Domestically Produced Peanuts Handled by Persons Subject to Peanut Marketing Agreement No. 146; Changes in Terms and Conditions of Indemnification

SUMMARY: This final rule modifies, for 1996 and subsequent crop

peanuts, the indemnification program for signatory handlers under

Peanut Marketing Agreement No. 146 (Agreement). This rule reduces

indemnification payment coverage to certain costs involved with appeal

and product claims. The Peanut Administrative Committee (Committee),

which is responsible for local administration of the quality assurance

program under the Agreement, recommended the changes. This rule reduces

the Committee's indemnification payments for losses incurred by

signatory handlers in not being able to ship unwholesome peanuts for

edible purposes from a ceiling of $7 million for each of the last two

years, to about $300,000. With the reduction in indemnification claim

payments, the Committee will have adequate funds in its indemnification

reserve to cover costs. No handler assessments for indemnification will

be necessary. This will reduce signatory handlers' costs, enabling them

to be more competitive in the marketplace.

EFFECTIVE DATE: This final rule becomes effective October 29, 1996.

FOR FURTHER INFORMATION CONTACT: Jim Wendland, Marketing Order

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

Box 96456, room 2525-S, Washington, D.C. 20090-6456; telephone: (202)

720-2170, or Fax: (202) 720-5698; or William G. Pimental, Marketing

Specialist, Southeast Marketing Field Office, Fruit and Vegetable

Division, AMS, USDA, P.O. Box 2276, Winter Haven, Florida 33883-2276;

telephone: (941) 299-4770, or Fax: (941) 299-5169. Small businesses may

request information on compliance with this regulation by contacting:

Jay Guerber, Marketing Order Administration Branch, Fruit and Vegetable

Division, AMS, USDA, P.O. Box 96456, room 2525-S, Washington, D.C.

20090-6456; telephone: (202) 720-2491, or Fax: (202) 720-5698.

SUPPLEMENTARY INFORMATION: This final rule is issued under Peanut

Marketing Agreement No. 146 (7 CFR part 998). The program regulates the

quality of domestically produced peanuts handled by Agreement signers.

The Agreement is effective under the Agricultural Marketing Agreement

Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as

the ``Act.''

The U.S. Department of Agriculture (Department) is issuing this

final rule in conformance with Executive Order 12866.

This final rule has been reviewed under Executive Order 12988,

Civil Justice Reform. This rule is intended to apply to 1996 (beginning

July 1, 1996) and subsequent crop year peanuts. This final rule will

not preempt any State or local laws, regulations, or policies, unless

they present an irreconcilable conflict with this rule.

Pursuant to the requirements set forth in the Regulatory

Flexibility Act (RFA), the Agricultural Marketing Service (AMS) has

considered the economic impact of this action 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 agreements and

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.

About 32 signatory peanut handlers subject themselves to regulation

under the Agreement. There are about 47,000 peanut producers in the 16-

State production area. Small agricultural service firms, which includes

handlers, have been defined by the Small Business Administration (13

CFR 121.601) as those having annual receipts of less than $5,000,000,

and small agricultural producers have been defined as those having

annual receipts of less than $500,000. Although approximately 25

percent of the signatory handlers may be classified as small entities,

they are seed shellers who ship almost no peanuts to human consumption

outlets. This final rule will have virtually no effect on them. A

majority of the producers may be classified as small entities.

Domestic peanut production in 1995 was 1.76 million tons, with a

farm value of $1 billion.

The objective of the Agreement is to ensure that only high quality

and wholesome peanuts enter human consumption markets in the United

States. About 70 percent of domestic handlers, handling approximately

95 percent of the crop, have signed the Agreement.

Under the regulations, farmers stock peanuts with visible

Aspergillus flavus mold (the principal source of aflatoxin) are

required to be diverted to non-edible uses. Each lot of milled peanuts

must be sampled and tested and those certified ``positive'' as to

aflatoxin must be diverted to non-edible uses. Handlers of such peanuts

currently may be eligible to receive indemnification payments for

losses incurred in not being able to ship the peanuts for edible uses.

Costs to administer the Agreement and make indemnification payments are

paid by assessments levied on signatory handlers.

The Committee, which is composed of producers and handlers of

peanuts, meets at least annually to review the Agreement's rules and

regulations, which are effective on a continuous basis from one year to

the next. Committee meetings are open to the public, and interested

persons may express their views at these meetings. The Department

reviews Committee recommendations and justifications, as well as

information from other sources, to determine whether modification of

the Agreement regulations would tend to effectuate the declared policy

of the Act.

[[Page 55548]]

The Committee believes that the domestic peanut industry is

undergoing a period of great change. The Committee endorses the

findings in a recent study entitled ``United States Peanut Industry

Revitalization Project'' developed by the National Peanut Council and

the Department's Agricultural Research Service. According to the study,

since 1991, the U.S. peanut industry has been in a period of dramatic

economic decline because of (1) decreasing consumption of peanuts and

peanut products, (2) decreasing U.S. peanut production and increasing

production costs, and (3) increasing imports of peanuts and peanut

products.

The study shows that peanut per capita consumption has steadily

declined; between 1991 and 1994, a total of 11 percent. Harvested acres

of peanuts in the U.S. have declined 25 percent between 1991 and 1995.

Production has fluctuated downward, with 1995 production 30 percent

below that of 1991. Farm value of peanut production has dropped 29

percent in the same period. Farmer production costs and revenue are

projected to be equal by the year 2000, as are handler costs and

revenue, which would leave no profit.

The Committee agrees that all of these factors combined show that

the domestic peanut industry is in decline and that the outlook is not

expected to change without some positive intervention by the industry.

The Committee has been meeting for the past two years to develop major

improvements and cut costs by streamlining handling procedures and

making them consistent with current industry economies and

technological developments.

Over the last several years, the Committee has been reducing the

indemnification benefits. This reduction has made indemnification of

failing peanuts a less viable economic option and has put more

responsibility on each handler to decide whether it is economical to

recondition a failing lot. Peanut processing machinery has improved

through technological advances to the point that virtually any lot of

peanuts, regardless of original (incoming) quality, can now be shelled,

remilled and/or blanched (processed) to meet outgoing quality

requirements established under the Agreement. The Committee concluded

that handlers should bear more responsibility for reconditioning their

own peanuts and in shipping quality peanuts to their customers, and

that Committee and handler indemnification costs should be reduced.

The Committee met on May 23, 1996, and recommended a substantial

reduction in indemnification coverage to reduce costs. Signatory

handlers have indicated they would rather have the Committee eliminate

the indemnification assessment currently collected from them than

continue the current indemnification coverage. The Committee's

indemnification payments for handler losses will decline from a record

high net loss of $21.6 million for crop year 1990, and ceilings of $9

million for crop years 1991-1993 and $7 million for each of the last

two years, to approximately $300,000. This will reduce signatory

handlers' costs, enabling them to be more competitive in the

marketplace.

The Committee has paid claims based on the initial sampling of any

peanut lot failing to meet aflatoxin requirements for human consumption

before the peanuts were shipped from the handler's plant to the buyer,

product and appeals claims. Payments were made for blanching fees and/

or remilling fees, freight charges for moving the peanuts from one

production area to another for marketing, and for losses for the

rejected peanuts.

Under the modified program, on an ``appeal claim'' the Committee

will pay only for freight costs from the handler's plant to the

manufacturer and return from manufacturer to the destination requested

by the handler (handler's plant, blancher, or remiller). ``Appeal

claims'' involve lots of peanuts, which had been certified as meeting

all quality requirements, prior to shipment, and then rejected by the

buyer on the basis of appeal aflatoxin test results. The deadline for

filing ``appeal'' indemnification claims with the Committee will remain

November 1 following the end of the crop year.

The Committee recommended that ``product claims'' continue to be

handled as they have been in the past. That is, claims may be filed by

any handler sustaining a loss as a result of a buyer withholding from

human consumption a portion or all of the product made from a lot of

peanuts which has been determined to be unwholesome due to aflatoxin.

The Committee will indemnify the amount of the raw peanuts in the

product at $0.35 per pound. The product is destroyed under the

supervision of USDA's Processed Products Branch inspectors and the

Committee pays these charges. The deadline for filing ``product

claims'' remains November 1 of the second year following the year in

which the peanuts were produced.

An estimated $2.0 to $2.5 million indemnification reserve (after

all 1995 crop claims are paid) should be available to cover claims

under the revised program. With annual costs under the program

estimated at $200,000 to $300,000, there is enough money in reserves to

cover claims for about 10 crop years. Thus, handlers will not be

required to pay indemnification assessments during that period.

Indemnification assessments during the 1994 and 1995 crop years totaled

approximately $3.4 million and $1.3 million, respectively.

If the Committee had recommended maintaining the current coverage

at the $7,000,000 ceiling, an indemnification assessment rate of about

$4.00 per ton on the 1996 crop would have been necessary to finance the

program. All signatory handlers, both large and small, will benefit

from the substantially lower costs associated with the elimination of

annual indemnification assessment obligations. Handlers who believe

they may be adversely impacted by aflatoxin can obtain private

insurance coverage against such losses.

Therefore, the AMS has determined that this action will not have a

significant economic impact on a substantial number of small entities.

The proposed rule concerning this action was published in the

August 28, 1996, issue of the Federal Register (61 FR 44192). That

proposal provided that interested persons could file comments,

including information on the regulatory and informational impacts of

the proposed rule on small businesses, through September 12, 1996. Six

comments were received, four favoring and two opposing the proposed

rule.

The comments in favor of implementing the changes set forth in the

proposed rule were submitted on behalf of four handlers. They

reiterated several of the justifications made in the proposed rule.

One commenter agreed that indemnification payments should be

limited to appeal and product claims. In support of this, he stated

that improvements in technology now allow normal aflatoxin problems to

be handled at each handler's shelling facilities and should not be an

extra cost to the industry.

Another commenter indicated that recent peanut shelling technology

and peanut buyer demands have forced the peanut industry to new heights

of peanut product safety and quality requirements. He also stated that

the outdated and unfair system of indemnification for sheller aflatoxin

claims needed to be changed. The proposed changes by the Peanut

[[Page 55549]]

Administrative Committee meet the needs of the peanut industry.

Two other commenters stated that it is time to limit

indemnification payments for aflatoxin to appeal claims and product

liability claims. They indicated there is no justification for those

indemnification payments for normal aflatoxin problems that exist

before blanching or remilling, since the industry has modern technology

that can detect these problems and these costs should be paid solely by

the individual sheller, not by the industry.

Two comments in opposition were submitted by two handlers. One

commenter indicated that eliminating indemnification insurance is to

``un-do'' a system of quality control that predecessors established

years ago, which has helped many small handlers survive. He agreed that

peanut processing machinery and technology is available to reduce the

aflatoxin content to an acceptable level on most any peanut lot, but he

thinks this is an expensive procedure and that few smaller independent

shellers can absorb the extra cost of reconditioning equipment

necessary to accomplish this. The commenter also stated that until the

industry greatly reduces or eliminates aflatoxin from occurring in

peanut production, the industry should not eliminate the time proven

system of handling it.

Another commenter stated that the small handler who is limited to a

specific area could be severely impacted if that area happened to be

dry or had other problems causing higher aflatoxin. He agreed that

state of the art processing equipment is available to recondition low

quality peanuts so they meet Outgoing Quality requirements.

The Department recognizes that the rule will place more

responsibility on shellers for meeting the needs of peanut buyers.

Information provided by the Committee indicates that the cost of the

current indemnification program is simply too high and the industry

must change to meet new world competition or face a serious decline.

The Committee is providing an opportunity for shellers to control the

quality of their own peanuts and eliminate their costs for

indemnification assessments. Those handlers who believe they may be

adversely impacted by aflatoxin can obtain private insurance coverage

against such losses. Such insurance coverage is readily available to

cover the current crop. We understand that some recent policies have

been written for a cost at or less than the Committee's previous

indemnification assessment rate. Although there may be some burden, not

having to pay indemnification assessments is a cost saving which is

expected to continue for several years due to the funds available in

the indemnification reserve. Therefore, after thoroughly analyzing the

comments received and other available information, the Department has

concluded that this final rule is appropriate.

After consideration of relevant matter presented, including the

information and recommendations submitted by the Committee, the six

comments received, and other available information, it is hereby found

that the final rule, as hereinafter set forth, will tend to effectuate

the declared policy of the Act.

It is further found that good cause exists for not postponing the

effective date of this rule until 30 days after publication in the

Federal Register (5 U.S.C. 553) because this final rule should be

implemented as close to the beginning of the crop year as possible. The

crop year began July 1, 1996. Further, handlers are aware of these

program changes, which were recommended at a public meeting of the

Committee on May 23, 1996, and need no additional time to take

advantage of the modified program. Also, at that meeting the Committee

did not recommend an indemnification assessment for 1996 crop peanuts.

Further, interested persons were given an opportunity to comment on the

proposed rule.

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

Chapter 35), any information collection requirements that may be

contained in this final rule have been previously approved by the

Office of Management and Budget (OMB) and have been assigned OMB No.

0581-0067. This final rule will likely result in less reports having to

be filed, particularly because there will likely be less

indemnification claims filed under the reduced program coverage.

The Committee also recommended numerous relaxations to the

Agreement's incoming and outgoing quality regulations for 1996 and

subsequent crop peanuts, which have been proposed in a separate

rulemaking action which was published in the October 4, 1996, issue of

the Federal Register (61 FR 51811). Comments on that proposal must be

received by October 24, 1996.

List of Subjects in 37 CFR Part 998

Marketing agreements, Peanuts, Reporting and recordkeeping

requirements.

For the reasons set forth above, 7 CFR part 998 is amended as

follows:

1. The authority citation continues to read as follows:

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

PART 998--MARKETING AGREEMENT REGULATING THE QUALITY OF

DOMESTICALLY PRODUCED PEANUTS

2. Section 998.300 is revised to read as follows:

Sec. 998.300 Terms and conditions of indemnification for 1996 and

subsequent crop peanuts.

(a) For the purpose of paying indemnities on a uniform basis

pursuant to Sec. 998.36 of the peanut marketing agreement, each handler

shall promptly notify or arrange for the buyer to notify the Manager,

Peanut Administrative Committee, of any lot of cleaned inshell or

shelled peanuts, milled into one of the categories listed in paragraph

(a) of the Outgoing quality regulation (7 CFR 998.200) or paragraph (j)

of this section, on which the buyer, including the user division of a

handler, has withheld usage due to a finding as to aflatoxin content as

shown by the results of further chemical assay, after shipment.

(b) To be eligible for indemnification, such a lot of peanuts shall

have been inspected and certified as meeting the quality requirements

for Indemnifiable Grades as specified in paragraph (a) of the Outgoing

quality regulation (7 CFR 998.200), shall have met all other applicable

regulations issued pursuant thereto, including the pretesting

requirements in paragraphs (a) and (c) of the Outgoing quality

regulation (7 CFR 998.200) and the lot identification shall have been

maintained. If the Committee concludes, based on further assays, that

the lot is so high in aflatoxin that it should be handled pursuant to

this section, and such is concurred in by the Agricultural Marketing

Service, the lot shall be accepted for indemnification.

(c) The indemnification payment shall be transportation expenses

(excluding demurrage, loading and unloading charges, custom fees,

border re-entry fees, etc.) from the handler's plant or storage to the

point within the Continental United States or Canada where the

rejection occurred and from such point to a delivery point specified by

the Committee if the lot is found by the Committee to be unwholesome as

to aflatoxin after such lot had been certified negative as to aflatoxin

prior to being shipped or otherwise disposed of for human consumption

by the handler pursuant to requirements of the

[[Page 55550]]

Outgoing quality regulation (7 CFR 998.200).

(d) Claims for indemnification may be filed by any handler

sustaining a loss as a result of a buyer withholding from human

consumption a portion or all of the product made from a lot of peanuts

which has been determined to be unwholesome due to aflatoxin. The

Committee shall pay such claims as it determines to be valid, to the

extent of the equivalent indemnification value applicable to the

peanuts used in the product so withheld. On products manufactured from

edible quality grades of peanuts, such claims may be filed with the

Committee no later than November 1 of the second year following the

year in which the peanuts were produced.

(e) Notice of claims for indemnification on peanuts of the current

crop year shall be received by the Committee (by mail or legible

facsimile) no later than the close of the business day on November 1,

following the end of the crop year. For the purpose of this paragraph,

``notice'' shall be defined as the covering (executed and signed) Form

PAC-5, accompanied by a copy of the applicable valid grade inspection

certificate and the lab certificate showing the aflatoxin assay results

which caused the request for rejection.

(f) Each handler shall include, directly or by reference, in the

handler's sales contract, the following provisions:

(1) Buyer shall give the Peanut Administrative Committee

(Committee) office notice of any request made to the Federal or

Federal-State Inspection Service for an ``appeal'' inspection for

aflatoxin. Results of the ``appeal'' inspection will be reported by the

Federal or Federal-State Inspection Service or other designated lab to

Committee management. If the Committee management determines that the

test results of the ``appeal'' sample show the lot to be high in

aflatoxin, Committee management shall inform the buyer and handler of

the results. In this case, the buyer may apply to reject the lot and

return it to the handler by filing a rejection letter with Committee

management. Upon a determination of the Committee, confirmed by the

Agricultural Marketing Service, authorizing rejection, such peanuts,

and title thereto, if passed to the buyer, shall be returned to the

seller. Buyer must return the rejected lot to the seller within 45 days

of the date on which Committee management informs buyer of the

``appeal'' sample test results, otherwise the buyer agrees that he/she

forfeits the right to reject the lot and return it to the seller.

(2) Seller shall, prior to shipment of a lot of shelled peanuts

covered by this sales contract, cause appropriate samples to be drawn

by the Federal or Federal-State Inspection Service from such lot, shall

cause the sample(s) to be sent to a USDA laboratory or if designated by

the buyer, a laboratory listed on the most recent Committee list of

approved laboratories to conduct such assay, for an aflatoxin assay and

cause the laboratory, if other than the buyer's to send one copy of the

results of the assay to the buyer. A portion of the costs of aflatoxin

sampling and testing, as provided in Sec. 998.200(c)(3), shall be for

the account of the buyer and the buyer agrees to pay such costs.

(g) Any handler who fails to include such provisions in his/her

sales contract shall be ineligible for indemnification payments with

respect to any claim filed with the Committee on current crop year

peanuts covered by the sales contract.

(h)(1) Any handler who fails to conform to the requirements of

paragraph (g) of the Incoming quality regulation (7 CFR 998.100) shall

be ineligible for any indemnification payments until such condition or

conditions are corrected to the satisfaction of the Committee.

(2) Any handler who fails to comply with the requirements of

paragraph (h)(1) or (h)(2) of the Outgoing quality regulation (7 CFR

998.200) shall be ineligible for any indemnification payments until

such non-compliance is corrected to the satisfaction of the Committee.

(i) Any handler who fails to cause positive lot identification on

any lot of peanuts to accurately reflect the crop year in which such

peanuts were produced, pursuant to paragraph (d) of the Outgoing

quality regulation (7 CFR 998.200), shall be ineligible for any

indemnification payments until such non-compliance is corrected to the

satisfaction of the Committee.

(j) Categories of cleaned inshell peanuts eligible for

indemnification are as follows:

(1) Cleaned inshell peanuts \1\

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\1\ Eligible lots of cleaned inshell peanuts which are found,

after shipment, to contain excessive aflatoxin, may be rejected to

the handler. Transportation expenses (excluding demurrage, loading

and unloading charges, custom fees, border reentry fees, etc.) from

the handler's plant or storage to the point within the Continental

United States or Canada where the rejection occurred and from such

point to a delivery point specified by the Committee shall be the

extent of the indemnification payment.

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(i) U.S. Jumbos

(ii) U.S. Fancy Handpicks

(iii) Valencia-Roasting Stock \2\

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\2\ Inshell peanuts with not more than 25 percent having shells

damaged by discoloration, which are cracked or broken, or both.

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(2) Reserved.

(k) The indemnification value for peanuts indemnified shall be 35

cents per pound.

Dated: October 18, 1996.

Robert C. Keeney,

Director, Fruit and Vegetable Division.

[FR Doc. 96-27455 Filed 10-25-96; 8:45 am]

BILLING CODE 3410-02-P