost size operation for various levels of density.

At the lowest density level (1.31 tons per square mile), the least-cost
operation is a mill manufacturing 32,609 tons a year and distributing
into an area with a radius of 89 miles. The total average cost is $10.46 a
ton. Increasing density to the 6.55-ton level shifts the least-cost operation
to a mill manufacturing 45,287 tons a year and distributing into an area
with a radius of 46.9 miles. The total average cost is reduced to $7.82 a
ton. Increasing density to the 32.73-ton level shifts the least-cost opera-
tion to the largest firm size considered. This mill produces 90,577 tons
a year and distributes into an area with a radius of 29.7 miles for a total
average cost of $6.23 a ton. Most of the reductions in cost from adjust-
ments in mill size and density are a result of lower distribution costs, not
economies of size in feed manufacturing.

At a given density level, there is very little difference in average
cost of the combined milling and distribution operations between the
large size firms. This situation arises from the fact that as firm size is
increased, the economies of size in manufacturing are largely or entirely
offset by higher feed distribution costs.

Marketing New England Poultry

7. Economics of Broiler Feed Mixing
and Distribution

By Clark R. Burbee, Edwin T. Bardwell ami Alfretl A. Brown ^

I. Introduction

Substantial changes have taken place in the technology available to
feed manufacturing firms and in the structure of firms in the broiler in-
dustry during the last fifteen years. The advancement in technology and
competitive pressure has caused a shift in the location of feed manufac-
turing facilities from distant large-scale mills with their extensive dis-
tribution organizations to local specialized mills distributing directly
to broiler production units.

Relocating feed manufacturing facilities into major broiler produc-
ing areas offers potential cost reductions from (1) operating a modern
specialized mill, (2j direct distribution of feed to the producing units
by truck, and (3) lower rail freight rates in some areas on ingredients
not transhipped by rail as finished feed.^

A primary question facing firms in the industry is the optimum sized
manufacturing facility and distribution operation needed to minimize
the total feed cost per ton at the farm. However, the optimum size is de-
pendent on economies of size in manufacturing and the spatial costs of
distributing feed. If economies of size exist (decreasing unit cost with
increasing size of mills) increasing capacity may require a firm to en-
large its distribution area. Enlargement of the distribution area increases
the average length of haul per ton and consequently the unit distribution
cost, providing production density remains constant. The increase in
unit distribution cost may partially or totally offset the reductions in
unit cost resulting from economiesof size in manufacturing. Management
must consider manufacturing and distribution costs simultaneously to
determine the least cost size operation.

1 Mr. Burbee is Agricultural Economist, Marketing Economics Division, Economic
Research service, U.S.D.A., formerly stationed at the University of New Hampshire,
now stationed at theUniversity of Minnesota.

Mr. Bardwell is Cooperative Agent, Agricultural Experiment Station, University of
New Hampshire and Economic Research Service, U.S.D.A.

Mr. Brown is Professor of Marketing and Transportation, Department of Agricul-
tural and Food Economics, University of Massachusetts.

2 The introduction on July 15, 1964 of mileage, non-transit rates on shelled corn
between points in the East is an additional change of potential significance. They are
temporary rates due to expire midnight July 14, 1966. Should the rates become a
permanent part of the structure, they will add to the cost advantages of mills located
in feed-consuming areas that can utilize direct mill-to-farm distribution by truck.

This report does not consider the optimum size and output for a
vertically coordinated broiler producing and marketing firm. Such firms
perform a number of other activities such as processing, hatching, broil-
er assembling, and chick distribution. That analysis is the subject of a
future report in this series. The present study, however, relates the size
of feed mills to the size of growing operations specified for processing
plants of stated capacity.

II. Objectives

The purpose of this report is to provide information for planning
adjustments that will reduce feed costs for feed-mixing firms with par-
ticular reference to the New England broiler industry. Specifically, this
report has four objectives, which are:

1. To determine the economies of size in the manufacture of broil-
er and breeder feeds by feed-mixing plants.

2. To determine the cost of bulk-feed distribution at three levels
of broiler and breeder flock production density.

3. To determine the optimum size of combined manufacturing and
distributing operations for each production density level.

4. To determine the potential reductions in distribution costs from
increases in production density.

In addition, data on input requirements for labor, building, equip-
ment, management, utilities, and other resources of lesser importance
are provided for the several sizes of manufacturing and distributing
operations. These data along with costs applicable to the New England
region are used to develop a short-run average cost curve for each firm
to illustrate cost variation with short-run changes in output.

III. Method and Procedure
Method

The economic-engineering method is used to develop the costs in
feed manufacturing and feed distributing under several levels of broiler
and breeder production density. This approach requires the determina-
tion of the various physical input-output relationships for each of the
steps in the process. Standardized costs are applied to the physical rela-
tionships to derive the cost functions. These relationships are used in
"constructing" and "operating" the several model plants and distribu-
tion operations.

Several sources were used in obtaining information and data for the
manufacturing and distributing phases of this report. Time studies and
interviews with mill personnel were made to obtain data on labor re-
quirements. Mill personnel also provided information on managerial
inputs, technical data on equipment, and accounting and cost data. Build-

ing and equipment specifications and costs were obtained from engi-
neering and equipment manufacturers.

Procedure

Eight model plants are developed and short-run average cost curves
determined for comparisons to illustrate the economies of size in feed
manufacturing. The volumes of these plants are based on the total feed
requirements of eight coordinated firms that produce broilers and hatch-
ing eggs under contract along with such other activities as processing and
hatching (see Appendix A). The capacity of the final activity stage in
the firm, processing, establishes the capacities and volumes for all other
activities. Processing capacities considered for this analysis are: 600,
1,200, 1,800, 2,400, 3,600, 5,000, 7,500 and 10,000 of 3.5 pound live birds
per hour for eight hours a day, 260 days a year. ^

The feed volume required of each mill is derived from several input-
output relationships and accepted feeding practices. ^ Each mill manu-
factures a total of five basic formulations, two for broilers and three for
breeders producing hatching eggs.^ It is assumed that each mill pro-
duces a given quantity of each formulation each day. The total daily
tonnage is manufactured in an eight-hour day and operations are con-
ducted 260 days a year. Table 1 gives the tonnages manufactured per day
by formulation and form.

Table 1. Volumes of Feed Manufactured per Day
by Formulation and Form for Eight Model Mills

Form

Mills

Formulation

A

A'

B

B' C

D

E

F

(tons)

Broiler

Starter*

Crumbles

6.90

13.79

20.70

27.58 41.40

57.48

86.21

114.94

Finisher**

Crumbles

10.74

21.48

32.22

42.97 64.44

89.52

134.29

179.06

Breeder

Startert

Mash

.24

.48

.72

.96 1.44

1.99

2.99

3.99

Growert

Pellets

.56

1.12

1.67

2.24 3.35

4.65

6.98

9.30

Breeder§ Mash 2.46 4.93 7.39 9.86 14.79 20.54 30.81 41.08

Total tons per day 20.9 41.8 62.7 83.6 125.4 174.2 261.3 348.4

Total tons per year 1 1 5,434 10,868 16,302 21,739 32,609 45,287 67,933 90,577

Coefficients Used

* 2.87 pounds per finished broiler + 14.0 pounds per breeder started

** 4.48 ponnds per finished broiler § 8.5 pounds per dozen hatching eggs

t 6.0 pounds per breeder started needed.

1 1 260 day year

1 These processing firm capacities were developed in G. B. Rogers and E. T. Bard-
well's Marketing New England Poultry: 2. Economies of Scale in Chicken Process-
ing, University of New Hampshire, Agricultural Experiment Station Bulletin 459,
April 1959. However, in that report the processing firms were operated only 247 days
per year.

2 See Appendix A for the coefficients and method used in developing feed volumes
manufactured by each model.

3 See Appendix B for feed formulations.

The ingredients for the formulations are purchased separately by
each mill from various sources. The only ingredients purchased as a
premix are the drugs and some minerals used in minute quantities
which are mixed with a carrier such as corn meal.

In the analysis of short-run average costs for each mill, the outputs
of breeder feeds are held constant while broiler feed outputs are varied.
The analysis is made in this manner since the production cycle of broil-
ers is substantially shorter than for breeders.

Feed distribution costs are developed for six of the eight mills with
operations at their specified capacities. These mills: A, B, C, D. E, and F
distribute their total feed production in bulk form by truck direct to
broiler and hatching egg-producing units in the surrounding area. The
analysis of the distribution operation is based on a method developed
in a previous report in this series.*

IV. Economies of Size in Feed Manufacturiug

Feed Manufacturing Process

The feed manufacturing process of the model mills consists of sev-
eral stages: receiving and storing ingredients, grinding, mixing, pelleting,
and storing finished feeds. Figure 1 illustrates the flow of ingredients
and feed through the stages for manufacturing broiler and breeder feeds.

1. Receiving and Storing Ingredients — The model mills rely ex-
clusively on rail and truck delivery of ingredients. All grain and grain
products originating in the Midwest and some minerals from other re-
gions are delivered by railroad. Other ingredients such as meat and bone
scrap, fishmeal, limestone, fat, and premixes are delivered by truck.

Dry ingredients are purchased in bulk or bags. Bulk ingredients are
delivered by rail in either hopper or boxcars. Delivery by hopper cars
which empty directly into a receiving sink is usually more efficient than
l>ox car delivery which requires more time and manual labor to unload.
Bagged ingredients are delivered by truck or rail. In either method, the
ingredients are unloaded by hand bag truck and stored in a warehouse.

Fat is delivered by heated tank truck in a liquid state and is pump-
ed from the truck directly into heated storage tanks.

Bulk ingredients are conveyed from the receiving sink by a series
of screw conveyors to a bucket elevator. The ingredients are elevated and
gravity-fed through a turnhead into pipes leading directly to storage
silos or bins or to horizontal screw conveyors that convey the ingredients
to bins. In the receiving system there is a cleaning shoe to remove for-
eign material and magnets to remove tramp metal.

Shelled corn is stored in silos located adjacent to the mill Imilding
and rail siding. All other dry bulk ingredients are stored in a cluster of
bins located in the mill building above the first floor. The capacity of
the silos and bins is sufficient for ten days of mill operation at its
designed capacity.

-* W. F, Henry and C. R. Burbee, Marketing New England Poultry: 5. Effects of
Firm Size and Production Density on Broiler Assembly Costs, University of New
Hampshire Agricultural Experiment Station Bulletin 482, April 1964.

Figure 1. Schematic Flow of Ingredients from Receiving
to Finished Mixed Feed

Bulk

CI eon

Bins
T

X

Grind

Bins

Bag

Wrh's'e

ngredients

Bag

Pockage

Worehouse

3

M

Dress

Pellet

Cool

Crumble

LJ

Fat

Applicdiion

Liquid

Tank

Bulk
Bins

Finished Feed

2. Grinding — Shelled corn and alfalfa pellets must be ground be-
fore being mixed with other ingredients. They are moved by screw con-
veyor or gravity to the feeders on the hammermills which are used in the
model mills. The ground ingredients are then elevated into bins by a
pneumatic system.

3. Mixing — The mixing stage consists of the following sequence
of steps : moving ingredients to the mixing center, weighing, mixing, con-
ditioning and conveying the batch to the next stage. A number of tech-
niques exist for performing each step.

Bulk ingredients are moved from bins to the mixer by "weigh bug-
gies'' or conveyors. Weigh buggies are used in conjunction with vertical
mixers in small size mills. The ingredients are weighed into the buggy
and pushed to and dumped into the mixer sink.

The movement of bulk ingredients by conveyors is the practice in
the large size mills since large quantities nuist be moved in short periods
of time to keep mixers operating at capacity. Feeder screws move ingre-
dients into a weigh hopper over the mixer. The quantities of the differ-
ent ingredients fed into the hopper are controlled from a central panel
either by an operator or by automatic devices.

The bagged ingredients are brought from the warehouse periodic-
allv. For each batch the bags are opened, weighed, and dumped into the
mixer. Fat is pumped directly into the mixer, the amount being controll-
ed manually or automatically. However, if the batch is to be pelleted,
the full amount is not generally added at this stage, since a high propor-
tion of fat in the mix makes pelleting extremely difficult.

A batch is mixed for a predetermined length of time to oljtain a
thorough blend of ingredients. The specific time required depends on
the formulation and characteristics of the mixer. Generally, the mixino;
time is between eight and ten minutes in a vertical mixer and three and
five minutes in a horizontal. The time is controlled manually or by an
automatic timing device.

The mixed batch is moved from the vertical mixer by conveyor to a
bucket elevator. Batches mixed in a horizontal mixer are dumped into a
surge bin from which they are moved by conveyor to a bucket elevator.
The use of a surge bin results in a substantial increase in mixer capacity.

The mixed batch is elevated and passed through a conditioner to
remove any foreign material and to break up lumps. The conditioned
batch is moved by self-cleaning chain drag conveyors to the finished
mash bins or to holding bins for pelleting.

4. Pelleting or Crumbling — This stage consists of several different
series of steps depending on the desired finished form of the feed and
the formulation. These steps include pelleting, crumbling, and fat appli-
cation. The pelleting stage starts with mash being fed into the pellet mill
where it is conditioned by steam and forced through the pellet die. The
continuous flow of hot pellets is gravity fed into a vertical cooler, and
then conveyed directly to the grading shoe. If the desired output is
crumbles, the cooled pellets are fed into a crumbier and then conveyed
to the grading shoe. Fines and oversizes are screened off on the shoe
and conveyed back to the pellet mill. Formulations in pellet or crumble
form that require additional fat are routed through a fat applicator

10

where the fat is sprayed on. The finished pellets and crumhles are then
conveyed to the holding bins.

5. Storing Finished Feed — The finished feeds are elevated to
holding bins adjacent to the mill from which they are loaded into bulk
trucks. Each model mill has storage capacity for one day's output of
each formulation.

Special orders may be bagged. For this purpose, a small bagging
scale and portable sewing head are included in each mill. Also, any of
the ingredients in the bins may be drawn off and bagged individually.

Labor Inputs and Costs

The labor force consists of production workers who perform the sev-
eral manufacturing processes and maintenance and repair personnel
who are responsible for periodic maintenance and repairs on the equip-
ment and other mill facilities. The man-equivalent estimates given in-
clude sufficient time for personal needs as well as limited housekeeping
in the respective work areas.

1. Receiving — The labor input for receiving a given quantity of
ingredients depends on a number of variables such as receiving tech-
nology, the form of the ingredients, the flowability of bulk ingredients,
the inbound transportation and means of delivery. It is assumed that
each mill purchases as many of the ingredients and as large a portion
of its requirements in bulk as is possible within the limits of its storage
capacity and the established minima required for bulk shipment. In
addition, dry bulk ingredients shipped by rail are received iri hopper
cars if the model mill can regularly order amounts equal to or greater
than the carload minimum. Other bulk ingredients are received in box-
cars. The percentage of ingredients received, their form, and mode of
transportation — including kind of car for rail movements — is given in
Table 2.

Table 2. Form Specifications and Mode of Transportation for
Ingredients Receipts of Eight Model Feed Mills

Mills

Mode and Form

A

A'

B

B'

C

D

E

F

5,434*

10,868

16,302

21,739

32,609 45,287 67,933

90,577

(percentage d

listribut

ion)

Rail:

Hopper car — Bulk

78.5

78.5

78.5

88.8

88.8

88.8

88.8

88.8

Boxcar — Bulk

10.3

10.3

Boxcar — Bagged

10.2

.3

.3

.3

Truck:

Bulk

8.3

8.3

8.3

8.3

8.3

8.3

8.3

8.3

Bagged

3.0

2.9

2.9

2.9

2.9

2.6

2.6

2.6

Total

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

* Figures across are the tons manufactured annually.

11

Each mill is equipped with one or more bulk receiving systems
rated at 2,000 bushel-per-hour. Hopper cars are unloaded at two differ-
ent rates depending on the weight per cubic foot of the ingredients and
flowability. The rate for corn and pellets is 60 tons per hour and for the
soft or lighter ingredients 42 tons per hour. Boxcars are unloaded with a
power shovel, also at two different rates: corn and pellets at 42 tons per
hour and soft goods at 15 tons per hour. Bagged ingredients are unload-
ed from l)Oxcars or trucks at a rate of six tons per man-hour.

The receiving crew sets the gates and controls but does not unload
l)ulk ingredients, dry or liquid, when delivered by truck. The truck
driver performs the unloading.

In addition to their unloading function, the receiving labor must
position and open cars and clean them out after they are emptied. The
crew must also clean up around the receiving sink. In the three larger
mills which are equipped with automatic control devices for mixing, the
receiving crew must move and dump bagged ingredients into small over-
head working bins.

The labor requirements for receiving, reduced to a man-equivalent
basis, vary from 0.2 in Mill A to 2.1 in Mill F. and are given in Talile 3.

Table 3. Daily Labor Requirements and Labor Productivity
for Production. Maintenance and Repair of Eight Model Feed Mills*

Mills

Operation

A

A'

B

B'

C

D

E

F

20.9**

41.8

62.7

83.6

125.4

174.2

261.3

348.4

(man-equivalenti

5)

Labor Requirements

Production

Receiving

.2

.3

.4

.4

.6

1.2

1.6

2.1

Grinding

.2

.1

.1

Mixing

1.0

2.0

2.6

2.0

2.0

1.0

1.0

1.0

Pelleting and Crumbling

.4

.6

1.0

1.0

1.0

1.0

1.0

1.0

Miscellaneous

.5

.t

.9

.6

.8

.6

.i

.9

Production Total

2.3

3.7

5.0

4.0

4.4

3.8

4.3

5.0

Maintenance

and Repair Total

.3

.5

.7

.9

1.0

1.2

1.5

2.0

Total Labor Requirements

2.6

4.2

5.7

4.9

5.4

5.0

5.8

7.0

(tons

per 1

man-hour)

Labor Productivitv

Production Labor

1.1

1.4

1.6

2.6

3.6

5.7

7.6

8.7

Maintenance

and Repair Labor

7.9

10.5

11.7

12.3

15.7

18.1

21.8

21.8

Combined

1.0

1.2

1.4

2.2

2.9

4.4

5.6

6.2

(mar

i-hours

; per ton)

Combined

1.00

.80

.72

.46

.34

.23

.18

.16

* Per eight hour day.
** Figures across are tons manufactured daily-

12

2. Grinding — Generally, very little labor is needed for the grind-
ing of ingredients, except to set the proper conveyors and gates, adjust
the feeder control, change a screen, and clean the magnets occasionally.

Corn and alfalfa pellets, the two ingredients that require grinding
before mixing, are in bulk form in all the model mills except A where
alfalfa pellets are in bags. In this mill the operator must move, open,
and dump the bagged pellets into a sink located above the hammermill.

A vi?ual check of the grinding equipment when operating is requir-
ed only in Mills A, A' and B. The other mills have remote indicating
devices to eliminate the periodic checks at the machines so no labor
requirements are shown in Table 3 for them. Responsibility for per-
forming this operation is generally given to the receiving or mixing stage
personnel.

3. Mixing — The labor requirements for mixing depend upon the
kind of mixer, materials-handling equipment, and the degree of auto-
mation used to control the process. Three equipment combinations are
considered: (1) the vertical mixer with weigh buggies for weighing and
moving bulk ingredients, (2) the horizontal mixer with feeder screws,
weigh hopper, surge bin, and semi-automatic controls, and (3) the same
equipment combination as (2) but with automatic controls.

The first equipment combination requires a substantial amount of
labor since the ingredients are handled manually. Buggies are loaded
with the required amount of each bulk ingredient, moved, and dumped
into the empty vertical mixer. Bagged ingredients are moved from the
warehouse, opened, weighed out, and dumped into the mixer sink. As
the batch is mixed, the buggies are reloaded. The mixer operator adds
any pre-mixes and controls the mix time. This equipment combination
is used in model Mills A, A' and B and the man-equivalents vary from
1.0 to 2.6.

The second equipment combination requires a two-man crew. The
mixer operator controls the conveyors moving ingredients to the weigh
hopper, the weighing, mix time, and the gates in the weigh hopper and
mixer from a control panel. An assistant weighs out and adds bagged in-
gredients to each batch and performs other minor tasks such as cleaning
up around the mixer sink. This equipment combination is utilized in
model Mills B' and C.

The third equipment combination is almost completely automated.
The material handling, weighing, mix time, operation of gates, and num-
ber of batches are automatically controlled. The mixer operator sets the
proper controls for each formulation run, adds premixes, and oversees
the operation. With a motor control panel for operating equipment in
other manufacturing stages, the mixer operator coordinates the manufac-
turing stages in the mill. This type of system is used in Mills D, E, and F.

The automatic system has two characteristics not found in the other
systems : (1) only one operator is required over a relatively wide range
of mixer capacities, and (2) all batches of a given formulation are prac-
tically identical because possibilities of human error are largely elimin-
ated.

4. Pelleting and Crumbling — The labor requirements for the
pelleting stage are essentially those needed for overseeing the operation.

13

The operator sets up the various pieces of equipment in the stage for
each run and clears the system at the end of the run. During the run, the
operator makes certain that there is sufficient steam pressure to condition
the mash and that the pellet mill motors are operating at or close to
their rated capacity. Occasionally, a plug-up occurs in a pellet mill which
the operator must clear. Frequent checks of the finished pellets and
crumbles are made to assure proper hardness and size, since the oversizes
and fines must be recycled through the pellet mill. Excessive recycling
can reduce the finished feed output per unit of time.

Table 3 gives the man-equivalents required for this stage which in-
crease from 0.4 for Mill A, to 1.0 for Mills B through F.

5. Miscellaneous — There are a number of minor needs for labor
in a mill. These include such jobs as bin supervision, housekeeping
chores not performed by the other personnel, running errands, and fill-
ing in for other personnel that are absent. Man-equivalents needed for
these activities are given in Table 3.

6. Total Labor Inputs — Table 3 gives the total man-equivalents
for production labor and they range from 2.3 for Mill A to 5.0 for Mill F.
However, the number of man-equivalents for production labor does not
increase continuously with mill size and output because of major changes
in manufacturing technology. In Mills A, A' and B with their large labor
input in the mixing stage, the total man-equivalents increase from 2.3
to 5.0. Mills B' and C have fewer man-equivalents than B, 4.0 and 4.4,
and the man-equivalents for Mills D, E, and F vary from 3.8 to 5.0.
Labor productivity in production increases continuously over the range
in mill sizes from 1.1 to 8.7 tons per man-hour.^

Man-equivalents for maintenance and repair, shown in Table 3. vary
from 0.3 for Mill A to 2.0 for Mill F.

The total man-equivalents for production and maintenance increase
from 2.6 for Mill A to 7.0 for Mill F. Productivity increases from 1.0 ton
per man-hour to 6.2 for Mill F.

7. Total Labor Costs — Wages for production and maintenance
labor vary considerably in New England. The wage rate adopted for pro-
duction labor is $1.85 an hour plus 37 cents an hour in fringe benefits.
Maintenance personnel receive a base wage of $2.00 an hour plus 40
cents an hour in fringe benefits.

Table 4 gives the annual dollar cost and the average labor cost per
ton. As mill size and output are increased, the average cost per ton falls
rapidly from Mill A through Mill D. Over the range of sizes considered,
average cost for labor decreases from $2.26 to $.36 a ton. Decreases in
production labor costs account for the greater share of the cost reduc-
tion. The average production labor cost decreases from $1.96 to $.26 a
ton while the average maintenance labor cost decreases from S,30 to
$.11 a ton.

5 Mills generally measure productivity in terms of man-hours per ton. For produc-
tion labor, man-hours per ton decrease from 0.93 for Mill A to 0.11 for Mill F.

14

Table 4. Annual Production and Maintenance Labor Costs
for Eight Model Feed Mills

Output

Production

Maintenance

Total

Mill

per

Year

Annual

Per Ton

Annual

Per Ton

Annual Per Ton

1 tons)

(dolli

its)

A

5,434

10,621

1.96

1,648

.30

12,269

2.26

A'

10.868

17,085

1.57

2,496

.23

19,581

1.80

B

16,302

23,088

1.42

3,344

.20

26,432

1.62

B'

21,739

18,470

.85

4,243

.20

22,713

1.04

C

32,609

20,316

.62

4,992

.15

25,308

.78

D

45,287

17,389

.38

5,715

.13

23,104

.51

E

67.933

19,856

.29

7,488

.11

27,344

.40

F

90.577

23,088

.26

9,984

.11

33,072

.36

Investment and Costs for Feed Manufacturing Facilities

Feed mill investment is the initial dollar purchase price of the dur-
able inputs plus their installation costs. The durable inputs include such
items as equipment, buildings and land.

1. Equipment — The kind, type and number of equipment items
required for the model mills are synthesized from input-output relation-
ships and manufacturer's equipment specifications.^ Each mill has only
the manufacturing equipment capacity to produce the five formulations
in the specified forms and quantities within an eight-hour day,

Equipment is divided into seven categories, four of which are con-
cerned with the primary manufacturing stages. The equipment cost pre-
sented in Table 5 is the delivered price with the equipment ready for
installation. The total installation cost for each model is given in the
second part of the table.

Equipment for receiving ingredients consists primarily of screw con-
veyors and bucket elevators for conveying ingredients from receiving
points to storage bins in the mill. Mills A through D have a single bulk
receiving system, and Mills E and F have two bvilk receiving systems.

Grinding equipment includes screw conveyors to move shelled corn
to the hammermills, and pneumatic conveyors for moving the ground
materials into working bins.

The mixing equipment consists of conveyors, weigh buggies or hop-
pers, mixers, conditioners, and weighing and mixing control devices. A
substantial change in this equipment is required with the shift from ver-
tical mixers and weigh buggies in Mill B to mechanized conveyors, hor-
izontal mixers, and simple weighing controls in Mill B'.

The pelleting and fat application stage requires the largest pur-
chase price for equipment. This stage includes pellet mills, vertical cool-
ers, crumblers, graders, fat application equipment, and conveyors. This
stage accounts for approximately 45 percent of the total purchase price
of equipment for each mill.

6 See Appendix C for list of major equipment items for each model mill.

15

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16

Boiler sizes for the model mills are based on estimated steam re-
quirements, most of which are for pelleting, and vary from 20 h.p. for
Mill A to 300 h.p. for Mill F.

Miscellaneous equipment includes items not assignable to any of
the other categories, such as fat pumping and straining equipment, fat
tanks, air compressors, remote motor control equipment, indicators for
bins, and so on.

The investment in equipment includes not only the purchase price,
but the installation charges for placing the equipment in operational
status. These charges include costs for wiring, mechanical installation,
and plumbing of fat, steam, and air lines throughout the mill. Installa-
tion costs are equivalent to between 40 and 50 percent of the equipment
purchase price.

The total investment for equipment — purchase price plus installa-
tion — varies from $52,627 for Mill A to $508,456 for Mill F. Total in-
vestment, however, does not increase in proportion to increases in capa-
city. Investment per ton of annual capacity decreases from $9.68 for Mill
A to $5.61 for MiU F.

2. Mill Building — A number of variables determine the construc-
tion cost of buildings. The major ones are: location with reference to
transportation, topography and soil conditions of the site, type and size
of building constructed, building materials used, and building code re-
quirements. All model mills are assumed to be located on level sites in
close proximity to a railroad and highway, with soil conditions satis-
factory to support buildings with concrete footings, thus eliminating the
need and expense of piling. All buildings are constructed with a steel
frame and metal sheathing with no consideration given for future ex-
pansion.

The mill building is high in relation to its width and length. This
type of construction permits use of gravity as much as possible to move
materials. Much of the cubic volume of the mill building above the first
floor consists of working bins for storage of ingredients.

The basement of each mill contains the receiving cleaning shoe,
hammermills, fat tanks and pumps. In Mills B' through F, the horizontal
mixers, surge bins, vertical pellet coolers, and necessary conveyors are
also located in the basement.

The first floor area holds various kinds of equipment depending on
the size of the mill, technology adopted, and physical layout. For Mill A
the vertical mixer, a unit that contains the pellet mill, cooler, crumb-
ilizer, and grading shoe, and the fat application equipment are located
on the first floor. In Mills A' and B, only the vertical mixers, pellet
coolers, and fat application equipment are located on the first floor. The
first floor in Mills B' through F holds the weighing and proportioning
equipment, control centers, and pellet mills.

The upper floors of each mill are constructed next to the ingredient
holding bin cluster. On these floors are located the mash feed condition-
ers for all mills, the pellet mills for Mills A' and B, the crumbilizers and
grading shoes for Mills A' through F, and the fat application equipment
for Mills B' through F. Also on these floors are the bins for holding
mash feed for pelleting and for holding pellets or crumbles for fat appli-
cation.

17

The investment for the mill buildings complete with bins and fix-
tures installed ranges from $27,083 for Mill A to $272,091 for Mill F as
shown in Table 6.

3. Warehouse — Each mill has a warehouse adjoining the mill
building and adjacent to rail siding for receiving and storing bagged in-
gredients. Warehouses have a capacity equivalent to a ten-day require-
ment for bagged ingredients. Such buildings are steel framed with metal
sheathing, constructed on a concrete pad. A cost rate of $6.00 per square
foot was used to estimate the warehouse investment for each model mill.

4. Office — Each mill has office space for its administrative per-
sonnel and staff. The space required for each model is primarily a func-
tion of the number of personnel. Square footage requirements were es-
timated and a cost rate of $10.00 per square foot was used to determine
the investment.

5. Boiler House — Substantial quantities of steam are required in
feed manufacturing for making pellets, heating fat, and heating various
sections of the mill. Each mill has one boiler to supply steam, and the
boiler is located in a boiler house near the mill. The size of the ])oiler
house is based on the dimensions of the boiler. A cost rate of $12.00 per
square foot was used and includes building construction, accessories, and
the stack.

6. Grain Storage — Each mill has capacity to store a ten-day re-
quirement of shelled corn. The storage facilities range in capacity from
4,400 bushels to74,000 bushels, and consist of two or more round bolted
steel tanks located next to the mill building and siding. The investment
includes the tanks, fabricated steel supports, concrete pad and footings,
ladders, walkways, and erection labor costs.

7. Rail Siding — Each mill requires a rail siding to spot and hold
loaded cars of ingredients and empty cars waiting to be picked up. Since
the railroads in New England generally do not provide private sidings
at their expense, the cost is borne by the firm reqiiiring the siding. The
linear feet of siding was derived by estimating the likely maximum num-
ber of cars to be on track daily and assumed only one switch per day by
the railroad. Mills A through D have a one-track siding while Mills E
and F have a two-track siding. A rate of $11.00 per linear foot of track
was used to derive the siding cost.

8. Finished Feed Holding — Each mill has a finished feed holding
capacity equivalent to the daily output of each formulation in bulk form.
This facility consists of square bolted steel bins erected on a steel frame
over a weighing unit and is located next to the mill Imilding. The invest-
ment for finished feed storage includes the cost of the bins, fabricated
steel, erection, concrete supports, and the weighing unit. A platform
motor truck scale to weigh the feed is used for Mills A through C. while
a traveling weigh hopper over the trucks is used in Mills D, E, and F.

9. Land — Acreage requirements for the several mills were deter-
mined from physical layout drawings. The land requirement ranges from

18

.69 acres for Mill A to 2.68 acres for Mill F. Land was assigned a cost of
$5,000 an acre.

10. Total Investment — Total investment for the mill sizes con-
sidered varies from $105,718 for Mill A to $923,397 for Mill F and are
shown in Table 6. Approximately half of the investment is for equip-
ment, and another quarter of it is for the mill building. The other cate-
gories account for the remaining quarter of the total investment.

The investment per ton of annual capacity decreases discontinuous-
ly over the range of mill sizes considered from a high of $19.46 for Mill
A to a low of $10.20 for Mill F. A discontinuity occurs at Mill B' where
substantial changes in manufacturing technology are incorporated.

Ownership Costs

The initial cost of the durable input is spread over its productive
life as depreciation. In addition, there are several other costs such as in-
surance, taxes, maintenance, and interest on investment. In the short
run. these costs are fixed, since they do not vary with output. The level
of ownership costs for each firm and each item is given in Table 7.

1. Depreciation — Depreciation is the cost of time, wear, and
obsolescence. Rates for determining annual depreciation costs for the
model firms were developed from information provided by mills and
equipment manufacturers.

Obsolescence appeared to be the primary consideration in the es-
tablishment of the equipment depreciation rate. Firms indicated that 15
years is the maximum period for depreciating equipment, and most were
using a shorter time period. All equipment for the model mills is depre-
ciated by the straight-line method over a ten-year period, except the
lioiler which is depreciated over a 15-year period.

Firms indicated that mill buildings and other facilities are being de-
preciated over a longer time period. These facilities have not been ren-
dered obsolete by the numerous technological developments in feed
manufacturing equipment, and firms apparently do not expect obsoles-
cence to become an important factor. For the model mills, all buildings,
the grain storage, rail siding, and finished feed storage are depreciated
by the straight-line method over a 25-year period.

2. Interest on Investment — A rate of six percent on the undepre-
ciated balance or three percent on the initial investment in equipment,
buildings, and other facilities was used to determine the annual cost for
interest. In addition, a rate of six percent was used on the nondepreciat-
ing land investment.

3. Taxes — Property taxes vary considerably between communities
as well as between states. In some New England states taxes may be
levied on all property, while in others equipment may be exempted. Fur-
thermore, communities in most states are allowed to establish the per-
centage of total value to be assessed.

The method of establishing the annual tax cost for the model mills
was to apply a charge of $5.00 per hundred dollars on 50 percent of the

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total mill investment. It is assumed that any county taxes incurred are
included in the above rate.

4. Insurance — A number of factors affect the insurance rate for
a feed manufacturing plant. Those having to do with the plant itself
include building materials, type of electrical motors and type and quan-
tity of installed fire prevention equipment. The location of the mill in
relation to the location of the housing of the community's fire fighting
equipment, and the quality and quantity of fire protection services pro-
vided by the community also affects the rate.

A rate of $1.00 per $100 of investment in buildings, equipment, and
all facilities except the rail siding was used to estimate the annual cost
of insurance. The same rate was also used to determine the insurance
cost on the average quantity of ingredients being stored by the model
mills.

5. Maintenance — Maintenance is a fixed cost for keeping Iniild-
ings, equipment, and facilities in operating condition. An assigned rate
of one percent of the initial investment was used to derive the annual
maintenance costs.

6. Total Ownership Costs — The ownership cost per ton of annual
capacity decreases from a high of $2.78 for Mill A to a low of SI. 50 for
Mill F. The cost per ton decreases with increasing size except at Mill B'
where a major change in manufacturing technology is incorporated.

Administrative and Supervisory Personnel Costs

A number of administrative functions must be performed in a feed
mill including management, ingredient purchasing, nutrition and formu-
lation analysis and quality control, typing, bookkeeping, and supervision
of personnel. Requirements for these functions were derived from data
provided by mills. The man-equivalents required for each function in
the model mills are given in Table 8.

Table 8. Personnel

Requii

rements

i per

Day f<

>r Various Managerial

Functi

ions for Eight

Model Feed Mills

(Man

-Equiva

lent

Basis)

Mills

Personnel

A

A'

B

B'

C

D

E

F

20.9*

41.8

62.7

83.6

125.4

174.2

261.3

348.4

Manager

.20

.35

.45

.55

.80

1.00

1.00

1.00

Assistant Manager

.35

.60

Formulation, Analysis

and Quality Control

.10

.15

.15

.20

.25

.30

.35

.40

Foreman

.30

.45

.60

.70

1.00

1.00

1.00

1.00

Assistant Foreman

.20

.65

1.00

Bookkeeper

.15

.25

.35

.45

.65

.85

1.20

1.60

Tvpist-Records

.25

.40

.55

.70

.95

1.20

1.65

2.00

Steno-Bookkeeper

.10

.15

.15

.20

.25

.30

.35

.40

Figures across are tons manufactured daily.

22

The annual cost increases from $7,800 for Mill A to $54,300 for Mill
F. On a per ton basis, the cost decreases from a high of $1.44 for Mill A
to $6.00 for Mill F. The administrative personnel costs are summarized
in Table 9.

Utility Costs

Utility cost tiems include electricity, water, and fuel. The use data
and cost information were obtained from mills, engineering estimates
and secondary sources. Costs are shown in Table 10.

1. Electricity — Electricity costs for the model mills are deter-
mined by estimating the kilowatt hours consumed per day and applying
a cost per kilowatt hour. Kilowatt hours are derived by determining
the number of horsepower hours per day times a conversion factor of
0.746. Motors under 100 horsepower are further adjusted by a factor of
0.85 because of reduced efficiency in smaller horsepower motors. Pellet
mill motors are treated differently since the above method did not pro-
vide satisfactory solutions in comparison to available data. These motors
consume 70.4 kilowatt hours per machine-hour for each 100 horsepower
of rating.

Observed mills in New England paid between 2.8 and 3.0 cents a
kilowatt hour. A rate of 2.8 cents per KWH was adopted for the model
mills. On a per ton basis, the cost decreases over the range of mill sizes
considered from 60.3 cents for Mill A to 49.6 cents for Mill F.

2. Water — Water requirements for the model mills are based on
boiler and employee consumption. An average of 34.5 pounds of water
is used for each boiler horsepower-hour and 100 gallons per day per
employee.

Water consumption varies from 29,500 cubic feet per year for Mill
A to 341,000 cubic feet for Mill F. The cost, based on a local rate^, de-
creases from 1.42 cents per ton of feed for Mill A to 0.67 cents for Mill F.

3. Fuel — Fuel requirements for the model mills are based on
steam usage for heating certain areas of the mills, the fat, and for pellet-
ing. Fuel consumption for heating space and fat is estimated at from 7.7
to 80.7 gallons per day depending on the mill size. Pelleting requires
1.86 gallons of fuel for each ton of feed pelleted. Total fuel consumption
varies from 41.5 to 644.8 gallons per day for the range of mill sizes con-
sidered.

Each mill has a fuel storage capacity equivalent to approximately
the requirements of ten operating days. On this basis, only Mills D, E,
and F are able to receive truck-load quantities of fuel.

All mills use No. 5 fuel oil which is purchased locally. Mills pur-
chasing less than truckload quantities are assumed to pay 10 cents per
gallon while other mills receive a truckload quantity discount of one
cent per gallon. On a per ton basis, the cost decreases moderately over
the range of mill sizes considered from 20 cents a ton for Mill A to 17
cents a ton for Mill F.

7 $30.60 first 10,000 cu. ft. plus 17c/100 cu. ft. for all additional, semiannually.

23

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Other Costs

In addition to costs for labor, ownership, administration, supervi-
sion and utilities, there is a set of other costs. These are discussed Jjelow
and their levels on an annual and per ton basis are shown in Tal)le 11.

1. Equipment Repair and Service Costs ■ — Equipment repairs and
services are the cost of replacement parts for equipment that has failed
because of wear, and services hired by the mill to make certain repairs.
Examples are the purchase of pellet mill dies and rolls, hammermill
hammers, and the ribbon for a mixer. Services hired by a mill may be
for rewinding a burned-out motor or making other repairs that mill
personnel are not qualified to make.

Equipment repairs and services are a variable cost since they are
a result of wear or use. Data for deriving an estimate of this cost for the
model mills were obtained from the observed mills accounting records.

Figure 2 shows the relationship used to estimate repair and service
costs. The relationship is between the percent of new equipment invest-
ment and the percent of capacity under which the mill is operated. At
100 percent of capacity, the annual repair cost is equivalent to 6.5 per-
cent of the equipment investment.

Figure 2. Relationship between Percent of Mill Capacity Utilized

and Percent of New Equipment Investment for Estimating

the Annual Variable Equipment Repair Cost

0

25
Percent

50 75

of mill capacity utilized

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27

2. Mill Supplies Costs — Mill supplies include lubricants, house-
keeping materials, and a number of other miscellaneous items and mat-
erials used in the mill. The cost of this category is based on accounting
information provided by the observed mills.

3. Miscellaneous Costs — Miscellaneous costs include feed regis-
tration and analysis fees, audit and legal fees, travel expenses for man-
agerial personnel, dues and subscription costs for various trade mag-
azines and journals, office supplies, telephone, and other minor costs.
Accounting data from the observed mills were used to develop estimates
of these costs for the model mills.

4. Inventory Costs — Sufficient ingredients storage capacity has
been built into each model mill to meet capacity needs for ten-day's
operation. However, mills generally have smaller volumes of ingredients
on hand. For purposes of this analysis, the average quantity of ingre-
dients on hand was assumed to be equivalent to five days of capacity
operation.

Two costs are associated with the ingredient inventory, insurance
and interest on the investment. Insurance is generally purchased quar-
terly and the cost approximates $1.00 per $100 of ingredients. Interest on
investment is a cost since mills must either use their own or borrow
working capital to purchase ingredients. An interest rate of five percent
is assumed for capital invested in the five-day supply of ingredients.

The inventory value is established by using the average 1963 deliver-
ed price of feed ingredients to New England points. Quantities of ingre-
dients stored are derived from formulations and quantities of each for-
mulation produced per day.

5. Shrinkage Costs — Mills experience some loss of ingredients
during the handling, storing, and manufacturing stages. This loss is re-
ferred to as shrink. Shrink may be caused by loss of moisture in some
ingredients which reduces their weight. Other losses occur during the
unloading and handling in the mill.

Observed mills did not have precise data on shrink. Most indicated
that losses probably ranged from one-quarter to three-quarters of one
percent by weight.

A shrink rate of one-quarter of one percent is adopted for the model
mills. A low rate is assumed since the model mills have equipment to
minimize losses. Shrink was determined for all ingredients except fat
and the premixes. Prices used are the average delivered ingredient price
to New England points.

6. Summary of Costs — Table 12 is a summary of the several cost
categories for the eight model mills operating at capacity. The costs are
classified as either fixed or variable. Fixed costs include ownership, ad-
ministrative and supervisory, and miscellaneous. All other costs are
variable.

Three of the nine major cost categories account for between two-
thirds and three-quarters of the total cost per ton. In Mills A through C.
these major costs are ownership, labor, and administrative and svxper-
visory. In Mills D, E and F, the three major costs are ownership, utili-
ties, and administrative and supervisory.

28

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29

Economies of Size

Two major cost relationships are of concern to feed mill manage-
ment: one has to do with the relationship of the size of the mill to
average cost of manufacturing, the other with the relationship of short-
run changes in output to average costs. The first type, often called long-
run average cost, is represented by the solid line in Figure 3. That line
and Table 12 show that as the size of the mill increases, the average
cost per ton at 100 percent of capacity decreases from $8.59 for Mill A
to $4.01 for MiU F.

Three categories account for 87 percent of the economies. Labor is
the most important and accounts for 41 percent of the total economies of
size. The ownership and administrative personnel costs are the second
and third major source of economies. Ownership accounts for 28 percent
and administrative for 18 percent of the total economies. Three other
categories, utilities, equipment repairs and services, and miscellaneous,
account for the remaining 13 percent of the economies.

Examination of Figure 3 indicates that further economies of size
might exist for larger size operations than considered here. The size
curve has not become parellel with the output axis since each successive-
ly larger mill model has a lower average cost per ton when operated at
its designed capacity. Further economies may be possible with equip-
ment possessing greater capacity and by using other technologies.

Figure 3. Short-Run Cost Curves and Economies of Size Curve
for Eight Model Feed Manufacturing Mills

K.00

12.00

IQOO

o 8.00

Q.

6.00

o
Q

4.00

2.00

A through F = mills

20 30 40 50 60 70

Volume per year ■ thousands of tons

80

90

30

Short-Run Average Costs

Output of mills often drops over short periods because of seasonal
fluctuations in broiler production. During such periods of reduced out-
put the capacities of mills do not change. However, production costs per
ton generally rise because fixed costs of mill ownership and management
stay the same, and efficiency in the use of labor is impaired. The effects
of such short-run changes in output on average cost for each size of mill
are shown by the dotted curves in Figure 3 and are given in Appendix
Tables D-1 through D-4. Costs were determined for each mill with out-
put of broiler feed at 40, 60, 80, 95 and 100 percent of capacity. Breeder
feed tonnage is held constant because the production cycle for breeders
is not affected by short-run changes in broiler production.

V. Cost of Bulk Feed Distribution

New England feed manufacturers have two methods for distributing
bulk feed to farms. Mills located in the feed consuming areas rely on
direct mill-to-farm shipments by truck. Other firms with mills located
substantial distances from feed consuming areas use railroads for the
movement of feed to distributing centers. The feed is stored locally and
transhipped to farms by truck.

The trend is toward increased direct mill-to-farm distribution. Mills
are constructed at strategic locations in major feed consuming areas and
bulk distribution is usually confined to a 50 to 70-mile radius.

The purpose of this section is to develop the costs of direct mill-to-
farni bulk feed distribution. Costs are determined for six of the eight
model feed mills discussed in the previous section for each of three levels
of poultry production density.

Procedure

The procedure involves establishing and standardizing a number of
different factors which affect distribution costs. These factors include
the number and volume of distribution operations, poultry production
densities, location and distance from the mill of the poultry production
units, technology and technical input-output relationships for deter-
mining total inputs by each firm. A schedule of the number and size of
daily deliveries is developed from a number of assumptions and condi-
tions pertaining to the conduct of the operation, feeding practices, feed
input-output relationships, and flock sizes. The number of trucks and
drivers required are calculated for each firm size and density level, and
standardized costs are applied to the results. In addition, inputs and costs
are estimated for other requirements such as administrative personnel,
garage, and so on. With all costs determined, analyses are made to deter-
mine how changes in firm size and production density affect feed dis-
tribution costs and investment.

1. Number and Size of Firms, Production Densities, and Location
of Poultry Production Units^ — Six feed manufacturing mills vary-

1 This section adapted from W. F. Henry and C. R. Burbee, op. cit.

31

ing in daily output from 20.90 to 348.37 tons establish the respective
volumes for the six distribution firms studied. The six mill models are
equivalent in output to models A, B, C, D, E, and F in the previous sec-
tion. These mills supply broiler and breeder feed to coordinated or-
ganizations producing from 1.25 to 20.80 million broilers a year.2 For
purposes of identification, each feed distribution firm has the same letter
designation as the mill it serves. Table 13 gives the volumes of feed dis-
tributed by the six firms.

Three levels of poultry production density are considered.^ These
densities expressed in terms of feed are equivalent to distributing 1.31,
6.55. and 32.73 tons per square mile per year.

The broiler producing area of each firm is a circle with the feed
mill located at the center and production units scattered uniformly
throughout. The size of the area is a function of firm volume and pro-
duction density. For each firm, the producing area has a specific number
of square miles and radius for each density level. The sizes of the areas
and radii are given for each firm in Table 13.

Increasing the volume distributed with density held constant re-
quire? a proportionate increase in area. This is illustrated in Figure 4.
The circular production area for each of the six firms are superimposed
in order of size. The result is a circle enclosed by five bands. The basic or
primary circle represents the poultry producing area for Firm A. Mov-
ing out from the center, each distribution area in effect adds a band
representing the area that must be added with each successive increase
in firm size and output. This geometric arrangement provides the frame-
work for investigating feed distribution by the added cost approach. The
tons of feed delivered into each band annually are given in Table 13.

Poultry production is assumed to be uniformly scattered through-
out the area of each band in producing units. The average of the loca-
tions of these units is on a line of determinable radial distance that
divides a band into two equal parts with respect to area. The radial or
airline distance from the mill location to the line of average location in
each band for each density level is derived and given in Table 13.

The relationship between radial distance and road mileage depends
on the road net-work concentration in the producing area. For purposes
of determining this relationship, Concord, New Hampshire, was selected
as the center. The radial distance and road mileage to a number of ran-

- See Appendix Table A-1.

3 Broiler production densities are 1,052, 5,263, and 26,216 pounds of finished 3.5-
pound live broilers produced per square mile per year. Hatching eggs are produced
at equivalent density levels. Three such density levels were used in previous reports
in this series: for broiler production. Ibid.; for hatching eggs, C. R. Burbee and E.
T. Bardwell, Marketing New England Poultry: 6. Economies of Scale in Hatching and
Cost of Distributing Broiler Chicks, University of New Hampshire, Agricultural Ex-
periment Station Bulletin 483, May 1964; and for all spatial activities, C. R. Burbee,
E. T. Bardwell, and W. F. Henry, Marketing New England Poultry: 8. Effects of Firm
Size and Production Density on Spatial Costs for an Integrated Broiler Marketing
Firm, University of New Hampshire, Agricultural Experiment Station Bulletin 485,
November 1964. However, in those three reports the work year was set at 247 days,
rather than the 260 days used in this report, so production density levels were lower
on a yearly basis in the previous three reports.

32

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33

Figure 4. Relationship between Poultry Producing Bands
and Firm Area with Density Constant

domly selected points around Concord were used to derive an equation.
The equation is:

RM = -1.534 + 1.351R
where RM is the road mileage and R the radial distance. This equation
has a negative intercept value as a result of the extreme concentration
of roads in the immediate vicinity of the center. Because of the negative
intercept value, the above equation is used to derive all road mileages
for radial distances in excess of ten miles.

For radial distances of ten miles or less the following equation is
used:

RM rr 1.196R
where RM is the road mileage and R is the radial distance. Table 13
gives the radial distance and corresponding road mileage from the cen-
ter or mill location to the average location in each of the bands at each
density level.

34

Bulk Feed Distribution Operation

1. Characteristics — The bulk feed distribution operation consists
of loading out trucks at a mill, travel to and unloading at one or more
production units, and retvirning to the mill for another load. The opera-
tion is under the supervision of a dispatcher who prepares the daily
delivery order schedule and assigns orders for delivery to the drivers.
There is also an administrative staff for purposes of decision making and
maintaining various records. The bulk feed distribution operation is
closely coordinated with the feed manufacturing operation.

2. Technical Relationships — Before solving for the number of
trucks and drivers needed by each firm to distribute feed at each den-
sity level, the technology and related physical input-output relationships
must be defined. It is assumed that each firm uses 12-ton capacity trucks
with four equal size compartments and a pneumatic unloading system.

Each trip includes three kinds of operations. These are (a) loading
at the mill, (b) travel to production units and return to the mill, and
(c) unloading at the production units. The data needed to develop rela-
tionships were collected from firms utilizing the 12-ton capacity truck.

(a) The loading stage commences when the driver arrives at the
mill. The driver obtains the delivery orders for the trip from the dis-
patcher and positions the truck under the finished feed holding bins.
The driver loads the quantities shown on the order into the compart-
ments and records the net weight on each order slip. In no case does the
driver put part or all of two orders for the same or different formula-
tions in the same compartment.

The equation relating time to the tons loaded is:

Hi = 0.133 + 0.0167T
where Hj is the hours to load T tons of feed.

(b) The travel period is the hours for the round trip from the mill
to production units and return. During this period, the driver may take
some time for personal needs svich as a coffee break or lunch. The equa-
tion for this stage is:

Hs = 0.435 + 0.0221RT
where Ho is the hours of travel for the round trip of RT miles. This
eqiiation is used to calculate the travel time from the mill to the average
location in each band and return to the mill at each density level as
shown in Table 13.

(c) The unloading time is the period required to position the truck
at the poultry house, attach a pipe from the l)lower unit to a pipe lead-
ing to a bulk bin, start the blower unit to unload the feed. Once the feed
is unloaded, the set-up procedure is reversed. The equation relating
time to the tons unloaded is:

Ho = 0.0702 + 0.1146T
whereHo is the hours to unload T tons.

Feed Distribution Model

1. Conditions and Assumptions — A number of assumptions and
conditions pertinent to the analysis follow:

35

(a) "Day old" broiler and breeder chicks are placed continually in
specified quantities throughout the area.

(b) The production period for breeders and broilers is not varied
in length.

(c) Seasonal variations in feed conversion are ignored thus keeping
the quantity of feed produced and distributed each day by each firm
constant.

(d) Feed deliveries during any one day are planned to be primarily
confined to an erea segment equivalent to one-fifth of the poultry pro-
ducing area, the daily requirement set by a 5-day week. This arrange-
ment reduces to a minimum the intraband travel. The truck proceeds to
one or more units and returns by the same route.

(e ) Broiler flock sizes of a single age group are 4,800 birds in Band
L 9.600 in Band II, 14,400 in Band III, 11,200 in Band IV, and 20,000 in
Bands V and VI.

(f) Mature breeder flock sizes consist of 2,595 birds in Band I,
5,190 in Band II, 7,785 in Band III, 6,055 in Band IV, and 5,405 in Bands
V and VI. Birds in these flocks consist of several age groups.

(g) Replacement flock sizes average 1,343 birds in Band I. 2.686 in
Band II, 4,029 in Band III, 3,364 in Band IV, and 3,014 in Bands V and
VI.

(h) The work day for each truck and driver cannot exceed ten con-
secutive hours. This assumption prevents the shifting of the effects of an
increasing producing area onto drivers and trucks through use of over-
time payments and increased truck utilization.

(i) Each truck and driver can undertake only those trips that can
be completed in ten hours or less. This means that a truck and driver
cannot initiate a trip one day and return the next.

(j) The quantity of feed delivered to a production unit plus the
quantity in bins at the production unit is restricted to the amount that
will be consumed in the following two weeks. The purpose of this as-
sumption is to simulate as closely as possible prevailing practices.

(k) Only the quantities of each feed formulation as prescribed by
the adopted feeding practices are delivered to each production unit.

2. Number and Size of Daily Delivery Orders — The feed tonnage
delivered to a production unit is a function of the projected feed con-
sumption for the following two weeks, as determined by the size and age
of flock and the compartment size of the truck. Considering these factors
simultaneously with the intent of utilizing the maximum hauling cap-
acity of the truck on each trip, the number and size of orders are es-
tablished for each of the six bands.

Table 14 gives the daily delivery schedule for each band by formula-
tion, tonnage, and the number of truck body compartments needed to
transport each order. Many of these orders are in units of or multiples
of three tons which provides for maximum use of feed compartments.
Orders for formulations in other tonnage units result from either the as-
sumption concerning the amount of feed allowed to be in storage at a
production unit or the balance needed to finish feeding a particular
formulation.

36

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37

3. Truck and Driver Requirements — The daily schedule of deliv-
ery orders for each band and the three technical input-output relation-
ships for determining the time required to make a trip provides the
means for deriving the number of trucks, drivers, man-hours, and miles
of travel for each firm at each production density level. In all instances
the number of drivers is the same as the number of trucks. These re-
quirements are developed on a daily basis, but are readily convertible to
an annual basis since the roster is typical for every day of operations.
The relationships are assumed to hold over any given time period.

The requirements are calculated with the objective of maximizing
the tons hauled per trip and the number of trips by each truck and
driver in the allowed ten-hour work day.

The number of trips and tons delivered a day by a truck and driver
of a given firm depends on the distance between the mill and the aver-
age location of units in the bands, or the production density. As density
is increased, the mileage and travel time between origin and destinations
is reduced, allowing a truck to make more trips. Thus a firm with a given
volume to distribute is able to reduce the number of trucks and drivers.
However, as firm size and volume is increased with density constant, the
added trips increase in length and travel time, thereby reducing the
average number of trips and tons hauled per day per truck.

The requirements of each firm at each density level are summarized
in Table 15. At the lowest density level considered, 1.31 tons distributed
per square mile per year, with the 10-hour work day restriction on the
use of trucks and drivers, it is not possible for firm F to distribute into
Band VI, thus making the entire operation of firm F an impossibility.
Most of the trucks and drivers can complete only one or two trips and
average between 200 and 280 miles a day. The tonnage distributed per
truck varies between 12.4 and 20.9 a day.

Increasing density from 1.31 to 6.55 tons distributed per square mile
per year allows all six firms to operate and reduces the number of trucks
and drivers needed for all firms except Firm A. Trucks and drivers can
complete from two to three trips and average between 84 and 235 miles
a day. Each truck delivers from 20.4 to 25.1 tons a day.

At the highest density level considered, 32.73 tons per square mile
per year, trucks and drivers are further reduced in number. At this den-
sity level, trucks and drivers complete from three to four trips and travel
from 37 to 156 miles a day. Each truck delivers from 20.9 to 34.8 tons
a day.

Investment

Trucks are the largest investment item for the feed distribution firm.
However, additional investment is needed for a garage in which to
house the trucks, office space for the administrative personnel, and office
equipment.

1. Truck — The type of bulk delivery truck considered here has a
cost of $19,500. The tandem-axle, heavy-duty chassis costs $13,000, and
the bulk feed tank with the pneumatic unloading equipment costs $6,500.
These prices include all the extra equipment required by safety rules
and regulations.

38

Table 15. Number of Trucks and Drivers, Miles and Man-Hours

per Day and per Ton for Six Firms Distributing Feed

at Three Density Levels

Man-

Man-

Tons

Number

Miles

Miles Number of

Hours

Hours

Firm

per Day

of Trucks

per Day

per Ton D

rivers

per Day*

per Ton

1.31 Ton Density Level

A

20.9

1

199

9.53

1

9.34

.45

B

62.7

4

812

12.95

4

31.32

.50

C

125.4

8

1,974

15.74

8

69.33

.55

D

174.2

13

3,272

18.79

13

107.92

.62

E

261.3

21

5,837

22.34

21

181.83

.70

F

348.4

**

6.55 Ton Density Level

A

20.9

1

84

4.02

1

6.85

.33

B

62.7

3

351

5.61

3

21.14

.34

C

125.4

5

861

6.88

5

44.82

.36

D

174.2

7

1,433

8.25

7

67.42

.39

E

261.3

12

2,566

9.80

12

109.47

.42

F

348.4

17

3,989
32.73 Ton D<

11.48
3nsity Level

17

157.98

.45

A

20.9

1

37

1.78

1

5.83

.28

B

62.7

2

149

2.37

2

16.67

.27

C

125.4

4

368

2.93

4

33.88

.27

D

174.2

5

616

3.54

5

49.28

.28

E

261.3

8

1,110

4.25

8

77.24

.30

F

348.4

11

1,719

4.94

11

107.75

.31

* Day limited to 10 hours.
'* Firm F cannot distribute at this density level.

For any given firm, the truck investment varies according to density
in the producing area. A firm distributing a given quantity of feed gen-
erally needs more trucks at low density levels than at higher density
levels.

At the lowest density levels considered, total truck investment varies
from $19,500 for Firm A to $409,500 for Firm E. The investment per ton
distributed annually increases from $3.59 for Firm A to $6.03 for Firm
E. At the intermediate density level, investment varies from $19,500 for
Firm A to $331,500 for Firm F. Investment per ton decreases from $3.59
for Firms A and B to a low of $2.99 for Firm C and increases to $3.66 for
Firm F, This five-fold increase in density results in no reduction in truck
investment for Firm A to a reduction of $175,500 for Firm E.

Increasing density to the maximum considered in this study results
in further reductions in truck investment for all Firms but A. Firm F
realizes the largest reduction, $117,000. Investment per ton at this den-
sity level decreases with increasing firm size and volume from $3.59 for
Firm A to a low of $2.15 for Firm D and increases to $2.37 for Firm F.
Total investment for trucks is given in Table 16.

2. Garage — It is assumed that each firm has sufficient garage space
to house all its trucks. According to engineering estimates, garage space

39

requires an investment of $1,200 for each truck. However, the require-
ment for garage space varies according to the number of trucks needed
to distribute at each density level. Total garage investment is given in
Table 16 for each firm at each of the three density levels.

3. Office and Office Equipment — Office space and equipment are
two minor investment items. Estimates are based on the number of ad-
ministrative and clerical personnel and their equipment needs. The in-
vestment by firms is given in Table 16.

4. Total Investment — Total investment for all the firms except
Firm A varies with changes in density level. As density is increased, sub-
stantial reductions in capital outlay for trucks and garage space becomes
apparent. The total investment for the six distribution firms with density
at each of the three levels considered is shown in Table 16.

Table 16. Investment for Trucks, <

[parage, Office and Office Equipment

for Six Firms

at Each of Three Density Levels

i

Firms

A

B

C

D

E

F

5,434*

16,302

32,609

45,287

67,933

90,577

(dollars)

1.31 Ton

Density Level

I

Trucks**

19,500

78,000

156,000

253,500

409,500

t

Garaget

1,200

4,800

9,600

15,600

25,200

Office

300

600

750

900

1,150

Office Equipment

110

177

320

361

427

Total

21,110

83,577

166,670

270,361

436,277

Investment per

Ton

3.88

5.13

5.11
6.55 Ton

5.97
Density Level

6.42

Trucks**

19,500

58,500

97,500

136,500

234,000

331,500

Garaget

1,200

3,600

6,000

8,400

14,400

20,400

Office

300

600

750

900

1,150

1,400

Office Equipment

110

177

320

361

427

539

Total

21,110

62,877

104,570

146,161

249,977

353,839

Investment per

Ton

3.88

3.86

3.21

3.23

3.68

3.91

32.73 Ton

Density Level

Trucks**

19,500

39,000

78,000

97,500

156,000

214,500

Garaget

1,200

2,400

4,800

6,000

9,600

13,200

Office

300

600

750

900

1,150

1,400

Office Equipment

110

177

320

361

427

539

Total

21,110

42,177

83,870

104,761

167,177

229,639

Investment per

Ton

3.88

2.59

2.57

2.31

2.46

3.91

* Figures across are tons delivered annually.
** Truck investment is $19,500 each.
t Garage stalls at $1,200 for each truck.
t Firm F cannot operate at this density level.

40

Feed Distribution Costs

Application of standardized costs to the several input-output quan-
tities establishes the relationship between cost and the volume of feed
distributed. The costs used are appropriate to New England conditions.
The distribution costs are classified as truck, driver, administrative per-
sonnel and miscellaneous.

1. Truck Costs — A function relating cost to distance expressed in
miles was developed from technical data provided by several feed dis-
tributing firms and equipment manufacturers. Truck costs include a
number of items which are either fixed or variable costs or a combina-
tion of both. The fixed costs include truck registration, insurance, license
and anti-freeze. The variable costs associated with use are gas, oil, and
lubrication. Those costs associated with use and ownership are deprecia-
tion, interest on investment, maintenance and repair, taxes, and tires.

A cost was derived for each truck-cost item for each of several an-
nual mileage levels, and the costs were summed to determine an annual
total operating cost for each respective mileage level. A relationship
between the two was derived by the least-squares method, and the equa-
tion is:

AC = 3,157.5N + 0.18309M
where AC is the total annual operating cost in dollars, N is the total
number of trucks, and M is the miles of travel per year. The annual fixed
cost per truck is $3,157.50 and the variable cost is 18.3 cents per mile.
Figure 5 illustrates the relationship. The equation is used to determine
the annual cost of operating the trucks for each firm size at each of the
three density levels. These costs and the average cost per ton are given
in Table 17.

2. Driver Costs — Truck driver wage rates vary considerably in the
New England region. Generally, rates become progressively lower, the

Table 17. Truck Costs for Six Firms Distributing Feed
at Three Density Levels

Firm

Density A

B

C D

E

F

5,434*

16,302

32,609 45,287

67,933

90,577

( tons per square

(annual cost in dollars)

mile per year)
1.31 12,629
6.55 7,156
32.73 4,919

51,284
26,182
13,408

119.229 196,806
56,774 90,319
30,148 45,112

(dollars per ton)

344,170

160,040

78,100

**

243,568
116,563

1.31 2.32

6.55 1.32

32.73 .91

3.15

1.61

.82

3.66 4.35

1.74 1.99

.92 1.00

5.07
2.35
1.15

**

2.69
1.29

Figures across are tons delivered annually.
' Firm F cannot operate at this density level.

41

Figure 5. Relationship between Annual Mileage and Total Annual
Operating Costs for 12-Ton Capacity Bulk Feed Trucks

0

25 50 75

Miles per year (000)

farther north in the Region. The rate adopted for hulk feed track drivers
is a base wage of $2.00 per hour phis 40 cents an hour in fringe benefits.
Fringe benefits inchide vacation and sick leave, Social Security, medical
and health insurance, and a company-sponsored pension program.

This rate is used to determine the annual drivers' wage cost for each
of the six firms with distribution at each of three density levels. The
annual and per ton cost for drivers is given in Table 18.

3. Administrative Personnel and Costs — Administrative functions
include managing the distribution operation, scheduling and dispatching
trucks and drivers, and performing various clerical and bookkeeping
chores. Estimates of personnel requirements and costs were obtained

42

Table 18. Driver Costs for Six Firms Distributing Feed
at Three Density Levels

Firm

Den^it^

A

B

C D

E

F

5,434*

16,302

32,609 45,287

-67,933

90,577

(tons per

-<!»iare

(annual cost in dollars)

mile per

vear)

1.31

6.55

32.73

5,828
4,274
3,638

19,544
13,191
10,402

43,262 67,342
27,968 42,070
21,141 30,751

(dollars per ton)

113,462
68,309
48,198

**
98,580
67,236

1.31

6.55

32.73

1.07
.79
.67

1.20
.81
.64

1.33 1.49
.86 .93
.65 .68

1.67
1.01

.71

**

1.09

.74

* Figures across are tons delivered annually.

* Firm F cannot operate at this density level.

from firms distributing feed and applied to the model firms. Table 19
presents the estimated personnel requirements and annual costs.

4. Miscellaneous Costs — Miscellaneous costs include three gen-
eral categories. They are (1) ownership costs of the garage, office, and
office equipment, (2) service costs consisting of utilities and telephone,
and ( 3 ' supply costs consisting of weigh tags and other administrative
supplie-. Cost for these items are relativelv small and are shown in Table
20.

Table 19. Administrative Personnel Costs and Man-Equivalents
for Six Feed Distribution Firms

Firm

Item

A

5,434*

B

16,302

C

32,609

D

45.287

E

67,933

F

90,577

Manager*"

Dispatcher'^"

Bookkeeper-T;

k-pistt
Cost

(dollars — with
625 1,250
(.05) (.1)
600 1,500
(.1) (.25)
225 675
(.05) (.15)

1,450 3,425
.27 .21

man-equivalents in

1,875 2,500
(.15) (.2)
2,700 3,600
(.45) (.6)
1,125 1,500
(.25) (.33)

5,700 7,600
.18 .17

parentheses)

3,750

(.3)
4,800

(.8)
2,025
(.45)

5,000
(.4)
6,000
(1.0)
2,700
(.6)

Total Annual
Cost per Ton

10,575
.16

13,700
.15

* Figures across are tons distributed annually
** Annual Salary rate of S12,500
t Annual salary rate of S 6,000
-t Annual salary rate of $ 4,500

43

Table 20. Miscellaneous Costs for Six Firms Distributing Feed

at Three Density Levels

—

Firm

A

B

C

D

E

F

Item

5,434*

16,302

32,609

45,287

67,933

90,577

(dollars)

1.31 Ton Densi

ity Level

Ownership

Services

Supplies

192

87

109

652
174
326

1,247
277
652

1,962
351
906

3,105

507

1,359

**

Total Annual
Cost per Ton

Costs

388
.07

1,152
.07

2,176
.07

3,219
.07

4,971
.07

6.55 Ton Density Level

Ownership

Services

Supplies

192

87

109

514
174
326

833

277
652

1,134
351
906

1,863

507

1,359

2.600

672

1.812

Total Annual
Cost per Ton

Costs

388
.07

1,014
.06

1,762
.05

2,391
.05

3,729
.06

5.084
.06

52.73 Ton Density Level

Ownership

Services

Supplies

192

87

109

374
174
326

695

277
652

858
351
906

1,311

507

1,359

1.772

672

1.812

Total Annual
Cost per Ton

Costs

388
.07

874
.05

1,624
.05

2,115
.05

3,177
.05

4,256

.05

* Figures across are tons distributed annually.
■* Firm F cannot operate at this density level.

The ownership cost includes depreciation, interest on investment,
taxes, maintenance and repair, and insurance. Annual depreciation is
figured by the straight-line method and is four percent of the initial in-
vestment for the garage and office and ten percent of the initial invc>t-
ment for office equipment. The annual interest charge is three percent of
the initial investment. Annual taxes are $25 per thousand on half of the
new investment value. Annual insurance, maintenance and repair are
each assumed to be one percent of the initial investment.

Utility and telephone costs are estimated from information supplied
by firms. Supplies are a constant unit cost and are assumed to be two
cents per ton of feed distributed.

5. Total Distribution Cost — Table 21 gives the total annual and
average per ton feed distribution costs for each firm operating at three
density levels. For each situation, truck costs constitute approximately
half of the total cost. Drivers' wages are the second largest cost item and
vary from about 25 to 35 percent of the total. The administrative and
miscellaneous costs constitute the balance.

44

Table 21. Summary of Feed Distribution for Six Firms
Distributing Feed at Three Density Levels

Firm

A

B

C

D

E

F

Item

5,434*

16,302

32,609

45,287

67,933

90,577

(dollars)

1.31 Ton Density Level

Trucks
Drivers

Administrative
Miscellaneous

12,629

5,828

1,450

388

51,284

19,544

3,425

1,152

119,229

43,262

5,700

2,176

196,806

67,342

7,600

3,219

344,170

113,462

10,575

4,971

* *

Total Annual Cost
Cost per Ton

20,295
3.74

75,405
4.63

170,367
5.22

274,967
6.07

473,178
6.96

6,55 Ton Density Level

Trucks
Drivers
Administrative
Miscellaneous

7,156

4,274

1,450

388

26,182

13,191

3,425

1,014

56,774

27,968

5,700

1,762

90,319

42,070
7,600
2,391

160,040

68,309

10,575

3,729

243,568

98,580

13,700

5,084

Total Annual Cost
Cost per Ton

13,268
2.44

43,812
2.69

92,204
2.83

142,380
3.14

242,653
3.57

360,932
3.98

^

$2.73 Ton Density Level

Trucks
Drivers
Administrative
Miscellaneous

4,919

3,638

1,450

388

13,408

10,402

3,425

874

30,148

21,141

5,700

1,624

45,112

30,751

7,600

2,115

78,100

48,198

10,575

3,177

116,563

67,236

13,700

4,256

Total Annual Cost
Cost per Ton

10,395
1.91

28,109
1.72

58,613
1.80

85,578
1.89

140,050
2.06

201,755

2.23

* Figures across are tons distributed annually.
** Firm F cannot distribute at this density level. (To distribute at this density
level requires changes in the restriction on overtime.)

For the five firms able to distribute feed at the lowest density level
considered, total annual cost increases from $20,295 for Firm A to
$473,178 for Firm E. Average cost increases continuously with increasing
volume from $3.74 for Firm A to $6.96 a ton for Firm E.

All six firm sizes can distribute feed at the intermediate density
level. Total annual cost increases from $13,268 for Firm A to $360,932
for Firm F. Average cost also increases continuously with increasing
volume from $2.44 for Firm A to $3.98 a ton for Firm F.

Distributing feed at the highest density level results in annual costs
increasing from $10,395 for Firm A to $201,755 for Firm F. However,
average cost decreases from $1.91 a ton for Firm A to $1.72 for Firm B
and increases continuously with further increases in volume to $2.23 a
ton for Firm F.

The relationship between average cost and volume at each density
level is shown in Figure 6. The relationship between average cost and
density for each of the six firms is illustrated in Figure 7.

45

Figure 6.

7.00

6.00

5.00

4.00

■3.00

o

o

2.00

1.00

Average Cost per Ton for Bulk Feed Distribution
at Three Density Levels

.31 tons per square mile per year

6.55 tons per square mile per year

32.73 tons per square mile per year

20 30 40 50 60

Thousands of tons distributed per year

70

80

90

With a given firm size, decreasing the size of the hroiler producing
area resuhs in substantial reductions in the average cost per ton for dis-
tribviting feed. However, the reductions diminish with successive de-
creases in area.

For Firm A, most of the reductions occur over a range in density
from 1.31 to 10 tons per square mile and amounts to approximately $1.50
per ton. With increases in firm size and volume, reductions in average
cost occur over a wider density range, 1.31 to 20 tons per square mile and
increase in magnitude. The reduction in average cost increases from ap-
proximately $2.60 per ton for Firm B to $4.70 a ton for Firm E. Increas-
ing density from 20 to 32.73 tons per square mile results in small reduc-
tions varying from 19 cents per ton for Firm A to 25 cents per ton for
Firm F.

These data indicate the general positive relationship between dis-
tance and feed distribution costs. The methodology used does not, how-
ever, precisely determine the effect of distance on the cost of distributing
a ton of feed. To develop such a relationship, the cost of distributing a
ton of feed to each band at each density level was determined and paired
with its respective one-way road mileage. An equation expressing the
relationship is derived by the least-squares method and is:

C = 1.250 + 0.0489M4

4R2

.97.

46

where C is the cost per ton for delivering a ton of feed from a mill to a
production unit located M miles from the mill. The added cost per ton
for each mile (one way) is 4.89 cents, and the fixed cost associated with
each ton is $1.25. Figure 8 illustrates this relationship.

Figure 7. Relationship between Average Cost per Ton and Feed Distributed
per Square Mile per Year for Six Firms

7.00

6.00

5.00

§4.00

0)
Q.

3.00

"o
Q

2.00

1.00

A through F = firms

5 10 15 20 25 30

Tons of feed distributed per square mile per year

35

47

Figure 8. Relationship between Distance in Road Miles
and Distribution Cost per Ton

9.00

8.00

7.00

6.00-

§5.00

Q.

u> 4.00

_o

"o

Q

3.00

200

.00

O

Y= 1.250+ 0.0489 X

0

50 100

Road miles one way

150

VI. Total Cost for Feed Manufacturing

and Distribution

The optimum size of a feed manufacturing plant requires simultane-
ous consideration of feed manufacturing and distribution costs. Con-
sideration of each independently might result in a higher total average
cost than otherwise could be achieved and place the firm at a competi-
tive disadvantage. The purpose of this section is to combine the manu-
facturing and distribution costs developed in the previous sections to
determine the manner in which the two variables, plant size and density,
affect optimum size. The combined or total costs are presented for six

48

firms ranging in annual output from 5,434 to 90,577 tons with feed dis-
tributed at three density levels, 1.31. 6.55. and 32.73 tons per square
mile per year.

Effect of Density Level

The total average cost for each of the six firms at each density level
is given in Table 22. The volume-cost relationship for each density level
is illustrated in Figure 9.

At the lowest density level, total average cost decreases from $12.33
a ton for Firm A to $10.45 for Firm C and increases with further in-
creases in size and volume to $11.26 for Firm E. The least-cost size firm
at this density. Firm C, is producing 32,609 tons of feed a year and dis-
tributing into an area with a radius of 89 miles. This quantity of feed is
sufficient to produce the hatching eggs and broilers for a firm processing
7.5 million finished live broilers (26.2 million pounds) a year with a
plant capacity of 3,600 broilers an hour on a single shift basis. ^

Increasing density to the intermediate level results in the average
total cost per ton decreasing from $11.03 for Firm A to a low of $7.82
for Firm D and increasing with further increases in firm size and output
to $7.99 for Firm F. The least-cost size firm at this density. Firm D, pro-

Table 22. Total Feed Manufacturing and Distribution Cost per Ton
for Six Firms with Feed Distributed at Three Density Levels

Item

Feed Manufacturing
Feed L)i>tribution

Total

Firm

A

5.434^^

BCD

16,302 32,609 45,287

E

67,933

F

90,577

8.59
3.74

(dollars per ton)
1.31 Ton Density Level
6.29 5.23 4.68
4.63 5.22 6.07

4.30
6.96

**

12.33

10.92

10.45

10.75

11.26

Feed Manufacturing 8.59

Feed Di^tribution 2.44

Total 11.03

6.55 Ton Density Level

6.29 5.23 4.68

2.69 2.83 3.14

8.98

8.06

7.82

4.30
3.57

7.87

4.01
3.98

7.99

32.73 Ton Density Level

Feed Manufacturing
Feed Di^tribution

8.59
1.91

6.29
1.72

5.23
1.80

4.68
1.89

4.30
2.06

4.01
2.23

Total

10.50

8.01

7.03

6.57

6.36

6.24

* Figures across are annual volumes in tons.
** Firm F cannot distribute at this density level.

1 The feed manufacturing and distribution cost for Firm C is equivalent to 1.3 cents
a pound of finished live broiler.

49

12.00

10.00

800

°-6.00

o
o

4.00

2.00

Figure 9. Total Average Cost per Ton of Feed Manufacturing
and Distribution with Feed Distributed at Three Density Levels

31 tons per square mile per year

6.55 tons per square mile per year

32.73 tons per square mile per year

10 20 30 40 50 60

Thousonds of tons per year

70

80

90

duces 45,287 tons of manufactured feed a year and distribute? into an
area with a radius of 46.9 miles. This output is sufficient to produce 10.4
million finished live broilers (36.4 million pounds) annually and to
keep a processing plant with a line capacity of 5,000 broilers per hour
operating at its designed output on a single shift basis throughout the
year.-

Manufacturing and distributing feed at the highest density level
considered results in a decreasing total average cost over the entire range
of firm sizes considered. The cost per ton decreases from S 10.50 for
Firm A to $6.24 for Firm F. Firm F produces 90,577 tons of finished feed
a year and distributes into an area with a radius of 29.7 mile?. The feed
volume is sufficient to grow out 20.8 million finished live broilers (72.8
million pounds) annually.^ This volume of broilers will keep a pro-
cessing plant with a line capacity of 10,000 broilers an hour operating at
its designed output on a single shift basis throughout the year.

1. Long-Run Changes — The effect on total average cost from long-
run changes in mill size and output and density can be determined from
the data in Table 22. Increasing density from the 1.31 to 6.55-ton density
levels requires an increase in mill size and output from 32,609 to 45,287
tons a year and reduces the average manufacturing cost by S.55 a ton.

- The feed manufacturing and distribution cost for Firm D
cents a pound of finished live broiler.

3 The feed manufacturing and distribution cost for Firm F
cents a pound of finished live broiler.

is equivalent to 0.97
is equivalent to 0.78

50

The producing area is reduced in radius from 89 to 46.9 miles resulting
in a reduction of the distribution cost of $2.08 per ton. The total reduc-
tion amounts to $2.63 per ton.

Increasing density from the 6.55 to 32.73-ton level requires a
doubling in mill size and output from 45,287 tons to 90,577 tons a year.
This reduces the average manufacturing cost by $.67 a ton. The poultry
producing area is reduced from a radius of 46.9 miles to 29.7 miles and
the average distribution cost is reduced by $.91 a ton. The total reduc-
tion is $1.58 a ton which is substantially less than the previous reduction.

2. Short-Run Changes — In the short-run, while the firm is not
able to change plant size, substantial reduction in cost may be realized
by increasing density by dropping producers on the fringe and adding
producers close to the mill. Increasing density from 1.31 to 6.55 tons
reduces the distribution cost by amounts varying from $1.30 per ton for
Firm A to as much as $3.39 per ton for Firm E. Only 24 cents a ton then
separates the costs for Firms C. D. E. and F.

Increasing density from the 6.55-ton to the 32.73-ton level provides
further reductions in cost varying from $.53 a ton for Firm A to a high
of $1.75 a ton for Firm F. The average costs of the three lowest cost
Firms D, E, and F. fall within a range of 34 cents.

51

APPENDIX A

Determination of Feed Mill Capacities and Outputs

The feed manufacturing capacity and output of each model feed
mill is based on the feed requirements of the vertically coordinated
broiler marketing organization consisting in part of broiler processing,
live broiler production, hatching egg production, and broiler chick
hatching. The organization controls other stages such as broiler assembly
and chick distribution, but neither affects the quantities of broilers and
eggs produced. It is assumed that the organization produces only the
quantities of inputs necessary to ultimately operate the broiler process-
ing plant at its designed capacity and output.

Eight processing plants ranging in capacity from 600 to 10.000 broil-
ers per hour serve as the basis for establishing feed requirements. These
plants are assumed to process straight-run broilers averaging 3.5 pounds
live. Plants operate eight hours a day, 260 days a year. The quantity of
broilers needed varies from 1.248 million a year for the smallest firm to
20.8 million for the largest firm size considered. Appendix Taljle A-1
gives the annual requirements. ^

The input for the processing plants establishes the output for the
live broiler production stage. However, the input of day-old chicks need-
ed is somewhat larger to compensate for bird mortality during the grow-
ing-out period. A mortality rate of 4.2 percent is used to derive the re-
quired chick input. This input varies from 1.303 million a year to 21.712
million chicks as shown in Table A-1.

Hatchery outputs are equivalent to the broiler chick inputs. Con-
verting chicks to hatching eggs is based on a 72 percent hatchability rate
of good chicks. Egg inputs to the hatcheries vary from 5,026 cases to
83,765 cases a year. The quantities for the intermediate size firms are
given in Table A-1.

Mature breeders are assumed to prodvice an average of 118 hatching
eggs per bird over a 40-week laying period. At this rate, the total annual
number of female breeders required varies from 15,333 to 255.553 with
11,795 to 196,579 being in production at any one time. There is a min-
imum of one male for each ten females. The total annual numljer of
males varies from 1,533 to 25,555 with 1,179 to 19,658 being fed at any
one time.

The breeders are purchased as day-old chicks from a primary l)reed-
er hatchery and grown out to maturity by the firm. During this period,
an assumed 15 percent of the females are lost through mortality and
culling. For each 100 purchased female chicks, 15 male chicks are pur-
chased. The total number of day-old chicks purchased annually varies
from 18,039 females and 2,705 males to 300,651 females and 45.098 males.
Table A-1 gives the quantities of chicks purchased by each of the eight
firms.

1 Derived from G. B. Rogers and E. T. Bardwell, op. cit. In that report the hourly
capacities of the processing plants are the same as those used in this report: however,
the work year was 247 days in the Rogers and Bardwell report, but is 260 in this
one, so that total annual capacities are not the same.

52

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53

Feeding Practices- and Coefficients

Straight-run broilers averaging 3.5 pounds live are grown out in
eight weeks on a feed conversion of 2.10 pounds of feed per pound of
broilers. At the time of assembly for processing, each broiler has con-
sumed an average of 7.35 pounds of feed, all in crumble form. A broiler-
starter formulation is fed for the first five weeks of the growing period.
During this period, birds consume an average of 2.9 pounds each. The
balance of the feed, 4.5 pounds of finisher formulation, is consumed dur-
ing the last three weeks.

Breeders are fed three formulations, two during the growing period
and one during the laying period. A starter formulation in mash form is
fed for the first six weeks at the rate of six pounds per chick started. This
formulation is followed by a grower formulation for the next 14 weeks
in pellet form at the rate of 14 pounds per started chick. During this
14-week period, birds are on a restricted feeding program. A mash form
breeder formulation is fed during the production period at the rate of
8.5 pounds per dozen hatching eggs. The tonnages of each formulation
mixed daily by each of the eight mills and the total tonnages mixed an-
nually are given in Table 1, page 7.

2 Input-output relationships and feeding practices provided by the Poultry Division,
Animal Science Department, University of New Hampshire.

54

APPENDIX B

Poultry Feed Formulations

The two broiler and three breeder feed formulations used in this
report are given in Table B-1. The formulations are adopted from the
1963 New England College Conference Chicken and Turkey Rations.
The breeder formulations are modified by substituting 50 percent pro-
tein soybean oil meal for the recommended 44 percent. This eliminates
the need for the model mills to purchase and store two different grades
of meal. The substitution reduces the pounds of soybean meal per ton
and is offset by the addition of a like number of pounds of corn.

Appendix Table B-1. Broiler and Breeder Feed Formulations'*

Ingredient

Broiler Breeder

Starter Finisher Starter Grower Breeder

Corn, yellow No. 2
Soybean Meal (50%)

1,075
500

1,225
350

(pounds)

1,175

500

1,260
220

1,365
175

Stabilized fat

80

80

20

20

20

Corn gluten meal

100

100

Fish meal (60%)

100

100

50

50

75

Distillers dried sol.

50

50

50

50

50

Alfalfa meal

50

50

50

50

50

Standard wheat midds

100

300

100

Dicalcium phosphate

18

18

22

24

10

Ground limestone

20

20

24

20

100

Iodized salt

5

5

5

5

5

Meat and bone scrap

50

Manganese sulfate

.5

.5

.5

.5

.5

dl Methionine

.5

.5

Antioxidant

.25

.25

Organic arsenical supplement

.1

.1

Antibiotic supplement

**

**

**

**

Total Ibs.t

1,999.35

1,999.35

1,996.5

1,999.5

2,000.5

* New England College Conference Chicken and Turkey Rations, Department of
Animal Sciences, University of New Hampshire, Durham, New Hampshire, 1963.

** Add one to five pounds per ton depending on product and manufacturer's
recommendations.

t Add or subtract corn to adjust to 2,000 pounds.

55

APPENDIX C

Major Equipment Items for Eight Model Mills

Mill A

Mill A

20.9

tons per day

41.8

tons per day

1 ea.

40 hp

Hammermill ar

id blower

ea.

50

hp

Hammermill

1 ea.

5 hp

Vertical mixer.

1 ton

ea.

20

hp

Pneumatic conveyor

1 ea.

40 hp

Pellet mill

ea.

10

hp

Vertical mixer, 2 toi

1 ea.

10 hp

Cooler and cru

mhillzer

ea.

75

hp

Pellet mill

1 ea.

31/2 hp

Fat applicator

ea.

101/2

hp

Pellet cooler

1 ea.

20 hp

Boiler

ea.

71/2

hp

Crumbilizer

ea.

31/2

hp

Fat applicator

ea.

45

hp

Boiler

Mill B

Mill B '

62.7

tons per day

83.6

tons per day

1 ea.

75 hp

Hammermill

1

ea.

100

hp

Hammermill

1 ea.

25 hp

Pneumatic conveyor

1

ea.

25

hp

Pneumatic conveyor

2 ea.

71/2 hp

Vertical mixers

, 11/2 ton

1

ea.

15

hp

Horizontal mixer,

1 ea.

60 hp

Pellett mill

11/2 ton

1 ea.

50 hp

Pellet mill

2

ea.

75

hp

Pellet mills

1 ea.

151/ hp

Pellet cooler

2

ea.

101/2

hp

Pellet coolers

1 ea.

10 hp

Crumbilizer

2

ea.

10

hp

Crumbilizers

1 ea.

31/2 hp

Fat applicator

1

ea.

5

hp

Fat applicator

1 ea.

60 hp

Boiler

1

ea.

80

hp

Boiler

2 ea.

1 ea.

1 ea.

1 ea.

1 ea.

1 ea.

1 ea.

2 ea.
1 ea.

Mill C

125.42 tons per day

75 hp

50 hp

20 hp
100 hp
125 hp

101/2 hp

151/2 hp

10 hp
5 hp

1 ea. 125 hp

Hammermills
Pneumatic conveyor
Horizontal mixer, 2
Pellet mill
Pellet mill
Pellet cooler
Pellet cooler
Crumbilizers
Fat applicator
Boiler

ton

Mill D
174.18 tons per day

2 ea.

100

hp

Hammermills

1 ea.

60

hp

Pneumatic conveyor

1 ea.

25

hp

Horizontal mixer, 3 ton

2 ea.

100

hp

Pellet mills

1 ea.

125

hp

Pellet mill

2 ea.

101/2

hp

Pellet coolers

1 ea.

151/2 hp

Pellet cooler

3 ea.

10

hp

Crumbilizers

1 ea.

5

hp

Fat applicator

1 ea.

200

hp

Boiler

261.28

3 ea.

100

hp

1 ea.

60

hp

1 ea.

30

hp

2 ea.

20

hp

3 ea.

125

hp

1 ea.

100

hp

3 ea.

151/2

hp

1 ea.

101/2

hp

4 ea.

10

hp

2 ea.

5

hp

1 ea.

250

hp

Mill E

tons per day

Hammermills
Pneumatic conveyors
Pneumatic conveyor
Horizontal mixers, 2
Pellet mills
Pellet mill
Pellet coolers
Pellet cooler
Crumbilizers
Fat applicators
Boiler

ton

Mill F
348.37 tons per day

3 ea.

125

hp

Hammermills

3 ea.

40

hp

Pneumatic conveyors

2 ea.

25

hp

Horizontal mixers, 3 ton

4 ea.

125

hp

Pellet mills

1 ea.

100

hp

Pellet mill

4 ea.

151/2

hp

Pellet coolers

1 ea.

101/2 hp

Pellet cooler

5 ea.

10

hp

Crumbilizers

2 ea.

5

hp

Fat applicators

1 ea. 300 hp Boiler

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