Tart Cherries Grown in the States of Michigan, New York, Pennsylvania, Oregon, Utah, Washington and Wisconsin; Recommended Decision and Opportunity To File Written Exceptions to Proposed Amendment of Marketing Agreement and Order No. 930

DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 930

[Docket Nos. AO-370-A6; FV98-930-2]

Tart Cherries Grown in the States of Michigan, New York,

Pennsylvania, Oregon, Utah, Washington and Wisconsin; Recommended

Decision and Opportunity To File Written Exceptions to Proposed

Amendment of Marketing Agreement and Order No. 930

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule and opportunity to file exceptions.

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SUMMARY: This recommended decision invites written exceptions on

proposed amendments to the marketing agreement and order for tart

cherries grown in Michigan, New York, Pennsylvania, Oregon, Utah,

Washington and Wisconsin. The amendments were proposed by the Cherry

Industry Administrative Board (Board), which is responsible for local

administration of the order. One amendment would clarify the current

limitation on the number of Board members that may be from, or

affiliated with, a single ``sales constituency'' by amending the

definition of that term. Another would simplify the method used to

establish volume regulations for tart cherries. The proposed amendments

are intended to improve the operation and functioning of the tart

cherry marketing order program.

DATES: Written exceptions must be filed by February 4, 2000.

ADDRESSES: Written exceptions should be filed with the Hearing Clerk,

U.S. Department of Agriculture, room 1081-S, Washington, DC 20250-9200,

FAX number (202) 720-9776. Four copies of all written exceptions should

be submitted and they should reference the docket numbers and the date

and page number of this issue of the Federal Register. Exceptions will

be made available for public inspection in the Office of the Hearing

Clerk during regular business hours.

FOR FURTHER INFORMATION CONTACT: Anne M. Dec, Marketing Order

Administration Branch, Fruit and Vegetable Programs, AMS, USDA, room

2525-S, Washington, D.C. 20250-0200; telephone: (202) 720-2491, or Fax:

(202) 720-5698. Small businesses may request information on compliance

with this regulation by contacting Jay Guerber, Marketing Order

Administration Branch, Fruit and Vegetable Programs, AMS, USDA, P.O.

Box 96456, room 2525-S, Washington, DC 20090-6456; telephone (202) 720-

2491; Fax (202) 720-5698.

SUPPLEMENTARY INFORMATION: Prior document in this proceeding: Notice of

Hearing issued on November 12, 1998, and published in the November 17,

1998, issue of the Federal Register (63 FR 63803).

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

Notice is hereby given of the filing with the Hearing Clerk of this

recommended decision with respect to the proposed amendment of

Marketing Agreement and Order No. 930, regulating the handling of tart

cherries in Michigan, New York, Pennsylvania, Oregon, Utah, Washington

and Wisconsin (hereinafter referred to as the order), and the

opportunity to file written exceptions thereto. Copies of this decision

can be obtained from Anne M. Dec whose address is listed above.

This action is issued 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 orders (7 CFR part 900).

The proposed amendment of Marketing Agreement and Order No. 930 is

based on the record of a public hearing held in Grand Rapids, Michigan

on December 1, 1998, and in Salt Lake City, Utah on December 3, 1998.

Notice of this hearing was published in the Federal Register on

November 17, 1998. The notice of hearing contained proposals submitted

by the Board.

The Board proposed two amendments. One would amend the current

order provision which defines the term ``sales constituency'' in order

to clarify the intent of the Board membership limitation regarding

sales constituency affiliation. The second would simplify the method

used to establish volume regulations for tart cherries.

Also, the Fruit and Vegetable Programs of the Agricultural

Marketing Service (AMS), proposed to allow such changes as may be

necessary to the order, if either or both of the above amendments are

adopted, so that all of its provisions conform with the proposed

amendment.

Eighteen witnesses testified at the hearing. These witnesses

represented tart cherry growers, processors and marketers in Michigan,

Oregon, Washington and Utah. Some witnesses supported the Board's

proposed amendments, while others were opposed to the recommended

changes.

At the conclusion of the hearing, the Administrative Law Judge

fixed February 11, 1999, as the final date for interested persons to

file proposed findings and conclusions or written arguments and briefs

based on the evidence received at the hearing. That date was later

extended to February 26, 1999. Six briefs were filed. Briefs in support

of the proposed amendments were filed by the Cherry Industry

Administrative Board; Michigan grower Cherry Bay Orchards, Inc.; and

CherrCo, Inc. of Ludington, Michigan. Briefs in opposition to one or

both of the proposed amendments were filed by Oregon grower Fruithill,

Inc.; the Oregon Tart Cherry Association; and Washington grower

Washington Tart Cherry.

Material Issues

The material issues of record addressed in this decision are as

follows:

(1) Whether to clarify the current limitation on the number of

Board members that may be from, or affiliated with, a single ``sales

constituency'; and

(2) Whether to simplify the method used to establish volume

regulations for tart cherries.

Findings and Conclusions

The findings and conclusions on the material issues, all of which

are based on evidence presented at the hearing and the record thereof,

are:

Material Issue Number 1--Definition of Sales Constituency

The current order provision which defines the term ``sales

constituency'' should be amended in order to clarify the intent of the

Board membership limitation regarding sales constituency membership or

affiliation.

The tart cherry marketing order, which became effective in 1996,

covers tart cherries grown in Michigan, New York, Pennsylvania, Oregon,

Utah, Washington and Wisconsin. The record indicates that while the

order covers tart cherries grown in seven States, production is not

evenly distributed among those States. To illustrate, the 1998-99 tart

cherry crop was about 340 million pounds. Michigan accounted for 76.4

percent of the production, followed by Utah with 9.6 percent, Wisconsin

with 4.3 percent, Washington with 4.0 percent, New York with 3.9

percent,

[[Page 673]]

Pennsylvania with 1.2 percent, and Oregon with 0.6 percent.

The record evidence is that there are about 41 tart cherry handlers

covered by the program and about 896 growers in the production area. By

State, about 72.5 percent of the growers are in Michigan, 9.9 percent

in New York, 5.3 percent in Utah, 4.5 percent in Wisconsin, 3.6 percent

in Pennsylvania, 2.5 percent in Oregon, and 1.7 percent in Washington.

The program is administered locally by the 18-member Cherry

Industry Administrative Board. Among the Board's responsibilities is

recommending regulations to implement marketing order authorities. 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. For those districts with more than one member, only

one of those members can be associated with a single ``sales

constituency.'' Five 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), and Utah (two members). The four districts with one

member each are Oregon, Pennsylvania, Washington and Wisconsin. (The

eighteenth Board member is selected to represent the general public,

and need not be from any specific area.)

The term ``sales constituency'' is currently defined in Sec. 930.16

of the order to mean a common marketing organization or brokerage firm

or individual representing a group of handlers or growers. Section

930.20(f) states that not more than one Board member may be from, or

affiliated with, a single sales constituency in those districts having

more than one seat on the Board. Record evidence shows that this

limitation was designed to prevent any single sales organization from

having undue control of Board decision making. Actual control of the

sales function was cited as the defining characteristic of a ``sales

constituency.''

The record further indicates that this limitation was designed to

prevent the recurrence of a problem that existed under a previous

Federal tart cherry marketing order that was in effect from 1971

through 1987. Under the terms of that program, persons affiliated with

a single sales organization could fill a majority of Board member

seats. This could occur even if that organization accounted for less

than a majority of the total volume of tart cherries produced. Under

the terms of the previous order, actions of the Board only required a

simple majority vote. This meant that representatives from a single

sales organization could pass Board actions without the support of

other industry members. Several witnesses testified that the current

order requirement that any action be approved by 12 of 18 Board members

makes the sales constituency limitation far less critical than it was

in the past.

The record shows that the tart cherry industry is comprised of many

different types of organizations with varying functions. At one end of

the spectrum is a group like Cherry Central, Inc. (Cherry Central). The

record indicates that Cherry Central is a federated cooperative with 14

grower cooperative members. Twelve of those cooperatives grow tart

cherries. Other commodities marketed by Cherry Central include sweet

cherries, blueberries and apples. Cherry Central members grow fruit in

Michigan, New York, Utah, Washington, and Wisconsin, as well as in

Florida, Georgia and Indiana.

The record indicates that Cherry Central's purpose is to market and

sell its members' tart cherries and other products. It acts as the sole

sales agent for its members, performing a broad range of sales

activities from advertising to quality control. It employs its own

sales force that is responsible for soliciting customers, dealing with

buyers and negotiating sales. It acts as a single entity in the

marketplace, not differentiating among its members' products.

The record indicates that the sales constituency limitation was

clearly intended to apply to this type of organization. That was the

intent at the time the current order was promulgated when Cherry

Central was identified as the type of organization whose Board

membership should be limited. No witness offered testimony indicating

that such limitation is no longer necessary.

At the other end of the spectrum is an organization known as the

Cherry Marketing Institute (CMI). CMI is an organization established

under Michigan State law, and its members grow tart cherries in a

number of States. CMI's primary function is to conduct generic

promotion activities to expand overall sales of tart cherry products.

It also conducts research in the areas of processing techniques and

product development. CMI activities are funded primarily with tart

cherry grower dollars. CMI is not directly involved in the sales of

tart cherries.

The record indicates that CMI efforts benefit all tart cherry

growers and processors, not only those who contribute to its

operations. At the time the order was promulgated, it was specifically

stated that the sales constituency limitation should not apply to CMI.

No evidence contrary to this view was presented in the current

proceeding.

Another example of an organization that would not constitute a

sales constituency under the current order definition is the Michigan

Agricultural Cooperative Marketing Association (MACMA). The record

indicates that MACMA is another grower organization formed to act on

the behalf of tart cherry growers generally. At one time, MACMA was

involved in negotiating grower prices, but it no longer performs that

function. MACMA's current functions are to collect and disseminate

market information to assist growers in making informed decisions.

Again, the record contains no evidence which would suggest that MACMA's

status under the order should be reconsidered.

Between the two ends of the spectrum is a recently formed federated

cooperative named CherrCo, Inc. (CherrCo). The record indicates that

this organization was not in existence at the time the order became

effective, although preliminary discussions concerning its formation

may have been underway. The record contains varying viewpoints as to

whether CherrCo should be considered as a single sales constituency for

purposes of Board membership under the current order provisions.

The record shows that CherrCo is a federated grower cooperative. It

is comprised of 24 member cooperatives. CherrCo's members account for

75-80 percent of Michigan's tart cherry production, and a significant

portion of the production in New York, Utah, Washington and Wisconsin.

CherrCo currently has no members in Oregon or Pennsylvania. The record

indicates that CherrCo members range in size producing from

approximately 600,000 pounds of tart cherries per year to more than 50

million pounds of tart cherries per year.

The primary function of CherrCo is to establish minimum prices for

tart cherries. Minimum prices are established for various grades and

packs of frozen and hot pack tart cherries, but not for pie fill, dried

cherries, or other products. All CherrCo's members agree to sell their

frozen and hot pack tart cherry products at or above these minimum

prices.

Record evidence further indicates that CherrCo is not directly

involved in the actual sales of its members' products. Instead, each

member individually selects a sales agent. These agents then

[[Page 674]]

work to generate and consummate sales for the individual CherrCo

member, not for CherrCo itself. No cherries are sold under the CherrCo

name, but rather under that of the CherrCo member or the sales agent.

CherrCo members are free to change their sales agents whenever they so

choose.

According to record evidence, competition among CherrCo members is

strong, unlike that of members of other organizations such as Cherry

Central. Cherry Central, for example, works as a single unit to sell

the products of its members, and there is no competition among its

members to secure sales. CherrCo members, on the other hand, compete

with each other, as well as with non-CherrCo members to secure sales of

their products. The record evidence is that while CherrCo members'

sales agents agree to meet the minimum prices established by CherrCo,

there are many other ways that individual companies compete to obtain

sales (that is, other than on the basis of price). These include, for

example, the product mix offered by individual companies. Testimony

indicates that while some CherrCo members offer an extensive mix of

tart cherry and other products, others specialize in a single product

(for example, frozen tart cherries). Other ways individual companies

that belong to CherrCo differentiate themselves are on their own

reputations, on the quality of the products they offer, on any special

services they supply to their customers, and on whether or not their

processing plants are certified to conform with certain sanitation

standards.

The record shows that CherrCo does not perform functions other

sales organizations may. CherrCo does not make any processing or sales

decisions. It does not direct how much its members should produce, what

products they should produce, or for whom. Sales information is treated

as proprietary and is not shared with CherrCo's membership. Information

such as who is selling to whom and at what price is kept confidential.

Witnesses testified that this is unlike the way Cherry Central

operates. In that organization, members share information on customers

and quantities sold.

The record also shows that, in addition to establishing minimum

prices, CherrCo performs other functions for its members. Most of these

functions relate directly to ensuring that its members are complying

with their agreement to abide by the established minimum prices. The

record shows, for example, that CherrCo licenses its sales agents. All

CherrCo members agree to sell only through these licensed sales agents.

In order to become licensed, the sales agents agree to conform to

CherrCo's pricing structure. The record indicates that CherrCo

currently has 10 licensed sales agents, all of which also agree to only

market CherrCo members' products.

CherrCo performs other functions as well, such as collecting

proceeds from sales and distributing them to its members. The record

indicates that subsequent to processing by a CherrCo member, tart

cherries are sent to a storage facility (for example, a freezer). At

that time, the cherries are consigned to CherrCo. On paper, the

cherries belong to CherrCo, although they are not physically in

CherrCo's possession. CherrCo is then informed of any sale by the

member's sales agent and, if the minimum pricing requirements are met,

the cherries are released by CherrCo for movement. CherrCo then bills

the buyer, collects the proceeds, and remits those proceeds to the

pertinent member after subtracting an administrative charge to cover

its expenses.

It was testified that CherrCo employs a staff of four individuals,

including its President. None of these individuals are engaged in

negotiating sales with current or prospective buyers on behalf of

CherrCo members. One employee is responsible for billing, and

disbursing sales receipts. Another monitors sales agreements between

licensed sales agents and buyers, and releases tart cherries for

movement if those agreements conform with CherrCo's minimum pricing

requirements. A third employee tracks the inventory consigned to

CherrCo. The President oversees the day-to-day operations of the

organization and is responsible for member relations. Again, none of

these employees is actively engaged in arranging for the sale of tart

cherry products.

The Board's recommended amendment would revise the current

definition of ``sales constituency'' to specifically exclude an

organization which receives consignments of tart cherries but does not

direct where those cherries are sold. This exclusion would mean that

entities which perform functions and services such as CherrCo would not

be considered sales constituencies, and their representation on the

Board would not be subject to the limitation in Sec. 930.20(f) of the

order.

Witnesses supporting the Board's proposal agreed with the

proponents' intent at the time of the order's promulgation that control

of sales should be the criteria for determining whether an organization

is considered a sales constituency. They also testified that CherrCo is

more akin to CMI than to Cherry Central because its activities benefit

everyone in the tart cherry industry, not just its members. There was

testimony to the effect that limiting representation on the Board by

CherrCo members could disenfranchise many tart cherry growers. That is,

many growers would be deprived of adequate representation on the Board.

This is because such a high percentage of growers are affiliated with

CherrCo. The record indicates this would be particularly true in

certain districts. Several witnesses stated that in District 2--Central

Michigan--almost all tart cherry growers and handlers are affiliated

with CherrCo. Since District 2 has three positions on the Board, this

could result in two vacant seats in a district that produces over 17

percent of the tart cherry crop. A similar situation could exist in

Northern Michigan (District 1), the largest growing area with four

Board positions. Witnesses estimated that growers and handlers

accounting for between 70 and 80 percent of that area's cherries are

affiliated with CherrCo. Limiting those growers and handlers to only

one of the District's four seats may make it more difficult to fill the

remaining positions. The proponents indicated that even if qualified

candidates could be found to serve in those Board positions, it would

not provide equitable representation for the majority of growers in

that district.

Industry witnesses supporting the Board's proposed amendment were

all affiliated with CherrCo in some way. Three witnesses not affiliated

with CherrCo presented opposition testimony. One, a grower/processor in

Oregon, suggested that the current Board is improperly constituted.

This witness believed that CherrCo is indeed a sales constituency as

currently defined under the order. He was opposed to any single

interest group being able to control the Board, and believed the

Board's proposal would allow just that.

The witness suggested two alternatives. One was to prohibit any

sales constituency from having more than half the seats on the Board.

The other would prohibit any industry group (rather than just a sales

constituency) from having more than one seat per district. His stated

objective was to provide the Department with additional methods of

allocating Board membership in ways that would ensure that the

interests of small, remote, independent growers are protected. In the

brief filed by this witness, he recommended that the Board's proposed

amendment be rejected, and that this issue be referred back to the

Board for reconsideration.

[[Page 675]]

A tart cherry grower/handler from Washington had similar concerns

about CherrCo being able to control Board decisions. He suggested that

the current sales constituency limitation be applied to industry groups

like CherrCo. He also proposed that an additional requirement be added

to the order to provide that no sales constituency could have more than

a total of eight members on the Board. In his brief, he further

proposed that limitations on Board membership should apply to all

industry organizations, not only to sales constituencies.

The third witness offering evidence in opposition to the Board's

proposal was a tart cherry grower and handler in Utah. He agreed with

the statements made earlier in this decision that Cherry Central is an

industry group whose membership on the Board should be limited, whereas

CMI is not. He disagreed, however, with the proponents' classification

of CherrCo. His testimony was that CherrCo does perform important sales

functions for its members such as minimum pricing and billing,

collecting and disbursing sales receipts. CherrCo's members have common

economic and proprietary interests. As such, the marketing order needs

to have some provisions to ensure that industry members outside that

organization have a voice in Board deliberations.

This witness suggested that one or more ``at-large'' industry

member positions be added to the Board. These members could be from any

district in the production area. This proposal would provide growers in

districts heavily dominated by CherrCo with an alternative--that is, to

vote for representatives other than those supported by CherrCo

affiliates.

There are many different ways the Board's membership could be

allocated. There are some fundamental issues, however, that the

alternative proposals offered on the record fail to address.

The record shows that there are varying interests among tart cherry

growers and handlers, dependent in large part on the district in which

they are located. One critical difference, of course, is that some of

the districts are subject to volume regulation while others are not.

Other differences among districts include varying growing and marketing

conditions. It is the Department's view that any scheme for Board

membership allocation must ensure that growers in each production

district have fair representation in program matters. As previously

discussed, restrictions on CherrCo's membership on the Board would

impact different growing areas differently. For example, growers in

some of the highest volume producing areas could be prevented from

having adequate representation on the Board. None of the alternatives

proposed adequately address this concern.

Based on record evidence, the Department has determined that the

differences between the functions of an organization such as CherrCo

and other organizations that qualify as sales constituencies under the

current order definition of that term are such that these organizations

should not be considered to be ``sales constituencies'' for the purpose

of the order limitation concerning Board membership.

CherrCo members do not act as a single interest group. Rather, the

interests of individual members are sufficiently diverse to preclude

the need to limit their representation on the Board. Adequate

safeguards exist for ensuring the fair consideration of all industry

segments in implementing the program. These include the geographic

allocation of membership, the super-majority voting requirement for

Board actions, the public rulemaking process followed to implement any

regulatory actions, and the Department's role in overseeing operation

of the program.

For these reasons, the Department is recommending adoption of the

Board's proposed amendment to Sec. 930.16 Sales Constituency. This

section would be amended by adding the following sentence: ``An

organization which receives consignments of cherries and does not

direct where the consigned cherries are sold is not a sales

constituency.''

Material Issue Number 2--Revision of Optimum Supply Formula

The tart cherry marketing order should be amended to simplify the

procedures followed to establish volume regulations.

A principal feature of the tart cherry marketing order is supply

management through the use of volume regulations. The order provides

that production area districts with annual production of less than 15

million pounds of cherries are not subject to volume regulation. Under

this provision, volume regulations have not applied to cherries grown

in Oregon, Pennsylvania, Washington and Wisconsin.

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 normal commercial outlets. This can be

accomplished by either placing the cherries into handlers' inventories

or by diverting them. Cherries may be diverted in the orchard or at the

processing plant; placed into a reserve pool; or sold in secondary

markets. These secondary markets include exports (except to North

America or Japan), and new products. Sales of restricted percentage

cherries to these specified exempt markets receive diversion credits

which handlers use to fulfill their restricted obligation.

The record indicates that the primary objective of tart cherry

volume regulations is to balance supplies with market demand, thereby

stabilizing the market and improving grower and processor returns. A

second objective is to encourage market growth by allowing restricted

percentage cherries to be sold in secondary markets (for example, most

export markets). Witnesses attributed much of the improvement in recent

cherry market conditions to the use of volume regulations in the 1997/

98 and 1998/99 seasons.

The order currently sets forth an ``Optimum Supply Formula'' (OSF)

which the Board must follow in its consideration of annual free and

restricted percentages. First, the Board considers the available supply

of tart cherries. This is the sum of the annual crop estimate and the

carry-in supply from previous crop years. The Board next computes the

optimum supply and compares it with the available supply. If the

available supply exceeds the optimum supply, then a surplus exists,

calling for the use of supply controls. The calculated surplus is then

divided by the projected production in the regulated districts to

derive the restricted percentage.

The optimum supply is currently defined as 100 percent of the

average sales of the prior 3 years, to which is added a desirable

carryout inventory not to exceed 20 million pounds (or such other

amount as the Board, with the Secretary's approval, may establish).

According to the record, using 100 percent of prior years' sales may

result in an overstatement of the optimum supply. This is because those

total sales include not only sales to the primary market, but sales of

restricted percentage cherries to secondary markets as well. Currently,

all sales of restricted percentage cherries that receive diversion

credits are included in the total sales figure.

The record shows that including the sales of restricted percentage

cherries in

[[Page 676]]

the optimum supply may understate the projected surplus which would

then result in a higher free percentage than supply and market

conditions warrant. Making too many tart cherries available to be sold

in the primary market could obviate the objectives of supply

management. In the years that tart cherry volume regulations have been

used, this issue has been addressed through use of an adjustment in

order to achieve an optimum supply of cherries in the marketplace. Once

a surplus has been computed (deducting the optimum from the available

supply), sales of restricted percentage cherries to secondary markets

are added back to the surplus as an economic adjustment. The Board's

recommended amendment would revise the order procedures currently used

in calculating the optimum supply. Under its proposal, the optimum

supply would be equal to the 3-year average sales in primary markets

(total sales less sales to markets eligible for diversion credit) plus

the target carryout. It is intended that all sales of restricted

percentage cherries that receive diversion credits would be deducted

from the optimum supply calculation, except as discussed later in this

decision.

The record indicates that this change would simplify current

procedures and make them easier for tart cherry growers and processors

to understand. This would benefit the industry without changing the

actual level of regulation.

The following example was presented at the hearing to illustrate

the change being proposed. The example uses numbers from the 1997 tart

cherry crop. With the exception of the regulated percentages, all

numbers are in million pound units.

------------------------------------------------------------------------

With With

current proposed

approach approach

------------------------------------------------------------------------

U.S. Crop Size................................ 285 285

Carryin....................................... +70 +70

-------------------------

Total Available Supply........................ 355 355

=========================

Optimum Supply Formula

3 Year Average Industry Sales............... 270 270

Adjustment for Diversion Credits............ ........... -23

Target Carryout............................. +0 +0

Optimum Supply.............................. 270 247

Surplus..................................... 85 108

Adjustment for Economic Conditions.......... 23 ...........

Surplus after Adjustment.................... 108 108

Production in Regulated Districts........... 240 240

Regulated Percentage........................ 45% 45%

------------------------------------------------------------------------

While no evidence was received at the hearing in overall objection

to this change, one portion of the proposal did generate some

disagreement. The Board's proposed amendment stated that the optimum

supply volume shall be calculated as ``100 percent of the average sales

of the prior three years, reduced by the sales that represent

dispositions of restricted cherries qualifying for diversion credit,

unless the Board votes to do otherwise * * *'' This last phrase,

``unless the Board votes to do otherwise,'' was objectionable to some

witnesses.

Evidence shows that this phrase is intended to allow the Board a

limited amount of flexibility in recommending free and restricted

percentages appropriate for a specific season. The record shows that

this provision is intended only to enable the Board to revise the

volume of restricted sales it subtracts from total sales in determining

the optimum supply, and only if economic and other conditions warrant

such a revision. This provision would not allow a wholesale change in

the way free and restricted percentages are calculated.

Record evidence indicates that in most years, the Board would be

required to use the optimum supply formula set forth in the order (that

is, 100 percent of average sales reduced by sales of restricted

percentage cherries). Witnesses provided several examples of situations

where a revision in the volume subtracted from total sales might be

needed.

One example given was that of a freeze in another producing

country. Under such a circumstance, reduced supplies from a foreign

source would provide additional marketing opportunities for the U.S.

tart cherry industry. An increased optimum supply (by reducing the

amount of sales of restricted percentage cherries from total sales)

would enable the industry to take advantage of these opportunities.

A second example involved export sales. As previously described,

sales of restricted percentage cherries in certain secondary (or

exempt) markets qualify for diversion credits. Those secondary, exempt

markets are defined through the informal rulemaking process and can

change over time. If those exempt markets are redefined, an adjustment

in the optimum supply would be needed to reflect that change. For

example, sales of restricted percentage cherries to export markets

(except North America and Japan) currently qualify for diversion

credits. If exports were no longer considered a secondary, exempt

market, but part of the primary market, subtracting past years' export

sales from total sales would result in an optimum supply that would

allow too few cherries available for the newly defined primary market.

In this situation, sales of restricted percentage cherries to export

markets would not be subtracted from total sales. On the other hand, if

a new market were designated as a secondary, exempt market, sales to

that new market in previous years might need to be subtracted from

total sales in those years. Otherwise, the optimum supply could allow

too many cherries to enter the primary market.

The record supports allowing the Board some discretion in

determining the amount of sales of restricted percentage cherries it

subtracts from total sales to derive the optimum supply. As shown in

the examples above, that amount could be greater or less than actual

sales of restricted cherries in the defined previous period (three

years).

Witnesses objecting to the Board's proposed amendment believed that

this phrase would give the Board too much discretion in establishing

volume regulations. For example, they believed that the Board could

choose to use an equation to compute free and restricted percentages

that was totally different from that contained in the order.

Additionally, it was believed that the Board could use a different

procedure in establishing its preliminary percentages (done on or about

July 1) than in establishing its final percentages (done by September

15, adjusted for actual production). It was testified that significant

changes in procedures from one season to another, and particularly

within a single season, would be extremely disadvantageous to growers

and processors. This is because industry members make decisions based

on their expectations of what program requirements will be. Constantly

changing these requirements would therefore create chaos rather than

stability in the tart cherry industry.

Based on record testimony, it is clear that this provision is

intended to provide only limited discretion to the Board. The Board

should, with adequate

[[Page 677]]

justification and the Secretary's approval, have the discretion to

adjust the volume of sales of restricted percentage cherries it

subtracts from total sales to derive its annual optimum supply, if such

an adjustment is needed to promote orderly marketing conditions.

Barring an emergency, a major change in economic conditions, or other

like circumstances, the amount subtracted cannot later be changed

within a given season, except as may be necessary to replace any

estimates of sales used at the time preliminary percentages are

recommended with actual figures known at the time final percentages are

established.

Further, the fact that any such adjustment would require the vote

of 12 of the 18 Board members and that such an adjustment would require

the Secretary's approval through the public rulemaking process should

serve as sufficient safeguards to ensure the judicious use of this

discretion.

The proposed amendment to Sec. 930.50(a) of the order which

appeared in the notice of hearing has been changed by the Department to

clarify (for the reasons discussed above) that the discretion provided

by this phrase only pertains to the volume of sales of restricted

percentage cherries that is subtracted from total sales to derive the

optimum supply.

In addition, witnesses proposed one clarifying change in the

language contained in the notice of hearing. As previously indicated,

the optimum supply volume is calculated as 100 percent of the average

sales of the prior three years. The Board's amendment, as set forth in

the notice of hearing, proposed that this total be reduced by sales of

restricted cherries qualifying for diversion credit. However, no time

period was specified for the sales of restricted cherries that were to

be subtracted from the total sales. The record indicates that the same

3-year average should be used for both total sales and the sales of

restricted cherries qualifying for diversion credits. Such language has

been added to Sec. 930.50(a) to clarify this point.

One other change is being made in the language in Sec. 930.50(a) by

the Department. The language in the notice of hearing referred to sales

of ``restricted cherries.'' This phrase has been changed to

``restricted percentage cherries'' since that phrase is defined in

Sec. 930.15 of the order and is a more accurate phrase to use.

For the above reasons, the Department is recommending that

Sec. 930.50(a) be amended to provide that sales of restricted

percentage cherries qualifying for diversion credits be subtracted from

total industry sales in deriving the optimum supply of tart cherries.

The Agricultural Marketing Service proposed to make such changes as

may be necessary to the order to conform with any amendment that may

result from the hearing. No necessary conforming changes have been

identified by the Department.

Small Business Considerations

Pursuant to the requirements set forth in the Regulatory

Flexibility Act (RFA), the AMS has considered the economic impact of

this action on small entities. Accordingly, the AMS has prepared this

initial 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. Small agricultural producers

have been defined by the Small Business Administration (SBA) (13 CFR

121.601) as those having annual receipts of less than $500,000. 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 growers and

handlers would not be burdened by any additional regulatory

requirements, including those pertaining to reporting and

recordkeeping, as a result of these proposed amendments.

The record indicates that during the 1998-99 crop year,

approximately 41 handlers were regulated under Marketing Order No. 930.

In addition, there were about 896 producers of tart cherries in the

production area. 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.

The 1998-99 tart cherry crop was about 340 million pounds. The

record indicates that of the 41 tart cherry handlers, 12 had processed

tonnage of more than 10 million pounds (or 29 percent of all handlers);

4 had between 5 and 10 million pounds (10 percent); 15 had between 1

and 5 million pounds (37 percent); and the remaining 10 had less than 1

million pounds of processed tonnage (24 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. The majority of tart cherry processors are located in

Michigan. Many handle cherries grown in more than one district.

Michigan accounted for 76.4 percent of the production, followed by Utah

with 9.6 percent, Wisconsin with 4.3 percent, Washington with 4.0

percent, New York with 3.9 percent, Pennsylvania with 1.2 percent, and

Oregon with 0.6 percent. By State, about 72.5 percent of the growers

are in Michigan, 9.9 percent in New York, 5.3 percent in Utah, 4.5

percent in Wisconsin, 3.6 percent in Pennsylvania, 2.5 percent in

Oregon, and 1.7 percent in Washington.

Dividing total production by the number of growers, the average

grower produces about 380,000 pounds of cherries annually. With grower

returns of about 20 cents per pound, average revenues would be $76,000.

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. No record

evidence was provided to indicate how many tart cherry growers produce

2.5 million pounds or more. One witness testified, however, that an

estimated 150 growers (about 17 percent of the total number of growers)

produce in excess of 1 million pounds, with the remainder producing

less than that. With a majority of growers producing less than 1

million pounds, it follows that a majority of growers produce less than

2.5 million pounds. This supports the conclusion that the majority of

tart cherry growers are small businesses. By State, however, average

grower size varies considerably. The average grower in Washington

accounts for roughly 910,000 pounds of cherries. Next in size is Utah

with 680,000 pounds, followed by Michigan (400,000 pounds), Wisconsin

(370,000 pounds), New York (150,000 pounds) Pennsylvania (130,000

pounds), and Oregon (100,000 pounds).

This decision recommends two amendments to the tart cherry

marketing order. One would clarify the current limitation on the number

of Board members that may represent a single ``sales constituency.''

The second would simplify the method used to establish volume

regulations for tart cherries.

Definition of Sales Constituency

Section 930.20 of the tart cherry marketing order provides for an

18-member Cherry Industry Administrative Board to assist the Department

in

[[Page 678]]

administering the program. That section also divides the production

area into nine districts for purposes of representation on the Board

and allocates membership among those districts. Five 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), and Utah (two

members). The four districts with one member each are Oregon,

Pennsylvania, Washington and Wisconsin. (The eighteenth Board member is

selected to represent the general public, and need not be from any

specific area.)

Section 930.20 further provides that for those districts allocated

more than one member, only one of those members can be affiliated with

a single sales constituency. Section 930.16 currently defines a sales

constituency to mean a common marketing organization or brokerage firm

or individual representing a group of handlers or growers.

The proposed amendment to Sec. 930.16 would provide that an

organization that receives consignments of cherries but does not direct

where those cherries are sold would not be considered a sales

constituency. The growers and handlers affiliated with such an

organization would not be limited in their representation on the Board.

The record shows that one of the Board's primary responsibilities

is to recommend regulations to implement the marketing order's

authorities relating to supply management, or volume regulation. Volume

regulations benefit all industry members, both large and small, by

matching demand in primary markets with available supplies of tart

cherries. These regulations also serve to expand sales in secondary

markets. The result is improved grower and processor returns.

The record shows that approximately 11 of the current 18 members of

the Board are affiliated in some way with CherrCo, the organization

which raised the question of the intended meaning of the term sales

constituency. Applying the current order limitation on the number of

members representing a single sales constituency to CherrCo would

result in five of the current Board members being declared ineligible

to serve on the Board. All of these members represent regulated

districts--four in Michigan and one in New York.

The record shows that CherrCo is a federated grower cooperative. It

is comprised of 24 member cooperatives. CherrCo's members account for

75-80 percent of Michigan's tart cherry production, and a significant

portion of the production in New York, Utah, Washington and Wisconsin.

CherrCo currently has no members in Oregon or Pennsylvania. The record

indicates that the primary function of CherrCo is to establish minimum

prices for certain tart cherry products. The record indicates that

CherrCo is not directly involved in the actual sales of its members'

products. There is intense competition among its members (as well as

between its members and non-members) to sell tart cherries. The

competition for sales is on the basis of individual handlers'

reputations, on the quality and mix of the products they offer, on any

special services they supply to their customers, and on whether or not

their processing plants are certified to conform with certain

sanitation standards.

Opponents of the Board's proposal believe that not limiting

CherrCo's representation would result in the elimination of certain

safeguards incorporated in the order to preserve the varying interests

of tart cherry growers and processors, especially those outside the

major producing area of Michigan. These safeguards include the

requirement that Board actions be passed by a super-majority (12 of 18

members), that Board representation be allocated among districts, and

that districts accounting for less than 15 million pounds of production

be exempt from volume regulations.

None of these program requirements could be changed by Board action

alone. All would require an order amendment through the formal

rulemaking process, including public hearings and the Department's

analysis of impacts of costs and benefits to small and large growers

and processors. Additionally, record evidence shows that individual

CherrCo members have sufficiently diverse interests to preclude them

from voting alike on all issues before the Board.

Based on the evidence in the record, it is the Department's

conclusion that an organization such as CherrCo should not be

considered a sales constituency. Limiting Board representation by

members of organizations such as CherrCo would be inconsistent with the

proper functioning of the order and would be contrary to the original

intent of the limitation on Board representation. This proposed

amendment should be favorable to both large and small entities.

Revision of the Optimum Supply Formula

A principal feature of the tart cherry marketing order is supply

management through the use of volume regulations. Authority for such

regulations appears in Sec. 930.51 of the marketing order.

Volume regulations are implemented through the establishment of

free and restricted percentages. Such percentages are recommended by

the Board in accordance with Sec. 930.50 of the order, and, if deemed

appropriate, 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. They may be diverted in the orchard or at the processing plant;

placed into a reserve pool; or sold in secondary markets. These

secondary markets include exports (except to North America or Japan),

and new products. Sales of restricted percentage cherries to these

specified exempt markets receive diversion credits which handlers use

to fulfill their restricted obligation.

The record indicates that the primary objective of tart cherry

volume regulations is to balance supplies with market demand, thereby

stabilizing the market and improving grower and processor returns. A

second objective is to encourage market growth by allowing restricted

cherries to be sold in secondary markets (for example, most export

markets). Witnesses attributed much of the improvement in recent cherry

market conditions to the use of regulation in the 1997/98 and 1998/99

seasons.

The order currently sets forth, in Sec. 930.50, an ``Optimum Supply

Formula'' (OSF) which the Board must follow in its consideration of

annual free and restricted percentages. The optimum supply is currently

defined as 100 percent of the average sales of the prior 3 years, to

which is added a desirable carryout inventory.

The record indicates that using 100 percent of prior years' sales

results in an overstatement of the optimum supply. The record shows

that including the sales of restricted cherries in the optimum supply

understates the projected surplus and results in a higher free

percentage than supply and market conditions warrant. This is because

those total sales include not only sales to the primary market, but to

secondary markets as well.

[[Page 679]]

In the years that tart cherry volume regulations have been used,

this issue has been addressed through use of an adjustment in order to

achieve an optimum supply of cherries in the marketplace. Once a

surplus has been computed (deducting the optimum from the available

supply), the sales to secondary markets are added back to the surplus

as an economic adjustment. The Board's recommended amendment would

revise the procedures currently used in calculating the optimum supply.

Under its proposal, the optimum supply would be equal to the 3-year

average sales in primary markets (total sales less sales to markets

eligible for diversion credit) plus the target carryout. This would

simplify the method of arriving at an optimum supply figure and would

be easier for tart cherry growers and processors to understand.

Therefore, any regulatory impact on growers or handlers would be

minimal or non-existent.

The record evidence supports the conclusion that this amendment

would result in no extra costs to growers or processors in that any

resulting level of volume regulation would be similar to what is

currently in effect and its economic effect on the industry would be

similarly analyzed in each instance. It would benefit industry members

both large and small, however, because the process relating to the

establishment of volume regulations would be less confusing and more

readily understood by industry members. This process is used by growers

and handlers in making seasonal decisions (including those relating to

harvesting cherries). To the extent that this process is more readily

understood, all in the industry should 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. Finally,

interested persons are invited to submit information on the regulatory

and informational impacts of this action on small businesses.

A 30-day comment period is provided to allow interested persons to

respond to this proposal. Thirty days is deemed appropriate so that

this rulemaking may be completed prior to the upcoming season. All

written exceptions timely received will be considered and a grower

referendum will be conducted before these proposals are implemented.

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.

Rulings on Briefs of Interested Persons

Briefs, proposed findings and conclusions, and the evidence in the

record were considered in making the findings and conclusions set forth

in this recommended decision. To the extent that the suggested findings

and conclusions filed by interested persons are inconsistent with the

findings and conclusions of this recommended decision, the requests to

make such findings or to reach such conclusions are denied.

General Findings

The findings hereinafter set forth are supplementary to the

findings and determinations which were previously made in connection

with the issuance of the marketing agreement and order; and all said

previous findings and determinations are hereby ratified and affirmed,

except insofar as such findings and determinations may be in conflict

with the findings and determinations set forth herein.

(1) The marketing agreement and order, as hereby proposed to be

amended, and all of the terms and conditions thereof, would tend to

effectuate the declared policy of the Act;

(2) The marketing agreement and order, as hereby proposed to be

amended, regulate the handling of tart cherries grown in the production

area in the same manner as, and are applicable only to, persons in the

respective classes of commercial and industrial activity specified in

the marketing agreement and order upon which a hearing has been held;

(3) The marketing agreement and order, as hereby proposed to be

amended, are limited in their application to the smallest regional

production area which is practicable, consistent with carrying out the

declared policy of the Act, and the issuance of several orders

applicable to subdivisions of the production area would not effectively

carry out the declared policy of the Act; and

(4) All handling of tart cherries grown in the production area as

defined in the marketing agreement and order, as hereby proposed to be

amended, is in the current of interstate or foreign commerce or

directly burdens, obstructs, or affects such commerce.

List of Subjects in 7 CFR Part 930

Marketing agreements, Reporting and recordkeeping requirements,

Tart cherries.

Recommended Amendment of the Marketing Agreement and Order

For the reasons set out in the preamble, 7 CFR part 930 is proposed

to be amended as follows:

PART 930--TART CHERRIES GROWN IN THE STATES OF MICHIGAN, NEW YORK,

PENNSYLVANIA, OREGON, UTAH, WASHINGTON AND WISCONSIN

1. The authority citation for 7 CFR part 930 continues to read as

follows:

Authority: 7 U.S.C. 601-674.

2. In part 930, Sec. 930.16 is revised to read as follows:

[[Page 680]]

Sec. 930.16 Sales Constituency.

Sales constituency means a common marketing organization or

brokerage firm or individual representing a group of handlers and

growers. An organization which receives consignments of cherries and

does not direct where the consigned cherries are sold is not a sales

constituency.

3. In Sec. 930.50, paragraph (a) is revised to read as follows:

Sec. 930.50 Marketing policy.

(a) Optimum supply. On or about July 1 of each crop year, the Board

shall hold a meeting to review sales data, inventory data, current crop

forecasts and market conditions in order to establish an optimum supply

level for the crop year. The optimum supply volume shall be calculated

as 100 percent of the average sales of the prior three years, reduced

by the average sales that represent dispositions of restricted

percentage cherries qualifying for diversion credit for the same three

years, unless the Board determines that it is necessary to recommend

otherwise with respect to sales of restricted percentage cherries, to

which shall be added a desirable carryout inventory not to exceed 20

million pounds or such other amount as the Board, with the approval of

the Secretary, may establish. This optimum supply volume shall be

announced by the Board in accordance with paragraph (h) of this

section.

* * * * *

Dated: December 29, 1999.

Kathleen A. Merrigan,

Administrator, Agricultural Marketing Service.

[FR Doc. 00-203 Filed 1-4-00; 8:45 am]

BILLING CODE 3410-02-P