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