[Federal Register Volume 62, Number 87 (Tuesday, May 6, 1997)]
[Rules and Regulations]
[Pages 24753-24765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11718]
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DEPARTMENT OF AGRICULTURE
Animal and Plant Health Inspection Service
7 CFR Part 301
[Docket No. 96-016-20]
RIN 0579-AA83
Karnal Bunt Regulatory Flexibility Analysis and Regulatory Impact
Analysis
AGENCY: Animal and Plant Health Inspection Service, USDA.
ACTION: Final rule; regulatory flexibility analysis and regulatory
impact analysis.
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SUMMARY: We are publishing in this document the regulatory flexibility
analysis prepared for a final rule, which is published elsewhere in
this issue of the Federal Register, that adopts, with changes, an
interim rule that provided compensation for certain growers and
handlers, owners of grain storage facilities, and flour millers in
order to mitigate losses and expenses incurred because of Karnal bunt
in the 1995-1996 crop season. The final rule also adds compensation
provisions for handlers of wheat that was tested and found negative for
Karnal bunt, for handlers and growers with wheat inventories for past
crop seasons, and for participants in the National Karnal Bunt Survey
whose wheat or grain storage facility is found positive for Karnal
bunt. We are also publishing in this document a regulatory impact
analysis for the interim rules and final rules that established the
Karnal bunt quarantine, regulations, and compensation provisions,
including a final rule on compensation published elsewhere in this
issue of the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Mike Stefan, Operations Officer,
Domestic and Emergency Operations, PPQ, APHIS, 4700 River Road Unit
134, Riverdale, MD 20737-1236, (301) 734-8247.
SUPPLEMENTARY INFORMATION: Karnal bunt is a fungal disease of wheat
(Triticum aestivum), durum wheat (Triticum durum), and triticale
(Triticum aestivum X Secale cereale), a hybrid of wheat and rye. Karnal
bunt is
[[Page 24754]]
caused by the smut fungus Tilletia indica (Mitra) Mundkur and is spread
by spores. The establishment of Karnal bunt in the United States would
have significant consequences with regard to the export of wheat to
international markets. The regulations regarding Karnal bunt are set
forth in 7 CFR 301.89-1 through 301.89-14.
On October 4, 1996, we published in the Federal Register (61 FR
52189-52213, Docket No. 96-016-14) a final rule that amended a series
of interim rules establishing a program to control and eradicate Karnal
bunt in the United States, and also made final a proposed rule
establishing criteria for levels of risk for areas with regard to
Karnal bunt and criteria for seed planting and movement of regulated
articles based on those risk levels. Elsewhere in this issue of the
Federal Register we are publishing a companion docket (Docket No. 96-
016-17) to this document, in order to adopt as a final rule, with
changes, an interim rule that amended the Karnal bunt regulations to
provide compensation for certain growers and handlers, owners of grain
storage facilities, and flour millers in order to mitigate losses and
expenses incurred because of Karnal bunt in the 1995-1996 crop season.
Additionally, the final rule adds compensation provisions for handlers
of wheat that was tested and found negative 1 for Karnal
bunt, for handlers and growers with wheat inventories for past crop
seasons, and for participants in the National Karnal Bunt Survey whose
wheat or grain storage facility is found positive \1\ for Karnal bunt.
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\1\ Throughout this document, in discussing tests for Karnal
bunt, ``found negative'' means that no Karnal bunt spores were
found, and ``found positive'' means that Karnal bunt spores were
found. This applies whether the tests involved were of propagative
wheat or nonpropagative wheat, in fields, conveyances, or grain
storage facilities.
On May 1, 1997, we published an interim rule in the Federal
Register (Docket No. 96-016-19, 62 FR 23620-23628) that established
a new standard for defining regulated areas for Karnal bunt based on
finding bunted wheat kernels rather than just spores. That change
does not affect any of the activities analyzed in this document.
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On April 3, 1997, we published in the Federal Register a regulatory
flexibility analysis (62 FR 15809-15819, Docket No. 96-016-18) for the
interim rules and the October 4, 1996, final rule that established the
Karnal bunt quarantine and regulations. In this document, we are
publishing a Final Regulatory Flexibility Analysis for Docket No. 96-
016-17. Additionally, in this document, we are publishing a Regulatory
Impact Analysis that analyzes the costs and benefits of the Karnal bunt
interim rules and final rule we have already published, as well as
those of the provisions in Docket No. 96-016-17.
I. Introduction
II. Need for Regulation
III. Benefits of the Federal Quarantine Program
IV. Impact on the Affected Industry of Karnal Bunt and Regulatory
Actions
V. Federal Compensation to Mitigate Losses
VI. Conditions for Wheat Production and Utilization in a Regulated
Area for the 1996-97 Crop Year
VII. Consideration of Alternatives to the Rule
VIII. Regulatory Flexibility Analysis--Impacts on Small Entities
Within the Regulated Area
IX. Summary and Conclusions
I. Introduction
In accordance with Executive Order 12866, this analysis examines
the economic impacts, including costs and benefits of the Karnal bunt
regulations published to date, including Docket No. 96-016-17.
Additionally, in accordance with the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), we have conducted an analysis of the economic
impact, costs, and benefits the provisions of Docket No. 96-016-17 will
have on small entities. That analysis is set forth below under the
heading ``VIII. Regulatory Flexibility Analysis--Impacts on Small
Entities Within the Regulated Area.''
On March 8, 1996, Karnal bunt was detected in Arizona during a seed
certification inspection done by the Arizona Department of Agriculture.
On March 20, 1996, the Secretary of Agriculture signed a ``Declaration
of Extraordinary Emergency'' authorizing the Secretary to take
emergency action under 7 U.S.C. 150dd with regard to Karnal bunt within
the States of Arizona, New Mexico, and Texas. In an interim rule
effective on March 25, 1996, and published in the Federal Register on
March 28, 1996 (61 FR 13649-13655, Docket No. 96-016-3), the Animal and
Plant Health Inspection Service (APHIS) established the Karnal bunt
regulations (7 CFR 301.89-1 through 301.89-11), and quarantined all of
Arizona and portions of New Mexico and Texas because of Karnal bunt.
The regulations define regulated articles and restrict the movement of
these regulated articles from the quarantined areas.
After the regulations were established, Karnal bunt was detected in
seed lots that were either planted or stored in California. On April
12, 1996, the Secretary of Agriculture signed a ``Declaration of
Extraordinary Emergency'' authorizing the Secretary to take emergency
action under 7 U.S.C. 150dd with regard to Karnal bunt within
California. In an interim rule effective on April 19, 1996, and
published in the Federal Register on April 25, 1996, APHIS also
regulated portions of California because of Karnal bunt (61 FR 18233-
18235, Docket No. 96-016-5). In an interim rule effective on June 27,
1996, and published in the Federal Register on July 5, 1996 (61 FR
35107-35109, Docket No. 96-016-6), we removed certain areas in Arizona,
New Mexico, and Texas from the list of areas regulated because of
Karnal bunt. That list was amended in a technical amendment effective
on July 9, 1996, and published in the Federal Register on July 15, 1996
(61 FR 36812-36813, Docket No. 96-016-8). In an interim rule effective
June 27, 1996, and published in the Federal Register on July 5, 1996
(61 FR 35102-35107, Docket No. 96-016-7), we amended the regulations to
provide compensation for certain growers and handlers, owners of grain
storage facilities, and flour millers in order to mitigate losses and
expenses incurred because of actions taken by the Secretary to prevent
the spread of Karnal bunt.
In a proposed rule published in the Federal Register on August 2,
1996 (61 FR 40354-40361, Docket No. 96-016-10), we proposed to amend
the regulations to establish criteria for levels of risk for areas with
regard to Karnal bunt and for the movement of regulated articles based
on those risk levels, and to establish criteria for seed planting. A
rule finalizing these provisions was published in the Federal Register
on October 4, 1996 (61 FR 52189-52213, Docket No. 96-016-14). In Docket
No. 96-106-17, published elsewhere in this issue of the Federal
Register, we make final the interim rule on compensation published in
the Federal Register on July 5, 1996, and establish compensation
provisions for handlers of wheat that was tested and found negative for
Karnal bunt, for handlers and growers with wheat inventories for past
crop seasons, and for participants in the National Karnal Bunt Survey
whose wheat or grain storage facility is found positive for Karnal
bunt.
II. Need for Regulation
Karnal bunt is a fungal disease of wheat (Triticum aestivum), durum
wheat (Triticum durum), and triticale (Triticum aestivum X Secale
cereale). Upon detection of Karnal bunt in Arizona, the imposition of
Federal quarantine and emergency actions was a necessary, short-run,
measure taken to prevent the interstate spread of the disease to other
wheat producing areas in the country. The intent of the quarantine was
to immediately contain the disease in the outbreak area, so that
eradication could be eventually
[[Page 24755]]
achieved. In dealing with a new disease outbreak, eradication is a
reasonable first objective as long as national disease-prevalence data
indicate that eradication remains a viable option. The establishment of
Karnal bunt in the United States would have significant economic
ramifications on the U.S. wheat export market, given that approximately
50 percent of exports are to countries that maintain restrictions
against wheat imports from countries where Karnal bunt is known to
occur. The benefits of the regulatory program can thus be viewed as the
avoidance of potential losses to the wheat export market in the absence
of regulation. The economic significance of the wheat industry required
swift and coordinated action, which in this case was most efficiently
achieved under Federal coordination.
Wheat intended for domestic processing and export is often blended
at elevators to establish lots of uniform quality. Except for those
occasions where a specific producer's wheat is processed separately
under contract to a miller, the elevator's supply of wheat usually
consists of a mix of many varieties from many producers and areas. For
this reason, Federal oversight is needed to safeguard against cross-
contamination and to instill confidence from both domestic and foreign
buyers. Thus, it is conceivable that, without Federal intervention,
individual States and importing countries would place their own,
perhaps more severe, restrictions on wheat shipments.
As additional information from sampling and testing became
available in subsequent months following the outbreak, the Agency was
able to ease the quarantine in order to minimize disruption to affected
entities. Those changes, which were detailed in the October 4, 1996,
final rule, established various risk categories for wheat planting for
the 1996-97 crop, relieving unnecessary restrictions as the regulatory
actions that are imposed on each category are based on the level of
risk.
Subsequent sections of this analysis are structured as follows:
Section III addresses the benefits of regulation to provide a
perspective against which the regulatory policies were formed. Section
IV addresses the impact on the affected industry of the disease and
subsequent quarantine actions. Section V analyzes compensation the
Agency expects to pay to partially mitigate losses caused by Agency
actions. Section VI provides a projection of the impact in the
regulated areas based on risk categories for wheat planting in 1996-97.
Other alternatives to the rule are discussed in section VII. The wheat
industry within the regulated area is composed largely of small
entities that can be classified as small according to definitions
established by the Small Business Administration (SBA). Thus, the
impacts discussed throughout this analysis are directly applicable to
small entities. As required by the Regulatory Flexibility Act, the
characteristics of and impacts on small entities within the regulated
areas are examined in section VIII. A summary of the analysis is
provided in section IX.
III. Benefits of the Federal Quarantine Program
The disease Karnal bunt causes production losses to wheat in the
form of yield reduction due to the infestation of kernels, and
reduction in the quality of grain. Roughly 4 percent of wheat fields in
Arizona, and 0.04 and 14 percent of fields in Imperial and Riverside
counties in California, respectively, were found to be infected with
Karnal bunt.
The most economically significant impact of the disease, however,
is inarguably its effect on the export market. This is because about
half of U.S. wheat exports are to countries that maintain restrictions
against wheat imports from countries where Karnal bunt is known to
occur.2 Eliminating the quarantine currently in place would
jeopardize trade with those countries. Benefits of Federal quarantine,
therefore, can be regarded largely as the avoided losses to the export
market.
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\2\ About 1.2 billion bushels of wheat are exported from the
U.S. annually, at a value of $4 billion.
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A 50-percent reduction in U.S. wheat exports would likely reduce
U.S. wheat prices by 30 percent, and lower net sector income by $2.7
billion. This estimate takes into account the dampening effect on
domestic wheat prices, as wheat for export is diverted into the
domestic consumption market, animal feed outlets, and ending stocks.
The reduction in U.S. wheat exports, however, would likely be less
than 50 percent. First, not all countries that have restrictions
against Karnal bunt would, in practice, strictly prohibit wheat imports
from the United States. (Italy and Germany currently import wheat from
countries where Karnal bunt is known to occur despite European Union
regulations to the contrary). Second, while some markets would be
captured by exports from countries that are free of Karnal bunt, U.S.
wheat exports to countries that have no restrictions against Karnal
bunt would likely increase. Lastly, substitution across domestic
markets could provide added flexibility in meeting export demands. In
the long run, the effects could be minimal depending on whether the
market were to treat Karnal bunt as a quality issue and develop
discounts for Karnal bunt.
It is estimated that the impact of Karnal bunt on exports, because
of substitution effects, would likely result in a 10-percent reduction
in U.S. wheat exports. A decrease of 10-percent in exports would cause
a 22-cent per bushel drop in the wheat prices and a drop in wheat
sector income of over $500 million. The effects of decreases in wheat
exports of various percentages are presented in Table 1.
Table 1.--Effect of a Decrease in Wheat Exports due to Karnal Bunt, 1997/98 Crop Year
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Reduction in exports
Item Unit -----------------------------------------
0% 10% 25% 50%
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Exports.................................... mil. bu. 1,200 1,080 900 600
Total use.................................. mil. bu. 2,462 2,394 2,295 2,138
Price...................................... $/bu..................... 3.85 3.63 3.29 2.68
Value of production........................ mil. dol. 9,543 8,898 8,146 6,637
Gross income \1\........................... mil. dol. 11,358 10,813 9,961 8,580
Variable expenses.......................... mil. dol. 4,823,823 4,823 4,823
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Net income............................. mil. dol. 6,536 5,990 5,138 3,758
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\1\ Includes market transition payments.
[[Page 24756]]
The 1996 Federal quarantine and emergency actions served to contain
Karnal bunt in the initial outbreak area of the Southwest United
States. The Federal program provided assurances to wheat importing
countries that wheat from uninfected areas were monitored for Karnal
bunt under the National Survey program, by sampling and testing of all
wheat fields in the United States. Countries that are willing to accept
wheat from the affected areas are also assured that grain originating
from those areas are tested negative twice for the disease. Through
these means, the Federal Karnal bunt program served to maintain and
preserve the economic viability of the U.S. wheat export.
IV. Impact on the Affected Industry of Karnal Bunt and Regulatory
Actions
The wheat industry within the regulated area is largely composed of
businesses who can be considered as ``small'' according to guidelines
established by the Small Business Administration (SBA). The
characteristics of these firms as well as other small affected entities
are provided in detail in section VIII, the Regulatory Flexibility
analysis of impacts on small entities. The following discussion on
impacts is directly applicable to these entities.
The 1995-96 Karnal bunt regulations primarily affect persons or
entities that produce wheat in a regulated area and/or move certain
articles associated with wheat out of a regulated area. These articles
are subject to certain regulatory actions to minimize the risk of
spreading the causal agent of the disease to other uninfected areas.
Regulated articles include:
1. Farm machinery and equipment used to produce wheat;
2. Conveyances from field to handler, such as farm trucks and
wagons;
3. Grain elevators, equipment and structures at facilities that
store and handle grain;
4. Conveyances from handler to other marketing channels, such as
railroad cars;
5. Plant and plant parts, such as grain for milling, grain for
seed, and straw;
6. Flour and milling byproducts;
7. Manure from animals fed wheat/wheat byproducts from quarantine
area;
8. Used sacks;
9. Seed-conditioning equipment;
10. Byproducts of seed cleaning;
11. Soil-moving equipment;
12. Root crops with soil;
13. Soil.
As part of the Karnal bunt program, grain that tests positive for
Karnal bunt is prohibited from moving out of the regulated areas. Other
contaminated articles must be cleaned and sanitized before such
movement. Millfeed must be treated to render inactive any disease
causal agent before its addition into animal feed. Grain that tests
negative may move under limited permit to approved mills. Commercial
seed intended for planting is prohibited movement outside the regulated
areas. Wheat seed to be planted within the regulated areas must be
sampled and tested for Karnal bunt, and, for seed originating in a
regulated area, treated prior to planting. Wheat growers in New Mexico
and Texas whose wheat fields were planted with contaminated seed were
ordered to destroy their crops.
These requirements have resulted in additional costs and claims of
losses to affected individuals. Wheat producers and handlers had loss
in market value of their grain; seed companies and researchers have had
similar losses, including lost royalties due to the disruption in the
development of seed varietals. Other costs were for cleaning and
disinfecting equipment and facilities, and damages to machinery caused
by required treatment. Some of these losses are presented in Table 2.
Table 2.--Impact of Karnal Bunt Quarantine Actions
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Types of impacts
Action Regulated article affected entities Numbers affected due to KB and
quarantine actions
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Plow-down & Seed Plot Fields Certain 4100 Loss in
destruction. planted with producers in acres value of wheat
infected seed at Texas and New 73 crop destroyed.
pre-boot stage Mexico producers
Cleaning/Disinfection.......... Tools and Wheat 145 cost of
Farm Equipment producers in RA growers cleaning.
Harvesters Farmer 389 cost of
owned and custom combines cleaning.
combines
Grain Grain 976 cost of
Trucks haulers from trucks cleaning.
field to grain
elevators
Grain Grain 17 cost of
storage and handling firms elevators cleaning.
loadout facilities
Harvesters Combine 36 to 40 Excess
harvester owners combines wear and tear on
equipment.
Harvesters Combines 5 to 10 Down-time
involved in pre- combines on harvesters due
harvest sampling to field testing.
Harvesters Custom 5 Loss of
combine companies companies income due to
termination of
contracts outside
the RA.
Railcars Grain 10,880 cost of
handling firms cars (511 for cleaning.
positive grain)
Restriction on Use or KB-postive Producers 145 Loss in
Marketings. milling wheat Grain growers value of KB-
handling firms 6 positive wheat.
handlers
KB- Producers 664 Loss in
negative milling in RA producers value of KB-
wheat Handlers 26.7 negative wheat in
in RA million bushels RA.
Millfeed Millers, 108 mills Millers
millfeed 45,644 reluctance to
processors tons mill KB-negative
wheat from RA.
Movement Seed 15 Loss in
restrictions on producers, producers premiums
wheat seed researchers, and 9 Loss in
companies research firms market value
20 seed Loss in
marketers royalties.
[[Page 24757]]
Straw, Straw 25 Loss in
Manure, Millfeed producers and growers income
Handlers-Users of 3 Increased
Straw contractors cost of
Livestock 1 straw production.
producers using user, making of
wheat or straw straw mats for
produced in the erosion control
RA 7 millers
Flour in 5 States
millers 2
Millfeed millfeed
processors/users processors
Moratorium Producers 109 Loss in
on wheat with KB-positive growers income from
production on KB- properties 13,674 wheat.
positive fields acres
Soil on Vegetable Unknown Increased
root crops grown producers on KB- number cost of
on infected positive production.
properties properties
Used seed Seed 9 Increased
sacks research and research firms cost of
Seed- marketing 20 seed production.
conditioning companies marketers
equipment
Byproducts
of seed
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RA--Regulated Area.
Estimated losses in value to the affected wheat industry in the
Southwest are discussed below. The major identified categories of
losses include:
Plow-down of infected fields in New Mexico and Texas;
Loss in value of wheat testing positive for Karnal bunt for
producers and handlers;
Loss in value of wheat testing negative for Karnal bunt for
producers and handlers;
Cost of millfeed treatment;
Cleaning and disinfecting of grain storage facilities;
Loss in product value to handlers and growers with wheat
inventories for past crop seasons;
Loss in product value to participants in the National Karnal Bunt
Survey whose wheat or grain storage facility is found positive for
Karnal bunt;
Loss in value of wheat seed and straw; and
Losses Related to Cleaning and Disinfecting Combine Harvesters and
Other Losses.
These areas of economic loss are discussed below. Please note that
losses have not been identified for participants in the National
Survey, because Karnal bunt has not been discovered outside the
original outbreak area of the Southwest. Also, losses to handlers and
growers with wheat inventories for past crop harvest are included in
the discussion of loss in value of negative testing grain.
With regard to wheat inventories for past crop harvest, historical
data and field staff observations suggest that pre-1996 produced wheat
inventories in the quarantine areas represent a small fraction of the
losses for negative testing grain, as leftover inventories are less
than 5 percent of the annual production (1-2 million bushels).
1. Order to Plow Down Fields Planted with Infected Seed at Pre-Boot
Stage. Most of the acreage ordered to be plowed down in April 1996 was
farm production acreage located in four counties in New Mexico (Dona
Ana, Hidalgo, Luna, and Sierra) and in two counties in Texas (El Paso
and Hudspeth). This acreage amounted to approximately 4,100 acres.
Other affected acreage were small seed experimental plots in
Washington, California, and South Dakota that totaled perhaps 50 acres
in all.
Many affected growers were able to plant immediately with
vegetables and recover some losses by farming alternative crops on
affected land. Fertilizer carry-over on destroyed wheat fields was
possible for crops grown on affected fields. The impact on farm income
that could have been derived from wheat, however, is uncertain, as it
is unclear what the market returns to wheat grown on known affected
fields would have been if the plow-down order had not occurred.
2. Cost of Sanitizing Grain Storage. The purpose of this
requirement was to destroy spores and thereby reduce the likelihood of
cross-contamination of grain storage facilities that came into contact
with infected kernals or spores. The sanitization of facilities
involves primarily fumigation with methyl bromide. Records of APHIS
surveys in the regulated area indicate that 16 facilities were subject
to cleaning. The average cleaning cost of each facility is estimated at
$16,750, for a total cleaning cost of $268,000 incurred to facility
owners.
3. Loss in Value of Wheat Testing Positive for Karnal Bunt. Wheat
testing positive for Karnal bunt (either by pre-harvest sample or by
testing at the elevator site) was required to go into sealed storage.
This movement of wheat out of the regulated area was restricted
(exiting only with a limited permit) and most went into local animal
feed uses after treatment that rendered ineffective any Karnal bunt
spore. This involved a heat-roll-flaking process commonly in use for
small grains for feed formulas in California. Infected wheat lost value
as it was diverted from its original purposes to the animal feed
markets where it had to compete against lower-priced feed grains.
Similar discounts would have likely existed in the absence of
regulatory actions.3
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\3\Price discounts on both KB-positive and negative wheat could
have been greater in the absence of regulatory action. While this
may justify the regulatory action taken, the more convincing
evidence is the large benefits of regulations to the greater part of
the U.S. wheat industry outside of the regulated area.
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Eight percent of wheat production in the regulated area was found
to be KB-positive. This level of production amounted to 2.32 million
bushels of wheat taking a loss on average of $1.80 per bushel, with an
estimated total loss in value of positive wheat to producers and
handlers of $4.2 million.
4. Loss in Value of Wheat Testing Negative for Karnal Bunt. At
harvest, many wheat buyers refused to honor purchase contracts with
producers for
[[Page 24758]]
their grain, most of which had been tested negative for Karnal bunt by
pre-harvest sample. These contracts had been agreed upon before the
discovery of the disease and the declaration of quarantine. Also, wheat
millers inside and outside the regulated areas became reluctant to buy
wheat from grain handlers due to the increased cost of handling wheat
from the regulated areas. Prices for wheat produced within the
regulated areas, therefore, dropped regardless of its disease status.
A total of approximately 26 million bushels of KB-negative wheat
produced in the quarantine areas apparently suffered price losses.
Ninety-two percent of the quantity produced for domestic milling
(approximately 13 million bushels), plus the diverted quantity of KB-
negative wheat that was originally intended to be exported (6 million
bushels) could have experienced a price reduction. A portion of the
remaining 7 million bushels intended for export that could not be sold
at contract price could also experience a similar loss. We estimate
that negative grain would suffer an average price drop of $1.10 per
bushel. Thus, total losses due to the decline in market value of KB-
negative wheat held by producers and handlers could total $28 million.
This amount would be reduced by the amount of grain sold on contract
which received full contract price. Producers would not have realized
any losses on such production. Handlers may have incurred the full drop
in value of their wheat sales depending on their previous contract
prices. Given that information on contracts of individual producers and
handlers is unknown, it is estimated that $28 million is the potential
maximum amount of economic loss due to a drop in value of uninfected
wheat grown in the regulated area. However, the actual amount of grain
that would experience a loss in value is expected to be lower.
5. Cost of Millfeed Treatment. Millfeed is a byproduct of wheat
milling (the outer husk of the wheat kernel and other byproducts from
milling). Approximately 25 percent of the raw wheat going into milling
comes out as millfeed, while the remaining 75 percent is converted into
flour. The sale of this milling byproduct contributes around 10 percent
towards their gross income from milling. With the higher likelihood of
Karnal bunt being present in the millfeed rather than the flour,
restrictions were placed on the movement of millfeed produced from
wheat grown in the regulated areas. These restrictions stated that
millfeed, before their addition into animal feeds, were to be treated
in order to render inactive any presence of Karnal bunt spores. For
whole wheat kernels, this normally means that wheat undergo a heating-
rolling-and-flaking process. Similar procedures, except for flaking,
were assumed to be required in treating millfeed.
Many animal feed manufacturers commonly heat and treat ingredients
in their feed products. The treatment requirements would not add any
additional costs for them. For others, that restriction would place an
additional processing cost of around $35 per ton to their operation.
Based on requests for compensation from millers in Minnesota, Missouri,
Oregon, Wisconsin, and Virginia who are processing KB-negative wheat
produced in a regulated area, we estimate the additional cost of mill
feed treatment in response to the Karnal bunt quarantine to total $1.6
million.
6. Loss in Value of Seed. Under the 1996 quarantine and emergency
actions, wheat seed produced in the regulated areas was prohibited from
sale outside of the regulated areas. Wheat seed intended for planting
within the regulated areas must be sampled and tested for Karnal bunt,
and for seed originating in a regulated area, treated prior to
planting. These restrictions are estimated to have a significant impact
on the seed industry, largely due to the high value that is commanded
by propagative seed. Seed companies contract with growers to produce
seed wheat at about 30 to 50 cents per bushel premium over non-
propagative wheat. This premium reflects the added precautions in
production to ensure seed integrity and cleanliness. These companies
were affected by the decline in market value resulting from the
inability to move seed out of the regulated areas. It is estimated that
1.5 million bushels of wheat seed sustained loss in value of between $5
and 6 million. Seed developers, who earn returns on their investment in
research and development of wheat varieties, also claim potential long-
term losses in royalties; by receiving plant variety protection (or
patent rights), seed developers then obtain royalties on future sales
of wheat that are developed and sold for propagative purposes. Other
economic losses suffered by the seed industry, but are difficult to
quantify, include additional handling, storage, and finance costs on
seed that could no longer be sold outside the regulated areas and costs
to relocate wheat breeding operations outside of the regulated areas.
7. Loss in Value of Straw. Many growers sell wheat straw to
supplement their wheat grain income. Straw is sold for use at places
such as racetracks, highway shoulders, feed yards, and parks for
erosion control and to minimize muddy conditions. Wheat straw is listed
in Karnal bunt regulations as a regulated article and is prohibited
from being moved outside of the regulated areas. This has prevented
many wheat straw producers from shipping their 1995-96 crop season
straw to the intended markets. Some wheat straw was sold to alternative
markets within the regulated areas for a lower price; other wheat straw
was not able to be sold. These losses are estimated at about $200,000.
8. Losses Related to Cleaning and Disinfecting Combine Harvesters
and Other Losses. A number of costs have been claimed by about 220
combine harvesters operating within the regulated areas, and those who
travel outside of the regulated areas to harvest crops. These losses
are related to the cleaning and disinfecting requirements of combine
harvesters, which particularly affected custom harvesters who
contracted with the Agency to do pre-harvest sampling for Karnal bunt.
These losses involved: (1) Excess damage to machines caused by
treatment protocols; (2) cleaning and disinfecting costs; (3) down time
and extra operational costs associated with testing of samples and
treatment protocols; and (4) loss of business as wheat producers inside
and outside the regulated areas switched to custom harvesters that were
not associated with the 1996 wheat harvest in the regulated areas. The
most serious of these claims that can be directly attributed to the
regulations involves the excess wear and tear due to the subsequent
corrosion on combines that underwent extensive cleaning and
disinfecting treatments according to protocol. The loss in value of
these combines is estimated at $2 million.
Other economic losses that have been claimed by affected
individuals in the regulated areas but that are difficult to quantify
include additional handling, storage, and finance charges incurred by
handlers of nonpropagative wheat and various other claims by producers
and handlers in the regulated areas such as cleaning and disinfecting
railcars and trucks and buying wheat from alternate sources to fulfill
contracts that originally stipulated wheat produced from the regulated
area. The Agency continues to gather information for quantifying costs
to seed producers and others impacted by Karnal bunt or the Agency
programs to limit it.
In sum, the quarantine and regulatory measures in the southwestern
United
[[Page 24759]]
States were necessary to protect the wheat industry from a $500 million
loss in net sector income due to a drop in wheat export. The Southwest
produces 3 percent of the U.S. wheat supply and its share of those
losses would have been $15 million, if the export losses were evenly
distributed across the country. It is likely that although the export
losses would become evenly distributed over time, the Southwest would
suffer higher proportionate losses the first year since in the absence
of a quarantine it would be perceived as the focus of a spreading
infestation.
The impact of Karnal bunt and the subsequent quarantine actions on
market value within the regulated area, as estimated in this analysis,
should not exceed $44 million (Table 3). As discussed in Section V
below, $39 million in compensation has been made available through
budget apportionment to mitigate these losses.
While certain losses described above are clearly linked to the
quarantine and emergency actions, it is likely that individuals
suffering these losses alternatively would have shared the projected
$500 million in export losses which would have occurred in the absence
of a quarantine. The costs incurred in destroying immature wheat fields
in New Mexico and Texas are more clearly associated with complying with
regulatory directives. It is unlikely that producers who planted with
suspect wheat seed would have plowed under their fields without the
order, because unless producers surveyed their fields or tested their
grain the disease may not have become evident until several years in
the future. The cleaning and disinfecting protocols for grain storage
facilities and farm equipment, which resulted in additional operating
expenses, can also be linked to regulatory requirements.
Regulatory requirements to sanitize railcars and treat millfeed
caused many domestic mills to drop contracts with producers and
handlers of grain from the affected areas, resulting in a decline in
wheat prices within the regulated areas. In the absence of the
regulatory requirement on millfeed, domestic wheat millers would have
likely purchased negative-testing grain from the infected areas.
Although some millers were reluctant, the high quality of the durum
wheat produced within this area, coupled with a regulatory program that
required testing, would have helped counter their reluctance. However,
in addition to requiring testing the regulations required that millfeed
be treated and railcars sanitized, which increased the costs of milling
wheat from the regulated area by $35-40 per ton, and prompted many
contracts with grain producers and handlers to be canceled.
It is reasonable to expect, however, that in the absence of
regulation some portion of the losses would have resulted as the market
responded to the disease. A number of importers refused to honor
purchase contracts with handlers for negative-testing grain. This is
due in part to the perceived risk of the product, and also due to the
increased costs of taking precautionary measures in handling grain from
the infected areas. Some decline in the value of uninfected wheat
within the regulated area would have likely occurred upon discovery of
Karnal bunt, even if quarantine actions were not invoked. The actual
share of losses that is directly attributable to the presence of the
disease itself is difficult to quantify. Based upon the quantifiable
losses calculated in this analysis, it is estimated that roughly 12
percent of the $44 million in losses (those associated primarily with
the plow-down, cleaning and disinfecting of storage facilities and
combine harvesters, and treating millfeed) were incurred due to
regulatory actions and requirements. The remaining 88 percent of the
losses (composed of loss in value of negative-testing grain, seed and
straw, and positive-tested wheat) occurred in the regulated area as the
market concentrated its restrictions to those areas identified as
having Karnal bunt.
Based upon the export experience of this past year, it is estimated
that 25 percent of the wheat intended for export was diverted to other
markets because countries refused to import wheat from the regulated
area, despite APHIS'' assurances the wheat had twice tested negative
for Karnal bunt. These losses would have occurred if no regulations had
been put into place and arguably more exports would have been diverted
to other markets in the absence of regulation.
Table 3.--Estimated Loss in Value due to Karnal Bunt Regulations, 1995-
96 Crop Year
[In million dollars]
------------------------------------------------------------------------
Estimated
Action loss in
value
------------------------------------------------------------------------
1. Plowdown of NM and TX fields planted with infected seed. $1.2
2. KB-positive grain diverted to animal feed market........ 4.2
3. KB-negative grain that experience loss in value......... \1\ 28.0
4. Cost of sanitizing storage facilities................... 0.3
5. Millfeed treatment of KB-negative grain................. 1.6
6. Loss in value of seed................................... 6.0
7. Loss in value of straw.................................. 0.2
8. Loss related to cleaning and disinfecting of combine
harvesters................................................ 2.0
------------
Total.................................................. 44.0
------------------------------------------------------------------------
\1\ $28 million is the potential maximum amount of loss in value of
uninfected wheat.
V. Federal Compensation To Mitigate Losses
The Karnal bunt quarantine that was initially established was
necessarily broad due to the lack of data available at the time as to
the extent of the infestation. The discovery of Karnal bunt and
subsequent quarantine and emergency actions occurred after production
and marketing decisions had been made. Producers and other affected
individuals had little time or ability to avoid the unexpected costs or
pass those costs on to others in the marketing chain. The impact was
particularly severe on the wheat industry in the affected area because
much of the crop is grown under contract at specified amounts and
prices.
In order to alleviate some of these hardships and to ensure full
and effective compliance with the quarantine program, compensation to
mitigate certain losses was offered to producers and other affected
parties in a regulated area. The payment of compensation is in
recognition of the fact that while benefits from regulation accrue to a
large portion of the wheat industry outside the regulated areas, the
regulatory burden falls predominantly on a small segment of the
affected wheat industry within the regulated area.
For the 1996 wheat crop, $39 million in compensation funding,
including pending compensation actions, has been made available to USDA
through budget apportionment.
The Agency has identified three principles for deciding whether to
provide compensation. First, compensation may be appropriate where
quarantine and emergency actions cause losses over and above those that
would result from the normal operation of market forces. Payment of
compensation would reflect the
[[Page 24760]]
incremental burdens of complying with regulatory requirements insofar
as market forces would not otherwise impose similar or analogous costs.
Second, compensation may be appropriate where parties undertake actions
that confer significant benefits on others. Under this principle,
payment of compensation would be intended to overcome the usual
disincentives to produce such benefits. Third, compensation may be
appropriate where a small number of parties necessarily bears a
disproportionate share of the burden of providing such benefits. This
principle rests on the widely shared belief that burden-sharing is a
fundamental principle of equity.
The Agency compensation plan for Karnal bunt proceeds from these
three principles. Individual decisions regarding what specific losses
to compensate and how much compensation to offer in each case were made
in line with the above basic principles which describe the goals of
compensation. A top equity priority was compensation for costs of
plowing down fields, and for wheat and other articles the Agency
ordered destroyed or prohibited movement. Compensation amounts took
into account the need to mitigate real losses caused by the
regulations, so that regulated parties would not have a strong economic
incentive to avoid compliance. At the same time, amounts were not set
at a high enough rate to establish a ``bounty'' that would encourage
fraudulent claims or behavior that would result in increases in
contaminated wheat or other articles eligible for compensation.
The compensation committed to date for the 1995-96 crop year, as
published as an interim rule in the Federal Register on July 5, 1996,
and adopted in a final rule published in this issue of the Federal
Register, included compensation for:
Plow-down of infected fields in New Mexico and Texas;
Loss in value of wheat testing positive for Karnal bunt
for producers and handlers;
Loss in value of wheat testing negative for Karnal bunt
for producers and handlers;
Cost of millfeed treatment;
Cleaning and disinfecting of grain storage facilities;
Compensation for handlers and growers with wheat
inventories for past crop seasons;
Compensation for participants in the National Karnal Bunt
Survey whose wheat or grain storage facility is found positive for
Karnal bunt.
These areas of compensation are discussed below. Please note that
compensation has not been necessary for participants in the National
Survey, because Karnal bunt has not been discovered outside the
original outbreak area of the Southwest. Also, losses to handlers and
growers with wheat inventories for past crop harvest are included in
the discussion of loss in value of negative testing grain.
To offset for costs related to the plow-down, compensation was
offered to 74 producers to cover the $25 per acre plowing cost plus the
$275 per acre in average cost of production expenses (up until the time
the crop was destroyed). In total, these producers received
compensation of $1.02 million to cover operating costs incurred for
growing wheat.
Compensation is committed to owners of contaminated grain storage
facilities on a one-time only basis for up to 50 percent of the cost of
decontamination, not to exceed $20,000. Total cost of compensation, as
of March 14, 1997, is estimated at $134,000, with an average
compensation per facility of $8,375.
The total compensation expected to be paid for the loss of value of
both KB positive wheat and KB negative wheat from the regulated areas
is approximately $25 million. Compensation paid as of March 14, 1997,
is estimated at $12,409,000. The categories of wheat eligible for
compensation are discussed below.
Program guidelines limited maximum compensation rates for KB
positive wheat to $2.50 per bushel; producers were asked to establish
financial losses by calculating the difference between their contract
price and actual prices received (if production was pre-contracted) or
the difference between the estimated market value in May-June 1996 and
their actual prices received (if production was not pre-contracted).
Handlers were limited by the same maximum compensation amount, but
determination of financial loss was based on the difference between
their wheat purchase price and a $3.60 per bushel salvage value. They
may have had additional costs to sort and treat their KB-positive wheat
(after finding their KB-negative wheat was, in fact, KB-positive).
Moreover, many handlers were reluctant to accept wheat from affected
areas. This expedited procedure was offered to handlers in order to
reduce administrative and recordkeeping costs by not addressing their
losses on a contract-by-contract basis. It provided assistance that
avoided a market collapse.
For those growers who grew wheat under contract but who did not
receive full contract price, compensation for loss in value of wheat
testing negative for Karnal bunt is made based on the difference
between the contracted price and the higher of the actual price
received by the producer or the salvage value. (Salvage value was to
equal whichever price was higher of the following: The average price
paid in the region of the regulated area where the wheat was sold for
the period between May 1 and June 30, 1996; or $3.60 per bushel.)
Compensation for growers of nonpropagative wheat not grown under
contract is based on the difference between the estimated market price
for the relevant class of wheat and the higher of the actual price
received or its salvage value. (Salvage value was to be the same as
above for contracted wheat.) The estimated market price is what the
market price would have been if there were no quarantine for Karnal
bunt, and is calculated for each class of wheat, taking into account
the prices offered by relevant terminal markets (animal feed, milling,
or export) for the period between May 1 and June 30, 1996, with
adjustments for transportation and other handling costs. The
compensation formula for negative grain would suggest an average price
drop of $1.10 per bushel.
In order to encourage wheat marketings from the regulated areas and
reassure millers that they would not incur any additional costs in
handling uninfected wheat from a regulated area, a $35 per ton cost
offset for heat treatment was offered to millers using KB-negative
wheat produced in a regulated area. As of March 14, 1997, 108 requests
have been made from millers in Minnesota, Missouri, Oregon, Wisconsin,
and Virginia for a total of $1.7 million.
It should be noted that, as stated in the interim rule of July 5,
1996, the Agency is developing a compensation plan for the loss in
value of 1995-96 crop season seed. This plan will be published in a
future edition of the Federal Register. Compensation for loss in income
due to the restrictions placed on movement of straw and damaged custom
harvesters will also be addressed in a future edition of the Federal
Register.
Compensation payments for loss in value, while not accounting for
every loss or expense due to the disease or regulation, limited the
adverse impact on wheat sector income of affected individuals within
the regulated areas. The final amount of compensation for grain testing
negative and for millfeed treatment will depend on the marketing
distribution of the 1996 wheat crop and
[[Page 24761]]
will be proportionately lower the greater the amount of wheat that is
exported.
VI. Conditions for Wheat Production and Utilization in a Regulated Area
for the 1996-97 Crop Year
Based upon survey data identifying the location of fields that have
tested positive, the regulations in effect during the 1996 harvest were
modified in 1997 for some areas within the initial quarantine. The
final rule published on October 4, 1996, set forth criteria by which
fields in regulated areas would be classified into two risk classes in
the 1996-97 crop year. The effects of being classified in a particular
category are outlined in Table 4.
In each regulated area, all or a portion of that regulated area is
designated as either being a restricted area or a surveillance area.
There are two differences between being designated a restricted area
and a surveillance area. First, grain from a restricted area that tests
negative for Karnal bunt may move under a limited permit from the
regulated area to designated facilities under safeguard and sanitation
conditions; grain from a surveillance area that tests negative for
Karnal bunt may move under a certificate to any destination without
restriction. Additionally, millfeed from grain produced in a restricted
area is required to be treated, whereas millfeed from grain produced in
a surveillance area is not required to be treated.
Each restricted and surveillance area is further divided into
individual fields within the respective areas. Each field within a
restricted area will fall into one of three categories: (1) A field in
which preharvest samples tested positive; (2) a field planted with
known contaminated seed in 1995; or (3) any other field within the
restricted area. In a surveillance area, each field will be designated
as (1) a field planted with known contaminated seed in 1995; or (2) any
other field in the surveillance area. In a restricted area, in fields
in which preharvest samples tested positive, no Karnal bunt host crops
may be planted in the 1996-97 crop season. The same prohibition applies
to fields in both restricted areas and surveillance areas which were
planted with known contaminated seed in 1995. Also, as noted above,
millfeed from grain from a field in the ``any other field'' category in
a restricted area must be treated; millfeed from a surveillance area
need not be treated.
Table 4.--Conditions for Wheat Production and Utilization in a Regulated Area
--------------------------------------------------------------------------------------------------------------------------------------------------------
Disposition of
Definition Host planting Seed Decontamination Millfeed Survey grain
--------------------------------------------------------------------------------------------------------------------------------------------------------
Restricted Area Category:
1........................ Fields in which No host planting N/A............. Equipment N/A............ N/A............ N/A.
preharvest in 1996-97 crop movement
samples tested season. outside
positive. regulated area:
cleaned and
sanitized.
Movement
within: no
restrictions.
2........................ Fields planted No host planting N/A............. Equipment N/A............ N/A............ N/A.
with known in 1996-97 crop movement
contaminated season. outside
seed in 1995. regulated area:
cleaned and
sanitized.
Movement
within: no
restrictions.
3........................ All other fields No restrictions. Tested and, if Equipment Required, Double tested: Movement of
within from regulated movement unless Sampled in grain testing
restricted area. area, treated outside destination field at positive
prior to regulated area: State controls harvest; restricted;
planting only cleaned and disposition / composite grain testing
within sanitized. movement. sample prior negative may
regulated area. Movement to movement. move under
within: no limited permit
restrictions. to designated
facilities
under
safeguard and
sanitation
conditions.
Surveillance Area:
4........................ Fields planted No host planting N/A............. Equipment N/A............ N/A............ N/A.
with known in 1996-97 crop movement
contaminated season. outside
seed in 1995. regulated area:
cleaned and
sanitized.
Movement
within: no
restrictions.
[[Page 24762]]
5........................ All other fields No restrictions. Tested and, if Equipment Not required... Double tested: Movement of
located in from regulated movement Sampled in grain testing
definable area area, treated outside field at positive
where no fields prior to regulated area: harvest; restricted;
in risk level 1 planting only cleaned and composite grain testing
are located. within sanitized. sample prior negative may
regulated area. Movement to movement. move under
within: no certificate.
restrictions. Safeguard and
sanitation of
railcars not
required.
--------------------------------------------------------------------------------------------------------------------------------------------------------
The number of wheat acres that is estimated to fall into the
various risk categories in the 1996-97 crop season is presented in
Table 5. The amount of wheat acres in the regulated area is estimated
to be greatly reduced from the previous years largely due to factors
affecting the wheat industry as a whole (in particular, the projected
decline in export demand for U.S. wheat). Wheat acres are estimated to
decline by 36 percent in the regulated areas of Arizona, an average of
24 percent in the three affected counties of California, and 20 percent
each in New Mexico and Texas.
Table 5.--Projected 1997 Regulated Wheat Acreage, by Risk Categories \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
California
---------------------------------------
Risk category Arizona Imperial Bard/ New Mexico Texas Total acres
Valley Winterhaven Blythe
--------------------------------------------------------------------------------------------------------------------------------------------------------
(6)Acres
------------------------------------------------------------------------------------------
Restricted Area.............................................. 9,200 ........... 40 450 3,239 494 13,423
Surveillance Area............................................ 105,800 90,000 3,960 4,050 4,128 3,906 211,844
------------------------------------------------------------------------------------------
Total 1997 Regulated Area................................ 115,000 90,000 4,000 4,500 7,367 4,400 225,267
==========================================================================================
1996 Regulated Area...................................... 180,000 106,592 8,909 14,000 9,209 5,494 324,204
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimates obtained from the Karnal Bunt Task Force, Arizona.
Overall, the impact of the Karnal bunt restrictions is likely to be
lessened for many growers and other individuals, as a large portion of
the regulated acres falls into the less restrictive surveillance
category. Additionally, an interim rule published in the Federal
Register on May 1, 1997 (Docket No. 96-016-19, 62 FR 23620-23628),
established a new standard for defining regulated areas for Karnal bunt
based on finding bunted wheat kernals rather than just spores. That
interim rule substantially reduced the size of the harvested wheat area
regulated for Karnal bunt, in addition to the market-based decline in
wheat acres in the regulated areas above. Wheat production can still
occur on fields in the regulated areas (in restricted category 3), on
land which was not previously planted with wheat in 1996. Growers who
choose to plant wheat in these areas are minimally restricted by
regulations as grain that tests negative for Karnal bunt can move under
limited permit to designated facilities.
Approximately 10,000 acres in risk categories 1 and 4 are
prohibited from planting wheat. The value of wheat production that
could have been harvested from these fields, calculated at an average
price for durum wheat before the disease outbreak of $5.50 per bushel,
would have been less than $6 million.4 The impact on growers
with fields in these categories, however, is uncertain. While the
restrictions deny income that could be earned from wheat, they do not
preclude the planting of other non-host crops, such as barley, alfalfa,
cotton, and vegetables. In many of the infected areas, especially on
irrigated operations, wheat is either double-cropped or grown on
rotation with other non-host crops. The impact on producers in these
risk categories would therefore be minimized with rotation. Barley
would likely be grown on these fields: county crop budget data from
Arizona indicate that, except for barley, the historical net returns
obtained from wheat production are actually lower than the net returns
for all other crops.5
---------------------------------------------------------------------------
\4\ The estimate is based on an average yield of 100 bushels per
acre for durum wheat produced in the desert Southwest.
\5\ Other rotational crops include alfalfa hay, sudan hay,
upland and pima cotton, safflower, and lettuce.
---------------------------------------------------------------------------
It should be noted that changes in the compensation plan to
remunerate for certain losses are being developed and will be published
in a future edition of the Federal Register. Information received
through public comments and other forums is invaluable in refining
regulatory policies regarding Karnal bunt. With no prior experience in
regulating the disease, the improvement of the Karnal bunt program
requires ongoing input from the public. This process will enable the
Agency to better protect the wheat growing areas of the United States,
while causing the least possible disruption to the affected areas.
[[Page 24763]]
VII. Consideration of Alternatives to the Rule
A number of alternatives to the quarantine were considered by the
Agency in controlling the disease outbreak. One alternative was to
limit the scope of the 1996 quarantine by regulating only fields that
tested positive for Karnal bunt. This option was rejected for the
following reasons. Karnal bunt was originally detected in many
certified wheat seed lots produced in Arizona, as well as in some grain
in storage from a previous harvest. The information available to the
Agency indicated that seed from the infected lots were planted widely
in parts of Arizona and California, and in a few counties in Texas and
New Mexico. This infected seed could not be traced to specific fields
because the process of seed certification in Arizona allows seed from
different fields to be commingled in making a seed lot. Because Karnal
bunt spores can remain viable in soil for as long as 4 to 5 years, and
because wheat is planted in rotation in the Southwest, the actual
infestation would not be apparent until fields came into rotation with
wheat. Moreover, the detection of Karnal bunt spores in some grain in
storage from the 1993 harvest indicated that the disease had been
present for at least several years. Given that there is currently no
feasible soil test, the disease, in this situation, could only be
detected as wheat is planted. The unknown extent of the infestation in
Arizona and California necessitated broader control actions than those
offered by quarantining infected fields. In New Mexico and Texas, where
wheat acreage planted with suspect seed was limited and the wheat crop
was immature, regulatory actions were directed at plow-down of those
fields.
Another alternative available to the Agency would be not to
quarantine. This alternative was rejected as it could not be justified
given the risk of spread of Karnal bunt to uninfected areas and the
potential for significant losses in the wheat export market. The
quarantine actions to prevent disease spread serve to instill domestic
and foreign consumer confidence in the integrity of U.S. wheat. The
1995-96 Karnal bunt program provided pre-harvest sampling of all wheat
fields; compensation for losses as a result of Agency actions; and
remuneration to offset part of the additional costs in handling and
treating wheat produced in the regulated area (through a millfeed cost
offset and a cost-share facility clean-up program with grain handlers).
Without Federal intervention, it is conceivable that farm income of
wheat producers both within the affected area, and outside the
regulated area, would have been more negatively impacted. Therefore, it
is also conceivable that Federal intervention to prevent the spread of
KB beyond the regulated areas and to identify the KB status of acres
within the regulated areas may have had a salutary effect on the market
and a beneficial impact on prices both within and outside the regulated
areas.
When the treatment protocols for regulated articles were
established, few options to the requirements were made available to
affected wheat growers, handlers, and combine owners. These specific
protocols were based on the best scientific information available on
disease management in other countries affected by Karnal bunt.
Furthermore, the decision to require millfeed treatment, as with other
treatment requirements, was based on risk assessments that were
conducted to determine the acceptable level of risk of the various
modes of transportation of the disease. Compensation is thus being
considered to offset unanticipated losses and damages caused by the
regulatory requirements.
VIII. Regulatory Flexibility Analysis--Impacts on Small Entities Within
the Regulated Area
The Regulatory Flexibility Act requires that agencies assess the
impact of regulations on small businesses, organizations, and
governments. A majority of the firms in the affected area can be
classified as small based on criteria established by the Small Business
Administration (SBA). Much of the analysis on impacts discussed in the
previous sections are therefore applicable to these firms. Unless
otherwise noted, the SBA's characterization of a small business for the
categories of interest in this analysis is a firm that employs at most
500 employees, or has sales of $5 million or less. The SBA defines a
``small'' wheat producer as having sales of less than $500,000.
In addition to private businesses that produce and handle grain in
the regulated area, there were a number of other parties, such as
governmental and quasi-governmental entities and industry
organizations, that were also affected by the quarantine. For example,
farm organizations that represented producer interests were impacted by
the reduced activity due to a change in farm receipts. Local
governments may also have experienced a change in the business activity
level, and thus tax receipts, due to lower farmer spending. Seed
certification boards are expected to see lower levels of seed
certification as the demand for seed is reduced. State and county
departments of agriculture could also have experienced increased
financial burdens as regulatory responsibilities related to Karnal bunt
surveillance and protocol monitoring increased on the local level. The
magnitude of these effects, however, are not quantifiable. The
information below describes the number of firms affected and provides
insight into the impact on small entities due to Federal regulations.
Number of Producers and Acreage in Regulated Area (RA): There were
5,657 farms in the counties of the RA as reported in 1992 with
1,501,089 acres.6 About \1/3\ of the reported total acreage
was irrigated. There were 598 wheat growers in the counties of the RA:
236 in California (out of 2,236 wheat growers in the State); 310 in
Arizona; 40 in New Mexico (out of 892 in the State); and 12 in Texas
(out of 14,877 in the State). Total wheat acreage reported in these
counties in 1992 was 176,753 acres producing 13.3 million bushels.
Wheat acreage represented less than 12 percent of total farm acreage.
---------------------------------------------------------------------------
\6\ Source: 1992 Census of Agriculture.
---------------------------------------------------------------------------
Characteristics of Producers in the RA: Similar cotton and
vegetable production data suggest that the primary source of income in
these areas is derived from cotton and vegetable production. Cotton
acreage in the counties of the RA was reported at 496,284 acres on
1,301 farms in 1992. Vegetables grown for harvest was reported on 509
farms with 202,694 acres. The acreage and number of producers growing
wheat, cotton, and other crops vary from year to year depending on
rotations, price and weather expectations, and other factors. Wheat is
often a rotation crop in cotton and vegetable crop production providing
a more stable income while ``resting the soil'' and providing weed
control. Common rotations call for wheat in one year in three. Data for
the Pacific region indicate that the previous crop on 57 percent of the
wheat acres in 1989 had crops other than wheat.7 Forty-
percent had wheat, while 2 percent had corn and 1 percent had sorghum
as the previous crop.
---------------------------------------------------------------------------
\7\ Source: Economic Research Service, Characteristics and
Production Costs of U.S. Wheat Farms, 1989, October, 1993.
---------------------------------------------------------------------------
Of the total 598 wheat farms in the counties of the RA, 577 (or
96.5 percent) were growing wheat on irrigated fields. Of the 598 wheat
producers in the RA, 86 percent of producers harvested 499 acres or
less of wheat. These 514 wheat producers are assumed to be classified
in the SBA business classification as
[[Page 24764]]
being ``small entities.'' It is assumed that the other 84 growers are
excluded from this business classification. Wheat growers in the RA
typically lack on-farm storage.
Acreage Affected: By 1995/96, the amount of planted wheat acreage
in the counties of interest had increased; the total number of growers
in the RA was reported at 882 growers (455 in Arizona, 354 in
California, 72 in New Mexico, and 1 in Texas), with wheat acreage
totaling over 300,000 acres. Approximately 145 growers were found to
have grown KB-positive wheat, and 73 growers were issued plow-down
orders. As a percentage of the total in the four States of the RA,
quarantine actions affected less than 3.3 percent of producers, 3.75
percent of wheat acreage, but almost 8 percent of wheat production.
Based on the SBA's size definition, 86 percent of producers (514
out of 598) are assumed to be classified within the small business
category. Thus, the major part of any impact from Karnal bunt or Karnal
bunt regulations is assumed to fall on these individuals.
Harvesters: Harvesting equipment is expensive and specialized for
many agricultural crops. With a cost of over $130,000 for a new combine
and only a limited time of use, many wheat growers in the regulated
area depend on custom operators or ``custom cutters'' to harvest their
wheat crop. It is estimated that about 390 combines were needed to
harvest the 1995/96 wheat crop in the regulated area, with much of it
being supplied by custom cutters. There were probably 20 to 30 firms
engaged in this business activity (not including individuals who may
have done some custom cutting of neighboring properties). All firms are
assumed to be classified in the SBA classification as being a ``small
business.'' It is assumed that only a few of these firms, namely those
that were subjected to extensive cleaning and disinfection if they had
harvested many KB-positive fields, suffered losses to their machinery
as a result of quarantine actions. Additional losses occurred because
some harvesters were not allowed to bring their equipment to certain
States.
Wheat Seed Dealers: Wheat seed dealers sell seed to growers to
produce their crop for milling. They also represent seed wheat research
firms in that they sell wheat seed that is grown to be used as seed for
the next growing season or for export. This wheat seed is called
private variety seed as it was developed by a private firm and has a
plant variety protection ``patent'' on that variety. There are
approximately 25 to 30 seed marketing firms in the RA; some specialize
in acquiring seed production from the RA for export. Probably 3 to 4
seed wheat dealers have over 80 percent of the seed business in the RA.
These firms were affected by quarantine actions, i.e. by the
restriction on selling or transferring seed out of the RA. Some of
these firms derive their income from other enterprises such as
vegetable production, rather than solely from wheat production and
marketing. The number of firms that can be classified as ``small''
cannot be determined due to the proprietary nature of sales records.
Seed Wheat Research Firms: Seed wheat research firms take the risk
and have the expertise to develop new wheat varieties for future use.
Many develop a relationship with a seed wheat dealer (who is then
called an ``associate'') to market the developers' specific varieties.
Seed wheat research firms use seed production in the RA as a basis for
seed to be used in climates similar to the RA, e.g. the Mediterranean,
or use production in the RA as seed increases'' to be used in Northern
climates the following spring. There are approximately 5 to 9
commercial seed wheat research firms engaged in the RA, with perhaps 3
to 4 major firms conducting over 70 percent of research activity. Also,
there are small firms in the RA that specialize in ``seed increases''
for varieties being developed by universities, private companies, and
foreign countries. The number of firms that can be classified as
``small'' according to SBA standards cannot be determined due to the
proprietary nature of sales records.
Custom Haulers: There are approximately 130 to 140 individuals in
the RA that haul grain from fields directly after harvest to storage
and load-out locations (referred to as grain handlers). Some of these
individuals also haul farm machinery from field to field to prepare or
harvest wheat and other crops. The number of firms that can be
categorized as a ``small business'' is unknown.
Grain Handlers: Grain handlers store and unload nonpropagative
wheat received from growers. Wheat is received by trucks, pickups, and
farm tractors pulling either grain buggies or farm wagons. Ownership of
the wheat is usually transferred from the grower to the grain handler.
It is estimated that there are 92 such assembly sites in the RA (50 in
Arizona, 33 in California, 8 in New Mexico, and 1 in Texas). Off-farm
storage capacities are only available on a State-wide basis
8: Arizona (22.3 million bushels), California (98.04 million
bushels), New Mexico (15.63 million bushels); and Texas (840.2 million
bushels). The SBA defines a small grain elevator as one that employs
fewer than 100 employees. It is estimated that nearly all of the
elevators in the regulated areas can be classified as ``small.''
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\8\ Source: Grain and Milling Annual 1996. Off-farm capacities
may also reflect storage capacities of millers.
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Wheat Millers: The number of wheat millers for the four States are
9: California (12, with 1 processing durum); Arizona (2,
with 1 processing durum); New Mexico (none); Texas (7, with 1
processing rye). There were 24 millers in and around the RA that
entered into limited permits with APHIS: 2 in Arizona, 1 in New Mexico,
and 21 in California. Limited permit data indicate that millers in the
following States were also affected: Minnesota, Oregon, Virginia,
Missouri, and Wisconsin. The size of these operations could not be
estimated in terms of their SBA classification as ``small'' or
``large'' businesses. However, these firms are likely to be classified
as a ``small'' business.
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\9\ See footnote 8.
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Prepared Feed Manufacturers: The number of animal feed
manufacturers and/or millfeed processors in the Riverside-San
Bernardino primary metropolitan statistical area (PMSA) is 15, and
there are 11 in Arizona.10 Only 12 of these 26
establishments employed over 20 employees. The Riverside-San Bernardino
PMSA data indicates that the 15 establishments in that area
collectively employed a total of 600 workers with a $20.5 million
payroll (8 establishments of the 15 employed more than 20 employees).
Based on these data, it is estimated that these larger firms employ
about 62 workers on average and smaller firms had 15 workers per firm.
Similar data for Arizona show that 4 of the 11 establishments in that
State employed more than 20 employees. Given these scant data and SBA's
definition of a ``small business'' in this group (SIC 2048)--i.e., an
establishment with fewer than 500 employees--it is assumed that all
firms fall in SBA's ``small'' business category.
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\10\ Source: U.S. Department of Commerce, Economics and
Statistics Administration, Bureau, Bureau of Census, various State
reports on California and Arizona, Manufacturers--Geographic Area
Series, 1992.
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Feedlots: It is estimated that about 24 feedlots in the RA
(presumably feeding beef cattle) were affected by the regulations. They
were found in Arizona (16), New Mexico (3), and California (5). SBA's
definition of a ``small business'' in this group (SIC 0211) is an
establishment with sales less than $1.5
[[Page 24765]]
million. No sales data on these firms were available, so it is not
possible to estimate the number of firms that do not fall in SBA's
small business category.
Based on the above information, we have concluded that the majority
of the impact of Karnal bunt and subsequent regulations falls on small
businesses. It is conceivable, however, that without Federal
intervention, individual States and importing countries would place
their own, perhaps more severe, restrictions on wheat shipments from
the regulated areas. The 1996 Karnal bunt program provided pre-harvest
sampling of fields and other measures to ensure the quality of wheat
from the regulated areas. The use of limited permits for uninfected
wheat further facilitated the marketing flow of wheat, thereby enabling
the wheat industry within the regulated areas to be preserved.
IX. Summary and Conclusions
The imposition of quarantine and emergency actions against Karnal
bunt was a necessary, short-run measure taken to prevent the artificial
spread of the disease to other wheat-producing areas in the United
States. The establishment of Karnal bunt would have had serious adverse
impact on the wheat export market, as over half of U.S. wheat exports
are to countries that maintain restrictions against imports from
countries where Karnal bunt is known to occur. In the absence of
regulatory action, it is conceivable that farm income both within and
outside the regulated areas could have been further jeopardized.
Given the regulatory objective of disease eradication, the
quarantine measures to control a new disease outbreak such as Karnal
bunt is necessarily broad due to the lack of information on the extent
of the outbreak. These actions, enacted after production and marketing
decisions were in place, undoubtedly had an adverse impact on growers
and other affected individuals; many were likely unable to recover
unexpected costs. The loss in market value due to the quarantine is
estimated at $44 million. The majority of affected individuals and
firms can be classified as ``small'' based on criteria established by
the Small Business Administration.
In order to reduce the economic impact of the quarantine on
affected wheat growers and other individuals, compensation was provided
to mitigate certain losses and expenses. The payment of compensation is
in recognition of the fact that while a large portion of the benefits
of regulation accrue to others outside the regulated area, the
regulatory burden falls disproportionately on a small segment of the
industry. Indeed, it could be argued that without compensation, the
regulatory actions would not have been economically justified, as the
costs of disease control that are borne now could have a greater weight
than benefits that are received in the future.
Based upon our analysis, we have concluded that our quarantine
measures were appropriate and justifiable when compared with the
magnitude of the benefits achieved. Even a 10-percent reduction in
wheat exports would have a significant effect on wheat sector income.
It is estimated that a 10-percent decrease in U.S. wheat exports would
cause a decline in wheat sector income of over $500 million.
As of April 4, 1997, $39 million in compensation funding has been
made available to USDA through budget apportionment. While not
accounting for every loss or expense due to the disease or regulation,
compensation for loss in value lessened the adverse impact on wheat
sector income within the regulated areas.
As more information is obtained on disease prevalence, the number
of regulated acres are reduced and restrictions for the 1996-97 crop
season are modified to be commensurate with the level of risk. The
impact on those that are affected by regulation would also likely be
reduced; unlike in 1996, the 1997 restrictions on wheat planting are
known in advance and can, therefore, be taken into account when
cropping decisions are made.
Wheat acreage in the regulated areas is projected to decline from
1995-96 levels, largely due to decreased demand for U.S. wheat exports.
Less than 5 percent of the acres in the regulated areas is prohibited
from planting wheat. The impact on farm income due to this prohibition
is uncertain, as wheat is normally rotated with other crops. Overall,
the impact of the Karnal bunt restrictions on wheat production in the
regulated areas is likely to be small, as wheat can still be grown on
ample, available land that was not planted with wheat in 1996.
Done in Washington, DC, this 30th day of April 1997.
Donald W. Luchsinger,
Acting Administrator, Animal and Plant Health Inspection Service.
[FR Doc. 97-11718 Filed 5-1-97; 11:27 am]
BILLING CODE 3410-34-P
