Browse by Year
/ 2002
/ May
/ Friday, May 10, 2002
[Federal Register: May 10, 2002 (Volume 67, Number 91)]
[Proposed Rules]
[Page 31895-31917]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10my02-20]
[[Page 31895]]
-----------------------------------------------------------------------
Part IV
Department of Agriculture
-----------------------------------------------------------------------
Agricultural Marketing Service
-----------------------------------------------------------------------
7 CFR Part 930
Tart Cherries Grown in the States of Michigan, New York, Pennsylvania,
Oregon, Utah, Washington and Wisconsin; Secretary's Decision and
Referendum Order on Proposed Amendment of Marketing Agreement and Order
No. 930; Proposed Rule
[[Page 31896]]
-----------------------------------------------------------------------
DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 930
[Docket Nos. AO-370-A7; FV00-930-1]
Tart Cherries Grown in the States of Michigan, New York,
Pennsylvania, Oregon, Utah, Washington and Wisconsin; Secretary's
Decision and Referendum Order on Proposed Amendment of Marketing
Agreement and Order No. 930
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule and referendum order.
-----------------------------------------------------------------------
SUMMARY: This decision proposes amendments to the marketing agreement
and order for tart cherries grown in Michigan, New York, Pennsylvania,
Oregon, Utah, Washington and Wisconsin, and provides growers and
processors with the opportunity to vote in a referendum to determine if
they favor the changes. The amendments are based on those proposed by
the Cherry Industry Administrative Board (Board), which is responsible
for local administration of the order. The amendments include making
districts producing more than 6 million pounds per year subject to
volume regulations (rather than 15 million pounds); making shipments of
cherry juice and juice concentrate to certain markets eligible to
receive diversion credit; changing provisions related to alternate
Board members serving for absent members at Board meetings; making all
processed cherries subject to assessments; and eliminating the
requirement that different assessment rates be established for
different cherry products. Remaining amendments pertain to allocation
of Board membership; clarification of order provisions relating to
exemption and diversion; release of cherries in the inventory reserve;
and the use of crop estimates other than the official USDA crop
estimate in developing the Board's marketing policy. The proposed
amendments are intended to improve the operation and functioning of the
tart cherry marketing order program.
DATES: The referendum will be conducted from May 20 to 31, 2002. The
representative period for the purpose of the referendum is June 1,
2000, through May 31, 2001.
FOR FURTHER INFORMATION CONTACT: Anne M. Dec, Marketing Order
Administration Branch, Fruit and Vegetable Programs, AMS, USDA, 1400
Independence Avenue, SW STOP 0237, Washington, DC 20250-0237;
telephone: (202) 720-2491, or Fax: (202) 720-8938. Small businesses may
request information on compliance with this regulation by contacting
Jay Guerber, Marketing Order Administration Branch, Fruit and Vegetable
Programs, AMS, USDA, 1400 Independence Avenue, SW STOP 0237,
Washington, DC 20250-0237; telephone (202) 720-2491; Fax (202) 720-
8938.
SUPPLEMENTARY INFORMATION: Prior documents in this proceeding: Notice
of Hearing issued on March 17, 2000, and published in the March 23,
2000, issue of the Federal Register (65 FR 15580); Recommended Decision
and Opportunity to File Written Exceptions issued on January 15, 2002,
and published in the January 24, 2002, issue of the Federal Register
(67 FR 3540).
This administrative action is governed by the provisions of
sections 556 and 557 of Title 5 of the United States Code and,
therefore, is excluded from the requirements of Executive Order 12866.
Preliminary Statement
The proposed amendments were formulated based on the record of a
public hearing held in Rochester, New York on March 27 and 28, 2000; in
Grand Rapids, Michigan on March 29, 30, and 31, 2000; in Kennewick,
Washington on April 4 and 5, 2000; and in Salt Lake City, Utah on April
6, 2000. The hearing was held to consider the proposed amendment of
Marketing Agreement and Order No. 930, regulating the handling of tart
cherries grown in the States of Michigan, New York, Pennsylvania,
Oregon, Utah, Washington, and Wisconsin, hereinafter referred to
collectively as the ``order.'' The hearing was held pursuant to the
provisions of the Agricultural Marketing Agreement Act of 1937, as
amended (7 U.S.C. 601 et seq.), hereinafter referred to as the ``Act,''
and the applicable rules of practice and procedure governing the
formulation of marketing agreements and marketing orders (7 CFR part
900). The notice of hearing contained numerous proposals submitted by
the Board, and one proposed by the Agricultural Marketing Service
(AMS).
The Board's proposed amendments included making all districts
subject to volume regulations, rather than only those districts
producing more than 15 million pounds per year; making shipments of
cherry juice and juice concentrate to certain markets eligible to
receive diversion credit; changing provisions related to alternate
Board members serving for absent members at Board meetings; making all
cherry shipments subject to assessments; and eliminating the
requirement that different assessment rates be established for
different cherry products. Other amendments proposed by the Board
pertained to allocation of Board membership; clarification of order
provisions relating to exemption and diversion; release of cherries in
the inventory reserve; and the use of crop estimates other than the
official USDA crop estimate in developing the Board's marketing policy.
The Fruit and Vegetable Programs of AMS proposed to allow such
changes as may be necessary to the order, if any of the proposed
amendments are adopted, so that all of the order's provisions conform
with the effectuated amendments.
Upon the basis of evidence introduced at the hearing and the record
thereof, the Administrator of AMS on January 15, 2002, filed with the
Hearing Clerk, U.S. Department of Agriculture, a Recommended Decision
and Opportunity to File Written Exceptions thereto by February 13,
2002.
Ninety-six exceptions were filed during the period provided.
Growers and processors in the production area submitted almost all of
the comments. Comments were also filed by the Board, the Wisconsin
Department of Agriculture, and Congressman Mark Green of Wisconsin.
All of the comments addressed the issue of whether to reduce the
production threshold level for districts to be subject to volume
regulation. Fourteen supported retaining the current 15 million pound
threshold; 17 favored reducing the threshold to 6 million pounds (as
proposed by USDA in the recommended decision); and 65 wanted the
threshold to be eliminated (as proposed by the Board). Growers and
processors in the regulated States tended to support the Board's
proposal, while those in unregulated States favored retaining a
threshold production level. The exception was Wisconsin. Twenty-two of
the 28 comments originating in that State supported eliminating the
threshold, but not lowering it.
Only four of the exceptions addressed other material issues
included in the recommended decision. The specific issues raised in all
of the exceptions are discussed in the Findings and Conclusions section
of this document.
In addition to the 96 timely exceptions, 4 comments were received
after the comment period ended. No substantive issues were raised by
these commenters that were not already known to the Department or
raised by those who filed in a timely manner.
[[Page 31897]]
Small Business Considerations
Pursuant to the requirements set forth in the Regulatory
Flexibility Act (RFA), AMS has considered the economic impact of this
action on small entities. Accordingly, AMS has prepared this final
regulatory flexibility analysis.
The purpose of the RFA is to fit regulatory actions to the scale of
business subject to such actions so that small businesses will not be
unduly or disproportionately burdened. Marketing orders and amendments
thereto are unique in that they are normally brought about through
group action of essentially small entities for their own benefit. Thus,
both the RFA and the Act are compatible with respect to small entities.
Small agricultural producers have been defined by the Small
Business Administration (SBA) (13 CFR 121.201) as those having annual
receipts of less than $750,000. Small agricultural service firms, which
include handlers regulated under the order, are defined as those with
annual receipts of less than $5,000,000.
Interested persons were invited to present evidence at the hearing
on the probable regulatory and informational impact of the proposed
amendments on small businesses. The record indicates that these
amendments could result in additional regulatory requirements being
imposed on some tart cherry handlers, while regulatory burdens on other
handlers could be reduced. Overall benefits are expected to exceed
costs.
The record indicates that there are about 40 handlers regulated
under Marketing Order No. 930. In addition, there are about 905
producers of tart cherries in the production area.
The record indicates that of the 41 tart cherry handlers operating
during the 1999-2000 season, 7 had processed tonnage of more than 10
million pounds (or 17 percent of all handlers); 8 had between 5.1 and
10 million pounds (20 percent); 12 had between 2.1 and 5 million pounds
(29 percent); and the remaining 14 had less than 2 million pounds of
processed tonnage (34 percent). Handlers accounting for 10 million
pounds or more would be classified as large businesses. Thus, a
majority of tart cherry handlers could be classified as small entities.
Twenty handlers are located in Michigan--nine in district 1
(Northern Michigan), eight in district 2 (Central Michigan) and three
in district 3 (Southern Michigan). Of the remaining 21 handlers, 4 are
in district 4 (New York), 3 are in district 5 (Oregon), 1 is in
district 5 (Pennsylvania), 3 are in district 7 (Utah), 5 are in
district 8 (Washington), and 5 are in district 9 (Wisconsin). Many
handlers process cherries grown in more than one district.
Of the 904 growers who produced cherries in 1999, 368 were in
Northern Michigan (41 percent), 149 were in Southern Michigan (16
percent), 129 percent in Central Michigan (14 percent), 84 in New York
(9 percent), 65 in Wisconsin (7 percent), 38 in Utah (4 percent), 29 in
Pennsylvania (3 percent), 27 in Oregon (3 percent), and 17 in
Washington (2 percent).
During the 3-year period 1999-2001, production of tart cherries
averaged 300.6 million pounds. By district, Northern Michigan accounted
for 44.0 percent of the production, followed by Central Michigan with
22.4 percent, Southern Michigan with 8.7 percent, Utah and Washington
each with 6.6 percent, New York with 5.3 percent, Wisconsin with 3.4
percent, Pennsylvania with 1.7 percent, and Oregon with 1.3 percent.
Dividing total production by the number of growers, the average
grower produces about 332,500 pounds of cherries annually. With grower
returns of about 20 cents per pound, average revenues would be $66,500.
Thus, it is reasonable to conclude that most tart cherry growers are
small entities.
At 20 cents per pound, a grower would have to produce 2.5 million
pounds of cherries to reach the $500,000 receipt threshold to qualify
as a large producing entity under the SBA's definition that was in
effect at the time of the hearing. The evidence of record is that only
13 growers (or less than 2 percent of the total number of growers)
produced 2.5 million pounds or more during the 1999-2000 crop year.
Five of those growers (or 38 percent) were located in Northern Michigan
(district 1) and three operated (23 percent) in Central Michigan
(district 2). The remaining five growers in this category (38 percent)
were distributed among the remaining seven districts. The distribution
of large growers is thus in proportion to the overall distribution of
growers among the districts.
A large majority (more than 98 percent) of the tart cherry growers
falls into the previous SBA definition of a small entity (annual
receipts of less than $500,000); it is reasonable to assume that an
even greater majority qualify under the current SBA definition of a
small grower (annual receipts of less than $750,000).
During the 3 years 1999 to 2001, the average grower accounted for
about 333,000 pounds of cherries. By district, average grower size
varies considerably. The average grower in Washington accounts for
roughly 1,159,000 pounds of cherries. Next in size is Central Michigan
with 530,000 pounds, followed by Utah (518,000 pounds), Northern
Michigan (360,000 pounds), New York (191,000 pounds), Pennsylvania
(179,000 pounds), Southern Michigan (177,000 pounds), Wisconsin
(155,000 pounds) and Oregon (141,000 pounds).
This decision proposes that the order be amended: (1) To provide
that all districts in the production area with annual production in
excess of 6 million pounds be subject to volume regulation rather than
only those with annual production in excess of 15 million pounds; (2)
To allocate Board membership among districts based on levels of
production and make a corresponding change in quorum requirements; (3)
To authorize a Board member to designate any alternate to serve for
that member at a Board meeting in the event the member and his or her
alternate are unavailable; (4) To clarify the diversion and exemption
provisions of the order by eliminating cross references among those
provisions and adding general rulemaking authority to implement handler
diversion provisions; (5) To add specific authority to the order to
exempt or provide diversion credit for cherries exported to designated
markets; (6) To provide diversion credit for shipments of cherry juice
and juice concentrate to established diversion markets; (7) To add
specific authority for the transfer of diversion credits among
handlers; (8) To provide that grower diversions that take place in
districts that are subsequently exempt from volume regulation qualify
for diversion credit; (9) To allow cherries in the inventory reserve to
be released for use in only certain designated markets; (10) To specify
that the 10-percent reserve release for market expansion only applies
during years when volume regulations are in effect; (11) To require
assessments to be paid on all cherries handled, except for those that
are diverted by destruction at a handler's facility and those covered
by a grower diversion certificate; (12) To eliminate the requirement
that differential assessment rates be established for various cherry
products based on the relative market values of such products; and (13)
To allow the Board to use an estimate other than the official USDA crop
estimate in developing its marketing policy.
Industry Background
The principal demand for tart cherries is in the form of processed
products. Tart cherries are dried, frozen, canned,
[[Page 31898]]
juiced, and pureed. During the period 1995-96 through 1999-00,
approximately 91 percent of the U.S. tart cherry crop, or 280.5 million
pounds, was processed annually. Of the 280.5 million pounds of tart
cherries processed, 62 percent was frozen, 29 percent was canned, and 9
percent was utilized for juice.
Based on National Agricultural Statistics Service data, acreage in
the United States devoted to tart cherry production has been trending
downward. In the ten-year period, 1987-88 through 1997-98, the tart
cherry area decreased from 50,050 acres, to less than 40,000 acres. In
1999-00, approximately 90 percent of domestic tart cherry acreage was
located in four States: Michigan, New York, Utah and Wisconsin.
Michigan leads the nation in tart cherry acreage with 70 percent of the
total. Michigan produces about 75 percent of the U.S. tart cherry crop
each year. In 1999-00, tart cherry acreage in Michigan decreased to
28,100 acres from 28,400 acres the previous year.
In crop years 1987-88 through 1999-00, tart cherry production
ranged from a high of 396.0 million pounds in 1995-96 to a low of 189.9
million pounds in 1991-92. The price per pound received by tart cherry
growers ranged from a low of 7.3 cents in 1987 to a high of 46.4 cents
in 1991. These problems of wide supply and price fluctuations in the
tart cherry industry are national in scope and impact. Growers
testified during the order promulgation process that the prices they
received often did not come close to covering the costs of production.
They also testified that production costs for most growers range
between 20 and 22 cents per pound, which is well above average prices
received during the 1993-1995 seasons.
The industry demonstrated a need for an order during the
promulgation process of the marketing order because large variations in
annual tart cherry supplies tend to lead to fluctuations in prices and
disorderly marketing. As a result of these fluctuations in supply and
price, growers realize less income. The industry chose a volume control
marketing order to even out these wide variations in supply and improve
returns to growers. During the promulgation process, proponents
testified that small growers and processors would have the most to gain
from implementation of a marketing order because many such growers and
handlers had been going out of business due to low tart cherry prices.
They also testified that, since an order would help increase grower
returns, this should increase the buffer between business success and
failure because small growers and handlers tend to be less capitalized
than larger growers and handlers.
Aggregate demand for tart cherries and tart cherry products tends
to be relatively stable from year-to-year. Similarly, prices at the
retail level show minimal variation. Consumer prices in grocery stores,
and particularly in food service markets, largely do not reflect
fluctuations in cherry supplies. Retail demand is assumed to be highly
inelastic which indicates that price reductions do not result in large
increases in the quantity demanded. Most tart cherries are sold to food
service outlets and to consumers as pie filling; frozen cherries are
sold as an ingredient to manufacturers of pies and cherry desserts.
Juice and dried cherries are expanding market outlets for tart
cherries.
Demand for tart cherries at the farm level is derived from the
demand for tart cherry products at retail. In general, the farm-level
demand for a commodity consists of the demand at retail or food service
outlets minus per-unit processing and distribution costs incurred in
transforming the raw farm commodity into a product available to
consumers. These costs comprise what is known as the ``marketing
margin.''
The supply of tart cherries, by contrast, varies greatly. The
magnitude of annual fluctuations in tart cherry supplies is one of the
most pronounced for any agricultural commodity in the United States. In
addition, since most tart cherries are either canned or frozen, they
can be stored and carried over from year-to-year. This creates
substantial coordination and marketing problems. The supply and demand
for tart cherries are rarely in equilibrium. As a result, grower prices
fluctuate widely, reflecting the large swings in annual supplies.
In an effort to stabilize prices, the tart cherry industry uses the
volume control mechanisms under the authority of the Federal marketing
order. This authority allows the industry to set free and restricted
percentages.
The primary purpose of setting restricted percentages is an attempt
to bring supply and demand into balance. If the primary market is
oversupplied with cherries, grower prices decline substantially.
The tart cherry sector uses an industry-wide storage program as a
supplemental coordinating mechanism under the Federal marketing order.
The primary purpose of the storage program is to warehouse supplies in
large crop years in order to supplement supplies in short crop years.
The storage approach is feasible because the increase in price--when
moving from a large crop to a short crop year--more than offsets the
cost for storage, interest, and handling of the stored cherries.
The price that growers receive for their crop is largely determined
by the total production volume and carry-in inventories. The Federal
marketing order permits the industry to exercise supply control
provisions, which allow for the establishment of free and restricted
percentages for the primary market, and a storage program. The
establishment of restricted percentages impacts the production to be
marketed in the primary market, while the storage program has an impact
on the volume of unsold inventories.
The volume control mechanism used by the cherry industry would
result in decreased shipments to primary markets. Without volume
control the primary markets (domestic) would likely be oversupplied,
resulting in low grower prices.
Recent grower prices have been as high as $0.20 per pound. At
current production levels, the cost of production is reported to be
$0.20 to $0.22 per pound. Thus, the estimated $0.20 per pound received
by growers is close to the cost of production. The use of volume
controls is believed to have little or no effect on consumer prices and
will not result in fewer retail sales or sales to food service outlets.
Without the use of volume controls, the industry could be expected
to continue to build large amounts of unwanted inventories. These
inventories have a depressing effect on grower prices. The use of
volume controls allows the industry to supply the primary markets while
avoiding the disastrous results of oversupplying these markets. In
addition, through volume control, the industry has an additional supply
of cherries that can be used to develop secondary markets such as
exports and the development of new products.
The free and restricted percentages established under the order
release the optimum supply and apply uniformly to all regulated
handlers in the industry, regardless of size. There are no known
additional costs incurred by small handlers that are not incurred by
large handlers. The stabilizing effects of the percentages impact all
handlers positively by helping them maintain and expand markets,
despite seasonal supply fluctuations. Likewise, price stability
positively impacts all producers by allowing them to better anticipate
the revenues their tart cherries will generate.
While the benefits resulting from operation of the marketing order
[[Page 31899]]
program are difficult to quantify, the stabilizing effects of volume
regulations impact both small and large handlers positively by helping
them maintain markets even though tart cherry supplies fluctuate widely
from season to season.
Districts Subject to Volume Regulation
The order currently covers cherries grown in Michigan, New York,
Pennsylvania, Oregon, Utah, Washington and Wisconsin. For purposes of
regulation and allocation of Board membership, the seven-State
production area is divided into nine districts. Michigan, the largest
producing State, is divided into three districts--Northern Michigan,
Central Michigan, and Southern Michigan. Each of the other States
constitutes a single district.
A principal feature of the tart cherry marketing order is supply
management through the use of volume regulations. Volume regulations
are implemented through the establishment of free and restricted
percentages that are recommended by the Board and implemented by the
Department through the public rulemaking process. These percentages are
then applied to each regulated handler's acquisitions in a given
season. ``Free market tonnage percentage'' cherries may be marketed in
any outlet. ``Restricted percentage'' cherries must be withheld from
the primary market. This can be accomplished by either placing the
cherries into handlers' inventory reserves or by diverting them.
Cherries may be diverted by leaving them unharvested in the orchard or
by destruction at the processing plant; or by using them in secondary
markets. These secondary markets include exports (except to Canada or
Mexico), new products, new market development, experimental purposes,
and charitable contributions. Shipments of restricted percentage
cherries to these specified markets receive diversion credits which
handlers use to fulfill their restricted obligation.
Section 930.52 of the order provides that volume regulations only
apply to cherries grown in districts in which average annual production
of cherries over the prior 3 years has exceeded 15 million pounds.
Additionally, paragraph (d) of Sec. 930.52 provides that any district
producing a crop which is less than 50 percent of the average annual
processed production in that district in the previous 5 years would be
exempt from any volume regulation in the year of the short crop.
The Board proposed eliminating the 15-million pound threshold, and
subjecting all 9 districts to volume regulation. No proposal was made
to change the provision of Sec. 930.52(d).
Most witnesses at the hearing addressed this issue. Growers and
processors in Michigan, Utah and Wisconsin testified in support of the
Board's proposal. Opposition was primarily from growers and handlers in
Pennsylvania and Oregon. Some growers and processors in New York and
Washington testified in support of the Board's proposal, while others
were opposed to a change in the 15-million pound threshold.
The record shows that production levels in the nine districts vary
considerably, with Northern Michigan consistently producing the largest
volume of tart cherries, and Oregon the least. The following table
shows tart cherry production by district for the 5 years 1997 through
2001 (all figures are in million pound units). The data for the first 3
years (1997 through 1999) were introduced on the hearing record. The
statistics for 2000 and 2001 became available subsequent to the hearing
and may be found in reports compiled by the Board and retained by the
Department.
----------------------------------------------------------------------------------------------------------------
District 1997 1998 1999 2000 2001
----------------------------------------------------------------------------------------------------------------
No. Michigan................................... 140.7 187.8 107.7 107.5 182.0
Central Mich................................... 68.7 58.2 47.2 70.8 84.0
So. Michigan................................... 14.4 17.4 28.6 20.3 30.1
New York....................................... 13.3 13.1 16.9 16.5 14.6
Oregon......................................... 2.4 2.2 5.1 4.0 2.2
Pennsylvania................................... 5.6 4.0 6.9 5.3 3.5
Utah........................................... 17.5 32.5 14.5 32.5 12.0
Washington..................................... 11.8 13.7 16.6 17.4 25.2
Wisconsin...................................... 11.2 14.7 7.9 9.7 12.7
----------------------------------------------------------------
Total...................................... 285.4 343.6 251.4 284.0 366.3
----------------------------------------------------------------------------------------------------------------
Using the above figures, the following 3-year averages (used to
determine which districts are subject to volume regulation) were
computed.
------------------------------------------------------------------------
Average Average Average
District 1997-99 1998-00 1999-01
------------------------------------------------------------------------
No. Michigan..................... 145.4 134.3 132.4
Central Mich..................... 58.0 58.7 67.3
So. Michigan..................... 20.1 22.1 26.3
New York......................... 14.4 15.5 16.0
Oregon........................... 3.2 3.8 3.8
Pennsylvania..................... 5.5 5.4 5.2
Utah............................. 21.4 26.5 19.7
Washington....................... 14.0 15.9 19.7
Wisconsin........................ 11.3 10.8 10.1
--------------------------------------
Total........................ 293.5 293.0 300.6
------------------------------------------------------------------------
The above table shows that for each of the 3-year periods, the
three Michigan districts and Utah consistently exceeded the 15-million
pound threshold. Production in Oregon, Pennsylvania and Wisconsin was
below the threshold in all periods, while New York and Washington each
exceeded the 15-
[[Page 31900]]
million pound threshold in two out of three of the periods.
The order became effective in 1996, based on a series of hearings
that began in December 1993 and ended in January 1995. Proponents of
the order supported the 15-million pound threshold as a criterion for
determining which districts would be subject to volume regulation. At
the time the order was implemented, the three Michigan districts, New
York and Utah had average annual production in excess of 15 million
pounds. These five districts accounted for 92 percent of U.S.
production in 1995, and 89 percent of U.S. production in 1996.
Proponents of the order also supported a provision that a district
not meeting the 15-million pound threshold would become covered by
regulation when it reached a production level equal to 150 percent of
its average annual production during the period 1989 through 1992. The
purpose of this provision was to catch surges in production that
occasionally occur in order to more equitably distribute the burden of
supply control. It was also to make sure that when smaller producing
districts expand production capacity, they do not take advantage of the
system and become free riders. This was intended to prevent a district
from benefitting from the program without contributing to the effort to
reduce surplus supplies.
After considering the record evidence in support of this provision,
the Department decided not to include it in the order. The provision,
as proposed, seemed to be overly complicated to administer and would
possibly be inequitable to tart cherry growers and handlers. In
addition, proponents indicated that it was not their intent to regulate
States with small production volumes since their aggregate volume is
not a critical amount when compared to the total volume of tart
cherries produced.
Several witnesses at the amendatory hearing suggested that, had the
150 percent rule been incorporated into the initial order, the
amendment to eliminate the 15-million pound threshold would now be
unnecessary.
The following table shows production in the initially unregulated
districts during the period 1989 through 1992.
----------------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 Average 150%
----------------------------------------------------------------------------------------------------------------
Pennsylvania...................... 6.0 3.5 11.5 6.0 6.7 10.0
Wisconsin......................... 7.6 4.8 7.8 9.1 7.3 10.9
Oregon............................ 15.0 7.5 7.5 9.5 9.9 14.8
Washington........................ 6.4 7.4 9.8 12.8 9.1 13.6
----------------------------------------------------------------------------------------------------------------
The record shows that neither Pennsylvania nor Oregon has reached a
level of production equal to 150 percent of their production during
this base period. Wisconsin first exceeded production of 10.9 million
pounds (150 percent of its average annual production in the base
period) in 1997, and Washington exceeded production of 13.6 million
pounds (150 percent of its production during the base period) in 1998.
If the order were implemented as proposed by the proponents during
the promulgation, all districts but Pennsylvania and Oregon would
currently be regulated. As it is, for the 2001 season, Wisconsin is
also unregulated. In the 1999 crop year, Pennsylvania and Oregon
together accounted for 4.9 percent of the U.S. tart cherry crop. In
2000, they accounted for 3.3 percent of the total, and in 2001, only
1.6 percent. Adding production in Wisconsin during those years brings
the percentages in the 3 years 1999 to 2001 to 8 percent, 7 percent and
5 percent respectively.
With respect to New York, witnesses concurred that with the 15-
million pound threshold, that district would likely be subject to
regulation only about 50 percent of the time in the future. That is
because production in that State is close to the threshold, ranging
from 13.1 to 16.9 million pounds over the last 5 seasons. Concern was
also expressed that Utah could fall below the established threshold in
upcoming years and become unregulated. Washington was expected to
continue to increase its production and become subject to regulation in
the near future. (Washington did exceed the threshold during the period
1998-2000, and will be subject to any volume regulation implemented for
the 2001 crop). Witnesses agreed that production in Oregon,
Pennsylvania and Wisconsin was likely to remain below 15 million
pounds.
The conclusion by proponents of the Board's proposal was that with
the order as currently written, a greater proportion of U.S. production
could become unregulated. This would dilute the effectiveness of the
program and, more important, increase the amount of regulation imposed
on the remaining regulated districts.
Since the order became operational, volume regulations have been
implemented for three crop years--1997, 1998, and 2000. A volume
regulation has also been recommended for the 2001 crop, but not yet
effectuated. No regulation was deemed necessary for the 1999 crop. The
following table shows the level of regulation implemented (or, in the
case of 2001, recommended) in 1997, 1998, 2000 and 2001. With the
exception of the restricted percentages, all figures are in million
pound units.
----------------------------------------------------------------------------------------------------------------
1997 1998 2000 2001
----------------------------------------------------------------------------------------------------------------
U.S. Crop................................................... 285.0 344.0 284.0 366.3
Carry-in.................................................... 70.0 38.8 87.0 39.0
---------------------------------------------------
Total Available Supply.................................. 355.0 382.8 371.0 405.3
3-Year Average Sales........................................ 269.9 288.6 277.0 217.0
Target Carry-out............................................ 0.0 0.0 0.0 0.0
Economic Adjustment......................................... (23.0) (31.4) (22.0) 50.0
Optimum Supply.............................................. 246.9 257.2 257.0 267.0
Surplus..................................................... 108.1 125.6 116.0 138.3
Production in Regulated Districts........................... 240.0 309.0 232.0 335.9
Restricted Percentage....................................... 45 41 50 41
----------------------------------------------------------------------------------------------------------------
[[Page 31901]]
If all districts had been subject to regulation, the surplus would
have been divided by total production rather than by production in the
regulated districts. Had this been done, the restricted percentage in
1997 would have been 38 percent rather than 45 percent; the restricted
percentage in 1998 would have been 37 percent rather than 41 percent;
the restricted percentage in 2000 would have been 41 percent rather
than 50 percent; and the restricted percentage recommended for 2001
would have been 39 percent instead of 41 percent. The difference is
relatively small for the 2001 crop year because production in Utah (12
million pounds) was less than 50 percent of its prior 5-year average,
so that district will be unregulated in the 2001 crop year.
One of the primary arguments made by supporters of the Board's
proposed amendment was that of fairness. These witnesses stated that
all tart cherry growers benefit from the operation of the order, but
the burden of regulation is borne only by those in the regulated
districts. They testified that revenues received by growers of similar
size varied considerably due solely to where a particular grower's farm
was located. They concluded that no growers in the regulated districts
receive gross returns equal to those received in non-regulated
districts.
To illustrate, an agricultural economist from Michigan State
University (who was a witness testifying in support of the Board's
amendment) presented an analysis of the economic impacts of the program
on growers in regulated versus non-regulated districts. This analysis
compared gross farm income for growers of the same size in regulated
and non-regulated districts. It assumed a grower who produces 200 tons
on 40 acres, or 10,000 pounds per acre. Estimates of likely returns for
the 1998 crop were used.
For purposes of this analysis, it was assumed that the grower in
the non-regulated district could sell all of his or her production in
primary market outlets. In the case of the grower in the regulated
district, it was assumed that his or her crop utilization would be
allocated in accordance with the overall industry averages in 1998. For
example, about 3 percent of the tonnage would be placed in the
inventory reserve, 11 percent would be exported, and 13 percent would
be diverted through non-harvest.
Prices for free market cherries were USDA estimates of 14 cents per
pound for the regulated districts and 13.5 cents per pound for the non-
regulated districts.
Returns for market growth factor cherries were expected to be
somewhat lower (12 cents per pound) because these cherries tend to be
sold later in the year, or perhaps in a subsequent year. A conservative
figure of 6 cents per pound was used for reserve cherries because of
the many uncertainties as to what those cherries might return (for
example, the timing of their release and prevailing prices that might
exist). Export sales were estimated by industry leaders to average
about 9 cents per pound in 1998. For new product development, an
estimate of 11 cents per pound was used, taking into account the
considerable variation of returns for new cherry products depending
upon the processor and the circumstances surrounding the new products.
For non-harvested cherries, a savings of 3 cents per pound in variable
costs (e.g., harvesting and trucking) was used. Finally, no return was
recorded for cherries diverted through at-plant diversions.
The income for a grower in a regulated district, based on the
analysis of the witness, is shown below:
----------------------------------------------------------------------------------------------------------------
Lbs. % Price Income
----------------------------------------------------------------------------------------------------------------
Open Market................................................. 240,000 60 $0.14 $33,600
Market Growth............................................... 36,000 9 0.12 4,320
Inventory Reserve........................................... 12,000 3 0.06 720
Exports..................................................... 44,000 11 0.09 3,960
New Products................................................ 8,000 2 0.11 880
Non-Harvest................................................. 52,000 13 0.03 1,560
At-Plant Diversion.......................................... 8,000 2 0.00 0
---------------------------------------------------
Total Production........................................ 400,000 100 ........... 45,040
----------------------------------------------------------------------------------------------------------------
For a grower in a non-regulated district, income was estimated as
follows:
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Open Market................................................. 400,000 100 $0.135 $54,000
----------------------------------------------------------------------------------------------------------------
In summary, the grower in the non-regulated district would receive
revenues of $54,000, about 20 percent more than the grower in the
regulated district. Both growers would benefit from any strengthening
of prices through the use of volume regulations.
Opposition to the Board's proposal was expressed primarily by
industry members in unregulated districts. One of the arguments made
was that growers in these districts would be much more severely
impacted by a volume regulation because yields in those districts are
so low compared to those in regulated districts.
One witness used the analysis given above, but used different
yields per acre. For the grower in a regulated district, he used 40
acres with a yield of 7,400 pounds per acre. This resulted in total
production for that grower of 296,000 pounds and revenues of about
$33,330. For the grower in a non-regulated district, he again used 40
acres, but used a yield of 2,400 pounds per acre. This provided total
production of 96,000 pounds and revenues of only $2,960. Had the second
grower been subject to volume regulation, his or her revenues would
have been even lower.
The following table shows yields per acre in the States covered by
the order for the years 1997 through 2000. The annual yields are from
USDA statistics, while the average yield for Washington for the 4-year
period was obtained from a processor survey in that State. All figures
are in pounds per acre.
----------------------------------------------------------------------------------------------------------------
State 1997 1998 1999 2000 Average
----------------------------------------------------------------------------------------------------------------
Utah........................................... 6,250 11,790 5,360 11,800 8,800
Michigan....................................... 7,920 9,260 6,580 7,020 7,695
New York....................................... 5,580 5,380 6,850 7,550 6,340
[[Page 31902]]
Pennsylvania................................... 5,420 3,500 6,000 5,080 5,000
Wisconsin...................................... 4,670 6,580 4,350 4,350 4,988
Oregon......................................... 2,850 2,150 4,080 3,380 3,115
Washington..................................... NA NA NA NA 14,000
----------------------------------------------------------------------------------------------------------------
The above table shows that average yields do vary among the cherry
producing States. It also shows that yields within the States vary
considerably from year to year.
A witness supporting the Board's proposal stated that the use of
average yields for an entire State is misleading. Michigan, for
example, has a 4-year average yield of about 7,600 pounds per acre. The
average yields for the three districts that comprise Michigan are quite
different. In Northern Michigan, yields averaged about 13,000 pounds
per acre, while in Central Michigan they averaged 5,000 pounds per acre
and in Southern Michigan only 4,000 pounds per acre.
This witness further went on to state that variations in yields
within a geographic district exceed the variations among the districts.
He gave a personal example. The witness is a processor in Central
Michigan. His organization deals with about 20 growers. Yields for
those growers in 1998 ranged from 1,000 to 15,000 pounds per acre.
Therefore, it is reasonable to assume that the State in which a
grower farms is not necessarily a good indicator of an individual
grower's potential yield per acre. While weather conditions affect
yields (e.g., susceptibility to freezes), weather conditions can vary
as much within a district as between districts. Also, there are many
other variables that contribute to a grower's yield per acre. These
include the density of trees planted per acre, the age of the trees,
and cultural practices undertaken by individual growers to care for
their orchards. However, the table showing yields per acre does
indicate that there is a definite difference in yields among the
various States.
Regarding the age of trees, the record indicates that tart cherry
trees start losing optimum productivity at about 20 years. Growers
testified that they typically replant their trees when they are between
20 and 25 years old. The following table shows the percentage of
acreage in each State that contained older trees in 1998.
----------------------------------------------------------------------------------------------------------------
Percentage
State % acreage 21- % acreage 26+ total 21+
25 years years years
----------------------------------------------------------------------------------------------------------------
Michigan........................................................ 15 6 21
Utah............................................................ 8 1 9
New York........................................................ 24 7 31
Wisconsin....................................................... 20 15 35
Washington...................................................... 18 5 23
Pennsylvania.................................................... 30 6 36
Oregon.......................................................... 30 48 78
----------------------------------------------------------------------------------------------------------------
Oregon, consistently the lowest yielding producing district, has
substantially more older trees planted than other States. Because older
trees tend to produce less fruit, and Oregon has a high percentage of
older trees, this is likely to explain in part why Oregon's yields are,
on average, lower than in other areas. Pennsylvania had the second
largest percentage of older trees.
Another argument against eliminating the 15 million-pound threshold
was that unregulated districts like Oregon and Pennsylvania had already
``done their part'' to reduce the surplus of tart cherries by reducing
their acreage. Any continued surpluses were attributable to the major
producing State, Michigan. It was therefore argued that State should
bear the consequences of its actions and not impose its problems on the
smaller districts.
The record shows that U.S. tart cherry bearing acreage had declined
from a high of 50,050 acres in 1987, to 39,880 acres in 2000. All
producing States recorded acreage reductions during this period. On a
percentage basis, the greatest reduction was in New York (down 52
percent), followed by Oregon (down 36 percent), Utah (down 30 percent),
Pennsylvania (down 25 percent), Washington (down 24 percent), and
Wisconsin (down 17 percent). Michigan had the lowest percentage
decrease (down 15 percent), but the largest decline in total number of
acres (a reduction of 5,140 acres).
The record evidence is that acreage in all districts have declined
over the past decade. Decisions to reduce acreage were made by
individual growers based on their assessments of the best use of their
land. While opportunities for alternative land uses vary somewhat by
State, they also vary within the States.
In determining whether a surplus of tart cherries exists, total
U.S. supplies are compared to total demand in the primary market.
Production in each district contributes to the total supply, and thus
to any surplus that may exist. However, Michigan accounts for such a
large proportion of the total, that production in that State alone can
warrant a volume regulation. Additionally, the evidence is that
production in the smallest producing State--Oregon--is negatively
correlated to production in Michigan. That is, when production in
Michigan is high, production in Oregon is generally low. Thus, it is
likely that with elimination of the production threshold, Oregon would
be regulated in years when its production is below normal. This could
result in a heavier burden being placed on growers in Oregon as a
result of volume regulation than is true in the other producing
districts.
Additionally, the record shows that the benefits of the supply
management provisions of the order accrue to the entire U.S. tart
cherry industry. The short-run benefits arise when surplus supplies are
reduced, and market prices (due to the inelastic demand for tart
cherries) rise to levels that are closer to growers' typical costs of
production. Longer range gains are also expected from the encouragement
to expand market demand through new market and new product development.
The aggregate short-run benefits to the industry's growers from the
use of volume regulation in 1997 and 1998 have been estimated to be at
least $20
[[Page 31903]]
million per year. This has resulted because the smaller market
surpluses have resulted in stronger grower prices which are estimated
to be 7 to 9 cents per pound greater during those years.
The record shows that tart cherries, regardless of where grown in
the U.S., are sold into markets that are essentially national markets
with similar, closely interrelated prices throughout the country.
Therefore, the somewhat higher prices that have resulted from the
order's supply management features have accrued to all tart cherry
growers in the United States.
However, the history of the order and the evidence on the record
support the premise that the smallest producing districts should not be
subject to volume regulation under the tart cherry marketing order.
Further, there is an argument to be made for reducing the current 15-
million pound threshold. After considering all the testimony and other
record evidence, the Department has concluded that a threshold of 6
million pounds would be more reasonable. This would result in all
districts that have increased production over the past decade being
subject to regulation, consistent with the original intent of the
proponents of the order.
The record shows that the two districts that would not be regulated
under a 6-million pound threshold--Oregon and Pennsylvania--produce
insignificant volumes of tart cherries compared with total U.S.
production. Production in these districts has not grown, nor is it
anticipated that it will in the future. The evidence supports claims
that these smaller producing districts would be more impacted by a
volume regulation than other districts. Costs may be higher to growers
in those areas than in others because they tend to have lower yields.
Also, processing capacity in those districts tends to be limited,
supporting the argument that production is unlikely to increase. In
addition, processors in the smaller producing districts testified that
they would have to shut down their facilities if those districts were
subject to volume regulation because they would not be able to get
sufficient supplies of cherries to run their operations efficiently. If
the smaller producing districts do increase their production, they
would become regulated once they reach the 6-million pound threshold.
The proponent evidence showed that while volume regulations have
helped strengthen overall cherry prices, there are costs involved with
complying with these regulations. Such costs include reduced returns
for cherries that cannot be sold in primary markets. Imposing those
costs on the smallest producing districts would not result in any
higher overall price for tart cherries. Additionally, regulating the
two smallest States would not reduce the volume of regulation imposed
on cherries grown in the other States because of their low levels of
production. In the four years that restricted percentages have been
recommended by the Board, the percentage would not have changed at all
in two of four years (by not including Pennsylvania and Oregon) and
would have been marginally reduced in the other two years. Thus, it
appears that the costs of regulating these minor districts would not be
outweighed by any accrued benefits.
Allocation of Board Membership
Section 930.20 of the order provides for a Cherry Industry
Administrative Board, appointed by the Secretary to locally administer
the program. Among the Board's responsibilities is recommending
regulations to implement marketing order authorities. The Board
consists of 19 members: 18 tart cherry growers and handlers, and 1
public member.
For purposes of Board representation (among other things), the
production area is divided into nine districts. Each district is
allocated one to four Board members. Six of the nine current districts,
including all districts subject to volume regulation, are allocated
more than one member. Those five districts are Northern Michigan (four
members), Central Michigan (three members), Southern Michigan (two
members), New York (two members), Utah (two members), and Washington
(two members). The three districts with one member each are Oregon,
Pennsylvania, and Wisconsin. The nineteenth Board member is selected to
represent the general public, and need not be from any specific area.
Section 930.20 further provides that if a district with a single
member becomes subject to volume regulation, that district will get a
second Board member position. There is no specific requirement that a
district must lose a seat if it falls below the 15 million pound
threshold and is no longer subject to regulation.
The Board proposed amending Sec. 930.20 to provide that membership
for each district be based on the average annual production for that
district over the previous 3 years. Districts with up to and including
10 million pounds would be represented by one Board member; districts
with more than 10 and up to and including 40 million pounds would have
two members; districts with more than 40 and up to and including 80
million pounds would have three members; and districts with more than
80 million pounds would have four members.
The record shows that this amendment could result in a larger
number of Board members. Using average annual production figures for
the years 1999 through 2001, one district (Wisconsin) would have been
entitled to an additional Board member position for the term of office
that began July 1, 2000. Thus, the total number of Board members under
this proposed amendment would have increased to 20 members (versus 19
members under the provisions currently in effect).
An increase in the number of Board members would result in a
marginal increase in Board expenses. This is because the Board
reimburses members for costs incurred in attending Board meetings
(travel costs, etc.). Since Board expenses are funded through handler
assessments, all handlers would be impacted by slightly higher
assessments.
However, these slight cost increases will be offset by better
industry representation on the Board. Reallocating membership on an
annual basis will allow membership to more closely reflect changing
production trends in the industry. This should lead to better decision
making by a more representative administrative body.
Designation of a Temporary Alternate To Act for an Absent Board
Member
As previously discussed, the Board is composed of 19 members, with
the industry members allocated among nine districts. Each Board member
has an alternate who has the same qualifications as the member.
Industry Board members and alternates are nominated by their peers in
the district they represent.
Section 930.28 of the order provides that if a Board member is
absent from a meeting, his or her alternate will act in that member's
place. There is no provision for a situation in which both the member
and that member's alternate are unavailable.
The Board has proposed changing Sec. 930.28 as follows. If both a
member and his or her alternate cannot attend a Board meeting, the
member or the alternate (in that order) could designate another
alternate member to act in their stead. If neither the member nor the
alternate chooses to make such a designation, the Board's chairperson
would be free to do so (with the concurrence of a majority of present
members).
The record supports the concept of allowing more flexibility for
alternates
[[Page 31904]]
to fill in for absent Board members. However, the Department is
proposing a revision in the Board's proposal. This decision proposes
allowing a Board member to designate an additional alternate to act in
his or her place when that member and that member's alternate are
unable to attend a Board meeting. However, if the member chooses not to
name an additional alternate, that decision would not then revert to
the Board or its chairperson.
This proposed amendment would allow more flexibility for Board
members who cannot attend a Board meeting. It should also encourage a
full contingency of voting members at Board meetings, while maintaining
adequate representation among the districts comprising the production
area. No additional costs should be incurred as a result of this
change.
Clarification of Diversion and Exemption Provisions
As previously discussed, a primary feature of the tart cherry
marketing order is supply management through the establishment of free
and restricted percentages. These percentages are applied to each
regulated handler's acquisitions of cherries. Free percentage cherries
may be sold in any market, while restricted percentage cherries must be
diverted by a grower or handler or placed in the inventory reserve.
Section 930.58 of the order provides for grower diversions. Under
this section, growers may receive diversion certificates for cherries
used for animal feed and cherries left unharvested in the orchard.
Growers may also receive diversion certificates for ``uses exempt under
Sec. 930.62.'' A grower's diversion certificates can then be
transferred to that grower's handler and used to meet the handler's
restricted obligation.
Section 930.59 provides for handler diversions. Handlers may
receive diversion credits for cherries used in such forms as the Board
may designate, with approval of USDA. These forms may include
destruction at the handler's facility; use in Board approved food banks
or other approved charitable organizations; acquisition of grower
diversion certificates; and uses exempt under Sec. 930.62. Handlers
desiring to use the first three forms must notify the Board prior to
diverting cherries. Use of the fourth form requires application to and
approval by the Board prior to diversion.
Section 930.62 provides that certain cherries may be exempt from
volume regulation upon Board recommendation and USDA approval. Such
cherries would also be exempt from assessment obligations and any
established quality standards. Section 930.62 currently provides that
exemptions may be provided for cherries diverted in accordance with
Sec. 930.59 (Handler diversion privilege); used for new product and new
market development; or used for experimental purposes or for any other
use designated by the Board, including cherries processed into products
for markets for which less than 5 percent of the preceding 5-year
average production of cherries was utilized.
The record indicates that the industry supports continuation of
both the authority to exempt certain cherries from regulation, and the
authority to provide diversion credits for cherries used for certain
purposes. The application of each provision is different, however. An
example provided at the hearing illustrates the difference. Assume a
restricted percentage of 20 percent has been established, a regulated
handler acquires 10 million pounds of cherries, and that handler uses 2
million pounds of those cherries for new market development. This
handler would have a restricted obligation of 2 million pounds of
cherries (20 percent of the 10 million pounds of cherries acquired).
If cherries used for new market development were eligible for
diversion credit, this handler would have met his or her restricted
obligation by using 2 million pounds for that purpose. The handler
could thus market the remaining 8 million pounds of his or her cherries
as free percentage cherries in any outlet he or she chose. If, however,
cherries used for new market development were exempt from regulation,
the restricted percentage would be applied to that handler's total
acquisitions (10 million pounds), less the volume of cherries exempt
from regulation (2 million pounds). Thus, this handler would have a
restricted obligation of 1.6 million pounds (20 percent of 8 million
pounds), which would have to be diverted in forms approved by the Board
as eligible for diversion credit.
Cross references between Secs. 930.59 and 930.62 have proved to be
confusing. Thus, these sections are proposed to be amended by deleting
those cross references. Also, uses listed under Sec. 930.62 as possible
exempt uses are being listed under Sec. 930.59 as possible uses
eligible for handler diversion credit. Rulemaking would be required to
designate whether a particular use would be exempt from regulation or
would constitute an approved diversion outlet. Such rulemaking would be
based on Board recommendations, following its assessment of the impact
exemptions or diversions would have on the tart cherry industry.
This proposed amendment is a clarification of the current order and
its operation. It would not introduce new or different concepts. To the
extent that it makes the order easier for growers and handlers to
understand, it should be of benefit to the industry.
Exemption or Diversion Credit for Export Shipments
As discussed in the previous material issue, Secs. 930.59 and
930.62 provide for handler diversions and exemptions, respectively.
Certain uses of cherries are listed as eligible for diversion credit or
exemptions. Under the authority in these sections (specifically, that
for market development), diversion credits have been made available to
handlers during recent crop years for shipments to export markets,
excluding Canada and Mexico. Canada and Mexico were not included
because of their proximity to the United States and concern about
compliance matters.
The record indicates that allowing export shipments to receive
diversion credits resulted in stronger export sales. Exports in 1997-98
were unusually high (around 50 million pounds), although they declined
during the next season to 34 million pounds. Witnesses stated that the
tart cherry industry needs to expand demand for its product through,
among other things, development of new markets.
The Board proposed adding specific authority to Secs. 930.59 and
930.62 to allow diversion credits or exemptions for such export markets
as recommended by the Board and approved by the Secretary. This is a
clarifying change only. It would impose no new or different regulatory
requirements on the tart cherry industry.
Diversion Credit for Juice and Juice Concentrate
Section 930.59 of the order relates to how handlers may receive
diversion credits to offset their restricted obligations. Paragraph (b)
of that section states that diversion may not be accomplished by
converting cherries into juice or juice concentrate.
The Board recommended that the order be amended by deleting the
prohibition in Sec. 930.59(b) that shipments of cherry juice and juice
concentrate to approved diversion outlets be eligible for diversion
credit.
The record indicates that in the promulgation proceeding, handlers
from Oregon and Washington were concerned that juice concentrate could
be established as a use eligible for
[[Page 31905]]
diversion credit. Those handlers indicated that they processed all or a
majority of their cherries into juice concentrate. Cherries produced in
that area of the country have a high brix (sugar content) level
desirable for juice concentrate. Concern was expressed that if the
Board decided to allow diversion credit for juice concentrate, an
increase in the volume of juice in the marketplace and an accompanying
reduction in juice prices could result. This would unduly harm the
industry in the Washington and Oregon. USDA therefore inserted the
provision to prohibit the use of juice or juice concentrate for
diversion credit.
However, the use of juice and juice concentrate for export was
allowed under the exemption provisions of the order for the 1997-98
season. The 1997-98 season was the first season of operation for the
cherry order, and its provisions were new to the industry and complex
to administer. Handlers unfamiliar with order's diversion provisions
had exported or contracted to export tart cherry juice or juice
concentrate to eligible countries with the intention of applying for
and receiving diversion certificates for those exports. If those
handlers had been prohibited from receiving diversion certificates for
those sales, the handlers would have incurred severe financial
difficulties. Thus, the prohibition against exports of juice and juice
concentrate was suspended for the 1997-98 season only.
The record shows that until 1997, the juice market was distressed.
One reason was that there had been large volumes of concentrate
produced in the preceding years in the Western United States--volumes
that exceeded market demand. In 1995 particularly, there was a very
large crop of tart cherries (a record 395.6 million pounds), and a
large portion of that crop was processed into concentrate. An
oversupply situation occurred, which led to low prices and a large
carry-over of concentrate.
Witnesses claimed that the operation of the order has helped
address the cherry oversupply situation, including the surplus of
juice. Allowing exports of juice to receive diversion credits in 1997-
98 was quite successful. The industry exported more than 4 million
pounds (raw product equivalent) of juice concentrate that year,
comprising about 10 percent of total exports qualifying for credit. At
9 cents per pound for the raw fruit, growers received about $382,500 in
revenue from these sales. Handlers, whose value-added component is
about $5.00 per gallon (or $.056 per pound), received $236,000 in
revenue. In total, the industry gained at least $618,000 from export
sales of juice concentrate in 1997-98.
Providing diversion credits for exports of juice concentrate by
handlers in the regulated districts encouraged more exports of this
product. The higher levels of exports of concentrate helped reduce
heavy inventories and reduced the supplies available in the domestic
market. This led to an increase in the domestic price for juice
concentrate of about $4.00-$6.00 per gallon. Producers whose cherries
were processed into concentrate benefitted from the strengthening of
domestic juice prices.
In 1998, diversion credits were no longer authorized for exports of
juice and juice concentrate. Witnesses stated that this hurt the U.S.
cherry industry. Demand for juice concentrate in Europe was strong, but
domestic processors could not export juice concentrate in a way that
was economically feasible. Some processors exported raw juice stock to
Europe so the raw stock could be juiced overseas. This meant that the
added value of converting the stock to juice concentrate was lost to
U.S. processors. It also meant higher freight costs for the raw product
(versus concentrate). When juice stock was exported, the freight cost
to Europe was about 10 cents per pound. Growers received little for
cherries exported as raw juice stock, while grower returns for exported
juice concentrate were positive.
Further, this restriction resulted in shorting the export juice
market. Witnesses stated that if you are unable to supply a market
consistently, that market looks for a more reliable source of supplies.
When a market is lost to the U.S. industry for this reason, it is
difficult to regain. This is particularly detrimental to the tart
cherry industry as it seeks to expand markets for its heavy supplies of
product.
As previously indicated, the prohibition on diversion credits for
juice and juice concentrate was in response to concerns expressed by
the industry in the Northwest. At the time the order was promulgated,
it was represented that more than 85 percent of the crop in Washington
was processed into juice. During recent years, less than half of the
Washington crop was used for juice. Most of the rest of the crop was
used for 5 + 1 cherries (25 pounds of cherries to 5 pounds of sugar).
Additionally, the record shows that in 1993 there were 7 pitters in the
State; by 2000, that number had grown to 20. This supports the
conclusion that processors in Washington are able to pack a wider
variety of finished products. Cherries grown in Washington have
increasingly been processed into products other than juice and juice
concentrate.
Also, production in the State of Washington has grown, and a number
of witnesses at the hearing held in early 2000 expressed their belief
that Washington would soon produce in excess of 15 million pounds
annually and thus would become subject to volume regulation. In fact,
production in Washington for the 3 years 1998 to 2000 averaged 15.9
million pounds, and Washington became subject to volume regulation in
2001. It was critical for handlers in Washington to be able to receive
diversion credits for exports of juice and juice concentrate. This was
particularly true because 5+1 cherries do not generally sell in export
markets because they contain sugar and are thus subject to increased
tariffs when exported. For these reasons, the Board unanimously
recommended suspension of the prohibition on receiving diversion credit
for exports of cherry juice and juice concentrate. This suspension
became effective August 1, 2001 [66 FR 39409, July 31, 2001].
An additional benefit of allowing diversion credits for exported
juice and juice concentrate is that it would ensure that the domestic
market is adequately supplied in short crop years. In years when the
crop is small, most available tart cherries will be used to supply
higher value finished products rather than juice concentrate. If the
industry does not have a supply of concentrate in reserve, the juice
markets, both domestic and foreign, could go unsatisfied. In order to
have supplies available in short crop years, there needs to be an
incentive to have tart cherries stored as juice concentrate. Making
juice and juice concentrate eligible for diversion credit would create
an incentive to produce and store concentrate, which would ensure that
markets for those products are adequately supplied. It could also
result in fewer cherries being diverted in the orchard. This would
benefit growers through enhanced revenues, because they receive more
for cherries that are processed and sold than for cherries that are
diverted in the orchard.
This proposed amendment would result in additional options for
handlers in meeting their restricted obligations under the order. It
would also encourage expansion of markets for U.S. tart cherry
products, which should benefit the industry as a whole. It would not
adversely impact the sale of juice and juice concentrate in primary
markets; in fact, it could tend to strengthen prices in those markets.
This is because more
[[Page 31906]]
juice would likely be exported, which would reduce the supply available
in the domestic market.
Handler Transfers of Diversion Credits
Section 930.59 of the order provides for handler diversion credits.
Those diversion credits are used by handlers to meet their restricted
obligations. That provision of the order is silent with respect to the
ability of handlers to transfer diversion credits among themselves to
meet their restricted obligations.
The Board proposed adding a new paragraph (e) to Sec. 930.59 to
provide that a handler who acquires diversion certificates representing
diverted cherries during any crop year may transfer such certificates
to another handler or handlers.
The record shows that allowing transfers of diversion certificates
provides additional flexibility to tart cherry growers and handlers in
meeting program requirements, without changing the amount of tart
cherries available to be marketed as free percentage cherries. This can
also result in the processing of the highest quality cherries available
in any crop year, which would benefit the industry as a whole.
One witness at the hearing explained as an example that Handler A
may acquire a very high quality of tart cherries in a given year, and
would want to process and sell a higher percentage of those cherries
than his or her free percentage would allow. Handler B may be in a
situation where he or she receives more diversion credits than needed
because most of that handler's pack is for export. (We are assuming
that export sales are eligible for diversion credits.) Handler B might
want to transfer those excess credits to Handler A.
Additionally, there may be a situation in which Handler C's growers
have low quality cherries due to adverse growing conditions. These
growers may choose to use in-orchard diversions to a greater extent
than they normally would. Handler C could wind up with more diversion
credits than needed and may want to transfer those credits to Handler
A. A simple example to illustrate this situation follows. In this
example, we will assume a restricted percentage of 40 percent has been
established.
----------------------------------------------------------------------------------------------------------------
Excess
Receipts Restricted Exports Grower diversion
Handler (pounds) obligation (pounds) diversions credit
(pounds) (pounds) (pounds)
----------------------------------------------------------------------------------------------------------------
A............................... 100,000 40,000 0 0 (40,000)
B............................... 100,000 40,000 70,000 0 30,000
C............................... 100,000 40,000 0 50,000 10,000
----------------------------------------------------------------------------------------------------------------
In this case, Handler A needs diversion credits totaling 40,000
pounds to meet his or her restricted obligation, while Handlers B and C
have excess credits representing 40,000 pounds of cherries. If Handler
A could receive Handler B's and C's excess diversion credits, he or she
could use them to fulfill Handler A's restricted obligation. Otherwise,
Handler A would have to divert 40,000 pounds of cherries (by destroying
them, for example) or put them in the inventory reserve. With the
ability to transfer diversion credits, Handler A could acquire excess
credits from Handlers B and C. Handler A would benefit by being able to
process all of his or her cherries for free use. Handlers B and C (and
their growers) would benefit by being compensated for their diversions,
including those above the required amount.
Both the transferring handlers' and the receiving handler's growers
would benefit. Also, the overall quality of the crop marketed could be
improved. This would serve to increase consumer confidence and
acceptance, thereby strengthening demand for tart cherries. This would
benefit the U.S. tart cherry industry as a whole.
Additionally, if the transfer of diversion credits were not
allowed, the market could be shorted. This would have a detrimental
impact on the tart cherry industry. Again, we will use the above
illustration and assume these three handlers comprise the entire
industry.
----------------------------------------------------------------------------------------------------------------
``Free'' sales
Restricted Excess -------------------------------
Handler Receipts obligation diversions Without
With transfers transfers
----------------------------------------------------------------------------------------------------------------
A............................... 100,000 40,000 (40,000) 100,000 60,000
B............................... 100,000 40,000 30,000 30,000 30,000
C............................... 100,000 40,000 10,000 50,000 50,000
-------------------------------------------------------------------------------
Total....................... 300,000 120,000 0 180,000 140,000
----------------------------------------------------------------------------------------------------------------
With a 60 percent free percentage, it would be expected that
180,000 pounds of cherries would be available for sale as free
percentage cherries (60 percent of total receipts of 300,000 pounds).
As shown above, without the ability to transfer diversion credits, the
total volume of ``free'' cherries available to market would be only
140,000 pounds. This would be well below the 180,000 pounds deemed
necessary to meet market demand. This would hamper the industry's
efforts to expand markets for its products. Allowing transfers of
diversion certificates therefore has a positive impact on the industry.
Grower Diversion Certificates
Section 930.58 provides that a grower may voluntarily choose to
divert all or a portion of his or her cherries. Typically, this is
accomplished by leaving cherries in the orchard unharvested, although
other means are provided as well. Upon diversion in accordance with
order provisions, the Board issues the grower a diversion certificate
which the grower may then offer to handlers in lieu of delivering
cherries. Handlers may then redeem those certificates to meet their
restricted obligations.
Section 930.52(d) of the order provides that any district producing
a crop which is less than 50 percent of the average annual processed
production in
[[Page 31907]]
that district in the previous 5 years is exempt from any volume
regulation in that year. This provision was included in the order to
help relieve a district from the burdens of the order in a year in
which its processors and growers were already suffering from a severely
short crop.
The Board proposed an amendment to Sec. 930.58(a) to provide that
any grower diversions completed in a district subsequently exempt from
regulation under Sec. 930.52(d) will qualify for diversion credit.
Witnesses at the hearing testified that this is a needed change to
the order to reduce the risk growers face in deciding whether or not to
divert all or a portion of their crops. The reason such risk exists is
primarily due to the difference between the time diversions must take
place and the time a district's final production figure is known.
The Board is required to meet on or about July 1 of each crop year
to develop its marketing policy and recommend preliminary free and
restricted percentages (if crop conditions so warrant). The marketing
policy is typically a week or two after the release of the USDA tart
cherry crop estimate in late June. Final free and restricted
percentages are not recommended until after the actual crop production
figure is available. This is typically not until September, after
harvest is complete. This is also when a final determination is made as
to whether a district will be covered by regulation in accordance with
Sec. 930.52(d).
The record shows that the tart cherry crop is harvested in late
June or July. Growers must, therefore, make decisions as to whether to
undertake diversion activities before they are certain whether or not
their district will be covered by regulation. This occurred in
Southwest Michigan in 1997. Based on the USDA estimate, it was expected
that this district would be covered by volume regulation during the
upcoming crop year. However, the actual crop came in at less than 50
percent of the prior 5-year average production in that district, and
Southwest Michigan (District 3) was exempt from regulation.
Witnesses testified that growers who divert their crops in
anticipation of a volume regulation should not be penalized for that
decision because the USDA crop estimate indicates their district will
be regulated, but it turns out it is not. If those growers' diversion
certificates become invalid, they receive nothing for the cherries they
diverted. If their diversions continue to qualify for credit, however,
handlers who accept those diversion certificates compensate the growers
for them.
Without this amendment, the record shows that growers in some
districts (where application of volume regulation is uncertain) could
be forced into harvesting their crops. This would be contrary to the
program objective of balancing tart cherry supplies with market demand.
This amendment should benefit tart cherry growers who choose to
divert cherries in anticipation of a volume regulation. It should also
contribute to the supply management objectives of the program, which
would benefit the U.S. tart cherry industry as a whole.
Release of Cherries in the Inventory Reserve
Section 930.51 of the order authorizes the issuance of volume
regulations for tart cherries in the form of free and restricted
percentages. Section 930.50(i) provides that a handler's restricted
percentage cherries must be placed in an inventory reserve or diverted
through non-harvest, destruction at a handler's facilities, or shipment
into approved secondary outlets.
The order specifies three possible releases of inventory reserves
under Secs. 930.50 (g) and (j) and 930.54 (a). The first, under
Sec. 930.50 (g), releases an additional 10 percent (above the optimum
supply level) of the average of the prior 3 years sales if such
inventory is available. This release is for market expansion purposes.
The second release, under Sec. 930.50 (j) occurs in years when the
expected availability from the current crop plus expected carry-in does
not fulfill the optimum supply (100 percent of the average annual sales
in the prior 3 years plus the desirable carry-out). This release is
made to all handlers holding primary inventory reserves and is a
required release to be made by the Board if the above conditions are
met and reserve cherries are available. This provision is intended to
assure that inventory reserves are utilized to stabilize supplies
available on the market. Under this authority, cherries released from
the reserve can be sold in any market.
The third release is authorized under Sec. 930.54 (a) which allows
the Board to recommend to the Secretary a release of a portion or all
of the primary (and secondary) reserve. To make this release, the
Boards needs to determine that the total available supplies for use in
commercial outlets do not equal the amount needed to meet the demand in
such outlets.
The Board recommended an amendment to Sec. 930.54 to provide a
fourth option for a reserve release. Specifically, it proposed that a
portion or all of the primary and/or secondary inventory reserve may be
released for sale in certain designated markets.
Witnesses at the hearing suggested that the industry (through the
Board) needs more flexibility in determining how to utilize inventory
reserves. One witness opined that limited releases of reserves during
years of non-regulation may be necessary to maintain markets that are
available for diversion credits during years of regulation. The example
given dealt with sales to export markets other than Canada and Mexico.
In years of volume regulation, sales of cherries to these markets are
eligible for diversion credits that handlers may use to meet their
restricted obligations.
In developing its marketing policy and determining whether a
surplus exists, the optimum supply is compared with available supplies.
The optimum supply is defined as average sales over the last 3 years,
minus sales qualifying for diversion credit. Thus, the optimum supply
measures the volume of cherries needed to fill demand in the primary
market. If anticipated supplies exceed demand in the primary market, a
volume regulation may be issued. Restricted percentage cherries are
then used to fill these secondary markets.
If anticipated supplies are reasonably in balance with demand in
the primary market, no volume regulation would be issued. Since all of
a handler's cherries would then be ``free'' percentage cherries, he or
she would likely attempt to sell all those cherries in the primary
market because returns tend to be higher in that market. This could
result in few cherries being made available for sale in secondary
markets (such as exports).
The record shows that the tart cherry industry needs to continue
its efforts to expand markets. A critical aspect of this effort is to
ensure that supplies are available to fill needs in developing markets.
If, for example, an export market is developed over the course of time,
and then cherries are not available to supply that market, that market
may be lost to the industry. The Board's proposal would allow a release
of inventory reserves to meet the needs of these specific markets. This
should contribute to the long-run health of the industry.
Another witness suggested that a limited release should also be
possible for specific types of cherry products. He stated that over
time, the mix of products offered by the tart cherry industry has
changed considerably. New product development should continue to be
encouraged to expand marketing opportunities for the industry. Releases
[[Page 31908]]
of inventory reserves can play a part in this endeavor.
The witness gave a hypothetical situation using dried cherries as
an example. He said that if demand for dried cherries was very strong,
and supplies of that product from the current year's crop were
insufficient to meet that demand, releases of that product from the
inventory reserve should be authorized.
This proposed amendment should contribute to the industry's efforts
to balance tart cherry supplies with market demand. It will give the
Board more flexibility in determining when inventory reserve cherries
should be released for use. It will not impose any additional
regulatory requirements on tart cherry handlers.
Ten Percent Reserve Release for Market Expansion
Section 930.51 of the order authorizes the issuance of volume
regulations for tart cherries in the form of free and restricted
percentages. Section 930.50(i) provides that a handler's restricted
percentage cherries must be placed in an inventory reserve or diverted
into approved secondary outlets.
Section 930.50 provides that any volume regulation make available
as free percentage cherries an ``optimum supply'' of tart cherries. The
optimum supply is defined as the average sales of the prior 3 years
(minus sales of cherries qualifying for diversion credit) plus a
desired carry-out. Section 930.50(g) further provides that in addition
to the free market tonnage percentage cherries, the Board must make
available tonnage equal to 10 percent of the average sales of the prior
3 years for market expansion.
The Board proposed amending Sec. 930.50(g) to specify that the 10
percent reserve release only apply during years when volume regulation
is in effect.
The record shows that the 10 percent reserve release provision was
made a part of the order in large part due to USDA policy guidelines.
The Secretary's Guidelines for Fruit, Vegetable, and Speciality Crop
Marketing Orders (Guidelines) state that, under volume control
programs, primary markets should have available a quantity equal to 110
percent of recent years' sales in those outlets before the Secretary
would approve secondary market allocation or pooling. This is to assure
plentiful supplies for consumers and for market expansion while
retaining the mechanism for dealing with burdensome supply situations.
Witnesses in support of the Board's proposal stated that allowing
for and encouraging market growth in years of surplus supplies is
sensible. In fact, several witnesses stated that an important objective
of the tart cherry industry and the marketing order program is to
expand markets for tart cherries. This is supported, for example, by
the authorization of diversion credits for new product and new market
development.
Several witnesses spoke against the 10 percent release during years
of no volume regulation, however. Two concerns were expressed in this
regard. First, the release of inventories in a year in which supplies
and market demand are reasonably in balance results in an oversupply
situation. This can be accompanied by reduced grower prices. Second,
and probably more important, industry reserves can be depleted. One
objective of keeping an inventory reserve is to aid in stabilizing
annual supply fluctuations and safeguard against the detrimental
impacts of a short crop year.
The record shows that the tart cherry industry experiences cycles
in acreage and production. During the phase of the cycle with less
bearing acreage and shorter supplies, a short crop year can result in
significant shortages of available market supplies. This can curtail
continued market demand and market growth. When supplies are short,
they can be supplemented by reserve cherries. This would mitigate
spikes in prices, which hinder long term market demand. Food
manufacturing customers in particular demand a stable supply of product
at reasonable prices. Absent a reliable supply, these customers tend to
substitute other fruits in their products.
The use of the inventory release option also provides that some
surplus supplies in a large crop year with low prices can be carried
over to short crop, high price years. This results in improved revenues
for growers and processors. The use of the inventory reserve option
also provides an alternative to grower diversions (i.e., non-harvest).
Several witnesses used the 1999-2000 crop year to show the effects
of a reserve release during a year of no regulation. During that year,
the crop was 251.0 million pounds which, when added to a carryover from
the previous crop year of 38.0 million pounds, yielded total available
supplies of 289.0 million pounds. With the optimum supply at 285.0
million pounds, the Board found that supplies were reasonably in line
with market demand, and recommended no volume regulation be
implemented.
At the beginning of the crop year, industry reserves totaled 28.4
million pounds. Four million pounds were released early in the crop
year to meet unanticipated demand, leaving 24.4 million pounds in the
reserve when it came time for the release for market expansion. Ten
percent of the 3-year average sales figure meant that 28.5 million
pounds should have been released for market expansion; however, there
were only 24.4 million pounds in the inventory reserve, so the entire
reserve was released.
Witnesses claimed that the release of reserves in the current crop
year may result in a surplus supply of cherries in the marketplace.
This could put a downward pressure on price, and could result in a
higher carryover into the next crop year. This could mean a greater
surplus in 2000-2001, which could result in a higher restricted
percentage and greater probability of cherries being left in the
orchard unharvested.
Ultimately, these releases could result in less economic incentive
to place cherries in the reserve because they could be released at the
wrong time and return little to growers. With less incentive to
participate in the inventory reserve, more cherries would likely be
diverted by growers through non-harvest. Overall grower returns would
be lower, and long term market losses may occur.
This proposed amendment should contribute to the industry's efforts
to balance tart cherry supplies with market demand. It will give the
Board more flexibility in determining when inventory reserve cherries
should be released for use. It will not impose any additional
regulatory requirements on tart cherry handlers.
Assessments on All Cherries Handled
Section 930.40 of the order authorizes the Board to incur such
expenses as the Secretary finds are reasonable and necessary for it to
administer the tart cherry marketing order program. Section 930.40
further provides that the Board's expenses be covered by income from
handler assessments.
Section 930.41 provides that handlers pay their pro rata share of
the Board's expenses. Each handler's share is determined by applying
the established assessment rate(s) to the volume of cherries each
handler handles during a crop year. Section 930.41 further provides
that handlers are exempt from paying assessments on cherries that are
diverted in accordance with Sec. 930.59, including cherries represented
by grower diversion certificates issued under Sec. 930.58. Cherries
devoted to exempt uses under Sec. 930.62 are also free from
assessments.
The Board recommended that Sec. 930.41 be amended to provide that
all cherries processed and sold by handlers
[[Page 31909]]
be subject to assessments. The only cherries that would be exempt from
assessments would be those diverted in-orchard by growers, and those
diverted by handlers through destruction at their plants.
Proponent witnesses testifying in support of this change stated
that all processed cherries should be subject to assessments because
handlers profit from the sale of these cherries. This is because each
pound of fruit processed increases the handler's overall profitability
by reducing the per unit cost of processing. This is true even if the
cherries are used in an outlet approved for diversion credit.
The record shows that handlers have different ways of meeting their
restricted obligations. Their decisions are based on their own
marketing strategies. Some handlers take advantage of marketing their
products in eligible diversion outlets, while others either cannot or
do not do so. Witnesses suggested that providing an exemption from
assessments to handlers who choose to divert their cherries through
sales in those designated outlets creates a competitive advantage over
their competitors who do not do so. It was their opinion that if a
substantial volume of cherries is diverted by certain handlers, the
burden of financing the program increases on other handlers. Those in
support of assessing all processed cherries concluded that subjecting
all processed cherries to the assessment provisions of the order would
eliminate this unintended advantage.
Additionally, the record shows that a large portion of the Board's
annual expenses is incurred for oversight of compliance activities
related to diversion credits. For example, for those export sales
eligible for diversion credit, handlers are required to submit proof of
export. The documentation typically consists of warehouse receipts,
bills of lading, overseas bills of lading, and other documents proving
the cherries were exported. The Board staff reviews the documentation
submitted by each handler for sufficiency, requests additional
documentation if necessary, and issues diversion certificates upon
proof of compliance with order requirements. Similar activities are
undertaken with respect to sales in other designated diversion markets
(e.g., new product development). Witnesses stated that those handlers
who take advantage of these order provisions should pay their share of
the costs of enforcing those provisions.
One witness also stated that an advantage of this amendment would
be that it would broaden the assessment base under the order. This
would lower the assessment rate needed to effectively administer the
program.
This amendment would increase assessment obligations on handlers
who choose to divert their restricted percentage cherries in approved
outlets. However, it would also tend to result in a more reasonable
assessment system.
Uniform Assessment Rate
As discussed in the preceding section, Secs. 930.40 and 930.41 of
the order provide that the Board may incur certain expenses, and that
the funds to defray those expenses be paid by handlers through
assessments. Section 930.41 also provides, among other things, that the
assessment rate(s) recommended by the Board and approved by the
Secretary must compensate for the differences in the amounts of
cherries used for various cherry products and the relative market
values of those products.
The Board recommended that Sec. 930.41 be amended to provide that a
uniform assessment rate be established for cherries used in any or all
products. This would be true unless the Board decided to consider the
volumes of cherries used for various products and their relative
values; if that were the case, the Board could recommend differential
assessment rates if warranted.
The record shows that at the time the order was promulgated,
proponents of the program supported different assessment rates being
established for cherries used for various products. In their testimony,
they suggested that high value products such as frozen, canned or dried
cherries be assessed at one rate, and low value products such as juice
concentrate and puree be assessed at one-half that rate.
Proponents of the Board's recommended amendment stated that the
order should not require one rate for certain products and twice that
rate for others. They stated that while a two-tiered assessment rate
scheme may be appropriate in some years, it may not be in others. They
cited the fact that the absolute and relative market values of various
tart cherry products fluctuate from year to year.
One witness testified, for example, that producer returns for
cherries used for juice concentrate are comparable to those for other
products. He stated that cherry juice concentrate was selling for about
$17 per gallon. Subtracting estimated handling charges of $5.81 per
gallon, the net return to the grower would be an estimated $11.19. In
Washington, where about 50 pounds are required to make a gallon of
concentrate, growers would receive 22 cents per pound. In Michigan,
where it takes approximately 90 pounds of cherries to make a gallon of
concentrate, growers would receive 12 cents per pound. This witness
stated that grower returns in this range are comparable to returns
available for other products.
The conclusion of the proponent witnesses was that the Board should
have discretion in determining appropriate rates of assessment. They
did not believe a two-tiered approach should be mandated.
An opponent of the proposed change stated that the order should
continue to require the Board to consider the volume of raw product
used in producing various cherry products as well as the relative value
of those products in recommending annual assessment rates. He stated
that he did not necessarily support two levels of assessment rates, but
believed the Board should be required to give due consideration to
relevant factors in making its recommendations.
The Department concludes that while there may be justification for
establishing different assessment rates for different products, it
should not be required under the order. Thus, the proposed amendment to
Sec. 930.41 provides that in its deliberations pertaining to
appropriate levels of assessment rates, the Board should consider the
volume of cherries used in making various products and the relative
market value of those products. The assessment rate established may be
uniform or may vary among products, based on the Board's analysis.
Implementation of this amendment could result in a single, uniform
assessment rate applicable to all cherries. Such action would likely
increase the rate established for cherries used for juice concentrate
and puree, and could result in a lower rate for cherries used for other
products. The impact of any such action would be analyzed by the Board
and USDA prior to its effectuation.
Crop Production Estimate
Section 930.50 of the order requires the Board to develop an annual
marketing policy. This policy serves as the basis for determining the
level of volume regulation needed in a given crop year. First, the
Board determines the ``optimum supply'' which is defined as the average
sales of cherries in the past three years plus the desirable carry-out.
Next, the Board takes the crop forecast for the upcoming year and
subtracts from it the optimum supply (less the carry-in). If the
remainder is positive, it represents a surplus in
[[Page 31910]]
supplies, supporting the use of volume regulation. Section 930.50
prescribes that the Board must use the official USDA crop estimate as
its crop forecast.
The Board's amendment proposal would allow the Board to use a crop
estimate other than the official USDA crop estimate in its marketing
policy.
The record shows that USDA bases its pre-harvest estimate on two
methods. In Michigan, an objective yield survey is done by the State.
Such a survey is based on the actual count of fruit on the tree, the
number of trees per acre, and the acres in production. In the other
producing States, subjective yield surveys are done by those States.
This method entails canvassing tart cherry growers and handlers to
obtain their assessment of the upcoming year's crop.
The Michigan crop survey costs a total of $60,000 per year. Of this
total, the Board pays $24,000. The Board's share was expected to
increase to half of the total in 2001. Concern was expressed at the
hearing that if the industry decides to no longer contribute to the
cost of the Michigan State survey, that State would likely discontinue
its objective yield surveys and turn to subjective yield surveys. This
could result in a less reliable crop estimate than is currently
available. This is of particular concern because Michigan produces more
than 70 percent of the U.S. tart cherry crop.
Witnesses in support of this proposal stated that, in some years,
USDA's pre-harvest crop estimate may not be accurate enough due to
quickly changing crop conditions. They stated that current order
provisions prohibit the Board from using any other estimate even if the
majority of Board members, with their years of experience in the
industry, believe USDA's estimate in a given year is inaccurate. Using
the most accurate crop estimate available in deriving preliminary free
and restricted percentages is important because growers and handlers
make decisions based in part on those percentages. For example, growers
decide whether to divert or harvest their crops; these decisions are
irrevocable. Handlers also make pack and marketing plans based in part
on the expected level of regulation. If actual harvest varies
significantly from the pre-harvest estimate, growers and handlers could
suffer economic harm. Using the most accurate information available is
therefore necessary to enhance industry decision making.
One witness pointed to the situation faced by district 3 (Southern
Michigan) growers in 1997. As previously discussed under Material Issue
Number 9, at the time the Board developed its marketing policy,
indications were that district 3 would be regulated that year.
Subsequent to harvest, however, it was determined that volume
regulation would not apply to district 3 cherries that year. Growers
who made decisions to divert their crops based on the Board's marketing
policy estimates found themselves with diversion certificates that were
of no value.
The record shows that the USDA estimate should be used by the Board
unless two things happen. The first would be that the Board would have
to agree that the USDA estimate was inaccurate. The second would be
that the Board would have to agree on another estimate or estimates to
use. Both these actions would require concurrence by at least two-
thirds of the Board members. This would safeguard against the
possibility of some members attempting to manipulate the crop estimate
to impact the level of volume restriction.
In addition, witnesses testified that other estimates used by the
Board would have to be from other reliable, independent sources, and
would be averaged in with the USDA estimate. Currently available is an
annual estimate made by the Michigan Food Processors Association. Other
possible sources include the Michigan Agricultural Cooperative
Marketing Association and individual State grower associations.
This proposed amendment provides the Board with more flexibility in
developing its marketing policy and recommending preliminary free and
restricted percentages. To the extent that the Board's decision making
improves, the entire U.S. tart cherry industry would benefit.
The collection of information under the marketing order would not
be affected by these amendments to the marketing order. Current
information collection requirements for Part 930 are approved by OMB
under OMB number 0581-0177.
As with all Federal marketing order programs, reports and forms are
periodically reviewed to reduce information requirements and
duplication by industry and public sector agencies.
The Department has not identified any relevant Federal rules that
duplicate, overlap or conflict with this proposed rule. These
amendments are designed to enhance the administration and functioning
of the marketing order to the benefit of the industry.
Board meetings regarding these proposals as well as the hearing
dates were widely publicized throughout the tart cherry industry, and
all interested persons were invited to attend the meetings and the
hearing and participate in Board deliberations on all issues. All Board
meetings and the hearing were public forums and all entities, both
large and small, were able to express views on these issues.
Civil Justice Reform
The amendments proposed herein have been reviewed under Executive
Order 12988, Civil Justice Reform. They are not intended to have
retroactive effect. If adopted, the proposed amendments would not
preempt any State or local laws, regulations, or policies, unless they
present an irreconcilable conflict with the amendments.
The Act provides that administrative proceedings must be exhausted
before parties may file suit in court. Under section 608c(15)(A) of the
Act, any handler subject to an order may file with the Secretary a
petition stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with law and request a modification of the order or to be exempted
therefrom. A handler is afforded the opportunity for a hearing on the
petition. After the hearing the Secretary would rule on the petition.
The Act provides that the district court of the United States in any
district in which the handler is an inhabitant, or has his or her
principal place of business, has jurisdiction to review the Secretary's
ruling on the petition, provided an action is filed not later than 20
days after date of the entry of the ruling.
Findings and Conclusions; Discussion of Comments
The material issues, findings and conclusions, rulings, and general
findings and determinations included in the Recommended Decision set
forth in the January 24, 2002, issue of the Federal Register (67 FR
3540) are hereby approved and adopted subject to the following
additions and modifications.
Material Issue Number 1--Districts Subject to Volume Regulation
Based upon the briefs and exceptions filed, the findings and
conclusions in material issue number 1 of the Recommended Decision
(whether to change the criterion for determining which districts are
subject to volume regulation) are amended by adding the following 18
paragraphs to read as follows:
Ninety-four exceptions were filed regarding this issue, mostly from
tart cherry growers and processors in the
[[Page 31911]]
production area. Seventeen of those exceptions supported the
Department's recommendation to reduce the annual production threshold
to 6 million pounds. The majority of these were from industry members
in Pennsylvania (12 of the 14 comments received from that State). Two
Michigan growers, two Oregon growers, and one Washington grower also
supported the 6 million pound threshold.
These 17 comments generally agreed with USDA's conclusion that
there continues to be a need to set a minimum production threshold to
recognize the unique circumstances of the smallest producing districts.
They stated that imposing regulation on these areas would result in
costs that would exceed any benefits derived. It was their contention
that the tart cherry industries operating in the smaller districts
would be detrimentally impacted by volume regulation, while regulating
them would change very little because these States are minor producers
of cherries.
The President of Knouse Foods, the only processor operating in
Pennsylvania, was one of the commenters who supported the 6 million
pound threshold as a compromise, although he indicated leaving the
threshold at its current level of 15 million pounds would be
preferable. In his exception, he asked that if USDA goes forward with
the reduction in the threshold, that it also inform the industry that
this topic will not be reopened. He suggested that the Board should
shift its focus from this issue to the more important issue of how the
industry can sell more cherries.
The Department is aware that this issue has been of significant
concern to tart cherry producers and handlers recently. This is
supported by the number of witnesses who testified at the hearing and
the number of exceptions filed on this matter. While this issue has
been explored in depth during this proceeding, it cannot be concluded
that it will never need to be reassessed sometime in the future.
Fourteen comments were received in opposition to any change in the
current production threshold of 15 million pounds. In this category
were two Pennsylvania growers, five Oregon growers, one Washington
grower, and six commenters from Wisconsin (including a Congressperson).
Many of the comments in this category echoed the arguments of those
in support of the 6 million pound threshold. That is, they believed a
production threshold was needed to protect smaller growing areas which
have higher costs and lower returns.
Several exceptions mentioned that the 15 million pound threshold
was a compromise made when the program was put into effect, and it is
unfair for those in the larger growing areas to now go back on the
promises that were originally made. Also, some stated that this is an
effort by the Michigan industry to eliminate competition from other
areas.
It is true that proponents of the order supported the 15 million
pound threshold during the promulgation process. However, the order
authorizes the Board to seek amendments to the program. This is to
recognize that things change over time, and changes may be needed to
improve the operations of the program. In fact, much testimony was
presented at the hearing about experience gained during the first years
of operating the program. Many issues have arisen that were not
foreseen at the time the program was put in place. Based on the record
evidence, USDA has concluded that the threshold should be reduced, but
not eliminated.
Two Oregon growers opposed lowering the threshold level because
they feared the precedent it would set. They were concerned that the
Board would continue its attempt to eliminate the threshold altogether.
As previously stated, this subject has been examined in depth
during this proceeding. USDA does not believe current conditions in the
tart cherry industry support a reduction in the production threshold
below 6 million pounds. However, it cannot be concluded that this issue
will not be reexamined at some point in the future.
Most of the comments received from Wisconsin (22 out of 28)
supported the Board's proposal to reduce the threshold to zero. The
remaining six opposed any change in the current threshold. Some of
these exceptions stated that making Wisconsin subject to volume
regulation would result in some growers and handlers going out of
business. One of the Wisconsin commenters in support of retaining the
15 million pound threshold stated that establishing a 6 million pound
threshold could end tart cherry production in Wisconsin. Commenters
also claimed that production and acreage in Wisconsin are expected to
decline, so there is no need to regulate that district because it does
not contribute in any meaningful way to the oversupply situation.
However, there were other Wisconsin commenters who supported a zero
threshold.
The record evidence does not support the claims concerning a
decline in Wisconsin production. Production in Wisconsin has increased
since the inception of the order, and no one presented evidence at the
hearing that this was expected to change. In any event, if production
were to decline significantly (below 6 million pounds), Wisconsin would
again become unregulated.
Volume control provisions of the order have stabilized tart cherry
marketing conditions and have been economically beneficial to growers
and handlers in the production area. As with all volume control
programs, there will be those who may argue that they are economically
disadvantaged and therefore disagree with controls which are
implemented. However, in light of the changes in the industry since the
promulgation of the order, and the experience which has been gained in
administering volume control provisions, it is the Department's belief
that, at this time, a 6 million pound threshold will best serve the
interests of the industry.
Sixty-five comments were received objecting to USDA's
recommendation to reduce the threshold to 6 million pounds, and
supporting the Board's proposal to eliminate the threshold. Thirty-
three of these were from Michigan, 22 from Wisconsin, 5 from Utah, 3
from New York, and 2 from Washington. Proponents questioned the concept
of the order focusing on districts rather than the individuals within
them. No amendments were offered to change the district structure of
the order pertaining to volume regulation, and the subject was not
developed at the hearing.
The arguments raised in comments supporting a zero threshold were
introduced at the hearing and have been addressed in this discussion of
Material Issue Number 1. These arguments pertain mainly to the issue of
``equity.'' That is, it is simply not fair that some districts are
subject to volume regulation and some are not. All cherries produced
contribute to the surplus; everyone in the industry benefits from the
operation of the marketing order; and, thus, everyone should bear a
share of the burden of regulation.
The Act requires that marketing orders be limited in their
application to the smallest regional production area practicable. In
the case of tart cherries, USDA has determined that this includes the
States of Michigan, New York, Pennsylvania, Oregon, Utah, Washington
and Wisconsin. The Act also requires the marketing orders prescribe
such different terms applicable to different areas, as USDA finds
necessary to give due recognition
[[Page 31912]]
to the differences in production and marketing in those areas.
Both the promulgation record and the record of this hearing are
replete with evidence concerning differences among the tart cherry
producing districts. There are differences in yields; costs of
production; the mix of cherry products made; the number of growers and
processors; climate; swings in annual levels of production; age of
orchards; proximity to different markets; and the quality of the
cherries produced, among other things.
Proponents of a zero threshold continue to argue that all cherries
in the production area should be regulated, no matter how small the
crop. Even though evidence at the order promulgation hearing shows that
it was the proponents' position that the minor production states have
little bearing on the market, they now argue otherwise. Any threshold,
in their opinion, creates a competitive advantage for those who are
unregulated. However, based on the record, it is the Department's view
that a production threshold is necessary to recognize the differences
among varying districts. Proponents of the zero threshold failed to
produce adequate evidence to change that view. Furthermore, the record
does not demonstrate that the added costs of regulating all cherries
would be exceeded by the benefits derived from doing so. For these
reasons, the exceptions are denied.
Material Issue Number 2--Allocation of Board Membership
Based upon the briefs and exceptions filed, the findings and
conclusions in material issue number 2 of the Recommended Decision
(concerning whether changes should be made in allocation of Board
membership and voting requirements) are amended by adding the following
seven paragraphs to read as follows:
The exception filed by the Oregon Tart Cherry Association (OTCA)
supported the concept of annual reallocation of Board membership based
on each district's production. However, the exception asked that
specific language be added to Sec. 930.20 to require that this
reallocation be implemented ``promptly,'' and not be delayed based on
the expectation that a district's production level may change in the
near future.
OTCA's comments regarding this issue are consistent with the intent
of the changes proposed in the Recommended Decision. Therefore,
Sec. 930.23(f) is being changed to indicate that each district's 3-year
average annual production would be recalculated annually. This would be
done as soon as possible after each season's final production figures
are known (typically in September). Any district meriting additional
seats due to increasing production would have them filled during the
next regularly scheduled round of nominations (generally held in
January or February). Nominees to fill these additional seats would
then be appointed by USDA to serve for the term of office beginning the
following July 1. Likewise, any seats needing to be vacated due to a
district's falling production would be vacated at the beginning of the
next term of office (July 1). There is no provision in the proposed
revision to Sec. 930.20 to allow the annual reallocation of Board
membership to be waived if there are expectations that changes in a
district's production level are temporary in nature.
The Board's exception asked for clarification regarding the way in
which it is determined which seats are to be vacated in the event a
district's production declines and it is entitled to fewer positions.
First, the Board took exception to an example given in the Recommended
Decision that a district with three members would have two grower
positions and one handler position. The Board pointed out that a
district with three members would not necessarily have two grower and
one handler positions, but could have one grower position and two
handler positions instead. The Board's observation is correct. The
example used in the Recommended Decision was for illustrative purposes
and was not intended to suggest that a district entitled to three Board
positions would always have two growers and one handler representing
that district.
Second, the Board suggested that in determining which member should
step down, the members representing the affected district should have
the discretion in deciding. If that was not successful, rules and
regulations governing this situation could be implemented. This is
precisely what the Recommended Decision states.
The Board's exception also addressed the issue of filling a new
seat when a district earns an additional Board representative due to
higher production levels. In such an instance, the Board wants the
members representing the district at the time the reallocation is made
to be able to state whether they want to be considered as a grower or a
handler member. This would be true regardless of which type of seat
they were nominated and appointed to fill.
Under the provisions of the order, only growers may participate in
nominating grower members to serve on the Board, and only handlers may
nominate handler members. While it is true that some members may be
both growers and handlers and may therefore be eligible to serve in
either type of position, each member is nominated by a different group
and appointed to represent that group. To illustrate, a person
nominated by handlers in a district to represent them may not be
acceptable to growers in that district to represent their interests (or
vice versa). The Board's exception on this point is contrary to the
nomination procedures contained in the order and is therefore denied.
Two exceptions expressed concern about the requirement that two-
thirds of the Board's membership be required to vote in favor of any
Board action. These two comments said it was unclear whether the two-
thirds applied to total membership or only to the membership present at
a given meeting. They objected to the latter scenario. The change
proposed in the Recommended Decision intended that two-thirds of the
total Board membership be required to approve any Board action (not
two-thirds of those present). Thus, no changes are needed.
Material Issue Number 3--Board Designation of a Temporary Alternate To
Act for an Absent Board Member
Based upon the briefs and exceptions filed, the findings and
conclusions in material issue number 3 of the Recommended Decision
(concerning added flexibility for alternates to serve for absent Board
members) are amended by adding the following five paragraphs to read as
follows:
Three exceptions were filed concerning this issue. One Washington
grower supported USDA's recommendation in its entirety.
The OTCA supported allowing a member to designate an additional
alternate to act in his or her stead when that member and that member's
alternate are unable to attend a Board meeting. However, the OTCA
opined that any such designated alternate should be required to be a
grower or handler in the district he or she |
