Karnal Bunt Regulatory Flexibility Analysis

SUMMARY: We are publishing in this document the regulatory flexibility

analysis prepared for an October 4, 1996, final rule that amended the

Karnal bunt regulations established in a series of interim rules and

that established criteria for levels of risk, the movement of regulated

articles, and the planting of seed from Karnal bunt host crops. Because

that final rule was published on an emergency basis, compliance with

the regulatory flexibility analysis requirements of the Regulatory

Flexibility Act was found to be impracticable, and completion of those

requirements was delayed by the Administrator of the Animal and Plant

Health Inspection Service. The required analysis has been completed and

is, therefore, being made available to the public.

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 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.

Under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (the

Act), agencies must prepare initial and final regulatory flexibility

analyses concerning the economic impact of the regulatory action on

small entities unless the agency certifies that the rule will not have

a significant economic impact on a substantial number of small

entities. The criteria for initial and final regulatory flexibility

analyses are set out in sections 603 and 604, respectively, of the Act.

Section 608, paragraph (a), of the Act provides, however, that an

agency head may waive or delay the completion of some or all of the

requirements for the initial regulatory flexibility analysis if an

emergency situation makes timely compliance with section 603

impracticable. Similarly, paragraph (b) of section 608 provides that an

agency head may delay the completion of a final regulatory flexibility

analysis for a period of not more than 180 days following the

publication of a final rule in the Federal Register if the agency

publishes in the Federal Register a written finding that the rule is

being promulgated in response to an emergency that makes timely

compliance with section 604 impracticable.

Because the October 4, 1996, final rule was published on an

emergency basis in order to give affected growers the opportunity to

make planting decisions for the 1996-97 crop season on a timely basis,

the rule was published without the regulatory flexibility analysis.

Instead, as provided by section 608 of the Act, the rule included a

written finding that compliance with section 603 and timely compliance

with section 604 of the Act was impracticable. We further stated that

the rule may have a significant economic impact on a substantial number

of small entities and, if that were the case, that we would discuss the

issues raised in accordance with section 604 of the Act in a final

regulatory flexibility analysis that would be published in a future

Federal Register. We have now completed the required regulatory

flexibility analysis, and it is set forth below.

I. Introduction

In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et

seq.), this analysis examines the economic impact, costs, and benefits

to small entities of the October 4, 1996, Karnal bunt final rule, as

well as impacts attributable to the interim regulations.

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

[[Page 15810]]

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). Although

that final rule did not change or make final the interim rule on

compensation published in the Federal Register on July 5, 1996, this

analysis necessarily addresses the role and impact of those interim

compensation provisions, which remain in effect.

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 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.

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.

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. The

impact on the affected industry of the disease and subsequent

quarantine actions, along with compensation to mitigate losses, are

discussed in section IV. Section V 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 VI.

The characteristics of the small entities within the regulated areas

that were impacted by the disease and the quarantine are described in

section VII. A summary of the analysis is provided in section VIII.

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.1 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.

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\1\ About 1.2 billion bushels of wheat are exported from the

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

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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,

[[Page 15811]]

in practice, strictly prohibit wheat imports from the United States.

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.

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 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 Yyear

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

Reduction in exports

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

0% 10% 25% 50%

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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 4,823 4,823 4,823

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

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\1\ Includes market transition payments.

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 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 VII of the analysis. 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 claimed

loss in market value of their grain; seed companies and researchers

have claimed similar losses, including lost royalties due to the

disruption in the development of seed varietals. Other types of claims

made were for the cost of cleaning and disinfecting equipment and

facilities, and damages to machinery caused by required treatment. Some

of these claims are presented in Table 2.

Table 2.--Impact of Karnal Bunt Quarantine Actions

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Types of impacts

Action Regulated article Affected entities Numbers affected due to KB and

quarantine actions

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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.

Tools and Wheat 145 Cost of

Farm Equipment. producers in RA. growers. cleaning.

[[Page 15812]]

Harvester Farmer 389 Cost of

s. owned and custom combines. cleaning.

combines.

Grain Grain 976 Cost of

Trucks. haulers from trucks. cleaning.

field to grain

elevators.

Cleaning/Disinfection........... Grain Grain 17 Cost of

storage and handling firms. elevators. cleaning.

loadout

facilities.

Harvester Combine 36 to 40 Excess

s. harvester owners. combines. wear and tear on

equipment.

Harvester Combines 5 to 10 Down-time

s. involved in pre- combines. on harvesters due

harvest sampling. to field testing.

Harvester Custom 5 Loss of

s. 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).

KB- Producers 145 Loss in

positive milling Grain growers. value of KB-

wheat. 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.

Restriction on Use or Marketings 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.

Moratoriu Producers 109 Loss in

m 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.

Byproduct

s of seed.

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Regulated area.

Estimated losses in value to the affected wheat industry in the

Southwest, and compensation payments to mitigate some of these losses,

are discussed below. The compensation committed to date for the 1995-96

crop year, published as an interim rule in the Federal Register on July

5, 1996, is as follows:

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;

Cost of millfeed treatment;

Cleaning and disinfecting of grain storage facilities.

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.

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 $1.23 million to cover operating costs incurred for

growing wheat.

2. Cost of Sanitizing Grain Storage

Records of APHIS surveys in the regulated area indicate that 16

facilities have applied for the cost-share program. Compensation is

committed to owners of contaminated grain storage facilities on a one-

time only basis for up to 50

[[Page 15813]]

percent of the cost of decontamination, not to exceed $20,000. The

total cost of cleaning facilities is estimated at $268,000, with an

average compensation per facility of $8,375. Total cost of

compensation, as of March 14, 1997, is estimated at $134,000.

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.2 Program guidelines limited maximum

compensation rates per bushel at $2.50; 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.

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2 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.

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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. It is

estimated that at these rates, compensation would need to be $4.2

million in order to offset much of the loss in value of positive wheat

to producers and handlers.

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

At harvest, many wheat buyers refused to honor purchase contracts

with producers for 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.

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.

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. The

compensation formula for negative grain would suggest 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 uninfected wheat grown in the regulated area.

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. 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 $1.6 million.

[[Page 15814]]

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. 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. A detailed discussion of impacts will be provided at

that time.

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. Compensation for loss in income

due to the restrictions placed on movement of straw is being

considered.

8. Losses Related to Cleaning and Disinfecting Combine Harvesters and

Other Losses

A number of claims have been raised by about 220 combine harvesters

operating within the regulated areas, and those who travel outside of

the regulated areas to harvest crops. These claims 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 claims 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. Compensation for this loss is being considered.

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 formulating

compensation for seed producers, and other issues relating to

compensation are also under consideration.

In sum, the impact on market value of the 1996 Federal quarantine

in the southwestern United States is estimated to be $44 million.

Roughly $35 million in compensation has been provided to cover for

these losses (Table 3). 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 will be

proportionately lower the greater the amount of wheat that is exported.

It is difficult to determine whether some of these losses would

have been incurred in the absence of regulation. Indeed, it could be

argued that losses without Federal intervention would have been higher

in the regulated areas, particularly in the long run, as the market

imposes its own restrictions by refusing to accept shipments due to the

inability to assess risk. 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.

Table 3.--Estimated Loss in Value Due to Karnal Bunt Regulations, and

Compensation to Date, 1995-96 Crop Year

[IN MILLIONS OF DOLLARS]

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

Estimated

Action loss in Compensation

value to date

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

1. Plowdown of NM and TX fields planted with

infected seed............................... $1.2 $1.2

2. Cost of sanitizing storage facilities..... 0.3 0.1

3. KB-positive grain diverted to animal feed

market...................................... 4.2 4.2

4. KB-negative grain that experienced loss in

value....................................... 28.0 28.0

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

6. Loss in value of seed..................... 6.0 (\1\)

7. Loss in value of straw.................... 0.2 (\1\)

8. Loss related to cleaning and disinfecting

of combine harvesters....................... 2.0 (\1\)

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

[[Page 15815]]

Total.................................. 44.0 35.0

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

Pending.

V. 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 movement N/A............... N/A............... N/A.

preharvest samples tested in 1996-97 crop outside regulated

positive. season. area: cleaned and

sanitized.

Movement within:

no restrictions.

2. Fields planted with known No host planting N/A............... Equipment movement N/A............... N/A............... N/A.

contaminated seed in 1995. in 1996-97 crop outside regulated

season. area: cleaned and

sanitized.

Movement within:

no restrictions.

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

restricted area. from regulated outside regulated destination State Sampled in field testing positive

area, treated area: cleaned and controls at harvest; restricted; grain

prior to planting sanitized. disposition/ composite sample testing negative

only within Movement within: movement. prior to Movement. may move under

regulated area. no restrictions. limited permit to

designated

facilities under

safeguard and

sanitation

conditions.

Surveillance Area:

4. Fields planted with known No host planting N/A............... Equipment movement N/A............... N/A............... N/A.

contaminated seed in 1995. in 1996-97 crop outside regulated

season. area: cleaned and

sanitized.

Movement within:

no restrictions.

[[Page 15816]]

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

in definable area where no from regulated outside regulated Sampled in field testing positive

fields in risk level 1 are area, treated area: cleaned and at harvest; restricted; grain

located.. prior to planting sanitized. composite sample testing negative

only within Movement within: prior to movement. may move under

regulated area. no restrictions. certificate.

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. 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.3 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.4

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

\3\ The estimate is based on an average yield of 100 bushels per

acre for durum wheat produced in the desert Southwest.

\4\ Other rotational crops include alfalfa hay, sudan hay,

upland and pima cotton, safflower, and lettuce.

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

The required millfeed treatment would also impose additional costs

on the production of grain from the regulated areas. It is estimated

that about 3.4 million bushels of grain would be subject to this

restriction at a cost of roughly $1 million.5

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

\5\ This estimate is based on a heat treatment cost of $35 per

ton.

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

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 are 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.

VI. 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

[[Page 15817]]

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 in 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.

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.

VII. Characteristics of 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 over 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 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

[[Page 15818]]

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 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

[[Page 15819]]

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.

VIII. 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 March 14, 1996, compensation for the 1995-96 crop year is

estimated at $35 million. 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. Remunerations for other losses are also being

developed.

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 31st day of March 1997.

Terry L. Medley,

Administrator, Animal and Plant Health Inspection Service.

[FR Doc. 97-8544 Filed 3-31-97; 3:19 pm]

BILLING CODE 3410-34-P