[Federal Register Volume 62, Number 64 (Thursday, April 3, 1997)]
[Rules and Regulations]
[Pages 15809-15819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8544]



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 Rules and Regulations
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  Federal Register / Vol. 62, No. 64 / Thursday, April 3, 1997 / Rules 
and Regulations  

[[Page 15809]]



DEPARTMENT OF AGRICULTURE

Animal and Plant Health Inspection Service

7 CFR Part 301

[Docket No. 96-016-18]
RIN 0579-AA83


Karnal Bunt Regulatory Flexibility Analysis

AGENCY: Animal and Plant Health Inspection Service, USDA.

ACTION: Final rule; 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.
---------------------------------------------------------------------------

    \1\ 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,

[[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%    
----------------------------------------------------------------------------------------------------------------
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 
----------------------------------------------------------------------------------------------------------------
\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                               
----------------------------------------------------------------------------------------------------------------
                                                                                               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.                           
                                   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.                                                                   
----------------------------------------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------

     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.
---------------------------------------------------------------------------

    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