No. CT-91/l THE COMPETITION TRIBUNAL IN THE MATTER of an application by the Director of Investigation and Research for orders pursuant to section 92 of the Competition Act R.S.C. 1985, c. C-34, as amended;
AND IN THE MATTER of the acquisition Holdings (Canada) Limited of 56% of he c6mmon'.. . sliare·!:r···· of Canada Packers Inc.
L B E T W E E N: E ~=-- :·· l 7 lt:~ ;· JJ . : l D - ~~C!ST;~:,;c - ~~tGISHi ·.nt { ---·---- ···--· -------··--__o _r_TA Vl A, o:tr. /-9r{,f)-THE DIRECTOR OF INVESTIGATION AND RESEARCH
Applicant, - and -HILLSDOWN HOLDINGS (CANADA) LIMITED, MAPLE LEAF MILLS LIMITED, CANADA PACKERS INC. and ONTARIO RENDERING COMPANY LIMITED
Respondents
REPLY AFFIDAVIT OF PROFESSOR MICHAEL TREBILCOCK I, Professor Michael Trebilcock, of the City of Toronto, in the Province of Ontario, MAKE OATH AND SAY:
1. I have been retained by Maple Leaf Foods Inc. to provide my opinion on the competitive implications of the merger between Maple Leaf Mills Inc., Rothsay Rendering Division and Canada Packers Inc. (now Maple Leaf Foods Inc.), Orenco Rendering operation on the rendering industry in Ontario. My background and qualifications are described in my ealier affidavit, which was filed by the Respondents on August 2, 1991.
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- 2 -2. Attached hereto as Exhibit "A" to this my affidavit is a true copy of my reply to the rebuttal affidavits of Thomas W. Ross and David o. Smith, filed by the Applicant on
August 23, 1991.
3. Attached hereto as Exhibit "B" to this my affidavit is a true copy of a computer database printout of an article entitled "Fat City", from the July 10, 1989 issue of Forbes magazine.
4. Attached hereto as Exhibit "C" to this my affidavit is a true copy of an article entitled "Renderers Bite the Bullet" from the January 1990 issue of Chemical Business.
5. Attached hereto as Exhibit 11 0 11 to this my affidavit is a true copy of an article from Ontario Farmer of August 29, 1990.
-· Sworn before me at the ) City of Toronto in the ) Provi~~r of Ontario ) this IJ.ljiday of S"S'J'iatt/1991.) 97000/1-2
This is Exhibit "A" to the Reply Affidavit of Michael J. Trebilcock, Sworn before me on the 'fL day of September, 1991
PROFESSOR MICHAEL J. TREBILCOCK
97000/3
1. The purpose of this reply is to address points made in the rebuttal affidavits of Professor Thomas Ross and Dr. David Smith.
I. Evaluating Mergers 2. In paragraphs 23 to 32 of my affidavit sworn on August 1, 1991, I explained why, in my opinion, this merger should be evaluated in the light of what will happen in the future, should the merger be blocked, rather than by comparing the immediate post and pre-merger scenarios, particularly in a case where an industry is undergoing important changes in demand, cost, and/or technology.
3. Professor Ross in paragraph 12 of his rebuttal affidavit appears to agree with this approach.
4. However, Dr. Smith appears not to accept this conceptual framework. In paragraph 4 of his rebuttal affidavit, he argues that the Tribunal "does not need to base its analysis and judgment regarding this merger on forecasts of future rendering activity. The competitive process, and its underlying market forces, should determine the number and configuration of competitors".
5. However, as I pointed out in my original affidavit, this approach is inconsistent with the explicit rejection of a structuralist approach to merger review in the Competition Act. Dr. Smith's view appears to leave no important role for mergers in the rationalization of a declining industry.
6. In paragraph 8 in his rebuttal affidavit, Dr. Smith appears to assume that the rationale for mergers in a declining industry is to prevent assets from exiting the industry. In
- 2 -fact, the rationale is exactly the opposite: mergers provide a vehicle for orderly contraction, rationalization, and exit. The alternative rationalization process involves individual firms, in the face of declining demand, gradually starving to death (bankruptcy).
7. Dr. Smith's view is contradicted by evidence of the extensive role played by mergers and acquisitions in the contraction and rationalization process in the rendering industries in the U.K. (described in paragraph 17 of my original affidavit) and in the U.S., where aggressive acquisition strategies by companies like Darling have resulted in major rationalizations and closures of facilities. (See attached articles, "Fat City", Forbes Magazine, July 10th, 1989 (attached to my reply affidavit as Exhibit "B") and "Renderers Bite the Bullet", Chemical Business, January, 1990 (attached to my reply affidavit as Exhibit "C").)
8. Dr. Smith,· at paragraphs 15 and 16 of his rebuttal affidavit, largely dismisses evidence of rationalization processes and resulting high concentration levels in the rendering industries in the United Kingdom and the United States (and I would add in every other province in Canada). Rather, he suggests, that the case has to be made that relevant markets and entry conditions in these other jurisdictions are comparable to those in Ontario and implies that each geographic market with respect to rendering must be analyzed in its own terms.
9. While I, of cou~se, do not deny this latter implication, in my view, ignoring similar structural changes observable in the U.K., the U.S., and every other province in Canada in this same industry seems to reject conventional methodology in industrial organization analysis.
- 3 -II. Declining Industry 10. I have already acknowledged in my original affidavit, in paragraphs 29 through 31, that mergers are not invariably the most efficient vehicle for resource reallocation in a declining industry, but that, on the other hand, depending on the reasons for the decline, in particular industry contexts they may perform an important role in this respect. That they have done so in the rendering industry in other jurisdictions without objection or opposition by the relevant anti-trust authorities is, in my view, reason to closely examine the specific characteristics of the meat rendering industry in Ontario and elsewhere, and the larger meat industry of which it is a part.
11. Whatever their differing views as to the role of mergers in a declining industry, both Professor Ross, in paragraphs 3 and 4, and Dr. Smith, in paragraph 3 of their respective rebuttal affidavits, question whether the industry is in fact in decline.
12. Professor Ross states in paragraph 4 that much turns on how one defines the industry. If the industry is defined as all captive and non-captive renderable materials, including both red meat and poultry, then given projections of substantial growth in Ontario poultry production and modest growth in pork production, the rendering industry in Ontario, as broadly defined, may not be in decline. However, most poultry and pork rendering is presently undertaken on a so-called "captive" or integrated basis by the poultry and pork producers themselves. In the Director's application to the Tribunal, the focus of concern was on the free market red meat rendering industry, which is overwhelmingly comprised of renderable beef material.
- 4 -13. Dr. Smith, in paragraph 3 of his rebuttal affidavit, is inclined to doubt even that the beef industry is in a process of decline. If we are focusing on the Ontario (not global) beef industry, this claim is contradicted by the evidence adduced by various experts before the Tribunal in these proceedings, which shows that between 1980 and 1990 in Ontario the beef kill rate has declined from 24,000 head a week to about 12,000. Professor van Duren in her affidavit projects further, albeit, somewhat more modest declines over the next five years (about 20% in total). Her projections are cautious relative to others that have been made.
14. For example, Kevin Grier of the Ontario Ministry of Agriculture and Food, the author of the study, Ontario Beef Packers Situations Outlook, cited in paragraph 9 of my original affidavit, in an interview reported in the Ontario Farmer, Tuesday, August 29th, 1990 (attached to my reply affidavit as Exhibit "D") states, "the number of cattle being killed in the province will probably decline from the 14,000 or so per week we are seeing now to 8,000 or 9,000 head per week five years from now". A decline of beef cattle slaughter from 24,000 head per week to 8,000 or 9,000 per week over a fifteen period constitutes a declining industry.
III. Evaluating Divestiture 15. Dr. Smith in paragraph 20 of his rebuttal affidavit is under a misunderstanding as to the point I sought to make in paragraph 34 of my original affidavit. The table reproduced there from the September ~O, 1990 presentation by Canada Packers to the Bureau of Competition Policy was intended to describe the merger scenario five years from now. The point I sought to make was that the relevant counterfactual against
- 5 which this merger scenario should be compared is the divestiture scenario five years from now.
16. In making this assessment, a central question is likely to be the capacity in the non-captive red meat rendering industry five years from now relative to projected supply of renderable red meat material. According to the evidence, the supply of non-captive renderable red meat material (beef and pork) will decline by about 3% a year over the next five years while there will be a significant increase in the supply of renderable poultry material (mostly captive). In comparing the divestiture scenario five years out with the merger scenario five years out, the central issue is whether, in the event of a divestiture of Orenco, Rothsay is likely to commit all or most of its capacity to rendering poultry and perhaps to a much smaller extent pork (mostly on a captive or integrated basis).
17. Professor Ross, in addressing the divestiture scenario in paragraph 14 of his rebuttal affidavit, argues that Rothsay may be able to continue to exert some competitive pressure on Orenco (if divested) through Rothsay's ability to switch from rendering poultry material to rendering non-captive red meat by-products. Dr. Smith makes the same point about relative ease of switching from poultry to red meat or vice versa.
19. The costs of processing both red meat and poultry material are not confined to switch-over costs but also entail significant costs of establishing or maintaining collection facilities for both categories of material, given that they
- 6 come from different sources. If there is excess capacity in the non-captive beef rendering industry, it is not clear that it would be either privately or socially efficient for Rothsay to make or maintain investments in heavily under-utilized collection facilities.
20. Professor Ross, in paragraph 15 of his rebuttal affidavit, goes on to suggest that in the divestiture scenario, Rothsay might well expand its Moorefield plant in an attempt to retain as much of their profitable business as they can. However, he previously conceded, in paragraph 6 of his affidavit sworn July 31, 1991, that regulatory barriers to expansion were likely to be substantial. Moreover, if one assumes, as the evidence seems to show, substantial and growing excess capacity in the non-captive beef rendering industry, it is not clear why it would be rational for Rothsay to invest resources in plant expansions which, because of their specialized nature, represent sunk costs. Other firms in the non-captive red meat rendering industry have already incurred these sunk costs, and can afford to price their services accordingly.
IV. Output Markets 21. I accept the point made by Professor Ross in paragraph 16 of his rebuttal affidavit and Dr. Smith in paragraph 23 of his rebuttal affidavit that whether this particular merger is blocked or not will have no significant impact on the competitive health of output markets in the rendering industry. However, two points should be considered. If anti-trust authorities in other jurisdictions had consistently blocked mergers in the rendering industry, cumulatively one would expect that there would have been an effect on the competitive health of output markets. In
- 7 deciding what is an appropriate policy towards this merger, it does not seem inappropriate to ask whether this policy could withstand extrapolation to merger policy in rendering markets generally. Second, whatever the impact of merger policy on the output market for renderable material, I reiterate the point made in paragraph 42 of my original affidavit that by denying the merging parties in this case the substantial efficiency gains from rationalization that anti-trust authorities have conceded to similar parties in all other countries risks creating significant production cost differentials. Over the long term these differentials may impair the competitive status of the rendering input market in Ontario. While neither Rothsay nor Orenco may be failing firms, the dynamic perspective that I have urged as appropriate in my original affidavit places a much stronger emphasis on what firms in the rendering industry in Ontario will have to do over the longer term to remain viable competitors in their output markets.
V. Trade off Analysis 22. Professor Ross, in Section B.1 of his rebuttal affidavit, develops a dominant firm model for the rendering industry in Ontario that generates predictions of very substantial price increases for rendering services by Maple Leaf Foods in the event that this merger is permitted. These very substantial price increases in turn generate predictions of very large dead-weight losses that outweigh the efficiency gains from the merger estimated by Professor McFetridge in his evidence. Again, this approach reflects a preoccupation with static considerations. It assumes that the dominant firm will be able to act as a pure monopolist. Indeed it is not clear what constraints are recognized in Professor Ross' model on how high the dominant firm can raise its prices. Specifically, Professor Ross appears to assume that no credible threat of
- 8 entry is likely to exist, either in the form of expansion by existing firms e.g. Darlings, Banner, Schneider, an increase in interprovincial or cross-border competition, integration by presently non-integrated meat packers, greenfield entry by new entrants, or smaller abattoirs forming co-operative rendering operations.
23. It was precisely this set of considerations that led the U.K. Monopolies and Mergers Commission in its report on Animal Waste to conclude that in the event of PDM making consistently high prof its, it was likely that market forces would emerge that would restrain them from becoming excessive (see pages 99, 100): "In the long run slaughterers would appreciate that the remedy for exploitation would be in their own hands, and barriers to entry would not be insuperable". It is also to be noted that Professor Ross, in speculating about the magnitude of possible price increases in his dominant firm model, adduces no empirical evidence as to the realism of these speculations.
24. Following the conclusion of the U.K. Monopolies and Mergers Commission, noted above, it is my view that credible threats of entry in fact discipline price increases for rendering services by dominant firms to substantially below the kind of levels that Professor Ross derives from his model, which assumes away any reaction function altogether. Indeed, as I pointed out in paragraph 40 of my original affidavit, in the only inquiry of this kind into this issue, the Monopolies and Merger Commission found that PDM, which in 1984 held a 50% market share of the rendering industry in the U.K. (compared to a 6 or 7% market share for the next largest competitor) had not engaged in rnonopsony pricing (see Chapter 9).
97070/1-8
This is Exhibit "B" to the Reply Affidavit of Michael J. Trebilcock, Sworn before me on the 'f{-., day of September, 1991
PROFESSOR MICHAEL J. TREBILCOCK
97000/4
Services of Mead Data Central ~ ; PAGE 20 6TH STORY of Level 2 printed tn FULL format. Copyright <c> 1989 Forbes, Inc.; Forbes July 10, 1989 SECTION: INVESTING; Pg. 70 LENGTH: 868 words HEADLINE: fat ct ty BYLINE: By Howard Rudnitsky HIGHLIGHT: The Sass brothers are best known for their investments 1n oil wells and Hollywood's Walt Disney Co. Their latest play is a lot less glamorous, but no less reward tng. BODY: THE RENDERING OF animal waste is hardly a business that comes to mind when investors think of 500% annual returns and s 180 million special cash dividends. But not many investors are as shrewd as Sid and Lee Bass of Fort Worth, Tex. Together with Equitable Life, Drexel Burnham, "ichael Milken, Richard Rainwater and Edward (Rusty> Rose, among others, the Bass brothers three years ago bought Chicago-based Darling-Delaware Co., one of the largest and oldest fat rendering outfits in the country. Since then Darling has increased its market share from 12% to 31% and paid its owners a special one-time cash dividend of s 180 million. That's nothing to turn your nose up at. Darling Co. was, and ts~ the rendering business' royalty. Founded by the darling family, the company has been rendering the fat of hogs and cattle since the 1880s. Heirs of the Swift meatpacking fortune, through a trust, were investors in Darling as well. These old-line families had learned that there was big money to be made tn the smelly business of processing animal waste and restaurant grease tnto products like tallow, yellow grease and bonemeal. The Bass brothers might never have gotten involved 1f tt weren't for a division among the private company's several hundred shareholders. Some holders wanted the company to pay out its excess cash. Others, including former chairman Edward M. Bakwin, wanted to use the company's cash hoard to diversify into other businesses. His goal was to offset the sharp margin swings of the highly cyclical rendering business and, Eakw1n says, to avoid the threat of antitrust action. Frustrated in his efforts to get the shareholders to go along, Bakwin tried to raise a 90 million from Harris Trust to buy the company h111self. That's when the Bass brothers gpt wind af Darling. Dealmaker Richard Rainwater, then working for the Basses, heard about the fat renderer from fellow Texan William Shirley. Shirley owned a rendering plant in Dallas and a tiny stake in Darling. Thus, Shirley learned early on that Darling's o~n managers ~ere trying to buy the company cheap. Rainwater, realizing how difficult it would be to break into the tight circle of Chicago's old-money set, turned the job over to Edward Rose, the llard-nosed president of Dallas-based Cardinal Investment Co. LEXIS~ NEXIS~ LEXIS~ NEXIS
. SeC-Oces of .M. ead Data Central ' ~ PAGE 21 <c> 1989 Forbes, July 10, 1989 With the backing of the Basses and the other investors, Rose offered I 96 million for Darling, some s 6 million more than Bakwin's bid. To Bakw1n's chagrin, shareholders chose Rose. The I 96 million seemed a rich price back in 1986. Darling's earnings from operations that year were only s 6.5 million, down sharply from I 17 million in 1985. But the new investors had put up only s 12 million tn cash and asserts and borrowed the rest from banks. "oreover, they saw hidden value. Darling itself was flush with I 22 million tn cash, most of which tt didn't need to run operations. On top of that, the new owners were able to quickly sell off nonrendering businesses like oil and gas operations, raising about s 10 million. Thus, the net cost of owning Darling's rendering business was one-third less than the original I 96 m1llton price tag. Next came the strategic maneuvering. First off, Darling's headquarters was moved to Dallas and Shirley was put in charge. Then Shirley sold his Dallas company, Sterling Byproducts, to Darling for s 3 million in cash and some stock. Shirley led Darling on an acquisition spree, buying up 17 rendering plants for about s 71 million in all. The aim was to increase revenue and profits and cut overhead. It worked. The company's revenue has jumped to I 459 million pro forma in 1988, from about s 197 million in 1986. Darling now has 31% of the noncaptive render1ng market, up from about 12% before the buyout. Earnings from operations increased to s 34 million. True, interest costs ate up more than that. However, cash flow remains strong. The payoff: Late last year Darling's new owners reckoned they had more equity capital in the business than they needed and decided to pay shareholders a o1v1dend -- a whopping I 180 million. The fact that Darling didn't have the s 180 million in cash on hand was no problem. Darling, though it was already saddled with I 173 million in debt, si~ply borrowed some I 150 million more to help fund the huge payout. The new lenders at first were reassured by Darling's substantial cash flow --s 37 million even after annual interest charges cf s '2 s1llion. This year, however, with gross margins declining, Darling's lenders have toughened covenant requirements: Equity must be increased to I 160 million in 1996, far more than 1t 1s currently. Cash flow coverage and working capital ratios have been tightened as well. But such problems are nothing as compared with the gains already realized. What's Darling worth? Richard Rainwater estimates Darling's current value to be about s 200 m1111on. So, for an original investment of I 12 m1111on 1n cash, the Basses and their fellow investors got a S 180 million dividend and the largest independent rendering company in the country. Okay, it's a smelly industry. But for those returns, smart investors can hold their noses. 6RAPHIC: Illustration, no caption, Raul Colon <c> 1989 Forbes, July 10, 1989
LEXIS~ NEXIS~ LEXIS~ NEXI~
This is Exhibit "C" to the Reply Affidavit of Michael J. Trebilcock, Sworn before me on the tft.. day of September, 1991
A Commi ion , etc. G-£PR I-£ Vt '-I/ PROFESSOR MICHAEL J. TREBILCOCK
97000/5
I r· t -.. :.:~ CASSELS & GRAYDON . . m , M e A o T N ERIA O L E O E B G TA f INED BY 70 1 LIBRARY _________________ • a at uae restricted to animal fee1l, steel lubri· factants in its detergent fonnulas. Ex-•• cants, and aoaps and ol•!ochemicals, ports, a large chunk of production. are ZL where they compete with th•! coconut and vital to US renderers. pahn oil. Losing the domestic laundry soap mar· MARKETS Health<anscious, f&t-surfeited North ket had a tremendous impact on the busi-Americans and Europeans hive shifted to ness, explains Kent Brady, director of in· unsaturated vegetable oils for cookin(, ternational marketing for the National and from laundry bar soap to liquid and Renderers Association (Washington), powder deterrents. whose ~ member& include renderers Now, even aoap and pe?'Sl>nal care for- and their customers. "Before WW II, mulators in the US may lH starting to most ot our members were small soap-Renderers move away from tallow to '·tgetable oil- maken who rot into rendering to get bued fatty acids. -c:o.meti ::s customers their raw materials, then bad to get out of teem to like the idea that these oils are soap," he says. Some, 1uch u Tucson Tal-Bite the not uaociated with Jiving things," u- low 4 Soap Co. (Tue.son, AZ> retain plain& Brian Shaufbnessy, marketing ~p" in their namea, though they no Bullet inanarer of performance rnaterials tor lonpr make it. oleochemicala producer Unichema Ironically, insu.f!icient tallow supplies Chemicals, Inc., Chicaio. helped push the move to synthetic deter-B ~" AGNrr SH' A~• ~ He aays the movement away from tal· genta during the war yean, e.xpla.ins CJ' ,._, MA&.19 1 low may follow the path tal:en by whale Lewis Spiegal, 1 Westchester, NY-based 1penn oil wax, which V.'IS replaced by jo-i• broker who buys tallow and grease for F S ince the Second World War, pe- joba oil in US cosmetics b the 1970&. domestic resale. c, troleum derivatives and sweeping Mainstays for today's anima ~ fats market Since then, renderers have been forced t- changes in the US meatpacking are in the Third World, where laundry to con5olidate, their numbers falling from !r industry have sharply altered the domes- bar aoap is still used, and in .rapan, which 600 renderers to 60 v.ithin the past 30 rt tic fat-renderin& business. Animal tats, use& biodegradable tallow acid-based sur- years, Spiegal notes. There were 32 in the <I once found in everything from bullet car- Metropolitan New York area alone. Now, tridge casings to laundry· and hand bar Soap-making method• hive changed he says, only four remain-three of them '· IO&ps and cooking oil, today find domestic llttl1 1lnce the days of tht colonl1t1. export only. 11 J. : .e. is >f ),
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Rendering, or extracting the oils from eattJe, hogs and chicken carcasses, is now c&nied on by the remaining independent companies, and in-house, by the ~or ilau&'hterhouses. The oil extracted from cattle ii known u tallow~ble it ex- tracted under the supervision or • De- partment or Agriculture inspector, ined- ible it nol Pure bog fat is known as lard, and mixtures of lard, chicken fat and vegttable oil are referred to u anase. The two largest independent renderers are Darling-Delaware (Matamoras, PA) and Baker Commodities, Inc. (Loe Anae- Jes, CA). Christopher Rolland, Darline- Delaware'a executive vice-president of marketing, says his company, in buaineas since the 19th century, produces tallow, pa.se, proteins, and petfood and ~ cesses cattle hides at 50 plants throughout North America. Darling-Delaware ex- ports roughly 30 percent of its yield to 35 oountries in South America, the EC, Pa- mic Rim, and Middle East. Among US soaper and chemical compa- ny C111tomers are Lever Brothers Co., Inc. CN ew York), Armour-Dial, Inc. (Phoenix, AZ), Unichema, Andrew Jer- rens Co. (Cincinnati, OH), Henkel Corp.'a Emery Division (Cincinnati), Akzo Chemie America CChicqo, ll.) and Procter It Gamble (Cincinnati). Rolla.nd agrees that rest:I"llcturlng bu trimmed the industry nnks. •rw e've probably been responsible for a Jot or that," he says, noting his company's fairly , qgressive acquisition schedule. · Georie Congleton, vice-president or marketing at competitor Baker, traces consolidation, not only to weakened soap markets ·and a leaner bleat ·industry, bUt to a &hart.age of raw materials. In the old days, carcasses were sold to supermar- kets and butcher ahops, and independents bought ICl'Bps to make into lats. Today, more alaughterhowses are bi!hming, cut- ting and packaging the meat themselves before shipping, leaving less for atnaller independent renderers to rJean. Today's three leading meatpaciw.- pnt Conagra, Cargill, Inc. '1 Excell Corp (Minneapois, MN) &nd IBP, CHouston)- also render fats, aellini them to the inde- pendents onshore, Ind exporting. Rick Stevena, marketing manarer with Cona- an'• Armour Products Division, 11)'1 his company's rendered fat sales are split evenly between independent.a onahore and the Japanese. How a.re these fats extracted? The be- lie proce58, ll!in& heat, has remained un- changed for centuries, although fairly re- cent improvements have made plants more tneJ'i)' efficient. Cofllleton aays a move from batch to PAGi: 40 • CHEMICAL 8US1NESS • JNIJAllrf tllO
continuous processing took place a.bout 25 years ago, using low-temperature equip-ment designed by Jack Keith, one of Ba-ker's original owners. Keith Engineering and Dupp1 Co. (Germantown, OH> formed Duke Systems (now, along with Keith En&inffring, part of Dupps) to build the new plants, which replaced the old cooldng-vat extractors with steam eoill. Outlining the process, Rolland saya, ·fat ia ateam-ext.racted, then centrifuged, ilmilar:cl dried, purified, and~ ftltered and tMeached. It ia difficult to eat.ima.te the am01.111t or fat rendered in the US each year, since pat.ha from abattoirs to restaurants and retail stores to renderers may convqe. Illustrating t.he problem ia yellow grease, a rendered commodity traded abroad; it combines tallow, chicken and pork irease, vegetable oil from slaughterhouse Jeavings and restaurant waste. In 1988, USDA statistics show 4.5 bil· lion pounds or rendered fats were aold in the US, and 2.9 billion pounds were exported. Aruma1 feed accounted for 42 per-cent orthe market, ao&ps, for 16 pereent, and lubricants, 10 percent. Bureau or the CeMUS monthly reports show that over 103,000 tons or edible lard and 808,000 tons of edible tallow were con1Umed in food-related uses in the US over the ftrst nine months of 1988. An-other 1,179 million tons of inedible tallow were concurrently 'used in industrial ap-plications, along with 36,000tons of ech"ble tallow and 25,000 tons of lard. Roughly 58 percent or the inedible tallow went into animal feed, 23 percent into f&tty acids, 16 ~ent into glycerine and _ aoaps and the remainder, into lubricants and odds and ends. Exports of tallow and grease ran over 100,000 tons a month in l98S, estimates Rolland of Darling-Delaware, to 1.2 mil-lion tons, or 35 percent of a total annualized 1988 consumption of 3.4 million tons. From October through June of 1989, Census Bureau firures ahow tallow and arease exports or716 million pounds, and lard sales of 38 million, down 64 percent and 56 percent, respectively, from the aame period or 1988. End usera in the chemical industry aay that through most of the 1980s, tallow pricing made it more attractive than palm or coconut oil in soap and chemical applications. "Back in the 1970s," explains Rolland, "palm oil was seen as the 'oil of the future', and a replacement for tallow, but customen mf ood markets have lost en-thusiasm be<:ause of its high saturated fat content." In 1988, it cost $60 per ton more than tallow, which now r.ms from $300 to $350 per ton, depending on grade.
I • 5 This year, the cost gap is narrowing ran to only 12.5,000 tons. Given more comand veretable oils may move into more TALLOW AND plicated cuatoms procedures and risks en-,. aoap and detergent applicationa, but tailed with less-than-accurate weighing l there is a perfonnance difi'erence be--PERESTROIKA and analysis at (.'UStomer plants, the cost ) tween tallow and vegetable oils in soap ~- ·Miners' strikes which r:iged across of US tallow sold in Egypt was raised, !l formulations. Althourh hydrorenation and most Emtian cuatomen shifted to :> makes vegetable oils more like tallow, the .the USSR last )'W' might seem to the much cheaper palm atearine. e animal derivative bas a solubility that :have little to do with animal tat brr :\ most cannot beat, explains chemist Grer ·port.a and less with ortho:lox Hmdu-India has also proven to be a politically charpd market base since the Sepoy Mu-., Filches.ser, project manarer at Andrew ilm, yet both played parts int.be up- tiny, 19th century India's first nunbling ' Jergen's Soap Division, "Tallow-based .heaval. Lac1c or aoap anc'. detergent of nationalism, where Indiana aerving in :1 IO&ps are renenlly 10lid at room tem- supplies were a major part or the the British army ?WJed to fire bullets perature and stable, and don't diaaolve ~problem, and It.ill plague the Soviet coated with animal fat. (Firing required .r too quickly." Union. India had alw&ys been a ma- biting off coatings offensive to Hindus and e C:OConut oil's latherinr Ind deanlni jor 1upplier of bar aoap to the Muslims since they contained both tallow :i properties are better than tallow's, how- . yss~ce it banned bnporta of and lard.) ever, Fitchesser says, IO a combination of ·.tanow six years ago, urn.for presslll'e In 1984, Indira Gandhi banned imports ' the two is needed to optimize product per- .~from the Ja .ins, it has not teen able to of tallow into India, effectively des~oying t tbrrnance. In todays hand soap formula- inake enough soap to expc1rt, and the the country's cottage soap-making indus-it tions, he adds, typical tallow-to-coconut Soviets have had to look to other try. The ban, Brady explains, came from e oil loadings, depending on brand and man- aources. political pressure. The Jains, orthodox ufacturer, range from a 50/50 split to 85 Hindus, accused a local vegetable oil pro-,. parts tallow to 15 parts coconut oil. ducer of using tallow in its formula. Even n In 1988, roughly averaging monthly thetics are encroaching on •>me markets though the accuaation did not hold, tallow .- consumption figures through September, and intrigue abounds. became a volatile issue, and the ban , still ... coconut oil accounted for 26 percent of Egypt's government, for example, in force, has been a main factor mt he ~ total domestic oil consumption for soap ltrapped for foreii?l exchanre currency, USSR's acute aoap shortage, since the produetion, and tallow for 72 percent; the ~ Soviet Union has been a leading buyer of s balance was made up by palm and tall oils. Indian soap. :i In fatty acid production, tall oil ac- Bangladesh may provide a new market e counted for 59 percent of raw material for food-grade tallow, which looks and s use; tallow, 84 percent, and coconut (with tastes like the local ghee, or clarified but-... a tiny amount of palm) oil for the balance. ter, but costs 30 percent less than vegeta-. r . ; Tallow accounted for roughly 81 per- ble oD alternatives. ~ Brady puts it, un-cent of the oils used as industrial lubri- saturated fats are not really a concern e cants, with lard, tall oil and some castor where many in the population are under-oil making up the balance. nourished and only 6 pounds of fat are l- With growth in most of tallow's US added to the average diet, compared with 0 markets, at best saturated, or at worst, 60 pounds in Europe and the US. d declining, exports will remain the only dy- The slaughtering proeess used in the 8 _namk outlet for renderen, who elolely US; although it laclts the ritual, confonns monitor developments abroad. to M~lem "hilal" methods, and, thus r Since a quota on US tallow exports was should' be acceptable to most Banglades lifted three year& ago, the EC should re- ahis, Brady says. The strict inspection re-l- main a stable market for US material, quired for tallow make it less likely than I- NRA's Brady aaya. Europeu exports all Yeietable oil to be adulterated with lard. ;. but dried out last ye.ar, Brady relates, u NRA hopes to capture 50,000 tons of ... West Gennany reclass~ed its customs the 850,000 ton edible oil market in that d cate(Ories and Spain extended Gennany'a country Within twQ years; With Jay Wald ban on tTS hormone-treated beef imports ter Thompson in India, feasibility studies it to tallow. ~ are under way and a promotional confer-e Start.in& with yellow areue, and later ~ ence will be held in Dacca in March.· extendinr thi.! to tallow, West Germany Ch1ng11 In m11t dl1trlbuUon have Long-term, Eastern Europe and the y moved what had been a 2 percent duty to 1h1rply altered th• rendering fnduatry. USSR may be next, since people in this N 12 percent. The rest of the EC followed. part of the world 1till use animal fats and n In response, the US threatened a $15 has announced that it will no :onger subsi- butter for cooking. "US renderers had be-i- millioc retaliatory duty on European ex- dize laundry bar soap prod Jetion. Last come mired into viewing tallow as an in-I- port.a to the US, an amount which Brady .May, subsidization ahrank .&om 100 per- dustrial food product-now we aee its poe aaya pales in comparison with the $45 mil- cent to 55 percent, and will b! phased out tential abroad for table use," says Brady. lt lion in sales they l0&t last year. Spain baa entirely this year. This, combined with Despite depressed markets, thia "low '"' 1ince accepted US tallow exports, and shaky econorruc conditions has depressed tech" industry has continued to survive Lt West Germany has agreed to rH!tablish imports of US-processed ·;allow from in an age of advanced composites and 'e the original 2 percent duty. 250,000 tons to under 150,000 tons over petroleum products, but renderen will " The Third World still otf'ers opportuni- the past four yean, Brady 1:ays. continue to look oveneas for new oppor-tlea, according to Brady, althou1h syn- Last year, Brady aaya. 1& es 1o Egypt tunities. am JANUARY 1890 •CHEMICAL BUSINESS• ltAGl 'I
This is Exhibit "D" to the Reply Affidavit of Michael J. Trebilcock, Sworn before me on the ~f"' day of September, 1991
PROFESSOR MICHAEL J. TREBILCOCK
97000/6
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