DEPARTMENT OF AGRICULTURE

OFFICE OF PERSONNEL MANAGEMENT

DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 981

[Docket No. FV93-981-2FIR]

Almonds Grown in California; Finalize Revision of Administrative

Rules and Regulations Concerning Creditable Promotion and

Advertising Requirements

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Final rule.

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SUMMARY: The Department of Agriculture (Department) is adopting as a

final rule, with modifications, the provisions of an interim final rule

that changed the focus of the Almond Board of California's (Board)

advertising and promotion program by broadening the scope of creditable

advertising and promotion activities available to handlers and

expanding the Board's ability to engage in a significant generic

advertising and promotion program to benefit the entire industry. This

action provides for more effective and efficient use of industry

advertising and promotion funds.

EFFECTIVE DATE: July 11, 1994.

FOR FURTHER INFORMATION CONTACT: Kathleen M. Finn, Marketing

Specialist, Marketing Order Administration Branch, Fruit and Vegetable

Division, AMS, USDA, Room 2536-S., P.O. Box 96456, Washington, DC

20090-6456; telephone: (202) 720-1509, or FAX (202) 720-5698; or Martin

Engeler, Assistant Officer-in-Charge, California Marketing Field

Office, Fruit and Vegetable Division, AMS, USDA, 2202 Monterey Street,

Suite 102-B, Fresno, California 93721; (209) 487-5901 or FAX (209) 487-

5906.

SUPPLEMENTARY INFORMATION: This final rule is issued under Marketing

Agreement and Order No. 981 [7 CFR Part 981], both as amended,

hereinafter referred to as the ``order'' regulating the handling of

almonds grown in California. The order is effective under the

Agricultural Marketing Agreement Act of 1937, as amended [7 U.S.C. 601-

674], hereinafter referred to as the ``Act.''

This final rule has been determined to be not significant for

purposes of Executive Order 12866 and therefore has not been reviewed

by OMB.

This final rule has been reviewed under Executive Order 12778,

Civil Justice Reform. This action is not intended to have retroactive

effect. This final rule will not preempt any State or local laws,

regulations, or policies, unless they present an irreconcilable

conflict with this rule.

The Act provides that administrative proceedings must be exhausted

before parties may file suit in court. Under section 8c(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. Such handler is afforded the opportunity for a hearing on

the petition. After a hearing the Secretary will 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 in equity to review the

Secretary's ruling on the petition, provided a bill in equity is filed

not later than 20 days after date of entry of the ruling.

Pursuant to requirements set forth in the Regulatory Flexibility

Act (RFA), the Administrator of the Agricultural Marketing Service

(AMS) has considered the economic impact of this final rule on small

entities.

The purpose of the RFA is to fit regulatory actions to the scale of

business subject to such actions in order that small businesses will

not be unduly or disproportionately burdened. Marketing orders issued

pursuant to the Act, and rules issued thereunder, are unique in that

they are brought about through group action of essentially small

entities acting on their own behalf. Thus, both statutes have small

entity orientation and compatibility.

There are approximately 115 handlers of almonds that are subject to

regulation under the marketing order and approximately 7,000 producers

in the regulated area. Small agricultural service firms are defined by

the Small Business Administration [13 CFR 121.601] as those whose

annual receipts are less than $5,000,000, and small agricultural

producers have been defined as those having annual receipts of less

than $500,000. The majority of the almond handlers and producers may be

classified as small entities.

This action finalizes an interim final rule which revised

Sec. 981.441 of Subpart--Administrative Rules and Regulations and is

based on recommendations of the Board, comments received in response to

the interim final rule, comments received in response to the reopening

of the comment period of the interim final rule, and other available

information. The interim final rule was published in the Federal

Register [58 FR 43500], on August 17, 1993. The rule amended

Sec. 981.441 of the rules and regulations in effect under the order. It

provided a 30 day comment period which ended September 16, 1993. During

this period, one comment was received from Cal-Almond, Inc., an

independent almond handler.

On December 22, 1993, the United States Court of Appeals for the

Ninth Circuit in California issued a ruling on a district court order

involving an action against the Department by three independent almond

handlers wherein such handlers alleged, among other things, that the

Board's advertising program during the 1980's was unconstitutional

because the program violated the handlers' First Amendment Rights. The

district court had ruled that the advertising program was

constitutional. The Ninth Circuit Court of Appeals acknowledged the

substantial public interest in designing effective advertising and

promotion programs to stimulate demand and to increase returns to

growers but concluded that the almond program in place during the

1980's was sufficiently flawed in that it did not meet the

constitutional standards.

In light of the potential effect of the Ninth Circuit Court of

Appeal's decision on the newly established Credit-Back advertising and

promotion program and on the almond industry as a whole, the Department

determined that it was in the public interest to reopen the comment

period for the interim final rule. Accordingly, the comment period was

reopened on January 31, 1994, [59 FR 4247]. Reopening of the comment

period provided interested persons an opportunity to review the rules

for the new Credit-Back advertising and promotion program and to submit

additional written opinions and information regarding the potential

effect of the Court's decision on that program. The Department also

sought comments on how to best address the issues raised in the Court's

decision. The second comment period closed on March 2, 1994. Seven

additional comments were received. All of the comments received on the

interim final rule will be discussed herein.

Statutory and Regulatory Background

The Almond Marketing Order is promulgated pursuant to the

Agricultural Marketing Agreement Act of 1937 (``Act''). Congress

enacted this statute in 1937, a time of economic upheaval for many

farmers, in order to stabilize market conditions and ameliorate

shortages and surpluses. Congress believed that ``establish[ing] and

maintain[ing]'' such orderly marketing conditions would be in the

public interest, ultimately benefitting both farmers and consumers. See

7 U.S.C. 602 (declarations of policy).

The principal means by which Congress sought to effectuate these

goals is the promulgation of marketing orders under 7 U.S.C. Sec. 608c.

Marketing orders are regulations issued by the Secretary of

Agriculture, after notice and hearing, and after a finding by the

Secretary that the order's terms ``will tend to effectuate the declared

policy of [the Act].'' See 7 U.S.C. Sec. 608c(4). Most orders do not

become effective until it is approved by two-thirds or more of the

affected producers voting in a referendum. See 7 U.S.C. Secs. 608c (8)

and (9). Conversely, a vote of a simple majority of the affected

producers can terminate an order. See 7 U.S.C. Sec. 608c(16)(B).

Although producers vote on the marketing order, the order imposes

direct regulatory obligations only on the activities of ``handlers'' or

processors of agricultural commodities. See 7 U.S.C. 608c(1).

Section 608c(6)(I) of the Act provides for the ``establishment of

production research, marketing research and development projects

designed to assist, improve, or promote the marketing, distribution,

and consumption or efficient production of any such commodity or

product, the expense of such projects to be paid from funds collected

pursuant to the marketing order.'' Section 608c(6)(I) also provides

``[t]hat with respect to orders applicable to almonds * * * such

projects may provide for any form of marketing promotion including paid

advertising and with respect to almonds * * * may provide for crediting

the pro rata expense assessment obligations of a handler with all or

any portion of his direct expenditures for such marketing promotion

including paid advertising as may be authorized by the order * * *''

Pursuant to this statutory scheme, the Secretary has promulgated a

marketing order regulating the handlers of almonds grown in California.

The Order is administered by the Almond Board of California

(``Board''), which is composed of industry representatives, whose

function it is to administer the Order and to recommend amendments to

the Order. The duties of the Board also include acting as intermediary

between the Secretary and industry members; investigating and

collecting data on growing, shipping, and marketing conditions with

respect to almonds; furnishing pertinent information to the Secretary;

and keeping record of its acts and transactions. Funds to cover the

Board's expenses are generated by levying assessments on each handler,

in proportion to the kernel weight of almonds received.

Background of the California Almond Industry

The California Almond Marketing Order has been in effect since

1950. It provides a means for growers and handlers to work together to

address various problems which affect the marketing of California

almonds, including varying weather conditions which can lead to annual

swings in production.

One way in which the Almond Marketing Order has helped to address

problems affecting the industry is by establishing salable and reserve

percentages for all almonds received by handlers during a given crop

year. The establishment of reserve percentages has allowed the

Department to regulate the supply of almonds marketed and avoid

dramatic price drops during years of excess production. In years when

the anticipated annual crop is large, a reserve percentage may be

established and handlers withhold a percentage of the almonds received

from growers from the market. Conversely, in years when the annual crop

proves to be small, reserve almonds are released for sale. In addition,

small quantities of reserve almonds are sometimes used to develop new

products or are disposed of in secondary markets such as oil or

livestock feed.

The Department has analyzed the production and sale of almonds

since the inception of the Almond Marketing Order. Over the past forty

years, the production and sale of almonds, both in this country and

abroad, have increased dramatically. In the 1950's, almond production

grew from 19 million to 84 million pounds per year and the value

increased from $15 to $38 million. By 1969, production had reached 132

million pounds per year at a value of $74 million.

During the 1950's and 1960's, the domestic market was the primary

outlet for California almonds. Supplies which exceeded the needs of the

domestic market were exported or put to other ``non-competitive'' uses,

such as sliced, diced and slivered almonds. In 1969, shipments of

almonds to export markets exceeded domestic shipments for the first

time. Most export shipments were of reserve almonds which were sold at

prices below domestic levels.

The Almond Marketing Order was amended in 1971 to provide for

further market development through the establishment of a creditable

advertising and generic promotion program. These programs have been in

effect since 1972. In recommending that the Almond Marketing Order be

amended to authorize advertising and promotion programs, proponents

within the almond industry believed that advertising almonds would tend

to increase almond consumption and enhance grower returns. The

Department's analysis of sales figures for almonds during the last

twenty-two years demonstrate that this belief was correct.

The adoption of the creditable advertising and generic promotion

programs has fostered a period of steady growth in the demand for

almonds, both domestically and abroad. From 1972 to 1992, domestic

shipments of almonds increased from 75 million pounds to 186 million

pounds and their value increased from $63 million in 1972 to $318

million in 1992. During these years, the creditable advertising and

generic promotion programs fostered an even greater rate of growth in

the export market. Annual exports of almonds went from 69 million

pounds in 1972 to 350 million pounds in 1992 and the value increased

from $58 million to $598 million. The industry has benefitted from

increased production and sales as consumption grew and almonds expanded

into new markets.

Currently, the majority of almonds produced in the United States

are sold abroad, with the largest markets in Germany and Japan. The

California almond industry has become an established supplier of high

quality almonds to markets throughout the world and has maintained a

dominant share (over 60%) of the overall world almond market for the

past ten years. Substantial growth has also occurred in the demand for

sliced, diced and slivered almonds, once considered a secondary almond

market. Due to market expansion, shipments of almonds for such uses are

now considered normal commercial sales.

The relative proportion of annual crop sold to ingredient

manufacturers in bulk quantities has also increased substantially

during the last two decades. Currently, the majority of almonds sold in

the United States are sold for use as ingredients in candy, cereal, ice

cream, baked goods, cookies, granola bars, prepared meals, and other

manufactured products. The Department's data on almond sales to export

markets also indicates that the vast majority of almonds sold to

European countries are intended for use as ingredients.

Since the adoption of the creditable advertising and generic

promotion programs there has been an increase in the number of almond

handlers operating in the United States. In 1971, there were 15 almond

handlers in California and the four largest handled about 95% of the

annual crop. By 1991, there were 115 almond handlers in California and

the four largest handled 62% of the annual crop. The growth of the

almond market has enabled small handlers to enter the industry in

greater numbers.

The Former Creditable Advertising Program

At the time of its adoption in 1971, the almond Marketing Order's

advertising and promotion program was structured with a strong emphasis

on individual handler advertising and promotion, with a complementary

generic program conducted by the Board. Since its implementation, the

Secretary has instituted numerous rulemaking actions to revise and

update the creditable advertising and promotion program to address

changing circumstances in the industry.

In revising the program, the Secretary relied, in part, on industry

production and sales data and the Board's consistent belief that the

industry's advertising and promotion program provided an effective

means of increasing almond sales. The Board, on behalf of the industry,

responds to changing industry practices and trends by recommending to

the Secretary modifications to the Order's implementing regulations and

by redesigning its activities to better reflect these changes, thereby

ensuring further development of the almond industry. In addition, the

Secretary also relied on comments received from almond industry

representatives and other interested persons prior to adopting certain

amendments to the regulations.

Section 981.41 of the Order provides the Board, with the approval

of the Secretary, authority to credit a handler's direct expenditures

for marketing promotion, including paid advertising, against the

applicable portion of their assessment obligation. The requirements

that a handler needed to fulfill before obtaining credit for promotion

are set forth in Sec. 981.441 of the Administrative Rules and

Regulations. The purpose of these requirements was to ensure that

creditable activities undertaken by handlers were forms of promotion

recognized and accepted by advertising and promotion industry norms,

and could reasonably be expected to increase almond consumption. In

addition, the requirements were devised to ensure that creditable

activities could be documented and costs could be measured in

conformance with industry standards.

From the time of the program's inception, the list of handler

activities for which credit could be obtained has frequently been

revised and expanded in order to meet the changing needs of the

industry. In all, over twenty-five Board recommendations have been made

and adopted by the Secretary in an effort to improve the Order's

advertising and promotion program. Some examples of these revisions are

described below.

On September 16, 1982, [47 FR 40783], the creditable advertising

and promotion program was revised in order to allow handlers to receive

credit against their creditable assessment obligations for distributing

sample packages of almonds to charitable and educational institutions

(up to 150% credit allowed depending on volume), and for purchasing

almond promotional materials from the Board (100% credit allowed). The

Board believed that these revisions would provide handlers with

additional opportunities to obtain credit for their promotion of

almonds, especially for handlers who did not market almonds under a

specific brand name. These revisions were also intended to be

advantageous to small handlers.

On April 23, 1987, [52 FR 13427], the program was revised to expand

provisions already in place concerning the crediting of certain handler

marketing promotion expenditures related to mail order promotions.

Specifically, the costs of purchasing mailing lists to conduct mail

order promotions and the costs of postage and envelopes to mail printed

promotional materials became creditable at a rate of up to $25,000 per

crop year. The revision was intended to give all handlers a new

opportunity to take advantage of crediting. In 1990, [55 FR 41826] the

creditable amount was further relaxed to allow handlers to obtain

credit for mail order promotions at a rate of up to $25,000 per crop

year or 25 percent of their creditable assessment obligations,

whichever was greater.

On October 13, 1987, [52 FR 37926], the program was revised to

increase the amount of credit that handlers could obtain for media

advertising in certain foreign markets. The revision was made because

the export market for California almonds was steadily increasing and

the need for advertising in foreign countries was increasing

accordingly. Under this revised rule, handlers became eligible to

receive a 100% credit for all qualified brand advertising media

expenditures conducted in designated foreign markets.

On February 15, 1989, [54 FR 6866], the program was again revised

to allow handlers credit against their creditable assessment

obligations for payments for in-store supermarket generic or brand

advertising using fixed position (i.e. stationary) display

advertisements, or video media. In addition, the provisions were

further expanded to allow handlers to receive a 150% credit for

payments to the Board for the Board's generic advertising and promotion

program. These changes gave handlers additional flexibility in meeting

their assessment obligations and particularly benefited small handlers

which did not have brand names and/or did not market their almonds in

retail outlets.

On October 16, 1990, [55 FR 41826], the program was further revised

to provide handlers with additional opportunities to receive credit

against their creditable assessment obligations for their own branded

or generic advertising and promotional activities by (1) allowing

credit for in-store supermarket advertisements using light emitting

diode (LED) signs (a new form of in-store supermarket advertising which

was being offered by advertising firms at that time); (2) expanding the

provisions under which handlers could receive credit for in-store

supermarket advertisements using fixed position media; (3) allowing

handlers credit for brand advertisements in all foreign countries where

California almonds were sold; and (4) increasing credit for certain

mail order promotion costs. These revisions were intended to better

reflect current industry practices as they related to advertising and

promotion.

Over the years, other revisions to the program have been adopted in

order to expand activities eligible for credit, improve program

administration and generally bring the program into line with industry

practices. These numerous revisions to the program demonstrate the

Board's, as well as the industry's, recognition of changing conditions

within the market and their willingness and ability to adapt the almond

advertising and promotional program to address these changes.

The Ninth Circuit's Review of the Former Creditable Advertising Program

The Ninth Circuit Court of Appeals recently reviewed the Almond

Marketing Order's former creditable advertising and promotion program

in Cal-Almond v. U.S. Department of Agriculture. The case was brought

by three independent almond handlers, each of which challenged the

constitutionality of the Almond Marketing Order's former creditable

advertising program on the grounds that the mandatory nature of the

program violated their First Amendment rights. The Department's

Judicial Officer upheld the validity of the Order. The handlers sought

review in the United States District Court, which affirmed the

Secretary's decision. The handlers then appealed to the Ninth Circuit

Court of Appeals.

In reviewing the District Court's decision, the Court of Appeals

held that the former advertising and promotion program imposed a burden

on almond handlers' First Amendment rights, and, therefore, it was

necessary to evaluate the nature and scope of the burden imposed on

those rights to determine whether the program was constitutional.

The Ninth Circuit evaluated the constitutionality of the former

almond advertising and promotion program under a three-pronged test:

(1) Is the governmental interest in establishing and carrying out

an advertising and promotion program substantial?

(2) Does the program directly advance that interest?

(3) Is the program no more extensive than necessary to achieve the

government's purpose?

In evaluating the almond program under this test, the Court held

that there was in fact a substantial governmental interest in

establishing a program that would stimulate the demand for almonds and

help maintain and expand markets so as to enhance returns to almond

growers. The Court went on to find, however, that there was

insufficient record evidence to establish that the former almond

advertising and promotion program was effective enough to directly

advance the government's interest in increasing almond sales, and that

the rules providing for credit against a handler's assessment

obligation for its own advertising were more extensive and cumbersome

than necessary. Thus, it held that the advertising regulations were an

unconstitutional restriction on the handlers' First Amendment rights.

It is important to note that in Cal-Almond, the Ninth Circuit did

not find inherent constitutional harm in the establishment of research

and promotion programs designed to increase sales and enhance grower

returns. In fact, the Court acknowledged the substantial governmental

interest in establishing such programs in order to maintain and expand

the markets for agricultural commodities. The Court's complaint lay

with the unique design of the former almond advertising and promotion

program, with the lack of record proof that it directly advanced the

stated interests, and with the fact that the former creditable

advertising requirements seemed more extensive than necessary to

achieve the approved goals.

The New Credit-Back Advertising and Promotion Program

An interim final rule published in the Federal Register on August

17, 1993, [57 FR 43500] represents the most recent and extensive

revision to the Order's advertising and promotion program. Due to

changes in the size and structure of the California almond industry

during the 1980's and 1990's, as well as the fact that more handlers

were beginning to sell almonds for use as ingredients in manufactured

products rather than for direct consumption, there was a general

perception within the industry that a new and innovative program needed

to be implemented which would be even more effective than the former

program in promoting the sale of California almonds.

This prompted the Board and its Public Relations and Advertising

Committee to seek to create a new and widely accepted advertising and

promotion program designed to aid the further development of the almond

industry. On April 20, 1993, by a vote of 9-1, the Board recommended

the new Credit-Back advertising and promotion program. The sole Board

member opposing the new program was generally opposed to the entire

concept of creditable advertising and promotion. This Board member

asserted that all handlers should be required to fund a generic

promotion program equally and that any brand advertising done on their

own should be carried out at their own expense without any type of

Board oversight.

The new Credit-Back advertising and promotion program recognizes

new marketing techniques which have been developed by the industry over

the years, and is intended to work with and complement a strong generic

advertising and promotion program which will be undertaken by the

Board. The premise of the new program is that individual handlers will

be most effective in promoting their own portion of the almond crop

while the Board will be the most effective vehicle through which to

enhance total demand for almonds through a generic advertising and

promotion program. Some of the significant features of the new program

are as follows.

Under the new program, as modified in this final rule, handlers

conducting their own advertising and promotional activities will

receive credit against their Credit-Back assessment up to the amount of

the Credit-Back assessment installment due if they conduct and document

their advertising and promotional activities at least two weeks prior

to assessment billings. If handlers do not conduct any advertising and

promotional activities prior to assessment billings, they will be

required to submit their advertising and promotional assessment when

billed. If handlers conduct advertising and promotional activities

after assessment billings and file appropriate documentation, they will

be eligible for a refund or Credit-Back. Handlers will be billed in

four equal installments during the crop year. Handlers are not

obligated to take part in the new program. Each handler must make an

individual decision whether or not to participate in the new program.

The new Credit-Back program substantially expands the list of

advertising and promotional activities which will be eligible for

credit under the regulations. The range of activities eligible for

credit cover virtually every sales assistance, promotional, publicity

and advertising area which a brand or individual company could use to

aid in product sales, with the exception of price reductions. In all,

there are now fourteen advertising, promotion and public relations

categories of activities which will be eligible for credit. These

include marketing research, paid media advertising directed to end-

users, trade or industrial users, in-store demonstrations, trade fairs,

seminars and exhibits, couponing, sponsorships, printing costs, trade

and consumer product publicity, direct mailings, sales and marketing

presentation kits, and 50/50 advertising with retailers. Each of these

activities are widely used and accepted forms of marketing advertising

and promotion.

Another aspect of the new program is the elimination of the 33%

discount which was formerly allowed to handlers who paid their

assessments directly to the Board by a specified date. Under the former

creditable advertising and promotion program, handlers who paid their

assessments to the Board by a specific date received a 150% credit

against the advertising and promotional portion of their assessments.

These payments were then used by the Board for generic advertising and

promotion. In effect, this allowed handlers a 33% discount on a portion

of their assessments. The purpose of the discount at the time was to

encourage smaller handlers which did not have individual advertising

and promotional programs to contribute to the Board's generic

advertising and promotion program. Many members of the industry

believed, however, that handlers who received the benefit of the

discount did not always pass it on to growers and thus achieved a

competitive advantage over handlers who engaged in individual

advertising and promotional programs.

Another feature of the new program is an appeals process whereby

handlers have the option of anonymity in the event a claim for a

promotional activity is denied. Handlers may request that the Public

Relations and Advertising Committee review Board staff decisions

concerning denied claims. If not satisfied with that committee's

decision, handlers may request that the Board review the issue.

Handlers have the option of anonymity when their appeal is brought

before the Board. Finally, handlers may request that the Department

review the Board's decisions. The Department may review all decisions

at any point during the appeals process.

The new Credit-Back program also offers handlers more flexibility

in getting credit against their assessments for their own advertising

and promotional activities compared with the former creditable

advertising and promotion program. Some examples of the ways in which

the new Credit-Back program offers handlers more flexibility are as

follows.

Under the former program, handlers were denied credit for

individual advertisements if those advertisements directed consumers to

a specific retail store. Under the new program, this type of activity

will be covered under the 14 broad categories for which credit will be

allowed. Thus, the new program eliminates previous restrictions on

handlers and will allow them greater flexibility in the promotion of

their own products.

Also, under the former program credit was denied for advertisements

which also promoted competing nuts. Under the new program,

advertisements which contain references to almonds as well as competing

nuts will be eligible for reimbursement. Any reimbursement will,

however, be limited to that percentage of the advertisement's cost

which is equal to the percentage of the advertisement which is devoted

to almonds or the percentage of the product's weight which is almonds.

The Board believes that the percentage rule is logical and fair because

the handler credit originates from assessments on almonds, not on other

products. The Board believes that to allow more credit than provided in

the percentage rule would not serve the best interests of the industry

because handlers would receive credit for promoting products which have

nothing to do with the almond industry.

Previously, handlers were not allowed credit for advertisements

which promoted complementary branded products. Under the new program,

credit will be allowed for advertisements that promote both almonds and

complementary branded products. For the reasons described above,

however, the amount of the reimbursement will be directly related to

the percentage of the advertisement which is devoted to the promotion

of almonds. This will allow the almond industry to operate under a

system which is as unrestricted as possible without sacrificing the

objectives of the Almond Marketing Order.

Finally, under the old program, credit was denied for

advertisements which promoted products which were less than 50%

almonds. Under the new program, credit will be granted for all

advertisements of products which contain almonds, regardless of the

amount of almonds which are actually in the product. Again, the amount

of the reimbursement will be directly related to the percentage of the

advertisement which is devoted to the promotion of almonds.

In recommending the new Credit-Back program, the Board concluded

that because of the fundamental changes which have occurred in the

almond industry in recent years, it has become more difficult for

individual handlers to directly reach end consumers through their own

advertising and promotion. Therefore, the importance of a collective

industry effort to generically promote the overall use of almonds has

grown. For these reasons, the Board elected to strengthen its generic

promotion program while at the same time providing increased

opportunities and incentives for handlers who wished to continue to

advertise their own brand products in order to receive Credit-Back

against their assessments.

The Board believes that the implementation of the new Credit-Back

advertising and promotion program will directly advance the industry's

collective goal of increasing almond sales and enhancing grower

returns. In addition, the new program encourages and empowers handlers

to protect their own interests by promoting their own brand of products

in order to get Credit-Back. The new program also recognizes that the

collective interests of the industry are better served if brand

advertising and promotion is combined with the generic advertising and

promotion of almonds. Both generic and brand advertising and promotion

are proven promotional tools which have fostered the growth of the

almond market over the last twenty years.

The new advertising and promotion program has been carefully

structured so that the rules which govern its efficient administration

are no more extensive than necessary to meet the desired goals of

increasing almond sales and enhancing grower returns. Virtually all

aspects of the former creditable advertising and promotion program have

been modified or eliminated so as to increase efficiency while at the

same time imposing a minimum of restrictions on handlers. The Board,

the elective body composed of industry representatives, has carefully

considered all aspects of this program and believes that its

implementation will lead to even greater strides in the development of

the almond market.

The new advertising and promotion program is intended to enable the

almond industry to have an advertising and promotion program which

better reflects its current needs. The Board believes that there is

widespread industry support for the new program. Overall, the new

Credit-Back program is expected to foster the worldwide demand for

California almonds through the provision of a more efficient and

effective program which will encompass both generic and brand

advertising and promotion.

Discussion of the Comments

As was previously stated, USDA provided two comment periods for the

new Credit-Back program. The first comment period ended on September

16, 1993. One comment was received during this period from Cal-Almond,

Inc., an independent almond handler.

The second comment period ended on March 2, 1994. During this

period, seven comments were received. Five comments were from

independent almond handlers. They were Wiggin Farms, Arbuckle, CA;

Western Nut Company, Chico, CA; Waterford Nut Company, Waterford, CA;

Rotteveel Orchards, Dixon, CA; and Cal-Almond, Inc., Hughson, CA. A

sixth comment was received from the U.S. Small Business Administration,

Washington, DC. The seventh comment was received from Mr. Rodger

Wasson, President and CEO of the Almond Board of California. All of the

comments will be discussed below. Because many of the comments by the

independent almond handlers contained similar concerns, they have been

combined where appropriate and are addressed collectively.

In its first comment submitted on September 14, 1993, Cal-Almond,

Inc., stated that the issuance of an interim final rule rather than a

proposed rule to establish the new Credit-Back program was arbitrary

and capricious. The commenter asserted that the former creditable

advertising and promotion program has been substantially altered by the

interim final rule and the burden on handlers has been drastically

increased.

It is the Department's position that the issuance of the interim

final rule met each of the requirements of the Administrative Procedure

Act (APA) which pertain to the promulgation of regulations. The Board

requested that the new regulations for the Credit-Back program be

effective for the 1993-94 crop year. The only way to accomplish this

was through the utilization of interim final rulemaking procedures, as

authorized by the APA. Also, the Department was advised by the Board

that the action was widely supported by the industry. While there was

one dissenting vote among the ten Board members who voted on the

establishment of the new program, that person was opposed to the

imposition of any advertising assessments on members of the industry.

The dissenting Board member had no specific criticisms of the new

Credit-Back program. Finally, contrary to the commenter's assertion,

the interim final rule represented a relaxation of the then-existing

regulations. Moreover, the new Credit-Back program, as modified in this

final rule, is further relaxed. The new program is carefully structured

so that the rules which govern its efficient administration are no more

extensive than necessary to meet the desired industry goals of

increasing almond sales and enhancing grower returns. The new program

substantially increases the advertising and promotional activities for

which handlers can receive credit against their assessment obligations.

At the same time, it decreases the number of reporting deadlines and

recordkeeping requirements imposed on handlers.

Cal-Almond further asserted that the Department does not have the

authority to regulate how handlers pay growers and that the new Credit-

Back program's elimination of the provision which allowed handlers to

receive a 150% credit against the promotional advertising portion of

their assessments because of concerns about grower returns was

therefore arbitrary and capricious. The commenter contended that: (1)

the Almond Marketing Order does not permit the Department to insure

that growers receive a certain amount of returns on their products, and

(2) the Order does not permit the Department to become involved in

contracts which handlers have with their growers.

Contrary to the commenter's assertions, the interim final rule

establishing the new Credit-Back program does not specify how handlers

should pay almond growers, nor does it seek to regulate the returns

which growers receive for their almonds. It is, however, the Act's

intent that marketing orders help growers and handlers to work together

to solve problems which affect their industry. Thus, industry practices

which have a potentially negative effect on growers should be

considered when making recommendations on changes to marketing order

regulations.

Cal-Almond and another independent almond handler, Western Nut

Company, also commented that the new Credit-Back program requires

handlers to make expenditures of $3 in order to get back $1, thus

placing an incredible financial burden on handlers. Cal-Almond stated

that this, in turn, will reduce handlers' initial payments to growers.

In addition, independent almond handler, John Rotteveel on behalf

of Rotteveel Orchards, indicated that he did not believe that the 50%

return for creditable activities was enough to warrant any investment

in the program. Grant Ecker on behalf of Waterford Nut Company, stated

the new Credit-Back program places a larger economic burden on small

handlers than the old program did.

Cal-Almond also objected to the new Credit-Back program's

imposition of a 50 percent Credit-Back limit for promotional activities

in foreign markets. Cal-Almond stated that this is not an expansion of

the previous rule, but is instead a restriction because the former rule

allowed 100% credit for qualified promotional activities in foreign

markets.

The former creditable advertising and promotion program allowed for

variable levels of credit for different activities, between 50 percent

and 150 percent depending on the activity. The new Credit-Back program

is designed to be more equitable because the credit allowed for all

activities is the same. The amount of credit granted for foreign

advertising expenditures is identical to the amount given for domestic

advertising.

The Department believes that having the same credit amount for each

activity provides equity for all handlers' advertising and promotional

activities. No preference is given in the new Credit-Back program for

one type of advertising and promotional activity over another.

The range of Credit-Back activities has been expanded so that

handlers will be able to receive credit for 13 additional categories of

promotion and advertising. This expansion could offset any increased

outlays which handlers must make for brand promotion and advertising

projects due to the reduced rate of credit.

The new Credit-Back program is designed to provide handlers with

more flexibility in conducting their advertising and promotional

activities. The commenters seem to be suggesting that it would be more

desirable for the new program to have an increased credit amount than

what is currently allowed.

On May 16, 1994, the Board met and discussed possible revisions

that could be made to the new Credit-Back program. It was expressed at

this meeting that the 50 percent Credit-Back amount may impose a

greater financial burden on handlers than was anticipated. The Board

unanimously recommended that the Credit-Back amount be modified from 50

percent to 66\2/3\ percent ($1.00 for every $1.50 spent). It was

determined that this amount would provide incentive for handlers to

maintain their individual advertising and promotional efforts and still

allow adequate funds for the generic portion of the new advertising and

promotion program.

The Department believes that the new Credit-Back program's expanded

activities along with an increased credit amount will provide handlers

with more incentive to maintain and more flexibility to conduct their

individual advertising and promotional efforts. Therefore, we are

modifying the new Credit-Back program in this final rule by increasing

the amount of credit allowed for approved promotional activities from

50 percent to 66\2/3\ percent.

Cal-Almond also claimed that the requirement that handlers file an

application with the Board to obtain pre-approval of creditable

activities means that handlers cannot change their advertising plan for

the entire year. Cal-Almond also objected to the requirement that

handlers submit proof of at least one approved advertising activity by

January 15 of each year. Sharon Wiggin, on behalf of Wiggin Farms, also

stated that the form filing requirements and deadlines contained in the

interim final rule are difficult to meet. The Department has determined

that these comments have merit. The purpose of the requirement that

handlers file an application with the Board to obtain pre-approval of

creditable activities under the new program was to ensure that handlers

were aware that the activity was eligible for Credit-Back prior to

expending funds for the activity. In the past, the Board occasionally

had to reject claims for activities that did not qualify after the

promotional activity had already been conducted by the handler. The

pre-approval provision was only intended to assist handlers by helping

them avoid any unnecessary outlays of funds for activities that did not

qualify for credit.

This aspect of the new program was also discussed at the recent

Board meeting. The Board unanimously recommended that the pre-approval

provision was not essential to the successful administration of the

program. As previously explained, this provision was only intended to

assist handlers. Handlers will no longer be required to obtain pre-

approval of creditable activities from the Board under the new program

as modified in this final rule. The Board will continue to assist any

handler in determining whether an advertising and promotional activity

is eligible for Credit-Back under the new program prior to the handler

expending funds for the activity.

Cal-Almond also objected to the provision which allows Credit-Back

payments only for the portion of product weight represented by almonds

or the handler's actual payment, whichever is less. The commenter

claims that this provision works against those handlers who apply for

Credit-Back for advertising of processed products that contain only a

small percentage of almonds. The new Credit-Back program is, however,

intended to allow Credit-Back only for money actually spent for

advertising California almonds, not for advertising another product. As

discussed previously, the Board believes that the percentage rule is

logical and fair because the handler's credit originates from

assessments on almonds, not on other products. Without the percentage

rule, the best interests of the entire industry would not be served

because handlers would receive credit for promoting products which have

nothing to do with the almond industry.

Cal-Almond also objected to the provision which requires a

handler's name, brand, or the words ``California almonds,'' to appear

on the product's primary face label in order for the handler to be

eligible for Credit-Back. The commenter contended that, because nearly

all almonds produced in the United States are grown in California, the

requirement that the word ``California'' be placed on the label is

unnecessary and may limit marketing opportunities for some handlers in

their negotiations with product manufacturers. The intent, however, of

the new advertising and promotion program is to promote the sale and

consumption of ``California'' almonds, not other ingredients in

products or almonds not grown in California. This provision will help

ensure that advertising generated by the new Credit-Back program is,

indeed, for almonds grown in California. In addition, the provision is

not limited to the word ``California'' being placed on the product's

primary face label in order for the handler to be eligible for Credit-

Back. Handlers can also negotiate with product manufacturers for the

appearance of the handler's name or brand on the primary face label in

order to be eligible for Credit-Back. Handlers have three alternatives

under the new program, all of which ensure the promotion of

``California'' almonds.

Cal-Almond, Thomas L. Motta, on behalf of Western Nut Company,

Grant Ecker, and Sharon Wiggin objected to handlers being required to

expend advertising and promotion funds up-front in order to be eligible

for a Credit-Back refund at a later date. Cal-Almond also stated that

handlers should not have to wait until February 15 of the crop year to

begin receiving Credit-Back refunds and that they should not have to

wait 30 days after submission of claims to receive a refund. The

Department has determined that these comments have merit. Because

payment practices have been changed under the new Credit-Back program,

the up-front payment may not provide some handlers with enough

flexibility early in the crop year to conduct their advertising and

promotional activities.

This aspect of the new program was also discussed at the recent

Board meeting. The Board unanimously recommended that handlers

conducting their own advertising and promotional activities may now

receive credit against their Credit-Back assessment up to the amount of

the Credit-Back assessment installment due if they conduct and document

their advertising and promotional activities at least two weeks prior

to assessment billings.

The Department has determined that in order to allow handlers more

flexibility early in the crop year to conduct their advertising and

promotional activities, this final rule will be modified to allow

handlers to receive credit against their Credit-Back assessment up to

the amount of the Credit-Back assessment installment due if they

conduct and document their advertising and promotional activities at

least two weeks prior to assessment billings.

Cal-Almond also objected to the appeal process for determining

whether a handler should receive Credit-Back for a particular

promotional activity. The commenter claimed that competitors of some

handlers will determine the outcome of their appeals. As previously

discussed, handlers have the option of anonymity when their appeal is

brought before the Board. In addition, the process allows for further

appeal to the Department. The Department also has the right to review

all decisions at any point during the appeal process.

During the second comment period, Cal-Almond, as well as another

independent almond handler, Rotteveel Orchards, commented that under

the new Credit-Back program there are many types of promotional and

advertising activities which handlers use to promote their products

which will be ineligible for Credit-Back. John Rotteveel, on behalf of

Rotteveel Orchards, stated the best forms of advertising for his

company--``word-of-mouth'' advertising and personal contact with

potential buyers--are not creditable activities under the new Credit-

Back program. In addition, Rotteveel indicated that he did not believe

that the 50% return for creditable activities was enough to warrant any

investment in the program.

As has already been pointed out, the range of promotional

activities eligible for reimbursement under the new Credit-Back program

have been significantly expanded. The Department has also modified the

new Credit-Back program in this final rule by increasing the amount of

credit allowed for approved promotional activities from 50 percent to

66\2/3\ percent.

Cal-Almond also objected to the Board's television advertisements

because it believes that they have a religious connotation which should

not be used to promote almonds. The advertising campaign referred to is

not intended to be offensive toward any religion, nor does it contain

any negative connotations.

Cal-Almond also objected to the portion of the provision which

requires individual handlers to determine and declare, within 15 days

after the start of the season, the extent to which they intend to use

the advertising program. According to the commenter, a handler should

not be required to report a year in advance how he/she intends to

advertise over an entire year's period.

The intent of this provision, in part, was to help the Board plan

its finances for the upcoming crop year. With this information

available, the Board could determine who was participating and who was

not participating in the new program for that year. They would know at

that time that all handlers who did not declare their intent would be

paying the entire assessment to the Board and that amount could be

earmarked for the generic advertising and promotion program.

The provision did not require handlers to give a dollar amount or

an advertising plan to the Board, but merely an anticipated percentage

of their entire advertising assessment they believed would be used

under the new program. The deadline was not intended to limit a

handler's use of the program. Handlers were not restricted to any types

of advertising or any specific amounts. However, the total Credit-Back

amount could not exceed the original percentage reported to the Board.

Although Cal-Almond's interpretation of this provision is not

accurate, the Department considered all aspects of this provision to

determine if there were other ways that the Board could obtain this

information without requiring handlers to declare their intent to

utilize the program. The new Credit-Back program is intended to provide

handlers with more flexibility to conduct their own advertising and

promotional activities.

The Department believes that the Board has other alternatives to

accomplish the objectives discussed above, such as reviewing handler

participation during past years to obtain an estimate of participation

in the new Credit-Back program for the new crop year. The Department

has determined that in order to allow handlers more flexibility to

participate in the new Credit-Back program, this provision should be

eliminated from the regulations. Accordingly, this final rule will be

revised to reflect that change.

During the second comment period, another independent handler,

Wiggin Farms, stated that a referendum should be conducted every three

years to offer growers an opportunity to vote on increasing or

decreasing advertising expenditures and for voting on continuation of

the Order.

The Department notes that the Board currently has the authority to

recommend annual changes in program expenditures. Determining the

merits of holding periodic continuance referenda is outside the scope

of this rulemaking. The referenda issue was addressed last year when

the Board and other industry groups recommended, during a formal

rulemaking hearing in Modesto, California, that periodic referenda be

held. The Department is in the process of reviewing and evaluating the

record of the formal rulemaking proceeding.

Many comments, as requested, addressed the Ninth Circuit decision.

These comments are as follows:

Cal-Almond stated that all of the rules and regulations contained

in the interim final rule deprive handlers of their First Amendment

rights and suggested that the entire creditable program be eliminated.

The commenter asserted that a determination has never been made by the

Board as to whether the Order or individual handlers are better at

promoting and advertising almonds. The commenter further stated that

there have never been any studies conducted to indicate whether the

current advertising program is effective and contended that the

Department is unable to show that the regulations are required in order

to advance the stated goal of selling more almonds and increasing

returns to producers. In addition, the commenter contended that the

regulations contained in the interim final rule are more extensive than

necessary to serve the governmental interest of increasing almond

sales.

One independent almond handler, Thomas Motta on behalf of Western

Nut, stated that if the Marketing Order's advertising program is deemed

constitutional at some future date, the Secretary should evaluate what

type of advertising program best serves the almond industry. Motta

further stated that the Ninth Circuit ruled that compelled advertising

violates a handler's First Amendment rights and that regardless of what

the Board calls it, it is still forced collection. Motta suggested that

the advertising provisions of the order be put on hold until they are

proven to be beneficial to the industry and are determined to be legal

by the appropriate Court.

Another independent almond handler, Grant Ecker on behalf of

Waterford Nut Company, stated that he agrees with the Ninth Circuit

Court ruling that the regulations hinder handler's efforts to increase

sales and returns to growers. He stated that the new Credit-Back

program places a larger economic burden on small handlers than the old

program did.

John Rotteveel, on behalf of Rotteveel Orchards, stated that the

current and former advertising programs violate his constitutional

rights. He believes that the program is a waste of money and does

nothing to increase the consumption of almonds that almond handlers

could not do themselves. Finally, Rotteveel stated that there is no way

to prove that the advertising programs have increased world demand for

almonds. He believes that growers and handlers are expanding these

markets without the help of the Order and does not think that the

increase in the number of handlers and growers in the United States can

be attributed to the Order. Rotteveel suggested phasing out the Order

and letting the almond industry run itself.

It is the Department's position that the former creditable

advertising program and the new Credit-Back program meet each of the

criteria set forth in the Ninth Circuit decision which pertain to

constitutionality. The Department believes that both programs are

authorized under the Act and that the regulations do not infringe upon

the First Amendment rights of any handler. Importantly, the Court in

Cal-Almond did not hold that all advertising and promotion programs are

unconstitutional or illegal on their face. Rather, the court recognized

the substantial government interest in promoting almond consumption in

order to stimulate the demand for almonds and enhance grower returns.

As previously discussed, the new Credit-Back advertising and

promotion program has been carefully structured so that the rules which

govern its efficient administration are no more extensive than

necessary to meet the desired goals of increasing almond sales and

enhancing grower returns. Virtually all aspects of the former

creditable advertising and promotion program have been modified or

eliminated so as to increase efficiency while at the same time imposing

a minimum of restrictions on handlers.

An additional comment in the form of an exception to another

comment was received from Cal-Almond well after the second comment

period closed. Because Cal-Almond's comment was received after the

close of the comment period, it has not been considered.

Another comment was received from the Office of Chief Counsel for

Advocacy of the United States Small Business Administration (SBA). The

SBA contended that the Secretary did not comply with the Regulatory

Flexibility Act (RFA) in issuing the interim final rule. It recommended

that the Department perform a regulatory flexibility analysis, which

would study the impact of advertising programs on small handlers and

would consider alternatives to the program. The SBA further stated that

the Secretary's assertion about small entity orientation and

compatibility did not meet the requirements of the RFA. The SBA stated

that the RFA does not provide exceptions for statutes that are not

compatible with its goals. The SBA commented further that: (1) most

small handlers sell to ``food processors'' and have no reason to

promote fresh consumption of almonds, and (2) advertising expenses

designed to increase use by ingredient manufacturers were not

creditable under the old program and are not creditable under the new

program. Finally, the SBA stated that the Credit-Back program was

promulgated with no evidence that it would advance the government's

interest, or that it is the least restrictive program needed to enhance

almond sales.

For these reasons, the SBA indicated that the Secretary should

consider alternatives to the current advertising program, including no

program at all, or, at a minimum, a program that imposes less

restrictions on handlers. The SBA also recommended that promotional

efforts targeting ingredient manufacturers should be given the same

credit as those targeting fresh consumption.

Advertisements resulting from joint participation by a handler and

manufacturers or sellers of two complementary products or commodities

were eligible for credit under the former advertising and promotion

program provided that the brand name was used.

Under the new Credit-Back program, advertising and promotion

activities to trade, industrial or end users are specifically eligible

for Credit-Back, with no requirement for a brand name. In addition, the

Board's generic program contains consumer advertising designed to

communicate the message that almonds enhance any product to which they

are added. Research has found such consumer advertising is successful

in promoting consumption of products used as ingredients. Increased

consumption of almonds benefits the entire industry.

The Department disagrees with the SBA's assertion that this action

fails to meet the requirements for the Regulatory Flexibility Act. The

SBA's concerns regarding the program's impact on small businesses have

been properly addressed in this document and the interim final rule.

Finally, a comment was received from Rodger Wasson, CEO of the

Almond Board, which supported the new Credit-Back program and supplied

documentation to substantiate the Board's position. Mr. Wasson

discussed the history of the almond industry and beneficial changes

that have taken place since the implementation of the creditable

advertising program. He stated that the program has provided a variety

of services designed to increase the demand for California almonds. In

addition, it has continually been revised to meet the needs of the

industry. Mr. Wasson stated that the Credit-Back provisions were

recommended in order to more fully address the needs of the changing

industry.

He stated there are major differences between the previous

creditable advertising program and the new Credit-Back program. Some

examples are as follows: (1) The previous program allowed handler

credit for paid media advertisements only. There were separate systems

for ``generic packs'' and ``150 percent credit''. The new Credit-Back

program adds 13 advertising, promotion and public relations categories

(only travel is excluded across-the-board); (2) The previous program

contained many reporting periods, carryovers, and recordkeeping on

different systems. Credit-Back is simplified with one system, no

carryovers, and a basic report-as-you-go reporting system; (3) The

previous program did not allow credit for almonds used as an ingredient

if the product contained less than 50 percent of almonds by weight.

Credit-Back allows credit for the weight represented by almonds as an

ingredient; (4) The previous program did not allow credit for

advertisements directing consumers to one or more named retail outlets,

other than handler-operated outlets. Credit-Back allows such

advertisements if they include mention of almonds; (5) The previous

program did not allow credit for advertisements promoting ``competing

nuts.'' Credit-Back allows credit for this activity determined by the

portion of the product represented by almonds and/or product weight,

and (6) The previous program did not allow credit for advertisements

that promote more than two complementary products. Credit-Back allows

credit up to the portion represented by almonds.

In addition, Mr. Wasson submitted materials on the benefits of

generic advertising. A summary of the materials is as follows.

Generic Advertising and Promotion Programs

Generic advertising, i.e., advertising activities which focus on

the general properties of a product such as flavor, nutritional

benefits and convenience, rather than touting specific brand names, is

a proven promotional tool which is often used to increase demand for

agricultural commodities. When used in conjunction with brand name

promotion, generic advertising has proven to be highly successful.

For these reasons, generic advertising of agricultural commodities

has grown steadily since the first commodity board was created more

than 50 years ago. In 1990, about 350 generic promotion programs were

in effect at the federal and state levels, covering more than 80

commodities at a cost of over $530 million annually.

Each of the federal programs referred to above are overseen by

USDA. The Agricultural Marketing Service (``AMS'') of the USDA

currently oversees promotional programs contained in various federal

marketing orders authorized under the Agricultural Marketing Agreement

Act of 1937 (the AMAA). These marketing orders cover fruits,

vegetables, specialty crops and milk. In addition, AMS has oversight

responsibility for numerous federal statutes which authorize research

and promotion programs for a variety of commodities, including beef,

cotton, dairy, eggs, honey, limes, mushrooms, pork, potatoes, soybeans,

milk, and watermelons.

The success of many of these advertising and promotion programs has

been well documented. For instance, an advertising campaign conducted

by the Potato Board has yielded dramatic results.

The Potato Board was founded in 1972 at a time when potato

consumption was steadily declining. Many people had poor images of

potatoes, did not know of their nutritional value and believed that

they were fattening. In the years after its formation, the Board

initiated numerous advertising campaigns designed to improve the

potato's poor reputation and increase consumer sales. As a result,

potato consumption has increased by 12% and 96% of the public is now

aware that potatoes are a high fiber, low fat food which can be

included in any healthy diet.

Efforts of the National Dairy Promotion and Research Board to

promote milk and milk products have also met with success. The Board

was founded in 1984 and since then has spent more than $75 million

annually on the promotion of dairy products. As a result, dairy product

consumption rose by 12% between 1983 and 1990.

Another example of a successful generic program is provided by the

California Prune Board. In the 1980's, prunes were not a popular fruit

and most members of the public had little knowledge of their

nutritional value, specifically, their high fiber content. In 1987, the

prune Board began a campaign to highlight the link between consumption

of high fiber foods (such as prunes, which were marketed as a good

tasting, high fiber fruit) and cancer prevention. The program included

direct mailings of product samples to physicians, publicity and media

appearances by experts about the health benefits of prunes, and

sampling programs in shopping malls and on domestic airline flights.

Combined with generic advertising and promotion, the program resulted

in a 12% increase in prune sales in 1987 alone. To date, the sales of

California prunes continue to rise.

The success of certain commodity programs has also been measured

through technical economic studies on the effects of generic

advertising on industry sales. The results are impressive.

For instance, in a recent study of the Washington apple industry

(Olan D. Forker and Ronald W. Ward, 1991) it was estimated that between

1988 and 1991, the industry received a rate of return of $6.63 for

every dollar of assessments spent on the promotion of apples. In all,

this represented a $133.76 million dollar return on a $17.5 million

investment and the market price which Washington apple growers received

for their apples between 1988 and 1991 was estimated to be 12.9% higher

than it would have been without generic advertising.

Similarly, a recent study sponsored by the Cattlemen's Beef

Promotion and Research Board (Ronald W. Ward, 1993) examined the

effects of generic advertising on the beef industry. Based on extensive

economic analysis, it was estimated that between 1987 and 1992, the

beef industry realized an average return rate of $5.80 for every dollar

spent on promotional activities. By February 1992, the total economic

return to the industry was estimated at $2.99 billion.

A study by Ronald Ward and Bruce Dixon in 1989 provides an economic

analysis of the effects of generic advertising on fluid milk

consumption. The authors of this study found that such promotion,

authorized under the National Dairy and Tobacco Adjustment Act of 1983,

``confirm[s] a statistically significant relationship between fluid

milk consumption and generic fluid milk advertising * * *'' Other

research conducted by O.D. Forker and H.M. Kaiser of Cornell University

indicates that between 1984 and 1990, dairy farmers realized a farm

level return rate of 4.6 to 1 on investments in generic advertising

authorized under the National Dairy Promotion Program.

Mr. Wasson also submitted materials on the benefits of branded

advertising. A summary of the materials is as follows.

Branded Advertising

The usefulness of branded advertising to increase the sales of a

particular product is also well documented. Within the private sector,

companies unfailingly recognize the importance of advertising and

collectively spend billions of dollars a year on advertising and

promotion activities in order to generate sales. In 1992 alone, the

nation's top 20 advertisers spent more than $500 million on

advertising. (Advertising Age, August 29, 1993).

Within the agricultural field, brand advertising is also a useful

tool which has been found to benefit not only the actual brand

advertiser, but the overall industry as well. Through brand

advertising, handlers seek to move their own products from the shelf to

the consumer. A recent study conducted by an economist at the

University of California at Davis, Department of Agricultural Economics

(Jason Christian, 1994) concluded that brand advertising has afforded

substantial benefits to all California almond growers.

In his analysis, Christian examined the market effects of brand

advertising by one large almond cooperative as well as other

independent handlers, between 1972 and 1992. Based on Christian's

analysis, it was estimated that the average rate of return to the

industry as a result of brand advertising by the cooperative was

substantial. During the 1980's the average rate of return for each

additional dollar spent on advertising expenditures was about $5.00.

Aside from the individual brand advertiser, other handlers in the

industry also benefited from the advertising because it created an

increased demand for all almonds. Between 1979 and 1990, the benefits

received by other almond handlers actually exceeded the returns

received by the brand advertiser.

Mr. Wasson also submitted materials on the effects of almond

promotion on the industry, including documentation on imports and

exports of almonds and statistical tables on the almond industry. A

summary of the materials is as follows.

Effects of Almond Promotion on the Almond Industry

Aside from the studies described above, there are numerous other

indications that the combined creditable and generic advertising

program administered by the Almond Board has been highly successful.

Statistics indicate that both the supply and demand of California

almonds have increased significantly since the inception of the Almond

Marketing Order's advertising and promotion program.

In the early 1980's the U.S. almond crop averaged about 300 million

pounds. By the early 1990's the almond crop averaged about 550 million

pounds. Almonds have thus attained a level of market growth which few

other agricultural commodities can claim.

Significantly, grower prices for almonds have remained relatively

stable throughout these years of increased production. One basic theory

of economic analysis is that prices for a product will fall if supply

increases without a corresponding increase in demand. The relative

stability of prices within the almond industry throughout the years of

increased production indicate that demand for California almonds has

increased dramatically over the years.

Another measure of the growing popularity of almonds can be

obtained through analysis of per capita consumption. USDA figures

indicate that the United States' per capita consumption of almonds is

well ahead of that of any competing nuts. In 1970-71, the average

American's per capita consumption of almonds was about .34 pounds per

person. In 1987-88, the average per capita consumption of almonds was

.58 pounds per person. By 1991-92, per capita consumption had risen to

.82 pounds per person. This represents a 40% increase in per capita

consumption between 1987 and 1992. Importantly, no tree nut was

promoted more aggressively than almonds during this period.

Additionally, the tree nut with the second largest per capita

consumption between 1987 and 1992 was walnuts, at just .54 pounds per

person.

Further evidence of the growth of the almond industry is provided

by the fact that the use of almonds as ingredients in new products

continues to increase. In 1992, almonds were most often included in all

new foods containing tree nuts or peanuts which were introduced on the

market. In all, 35% of all new products containing any type of nuts

which were introduced in 1992 contained almonds.

The Department notes that economic studies of the almond industry

also show that advertising is a good use of industry funds. In his 1985

study of the relationship between advertising, risk and domestic sales

of almonds, Dr. John Baritelle, a research agricultural economist and a

professor at the University of California-Riverside, concluded that

advertising has been a good investment for the industry.

As the basis for his study, Baritelle posed the initial question,

``What does the industry get for its advertising dollar, and what would

we get if we advertised even more?'' (Non-Technical Statement on Almond

Advertising Model and Domestic Sales, at p. 2) (July, 1985). Almond

crops for the years 1981 through 1983 were analyzed.

The study found that for the crop year 1981, when almond production

was at an all time high of 408 million pounds and the advertising

budget was 10.86 million dollars, total estimated returns on

advertising ranged from $1.21 to $4.51 for each dollar spent. This

figure included the estimated returns that advertising dollars expended

in 1981 would yield in 1982 since the study found that advertising has

an impact on per capita sales in the year of expenditure as well as in

the following year. Importantly, Baritelle found that even if the 1981

advertising budget had been increased by 25% to $13.58 million, the

industry would still have received a total return of at least $1.02 on

every dollar spent.

In 1982, when almond production returned to more normal levels and

the advertising budget was $8.85 million, total estimated returns on

advertising ranged from $1.75 to $6.26 for each dollar spent. Again,

this figure included the estimated returns that advertising dollars

expended in 1982 would yield in 1983. Additionally, Baritelle noted

that even if the 1982 budget had been increased by 75% to $15.49

million, the return to the industry would have been at least $1.04 for

every dollar spent.

Finally, the Department notes that in 1983, when almond production

was low due to poor weather conditions and the advertising budget was

$6.10 million, estimated returns ranged from $2.34 to $8.37. Again,

this figure took into account returns that were expected to be realized

in 1984.

Mr. Wasson went on to state that although investing in the

advertisement of almonds is a proven way to increase sales, it is

significant that, when compared to other commodity boards, the Almond

industry spends relatively little on promotional activities. For

instance, the Washington Apple and Almond industries have similar crop

sizes--about $1 billion--yet the Almond Board spends substantially less

on advertising than the Washington Apple Commission. The Almond Board's

promotional budget for the year 1993-94 was $5.4 million. The

Washington Apple Commissions' advertising expenses for that same period

was a little over $7.0 million.

It is also significant that the Almond Board's lengthy process of

developing and implementing generic advertising campaigns is consistent

with advertising industry norms. Testing and monitoring is performed at

various stages in the development and airing of advertisements and

follow-up research on their effectiveness is conducted.

Different concepts regarding the best method of promoting almonds

are also explored. For example, focus group concept testing was

conducted prior to the 1993-94 advertising campaign, and a concept was

chosen from four alternatives. Advertisements were then developed,

presented to a consumer audience for reaction, and adjustments and

refinements were made before a final product was developed.

After airing an advertisement, consumer awareness is measured since

this is a basic measurement of an advertisement's effectiveness.

Results of these tests recently showed that the television

advertisement approved for use by the Almond Board during the 1993-94

campaign was very successful. In addition, based on the experience

gained from the 1993-94 campaign, the Board has conducted research to

assist in developing a new program for 1994-95.

The Order and its regulations were initiated by the industry for

the benefit of the industry. Without majority industry support, the

Order, or any part of it, could have been suspended or terminated. Mr.

Wasson concluded by stating that the advertising and promotional

programs instituted by the Board have received continual majority

support since their inception.

The Department's Conclusion

The Department's experience has been that whenever a segment of any

industry is ``required'' to do certain things in order to make a

program work for all, it is not unusual to find members of the industry

who do not agree with any or all aspects of the program. There are some

who just do not want to participate in any advertising or promotion

programs. In order for a marketing order to be successful, however,

participation by everyone is very important.

With the decision of the Ninth Circuit, the Department's oversight

responsibilities of the almond marketing order were carefully analyzed

and considered. It was determined that it is in the best interest of

the majority of the almond industry that the advertising and promotion

program continue as modified herein.

Based on the above, the Administrator of the AMS has determined

that this final rule will not have a significant economic impact on a

substantial number of small entities.

The information collection requirements contained in these

regulations have been previously approved by the Office of Management

and Budget (OMB) and have been assigned OMB Control Number 0581-0071.

Pursuant to 5 U.S.C. 553, it is also found and determined that good

cause exists for not postponing the effective date of this action until

30 days after publication in the Federal Register because: (1) the new

Credit-Back program, as modified herein, will be more beneficial to the

industry if it is implemented at the beginning of the 1994-95 crop year

which begins July 1, 1994; (2) this action provides handlers with

additional flexibility in the types of promotion and advertising

allowed for crediting; (3) this action relaxes requirements currently

in effect; (4) the interim final rule provided two comment periods

which were addressed in this action and modifications were made based

on the comments and other relevant information.

After consideration of the all relevant material presented, the

information and recommendations submitted by the Board, the comments

received, and other information, the Department has determined that

finalizing the interim final rule, with modifications, as published in

the Federal Register [58 FR 43500, August 17, 1993] will tend to

effectuate the declared policy of the Act.

List of Subjects in 7 CFR 981

Almonds, Marketing agreements, Nuts, Reporting and recording

requirements.

For the reasons set forth in the preamble, 7 CFR Part 981 is

amended as follows:

PART 981--ALMONDS GROWN IN CALIFORNIA

1. The authority citation for 7 CFR Part 981 continues to read as

follows:

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

2. Section 981.441 is revised to read as follows:

Sec. 981.441 Credit for market promotion activities, including paid

advertising.

(a) In order for a handler to receive credit for his/her own

promotional activities from his/her pro rata portion of advertising

assessment payments, pursuant to Sec. 981.41(c), the Board must

determine that such expenditures meet the applicable requirements of

this section. Credit will be granted either in the form of a payment

from the Board, or as an offset to the advertising assessment if

activities are conducted and documented to the satisfaction of the

Board at least two weeks prior to assessment billings. Credit,

hereinafter termed ``Credit-Back'', will be granted in an amount not to

exceed 66\2/3\ percent of a handler's proven expenditures for qualified

activities.

(b) The portion of the handler assessment for which credit may be

received under this section will be billed, and is due and payable, at

the same time as the portion of the handler assessment used for the

Board's administrative expenses, unless the handler(s) conduct and

document activities at least two weeks prior to assessment billings. In

the latter case, handlers' advertising assessment obligations will be

reduced according to the amount of proven activities approved by the

Board.

(c) The Board shall grant Credit-Back for qualifying activities

only to the handler who performed such activities and who filed a claim

for Credit-Back in accordance with this section.

(d) Credit-Back shall be granted only for qualified promotional

activities which are conducted and completed during the crop year for

which Credit-Back is requested.

(e) The following requirements shall apply to Credit-Back for all

promotional activities:

(1) Credit-Back granted by the Board shall be that which is

appropriate when compared to accepted professional practices and rates

for the type of activity conducted. In the case of claims for Credit-

Back activities not covered by specific and established criteria, the

Board shall grant the claim if it is consistent with practices and

rates for similar activities. To this end, the Board may issue

guidelines for qualifying activities from time to time as warranted.

For activities in markets other than the United States and Canada,

paragraph (e)(5) of this section shall also apply.

(2) The clear and evident purpose of each activity shall be to

promote the sale, consumption or use of California almonds, and nothing

therein shall detract from this purpose.

(3) No Credit-Back will be given for advertising placed in

publications that target the farming or grower trade. No Credit-Back

shall be given for any outdoor advertising or sponsorships in the

California almond growing counties of Butte, Colusa, Fresno, Glenn,

Kern, Madera, Merced, Sacramento, San Joaquin, Stanislaus, and Tulare

counties, except that, outdoor advertising in these counties which

specifically directs consumers to a handler-operated outlet offering

direct purchase of almonds will be eligible for Credit-Back.

(4) Credit-Back shall be granted for those qualified activities

specified below, except that Credit-Back for travel expenses will not

be allowed in any case.

(i) Paid advertising directed to end-users, trade or industrial

users. Credit-Back shall be granted for money spent on paid advertising

space or time including, but not limited to, newspapers, magazines,

radio, television, transit and outdoor media, and including the

standard agency commission costs not to exceed 15 percent of gross.

(ii) Other market promotion activities. Credit-Back shall be

granted for market promotion other than paid advertising, for the

following activities:

(A) Marketing research (except pre-testing and test-marketing of

paid advertising);

(B) Trade and consumer product publicity;

(C) Printing costs for promotional material;

(D) Direct mail printing and distribution;

(E) Retail in-store demonstrations;

(F) Point-of-sale materials (not including packaging);

(G) Sales and marketing presentation kits;

(H) Trade fairs and exhibits;

(I) Trade seminars;

(J) 50/50 advertising with retailers;

(K) Couponing (printing, distribution and handling costs only);

(L) Purchase of Board produced promotional materials; and

(M) Sponsorships

(iii) For any qualified activity involving joint participation by a

handler and a manufacturer or seller of a complementary product(s), or

a handler selling multiple complementary products, including other

nuts, with such activity including the handler's name or brand, or the

words ``California Almonds'', the amount allowed for Credit-Back claim

shall reflect that portion of the activity represented by almonds, or

the handler's actual payment, whichever is less.

(iv) When products containing almonds are promoted, the amount

allowed for Credit-Back shall reflect that portion of the product

weight represented by almonds, or the handler's actual payment,

whichever is less. In addition, the product must display the handler's

name or brand, or the words ``California Almonds'' on the primary, face

label.

(5) Credit-Back for promotional activities in a foreign market

shall be granted at 66\2/3\ percent of a handler's unreimbursed

expenditures for qualified activities in any foreign market, if the

handler is promoting pursuant to a contract with the Foreign

Agricultural Service, USDA (FAS) and/or the California Department of

Food and Agriculture (CDFA). Such activities must also meet the

requirements of paragraphs (e) (1), (2), (3), (4), and (6) of this

section. Unless the Board is administering the foreign marketing

program, such activities shall not be eligible for Credit-Back unless

the handler certifies that he/she was not and will not be reimbursed by

either FAS or the CDFA for the amount claimed for Credit-Back, and has

on record with the Board all claims for reimbursement made to FAS and/

or the CDFA. Foreign market expenses paid by third parties as part of a

handler's contract with FAS or CDFA will not be eligible for Credit-

Back.

(6) A handler must file claims with the Board to obtain Credit-Back

for promotional expenditures, as follows:

(i) All claims submitted to the Board for any qualified activity

must include:

(A) A description of the activity and when and where it was

conducted;

(B) Copies of all invoices from suppliers or agencies;

(C) Copies of all canceled checks issued by the handler in payment

of these invoices; and

(D) An actual sample, picture or other physical evidence of the

activity.

(ii) Handlers may receive credit against their assessment

obligation up to the advertising amount of the assessment installment

due; Provided: That the handler submits the required documentation for

a qualified activity at least two weeks prior to the mailing of

assessment notices from the Board. In all other instances, handlers

must remit the advertising assessment to the Board when billed, and a

refund will be issued to the extent of proven, qualified activities.

(iii) Checks from the Board in payment of approved Credit-Back

claims will be mailed to handlers on February 15, April 15, June 15,

and 30 days after submission of final claims for the crop year pursuant

to paragraph (e)(6)(iv) of this section. To receive payment on these

dates, handler claims must be submitted, with all required elements, at

least one month prior to the payment date. A handler can receive

Credit-Back for his/her allowable direct expenditures only up to the

amount of that portion of the handler's assessment designated for

marketing promotion, including paid advertising.

(iv) A statement of the Credit-Back commitments outstanding as of

the close of a crop year must be submitted in full to the Board within

15 days after close of that crop year. Final claims must be submitted

within 105 days after the close of that crop year.

(f) Appeals. If a determination is made by the Board staff that a

particular promotional activity is not eligible for Credit-Back because

it does not meet the criteria specified herein, or for any other

reason, the affected handler may request the Public Relations and

Advertising Committee to review the Board staff's decision. If the

affected handler disagrees with the decision of the Public Relations

and Advertising Committee, the handler may request that the Board

review the Committee decision. If the handler disagrees with the

decision of the Board, the handler, through the Board, may request that

the Secretary review the Board's decision. Handlers have the right to

request anonymity in the review of their appeal. The Secretary

maintains the right to review any decisions made by the aforementioned

bodies at his/her discretion.

Dated: July 6, 1994.

Robert C. Keeney,

Deputy Director, Fruit and Vegetable Division.

[FR Doc. 94-16731 Filed 7-6-94; 4:14 pm]

BILLING CODE 3410-02-P