Karnal Bunt Regulatory Flexibility Analysis and Regulatory Impact Analysis

DEPARTMENT OF AGRICULTURE

Animal and Plant Health Inspection Service

7 CFR Part 301

[Docket No. 96-016-20]

RIN 0579-AA83

Karnal Bunt Regulatory Flexibility Analysis and Regulatory Impact

Analysis

AGENCY: Animal and Plant Health Inspection Service, USDA.

ACTION: Final rule; regulatory flexibility analysis and regulatory

impact analysis.

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

SUMMARY: We are publishing in this document the regulatory flexibility

analysis prepared for a final rule, which is published elsewhere in

this issue of the Federal Register, that adopts, with changes, an

interim rule that provided compensation for certain growers and

handlers, owners of grain storage facilities, and flour millers in

order to mitigate losses and expenses incurred because of Karnal bunt

in the 1995-1996 crop season. The final rule also adds compensation

provisions for handlers of wheat that was tested and found negative for

Karnal bunt, for handlers and growers with wheat inventories for past

crop seasons, and for participants in the National Karnal Bunt Survey

whose wheat or grain storage facility is found positive for Karnal

bunt. We are also publishing in this document a regulatory impact

analysis for the interim rules and final rules that established the

Karnal bunt quarantine, regulations, and compensation provisions,

including a final rule on compensation published elsewhere in this

issue of the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. Mike Stefan, Operations Officer,

Domestic and Emergency Operations, PPQ, APHIS, 4700 River Road Unit

134, Riverdale, MD 20737-1236, (301) 734-8247.

SUPPLEMENTARY INFORMATION: Karnal bunt is a fungal disease of wheat

(Triticum aestivum), durum wheat (Triticum durum), and triticale

(Triticum aestivum X Secale cereale), a hybrid of wheat and rye. Karnal

bunt is

[[Page 24754]]

caused by the smut fungus Tilletia indica (Mitra) Mundkur and is spread

by spores. The establishment of Karnal bunt in the United States would

have significant consequences with regard to the export of wheat to

international markets. The regulations regarding Karnal bunt are set

forth in 7 CFR 301.89-1 through 301.89-14.

On October 4, 1996, we published in the Federal Register (61 FR

52189-52213, Docket No. 96-016-14) a final rule that amended a series

of interim rules establishing a program to control and eradicate Karnal

bunt in the United States, and also made final a proposed rule

establishing criteria for levels of risk for areas with regard to

Karnal bunt and criteria for seed planting and movement of regulated

articles based on those risk levels. Elsewhere in this issue of the

Federal Register we are publishing a companion docket (Docket No. 96-

016-17) to this document, in order to adopt as a final rule, with

changes, an interim rule that amended the Karnal bunt regulations to

provide compensation for certain growers and handlers, owners of grain

storage facilities, and flour millers in order to mitigate losses and

expenses incurred because of Karnal bunt in the 1995-1996 crop season.

Additionally, the final rule adds compensation provisions for handlers

of wheat that was tested and found negative 1 for Karnal

bunt, for handlers and growers with wheat inventories for past crop

seasons, and for participants in the National Karnal Bunt Survey whose

wheat or grain storage facility is found positive \1\ for Karnal bunt.

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

\1\ Throughout this document, in discussing tests for Karnal

bunt, ``found negative'' means that no Karnal bunt spores were

found, and ``found positive'' means that Karnal bunt spores were

found. This applies whether the tests involved were of propagative

wheat or nonpropagative wheat, in fields, conveyances, or grain

storage facilities.

On May 1, 1997, we published an interim rule in the Federal

Register (Docket No. 96-016-19, 62 FR 23620-23628) that established

a new standard for defining regulated areas for Karnal bunt based on

finding bunted wheat kernels rather than just spores. That change

does not affect any of the activities analyzed in this document.

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

On April 3, 1997, we published in the Federal Register a regulatory

flexibility analysis (62 FR 15809-15819, Docket No. 96-016-18) for the

interim rules and the October 4, 1996, final rule that established the

Karnal bunt quarantine and regulations. In this document, we are

publishing a Final Regulatory Flexibility Analysis for Docket No. 96-

016-17. Additionally, in this document, we are publishing a Regulatory

Impact Analysis that analyzes the costs and benefits of the Karnal bunt

interim rules and final rule we have already published, as well as

those of the provisions in Docket No. 96-016-17.

I. Introduction

II. Need for Regulation

III. Benefits of the Federal Quarantine Program

IV. Impact on the Affected Industry of Karnal Bunt and Regulatory

Actions

V. Federal Compensation to Mitigate Losses

VI. Conditions for Wheat Production and Utilization in a Regulated

Area for the 1996-97 Crop Year

VII. Consideration of Alternatives to the Rule

VIII. Regulatory Flexibility Analysis--Impacts on Small Entities

Within the Regulated Area

IX. Summary and Conclusions

I. Introduction

In accordance with Executive Order 12866, this analysis examines

the economic impacts, including costs and benefits of the Karnal bunt

regulations published to date, including Docket No. 96-016-17.

Additionally, in accordance with the Regulatory Flexibility Act (5

U.S.C. 601 et seq.), we have conducted an analysis of the economic

impact, costs, and benefits the provisions of Docket No. 96-016-17 will

have on small entities. That analysis is set forth below under the

heading ``VIII. Regulatory Flexibility Analysis--Impacts on Small

Entities Within the Regulated Area.''

On March 8, 1996, Karnal bunt was detected in Arizona during a seed

certification inspection done by the Arizona Department of Agriculture.

On March 20, 1996, the Secretary of Agriculture signed a ``Declaration

of Extraordinary Emergency'' authorizing the Secretary to take

emergency action under 7 U.S.C. 150dd with regard to Karnal bunt within

the States of Arizona, New Mexico, and Texas. In an interim rule

effective on March 25, 1996, and published in the Federal Register on

March 28, 1996 (61 FR 13649-13655, Docket No. 96-016-3), the Animal and

Plant Health Inspection Service (APHIS) established the Karnal bunt

regulations (7 CFR 301.89-1 through 301.89-11), and quarantined all of

Arizona and portions of New Mexico and Texas because of Karnal bunt.

The regulations define regulated articles and restrict the movement of

these regulated articles from the quarantined areas.

After the regulations were established, Karnal bunt was detected in

seed lots that were either planted or stored in California. On April

12, 1996, the Secretary of Agriculture signed a ``Declaration of

Extraordinary Emergency'' authorizing the Secretary to take emergency

action under 7 U.S.C. 150dd with regard to Karnal bunt within

California. In an interim rule effective on April 19, 1996, and

published in the Federal Register on April 25, 1996, APHIS also

regulated portions of California because of Karnal bunt (61 FR 18233-

18235, Docket No. 96-016-5). In an interim rule effective on June 27,

1996, and published in the Federal Register on July 5, 1996 (61 FR

35107-35109, Docket No. 96-016-6), we removed certain areas in Arizona,

New Mexico, and Texas from the list of areas regulated because of

Karnal bunt. That list was amended in a technical amendment effective

on July 9, 1996, and published in the Federal Register on July 15, 1996

(61 FR 36812-36813, Docket No. 96-016-8). In an interim rule effective

June 27, 1996, and published in the Federal Register on July 5, 1996

(61 FR 35102-35107, Docket No. 96-016-7), we amended the regulations to

provide compensation for certain growers and handlers, owners of grain

storage facilities, and flour millers in order to mitigate losses and

expenses incurred because of actions taken by the Secretary to prevent

the spread of Karnal bunt.

In a proposed rule published in the Federal Register on August 2,

1996 (61 FR 40354-40361, Docket No. 96-016-10), we proposed to amend

the regulations to establish criteria for levels of risk for areas with

regard to Karnal bunt and for the movement of regulated articles based

on those risk levels, and to establish criteria for seed planting. A

rule finalizing these provisions was published in the Federal Register

on October 4, 1996 (61 FR 52189-52213, Docket No. 96-016-14). In Docket

No. 96-106-17, published elsewhere in this issue of the Federal

Register, we make final the interim rule on compensation published in

the Federal Register on July 5, 1996, and establish compensation

provisions for handlers of wheat that was tested and found negative for

Karnal bunt, for handlers and growers with wheat inventories for past

crop seasons, and for participants in the National Karnal Bunt Survey

whose wheat or grain storage facility is found positive for Karnal

bunt.

II. Need for Regulation

Karnal bunt is a fungal disease of wheat (Triticum aestivum), durum

wheat (Triticum durum), and triticale (Triticum aestivum X Secale

cereale). Upon detection of Karnal bunt in Arizona, the imposition of

Federal quarantine and emergency actions was a necessary, short-run,

measure taken to prevent the interstate spread of the disease to other

wheat producing areas in the country. The intent of the quarantine was

to immediately contain the disease in the outbreak area, so that

eradication could be eventually

[[Page 24755]]

achieved. In dealing with a new disease outbreak, eradication is a

reasonable first objective as long as national disease-prevalence data

indicate that eradication remains a viable option. The establishment of

Karnal bunt in the United States would have significant economic

ramifications on the U.S. wheat export market, given that approximately

50 percent of exports are to countries that maintain restrictions

against wheat imports from countries where Karnal bunt is known to

occur. The benefits of the regulatory program can thus be viewed as the

avoidance of potential losses to the wheat export market in the absence

of regulation. The economic significance of the wheat industry required

swift and coordinated action, which in this case was most efficiently

achieved under Federal coordination.

Wheat intended for domestic processing and export is often blended

at elevators to establish lots of uniform quality. Except for those

occasions where a specific producer's wheat is processed separately

under contract to a miller, the elevator's supply of wheat usually

consists of a mix of many varieties from many producers and areas. For

this reason, Federal oversight is needed to safeguard against cross-

contamination and to instill confidence from both domestic and foreign

buyers. Thus, it is conceivable that, without Federal intervention,

individual States and importing countries would place their own,

perhaps more severe, restrictions on wheat shipments.

As additional information from sampling and testing became

available in subsequent months following the outbreak, the Agency was

able to ease the quarantine in order to minimize disruption to affected

entities. Those changes, which were detailed in the October 4, 1996,

final rule, established various risk categories for wheat planting for

the 1996-97 crop, relieving unnecessary restrictions as the regulatory

actions that are imposed on each category are based on the level of

risk.

Subsequent sections of this analysis are structured as follows:

Section III addresses the benefits of regulation to provide a

perspective against which the regulatory policies were formed. Section

IV addresses the impact on the affected industry of the disease and

subsequent quarantine actions. Section V analyzes compensation the

Agency expects to pay to partially mitigate losses caused by Agency

actions. Section VI provides a projection of the impact in the

regulated areas based on risk categories for wheat planting in 1996-97.

Other alternatives to the rule are discussed in section VII. The wheat

industry within the regulated area is composed largely of small

entities that can be classified as small according to definitions

established by the Small Business Administration (SBA). Thus, the

impacts discussed throughout this analysis are directly applicable to

small entities. As required by the Regulatory Flexibility Act, the

characteristics of and impacts on small entities within the regulated

areas are examined in section VIII. A summary of the analysis is

provided in section IX.

III. Benefits of the Federal Quarantine Program

The disease Karnal bunt causes production losses to wheat in the

form of yield reduction due to the infestation of kernels, and

reduction in the quality of grain. Roughly 4 percent of wheat fields in

Arizona, and 0.04 and 14 percent of fields in Imperial and Riverside

counties in California, respectively, were found to be infected with

Karnal bunt.

The most economically significant impact of the disease, however,

is inarguably its effect on the export market. This is because about

half of U.S. wheat exports are to countries that maintain restrictions

against wheat imports from countries where Karnal bunt is known to

occur.2 Eliminating the quarantine currently in place would

jeopardize trade with those countries. Benefits of Federal quarantine,

therefore, can be regarded largely as the avoided losses to the export

market.

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

\2\ About 1.2 billion bushels of wheat are exported from the

U.S. annually, at a value of $4 billion.

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

A 50-percent reduction in U.S. wheat exports would likely reduce

U.S. wheat prices by 30 percent, and lower net sector income by $2.7

billion. This estimate takes into account the dampening effect on

domestic wheat prices, as wheat for export is diverted into the

domestic consumption market, animal feed outlets, and ending stocks.

The reduction in U.S. wheat exports, however, would likely be less

than 50 percent. First, not all countries that have restrictions

against Karnal bunt would, in practice, strictly prohibit wheat imports

from the United States. (Italy and Germany currently import wheat from

countries where Karnal bunt is known to occur despite European Union

regulations to the contrary). Second, while some markets would be

captured by exports from countries that are free of Karnal bunt, U.S.

wheat exports to countries that have no restrictions against Karnal

bunt would likely increase. Lastly, substitution across domestic

markets could provide added flexibility in meeting export demands. In

the long run, the effects could be minimal depending on whether the

market were to treat Karnal bunt as a quality issue and develop

discounts for Karnal bunt.

It is estimated that the impact of Karnal bunt on exports, because

of substitution effects, would likely result in a 10-percent reduction

in U.S. wheat exports. A decrease of 10-percent in exports would cause

a 22-cent per bushel drop in the wheat prices and a drop in wheat

sector income of over $500 million. The effects of decreases in wheat

exports of various percentages are presented in Table 1.

Table 1.--Effect of a Decrease in Wheat Exports due to Karnal Bunt, 1997/98 Crop Year

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

Reduction in exports

Item Unit -----------------------------------------

0% 10% 25% 50%

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

Exports.................................... mil. bu. 1,200 1,080 900 600

Total use.................................. mil. bu. 2,462 2,394 2,295 2,138

Price...................................... $/bu..................... 3.85 3.63 3.29 2.68

Value of production........................ mil. dol. 9,543 8,898 8,146 6,637

Gross income \1\........................... mil. dol. 11,358 10,813 9,961 8,580

Variable expenses.......................... mil. dol. 4,823,823 4,823 4,823

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

Net income............................. mil. dol. 6,536 5,990 5,138 3,758

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

\1\ Includes market transition payments.

[[Page 24756]]

The 1996 Federal quarantine and emergency actions served to contain

Karnal bunt in the initial outbreak area of the Southwest United

States. The Federal program provided assurances to wheat importing

countries that wheat from uninfected areas were monitored for Karnal

bunt under the National Survey program, by sampling and testing of all

wheat fields in the United States. Countries that are willing to accept

wheat from the affected areas are also assured that grain originating

from those areas are tested negative twice for the disease. Through

these means, the Federal Karnal bunt program served to maintain and

preserve the economic viability of the U.S. wheat export.

IV. Impact on the Affected Industry of Karnal Bunt and Regulatory

Actions

The wheat industry within the regulated area is largely composed of

businesses who can be considered as ``small'' according to guidelines

established by the Small Business Administration (SBA). The

characteristics of these firms as well as other small affected entities

are provided in detail in section VIII, the Regulatory Flexibility

analysis of impacts on small entities. The following discussion on

impacts is directly applicable to these entities.

The 1995-96 Karnal bunt regulations primarily affect persons or

entities that produce wheat in a regulated area and/or move certain

articles associated with wheat out of a regulated area. These articles

are subject to certain regulatory actions to minimize the risk of

spreading the causal agent of the disease to other uninfected areas.

Regulated articles include:

1. Farm machinery and equipment used to produce wheat;

2. Conveyances from field to handler, such as farm trucks and

wagons;

3. Grain elevators, equipment and structures at facilities that

store and handle grain;

4. Conveyances from handler to other marketing channels, such as

railroad cars;

5. Plant and plant parts, such as grain for milling, grain for

seed, and straw;

6. Flour and milling byproducts;

7. Manure from animals fed wheat/wheat byproducts from quarantine

area;

8. Used sacks;

9. Seed-conditioning equipment;

10. Byproducts of seed cleaning;

11. Soil-moving equipment;

12. Root crops with soil;

13. Soil.

As part of the Karnal bunt program, grain that tests positive for

Karnal bunt is prohibited from moving out of the regulated areas. Other

contaminated articles must be cleaned and sanitized before such

movement. Millfeed must be treated to render inactive any disease

causal agent before its addition into animal feed. Grain that tests

negative may move under limited permit to approved mills. Commercial

seed intended for planting is prohibited movement outside the regulated

areas. Wheat seed to be planted within the regulated areas must be

sampled and tested for Karnal bunt, and, for seed originating in a

regulated area, treated prior to planting. Wheat growers in New Mexico

and Texas whose wheat fields were planted with contaminated seed were

ordered to destroy their crops.

These requirements have resulted in additional costs and claims of

losses to affected individuals. Wheat producers and handlers had loss

in market value of their grain; seed companies and researchers have had

similar losses, including lost royalties due to the disruption in the

development of seed varietals. Other costs were for cleaning and

disinfecting equipment and facilities, and damages to machinery caused

by required treatment. Some of these losses are presented in Table 2.

Table 2.--Impact of Karnal Bunt Quarantine Actions

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

Types of impacts

Action Regulated article affected entities Numbers affected due to KB and

quarantine actions

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

Plow-down & Seed Plot Fields Certain 4100 Loss in

destruction. planted with producers in acres value of wheat

infected seed at Texas and New 73 crop destroyed.

pre-boot stage Mexico producers

Cleaning/Disinfection.......... Tools and Wheat 145 cost of

Farm Equipment producers in RA growers cleaning.

Harvesters Farmer 389 cost of

owned and custom combines cleaning.

combines

Grain Grain 976 cost of

Trucks haulers from trucks cleaning.

field to grain

elevators

Grain Grain 17 cost of

storage and handling firms elevators cleaning.

loadout facilities

Harvesters Combine 36 to 40 Excess

harvester owners combines wear and tear on

equipment.

Harvesters Combines 5 to 10 Down-time

involved in pre- combines on harvesters due

harvest sampling to field testing.

Harvesters Custom 5 Loss of

combine companies companies income due to

termination of

contracts outside

the RA.

Railcars Grain 10,880 cost of

handling firms cars (511 for cleaning.

positive grain)

Restriction on Use or KB-postive Producers 145 Loss in

Marketings. milling wheat Grain growers value of KB-

handling firms 6 positive wheat.

handlers

KB- Producers 664 Loss in

negative milling in RA producers value of KB-

wheat Handlers 26.7 negative wheat in

in RA million bushels RA.

Millfeed Millers, 108 mills Millers

millfeed 45,644 reluctance to

processors tons mill KB-negative

wheat from RA.

Movement Seed 15 Loss in

restrictions on producers, producers premiums

wheat seed researchers, and 9 Loss in

companies research firms market value

20 seed Loss in

marketers royalties.

[[Page 24757]]

Straw, Straw 25 Loss in

Manure, Millfeed producers and growers income

Handlers-Users of 3 Increased

Straw contractors cost of

Livestock 1 straw production.

producers using user, making of

wheat or straw straw mats for

produced in the erosion control

RA 7 millers

Flour in 5 States

millers 2

Millfeed millfeed

processors/users processors

Moratorium Producers 109 Loss in

on wheat with KB-positive growers income from

production on KB- properties 13,674 wheat.

positive fields acres

Soil on Vegetable Unknown Increased

root crops grown producers on KB- number cost of

on infected positive production.

properties properties

Used seed Seed 9 Increased

sacks research and research firms cost of

Seed- marketing 20 seed production.

conditioning companies marketers

equipment

Byproducts

of seed

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

RA--Regulated Area.

Estimated losses in value to the affected wheat industry in the

Southwest are discussed below. The major identified categories of

losses include:

Plow-down of infected fields in New Mexico and Texas;

Loss in value of wheat testing positive for Karnal bunt for

producers and handlers;

Loss in value of wheat testing negative for Karnal bunt for

producers and handlers;

Cost of millfeed treatment;

Cleaning and disinfecting of grain storage facilities;

Loss in product value to handlers and growers with wheat

inventories for past crop seasons;

Loss in product value to participants in the National Karnal Bunt

Survey whose wheat or grain storage facility is found positive for

Karnal bunt;

Loss in value of wheat seed and straw; and

Losses Related to Cleaning and Disinfecting Combine Harvesters and

Other Losses.

These areas of economic loss are discussed below. Please note that

losses have not been identified for participants in the National

Survey, because Karnal bunt has not been discovered outside the

original outbreak area of the Southwest. Also, losses to handlers and

growers with wheat inventories for past crop harvest are included in

the discussion of loss in value of negative testing grain.

With regard to wheat inventories for past crop harvest, historical

data and field staff observations suggest that pre-1996 produced wheat

inventories in the quarantine areas represent a small fraction of the

losses for negative testing grain, as leftover inventories are less

than 5 percent of the annual production (1-2 million bushels).

1. Order to Plow Down Fields Planted with Infected Seed at Pre-Boot

Stage. Most of the acreage ordered to be plowed down in April 1996 was

farm production acreage located in four counties in New Mexico (Dona

Ana, Hidalgo, Luna, and Sierra) and in two counties in Texas (El Paso

and Hudspeth). This acreage amounted to approximately 4,100 acres.

Other affected acreage were small seed experimental plots in

Washington, California, and South Dakota that totaled perhaps 50 acres

in all.

Many affected growers were able to plant immediately with

vegetables and recover some losses by farming alternative crops on

affected land. Fertilizer carry-over on destroyed wheat fields was

possible for crops grown on affected fields. The impact on farm income

that could have been derived from wheat, however, is uncertain, as it

is unclear what the market returns to wheat grown on known affected

fields would have been if the plow-down order had not occurred.

2. Cost of Sanitizing Grain Storage. The purpose of this

requirement was to destroy spores and thereby reduce the likelihood of

cross-contamination of grain storage facilities that came into contact

with infected kernals or spores. The sanitization of facilities

involves primarily fumigation with methyl bromide. Records of APHIS

surveys in the regulated area indicate that 16 facilities were subject

to cleaning. The average cleaning cost of each facility is estimated at

$16,750, for a total cleaning cost of $268,000 incurred to facility

owners.

3. Loss in Value of Wheat Testing Positive for Karnal Bunt. Wheat

testing positive for Karnal bunt (either by pre-harvest sample or by

testing at the elevator site) was required to go into sealed storage.

This movement of wheat out of the regulated area was restricted

(exiting only with a limited permit) and most went into local animal

feed uses after treatment that rendered ineffective any Karnal bunt

spore. This involved a heat-roll-flaking process commonly in use for

small grains for feed formulas in California. Infected wheat lost value

as it was diverted from its original purposes to the animal feed

markets where it had to compete against lower-priced feed grains.

Similar discounts would have likely existed in the absence of

regulatory actions.3

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

\3\Price discounts on both KB-positive and negative wheat could

have been greater in the absence of regulatory action. While this

may justify the regulatory action taken, the more convincing

evidence is the large benefits of regulations to the greater part of

the U.S. wheat industry outside of the regulated area.

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

Eight percent of wheat production in the regulated area was found

to be KB-positive. This level of production amounted to 2.32 million

bushels of wheat taking a loss on average of $1.80 per bushel, with an

estimated total loss in value of positive wheat to producers and

handlers of $4.2 million.

4. Loss in Value of Wheat Testing Negative for Karnal Bunt. At

harvest, many wheat buyers refused to honor purchase contracts with

producers for

[[Page 24758]]

their grain, most of which had been tested negative for Karnal bunt by

pre-harvest sample. These contracts had been agreed upon before the

discovery of the disease and the declaration of quarantine. Also, wheat

millers inside and outside the regulated areas became reluctant to buy

wheat from grain handlers due to the increased cost of handling wheat

from the regulated areas. Prices for wheat produced within the

regulated areas, therefore, dropped regardless of its disease status.

A total of approximately 26 million bushels of KB-negative wheat

produced in the quarantine areas apparently suffered price losses.

Ninety-two percent of the quantity produced for domestic milling

(approximately 13 million bushels), plus the diverted quantity of KB-

negative wheat that was originally intended to be exported (6 million

bushels) could have experienced a price reduction. A portion of the

remaining 7 million bushels intended for export that could not be sold

at contract price could also experience a similar loss. We estimate

that negative grain would suffer an average price drop of $1.10 per

bushel. Thus, total losses due to the decline in market value of KB-

negative wheat held by producers and handlers could total $28 million.

This amount would be reduced by the amount of grain sold on contract

which received full contract price. Producers would not have realized

any losses on such production. Handlers may have incurred the full drop

in value of their wheat sales depending on their previous contract

prices. Given that information on contracts of individual producers and

handlers is unknown, it is estimated that $28 million is the potential

maximum amount of economic loss due to a drop in value of uninfected

wheat grown in the regulated area. However, the actual amount of grain

that would experience a loss in value is expected to be lower.

5. Cost of Millfeed Treatment. Millfeed is a byproduct of wheat

milling (the outer husk of the wheat kernel and other byproducts from

milling). Approximately 25 percent of the raw wheat going into milling

comes out as millfeed, while the remaining 75 percent is converted into

flour. The sale of this milling byproduct contributes around 10 percent

towards their gross income from milling. With the higher likelihood of

Karnal bunt being present in the millfeed rather than the flour,

restrictions were placed on the movement of millfeed produced from

wheat grown in the regulated areas. These restrictions stated that

millfeed, before their addition into animal feeds, were to be treated

in order to render inactive any presence of Karnal bunt spores. For

whole wheat kernels, this normally means that wheat undergo a heating-

rolling-and-flaking process. Similar procedures, except for flaking,

were assumed to be required in treating millfeed.

Many animal feed manufacturers commonly heat and treat ingredients

in their feed products. The treatment requirements would not add any

additional costs for them. For others, that restriction would place an

additional processing cost of around $35 per ton to their operation.

Based on requests for compensation from millers in Minnesota, Missouri,

Oregon, Wisconsin, and Virginia who are processing KB-negative wheat

produced in a regulated area, we estimate the additional cost of mill

feed treatment in response to the Karnal bunt quarantine to total $1.6

million.

6. Loss in Value of Seed. Under the 1996 quarantine and emergency

actions, wheat seed produced in the regulated areas was prohibited from

sale outside of the regulated areas. Wheat seed intended for planting

within the regulated areas must be sampled and tested for Karnal bunt,

and for seed originating in a regulated area, treated prior to

planting. These restrictions are estimated to have a significant impact

on the seed industry, largely due to the high value that is commanded

by propagative seed. Seed companies contract with growers to produce

seed wheat at about 30 to 50 cents per bushel premium over non-

propagative wheat. This premium reflects the added precautions in

production to ensure seed integrity and cleanliness. These companies

were affected by the decline in market value resulting from the

inability to move seed out of the regulated areas. It is estimated that

1.5 million bushels of wheat seed sustained loss in value of between $5

and 6 million. Seed developers, who earn returns on their investment in

research and development of wheat varieties, also claim potential long-

term losses in royalties; by receiving plant variety protection (or

patent rights), seed developers then obtain royalties on future sales

of wheat that are developed and sold for propagative purposes. Other

economic losses suffered by the seed industry, but are difficult to

quantify, include additional handling, storage, and finance costs on

seed that could no longer be sold outside the regulated areas and costs

to relocate wheat breeding operations outside of the regulated areas.

7. Loss in Value of Straw. Many growers sell wheat straw to

supplement their wheat grain income. Straw is sold for use at places

such as racetracks, highway shoulders, feed yards, and parks for

erosion control and to minimize muddy conditions. Wheat straw is listed

in Karnal bunt regulations as a regulated article and is prohibited

from being moved outside of the regulated areas. This has prevented

many wheat straw producers from shipping their 1995-96 crop season

straw to the intended markets. Some wheat straw was sold to alternative

markets within the regulated areas for a lower price; other wheat straw

was not able to be sold. These losses are estimated at about $200,000.

8. Losses Related to Cleaning and Disinfecting Combine Harvesters

and Other Losses. A number of costs have been claimed by about 220

combine harvesters operating within the regulated areas, and those who

travel outside of the regulated areas to harvest crops. These losses

are related to the cleaning and disinfecting requirements of combine

harvesters, which particularly affected custom harvesters who

contracted with the Agency to do pre-harvest sampling for Karnal bunt.

These losses involved: (1) Excess damage to machines caused by

treatment protocols; (2) cleaning and disinfecting costs; (3) down time

and extra operational costs associated with testing of samples and

treatment protocols; and (4) loss of business as wheat producers inside

and outside the regulated areas switched to custom harvesters that were

not associated with the 1996 wheat harvest in the regulated areas. The

most serious of these claims that can be directly attributed to the

regulations involves the excess wear and tear due to the subsequent

corrosion on combines that underwent extensive cleaning and

disinfecting treatments according to protocol. The loss in value of

these combines is estimated at $2 million.

Other economic losses that have been claimed by affected

individuals in the regulated areas but that are difficult to quantify

include additional handling, storage, and finance charges incurred by

handlers of nonpropagative wheat and various other claims by producers

and handlers in the regulated areas such as cleaning and disinfecting

railcars and trucks and buying wheat from alternate sources to fulfill

contracts that originally stipulated wheat produced from the regulated

area. The Agency continues to gather information for quantifying costs

to seed producers and others impacted by Karnal bunt or the Agency

programs to limit it.

In sum, the quarantine and regulatory measures in the southwestern

United

[[Page 24759]]

States were necessary to protect the wheat industry from a $500 million

loss in net sector income due to a drop in wheat export. The Southwest

produces 3 percent of the U.S. wheat supply and its share of those

losses would have been $15 million, if the export losses were evenly

distributed across the country. It is likely that although the export

losses would become evenly distributed over time, the Southwest would

suffer higher proportionate losses the first year since in the absence

of a quarantine it would be perceived as the focus of a spreading

infestation.

The impact of Karnal bunt and the subsequent quarantine actions on

market value within the regulated area, as estimated in this analysis,

should not exceed $44 million (Table 3). As discussed in Section V

below, $39 million in compensation has been made available through

budget apportionment to mitigate these losses.

While certain losses described above are clearly linked to the

quarantine and emergency actions, it is likely that individuals

suffering these losses alternatively would have shared the projected

$500 million in export losses which would have occurred in the absence

of a quarantine. The costs incurred in destroying immature wheat fields

in New Mexico and Texas are more clearly associated with complying with

regulatory directives. It is unlikely that producers who planted with

suspect wheat seed would have plowed under their fields without the

order, because unless producers surveyed their fields or tested their

grain the disease may not have become evident until several years in

the future. The cleaning and disinfecting protocols for grain storage

facilities and farm equipment, which resulted in additional operating

expenses, can also be linked to regulatory requirements.

Regulatory requirements to sanitize railcars and treat millfeed

caused many domestic mills to drop contracts with producers and

handlers of grain from the affected areas, resulting in a decline in

wheat prices within the regulated areas. In the absence of the

regulatory requirement on millfeed, domestic wheat millers would have

likely purchased negative-testing grain from the infected areas.

Although some millers were reluctant, the high quality of the durum

wheat produced within this area, coupled with a regulatory program that

required testing, would have helped counter their reluctance. However,

in addition to requiring testing the regulations required that millfeed

be treated and railcars sanitized, which increased the costs of milling

wheat from the regulated area by $35-40 per ton, and prompted many

contracts with grain producers and handlers to be canceled.

It is reasonable to expect, however, that in the absence of

regulation some portion of the losses would have resulted as the market

responded to the disease. A number of importers refused to honor

purchase contracts with handlers for negative-testing grain. This is

due in part to the perceived risk of the product, and also due to the

increased costs of taking precautionary measures in handling grain from

the infected areas. Some decline in the value of uninfected wheat

within the regulated area would have likely occurred upon discovery of

Karnal bunt, even if quarantine actions were not invoked. The actual

share of losses that is directly attributable to the presence of the

disease itself is difficult to quantify. Based upon the quantifiable

losses calculated in this analysis, it is estimated that roughly 12

percent of the $44 million in losses (those associated primarily with

the plow-down, cleaning and disinfecting of storage facilities and

combine harvesters, and treating millfeed) were incurred due to

regulatory actions and requirements. The remaining 88 percent of the

losses (composed of loss in value of negative-testing grain, seed and

straw, and positive-tested wheat) occurred in the regulated area as the

market concentrated its restrictions to those areas identified as

having Karnal bunt.

Based upon the export experience of this past year, it is estimated

that 25 percent of the wheat intended for export was diverted to other

markets because countries refused to import wheat from the regulated

area, despite APHIS'' assurances the wheat had twice tested negative

for Karnal bunt. These losses would have occurred if no regulations had

been put into place and arguably more exports would have been diverted

to other markets in the absence of regulation.

Table 3.--Estimated Loss in Value due to Karnal Bunt Regulations, 1995-

96 Crop Year

[In million dollars]

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

Estimated

Action loss in

value

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

1. Plowdown of NM and TX fields planted with infected seed. $1.2

2. KB-positive grain diverted to animal feed market........ 4.2

3. KB-negative grain that experience loss in value......... \1\ 28.0

4. Cost of sanitizing storage facilities................... 0.3

5. Millfeed treatment of KB-negative grain................. 1.6

6. Loss in value of seed................................... 6.0

7. Loss in value of straw.................................. 0.2

8. Loss related to cleaning and disinfecting of combine

harvesters................................................ 2.0

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

Total.................................................. 44.0

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

\1\ $28 million is the potential maximum amount of loss in value of

uninfected wheat.

V. Federal Compensation To Mitigate Losses

The Karnal bunt quarantine that was initially established was

necessarily broad due to the lack of data available at the time as to

the extent of the infestation. The discovery of Karnal bunt and

subsequent quarantine and emergency actions occurred after production

and marketing decisions had been made. Producers and other affected

individuals had little time or ability to avoid the unexpected costs or

pass those costs on to others in the marketing chain. The impact was

particularly severe on the wheat industry in the affected area because

much of the crop is grown under contract at specified amounts and

prices.

In order to alleviate some of these hardships and to ensure full

and effective compliance with the quarantine program, compensation to

mitigate certain losses was offered to producers and other affected

parties in a regulated area. The payment of compensation is in

recognition of the fact that while benefits from regulation accrue to a

large portion of the wheat industry outside the regulated areas, the

regulatory burden falls predominantly on a small segment of the

affected wheat industry within the regulated area.

For the 1996 wheat crop, $39 million in compensation funding,

including pending compensation actions, has been made available to USDA

through budget apportionment.

The Agency has identified three principles for deciding whether to

provide compensation. First, compensation may be appropriate where

quarantine and emergency actions cause losses over and above those that

would result from the normal operation of market forces. Payment of

compensation would reflect the

[[Page 24760]]

incremental burdens of complying with regulatory requirements insofar

as market forces would not otherwise impose similar or analogous costs.

Second, compensation may be appropriate where parties undertake actions

that confer significant benefits on others. Under this principle,

payment of compensation would be intended to overcome the usual

disincentives to produce such benefits. Third, compensation may be

appropriate where a small number of parties necessarily bears a

disproportionate share of the burden of providing such benefits. This

principle rests on the widely shared belief that burden-sharing is a

fundamental principle of equity.

The Agency compensation plan for Karnal bunt proceeds from these

three principles. Individual decisions regarding what specific losses

to compensate and how much compensation to offer in each case were made

in line with the above basic principles which describe the goals of

compensation. A top equity priority was compensation for costs of

plowing down fields, and for wheat and other articles the Agency

ordered destroyed or prohibited movement. Compensation amounts took

into account the need to mitigate real losses caused by the

regulations, so that regulated parties would not have a strong economic

incentive to avoid compliance. At the same time, amounts were not set

at a high enough rate to establish a ``bounty'' that would encourage

fraudulent claims or behavior that would result in increases in

contaminated wheat or other articles eligible for compensation.

The compensation committed to date for the 1995-96 crop year, as

published as an interim rule in the Federal Register on July 5, 1996,

and adopted in a final rule published in this issue of the Federal

Register, included compensation for:

Plow-down of infected fields in New Mexico and Texas;

Loss in value of wheat testing positive for Karnal bunt

for producers and handlers;

Loss in value of wheat testing negative for Karnal bunt

for producers and handlers;

Cost of millfeed treatment;

Cleaning and disinfecting of grain storage facilities;

Compensation for handlers and growers with wheat

inventories for past crop seasons;

Compensation for participants in the National Karnal Bunt

Survey whose wheat or grain storage facility is found positive for

Karnal bunt.

These areas of compensation are discussed below. Please note that

compensation has not been necessary for participants in the National

Survey, because Karnal bunt has not been discovered outside the

original outbreak area of the Southwest. Also, losses to handlers and

growers with wheat inventories for past crop harvest are included in

the discussion of loss in value of negative testing grain.

To offset for costs related to the plow-down, compensation was

offered to 74 producers to cover the $25 per acre plowing cost plus the

$275 per acre in average cost of production expenses (up until the time

the crop was destroyed). In total, these producers received

compensation of $1.02 million to cover operating costs incurred for

growing wheat.

Compensation is committed to owners of contaminated grain storage

facilities on a one-time only basis for up to 50 percent of the cost of

decontamination, not to exceed $20,000. Total cost of compensation, as

of March 14, 1997, is estimated at $134,000, with an average

compensation per facility of $8,375.

The total compensation expected to be paid for the loss of value of

both KB positive wheat and KB negative wheat from the regulated areas

is approximately $25 million. Compensation paid as of March 14, 1997,

is estimated at $12,409,000. The categories of wheat eligible for

compensation are discussed below.

Program guidelines limited maximum compensation rates for KB

positive wheat to $2.50 per bushel; producers were asked to establish

financial losses by calculating the difference between their contract

price and actual prices received (if production was pre-contracted) or

the difference between the estimated market value in May-June 1996 and

their actual prices received (if production was not pre-contracted).

Handlers were limited by the same maximum compensation amount, but

determination of financial loss was based on the difference between

their wheat purchase price and a $3.60 per bushel salvage value. They

may have had additional costs to sort and treat their KB-positive wheat

(after finding their KB-negative wheat was, in fact, KB-positive).

Moreover, many handlers were reluctant to accept wheat from affected

areas. This expedited procedure was offered to handlers in order to

reduce administrative and recordkeeping costs by not addressing their

losses on a contract-by-contract basis. It provided assistance that

avoided a market collapse.

For those growers who grew wheat under contract but who did not

receive full contract price, compensation for loss in value of wheat

testing negative for Karnal bunt is made based on the difference

between the contracted price and the higher of the actual price

received by the producer or the salvage value. (Salvage value was to

equal whichever price was higher of the following: The average price

paid in the region of the regulated area where the wheat was sold for

the period between May 1 and June 30, 1996; or $3.60 per bushel.)

Compensation for growers of nonpropagative wheat not grown under

contract is based on the difference between the estimated market price

for the relevant class of wheat and the higher of the actual price

received or its salvage value. (Salvage value was to be the same as

above for contracted wheat.) The estimated market price is what the

market price would have been if there were no quarantine for Karnal

bunt, and is calculated for each class of wheat, taking into account

the prices offered by relevant terminal markets (animal feed, milling,

or export) for the period between May 1 and June 30, 1996, with

adjustments for transportation and other handling costs. The

compensation formula for negative grain would suggest an average price

drop of $1.10 per bushel.

In order to encourage wheat marketings from the regulated areas and

reassure millers that they would not incur any additional costs in

handling uninfected wheat from a regulated area, a $35 per ton cost

offset for heat treatment was offered to millers using KB-negative

wheat produced in a regulated area. As of March 14, 1997, 108 requests

have been made from millers in Minnesota, Missouri, Oregon, Wisconsin,

and Virginia for a total of $1.7 million.

It should be noted that, as stated in the interim rule of July 5,

1996, the Agency is developing a compensation plan for the loss in

value of 1995-96 crop season seed. This plan will be published in a

future edition of the Federal Register. Compensation for loss in income

due to the restrictions placed on movement of straw and damaged custom

harvesters will also be addressed in a future edition of the Federal

Register.

Compensation payments for loss in value, while not accounting for

every loss or expense due to the disease or regulation, limited the

adverse impact on wheat sector income of affected individuals within

the regulated areas. The final amount of compensation for grain testing

negative and for millfeed treatment will depend on the marketing

distribution of the 1996 wheat crop and

[[Page 24761]]

will be proportionately lower the greater the amount of wheat that is

exported.

VI. Conditions for Wheat Production and Utilization in a Regulated Area

for the 1996-97 Crop Year

Based upon survey data identifying the location of fields that have

tested positive, the regulations in effect during the 1996 harvest were

modified in 1997 for some areas within the initial quarantine. The

final rule published on October 4, 1996, set forth criteria by which

fields in regulated areas would be classified into two risk classes in

the 1996-97 crop year. The effects of being classified in a particular

category are outlined in Table 4.

In each regulated area, all or a portion of that regulated area is

designated as either being a restricted area or a surveillance area.

There are two differences between being designated a restricted area

and a surveillance area. First, grain from a restricted area that tests

negative for Karnal bunt may move under a limited permit from the

regulated area to designated facilities under safeguard and sanitation

conditions; grain from a surveillance area that tests negative for

Karnal bunt may move under a certificate to any destination without

restriction. Additionally, millfeed from grain produced in a restricted

area is required to be treated, whereas millfeed from grain produced in

a surveillance area is not required to be treated.

Each restricted and surveillance area is further divided into

individual fields within the respective areas. Each field within a

restricted area will fall into one of three categories: (1) A field in

which preharvest samples tested positive; (2) a field planted with

known contaminated seed in 1995; or (3) any other field within the

restricted area. In a surveillance area, each field will be designated

as (1) a field planted with known contaminated seed in 1995; or (2) any

other field in the surveillance area. In a restricted area, in fields

in which preharvest samples tested positive, no Karnal bunt host crops

may be planted in the 1996-97 crop season. The same prohibition applies

to fields in both restricted areas and surveillance areas which were

planted with known contaminated seed in 1995. Also, as noted above,

millfeed from grain from a field in the ``any other field'' category in

a restricted area must be treated; millfeed from a surveillance area

need not be treated.

Table 4.--Conditions for Wheat Production and Utilization in a Regulated Area

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

Disposition of

Definition Host planting Seed Decontamination Millfeed Survey grain

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

Restricted Area Category:

1........................ Fields in which No host planting N/A............. Equipment N/A............ N/A............ N/A.

preharvest in 1996-97 crop movement

samples tested season. outside

positive. regulated area:

cleaned and

sanitized.

Movement

within: no

restrictions.

2........................ Fields planted No host planting N/A............. Equipment N/A............ N/A............ N/A.

with known in 1996-97 crop movement

contaminated season. outside

seed in 1995. regulated area:

cleaned and

sanitized.

Movement

within: no

restrictions.

3........................ All other fields No restrictions. Tested and, if Equipment Required, Double tested: Movement of

within from regulated movement unless Sampled in grain testing

restricted area. area, treated outside destination field at positive

prior to regulated area: State controls harvest; restricted;

planting only cleaned and disposition / composite grain testing

within sanitized. movement. sample prior negative may

regulated area. Movement to movement. move under

within: no limited permit

restrictions. to designated

facilities

under

safeguard and

sanitation

conditions.

Surveillance Area:

4........................ Fields planted No host planting N/A............. Equipment N/A............ N/A............ N/A.

with known in 1996-97 crop movement

contaminated season. outside

seed in 1995. regulated area:

cleaned and

sanitized.

Movement

within: no

restrictions.

[[Page 24762]]

5........................ All other fields No restrictions. Tested and, if Equipment Not required... Double tested: Movement of

located in from regulated movement Sampled in grain testing

definable area area, treated outside field at positive

where no fields prior to regulated area: harvest; restricted;

in risk level 1 planting only cleaned and composite grain testing

are located. within sanitized. sample prior negative may

regulated area. Movement to movement. move under

within: no certificate.

restrictions. Safeguard and

sanitation of

railcars not

required.

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

The number of wheat acres that is estimated to fall into the

various risk categories in the 1996-97 crop season is presented in

Table 5. The amount of wheat acres in the regulated area is estimated

to be greatly reduced from the previous years largely due to factors

affecting the wheat industry as a whole (in particular, the projected

decline in export demand for U.S. wheat). Wheat acres are estimated to

decline by 36 percent in the regulated areas of Arizona, an average of

24 percent in the three affected counties of California, and 20 percent

each in New Mexico and Texas.

Table 5.--Projected 1997 Regulated Wheat Acreage, by Risk Categories \1\

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

California

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

Risk category Arizona Imperial Bard/ New Mexico Texas Total acres

Valley Winterhaven Blythe

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

(6)Acres

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

Restricted Area.............................................. 9,200 ........... 40 450 3,239 494 13,423

Surveillance Area............................................ 105,800 90,000 3,960 4,050 4,128 3,906 211,844

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

Total 1997 Regulated Area................................ 115,000 90,000 4,000 4,500 7,367 4,400 225,267

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

1996 Regulated Area...................................... 180,000 106,592 8,909 14,000 9,209 5,494 324,204

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

\1\ Estimates obtained from the Karnal Bunt Task Force, Arizona.

Overall, the impact of the Karnal bunt restrictions is likely to be

lessened for many growers and other individuals, as a large portion of

the regulated acres falls into the less restrictive surveillance

category. Additionally, an interim rule published in the Federal

Register on May 1, 1997 (Docket No. 96-016-19, 62 FR 23620-23628),

established a new standard for defining regulated areas for Karnal bunt

based on finding bunted wheat kernals rather than just spores. That

interim rule substantially reduced the size of the harvested wheat area

regulated for Karnal bunt, in addition to the market-based decline in

wheat acres in the regulated areas above. Wheat production can still

occur on fields in the regulated areas (in restricted category 3), on

land which was not previously planted with wheat in 1996. Growers who

choose to plant wheat in these areas are minimally restricted by

regulations as grain that tests negative for Karnal bunt can move under

limited permit to designated facilities.

Approximately 10,000 acres in risk categories 1 and 4 are

prohibited from planting wheat. The value of wheat production that

could have been harvested from these fields, calculated at an average

price for durum wheat before the disease outbreak of $5.50 per bushel,

would have been less than $6 million.4 The impact on growers

with fields in these categories, however, is uncertain. While the

restrictions deny income that could be earned from wheat, they do not

preclude the planting of other non-host crops, such as barley, alfalfa,

cotton, and vegetables. In many of the infected areas, especially on

irrigated operations, wheat is either double-cropped or grown on

rotation with other non-host crops. The impact on producers in these

risk categories would therefore be minimized with rotation. Barley

would likely be grown on these fields: county crop budget data from

Arizona indicate that, except for barley, the historical net returns

obtained from wheat production are actually lower than the net returns

for all other crops.5

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

\4\ The estimate is based on an average yield of 100 bushels per

acre for durum wheat produced in the desert Southwest.

\5\ Other rotational crops include alfalfa hay, sudan hay,

upland and pima cotton, safflower, and lettuce.

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

It should be noted that changes in the compensation plan to

remunerate for certain losses are being developed and will be published

in a future edition of the Federal Register. Information received

through public comments and other forums is invaluable in refining

regulatory policies regarding Karnal bunt. With no prior experience in

regulating the disease, the improvement of the Karnal bunt program

requires ongoing input from the public. This process will enable the

Agency to better protect the wheat growing areas of the United States,

while causing the least possible disruption to the affected areas.

[[Page 24763]]

VII. Consideration of Alternatives to the Rule

A number of alternatives to the quarantine were considered by the

Agency in controlling the disease outbreak. One alternative was to

limit the scope of the 1996 quarantine by regulating only fields that

tested positive for Karnal bunt. This option was rejected for the

following reasons. Karnal bunt was originally detected in many

certified wheat seed lots produced in Arizona, as well as in some grain

in storage from a previous harvest. The information available to the

Agency indicated that seed from the infected lots were planted widely

in parts of Arizona and California, and in a few counties in Texas and

New Mexico. This infected seed could not be traced to specific fields

because the process of seed certification in Arizona allows seed from

different fields to be commingled in making a seed lot. Because Karnal

bunt spores can remain viable in soil for as long as 4 to 5 years, and

because wheat is planted in rotation in the Southwest, the actual

infestation would not be apparent until fields came into rotation with

wheat. Moreover, the detection of Karnal bunt spores in some grain in

storage from the 1993 harvest indicated that the disease had been

present for at least several years. Given that there is currently no

feasible soil test, the disease, in this situation, could only be

detected as wheat is planted. The unknown extent of the infestation in

Arizona and California necessitated broader control actions than those

offered by quarantining infected fields. In New Mexico and Texas, where

wheat acreage planted with suspect seed was limited and the wheat crop

was immature, regulatory actions were directed at plow-down of those

fields.

Another alternative available to the Agency would be not to

quarantine. This alternative was rejected as it could not be justified

given the risk of spread of Karnal bunt to uninfected areas and the

potential for significant losses in the wheat export market. The

quarantine actions to prevent disease spread serve to instill domestic

and foreign consumer confidence in the integrity of U.S. wheat. The

1995-96 Karnal bunt program provided pre-harvest sampling of all wheat

fields; compensation for losses as a result of Agency actions; and

remuneration to offset part of the additional costs in handling and

treating wheat produced in the regulated area (through a millfeed cost

offset and a cost-share facility clean-up program with grain handlers).

Without Federal intervention, it is conceivable that farm income of

wheat producers both within the affected area, and outside the

regulated area, would have been more negatively impacted. Therefore, it

is also conceivable that Federal intervention to prevent the spread of

KB beyond the regulated areas and to identify the KB status of acres

within the regulated areas may have had a salutary effect on the market

and a beneficial impact on prices both within and outside the regulated

areas.

When the treatment protocols for regulated articles were

established, few options to the requirements were made available to

affected wheat growers, handlers, and combine owners. These specific

protocols were based on the best scientific information available on

disease management in other countries affected by Karnal bunt.

Furthermore, the decision to require millfeed treatment, as with other

treatment requirements, was based on risk assessments that were

conducted to determine the acceptable level of risk of the various

modes of transportation of the disease. Compensation is thus being

considered to offset unanticipated losses and damages caused by the

regulatory requirements.

VIII. Regulatory Flexibility Analysis--Impacts on Small Entities Within

the Regulated Area

The Regulatory Flexibility Act requires that agencies assess the

impact of regulations on small businesses, organizations, and

governments. A majority of the firms in the affected area can be

classified as small based on criteria established by the Small Business

Administration (SBA). Much of the analysis on impacts discussed in the

previous sections are therefore applicable to these firms. Unless

otherwise noted, the SBA's characterization of a small business for the

categories of interest in this analysis is a firm that employs at most

500 employees, or has sales of $5 million or less. The SBA defines a

``small'' wheat producer as having sales of less than $500,000.

In addition to private businesses that produce and handle grain in

the regulated area, there were a number of other parties, such as

governmental and quasi-governmental entities and industry

organizations, that were also affected by the quarantine. For example,

farm organizations that represented producer interests were impacted by

the reduced activity due to a change in farm receipts. Local

governments may also have experienced a change in the business activity

level, and thus tax receipts, due to lower farmer spending. Seed

certification boards are expected to see lower levels of seed

certification as the demand for seed is reduced. State and county

departments of agriculture could also have experienced increased

financial burdens as regulatory responsibilities related to Karnal bunt

surveillance and protocol monitoring increased on the local level. The

magnitude of these effects, however, are not quantifiable. The

information below describes the number of firms affected and provides

insight into the impact on small entities due to Federal regulations.

Number of Producers and Acreage in Regulated Area (RA): There were

5,657 farms in the counties of the RA as reported in 1992 with

1,501,089 acres.6 About \1/3\ of the reported total acreage

was irrigated. There were 598 wheat growers in the counties of the RA:

236 in California (out of 2,236 wheat growers in the State); 310 in

Arizona; 40 in New Mexico (out of 892 in the State); and 12 in Texas

(out of 14,877 in the State). Total wheat acreage reported in these

counties in 1992 was 176,753 acres producing 13.3 million bushels.

Wheat acreage represented less than 12 percent of total farm acreage.

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

\6\ Source: 1992 Census of Agriculture.

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

Characteristics of Producers in the RA: Similar cotton and

vegetable production data suggest that the primary source of income in

these areas is derived from cotton and vegetable production. Cotton

acreage in the counties of the RA was reported at 496,284 acres on

1,301 farms in 1992. Vegetables grown for harvest was reported on 509

farms with 202,694 acres. The acreage and number of producers growing

wheat, cotton, and other crops vary from year to year depending on

rotations, price and weather expectations, and other factors. Wheat is

often a rotation crop in cotton and vegetable crop production providing

a more stable income while ``resting the soil'' and providing weed

control. Common rotations call for wheat in one year in three. Data for

the Pacific region indicate that the previous crop on 57 percent of the

wheat acres in 1989 had crops other than wheat.7 Forty-

percent had wheat, while 2 percent had corn and 1 percent had sorghum

as the previous crop.

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

\7\ Source: Economic Research Service, Characteristics and

Production Costs of U.S. Wheat Farms, 1989, October, 1993.

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

Of the total 598 wheat farms in the counties of the RA, 577 (or

96.5 percent) were growing wheat on irrigated fields. Of the 598 wheat

producers in the RA, 86 percent of producers harvested 499 acres or

less of wheat. These 514 wheat producers are assumed to be classified

in the SBA business classification as

[[Page 24764]]

being ``small entities.'' It is assumed that the other 84 growers are

excluded from this business classification. Wheat growers in the RA

typically lack on-farm storage.

Acreage Affected: By 1995/96, the amount of planted wheat acreage

in the counties of interest had increased; the total number of growers

in the RA was reported at 882 growers (455 in Arizona, 354 in

California, 72 in New Mexico, and 1 in Texas), with wheat acreage

totaling over 300,000 acres. Approximately 145 growers were found to

have grown KB-positive wheat, and 73 growers were issued plow-down

orders. As a percentage of the total in the four States of the RA,

quarantine actions affected less than 3.3 percent of producers, 3.75

percent of wheat acreage, but almost 8 percent of wheat production.

Based on the SBA's size definition, 86 percent of producers (514

out of 598) are assumed to be classified within the small business

category. Thus, the major part of any impact from Karnal bunt or Karnal

bunt regulations is assumed to fall on these individuals.

Harvesters: Harvesting equipment is expensive and specialized for

many agricultural crops. With a cost of over $130,000 for a new combine

and only a limited time of use, many wheat growers in the regulated

area depend on custom operators or ``custom cutters'' to harvest their

wheat crop. It is estimated that about 390 combines were needed to

harvest the 1995/96 wheat crop in the regulated area, with much of it

being supplied by custom cutters. There were probably 20 to 30 firms

engaged in this business activity (not including individuals who may

have done some custom cutting of neighboring properties). All firms are

assumed to be classified in the SBA classification as being a ``small

business.'' It is assumed that only a few of these firms, namely those

that were subjected to extensive cleaning and disinfection if they had

harvested many KB-positive fields, suffered losses to their machinery

as a result of quarantine actions. Additional losses occurred because

some harvesters were not allowed to bring their equipment to certain

States.

Wheat Seed Dealers: Wheat seed dealers sell seed to growers to

produce their crop for milling. They also represent seed wheat research

firms in that they sell wheat seed that is grown to be used as seed for

the next growing season or for export. This wheat seed is called

private variety seed as it was developed by a private firm and has a

plant variety protection ``patent'' on that variety. There are

approximately 25 to 30 seed marketing firms in the RA; some specialize

in acquiring seed production from the RA for export. Probably 3 to 4

seed wheat dealers have over 80 percent of the seed business in the RA.

These firms were affected by quarantine actions, i.e. by the

restriction on selling or transferring seed out of the RA. Some of

these firms derive their income from other enterprises such as

vegetable production, rather than solely from wheat production and

marketing. The number of firms that can be classified as ``small''

cannot be determined due to the proprietary nature of sales records.

Seed Wheat Research Firms: Seed wheat research firms take the risk

and have the expertise to develop new wheat varieties for future use.

Many develop a relationship with a seed wheat dealer (who is then

called an ``associate'') to market the developers' specific varieties.

Seed wheat research firms use seed production in the RA as a basis for

seed to be used in climates similar to the RA, e.g. the Mediterranean,

or use production in the RA as seed increases'' to be used in Northern

climates the following spring. There are approximately 5 to 9

commercial seed wheat research firms engaged in the RA, with perhaps 3

to 4 major firms conducting over 70 percent of research activity. Also,

there are small firms in the RA that specialize in ``seed increases''

for varieties being developed by universities, private companies, and

foreign countries. The number of firms that can be classified as

``small'' according to SBA standards cannot be determined due to the

proprietary nature of sales records.

Custom Haulers: There are approximately 130 to 140 individuals in

the RA that haul grain from fields directly after harvest to storage

and load-out locations (referred to as grain handlers). Some of these

individuals also haul farm machinery from field to field to prepare or

harvest wheat and other crops. The number of firms that can be

categorized as a ``small business'' is unknown.

Grain Handlers: Grain handlers store and unload nonpropagative

wheat received from growers. Wheat is received by trucks, pickups, and

farm tractors pulling either grain buggies or farm wagons. Ownership of

the wheat is usually transferred from the grower to the grain handler.

It is estimated that there are 92 such assembly sites in the RA (50 in

Arizona, 33 in California, 8 in New Mexico, and 1 in Texas). Off-farm

storage capacities are only available on a State-wide basis

8: Arizona (22.3 million bushels), California (98.04 million

bushels), New Mexico (15.63 million bushels); and Texas (840.2 million

bushels). The SBA defines a small grain elevator as one that employs

fewer than 100 employees. It is estimated that nearly all of the

elevators in the regulated areas can be classified as ``small.''

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

\8\ Source: Grain and Milling Annual 1996. Off-farm capacities

may also reflect storage capacities of millers.

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

Wheat Millers: The number of wheat millers for the four States are

9: California (12, with 1 processing durum); Arizona (2,

with 1 processing durum); New Mexico (none); Texas (7, with 1

processing rye). There were 24 millers in and around the RA that

entered into limited permits with APHIS: 2 in Arizona, 1 in New Mexico,

and 21 in California. Limited permit data indicate that millers in the

following States were also affected: Minnesota, Oregon, Virginia,

Missouri, and Wisconsin. The size of these operations could not be

estimated in terms of their SBA classification as ``small'' or

``large'' businesses. However, these firms are likely to be classified

as a ``small'' business.

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

\9\ See footnote 8.

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

Prepared Feed Manufacturers: The number of animal feed

manufacturers and/or millfeed processors in the Riverside-San

Bernardino primary metropolitan statistical area (PMSA) is 15, and

there are 11 in Arizona.10 Only 12 of these 26

establishments employed over 20 employees. The Riverside-San Bernardino

PMSA data indicates that the 15 establishments in that area

collectively employed a total of 600 workers with a $20.5 million

payroll (8 establishments of the 15 employed more than 20 employees).

Based on these data, it is estimated that these larger firms employ

about 62 workers on average and smaller firms had 15 workers per firm.

Similar data for Arizona show that 4 of the 11 establishments in that

State employed more than 20 employees. Given these scant data and SBA's

definition of a ``small business'' in this group (SIC 2048)--i.e., an

establishment with fewer than 500 employees--it is assumed that all

firms fall in SBA's ``small'' business category.

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

\10\ Source: U.S. Department of Commerce, Economics and

Statistics Administration, Bureau, Bureau of Census, various State

reports on California and Arizona, Manufacturers--Geographic Area

Series, 1992.

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

Feedlots: It is estimated that about 24 feedlots in the RA

(presumably feeding beef cattle) were affected by the regulations. They

were found in Arizona (16), New Mexico (3), and California (5). SBA's

definition of a ``small business'' in this group (SIC 0211) is an

establishment with sales less than $1.5

[[Page 24765]]

million. No sales data on these firms were available, so it is not

possible to estimate the number of firms that do not fall in SBA's

small business category.

Based on the above information, we have concluded that the majority

of the impact of Karnal bunt and subsequent regulations falls on small

businesses. It is conceivable, however, that without Federal

intervention, individual States and importing countries would place

their own, perhaps more severe, restrictions on wheat shipments from

the regulated areas. The 1996 Karnal bunt program provided pre-harvest

sampling of fields and other measures to ensure the quality of wheat

from the regulated areas. The use of limited permits for uninfected

wheat further facilitated the marketing flow of wheat, thereby enabling

the wheat industry within the regulated areas to be preserved.

IX. Summary and Conclusions

The imposition of quarantine and emergency actions against Karnal

bunt was a necessary, short-run measure taken to prevent the artificial

spread of the disease to other wheat-producing areas in the United

States. The establishment of Karnal bunt would have had serious adverse

impact on the wheat export market, as over half of U.S. wheat exports

are to countries that maintain restrictions against imports from

countries where Karnal bunt is known to occur. In the absence of

regulatory action, it is conceivable that farm income both within and

outside the regulated areas could have been further jeopardized.

Given the regulatory objective of disease eradication, the

quarantine measures to control a new disease outbreak such as Karnal

bunt is necessarily broad due to the lack of information on the extent

of the outbreak. These actions, enacted after production and marketing

decisions were in place, undoubtedly had an adverse impact on growers

and other affected individuals; many were likely unable to recover

unexpected costs. The loss in market value due to the quarantine is

estimated at $44 million. The majority of affected individuals and

firms can be classified as ``small'' based on criteria established by

the Small Business Administration.

In order to reduce the economic impact of the quarantine on

affected wheat growers and other individuals, compensation was provided

to mitigate certain losses and expenses. The payment of compensation is

in recognition of the fact that while a large portion of the benefits

of regulation accrue to others outside the regulated area, the

regulatory burden falls disproportionately on a small segment of the

industry. Indeed, it could be argued that without compensation, the

regulatory actions would not have been economically justified, as the

costs of disease control that are borne now could have a greater weight

than benefits that are received in the future.

Based upon our analysis, we have concluded that our quarantine

measures were appropriate and justifiable when compared with the

magnitude of the benefits achieved. Even a 10-percent reduction in

wheat exports would have a significant effect on wheat sector income.

It is estimated that a 10-percent decrease in U.S. wheat exports would

cause a decline in wheat sector income of over $500 million.

As of April 4, 1997, $39 million in compensation funding has been

made available to USDA through budget apportionment. While not

accounting for every loss or expense due to the disease or regulation,

compensation for loss in value lessened the adverse impact on wheat

sector income within the regulated areas.

As more information is obtained on disease prevalence, the number

of regulated acres are reduced and restrictions for the 1996-97 crop

season are modified to be commensurate with the level of risk. The

impact on those that are affected by regulation would also likely be

reduced; unlike in 1996, the 1997 restrictions on wheat planting are

known in advance and can, therefore, be taken into account when

cropping decisions are made.

Wheat acreage in the regulated areas is projected to decline from

1995-96 levels, largely due to decreased demand for U.S. wheat exports.

Less than 5 percent of the acres in the regulated areas is prohibited

from planting wheat. The impact on farm income due to this prohibition

is uncertain, as wheat is normally rotated with other crops. Overall,

the impact of the Karnal bunt restrictions on wheat production in the

regulated areas is likely to be small, as wheat can still be grown on

ample, available land that was not planted with wheat in 1996.

Done in Washington, DC, this 30th day of April 1997.

Donald W. Luchsinger,

Acting Administrator, Animal and Plant Health Inspection Service.

[FR Doc. 97-11718 Filed 5-1-97; 11:27 am]

BILLING CODE 3410-34-P