STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
CASE NOs. 92-3038
92-3039
92-3040
SUGAR CANE GROWERS COOPERATIVE OF
FLORIDA, INC., ROTH FARMS, INC.,
and WEDGWORTH FARMS, INC.,
and
FLORIDA SUGAR CANE LEAGUE, INC.,
UNITED STATES SUGAR CORPORATION,
and NEW HOPE SOUTH, INC.,
VOLUME III
and
FLORIDA FRUIT AND VEGETABLE
ASSOCIATION, LEWIS POPE FARMS,
W.E. SCHLECHTER & SONS, INC., and
HUNDLEY FARMS, INC.,
Petitioners,
vs.
SOUTH FLORIDA WATER MANAGEMENT
DISTRICT,
Respondent,
and
MICCOSUKEE TRIBE OF INDIANS OF
FLORIDA, the UNITED STATES OF
AMERICA, FLORIDA DEPARTMENT OF
ENVIRONMENTAL REGULATION, and
FLORIDA WILDLIFE FEDERATION,
Intervenors.
_____________________________________________________________
DEPOSITION OF
DR. LEO C. POLOPOLUS
_____________________________________________________________
ACCURATE REPORTING
A/K/A
MACDONALD COURT REPORTING SERVICE
204 West University Ave., Suite 7, Gainesville FL 32601
(904) 373-1126 ù (800) 329-1133 ù FAX (904) 375-6249
Pursuant to due notice, the deposition of the above-
named witness was taken by the Respondent-Intervenor, the
United States of America, before Mary Macdonald, Court
Reporter and Notary Public, State at Large, at 204 West
University Avenue, Gainesville, Florida, on April 14, 15, and
16, 1993.
APPEARANCES:
KEITH E. SAXE, Esquire, United States Department of
Justice, Environment & Natural Resources Division, General
Litigation Section, Post Office Box 663, Washington, D.C.
20044-0663;
RICK BURGESS, Esquire, and SCOTT D. LIEBERMAN, Esquire,
Peeples, Earl & Blank, One Biscayne Tower, Suite 3636, Two
South Biscayne Boulevard, Miami, Florida 33131;
PATRICK S. COUSINS, Esquire, Popham, Hail, Schnobrich &
Kaufman, Ltd., 4000 International Place, 100 Southeast Second
Street, Miami, Florida 33131;
CAROL RAEPPLE, Esquire, Hopping, Boyd, Green & Sams,
Post Office Box 6526, Tallahassee, Florida 32314;
ALSO PRESENT: Lonnie L. Jones, Ph.D.
Grace Johns, Ph.D.
William Boggess, Ph.D.
416
I N D E X
SWORN TESTIMONY OF: PAGE:
LEO C. POLOPOLUS
Direct Examination by Mr. Saxe 417
EXHIBITS:
Polopolus' Exhibit No. 26
Document entitled "Supply Response of the
Florida Cane Sugar Industry and Related
Policy Implications" 462
Polopolus' Exhibit No. 27
Document entitled "Impact of New Technologies
on Sugar Cane Production and Processing in the
United States, 1970-89", written by Jos‚ Alvarez
and Leo C. Polopolus 475
417
Thereupon, the deposition of LEO C. POLOPOLUS was
continued on April 16, 1993, commencing at 9:00 a.m.
DIRECT EXAMINATION (continued)
BY MR. SAXE:
Q Good morning, Dr. Polopolus.
A Good morning.
Q Just a reminder, as a formality, you continue to be
under oath as a continuation of your deposition.
A Yes.
Q When we adjourned yesterday we were wrapping up a
discussion of treatment of baseline analysis and I just had
another couple of questions that I wanted to ask you on that
topic.
To be absolutely clear, on Exhibit 22, on Page 75,
the third table that summarizes the initial analysis
performed for the Governing Board presentation and Funding
Council in August.
A Yes.
Q All the figures in this table concerning lost
acreage and the resulting lost jobs and revenues were
baseline figures subtracted out of these numbers?
A The baseline analysis was conducted in all of that
analysis. We showed it in our August presentation, it's not
presented here, where there was a baseline, which had no lost
acreage. So that the impacts that are demonstrated on this
particular page, as well as our reports in August, show the
"net effect" of the impact of the regulations of imposing
assessments, if any, the BMPs and STAs.
Q Then is it the case that all of the impacts that
are shown on this table, in your opinion, are attributable
solely to the consequences of the SWIM regulations?
A All of the impacts that are shown at the bottom
table of Page 75, of our December 16th report, as well as our
reports of August 7th and August 13th, show the net effects
of the regulations that SWIM Plan would impose on sugar and
vegetable and sod growers.
Q Was the baseline evaluated with respect to your
assumptions on price?
A The baseline was not varied when those regulations
were imposed. So that within the baseline, as the Hazen and
Sawyer report, within the baseline analysis, there are a
series of assumptions that are made in the Hazen and Sawyer
analysis with respect to price and with respect to cost and
with respect to the factors that impinge on what would likely
happen to the economy absent these regulations of the
District.
So the purpose of the December 16th analysis, in
the middle block, was to demonstrate not the impact so much
of the baseline analysis, with respect to varying the
assessment rate, but to show the impact of varying the
baseline assumptions.
If I'm making myself clear.
For example, what is missing in the middle set of
tables, on Page 75, what we should have presented was for the
thirty-five dollars and ninety-five cents per ton with trend,
a twenty-five dollar assessment, we should have shown the
baseline analysis that corresponded with that.
If we had done so, we would have discovered,
without any reservation on my part, that in the baseline,
attached with that set of assumptions there, would have been
all the acreage remaining.
So, with respect to that particular scenario, I
feel confident that the net effect of taking out a hundred
and five thousand nine hundred and ninety-seven acres, at the
price level of thirty-five dollars and ninety-five cents a
ton, with price trend at one point seven percent, price
increase per annum, and the twenty-five dollar acre
assessment, and the STAs and the BMPs, that the hundred and
five thousand acres represents the net impact of the
regulation.
Q Okay.
A Then the next row should have had a baseline
corresponding with that.
Then the third one should have had a baseline
corresponding with that.
But the purpose of this demonstration was to say
that in the baseline analysis one should have been careful
with respect to the assumptions, with respect to price and
price trend. That's the point of that particular table.
We say this is what would happen if you assume that
price, this is what would happen if you assume the other
price, with no trend, and what happens if you didn't augment
the price and you get differential impacts.
Q Okay. In the baseline that I think you indicated
was run but not denominated on the third table. . .
A Yes.
Q . . .for the August ÄÄ or reflected in the August
presentations, were all the corrections made, corrections as
you would describe them, for the flawed assumptions and
methodologies that are described in the top of this?
A Yes, they're done in the baseline, although the
corrections that we described at the top are incorporated in
our baseline, so that when we analyze the impact of the
assessment, the BMP and the STAs, impact is the net impact of
that.
We're not changing prices and assessment rates at
the same time, those already have been done when the baseline
analysis was carried out.
Q Do you remember what the lost acreage figure was
for the baseline?
A In which one?
Q For the August presentation.
The third table summarizing the August
presentation.
A Okay. In the baseline there was no lost acreage.
Q So if I understand correctly, after you corrected
for the alleged effect of omission of income taxes paid by
growers, omission of debt carried by growers, in your
opinion, improper purchase of machinery in 1994, cash without
any debt, the improper use of FLIPSIM modeling technique, the
absence of risk in the sugar cane yield of model farms.
A Yes.
Q And all the rest of those listed defects.
A Yes.
Q You achieved results in which no acreage left
production?
A That's correct.
Again, I would defer to Dr. Richardson, who ran
these particular models and would have all the specific data,
but that's my understanding of our baseline.
Our baseline incorporated all these corrections and
there was still no acreage that was absent, which makes the
main point of this analysis and the point we were trying to
make in the December 16th presentation, is price level
assumptions in the baseline and price trend assumptions in
the baseline are very, very important in the determination of
economic impact of the regulations that might be imposed by
the District through the STAs, BMPs and the assessment.
As we look back to the August presentations we find
that the BMP analysis at that time had an impact on acreage
lost with the STAs of approximately twenty-five percent of
the acreage, with no assessment.
MR. SAXE: Rick, we would like to have
produced those documents, either in the possession
of Dr. Polopolus or Dr. Richardson, that show the
baseline analysis that can be produced without
compromising specific individual farm economic
data.
MR. BURGESS: You're talking about for the
August presentations?
MR. SAXE: For the August presentation, yes.
MR. BURGESS: There are none in Dr. Polopolus'
possession. We will have to make a response.
So I haven't seen them and they're not going
to be on the privileged list, because they're not
in his possession.
In responding to Dr. Richardson's notice, we
will look at them and see if, in our mind, they are
subject or not subject to the protective order.
What I can guarantee you, Keith, is that they
will be ÄÄ if privilege is asserted, they will be
asserted sufficiently in advance to allow you to ÄÄ
because I know it's a point of contention to allow
you to bring it to the hearing officer's attention,
and have it resolve before Dr. Richardson's
deposition.
MR. SAXE: Okay. That does raise one
procedural question there. There's arguably some
grounds for confusion about production date with
Dr. Richardson's documents, but the notice went out
on the same date as Dr. Polopolus'.
When can we expect the production of Dr.
Richardson's documents?
MR. BURGESS: Well, we're in the same
position, with respect to Drs. Suko, McFaee and
Blocker. We have not received their documents,
because of the pending stay negotiations, and those
depositions are also to take effect during the
stay, so they have to be renegotiated.
I would propose that we, however we decide to
handle these depositions, that were going to take
place while the stay is in effect, that we go from
three weeks before the depositions take place for
the due period of the documents and one week in
advance for the privileged list.
MR. SAXE: Under the agreed procedure for the
production of documents, and the timing of
production of documents, I believe Dr. Richardson's
document production came due under the original
notice date for his deposition, before you filed
your Motion for Protective Order and before the
stay negotiations were an issue. So I don't think
the impact of the stay negotiations gives any
explanation for the failure to produce Dr.
Richardson's documents before this deposition.
MR. BURGESS: Well, we had discussions aplenty
about Dr. Richardson's situation, that he has not
even been in his office for the ÄÄ when the
original notice came out, for me to talk to him or
even be in a position to review his documents, and
because of his conflict with the state and the week
that his deposition was set, we agreed to move his
deposition to May 10th, I think, which May 10th now
occurs during the stay.
I'm going to use the period of time during the
stay to review his documents and to respond to your
notice.
What I'm promising is that there will be a
response sufficient to bring to the hearing
officer's attention, because I know that you are
interested in it; however, we are interested in
protecting the confidentiality and not compromising
our position under the protective order.
MR. SAXE: I understand that.
MR. BURGESS: So what I want to do is comply
in sufficient time, while we discuss the resetting
of the depositions, to allow you to have any
decision on your entitlement to those documents in
advance of Dr. Richardson's deposition.
MR. SAXE: Thank you.
BY MR. SAXE:
Q Dr. Polopolus, did you review the results of the
baseline one that was prepared for the August presentations?
A I did see some of the results of the baseline.
Q And your testimony is that after the corrections
for all the reported flaws and incorrect assumptions, that
are described on Page 75 of Exhibit 22, the results in the
baseline involve no acreage leaving production.
A That is my understanding.
Q Okay. When I asked you about whether you reviewed
the results, did you personally see results which indicated
to you that no acreage left production in the circumstances
that I just described?
A I know that this table, Exhibit No. 16, on Page 29,
which is entitled, "Price-Cost Squeeze Effect Baseline
Scenario for Twenty-five Percent Debt", that if you look at
that particular scenario you see that in that particular
graph that the annual average cash receipts slightly exceed
annual costs in the year 2003, and this graph was based upon
our baseline analysis.
Q So then let me get back to my question.
Did you personally see documents that established
in your mind that all the allegedly flawed assumptions and
methodological errors were corrected, without any regulatory
impacts, that no acreage left production?
A I believe, to characterize my experience in that
regard, was telephonic communication that I had with Dr.
Richardson regarding the baseline scenario and what was the
likely or ÄÄ well, not only the likely, but what was the
outcome of those results with respect to acreage remaining or
acreage being taken out and, if I recall, the telephone call
back in late July of 1992, the answer to that question was
that there's no acreage that is exiting after we have
accounted for and adjusted for the assumption of taxes and
debt and so forth.
Q Do you use the same three-stage analysis and same
assumptions in constructing the baseline that you ÄÄ I mean,
you with Dr. Richardson, that were used in running the
subsequent regulatory impact. . .
A It is.
Q . . .analysis.
A I defer to Dr. Richardson, but that's my
understanding.
Q Did you see the output from those FLIPSIM runs?
A No.
Q Referring to the graph on Page 29 on Exhibit 16.
A Yes.
Q Is this a hypothetical graph or is that based on
actual data?
A This is based on actual data.
Q From a projection?
A These are model data, but they represent, in my
view, the nature of our findings in the baseline.
Q So, in other words, the projection that this graph
reflects was the baseline analysis that you understand was
performed by Dr. Richardson, prior to the August
presentations?
A It's my understanding that this summarizes, in one
graph, what was happening to revenues and costs in the
baseline, in the analysis that we conducted.
Q What is on the vertical axis, I guess that's what
it is, on that graph.
A Those are dollars in thousands.
Q Do you know what type of costs were included in the
cost curve?
A Again, I defer to Dr. Richardson for the
preparation of the data that are involved in this particular
graph.
They are average unit cost data.
Q What variables, reported on the vertical axis, is
that a percentage of something?
A No. These appear to be average annual receipts of
model farms and average annual costs of the model farm over
the baseline, assuming twenty-five percent debt.
Q When you say that reported on the vertical axis is
dollars in thousands, that would be dollars in thousands per
acre?
A No, no, it's not.
Q So this figure here would be six thousand thousands
or six million dollars.
A Yes. We said it represented a model farm, not an
average per unit of production.
Q So then this would reflect a model farm for which
the revenue under the price model was six million dollars for
that model farm in 1994?
A That's correct.
Q Okay. Do you know which model farm?
A I defer to Dr. Richardson for which model farm was
selected for that particular graph.
Q To be clear, is it your understanding that the
graph is a result of a FLIPSIM run?
A That's my understanding.
MR. BURGESS: For the record, I would point
out that Dr. Polopolus' graph that we're speaking
of is on the page where Dr. Polopolus has testified
that he doesn't intend to rely on for purposes of
his testimony on any of the data in this August
report, other than the first section of that
report.
BY MR. SAXE:
Q Dr. Polopolus, earlier we were on Page 74 of this
Exhibit 22, and we were talking about the issue identified
with respect to the Hazen and Sawyer ten-year study,
concerning the farm survival criteria.
A Yes.
Q I want to ask you a few questions about that,
amplify on your testimony yesterday and the day before.
In your opinion, does a change in land ownership
always imply a change in land use?
A Not necessarily.
Q In what circumstances would a change in land
ownership cause a change in land use?
A When that newly applied owner is unable to cover
his costs.
Q What costs would those be?
A Primarily the cost ÄÄ the variable costs, but in
the sense of a debt repayment, in the sense of other factors,
there might be other extenuating circumstances.
Q Can you elaborate on that?
You say primarily variable costs. Tell me what
kind of circumstances would include fixed costs in the
operative costs that might cause a new owner to take land out
of production.
A Well, I defer to Dr. Richardson, who is the FLIPSIM
expert in how one argues about the two operations, besides
quasi-rents, but in my view one can get to a point in the
aggregate of the EAA where one finds it impossible to obtain
adequate credit or adequate resources to continue an
operation, to pay the cash living expenses, for example, of
the farmer.
Q And those would be fixed costs?
A Well, they're not fixed costs. One has to eat.
Q How would this happen, the failure to apply the
credit necessary to continue in production?
A Well, if the financial community at large ÄÄ if the
community and the aggregate looked at the EAA and saw the
trend in economic agricultural enterprises were going in a
negative direction, it's possible that the trend, the
expectation effect of negative declining returns, if it's
clear as your face that the expectation of getting to the
point of total variable costs exceeding total revenue is
there, the banks and even the producers themselves may choose
not to continue that land in production. If the expectation
of profit, in the sense of quasi-rents, is going to turn out
to be negative.
So expectations become a part of the answer.
Q Is it your testimony that SWIM impacts would be the
future expectations that would cause a bank to expect
negative declining returns?
A It's possible, very possible.
Q Can you say why?
A Well, if the operation is showing a marginal quasi-
rent now, but given the expectation of SWIM's assessments and
SWIM's BMPs, adding to that cost, then the question becomes:
Will I be able to survive after those SWIM effects are taken
into effect? And when I say "we" I mean collectively the
agricultural community of the EAA.
Q So then it would be your testimony that banks might
shut down farmers, even while total revenue exceeded total
cost?
A If the expectation was that the SWIM Plan would
have a devastating effect on economic viability.
Q Would banks shut down a farmer in such
circumstances, in the hypothetical, without believing that
they had a more profitable use to put the land to or a
potential buyer for the land, who could continue in
production?
A I think we are assuming ÄÄ we did assume, as we
modeled the December work that was prepared for our
discussion with Hazen and Sawyer, we did incorporate in that
analysis. . .
I lost my train of thought.
Would you repeat. . .
MR. SAXE: Would you read the last question,
please?
(Thereupon, last question so read by reporter.)
ANSWER BY DR. POLOPOLUS: I was going to say
that in our December 16th analysis, if you recall
my testimony yesterday, we did assume that the
small farms would be acquired and that there would
be a transfer of small farm ownership, as defined
by Hazen and Sawyer, to the larger farm. The
question becomes: Now that we're ÄÄ let's assume
that now all the land is held by one or two or
three or four, but a very small number of large
farms, and let's say that in that scenario that the
likelihood that the profit rates are ÄÄ and profits
here I mean the quasi-rents ÄÄ are very close to
negative, but they're still positive, and then we
add to that scenario the likelihood of the SWIM
Plan where we add assessments.
I believe I read some of the statements of Dr.
Johns in a presentation at a Governing Board
meeting where the average cost of that plan was
eighty-three dollars an acre, but, whatever that
number is, let's assume that the cost of the SWIM
Plan is eighty-three dollars an acre. Now, what
would that do to the financial community if you're
already teetering on the brink of economic
disaster, close to meeting the Hazen and Sawyer
rule of land use going out, and you add to that
eighty-three dollars an acre, because of the SWIM
Plan, how will the financial community react?
My professional opinion would be that they
would react: Maybe this is not the place to add
new resources.
BY MR. SAXE:
Q Dr. Polopolus, let me get back to the question, if
I could.
We started out by probing into those circumstances
in which bankruptcy will lead to land going out of
production.
As I understand the last question that you just
gave, you indicated that your treatment in the analysis thus
far, I think you were referring to the early initial
analysis, correct me if I'm wrong, if the analysis was done
also for the December 16th meeting, but as I understand your
testimony, you're saying, in effect, that when small farms
went bankrupt, it was assumed that they were acquired by
large farms.
So that I have it clear, that's not a circumstance
in which the bankruptcy leads to land going out of
production, correct?
A No. We did not assume that the land went out of
production in that sense.
Q Right.
Then you said that ÄÄ then in your answer you moved
on to those circumstances, when basically there was, as I
understood it, all land had been consolidated into a few
large farms?
A That was a hypothetical scenario that I presented.
Q Well, I'm trying to understand when bankruptcy
leads to land going out of production, in the hypothetical
that you have given. So far the small farms went into large
farms, so land didn't go out of production.
A Right.
Q Now we have large farms.
Can you take me from there and tell me in what
circumstances land ÄÄ that large farm owned land would go out
of production where total revenue exceeded total costs, but
there was expectation of declining revenues?
A What is your question?
MR. SAXE: Would you read the last question?
(Thereupon, last question so read by reporter.)
ANSWER BY DR. POLOPOLUS: The point is that
total revenues will not exceed total operating
costs, given the impact of the SWIM Plan and the
point we try to make here is that the manner in
which we have been utilizing FLIPSIM is to be more
conservative than Hazen and Sawyer, arguing that we
will keep the farm in production, even when quasi-
rents are negative.
BY MR. SAXE:
Q What I'm asking is. . .
A And so when you add that FLIPSIM impact it would,
most likely, cause that total variable cost or total
operating cost to exceed total revenue.
Q What I'm asking though is when will it ever be the
case that land goes out of production while total revenue
exceeds total costs?
MR. BURGESS: I think he's answered that
question in each of the last two days, when he said
in his opinion it would not. . .
MR. SAXE: In his opinion it would not?
MR. BURGESS: Not.
MR. SAXE: Not.
BY MR. SAXE:
Q Is that correct, Dr. Polopolus?
A Well, I made one exception to that, and that is
when there is the expectation, clear expectation, that the
immediate direction is very negative.
Q So in that limited circumstance, land might go out
of production even while total revenue exceeded total cost,
and that limited circumstance would be when there was a clear
expectation of it.
A That that would happen.
Q Okay. In that limited circumstance, where land
might go out of production, that land going out of production
would be a function of bank foreclosure or lender
foreclosure, lender shutting down the land?
A Not limited to that.
Q What other circumstances?
A Well, the individuals themselves, they take a look
at the capital that may be left and the land values that may
be left and they look at the opportunity cost of that capital
that they may have and they may try to apply that capital, if
possible, in alternative uses, which would likely have a much
higher return.
Q Would they sell the land or would they simply idle
it, retain ownership, but not do anything with it?
A Either possibility.
Q And would it be your testimony, in this limited
circumstance, where total revenues exceed total costs, but
there's an expectation of declining revenues, the buyers of
the land might not continue production on the land?
A First of all, in the scenario we've painted, we're
talking about huge investments. We're talking about huge
investments and one would have to see who would enter to the
question of entry. It's not a question of entering normally
in agricultural production where we're talking about a fifty-
acre farm and a fifty-acre farm goes out of business and will
there be a replaced entrant taking over, what we're talking
about in this scenario, that we have painted, with relatively
few large farms remaining, who has the production expertise,
the capability and the financial resources to enter?
So this would create a rather constraining barrier
to entry and one would have to assess whether or not there
are investors who would be willing to enter.
Now, that's an empirical question where one would
have to try to make that determination and, in my
professional opinion, if these large and previously efficient
operations are unable to make a go of it, why would I want to
risk my capital in this declining enterprise?
Q Are you saying that all farmers make less than
eighty-three dollars an acre in quasi-rents?
A Pardon?
Q Are you saying that all farmers make less than
eighty-three dollars an acre in quasi-rents?
A It depends on the set of assumptions and the point
of time that you're talking about.
Q In the EAA.
A Again, it depends on the set of assumptions and the
point in time in which you're talking about.
Q I'm speaking empirically, in real live conditions
in the EAA.
A Again, we're talking about economic impact over a
ten-year scenario and to take focus on economic returns in
one period of time. It doesn't do justice to an economic
analysis.
Q How about now in the present?
A What do you mean?
Q Quasi-rents, are farmers making less than eighty-
three dollars per acre in statistical fiscal year 1992-1993?
A Some might, some might not.
Q So then would it be your testimony that you're
confident that not all farmers are making less than eighty-
three dollars per acre?
A I don't know the data.
Q Do you know what current quasi-rents are in the
EAA?
A I defer to Dr. Richardson's data for that. That's
not something that I follow.
Q Do you disagree with Dr. Johns' estimate of an
average of three hundred and twenty-seven dollars per acre
returns to land?
A I don't. . .
Q For the period '86 to '90?
A I have not reviewed ÄÄ I have not analyzed his
work.
Q So you have no opinion on the veracity of
those. . .
A No.
Q . . .conclusions?
A I have not tried to valuate.
Q Are you familiar with any instances in the United
States where there were significant numbers of farm
bankruptcies in a region?
A We have gone through various periods in American
agriculture where there have been bankruptcies.
Q And can you identify for me instances where there
were regional bankruptcies on a significant scale that
resulted in land going out of production?
A Well, we can talk about Alachua County.
Q Okay.
A At one time it was famous for cotton production and
we were leading in the state ÄÄ the leading county in the
State of Florida, in cotton, but there were economic
circumstances that led Alachua County out of cotton a little
bit after Reconstruction.
So, I mean, we can take all kinds of scenarios, all
types of history and we know that history is replete with
areas that may not have gone bankrupt, but land may have been
idle.
So one has to look at a combination of factors in
land use.
Land use patterns change in American agriculture
and it's possible that land use patterns could change in the
EAA.
Q Is that always the case in those instances where
bankruptcies lead the land going out of production, that
there's no next-best use for the land when the land goes out
of production?
A There's always some use for the land.
The question is, what economic use?
One use of the land is to idle all of it. Some
people may prefer that. Another use is to utilize the land
in a productive way to provide employment, income, economic
opportunity.
Q Would banks foreclose on both land and machinery
loans, based on expectations about the future?
A I would defer to Dr. Richardson, because I'm not a
financial expert.
Q Just for clarification.
Earlier in your testimony you were referring to
banks shutting down production. Could you just explain to
me, for the record, what you mean by shutting down
production?
A Cease making new loans.
Q Why would there be any value left in the land and
machinery if total costs exceeded total revenues?
A There would be scrap value in machinery.
Q In a farmer's decision-making process, what factors
would cause the farmer to idle land as opposed to changing
the use of land?
A Excuse me, I lost the first part of that question.
Q In a farmer's decision-making ÄÄ economic decision-
making, what factors would cause the farmer to idle land as
opposed to changing the use of the land, except for idle, as
defined as a use?
A Better off-farm employment, alternative employment,
looking at the human resource now, in terms of how that human
resource might be employed, relative the use of that human
resource managing land.
Again, American agriculture is replete with
examples and I think we find that the larger percentage of
American farmers spend more time off the farm than they do on
the farm, and in those scenarios, in many situations, there
is less intensive land use to seek higher total family income
by what is called sometimes off-farm employment.
Q Is this true for the EAA?
A I don't think that's completely characteristic of
the EAA.
I'm speaking of American agriculture in general.
Q Dr. Polopolus, did you teach advanced production
economics at Louisiana State University in 1963?
A Yes, I did.
Q So that I understand the relationship between your
testimony today and the work that has been done so far, in
preparing for the August presentations and the December
meeting with Hazen and Sawyer.
Is the theory that you're describing here today,
namely a limited set of circumstances in which bankruptcy
might lead the land going out of production, even while total
revenues exceeded total costs, is that treatment the same
treatment that was used by the team in the analysis done for
the August presentations?
MR. BURGESS: Object to the form.
MR. SAXE: Grounds?
MR. BURGESS: It's compound and I lost my
train of thought.
MR. SAXE: Okay. Let me try to clarify it.
BY MR. SAXE:
Q In the analysis that was performed for the August
presented analysis results, was the land taken out of
production only in a limited ÄÄ was land taken out of
production where there was change in ownership, only in the
limited set of circumstances that you described?
A I'm not sure that I understand the question, but I
believe I have answered this several times about the criteria
that we used, both in August and in December, in determining
when land went out of production.
I believe that I have said several times that land
goes out of production, according to a three-step process,
which goes beyond total variable costs exceeding total
revenue.
So the hypothetical that you're talking about of
let's assume total revenue exceeds total operating costs, it
doesn't properly and fairly characterize our analysis.
Q Okay. Let me just read you some statements and if
you would tell me whether you agree or disagree with them.
MR. BURGESS: Tell us where you're reading
from.
MR. SAXE: From my own notes.
BY MR. SAXE:
Q Under the twenty-five dollar per acre assessment,
the market value of the land would fall.
Is that true or false?
MR. BURGESS: Object to the form.
BY MR. SAXE:
Q Do you agree that under the twenty-five dollar per
acre assessment, as analyzed thus far by you and Dr.
Richardson and Peterson Consulting, and whoever else has done
so on behalf of the League, that the market value of the land
would fall?
MR. BURGESS: Object to the form.
ANSWER BY DR. POLOPOLUS: I defer to Dr.
Richardson, who conducted the FLIPSIM analysis and
made the computations of land value under that
scenario, but one would have to look at what was
land value before the twenty-five dollar assessment
and what it was after the twenty-five, and make a
determination as to what happened to land value.
My guess is that the additional twenty-five
dollars assessment would reduce land values by a
tad.
BY MR. SAXE:
Q Do you know what Dr. Richardson assumed happened to
land values in the twenty-five dollar per acre scenario?
A No, I do not.
Q Are you familiar with the market value of
agricultural land in the EAA?
A I have read some material about it, but I'm not an
expert on land values in the EAA.
Q Do you have any understanding of what some
representative values of land in the EAA are?
A I haven't read any contract or I have not seen any
contract or read any information regarding current sales of
land, if that's what you are referring to.
Q All right. Speaking in the hypothetical, can you
tell me what levels of agricultural income, in the sense of
residual returns to land and risk, would result in the EAA,
in land values at three thousand dollars per acre?
A Well, land valuation has been used to
capitalization methods, as opposed to market methods.
I thought your line of questioning at first was
trying to consider the market valuation of actual sales.
If one uses the capitalization formula as a basis
for determining land value or imputing the land value, it
doesn't mean that land sold at that value, but that land has
that inherent value.
It's basically for agricultural land. It's capital
value or ÄÄ excuse me, quasi-rent divided by the level of
interest rate or risk associated with that investment. That
assumes that the asset is an asset that is producing in
perpetuity and that's generally the assumption we make in
agriculture.
Q Is agriculture use the highest and best use of land
in the EAA?
A I believe it is.
Q In your understanding, is a market value and use
value, in the EAA, yield the same numerical value?
A Not necessarily.
Q Is there a significant variation?
A There could be.
Q If there's perfect information on the part of the
market, is there significant variation?
A If there is perfect knowledge, perfect information,
by both buyers and sellers, there should not be a large
discrepancy.
Q So, theoretically, if ag use is the highest and
best use of land in the EAA, whether you use the use
valuation method of arriving at a value, or a market
valuation approach, you should get roughly the same total
value?
I guess, returning to my question, if you gave me a
number, tell me and I'll apologize, but could you tell me
what level of residual returns for land and risk would be in
the EAA, that would support or result in a use valuation of
three thousand dollars per acre?
I have a calculator, if you would like to use that.
A I don't need a calculator for that.
Q Okay.
A But one has to take two pieces of ÄÄ the equation
if capital value is equal to quasi-rent, divided by the rate
of interest. That's the equation.
Q Okay.
A You said that the land value is three thousand; is
that what you said?
Q Yes.
A If assuming that the capital value is three
thousand dollars per acre, what is unknown at that point is
the quasi-rent and what is unknown is the level of risk of
interest rate.
So we have two unknowns and only one known.
Okay. So economists debate about the rate of
interest.
So what is the market rate of interest to
appropriately use, in analyzing this land valuation for the
EAA?
Well, one would have to say: What is the risk
associated with agriculture investment in the EAA?
Possibly without the SWIM Plan the level of risk
might be minimal. It could be that given the possibility of
the SWIM Plan the risk factor might change.
So you have to forecast through this scenario of
SWIM Plan: What is the likely risk? And attach that risk to
the level of interest.
In my view, the likelihood of SWIM Plan adds
uncertainty and adds risk.
So whatever the prevailing market rate for long-
term funds are, I would add some degree of risk to the
denominator of that equation.
So what level of risk? What's the number? I don't
know, but let's say a high level of risk in today's money
market would be ten percent. So if we assume ten percent,
given the returns on funds, and add a high level of
additional risk due to the SWIM Plan, then I come out with ÄÄ
if that's the level of risk, and given the constraint that we
have land value at two thousand an acre, net returns of three
hundred an acre would produce three thousand dollars.
Q And that ten percent interest rate, in your rough
analysis, would that be appropriate in the SWIM scenario? In
other words, that reflects the high risk that SWIM entails?
A I would have to give some thought to that and I
would have to confer with others who are more expert in land
valuation and appraisal than I am.
But for purposes of this discussion, that seems
reasonable to me.
Q That would be ÄÄ the three hundred dollar figure,
that would be net to land only?
A That's the return to land.
Q Do you know what the present capitalization rate is
for ag use valuation in the EAA?
A No.
Q Okay. Dr. Polopolus, I'd like to flip the page to
77, of Exhibit 22.
A Okay.
Q And talk about the issue identified as mill
efficiency.
A Yes.
Q The first observation by Dr. Polopolus and Dr.
Richardson listed in that column so titled is:
"No increasing trend in mill efficiency."
Does that represent your observation or opinion?
A That may be reaching a bit, a little bit.
Q Well, I guess my first question is ÄÄ I think I
understand where your answer is going, but let me break it
down.
Was that your language when this document was
prepared?
A Dr. Richardson and I were involved in the
preparation of that language and I'm trying to recall the
circumstances under which ÄÄ and the factors under which that
particular phrase was prepared, but I believe in the
discussions we had with Hazen and Sawyer on that day that
this was presented to her.
I believe we were more concerned in talking about
the inaccuracies that Hazen and Sawyer had conducted in
establishing the rate of mill efficiency.
So I think it's a question of degree rather than a
question of yes or no.
Q Would you define mill efficiency for me?
A Yes, that refers to the cost of mill cane, either
on the basis of cuttage of cane or on the basis of raw sugar
produced.
Q When you say cost of mill cane, what costs? Which
costs do you mean?
A Those are the costs that are involved in the
processes associated with milling: receiving the sugar cane,
preparing the sugar cane and slicing it, extracting the
sucrose from the cane, evaporating the sucrose, producing the
raw sugar, and so forth.
Q You indicated that it would be an amount expressed
either in terms of dollars per ton of cane or dollars per
pound of sugar: I believe raw sugar.
Would the dollars per pound of raw sugar be an
appropriate measure of that cost?
A That's one way to view it, yes.
Q My question is, is it an appropriate. . .
A It's an appropriate measure.
Q All right. When I asked before about breakdown of
which costs, are you referring to total costs or variable
costs?
Well, let me rephrase that.
What I was looking for is an answer relative to the
concepts of total costs versus variable costs only or long-
run costs versus short-run costs.
Can you address that for me?
A Yes, I can address that.
Dr. Alvarez and I have written papers on that,
using publicly available data. We have written a book that
includes data on the costs of milling cane in Florida and
other parts of the United States and Canada.
There are fixed costs and variable costs and the
U.S. Department of Agriculture provides us data on fixed
costs and their costs and so forth.
Q When you said earlier in your testimony that in
reconsidering this statement "no increasing trend in mill
efficiency", you did not use the word reconsidering, but in
the context of my question, that your opinion was really that
it was a question of methodology for determining whether or
not how large a trend there is and, therefore, it was a
question of degree as opposed to existence of an increasing
trend; is that correct?
A That's correct, and as we look forward to receiving
Hazen and Sawyer's twenty-year analysis, we tend to give
additional consideration to the mill efficiency, in light of
whatever Dr. Johns provides in her report, because this is
a -- as we look forward to the twenty-year period, the
question of technology and the question of the impact of
increased mechanical harvesting and factors of that nature
453
need to be evaluated to determine whether or not the
historical trends that are well-known and can be documented
using a variety of techniques, whether those historical
trends will be perpetuated over the next twenty years.
So history, recent history, may not be a guideline
for projecting mill efficiency in the future.
When I said our observation here may be skewed a
little bit harshly, in that December 16th document, I was
referring, in my comment, too, as we looked at past history.
I'm not saying that past history would say that
there is not increasing trend in mill efficiency, but what
I'm saying is that in past history that there is a
considerably less trend toward mill efficiency than as was
represented by the Hazen and Sawyer report of July 31, 1992.
A Who estimated mill efficiency in your analysis or
in the analysis for the December 16th figures?
MR. BURGESS: Keith, do you mean estimated for
purposes of making the statement? If you don't,
then what figures are you referring to?
BY MR. SAXE:
Q Okay. Referring back to the determination of
economic impacts under the three price trend scenarios in the
second table on Page 75, I guess it is, which summarizes
454
analysis done preparatory for the December 16th meeting.
Now, who estimated mill efficiencies in this
analysis?
A I would like to answer by saying that Page 75 --
okay. Compare Page 75 and Page 77.
Q All right.
A With respect to our comments on Page 77, where we
said: "No increasing trend in mill efficiency", on the same
date.
We more appropriately made the statement, on Page
75, that the mill efficiency trend overstated, and that's
what I was trying to say this morning.
Q I understand.
A As to who did that analysis, in reviewing Dr.
Richardson's analysis, I did my analysis, Dr. Richardson's
analysis was much more refined than my analysis, in looking
at this, and I looked at the figure number in the Hazen and
Sawyer report, where the cost data per ton of cane, I
believe, or per acre, but the efficiency numbers from 1964 to
1990 there was an egression.
Q Okay.
A In reviewing the mill efficiency work of Hazen and
Sawyer, I did review the data in the chart and attempted to
relate that data to the finding by Hazen and Sawyer that mill
efficiency increased by two percent per year and -- excuse
455
me, the two percent per year appeared to be not the result of
applying the regression equation that appeared in that graph,
but it appears that that computation was based on taking
simply two values, the value for 1964 and the value for 1990,
simply dividing ÄÄ excuse me, taking the difference of those
values and dividing by the number of years as the average
rate.
If one did that one got an estimate that was
approximately two percent, but not exactly the number that
was presented on the report, but the report gave the
impression to the reader that the trend line is represented
by the regression equation, was the efficiency that was used
in the analysis.
Dr. Richardson actually did the regression
analysis with that data and discovered it ÄÄ if my memory is
correct ÄÄ that the average rate of mill efficiency over the
1964-90 period was point seven percent or something like that
per annum, not two percent.
So that leads us to the conclusion that the mill
efficiency trend in the Hazen and Sawyer report is overstated
and that is the statement that we make on Page 75 of our
presentation of December the 16th.
Q Dr. Richardson's historical period was the same?
A Using the same time period, to my knowledge, and
the same data points.
Q To your knowledge, Dr. Richardson didn't use 1951
through 1990 as the historical period.
A It's possible, but you would have to ask him
exactly.
It's my recollection that it was the same, but. . .
Q If he did use a period or if one did use an
historical period that went back before that point in time,
when the presently existing southern mills in the EAA, to
find the total number of mills in the EAA, would there be any
problems with selecting such an historical period for the
analysis?
A My understanding of mill efficiency is ÄÄ it's
possible that the number of firms in the sample may have some
effect, but more importantly there's considerable variability
in year to year in mill efficiency and that leads us to ÄÄ
and one would have to ask Dr. Richardson about some of his
other models that he used to determine mill efficiency, where
he takes the sucrose level as a variable and puts that into
the equation of mill efficiency, and my understanding is when
that operation is done, that regression equation is run, that
the sucrose accounts for most of the variability in
efficiency, not the efficiency of the plant itself.
Q Let's clarify that, if we can.
Dr. Polopolus, we're talking here about mill
efficiency. When we talk about yield trends ÄÄ when we talk
about yield, is it the case that yield would be a function of
both the tonnage of cane per acre and the amount of raw sugar
recovered of ÄÄ per ton of cane?
A Are we talking about recovery or yield on the farm?
Q Yield recovery of the mill, excuse me.
A In my view, yield recovery is the amount of sugar
that can be extracted from a given ton of cane.
My point is, that recovery rate is not only a
function of the efficiency of the mill, but of the inherent
sucrose level of cane, which is weather dependent and a
number of other factors, variety, and so forth.
Q And you refer to that as a mill recovery?
A The mill recovery ÄÄ I refer to it as just the
recovery of sugar from the ton of cane, but the factors that
lead to that recovery rate is more complex than was described
in the Hazen and Sawyer report.
Q So mill recovery, is that the same thing as
recovery rate?
A It can be expressed as a rate.
Q And recovery rate would be a function of both the
sucrose content of the cane and the technological ability to
extract that sucrose content from the cane?
A That's correct.
Q Okay. Can you break down that recovery rate into
an extraction efficient component and sucrose component?
A I didn't do that, but Dr. Richardson has done that
in his regression analysis at this point.
Q Do you have an understanding of relatively how much
effect or how much contribution was attributable to each of
those two?
A My impression, after looking at the regression
results of Dr. Richardson at a meeting that we had, was that
most of the efficiency, so-called efficiency, is attributed
to the sucrose level.
Q In your work with Dr. Alvarez, have you documented
an increasing trend in mill efficiency?
A In my work with Dr. Alvarez we have analyzed the
USDA data on both fixed costs and variable costs of Florida
sugar cane mills and compared that cost with the costs of
milling in Louisiana, Texas and Hawaii and sugar industries.
Q Okay. Going back for a moment to the work that Dr.
Richardson did and in analyzing mill efficiency.
Do you know where the data was received or derived
for the sucrose content component?
A No, I do not.
Q Okay. Is it your opinion that mill efficiency is
likely to either stay constant or decline in the future, as
opposed to increasing?
A The question, is it likely that. . .
Q Yes. . .
A The costs go up or down?
Q No. Mill efficiency.
I'm asking you whether, in your opinion, it's
likely that that mill efficiency won't increase in the
future. In other words, that it will stay constant or
decline.
A Again, for clarification, is the question will the
mills become more efficient or less efficient in extracting
sugar per ton of cane, or will the cost per unit of
production go up or down as a result of the efficiency or
inefficiency in milling?
Q You can start with the first.
A Let me start with the cost per unit.
Q Which is the second.
A Which is the second.
Q Okay.
A Cost per unit of the mills we have noted, both in
our book and our publication of a paper we gave in Miami, I
think two years ago, that the costs of milling per unit of
production in Florida has declined in the last decade. Part
of that decline is due to technology and part of that decline
is due to economics of large sales.
Now, Dr. Alvarez and I have not done an analysis to
determine which of those two had a greater impact on
declining costs.
Now, as we look forward to the twenty-year
scenario, what has not been done and what is open for
determination is the extent to which there will be new
technologies, their extent to which there will be variety
with higher sucrose levels that will permit lower unit costs,
on that side of it, the technological side of it, and there
needs to be done, as we mentioned yesterday, the analysis of
the economies of scale to determine if land is withdrawing
from production what it will do to unit costs of milling as
the scale of the industry contracts.
So those may be offsetting forces. They may be.
One of these forces may overweigh the other. That
analysis has not been done, but needs to be done, and likely
will be done, given time and resources to carry that out, and
assuming that there is some difference of opinion on this
issue with the Hazen and Sawyer twenty-year study.
Q When you say cost per unit, you mean cost per pound
or cost per acre?
A Usually, preferably, to express it in dollars per
pound of raw sugar produced.
Q Okay. When you say it has declined, due to
technology and does that include ÄÄ in other words, does your
answer refer to the development of the cane variety as part
of the technology?
A Yes, it does.
Q Okay. So would it be fair to say that you don't
have an opinion as to whether mill efficiency will go up or
down in the future?
A At this point I really don't. I haven't studied
that carefully myself.
Q All right. I want to just briefly take a look at
another document, and I'm not sure whether this was one of
the documents in your production or not, it's possible that
it wasn't.
I'm referring to a staff paper by Carolyn A.
Advincula, Leo C. Polopolus, Ronald W. Ward and Jos‚ Alvarez,
of the Food and Resource Economics Department at IFAS, dated
November 1992 and it's entitled, "Supply Response of the
Florida Cane Sugar Industry and Related Policy Implications",
and I have an excerpt of it here, which I will show you.
There's some statements on Page 34 and I'm going to read
them.
Actually, I only have one copy of this, if you
would like to read it with me.
MR. BURGESS: For the record, we provided a
copy of that paper ÄÄ is that the document?
DR. POLOPOLUS: Then I should have a copy of
it right here.
MR. BURGESS: Yes.
(Document described above, so marked as Polopolus'
Exhibit No. 26.)
BY MR. SAXE:
Q Referring, Dr. Polopolus, to what has been marked
for identification as Exhibit 26, and that is the ÄÄ would
you confirm for me that that appears to be the complete
version of the Staff Paper Series that I referred to a moment
ago?
A Yes.
Q Okay. Turning to Page 34, the paragraph, second
one up from the bottom, and I'm reading:
"The design and operation of mills in the last
twenty years has reflected an emphasis on throughput rather
than efficiency. Overall recovery rates (sucrose in sugar as
a percentage of sucrose in cane) of sixty to eighty-five
percent area common, whereas rates of eighty-five to ninety
percent could be achieved in the same mills with minor
investment and improved operating techniques.
"Moving from seventy to eighty-five percent overall
recovery would reduce sugar costs by twenty to thirty percent
depending on additional investment requirements."
A Yes.
Q Is that a fair reading of that paragraph?
A That is a reading of that paragraph, yes.
Q Thank you.
Did this express your opinion at the time of the
publication?
A Not necessarily.
I would like to place this paragraph in the context
of this document.
This paragraph is a part of a Master's thesis by
Carolyn Advincula, a graduate student, under the supervision
of myself, Professor Ward and Professor Alvarez.
The primary purpose of that Master's thesis was to
estimate supply elasticities of sugar production in Florida
and that was the main thrust of that.
As part of that thesis, Carolyn Advincula was asked
by her committee to, in addition to estimating the supply
elasticities, which we believe she did very well, with
different methodologies and so froth, she was asked by her
committee to try to put the findings of supply elasticity in
the context of public policy, and she wrote a number of
things, including that paragraph, which I don't agree to
personally, but the committee as a whole was willing to
include that in a staff paper, which clearly on the front
page says that these: "Staff papers are circulated without
formal review by the Food and Resource Economics Department."
What we're now doing with this staff paper is
circulating it for comment and we're in the process of
drafting papers, and the specific paper for publication and
public presentation, and I can assure you that that paragraph
is not going to be a part of a scientific journal article
representing our thinking.
Ms. Advincula did no thesis resource or processing
costs, that was a quote she picked up from some reference, it
doesn't represent my view of that subject at the time and it
does not represent my view of that subject necessarily at the
present time ÄÄ so it's just one of those statements that is
there and I'm a party to the statement, but not necessarily a
willing party to the statement.
Q Tell me specifically what about the statement you
disagree with.
A I don't ÄÄ what I disagree about it is the fact
that there's no substantiation of reference and no basis upon
which that statement is made. So I'm not sure that at this
point ÄÄ I'm not sure from what source that material is
derived from, but it's not derived from the thesis directly.
Q Do you know whether any peer comments have been
received concerning the staff paper?
A Dr. Alvarez and I are preparing a paper for
presentation at the sugar cane short course that will be held
in May in Belle Glade and working with Dr. Ward, Dr. Alvarez,
myself and Carolyn Advincula, we're purely focusing on our
publication documents, the sugar supply elasticity
coefficiency, not the sort of ephemeral passages in the back
that try to give implications.
Q Do you know who chaired Ms. Advincula's committee?
A I did.
Q Is not the chairperson ultimately responsible for
the staff paper?
A The committee is.
Q Would it be possible for us to get a copy of Ms.
Advincula's Master's thesis?
A Certainly.
Q Tell us of your dissent, as I called it, or your
disagreement, as you referred to it.
Did you express this disagreement in writing?
A Not to my knowledge.
Q Did you express disagreement orally?
A It's possible.
Q But you don't recall?
A I don't recall. No, I don't recall.
Q Do you know whether you expressed your disagreement
to the other members of the committee?
A I don't recall.
Q Were you Ms. Advincula's major professor on this
thesis?
A Yes.
Q But would it be fair to say that you are dissenting
now; is that correct?
A Certainly.
Q Do you know whether anyone has studied future trend
in mill efficiency on behalf of the League or within the
League?
A I'm not aware of anyone.
Q Okay. Does the distinction between extraction
efficiency and sucrose content make a difference to eighty
percent of the sugar crop?
A Would you repeat that question?
Q Given the level of integration in the EAA, between
mills and growers, does the distinction between sucrose ÄÄ
make that economic difference between sucrose extraction
and. . .
A I really don't know.
Q Okay.
A It's a good question. I would have to think about
that.
Q Do you know what the comments of the other
committee members were, regarding the paragraph that we read
into the record?
A I don't recall, I really don't. We were really
preoccupied in this thesis of the elasticity determination,
which was done very well.
Q Do you know what the basis was for the paragraph
that we have been referring to? When I say basis, I
understand that you disagree with the conclusions, but do
know where Ms. Advincula obtained the data or whatever other
support she referred to in making the statement?
MR. BURGESS: Object to the form, asked and
answered.
MR. SAXE: Let me rephrase the question.
BY MR. SAXE:
Q Dr. Polopolus, with respect to the ÄÄ getting back
to Exhibit 22.
A Okay.
Q Page 77, the issue of mill efficiency.
There's a comment there: "Need to review longer
historical period."
A Yes.
Q Does that reflect your opinion?
A Yes, it does.
Q The next comment there: "Increased mill returns
are retained by the mill."
I think we had some extensive discussion of that
yesterday in the context of price level; is that correct?
A Yes.
Q Is there anything additional to the discussion that
we had yesterday or. . .
Is there anything additional to your testimony of
yesterday regarding the relevance of increased mill returns
to determining the price level that should be added with
respect to this comment in the context of the mill efficiency
issue?
MR. BURGESS: Are you asking him whether he
recalls testimony on this ÄÄ testimony that he gave
yesterday, and asking him if in addition he wants
to add. . .
MR. SAXE: Not too broadly, but in texture.
MR. BURGESS: You don't want him to repeat his
testimony.
MR. SAXE: That's right.
BY MR. SAXE:
Q We received some testimony yesterday about the
issue of increased mill returns.
A Yes.
Q You also listed that, in support of yours and Dr.
Richardson's identification of a defect involving mill
efficiency, in the Hazen and Sawyer ten-year analysis.
A Yes.
Q Can you tell me why?
A I stand on my testimony of yesterday on this point.
Q And that is the statement concerning what has
occurred in the past?
A I believe so.
Q Is it a statement concerning what occurs now?
A Not necessarily.
Q Is it a statement concerning what will occur in the
future without SWIM? When I say without SWIM, I mean
assuming no implementation of the SWIM measures.
A As we sit here, I am having trouble recalling the
relevancy of that line to this discussion. I don't recall
well.
Q Okay. Can you tell me what would ÄÄ specifically
what should Hazen and Sawyer have done either that they
didn't do or differently from what they did, in order to cure
this defect in your opinion?
A If they had to utilize the regression coefficient
from the trend line that would have been a good step forward.
Q And how would they have walked the rest of the
distance to the proper treatment of this issue?
A Well, then they would have reviewed ÄÄ if, for
example, on the basis of Dr. Richardson's coefficient effect,
we used that as a comparison to the two percent ÄÄ one had
point one seven percent coefficiency and one continued to
argue that that would represent, in the future, increased
profits on the mill, and one model that, through that twenty-
year period, whatever the time horizon one is analyzing, it
still said at the end of the period that it would still be
that, and then made a determination of how much of that
increase would then be augmented to growers, the difference
between say a point seven and a point one seven ÄÄ excuse me,
between a point seven and one point seven added to the price,
in alternative series, we think would lead to different
baseline results in the Hazen and Sawyer study. I presume
that in the twenty-year study that this statistical issue has
been resolved, that the regression equations are demonstrated
as to what they are, what the coefficients are, what the
standard errors ÄÄ all that statistical methodology there,
and we'll just wait for that report to see whether or not we
might take issue with both the methodology and the substance
on this particular issue.
Q Is the point seven percent estimated by Dr.
Richardson exclusive of sucrose content?
A Yes. When he added, the efficiency goes to zero,
because it's non-significant, as I recall his analysis, and
one doesn't have the basis for ascribing any mill efficiency
and, therefore, the price augmentation becomes zero if one
uses that framework of analysis.
Q Similar to the question I asked a short while ago.
Given the level of integration in the EAA, is the
distinction then significant to a large percentage of the
production in the EAA, production of processing in the EAA?
MR. BURGESS: Object to the form, asked and
answered.
BY MR. SAXE:
Q You can answer.
A I would have to think about it. It's a good
question.
Q All right. Do you know what the trend in sucrose
content over time is?
A It's variable.
Q Does that mean that there is no trend?
A I have not looked at the data recently on it, but
my impression is that it's a wash, it goes up and goes down
and may or may not be a trend.
We do know there is considerable turnover in variety
and if we speak to yield variability and the sucrose content of
the varieties, what we know is that there is considerable
attrition in varieties and many of the varieties that are
commonplace today will not be commonplace a few years hence.
The question is why, and the answer is because of
the breakdown in resistance to pests and disease, and it
requires a considerable research effort on the varietal side
to maintain yield and to maintain sucrose.
So in looking at that issue, you would have to
project forward the research and development of new varieties
so that they can replace the degrading effects of the present
varieties.
Some of these points are covered in a paper that
Alvarez and I presented, so this is not news for the members
in the cane breeding area.
Q Do you know whether there has been any statistical
analysis of whether there is a trend in this sucrose content?
A I believe Dr. Richardson has done some with the
data that he has.
Q Do you know whether there was a statistically
different trend?
A I don't really recall on the trend basis of
sucrose.
Q Are you familiar with the goal of varietal research
in terms of sucrose content?
A I believe the goal is to try to increase the level
of sucrose. I don't think there's any doubt about the goal.
The problem is with the execution of the goal.
Q What specifically is the problem with the execution
of that program that's resulted in the variability that you
have described?
A What I have said is that there is attrition, there
is turnover, as we have looked at the specific variety
developed, sugar, corn, others that were developed and
released. As the industry grows, there are certain varieties
that are developed for muck land, others that are developed
for sand land, certain varieties that are developed for
mechanical operational situations, there are other varieties
that are developed for land harvest and so forth.
So there is a lot of varietal work underway and
there's a lot of transition in them.
My point earlier was that no single variety has
dominance and can maintain its viability and its yield and
sucrose content in perpetuity and. . .
Q When you say attrition and turnover, what did you
mean by that?
A Well, I'm saying that ÄÄ a release number, a
varietal number, a hypothetical number, CP-165327, that
particular variety may account for thirty percent of the cane
variety on muck in 1972, but only five percent of the cane
land that is in the muck in say '92.
Q So it's a problem of growers not continuing in
maintaining their experimental conditions.
A No, it's nature that overtakes the effect of
scientists in the application of that variety over time,
pests and diseases become more prevalent, resistance that is
bred into them wanes, new predators attack and so forth.
Q So in your opinion there has been no historical
success with increasing the sugar sucrose content?
A Weather and nature, through acts of God, appear to
have more influence on these factors than the acts of man in
the development of varieties. So it's a battle of science
versus nature here, and I'm not sure that science has won
this one.
Q Is the continual change in varieties, that you have
described, unusual among agricultural varieties in other
crops?
A In my experience it appears to be more dominant, it
seems to raise its ugly head more prominently than in say
watermelons, where I have some familiarity, or let's say the
Crimson Sweet variety, which is a standard variety, it's been
here a long time and will continue to be here a long time.
Q Dr. Polopolus, I can elect to ask you a couple more
questions about a document that was produced with your
documents, and a copy of which I'm not sure that I have
directly at hand, so I'm going to let you refer to this copy
here.
MR. BURGESS: Page number?
MR. SAXE: DPL 244.
MR. BURGESS: It's not an exhibit yet?
MR. SAXE: No.
MR. BURGESS: Do you want to have it in front
of you? I can find mine for him.
MR. SAXE: Yes, that would be great.
(Document entitled "Impact of New Technologies on
Sugar Cane Production and Processing in the United
States, 1970-89", written by Jos‚ Alvarez and Leo C.
Polopolus, so marked as Polopolus' Exhibit No. 27.)
BY MR. SAXE:
Q Dr. Polopolus, I'm showing you what has been marked
for identification as Number 27.
A Yes.
Q Do you recognize that document?
A Yes, I do.
Q Could you identify it for the record and for me?
A That's a paper written by Jos‚ Alvarez and Leo C.
Polopolus, entitled: "Impact of New Technologies on Sugar
Cane Production and Processing in the United States, 1970-
89."
Q Would you return, please, to Page No. 7 of that
document.
A Yes.
Q Under the subsection entitled "Costs of
Processing", there's a paragraph on variable costs.
A Yes.
Q It says: "Average variable costs of processing per
net ton of sugar cane and per pound of raw sugar have
remained relatively stable during the last two decades (Table
8 and Fig. 6). When 1982 is used as the base year, several
ups and down very close to the base year are portrayed. In
fact, the highest positive and negative changes are less than
ten percent. Since the data represent current, and not
constant, dollars, it is fair to state that real variable
costs of processing per net ton and per pound of sugar have
declined during the study period."
Can you tell me what that last sentence means?
"Since the data represent current, and not constant, dollars,
it is fair to state that real variable costs of processing
per net ton and per pound of sugar have declined during the
study period."
A Yes, that means that the data presented in Table 8
had not been deflated by some price index.
Q On Table 8, the number of years in the study
appears to be eight years; is that correct?
A I believe that is correct.
Q So is it the case that in this case eight years of
data have been used to find an increasing cost for sugar
processing?
A That was the framework that was chosen in this
analysis.
Q Does this document reflect your opinion on the
matters presented in the document at the time it was
published? I say published, I'm not sure if it was, I'm just
assuming that it was.
MR. BURGESS: Dr. Polopolus, if you need to
review the paper in order to answer the question,
please feel free to do so.
ANSWER BY DR. POLOPOLUS: This paper was
presented at a conference, it's not been published,
and the primary author was Dr. Alvarez, but I do
believe that the statements reasonably reflect my
opinion at the time they were prepared.
BY MR. SAXE:
Q Do declining real costs of milling reflect an
increase in mill efficiency?
A It could, but if we look at the data again on Table
8, it says per pound raw sugar, we can see considerable
variability from year to year for Florida.
The sentence that you quoted was a sentence that
related this discussion to the United States as a whole and
not to Florida, per se.
Q Is this statement, in your opinion, inapplicable to
Florida?
A It may not be. I would have to do an analysis of
it with respect to Florida and see whether or not that
similar conclusion would be reached for Florida, but the
paper addresses the United States, not Florida.
Q In theory, if real costs per net ton of cane are
dropping, does this indicate an increase in mill efficiency?
A It could.
Q Under what conditions might it not?
A I can't think of any at the moment.
Q If you return to Page 8 of this document and the
conclusion section.
A Yes.
Q Under "Conclusions", the second paragraph, the
third sentence that begins with the word "But".
A Yes.
Q And I'm reading:
"But, after considering relative shifts in acreage
and yields, it was concluded that biomass yields, although not
in a significant manner, did increase in Florida and Hawaii
during that period." Do you agree with that statement?
A Well, it says not in a significant manner, so it
did increase it a little bit.
Q Do you agree with this then?
A I agree with the way it's written. It's not a
significant increase.
Q Next sentence:
"Sucrose content increases, on the other hand, were
obvious and higher than biomass yield increases."
Do you agree with that sentence?
A That relates to the United States as a whole.
Q That does not relate to Florida and Hawaii?
A One would have to ÄÄ you know, if I recall, the
analysis that Hawaii had had higher levels of sucrose
increases than other areas, but I can't recall where Florida
waded in, in relation to Louisiana, Texas and Hawaii. The
statement refers to the United States as a whole.
Q Okay. And you don't recall whether it's applicable
to Florida?
A I can't recall. I would have to look at it.
Q How much of U.S. cane ÄÄ how much of the total
production of U.S. cane is produced in Florida?
A An increasing share.
Q Approximately how much, at this point in time, in
terms of percentage?
A That figure is in our scenario data, as well as in
Hazen and Sawyer's economic profile data, but it depends on
whether you're talking about domestic sugar production or
domestic cane sugar production.
Q With respect to domestic cane sugar production, is
it your understanding that more than fifty percent is
produced in Florida?
A Let me answer the first one first, mainly with
respect to all domestic production, Florida would account for
about twenty-seven percent and with respect to domestic cane
sugar production, Florida would be slightly above fifty
percent.
Q If you would just turn to Page 3 of this document
for me.
A Yes.
Q In the second paragraph from the bottom.
A Yes ÄÄ excuse me, what paragraph?
Q The second paragraph up from the bottom, not
including the footnote.
A Yes.
Q The last two sentences of that paragraph, and
there's some reference to other statements in the paragraph,
so I'm not trying to take it out of context, but my focus is
on the last sentence.
I'm going to read it. It says:
"The same can be said about Florida's yields, where
most of the acreage expansion has taken place on marginal
lands. Maintaining the same yield level on less productive
Florida lands is a clear sign that cultivar releases have
resulted in more sugar cane production."
With respect to that last sentence, do you agree
with that statement that maintaining the same yield level, et
cetera?
MR. BURGESS: Dr. Polopolus, if you need to
review the paragraph, feel free to do so.
DR. POLOPOLUS: I'm having a hard time getting
the context of the sentence.
BY MR. SAXE:
Q It would probably be good to look at the paragraph.
A I believe one would need to go to the second full
paragraph on that page to get an overall view of what is
trying to be discussed in this particular passage, and that
relates to yield trend, and the sentence here is:
"Sugar cane yield in Hawaii about two and a half
times, about four times, and about three times higher than
the national average, Louisiana's and Florida's respectively,
while acreages in Hawaii and Louisiana have been decreasing
and increasing in Florida (Table 4). This means that, either
acreage increases in Florida and/or yield increases
generally, have more than compensated for the acreage
declines in Hawaii and Louisiana."
I think what you read is in the context of that
thrust, if I read that properly.
Q I'm sorry, have you finished your answer, Dr.
Polopolus?
Well, let me put the question this way.
If maintaining the same yield level on less
productive lands has been achieved through new cultivar
releases, is it fair to say that on a given acre that new
cultivar releases have resulted in more sugar cane yield?
A It's possible.
Q Is it likely?
A It's likely.
Q As acreage in Florida has increased, has cane
production moved on to less productive lands?
A It's my understanding that that is correct, it's
moved on to less productive land and to some extent sand
land.
Q If the Florida state average yield has remained
constant, given that expansion characteristic, doesn't that
mean that yield on existing land must be increasing?
A Not necessarily, because I believe ÄÄ here again I
defer to Dr. Richardson, who has spent some effort in trying
to determine, at one state of our analysis, yields in what
are known as less productive lands versus yield in the Zone
Belts 1 and 2, and I believe his conclusions to me on that
score were that there is as much yield variability in what
are known as the more productive lands than there is in the
less productive lands and that through management, through
good management, essentially the same or higher yields can be
obtained in the so-called less productive lands.
So it doesn't necessarily follow that "the less
productive lands provide lower yields", it's a function of
management.
Q Wouldn't you expect that increasing yield on
existing acres would be accounting for that phenomenon?
A That could be.
Q Is it likely, in your opinion?
A It's possible, but as I said, again, it's also
possible that good management on less productive lands could
offset any liability that that land might inherently have.
Q Which do you think is more likely, is a more likely
explanation: the good management on less productive lands or
increasing yields on existing lands?
A I don't know. One would have to ask Dr. Richardson
his findings on that, but in our earlier analysis, when we
reviewed the Hazen and Sawyer report, we came to the
conclusion that the location of the land was not as important
as management and size. So it may or may not be true, and I
really don't know.
(Thereupon, a short recess was had; whereupon, the
following proceedings were held:)
BY MR. SAXE:
Q Dr. Polopolus, back to Exhibit 22, Page 76, a new
issue and that's Issue No. 3, Debt.
A Yes.
Q I want to direct your attention to the statements
under "Observations by Dr. Polopolus and Dr. Richardson" of
that column.
A Yes.
Q The first one on debt says:
"EIS. . .", which I assume that means Economic
Impact Statement.
A Yes.
Q "EIS should include analysis of debt from fifteen
to seventy percent."
Is that statement representative of your opinion at
the time this document was produced?
A This statement is consistent with earlier
statements we made about sensitivity analysis, with respect
to the debt variable, and our recommendation earlier on was
that Hazen and Sawyer should have included some ÄÄ although
they did not include any consideration of long-term debt,
they should have considered some sensitivity analysis around
debt, so that the percentages there reflected our thinking
about that sensitivity analysis, as I recall.
Q Is that reference to debt, is that long-term debt
only?
A Well, initially it was focused on intermediate and
long-term debt.
At the meeting of economists, on December 16th, and
hearing from Dr. Johns, I believe we were better informed at
that meeting about her treatment of intermediate debt.
So as we sit here today, I believe our concern now
is with the long-term debt issue.
Q Let me jump, just as a tangent and hopefully a
brief one, and then we'll come back.
In light of your testimony, if we could jump to the
next page, Page 77, issue No. 9, "Farm Management".
A Yes.
Q The first four or the first three remarks under
"Observations by Dr. Polopolus and Dr. Richardson".
A Yes.
Q "Machinery should be a mix of old and new."
"M & E," which I think the reference is machinery
and equipment.
A Yes.
Q "M & E replacement needs to be considered."
And the third statement: "Debt on machinery and
equipment should be considered."
Is it the case that those observations are no
longer representative of your opinion about defects in the
Hazen and Sawyer work?
A I really would have to defer to Dr. Richardson on
that. These are primarily his area of responsibility, as to
whether or not we would no longer have a concern about those
first three items listed on Page 77, and a lot depends on how
the twenty-year report deals with machinery and machinery
replacement and the debt on intermediate-level credit.
Q Okay. I'm talking about the ten-year report now,
and in that context, with respect to your prior testimony, I
understood you to say that on the previous page, the comment
on the debt issue, that that economic impact statement should
include analysis of debt from fifteen to seventy percent. I
believe in your testimony you indicated that at first you and
Dr. Richardson were concerned about the treatment of long-
term and intermediate debt, but then after the December 16th
meeting Hazen and Sawyer had revised your opinions with
respect to the treatment of intermediate debt.
Is it fair to say that it's your opinion now that
Hazen and Sawyer's treatment in the ten-year study of
intermediate debt was appropriate?
A I believe that ÄÄ again, I would defer to Dr.
Richardson, but I think that's generally correct, but
responding to the first two lines: "Machinery should be a
mix of old and new machinery and equipment replacement needs
to be considered," I'm not sure that ÄÄ I think those
comments remain with respect to the Hazen and Sawyer ten-year
study.
Q But the next one down, on Page 77, under the "Farm
Management" issue.
"Debt on M & E should be considered."
In your opinion that is no longer applicable?
A I believe that that's our current thinking.
Q That it is no longer applicable?
A Yes.
Q So then would it be fair to say that in your
opinion now debt on machinery and equipment was considered.
A I believe the explanation given by Dr. Johns at the
December 16th meeting clarified the intermediate term debt.
MR. SAXE: Okay. Would you read back my
question, please?
(Thereupon, last question so read by reporter.)
BY MR. SAXE:
Q Now, the question again, Dr. Polopolus.
In your opinion did Hazen and Sawyer consider debt
on machinery and equipment in the ten-year analysis?
A Again, I would defer to Dr. Richardson, who
analyzed this and places a lot of his professional
credibility on the line with this issue.
My recollection of the December 16th meeting is that
Dr. Johns presented an explanation of how she treated that and
I believe that Dr. Richardson indicated to me that he felt that
he was reasonably satisfied that Hazen and Sawyer had included
intermediate term debt in her ten-year study.
Q In your opinion, did Hazen and Sawyer properly
consider intermediated debt in the ten-year analysis?
A I defer to Dr. Richardson as to whether it was
properly considered or not.
Q When you defer to Dr. Richardson, does that mean
that you're not going to be providing expert testimony
concerning the issues which you're deferring to Dr.
Richardson?
MR. BURGESS: I think he deferred to Dr.
Richardson a number of times during the course of
this deposition and I think it's a fair question to
ask him with respect to the question that is before
him, but I think it would be somewhat unfair to
cast it in terms of the last three days where he's
voiced opinions that has in the main deferred to
Dr. Richardson, and then try to box him in to
saying now that he's going to offer no testimony on
that subject.
MR. SAXE: Understood, Counsel.
BY MR. SAXE:
Q Let me recast the question.
Will this issue, namely the treatment of
intermediate debt, by Hazen and Sawyer in its economic impact
study, whether it be the ten or twenty-year study, be an
issue regarding which you do not expect to be presenting
expert testimony, but rather Dr. Richardson, who will be
presenting expert testimony?
A I think that's a fair statement.
Q Okay. Going back to the previous page concerning
long-term debt ÄÄ concerning debt, excuse me, Item No. 3.
A Okay.
Q I'm still not clear. Are these comments, the first
comment: "Economic impact statements should include analysis
of debt from fifteen to seventy percent", does that mean that
the Hazen and Sawyer ten-year study should have included an
analysis of long-term debt from fifteen to seventy percent or
also of long-term and intermediate debt from fifteen to
seventy percent?
A It's my understanding that that sentence refers to
the combination of debt, intermediate and long-term, in that
range of, the combined debt, it's my understanding, of
fifteen to seventy percent.
Q All right. Do you know what the basis is of the
fifteen to seventy percent range?
A Not exactly, but I believe it results from Dr.
Richardson's rather vast experience of dealing with debt on
farms throughout America and that that is, from his
experience, a reasonable range within which agricultural
operations find their debt situation.
Q Is Dr. Richardson familiar with debt levels in the
EAA?
A Only generally. We publicly stated that our
criterion for debt was derived from the assumptions about
debt and not from data about debt, but that there was debt,
both intermediate and long-term, and that debt level needed
to be plugged into the analysis, and I don't think I need to
go over the analysis where this long-term debt enters,
because we discussed that several times earlier with respect
to the FLIPSIM methodology we employed.
Q Dr. Polopolus, is this an area in which Dr.
Richardson will be providing expert testimony for the League?
MR. BURGESS: If you know. It might be better
to ask him, but if you know, you may answer.
DR. POLOPOLUS: Could I have the question
repeated?
(Thereupon, last question so read by reporter.)
ANSWER BY DR. POLOPOLUS: I would assume so.
BY MR. SAXE:
Q Is this an area where you will be providing expert
testimony for the League?
A Possibly not, only as it relates ÄÄ let me qualify
that and say that in doing the aggregate analysis that I will
need to be fully knowledgeable of the FLIPSIM methodology and
the assumptions contained therein, as I conduct any
aggregation and economic impact multiplier analysis
therefrom.
So within that context, I don't intend to be an
expert on debt of individual model farms.
MR. SAXE: Would you re-read that answer,
please?
(Thereupon, answer so read by reporter.)
BY MR. SAXE:
Q Dr. Polopolus, are you presently fully
knowledgeable of the FLIPSIM methodology and the assumptions
contained therein?
A It's a question of fully. I'm knowledgeable, I
have read a lot of Dr. Richardson's manuals and books on it.
So I'll leave it to others' knowledge as to whether I'm fully
expert or knowledgeable about it.
Q Over the course of your testimony, over these last
several days, you have indicated on a number of occasions
that you would defer to the special knowledge or expertise of
Dr. Richardson on issues pertaining to the micro-farm level
impact analysis, which you expect he will be conducting
possibly with FLIPSIM, as you prepare for trial.
A Yes.
Q Is it correct that in those instances, where you
have deferred to him in your testimony, that you do not
presently consider yourself fully knowledgeable of the
methodology or assumptions that he will be using in
performing that work?
MR. BURGESS: Object to the form.
MR. SAXE: Grounds?
MR. BURGESS: Fully knowledgeable, and I think
the record will speak for itself with respect to
the instances where he has and why he has deferred
to Dr. Richardson.
MR. SAXE: I note your objection, Counsel.
BY MR. SAXE:
Q Dr. Polopolus, I'll have the question re-read for
you, but before I do that, you testified a moment ago that
you need to be, in your opinion, fully knowledgeable, those
were your words, for the FLIPSIM, and in that sense I am
asking my question about your level of knowledge.
REPORTER: "Is it correct that in those
instances, where you have deferred to him in your
testimony, that you do not presently consider
yourself fully knowledgeable of the methodology or
assumptions that he will be using in performing
that work?"
ANSWER BY DR. POLOPOLUS: Possibly the word
fully is inappropriate. I would rather use the
word reasonably knowledgeable, and for that I feel
that I am currently reasonably knowledgeable and I
do intend to have an understanding of many of the
matters that are on the table here with regard to
the assumptions used in the modeling effort, for
which I may not prepare myself for testimony in a
trial.
BY MR. SAXE:
Q I can appreciate your caution with the question.
I tell you now that I'm not really trying to
establish a lack of knowledge on your part of the matters
regarding which you have deferred to Dr. Richardson or
certainly not a total lack of knowledge.
What I'm getting at is the division of areas of the
case between you and Dr. Richardson.
So let me phrase my question with that preface.
On those issues regarding which you have deferred
to Dr. Richardson's expertise during the course of your
testimony, do you expect that Dr. Richardson, instead of you,
will be presenting expert testimony at trial?
MR. BURGESS: Object to the form. My
objection is that what the question seeks to do is
ask this witness, two and a half days into his
deposition, to recount in each instance where he
has deferred to Dr. Richardson, in one way or
another, but then thought to answer Counsel's
question along the lines of: let me say this, or
in general I think that.
I think that's an improper question for this
witness.
I think, obviously, the better practice would
have been to, in response to Dr. Polopolus'
response in deferring to Dr. Richardson, to ask him
at that time whether he intends, as he sits here
today, to offer expert testimony on this subject
matter.
Given that objection, I think it's an improper
question, but Dr. Polopolus, you can try to
respond.
ANSWER BY DR. POLOPOLUS: I believe yesterday
or the day before I described my likely role in any
litigation that might occur when and if the Hazen
and Sawyer twenty-year analysis is completed, or if
it is not completed, any analysis that we, as
League economists, might conduct, those parameters
of my role were outlined and I can restate those
major roles, if that's the question.
BY MR. SAXE:
Q That might give me a helpful predicate for
restating the question.
I believe in your testimony earlier you indicated
that in doing either a reactive analysis or, as you called
it, a positive analysis that, correct me if I'm wrong, the
expectation at this point would be that there would be first
a micro-farm level impact analysis done by Dr. Richardson,
after which you would do the aggregation to the industry
level direct impacts, and then the input/output multiplier of
the secondary impacts, and the conversion of FTEs to people;
is that correct?
A Partially.
Q Would you complete it for me so that it is
complete?
A If you recall, I qualified that by saying that in
developing the baseline that I might let ÄÄ I might lend some
of my expertise on certain assumptions in the modeling
effort, for example, price policy, international trade
policy, price level, technology and efficiency, things of
that nature, where I may have some experience to provide to
the team effort.
If I recall my statement, I said if Dr. Richardson
chooses to ask me something along that line that I will be
prepared to offer my advice and information on those, as he
develops the microsimulations.
Q Okay. Let's go down the issue chart briefly and
see if we can clarify it that way.
With regard to Issue No. 1, "Use of FLIPSIM".
A Yes.
Q Do you expect to provide expert testimony at trial
concerning the use of the FLIPSIM issue?
MR. BURGESS: As it's defined in this exhibit?
MR. SAXE: I don't believe that the issue is
defined in the exhibit.
The issue is identified in the exhibit and
there are some comments about the Hazen and Sawyer
position and observations by Dr. Polopolus and Dr.
Richardson. So, no, I can't say as it's defined in
this exhibit.
MR. BURGESS: Okay. As contained in the
observations. In other words, would he be
testifying concerning Hazen and Sawyer's position
and the Polopolus and Richardson observations, or
just in general on FLIPSIM?
If you understand the question. . .
DR. POLOPOLUS: I'm not sure I do, but
certainly I'm not going to be conducting the
FLIPSIM analysis. That's clear.
BY MR. SAXE:
Q Okay.
A The next question: Will I be commenting on the
appropriate use or lack of use of FLIPSIM by Hazen and
Sawyer's twenty-year analysis? Maybe.
Q Okay.
A So. . .
Q All right. Thank you, Dr. Polopolus.
Getting back to the debt issue.
A Yes.
Q Did you use a debt level of twenty-five percent of
assets in your evaluation of lost acreage?
A Excuse me?
Q Did you use or did Dr. Richardson or Peterson
Consulting use a debt level of twenty-five percent of assets
in your evaluation of lost acreage?
A I would defer to Dr. Richardson, but my
understanding is that that is correct.
Q Would you clarify whether that is total assets or
value of land?
MR. BURGESS: Of what is?
BY MR. SAXE:
Q The twenty-five percent.
A Total assets, I believe.
Q Okay. How were the assumptions on the debt level
of twenty-five percent chosen?
A I would defer to Dr. Richardson for the exact
answer to that, but I recall telephone discussions with Dr.
Richardson about that level and in consideration of that
level where I believe he did preliminary runs at sixty
percent debt and twenty-five percent debt, and some other
ratios of debt, and at that time we felt the twenty-five
percent debt level was a reasonable level to expect for sugar
cane farms in the EAA.
Q All right. On what basis do you think it was
representative of the EAA?
A I defer to Dr. Richardson again, because he had the
primary responsibility for this selection and I can't recall
the criteria upon which that specific number was selected as
it relates to the EAA.
Q Do you have any empirical understanding of the
actual debt level in the EAA?
A No.
Q Do you understand what I mean by empirical
understanding?
A Yes.
Q Does the amount of land debt affect the quasi-
rents?
A No.
Q Referring then to the three-stage criteria for
taking land out of production.
Would you tell me, please, how does the amount of
land debt affect land leaving production?
A It doesn't affect the quasi-rent, but it does
affect the equity-to-asset ratio in our criterion for land
use is the equity-to-asset ratio.
Q When you say your criterion for land use is the
equity-to-asset ratio, if I recall your testimony, the
equity-to-asset ratio was used to determine the probability
of farm survival in that there was some method for
determining land leaving production from the probability of
farm survival. So over the period there would be a number of
steps between the equity-to-asset ratio determination and the
determination of land leaving production; is that correct?
A No. Not many steps.
Q Are there steps between determining the equity-to-
asset ratio and determining land leaving production?
A Yes.
Q Okay. Then how does debt, inasmuch as it affects
the equity-to-asset ratio, affect land leaving production?
A It affects it through the probability of survival.
Q Can you tell me the formulas or methods for
determining if it's leaving production from the equity-to-
asset ratio?
A I would defer to Dr. Richardson on that. He
conducted a stochastic determination of probability and I
would defer to him for that, the answer to that question.
Q In your opinion, in a more focused or limited
question, is it the case that the quasi-rents are positive if
the equity-to-asset ratio falls below point five that land
can leave production?
A That's not a likely scenario, but it may be
mathematically possible.
Q Then that would be a function of the trend?
A That would be a function of the numbers, the
empirical numbers at that point.
Q Why is it not a likely scenario?
A Because, as we said earlier, that most of the
situations where land is leaving production, in our models,
are situations where quasi-rents were negative.
Q All right. When you say most, can you quantify
that for me?
A I would defer to Dr. Richardson, who has all the
computer outputs and all the data.
Q I believe we addressed an aspect of this question
before, but I don't believe it was the same question, so let
me ask.
Did you see the quasi-rents for all the model farms
in your analysis of lost acreage?
A Only some of them.
Q Do you recall which ones you saw the quasi-rents
for?
A At some of the meetings where we were together, we
were together with Dr. Richardson, I saw some of the early on
runs.
Q Early on runs of all model farms or partial early
on runs?
A Of the model farms.
Q Were you shown runs for only large model farms?
A No.
Q Were you shown runs for only small model farms?
A No.
Q Were you only shown model farms in any particular
yield belt?
A I wasn't shown any of the model farms from the
December analysis. I didn't see that because of the time
element in which we conducted that analysis.
The computer results that I saw reflected the model
framework that we had adopted early on, which was the small,
medium and large-size farms.
Q And you saw. . .
A I saw the quasi-rents, I saw the probabilities of
survival.
Q For all those model farms?
A Yes.
Q You testified earlier that your criteria for land
leaving production were more conservative than Hazen and
Sawyer.
Would you explain to me in what sense. . .
You also testified that it's highly possible for
land to leave production when quasi-rents are greater than
zero.
Now, in the Hazen and Sawyer analysis land did not
leave production until total revenues or costs exceeded total
revenues.
So let me, with that preface, let me frame a
question.
How is it more conservative to take land out of
production where quasi-rents exceed zero than it is to leave
land in production until net returns fall to zero?
A That's a good question and I would have to answer
it in the context in which those statements were made.
In the one context, we were talking in general
about my philosophy, not the application of that philosophy
to this FLIPSIM analysis conducted by Dr. Richardson. Dr.
Richardson's analysis is where we are saying we are more
conservative, where we have many instances that he can
document and maybe most instances where the quasi-rents were
negative.
Q Well. . .
A I believe we're beating this quasi-rents issue a
little bit more ÄÄ we're beating it ÄÄ let me strike that and
say that I think we're overemphasizing the positive quasi-
rent issue here.
Q I understand.
Let me move on to another issue.
A Okay.
Q As I understood your testimony yesterday ÄÄ mainly
on Wednesday, but to some extent yesterday ÄÄ the first step
in the aggregation process that you performed from the
results that you get from the micro-farm level impact
analysis, is to convert the probabilities of survival for
model farms, produced by that three-stage FLIPSIM analysis,
into a number of acres leaving production.
We touched on that briefly on the first day of your
testimony and I believe, if I recall, you gave an example in
explaining the procedure from going from probability of model
farm survival to acres leaving production.
Now, can you give me a sufficiently detailed
explanation of the methodology you will use to make that
first step in the aggregation to enable somebody else to
reproduce that result?
A I believe we outlined that earlier in this
deposition.
If you would like me to review those steps, I would
be happy to do so again.
Q I would like you to do that, and I apologize to the
extent that I'm having you recover ground that you already
covered; but, like I said, I believe your account was focused
mainly on an example, although the example is helpful, I
would like to actually have the procedures, formulas,
methods, assumptions that you would be using to make the
conversion.
MR. BURGESS: Given Dr. Polopolus' statement
that he believes he has recounted this in the past,
my only point, for the record, would be that both
his previous statement in response to whatever
question he was asked on this subject and this
response be read together and that this does not
supplant his previous response.
MR. SAXE: I understand. Thank you, Counsel.
BY MR. SAXE:
Q Go ahead, sir.
A I believe we have placed into the record, in
Exhibit No. 19, the proper procedure by which I will take the
output from FLIPSIM and convert it into the numbers that will
provide the figures for estimating acres lost, jobs lost and
sales lost, and that example, on Exhibit 19, is tied to our
presentations of materials that we presented to Hazen and
Sawyer economists on December the 16th.
So if one were to take the results of the December
16th table of information that is contained in the middle
block, one could and I could and I'm willing and able, if you
are, to go through the labyrinth of steps that we would
utilize to construct those numbers.
Q Yes, if you would, Dr. Polopolus.
I believe your testimony earlier was to that
effect, that your methods were inferrable from the material
that we have been provided and you gave me an example, but
what I need is to be taken through the steps that you will
use and if you would like you may use ÄÄ if we have a full
set of representative model farms, probability of survival
output here, that is representative of the output that you
will get from the micro-farm level impact analysis process,
then you can use that to illustrate the process as you go.
If what I have here in Exhibit 19 is not sufficient
to enable you to take me through the methodology, then if you
would tell me what other inputs that you will receive from
the micro-farm level impact analysis process, and we'll go
through it.
Dr. Polopolus, our time is somewhat limited, let's
see if we can get through it.
A If this is useful, what I would like to do is take
a particular baseline situation and let's take a baseline
that Hazen and Sawyer used in terms of price level at thirty-
five dollars a ton with price trend.
Q What page are you referring to?
A I'm referring now to the second page.
Q Very good.
A And let's concentrate on sugar cane.
In a later document we have that same price
scenario for vegetables inside.
Okay.
Q Later document than this?
A In this package of exhibits, right.
Q Okay.
A The FLIPSIM methodology gives us the probability of
survival for each of ÄÄ going to the first page, but each of
the model farms, that is, the Hazen and Sawyer model farms,
Ag Belts 1 and 2, combined together, Ag Belt 3, Ag Belt 4, Ag
Belt 5.
Now, having the FLIPSIM result, what it says on the
first page of Exhibit 19, under that price, let's just keep
this price and not change price levels, but thirty-five
dollars and ninety-four cents for a time, with a one point
seven percent trend, in the fourth block, at the twenty-five
dollars per acre assessment, it said that for Ag Belt Zones 1
and 2, that both the average size farm, sixty-four thousand
acres per farm, and the small size farm remain in production.
Q One moment, Dr. Polopolus.
Generally it's not general practice for the
attorney to interrupt the witness during his testimony, but
because we're going to go through a lengthy account on your
part, if you don't mind, if I don't understand something that
you're referring to, I'll just interrupt you briefly and ask
you to explain.
A No problem.
Q Which of the figures in this cell, at the bottom of
Ag Belt 1 and 2 block, indicates the probability of survival?
Is it the zero percent figures that I see on the table?
A No. We have to look at the fourth block under
"Price".
Q Under "Price"?
A Under "Price", where it says assessment per acre.
Q Okay. So it's one hundred percent.
A It's saying the survival rate in Zone Belts 1 and 2
is a hundred percent, so nothing goes out there, and it's
telling you, the top of that column, the number of acres, it
represented seventy thousand acres, and for the small farm
fifteen thousand.
This from Hazen and Sawyer's models.
Q Does the probability of survival differ by Ag
Belts, because of yield differences in the belts?
A All of the above. For the modeling, that's a
factor.
Q Okay. Go ahead.
A Okay. So we're not taking any acreage out.
Now, as we move across the row and come to Ag Belt
3, where we have the average size large farms being thirteen
thousand acres per farm and the small farm, the average size,
being six hundred and forty acres per farm, where the
aggregate acreage in that belt is thirty-three thousand acres
for the large farms and the aggregation of the acres is
thirty-eight thousand for the small farms, we find that with
a twenty-five dollar assessment, moving down to the fourth
row, we find that the large farms did not ÄÄ the large farm
had no fatality, so to speak, but there was little fatality
for the small farms.
Okay?
Q That would be the ninety-eight percent figure.
A That would be the ninety-eight percent figure.
Okay?
Q Okay.
A But when we look at the acres remaining, the third
number in that column, it says that even though there was a
probability of mortality of four percent for the small farm,
as you recall my earlier testimony, that acreage did not
leave production, because there was a probability of more
mortality, because they were bought by the larger farm.
Q Dr. Polopolus, how was the lost acreage of zero
determined from the probability of survival of one hundred
percent from Model Farm 2 and ninety-eight percent from Model
Farm 6?
A Because the rule that we apply, that the smaller
farm would always be acquired by the larger farm in the zone
belt. So the probability. . .
Q Pardon me.
In all circumstances?
A In all circumstances.
Q Okay.
A So the acres remaining remains seventy-one
thousand.
Q But is there a change now in the acres attributed
to the different model farms for this column for Ag Belt 3?
A It was seventy-one thousand to begin with.
Q Total acres?
A Seventy-one thousand before the imposition of the
SWIM Plan. It was seventy-one thousand ÄÄ the STAs were not
in that zone belt, so they did not impact that belt, even
though there was some loss of some small farms, they were
bought by large farms.
Q Where is that reflected?
A It's reflected in the fact that in that right-hand
part of that column it's seventy-one thousand under total
acres represented. It's seventy-one thousand acres remaining
with the assessment of twenty-five dollars per acre.
Q What is the loss ÄÄ I understand that, this is a
different question.
Where is the loss of two percent of the small farm
acreage and addition of that acreage to the large farm
acreage in this yield belt reflected on this printout?
A That particular calculation is not represented in
the printout, but it's represented in the final product,
which is seventy-one thousand.
Q By product, you mean the additive product, the sum?
A The sum.
Q Okay.
A The sum remains the same, because it was the. . .
The key variable here is: What is the probability
of surviving acreage of the larger farm in that zone belt?
If that probability is a hundred percent, it will not affect,
irrespective of what the small farm percentage is, it will
not affect the survivability of the acres remaining for that
zone belt.
Q If I understood your earlier testimony of a
formula, if you will, for determining acres leaving
production for the small model farm, is that the percentage
of bankrupt acres, if you will, is always acquired by the
large model farm in the yield belt and so, by definition,
there is no loss of small farm acreage in any circumstance?
A That is correct.
Q In terms of out-of-production land?
A Yes.
Q Just a redistribution.
A A redistribution, that's correct.
Q All right.
A Now, we go to Ag Belt 4.
Q Okay.
A In Ag Belt 5, with a twenty-five dollar assessment,
with the STAs and with the BMPs all implied by this, there is
a survival rate of sixty-eight percent for the small farms
that average sixty-four hundred per acre, and aggregate
acreage of ninety-four thousand acres in that belt, and large
farms in that belt, which average thirty-two thousand acres
per farm, for which there are sixty-two thousand total acres,
in that scenario ÄÄ excuse me, in that ag belt the FLIPSIM
gave us the result of sixty-eight percent survival for the
small and ninety-five percent survival for the large.
Okay?
Q Okay.
A Now, all of the small farms that went bankrupt or
exited were acquired by the large, but this aggregation led
to the total acreage, because of the ninety-five percent
survival of the larger farm, this meant that the hundred and
fifty-six thousand acres that we began with now becomes a
hundred and fifty-one thousand three hundred and ninety-six,
whatever that number is.
Q Dr. Polopolus, once again forgive me for
interrupting, but I think it's unavoidable here, because of
time constraints, but you said it led to a drop in the next
acreage or total acreage in the yield belt remaining in
production.
A Yes.
Q I need to know how exactly it leads to ÄÄ how you
calculate exactly ÄÄ let me finish the question. . .
There's sixty-eight percent probability of survival
in this cell for Model Farm 7, that means thirty-two percent
mortality, if you will, for Model Farm 7.
A Yes.
Q Now, if I multiply thirty-two percent times the
ninety-four thousand acres that are in that Model Farm 7, I
come up with thirty thousand eighty acres.
So if I understood your previous testimony, this
thirty thousand eighty acres will be transferred to Model
Farm 3, the large farm, in this yield belt; is that correct?
A If I understand what you're saying, yes, I believe
that is correct.
Q So far all I have done is I have moved thirty
thousand eighty acres from one model farm to another model
farm category in this yield belt. That means now that my
total acreage, attributable to Model Farm 3, if you will. . .
A Yes.
Q . . .would be sixty-two thousand originally, plus
the thirty thousand eighty.
A Yes.
Q Now, I'm going to add those two on my calculator.
A Yes.
Q I come up with ninety-two thousand eighty acres. . .
A Yes.
Q . . .now in the Model Farm 3 category remaining.
Okay. Now take me ÄÄ I've got ninety-two thousand
eighty acres now under Model Farm 3, and under Model Farm 7
I've got sixty-three thousand nine hundred and twenty acres
with a total ÄÄ of course, at this point it still should be a
hundred and fifty-six thousand acres. Let me just check.
Yes, a hundred and fifty-six acres.
I have just redistributed it under your methodology
from small farm to large farm.
A Right.
Q Now, how do I get from a hundred and fifty-six
thousand acres, that I still have after redistribution, to
the one hundred and fifty-one thousand three hundred and
ninety-six that is shown here?
A You take the ninety-five percent of a hundred and
fifty-six and you should get very close to a hundred and
fifty-one thousand three hundred and ninety.
Q So then the theory or the formula that the
probability of survival of the large model farm means that
after small farm acreage going bankrupt is acquired by large
farm, the mortality percent of bankrupt large farms leave
production, so the bankrupt large farms always leave
production in the aggregation that you do to convert from
probability of survival to acres leaving production.
A Plus whatever remaining acreage there is from the
small farm.
Q That leaves production as well?
A No, it doesn't.
Q I'm just talking about the land leaving production.
A Excuse me.
Q Let me restate it.
The percentage of large model farms going bankrupt,
multiplied by the total acreage attributable to the large
model farms after you do the redistribution from the small
farm to the large farm equals the number of acres that goes
out of production for that yield belt, under all
circumstances.
A I think ÄÄ I believe that is correct.
Q Okay.
A And if our mathematics is correct for that zone
belt, we have lost a few thousand acres in that zone belt.
Q Well, let me point out.
If I multiply the one hundred and fifty-six
thousand acres, total ÄÄ well, it's before and after the
redistribution, because the redistribution doesn't change the
sum, times point nine five. . .
A No.
Q Okay. I may have missed something here.
A No, because you have remaining acreage.
Q Oh, I see.
So I only multiply the large model farm
attributable acreage by the point nine five.
A That is correct.
Q Okay. Let me do that.
That leaves eighty-seven thousand four hundred and
seventy-six acres remaining for the large farms, plus sixty-
three thousand nine hundred and twenty acres for the small
farms, which equals one fifty-one three ninety-six acres.
A You got it.
Q Yes, sir, thank you.
A Then we go to the next yield belt and we do a
similar calculation.
Q Same procedure.
A Same procedure, except here, if you'll notice,
here's where, according to ÄÄ and given the Hazen and Sawyer
study, with respect to STAs ÄÄ excuse me, the reports with
respect to STAs and their location, we find that there is a
total of a hundred and thirty-seven thousand acres of which
forty-four thousand are in that Model Farm 8, and ninety-
three thousand in Model Farm 4 or the average size in Model
Farm 4, the larger farm is thirty-two thousand, and the
average small farm is twelve hundred and eighty, the STAs,
Stormwater Treatment Areas, will, according to plan, take out
thirteen thousand acres of Model Farm 4 and fifteen thousand
acres of Model Farm 8, leaving a residual now of acreage
after the STAs of eighty thousand of Model Farm 4, and
thirty-one thousand remaining acreage for Model Farm 8.
Okay?
Q Okay.
A Now, given that, and now taking the price scenario
of thirty-five dollars and ninety-four cents per ton, plus
the one point seven percent increase in price trend per
annum, and the BMPs and the assessment of twenty-five dollars
an acre, result in the survival rate, after having done the
FLIPSIM and so forth, of two percent survival for the small
farms in that belt, forty-two percent survival of the larger
farm in that belt, yielding a final answer of forty-six
thousand nine hundred and eighty acres remaining in that zone
belt.
Q Okay. Dr. Polopolus, this has been very helpful to
me. I obviously haven't had an opportunity to finish going
through this and so, on the record, I'm acknowledging that
time is cutting your answers to the questions short.
Before we adjourn, which is momentarily, there's
one or two more questions I want to ask you on a different
topic.
Dr. Polopolus, in your opinion, do federal, state
and local income taxes determine whether or not land will
leave production?
A They're not used to determine quasi-rents.
Q They're factored into the cash flow analysis?
A Yes.
Q And thereby influence the debt-to-equity ratio?
A Yes.
Q Equity-to asset-ratio, I mean?
A Yes.
Q Okay. And so they impact the determination of
probability of farm survival; is that correct?
A They could.
Q I want to ask you how ÄÄ would it be correct to say
that they do so through the FLIPSIM analysis, three-stage
analysis that results in probability of survival?
A Dr. Richardson can speak to that.
In my conversations with him, they're not major
determinants of impact in any case, but he could answer the
specific impacts that income taxes have on the results that
we obtained.
MR. SAXE: Well, we're close to adjournment
time, and on the record I want to say that I have
not been able to finish the material that I had
hoped to go through and would, therefore, have to
reserve the right to complete this deposition,
independent of any right to take the follow-up
deposition at some later point in time, and I want
to also say, Dr. Polopolus, that you have been a
most pleasant opponent. Thank you very much for
your testimony.
MR. BURGESS: I would like to also state on
the record that as far as the deposition adjourning
as opposed to concluding, our position, with
respect to the resumption of the deposition, will
be the same as we have taken in our papers in our
motion before the hearing officer, and that is that
this expert should be deposed when his opinions are
final and when the Hazen and Sawyer twenty-year
report has been forthcoming, so that the expert can
finalize his opinions.
Thank you.
(Thereupon, the deposition was adjourned.)
520
STATE OF FLORIDA
COUNTY OF ALACHUA
I, Mary Macdonald, Court Reporter and Notary Public,
State at Large, do hereby certify that the witness:
LEO C. POLOPOLUS,
was first duly sworn by me to testify the whole truth; that
the foregoing deposition given by said witness was reported
by me in stenograph, reduced to typewriting under my direct
supervision; that the foregoing pages numbered 1 through 519
in three volumes, inclusive, constitute a true and accurate
transcription of said proceedings.
I further certify that the deposition was taken at 204
West University Avenue, Gainesville, Florida, on April 14, 15
and 16, 1993.
I further certify that I am neither attorney nor counsel
for any of the parties; nor a relative or employee of any
attorney or counsel connected herewith; nor am I financially
interested in the event of the cause.
IN WITNESS WHEREOF, I have hereunto affixed my hand and
seal this 2nd day of June, 1993.
________________________________
Mary Macdonald
Macdonald Court Reporting Service