[Federal Register Volume 62, Number 87 (Tuesday, May 6, 1997)]
[Rules and Regulations]
[Pages 24753-24765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11718]


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DEPARTMENT OF AGRICULTURE

Animal and Plant Health Inspection Service

7 CFR Part 301

[Docket No. 96-016-20]
RIN 0579-AA83


Karnal Bunt Regulatory Flexibility Analysis and Regulatory Impact 
Analysis

AGENCY: Animal and Plant Health Inspection Service, USDA.

ACTION: Final rule; regulatory flexibility analysis and regulatory 
impact analysis.

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SUMMARY: We are publishing in this document the regulatory flexibility 
analysis prepared for a final rule, which is published elsewhere in 
this issue of the Federal Register, that adopts, with changes, an 
interim rule that provided compensation for certain growers and 
handlers, owners of grain storage facilities, and flour millers in 
order to mitigate losses and expenses incurred because of Karnal bunt 
in the 1995-1996 crop season. The final rule also adds compensation 
provisions for handlers of wheat that was tested and found negative for 
Karnal bunt, for handlers and growers with wheat inventories for past 
crop seasons, and for participants in the National Karnal Bunt Survey 
whose wheat or grain storage facility is found positive for Karnal 
bunt. We are also publishing in this document a regulatory impact 
analysis for the interim rules and final rules that established the 
Karnal bunt quarantine, regulations, and compensation provisions, 
including a final rule on compensation published elsewhere in this 
issue of the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. Mike Stefan, Operations Officer, 
Domestic and Emergency Operations, PPQ, APHIS, 4700 River Road Unit 
134, Riverdale, MD 20737-1236, (301) 734-8247.

SUPPLEMENTARY INFORMATION: Karnal bunt is a fungal disease of wheat 
(Triticum aestivum), durum wheat (Triticum durum), and triticale 
(Triticum aestivum X Secale cereale), a hybrid of wheat and rye. Karnal 
bunt is

[[Page 24754]]

caused by the smut fungus Tilletia indica (Mitra) Mundkur and is spread 
by spores. The establishment of Karnal bunt in the United States would 
have significant consequences with regard to the export of wheat to 
international markets. The regulations regarding Karnal bunt are set 
forth in 7 CFR 301.89-1 through 301.89-14.
    On October 4, 1996, we published in the Federal Register (61 FR 
52189-52213, Docket No. 96-016-14) a final rule that amended a series 
of interim rules establishing a program to control and eradicate Karnal 
bunt in the United States, and also made final a proposed rule 
establishing criteria for levels of risk for areas with regard to 
Karnal bunt and criteria for seed planting and movement of regulated 
articles based on those risk levels. Elsewhere in this issue of the 
Federal Register we are publishing a companion docket (Docket No. 96-
016-17) to this document, in order to adopt as a final rule, with 
changes, an interim rule that amended the Karnal bunt regulations to 
provide compensation for certain growers and handlers, owners of grain 
storage facilities, and flour millers in order to mitigate losses and 
expenses incurred because of Karnal bunt in the 1995-1996 crop season. 
Additionally, the final rule adds compensation provisions for handlers 
of wheat that was tested and found negative 1 for Karnal 
bunt, for handlers and growers with wheat inventories for past crop 
seasons, and for participants in the National Karnal Bunt Survey whose 
wheat or grain storage facility is found positive \1\ for Karnal bunt.
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    \1\ Throughout this document, in discussing tests for Karnal 
bunt, ``found negative'' means that no Karnal bunt spores were 
found, and ``found positive'' means that Karnal bunt spores were 
found. This applies whether the tests involved were of propagative 
wheat or nonpropagative wheat, in fields, conveyances, or grain 
storage facilities.
    On May 1, 1997, we published an interim rule in the Federal 
Register (Docket No. 96-016-19, 62 FR 23620-23628) that established 
a new standard for defining regulated areas for Karnal bunt based on 
finding bunted wheat kernels rather than just spores. That change 
does not affect any of the activities analyzed in this document.
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    On April 3, 1997, we published in the Federal Register a regulatory 
flexibility analysis (62 FR 15809-15819, Docket No. 96-016-18) for the 
interim rules and the October 4, 1996, final rule that established the 
Karnal bunt quarantine and regulations. In this document, we are 
publishing a Final Regulatory Flexibility Analysis for Docket No. 96-
016-17. Additionally, in this document, we are publishing a Regulatory 
Impact Analysis that analyzes the costs and benefits of the Karnal bunt 
interim rules and final rule we have already published, as well as 
those of the provisions in Docket No. 96-016-17.

I. Introduction
II. Need for Regulation
III. Benefits of the Federal Quarantine Program
IV. Impact on the Affected Industry of Karnal Bunt and Regulatory 
Actions
V. Federal Compensation to Mitigate Losses
VI. Conditions for Wheat Production and Utilization in a Regulated 
Area for the 1996-97 Crop Year
VII. Consideration of Alternatives to the Rule
VIII. Regulatory Flexibility Analysis--Impacts on Small Entities 
Within the Regulated Area
IX. Summary and Conclusions

I. Introduction

    In accordance with Executive Order 12866, this analysis examines 
the economic impacts, including costs and benefits of the Karnal bunt 
regulations published to date, including Docket No. 96-016-17. 
Additionally, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), we have conducted an analysis of the economic 
impact, costs, and benefits the provisions of Docket No. 96-016-17 will 
have on small entities. That analysis is set forth below under the 
heading ``VIII. Regulatory Flexibility Analysis--Impacts on Small 
Entities Within the Regulated Area.''
    On March 8, 1996, Karnal bunt was detected in Arizona during a seed 
certification inspection done by the Arizona Department of Agriculture. 
On March 20, 1996, the Secretary of Agriculture signed a ``Declaration 
of Extraordinary Emergency'' authorizing the Secretary to take 
emergency action under 7 U.S.C. 150dd with regard to Karnal bunt within 
the States of Arizona, New Mexico, and Texas. In an interim rule 
effective on March 25, 1996, and published in the Federal Register on 
March 28, 1996 (61 FR 13649-13655, Docket No. 96-016-3), the Animal and 
Plant Health Inspection Service (APHIS) established the Karnal bunt 
regulations (7 CFR 301.89-1 through 301.89-11), and quarantined all of 
Arizona and portions of New Mexico and Texas because of Karnal bunt. 
The regulations define regulated articles and restrict the movement of 
these regulated articles from the quarantined areas.
    After the regulations were established, Karnal bunt was detected in 
seed lots that were either planted or stored in California. On April 
12, 1996, the Secretary of Agriculture signed a ``Declaration of 
Extraordinary Emergency'' authorizing the Secretary to take emergency 
action under 7 U.S.C. 150dd with regard to Karnal bunt within 
California. In an interim rule effective on April 19, 1996, and 
published in the Federal Register on April 25, 1996, APHIS also 
regulated portions of California because of Karnal bunt (61 FR 18233-
18235, Docket No. 96-016-5). In an interim rule effective on June 27, 
1996, and published in the Federal Register on July 5, 1996 (61 FR 
35107-35109, Docket No. 96-016-6), we removed certain areas in Arizona, 
New Mexico, and Texas from the list of areas regulated because of 
Karnal bunt. That list was amended in a technical amendment effective 
on July 9, 1996, and published in the Federal Register on July 15, 1996 
(61 FR 36812-36813, Docket No. 96-016-8). In an interim rule effective 
June 27, 1996, and published in the Federal Register on July 5, 1996 
(61 FR 35102-35107, Docket No. 96-016-7), we amended the regulations to 
provide compensation for certain growers and handlers, owners of grain 
storage facilities, and flour millers in order to mitigate losses and 
expenses incurred because of actions taken by the Secretary to prevent 
the spread of Karnal bunt.
    In a proposed rule published in the Federal Register on August 2, 
1996 (61 FR 40354-40361, Docket No. 96-016-10), we proposed to amend 
the regulations to establish criteria for levels of risk for areas with 
regard to Karnal bunt and for the movement of regulated articles based 
on those risk levels, and to establish criteria for seed planting. A 
rule finalizing these provisions was published in the Federal Register 
on October 4, 1996 (61 FR 52189-52213, Docket No. 96-016-14). In Docket 
No. 96-106-17, published elsewhere in this issue of the Federal 
Register, we make final the interim rule on compensation published in 
the Federal Register on July 5, 1996, and establish compensation 
provisions for handlers of wheat that was tested and found negative for 
Karnal bunt, for handlers and growers with wheat inventories for past 
crop seasons, and for participants in the National Karnal Bunt Survey 
whose wheat or grain storage facility is found positive for Karnal 
bunt.

II. Need for Regulation

    Karnal bunt is a fungal disease of wheat (Triticum aestivum), durum 
wheat (Triticum durum), and triticale (Triticum aestivum X Secale 
cereale). Upon detection of Karnal bunt in Arizona, the imposition of 
Federal quarantine and emergency actions was a necessary, short-run, 
measure taken to prevent the interstate spread of the disease to other 
wheat producing areas in the country. The intent of the quarantine was 
to immediately contain the disease in the outbreak area, so that 
eradication could be eventually

[[Page 24755]]

achieved. In dealing with a new disease outbreak, eradication is a 
reasonable first objective as long as national disease-prevalence data 
indicate that eradication remains a viable option. The establishment of 
Karnal bunt in the United States would have significant economic 
ramifications on the U.S. wheat export market, given that approximately 
50 percent of exports are to countries that maintain restrictions 
against wheat imports from countries where Karnal bunt is known to 
occur. The benefits of the regulatory program can thus be viewed as the 
avoidance of potential losses to the wheat export market in the absence 
of regulation. The economic significance of the wheat industry required 
swift and coordinated action, which in this case was most efficiently 
achieved under Federal coordination.
    Wheat intended for domestic processing and export is often blended 
at elevators to establish lots of uniform quality. Except for those 
occasions where a specific producer's wheat is processed separately 
under contract to a miller, the elevator's supply of wheat usually 
consists of a mix of many varieties from many producers and areas. For 
this reason, Federal oversight is needed to safeguard against cross-
contamination and to instill confidence from both domestic and foreign 
buyers. Thus, it is conceivable that, without Federal intervention, 
individual States and importing countries would place their own, 
perhaps more severe, restrictions on wheat shipments.
    As additional information from sampling and testing became 
available in subsequent months following the outbreak, the Agency was 
able to ease the quarantine in order to minimize disruption to affected 
entities. Those changes, which were detailed in the October 4, 1996, 
final rule, established various risk categories for wheat planting for 
the 1996-97 crop, relieving unnecessary restrictions as the regulatory 
actions that are imposed on each category are based on the level of 
risk.
    Subsequent sections of this analysis are structured as follows: 
Section III addresses the benefits of regulation to provide a 
perspective against which the regulatory policies were formed. Section 
IV addresses the impact on the affected industry of the disease and 
subsequent quarantine actions. Section V analyzes compensation the 
Agency expects to pay to partially mitigate losses caused by Agency 
actions. Section VI provides a projection of the impact in the 
regulated areas based on risk categories for wheat planting in 1996-97. 
Other alternatives to the rule are discussed in section VII. The wheat 
industry within the regulated area is composed largely of small 
entities that can be classified as small according to definitions 
established by the Small Business Administration (SBA). Thus, the 
impacts discussed throughout this analysis are directly applicable to 
small entities. As required by the Regulatory Flexibility Act, the 
characteristics of and impacts on small entities within the regulated 
areas are examined in section VIII. A summary of the analysis is 
provided in section IX.

III. Benefits of the Federal Quarantine Program

    The disease Karnal bunt causes production losses to wheat in the 
form of yield reduction due to the infestation of kernels, and 
reduction in the quality of grain. Roughly 4 percent of wheat fields in 
Arizona, and 0.04 and 14 percent of fields in Imperial and Riverside 
counties in California, respectively, were found to be infected with 
Karnal bunt.
    The most economically significant impact of the disease, however, 
is inarguably its effect on the export market. This is because about 
half of U.S. wheat exports are to countries that maintain restrictions 
against wheat imports from countries where Karnal bunt is known to 
occur.2 Eliminating the quarantine currently in place would 
jeopardize trade with those countries. Benefits of Federal quarantine, 
therefore, can be regarded largely as the avoided losses to the export 
market.
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    \2\ 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, in practice, strictly prohibit wheat imports 
from the United States. (Italy and Germany currently import wheat from 
countries where Karnal bunt is known to occur despite European Union 
regulations to the contrary). Second, while some markets would be 
captured by exports from countries that are free of Karnal bunt, U.S. 
wheat exports to countries that have no restrictions against Karnal 
bunt would likely increase. Lastly, substitution across domestic 
markets could provide added flexibility in meeting export demands. In 
the long run, the effects could be minimal depending on whether the 
market were to treat Karnal bunt as a quality issue and develop 
discounts for Karnal bunt.
    It is estimated that the impact of Karnal bunt on exports, because 
of substitution effects, would likely result in a 10-percent reduction 
in U.S. wheat exports. A decrease of 10-percent in exports would cause 
a 22-cent per bushel drop in the wheat prices and a drop in wheat 
sector income of over $500 million. The effects of decreases in wheat 
exports of various percentages are presented in Table 1.

              Table 1.--Effect of a Decrease in Wheat Exports due to Karnal Bunt, 1997/98 Crop Year             
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                                                                                  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.                    4,823,823        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.                                                                        


[[Page 24756]]

    The 1996 Federal quarantine and emergency actions served to contain 
Karnal bunt in the initial outbreak area of the Southwest United 
States. The Federal program provided assurances to wheat importing 
countries that wheat from uninfected areas were monitored for Karnal 
bunt under the National Survey program, by sampling and testing of all 
wheat fields in the United States. Countries that are willing to accept 
wheat from the affected areas are also assured that grain originating 
from those areas are tested negative twice for the disease. Through 
these means, the Federal Karnal bunt program served to maintain and 
preserve the economic viability of the U.S. wheat export.

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

    The wheat industry within the regulated area is largely composed of 
businesses who can be considered as ``small'' according to guidelines 
established by the Small Business Administration (SBA). The 
characteristics of these firms as well as other small affected entities 
are provided in detail in section VIII, the Regulatory Flexibility 
analysis of impacts on small entities. The following discussion on 
impacts is directly applicable to these entities.
    The 1995-96 Karnal bunt regulations primarily affect persons or 
entities that produce wheat in a regulated area and/or move certain 
articles associated with wheat out of a regulated area. These articles 
are subject to certain regulatory actions to minimize the risk of 
spreading the causal agent of the disease to other uninfected areas. 
Regulated articles include:
    1. Farm machinery and equipment used to produce wheat;
    2. Conveyances from field to handler, such as farm trucks and 
wagons;
    3. Grain elevators, equipment and structures at facilities that 
store and handle grain;
    4. Conveyances from handler to other marketing channels, such as 
railroad cars;
    5. Plant and plant parts, such as grain for milling, grain for 
seed, and straw;
    6. Flour and milling byproducts;
    7. Manure from animals fed wheat/wheat byproducts from quarantine 
area;
    8. Used sacks;
    9. Seed-conditioning equipment;
    10. Byproducts of seed cleaning;
    11. Soil-moving equipment;
    12. Root crops with soil;
    13. Soil.
    As part of the Karnal bunt program, grain that tests positive for 
Karnal bunt is prohibited from moving out of the regulated areas. Other 
contaminated articles must be cleaned and sanitized before such 
movement. Millfeed must be treated to render inactive any disease 
causal agent before its addition into animal feed. Grain that tests 
negative may move under limited permit to approved mills. Commercial 
seed intended for planting is prohibited movement outside the regulated 
areas. Wheat seed to be planted within the regulated areas must be 
sampled and tested for Karnal bunt, and, for seed originating in a 
regulated area, treated prior to planting. Wheat growers in New Mexico 
and Texas whose wheat fields were planted with contaminated seed were 
ordered to destroy their crops.
    These requirements have resulted in additional costs and claims of 
losses to affected individuals. Wheat producers and handlers had loss 
in market value of their grain; seed companies and researchers have had 
similar losses, including lost royalties due to the disruption in the 
development of seed varietals. Other costs were for cleaning and 
disinfecting equipment and facilities, and damages to machinery caused 
by required treatment. Some of these losses are presented in Table 2.

                               Table 2.--Impact of Karnal Bunt Quarantine Actions                               
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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                            
Cleaning/Disinfection..........   Tools and    Wheat       145         cost of  
                                  Farm Equipment       producers in RA     growers             cleaning.        
                                  Harvesters   Farmer      389         cost of  
                                                       owned and custom    combines            cleaning.        
                                                       combines                                                 
                                  Grain        Grain       976         cost of  
                                  Trucks               haulers from        trucks              cleaning.        
                                                       field to grain                                           
                                                       elevators                                                
                                  Grain        Grain       17          cost of  
                                  storage and          handling firms      elevators           cleaning.        
                                  loadout facilities                                                            
                                  Harvesters   Combine     36 to 40    Excess   
                                                       harvester owners    combines            wear and tear on 
                                                                                               equipment.       
                                  Harvesters   Combines    5 to 10     Down-time
                                                       involved in pre-    combines            on harvesters due
                                                       harvest sampling                        to field testing.
                                  Harvesters   Custom      5           Loss of  
                                                       combine companies   companies           income due to    
                                                                                               termination of   
                                                                                               contracts outside
                                                                                               the RA.          
                                  Railcars     Grain       10,880      cost of  
                                                       handling firms      cars (511 for       cleaning.        
                                                                           positive grain)                      
Restriction on Use or             KB-postive   Producers   145         Loss in  
 Marketings.                      milling wheat        Grain       growers             value of KB-     
                                                       handling firms      6           positive wheat.  
                                                                           handlers                             
                                  KB-          Producers   664         Loss in  
                                  negative milling     in RA               producers           value of KB-     
                                  wheat                Handlers    26.7        negative wheat in
                                                       in RA               million bushels     RA.              
                                  Millfeed     Millers,    108 mills   Millers  
                                                       millfeed            45,644      reluctance to    
                                                       processors          tons                mill KB-negative 
                                                                                               wheat from RA.   
                                  Movement     Seed        15          Loss in  
                                  restrictions on      producers,          producers           premiums         
                                  wheat seed           researchers, and    9           Loss in  
                                                       companies           research firms      market value     
                                                                           20 seed     Loss in  
                                                                           marketers           royalties.       

[[Page 24757]]

                                                                                                                
                                  Straw,       Straw       25          Loss in  
                                  Manure, Millfeed     producers and       growers             income           
                                                       Handlers-Users of   3           Increased
                                                       Straw               contractors         cost of          
                                                       Livestock   1 straw     production.      
                                                       producers using     user, making of                      
                                                       wheat or straw      straw mats for                       
                                                       produced in the     erosion control                      
                                                       RA                  7 millers                    
                                                       Flour       in 5 States                          
                                                       millers             2                            
                                                       Millfeed    millfeed                             
                                                       processors/users    processors                           
                                  Moratorium   Producers   109         Loss in  
                                  on wheat             with KB-positive    growers             income from      
                                  production on KB-    properties          13,674      wheat.           
                                  positive fields                          acres                                
                                  Soil on      Vegetable   Unknown     Increased
                                  root crops grown     producers on KB-    number              cost of          
                                  on infected          positive                                production.      
                                  properties           properties                                               
                                  Used seed    Seed        9           Increased
                                  sacks                research and        research firms      cost of          
                                  Seed-        marketing           20 seed     production.      
                                  conditioning         companies           marketers                            
                                  equipment                                                                     
                                  Byproducts                                                            
                                  of seed                                                                       
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RA--Regulated Area.                                                                                             

    Estimated losses in value to the affected wheat industry in the 
Southwest are discussed below. The major identified categories of 
losses include:
    Plow-down of infected fields in New Mexico and Texas;
    Loss in value of wheat testing positive for Karnal bunt for 
producers and handlers;
    Loss in value of wheat testing negative for Karnal bunt for 
producers and handlers;
    Cost of millfeed treatment;
    Cleaning and disinfecting of grain storage facilities;
    Loss in product value to handlers and growers with wheat 
inventories for past crop seasons;
    Loss in product value to participants in the National Karnal Bunt 
Survey whose wheat or grain storage facility is found positive for 
Karnal bunt;
    Loss in value of wheat seed and straw; and
    Losses Related to Cleaning and Disinfecting Combine Harvesters and 
Other Losses.
    These areas of economic loss are discussed below. Please note that 
losses have not been identified for participants in the National 
Survey, because Karnal bunt has not been discovered outside the 
original outbreak area of the Southwest. Also, losses to handlers and 
growers with wheat inventories for past crop harvest are included in 
the discussion of loss in value of negative testing grain.
    With regard to wheat inventories for past crop harvest, historical 
data and field staff observations suggest that pre-1996 produced wheat 
inventories in the quarantine areas represent a small fraction of the 
losses for negative testing grain, as leftover inventories are less 
than 5 percent of the annual production (1-2 million bushels).
    1. Order to Plow Down Fields Planted with Infected Seed at Pre-Boot 
Stage. Most of the acreage ordered to be plowed down in April 1996 was 
farm production acreage located in four counties in New Mexico (Dona 
Ana, Hidalgo, Luna, and Sierra) and in two counties in Texas (El Paso 
and Hudspeth). This acreage amounted to approximately 4,100 acres. 
Other affected acreage were small seed experimental plots in 
Washington, California, and South Dakota that totaled perhaps 50 acres 
in all.
    Many affected growers were able to plant immediately with 
vegetables and recover some losses by farming alternative crops on 
affected land. Fertilizer carry-over on destroyed wheat fields was 
possible for crops grown on affected fields. The impact on farm income 
that could have been derived from wheat, however, is uncertain, as it 
is unclear what the market returns to wheat grown on known affected 
fields would have been if the plow-down order had not occurred.
    2. Cost of Sanitizing Grain Storage. The purpose of this 
requirement was to destroy spores and thereby reduce the likelihood of 
cross-contamination of grain storage facilities that came into contact 
with infected kernals or spores. The sanitization of facilities 
involves primarily fumigation with methyl bromide. Records of APHIS 
surveys in the regulated area indicate that 16 facilities were subject 
to cleaning. The average cleaning cost of each facility is estimated at 
$16,750, for a total cleaning cost of $268,000 incurred to facility 
owners.
    3. Loss in Value of Wheat Testing Positive for Karnal Bunt. Wheat 
testing positive for Karnal bunt (either by pre-harvest sample or by 
testing at the elevator site) was required to go into sealed storage. 
This movement of wheat out of the regulated area was restricted 
(exiting only with a limited permit) and most went into local animal 
feed uses after treatment that rendered ineffective any Karnal bunt 
spore. This involved a heat-roll-flaking process commonly in use for 
small grains for feed formulas in California. Infected wheat lost value 
as it was diverted from its original purposes to the animal feed 
markets where it had to compete against lower-priced feed grains. 
Similar discounts would have likely existed in the absence of 
regulatory actions.3
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    \3\Price discounts on both KB-positive and negative wheat could 
have been greater in the absence of regulatory action. While this 
may justify the regulatory action taken, the more convincing 
evidence is the large benefits of regulations to the greater part of 
the U.S. wheat industry outside of the regulated area.
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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, with an 
estimated total loss in value of positive wheat to producers and 
handlers of $4.2 million.
    4. Loss in Value of Wheat Testing Negative for Karnal Bunt. At 
harvest, many wheat buyers refused to honor purchase contracts with 
producers for

[[Page 24758]]

their grain, most of which had been tested negative for Karnal bunt by 
pre-harvest sample. These contracts had been agreed upon before the 
discovery of the disease and the declaration of quarantine. Also, wheat 
millers inside and outside the regulated areas became reluctant to buy 
wheat from grain handlers due to the increased cost of handling wheat 
from the regulated areas. Prices for wheat produced within the 
regulated areas, therefore, dropped regardless of its disease status.
    A total of approximately 26 million bushels of KB-negative wheat 
produced in the quarantine areas apparently suffered price losses. 
Ninety-two percent of the quantity produced for domestic milling 
(approximately 13 million bushels), plus the diverted quantity of KB-
negative wheat that was originally intended to be exported (6 million 
bushels) could have experienced a price reduction. A portion of the 
remaining 7 million bushels intended for export that could not be sold 
at contract price could also experience a similar loss. We estimate 
that negative grain would suffer an average price drop of $1.10 per 
bushel. Thus, total losses due to the decline in market value of KB-
negative wheat held by producers and handlers could total $28 million. 
This amount would be reduced by the amount of grain sold on contract 
which received full contract price. Producers would not have realized 
any losses on such production. Handlers may have incurred the full drop 
in value of their wheat sales depending on their previous contract 
prices. Given that information on contracts of individual producers and 
handlers is unknown, it is estimated that $28 million is the potential 
maximum amount of economic loss due to a drop in value of uninfected 
wheat grown in the regulated area. However, the actual amount of grain 
that would experience a loss in value is expected to be lower.
    5. Cost of Millfeed Treatment. Millfeed is a byproduct of wheat 
milling (the outer husk of the wheat kernel and other byproducts from 
milling). Approximately 25 percent of the raw wheat going into milling 
comes out as millfeed, while the remaining 75 percent is converted into 
flour. The sale of this milling byproduct contributes around 10 percent 
towards their gross income from milling. With the higher likelihood of 
Karnal bunt being present in the millfeed rather than the flour, 
restrictions were placed on the movement of millfeed produced from 
wheat grown in the regulated areas. These restrictions stated that 
millfeed, before their addition into animal feeds, were to be treated 
in order to render inactive any presence of Karnal bunt spores. For 
whole wheat kernels, this normally means that wheat undergo a heating-
rolling-and-flaking process. Similar procedures, except for flaking, 
were assumed to be required in treating millfeed.
    Many animal feed manufacturers commonly heat and treat ingredients 
in their feed products. The treatment requirements would not add any 
additional costs for them. For others, that restriction would place an 
additional processing cost of around $35 per ton to their operation. 
Based on requests for compensation from millers in Minnesota, Missouri, 
Oregon, Wisconsin, and Virginia who are processing KB-negative wheat 
produced in a regulated area, we estimate the additional cost of mill 
feed treatment in response to the Karnal bunt quarantine to total $1.6 
million.
    6. Loss in Value of Seed. Under the 1996 quarantine and emergency 
actions, wheat seed produced in the regulated areas was prohibited from 
sale outside of the regulated areas. Wheat seed intended for planting 
within the regulated areas must be sampled and tested for Karnal bunt, 
and for seed originating in a regulated area, treated prior to 
planting. These restrictions are estimated to have a significant impact 
on the seed industry, largely due to the high value that is commanded 
by propagative seed. Seed companies contract with growers to produce 
seed wheat at about 30 to 50 cents per bushel premium over non-
propagative wheat. This premium reflects the added precautions in 
production to ensure seed integrity and cleanliness. These companies 
were affected by the decline in market value resulting from the 
inability to move seed out of the regulated areas. It is estimated that 
1.5 million bushels of wheat seed sustained loss in value of between $5 
and 6 million. Seed developers, who earn returns on their investment in 
research and development of wheat varieties, also claim potential long-
term losses in royalties; by receiving plant variety protection (or 
patent rights), seed developers then obtain royalties on future sales 
of wheat that are developed and sold for propagative purposes. Other 
economic losses suffered by the seed industry, but are difficult to 
quantify, include additional handling, storage, and finance costs on 
seed that could no longer be sold outside the regulated areas and costs 
to relocate wheat breeding operations outside of the regulated areas.
    7. Loss in Value of Straw. Many growers sell wheat straw to 
supplement their wheat grain income. Straw is sold for use at places 
such as racetracks, highway shoulders, feed yards, and parks for 
erosion control and to minimize muddy conditions. Wheat straw is listed 
in Karnal bunt regulations as a regulated article and is prohibited 
from being moved outside of the regulated areas. This has prevented 
many wheat straw producers from shipping their 1995-96 crop season 
straw to the intended markets. Some wheat straw was sold to alternative 
markets within the regulated areas for a lower price; other wheat straw 
was not able to be sold. These losses are estimated at about $200,000.
    8. Losses Related to Cleaning and Disinfecting Combine Harvesters 
and Other Losses. A number of costs have been claimed by about 220 
combine harvesters operating within the regulated areas, and those who 
travel outside of the regulated areas to harvest crops. These losses 
are related to the cleaning and disinfecting requirements of combine 
harvesters, which particularly affected custom harvesters who 
contracted with the Agency to do pre-harvest sampling for Karnal bunt. 
These losses involved: (1) Excess damage to machines caused by 
treatment protocols; (2) cleaning and disinfecting costs; (3) down time 
and extra operational costs associated with testing of samples and 
treatment protocols; and (4) loss of business as wheat producers inside 
and outside the regulated areas switched to custom harvesters that were 
not associated with the 1996 wheat harvest in the regulated areas. The 
most serious of these claims that can be directly attributed to the 
regulations involves the excess wear and tear due to the subsequent 
corrosion on combines that underwent extensive cleaning and 
disinfecting treatments according to protocol. The loss in value of 
these combines is estimated at $2 million.
    Other economic losses that have been claimed by affected 
individuals in the regulated areas but that are difficult to quantify 
include additional handling, storage, and finance charges incurred by 
handlers of nonpropagative wheat and various other claims by producers 
and handlers in the regulated areas such as cleaning and disinfecting 
railcars and trucks and buying wheat from alternate sources to fulfill 
contracts that originally stipulated wheat produced from the regulated 
area. The Agency continues to gather information for quantifying costs 
to seed producers and others impacted by Karnal bunt or the Agency 
programs to limit it.
    In sum, the quarantine and regulatory measures in the southwestern 
United

[[Page 24759]]

States were necessary to protect the wheat industry from a $500 million 
loss in net sector income due to a drop in wheat export. The Southwest 
produces 3 percent of the U.S. wheat supply and its share of those 
losses would have been $15 million, if the export losses were evenly 
distributed across the country. It is likely that although the export 
losses would become evenly distributed over time, the Southwest would 
suffer higher proportionate losses the first year since in the absence 
of a quarantine it would be perceived as the focus of a spreading 
infestation.
    The impact of Karnal bunt and the subsequent quarantine actions on 
market value within the regulated area, as estimated in this analysis, 
should not exceed $44 million (Table 3). As discussed in Section V 
below, $39 million in compensation has been made available through 
budget apportionment to mitigate these losses.
    While certain losses described above are clearly linked to the 
quarantine and emergency actions, it is likely that individuals 
suffering these losses alternatively would have shared the projected 
$500 million in export losses which would have occurred in the absence 
of a quarantine. The costs incurred in destroying immature wheat fields 
in New Mexico and Texas are more clearly associated with complying with 
regulatory directives. It is unlikely that producers who planted with 
suspect wheat seed would have plowed under their fields without the 
order, because unless producers surveyed their fields or tested their 
grain the disease may not have become evident until several years in 
the future. The cleaning and disinfecting protocols for grain storage 
facilities and farm equipment, which resulted in additional operating 
expenses, can also be linked to regulatory requirements.
    Regulatory requirements to sanitize railcars and treat millfeed 
caused many domestic mills to drop contracts with producers and 
handlers of grain from the affected areas, resulting in a decline in 
wheat prices within the regulated areas. In the absence of the 
regulatory requirement on millfeed, domestic wheat millers would have 
likely purchased negative-testing grain from the infected areas. 
Although some millers were reluctant, the high quality of the durum 
wheat produced within this area, coupled with a regulatory program that 
required testing, would have helped counter their reluctance. However, 
in addition to requiring testing the regulations required that millfeed 
be treated and railcars sanitized, which increased the costs of milling 
wheat from the regulated area by $35-40 per ton, and prompted many 
contracts with grain producers and handlers to be canceled.
    It is reasonable to expect, however, that in the absence of 
regulation some portion of the losses would have resulted as the market 
responded to the disease. A number of importers refused to honor 
purchase contracts with handlers for negative-testing grain. This is 
due in part to the perceived risk of the product, and also due to the 
increased costs of taking precautionary measures in handling grain from 
the infected areas. Some decline in the value of uninfected wheat 
within the regulated area would have likely occurred upon discovery of 
Karnal bunt, even if quarantine actions were not invoked. The actual 
share of losses that is directly attributable to the presence of the 
disease itself is difficult to quantify. Based upon the quantifiable 
losses calculated in this analysis, it is estimated that roughly 12 
percent of the $44 million in losses (those associated primarily with 
the plow-down, cleaning and disinfecting of storage facilities and 
combine harvesters, and treating millfeed) were incurred due to 
regulatory actions and requirements. The remaining 88 percent of the 
losses (composed of loss in value of negative-testing grain, seed and 
straw, and positive-tested wheat) occurred in the regulated area as the 
market concentrated its restrictions to those areas identified as 
having Karnal bunt.
    Based upon the export experience of this past year, it is estimated 
that 25 percent of the wheat intended for export was diverted to other 
markets because countries refused to import wheat from the regulated 
area, despite APHIS'' assurances the wheat had twice tested negative 
for Karnal bunt. These losses would have occurred if no regulations had 
been put into place and arguably more exports would have been diverted 
to other markets in the absence of regulation.

 Table 3.--Estimated Loss in Value due to Karnal Bunt Regulations, 1995-
                              96 Crop Year                              
                          [In million dollars]                          
------------------------------------------------------------------------
                                                              Estimated 
                           Action                              loss in  
                                                                value   
------------------------------------------------------------------------
1. Plowdown of NM and TX fields planted with infected seed.         $1.2
2. KB-positive grain diverted to animal feed market........          4.2
3. KB-negative grain that experience loss in value.........     \1\ 28.0
4. Cost of sanitizing storage facilities...................          0.3
5. Millfeed treatment of KB-negative grain.................          1.6
6. Loss in value of seed...................................          6.0
7. Loss in value of straw..................................          0.2
8. Loss related to cleaning and disinfecting of combine                 
 harvesters................................................          2.0
                                                            ------------
    Total..................................................        44.0 
------------------------------------------------------------------------
\1\ $28 million is the potential maximum amount of loss in value of     
  uninfected wheat.                                                     

V. Federal Compensation To Mitigate Losses

    The Karnal bunt quarantine that was initially established was 
necessarily broad due to the lack of data available at the time as to 
the extent of the infestation. The discovery of Karnal bunt and 
subsequent quarantine and emergency actions occurred after production 
and marketing decisions had been made. Producers and other affected 
individuals had little time or ability to avoid the unexpected costs or 
pass those costs on to others in the marketing chain. The impact was 
particularly severe on the wheat industry in the affected area because 
much of the crop is grown under contract at specified amounts and 
prices.
    In order to alleviate some of these hardships and to ensure full 
and effective compliance with the quarantine program, compensation to 
mitigate certain losses was offered to producers and other affected 
parties in a regulated area. The payment of compensation is in 
recognition of the fact that while benefits from regulation accrue to a 
large portion of the wheat industry outside the regulated areas, the 
regulatory burden falls predominantly on a small segment of the 
affected wheat industry within the regulated area.
    For the 1996 wheat crop, $39 million in compensation funding, 
including pending compensation actions, has been made available to USDA 
through budget apportionment.
    The Agency has identified three principles for deciding whether to 
provide compensation. First, compensation may be appropriate where 
quarantine and emergency actions cause losses over and above those that 
would result from the normal operation of market forces. Payment of 
compensation would reflect the

[[Page 24760]]

incremental burdens of complying with regulatory requirements insofar 
as market forces would not otherwise impose similar or analogous costs. 
Second, compensation may be appropriate where parties undertake actions 
that confer significant benefits on others. Under this principle, 
payment of compensation would be intended to overcome the usual 
disincentives to produce such benefits. Third, compensation may be 
appropriate where a small number of parties necessarily bears a 
disproportionate share of the burden of providing such benefits. This 
principle rests on the widely shared belief that burden-sharing is a 
fundamental principle of equity.
    The Agency compensation plan for Karnal bunt proceeds from these 
three principles. Individual decisions regarding what specific losses 
to compensate and how much compensation to offer in each case were made 
in line with the above basic principles which describe the goals of 
compensation. A top equity priority was compensation for costs of 
plowing down fields, and for wheat and other articles the Agency 
ordered destroyed or prohibited movement. Compensation amounts took 
into account the need to mitigate real losses caused by the 
regulations, so that regulated parties would not have a strong economic 
incentive to avoid compliance. At the same time, amounts were not set 
at a high enough rate to establish a ``bounty'' that would encourage 
fraudulent claims or behavior that would result in increases in 
contaminated wheat or other articles eligible for compensation.
    The compensation committed to date for the 1995-96 crop year, as 
published as an interim rule in the Federal Register on July 5, 1996, 
and adopted in a final rule published in this issue of the Federal 
Register, included compensation for:
     Plow-down of infected fields in New Mexico and Texas;
     Loss in value of wheat testing positive for Karnal bunt 
for producers and handlers;
     Loss in value of wheat testing negative for Karnal bunt 
for producers and handlers;
     Cost of millfeed treatment;
     Cleaning and disinfecting of grain storage facilities;
     Compensation for handlers and growers with wheat 
inventories for past crop seasons;
     Compensation for participants in the National Karnal Bunt 
Survey whose wheat or grain storage facility is found positive for 
Karnal bunt.
    These areas of compensation are discussed below. Please note that 
compensation has not been necessary for participants in the National 
Survey, because Karnal bunt has not been discovered outside the 
original outbreak area of the Southwest. Also, losses to handlers and 
growers with wheat inventories for past crop harvest are included in 
the discussion of loss in value of negative testing grain.
    To offset for costs related to the plow-down, compensation was 
offered to 74 producers to cover the $25 per acre plowing cost plus the 
$275 per acre in average cost of production expenses (up until the time 
the crop was destroyed). In total, these producers received 
compensation of $1.02 million to cover operating costs incurred for 
growing wheat.
    Compensation is committed to owners of contaminated grain storage 
facilities on a one-time only basis for up to 50 percent of the cost of 
decontamination, not to exceed $20,000. Total cost of compensation, as 
of March 14, 1997, is estimated at $134,000, with an average 
compensation per facility of $8,375.
    The total compensation expected to be paid for the loss of value of 
both KB positive wheat and KB negative wheat from the regulated areas 
is approximately $25 million. Compensation paid as of March 14, 1997, 
is estimated at $12,409,000. The categories of wheat eligible for 
compensation are discussed below.
    Program guidelines limited maximum compensation rates for KB 
positive wheat to $2.50 per bushel; producers were asked to establish 
financial losses by calculating the difference between their contract 
price and actual prices received (if production was pre-contracted) or 
the difference between the estimated market value in May-June 1996 and 
their actual prices received (if production was not pre-contracted). 
Handlers were limited by the same maximum compensation amount, but 
determination of financial loss was based on the difference between 
their wheat purchase price and a $3.60 per bushel salvage value. They 
may have had additional costs to sort and treat their KB-positive wheat 
(after finding their KB-negative wheat was, in fact, KB-positive). 
Moreover, many handlers were reluctant to accept wheat from affected 
areas. This expedited procedure was offered to handlers in order to 
reduce administrative and recordkeeping costs by not addressing their 
losses on a contract-by-contract basis. It provided assistance that 
avoided a market collapse.
    For those growers who grew wheat under contract but who did not 
receive full contract price, compensation for loss in value of wheat 
testing negative for Karnal bunt is made based on the difference 
between the contracted price and the higher of the actual price 
received by the producer or the salvage value. (Salvage value was to 
equal whichever price was higher of the following: The average price 
paid in the region of the regulated area where the wheat was sold for 
the period between May 1 and June 30, 1996; or $3.60 per bushel.)
    Compensation for growers of nonpropagative wheat not grown under 
contract is based on the difference between the estimated market price 
for the relevant class of wheat and the higher of the actual price 
received or its salvage value. (Salvage value was to be the same as 
above for contracted wheat.) The estimated market price is what the 
market price would have been if there were no quarantine for Karnal 
bunt, and is calculated for each class of wheat, taking into account 
the prices offered by relevant terminal markets (animal feed, milling, 
or export) for the period between May 1 and June 30, 1996, with 
adjustments for transportation and other handling costs. The 
compensation formula for negative grain would suggest an average price 
drop of $1.10 per bushel.
    In order to encourage wheat marketings from the regulated areas and 
reassure millers that they would not incur any additional costs in 
handling uninfected wheat from a regulated area, a $35 per ton cost 
offset for heat treatment was offered to millers using KB-negative 
wheat produced in a regulated area. As of March 14, 1997, 108 requests 
have been made from millers in Minnesota, Missouri, Oregon, Wisconsin, 
and Virginia for a total of $1.7 million.
    It should be noted that, as stated in the interim rule of July 5, 
1996, the Agency is developing a compensation plan for the loss in 
value of 1995-96 crop season seed. This plan will be published in a 
future edition of the Federal Register. Compensation for loss in income 
due to the restrictions placed on movement of straw and damaged custom 
harvesters will also be addressed in a future edition of the Federal 
Register.
    Compensation payments for loss in value, while not accounting for 
every loss or expense due to the disease or regulation, limited the 
adverse impact on wheat sector income of affected individuals within 
the regulated areas. The final amount of compensation for grain testing 
negative and for millfeed treatment will depend on the marketing 
distribution of the 1996 wheat crop and

[[Page 24761]]

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

VI. Conditions for Wheat Production and Utilization in a Regulated Area 
for the 1996-97 Crop Year

    Based upon survey data identifying the location of fields that have 
tested positive, the regulations in effect during the 1996 harvest were 
modified in 1997 for some areas within the initial quarantine. The 
final rule published on October 4, 1996, set forth criteria by which 
fields in regulated areas would be classified into two risk classes in 
the 1996-97 crop year. The effects of being classified in a particular 
category are outlined in Table 4.
    In each regulated area, all or a portion of that regulated area is 
designated as either being a restricted area or a surveillance area. 
There are two differences between being designated a restricted area 
and a surveillance area. First, grain from a restricted area that tests 
negative for Karnal bunt may move under a limited permit from the 
regulated area to designated facilities under safeguard and sanitation 
conditions; grain from a surveillance area that tests negative for 
Karnal bunt may move under a certificate to any destination without 
restriction. Additionally, millfeed from grain produced in a restricted 
area is required to be treated, whereas millfeed from grain produced in 
a surveillance area is not required to be treated.
    Each restricted and surveillance area is further divided into 
individual fields within the respective areas. Each field within a 
restricted area will fall into one of three categories: (1) A field in 
which preharvest samples tested positive; (2) a field planted with 
known contaminated seed in 1995; or (3) any other field within the 
restricted area. In a surveillance area, each field will be designated 
as (1) a field planted with known contaminated seed in 1995; or (2) any 
other field in the surveillance area. In a restricted area, in fields 
in which preharvest samples tested positive, no Karnal bunt host crops 
may be planted in the 1996-97 crop season. The same prohibition applies 
to fields in both restricted areas and surveillance areas which were 
planted with known contaminated seed in 1995. Also, as noted above, 
millfeed from grain from a field in the ``any other field'' category in 
a restricted area must be treated; millfeed from a surveillance area 
need not be treated.

                                      Table 4.--Conditions for Wheat Production and Utilization in a Regulated Area                                     
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Disposition of
                                  Definition       Host planting         Seed         Decontamination      Millfeed          Survey           grain     
--------------------------------------------------------------------------------------------------------------------------------------------------------
Restricted Area Category:                                                                                                                               
    1........................  Fields in which   No host planting  N/A.............  Equipment         N/A............  N/A............  N/A.           
                                preharvest        in 1996-97 crop                     movement                                                          
                                samples tested    season.                             outside                                                           
                                positive.                                             regulated area:                                                   
                                                                                      cleaned and                                                       
                                                                                      sanitized.                                                        
                                                                                      Movement                                                          
                                                                                      within: no                                                        
                                                                                      restrictions.                                                     
    2........................  Fields planted    No host planting  N/A.............  Equipment         N/A............  N/A............  N/A.           
                                with known        in 1996-97 crop                     movement                                                          
                                contaminated      season.                             outside                                                           
                                seed in 1995.                                         regulated area:                                                   
                                                                                      cleaned and                                                       
                                                                                      sanitized.                                                        
                                                                                      Movement                                                          
                                                                                      within: no                                                        
                                                                                      restrictions.                                                     
    3........................  All other fields  No restrictions.  Tested and, if    Equipment         Required,        Double tested:   Movement of    
                                within                              from regulated    movement          unless           Sampled in       grain testing 
                                restricted area.                    area, treated     outside           destination      field at         positive      
                                                                    prior to          regulated area:   State controls   harvest;         restricted;   
                                                                    planting only     cleaned and       disposition /    composite        grain testing 
                                                                    within            sanitized.        movement.        sample prior     negative may  
                                                                    regulated area.   Movement                           to movement.     move under    
                                                                                      within: no                                          limited permit
                                                                                      restrictions.                                       to designated 
                                                                                                                                          facilities    
                                                                                                                                          under         
                                                                                                                                          safeguard and 
                                                                                                                                          sanitation    
                                                                                                                                          conditions.   
Surveillance Area:                                                                                                                                      
    4........................  Fields planted    No host planting  N/A.............  Equipment         N/A............  N/A............  N/A.           
                                with known        in 1996-97 crop                     movement                                                          
                                contaminated      season.                             outside                                                           
                                seed in 1995.                                         regulated area:                                                   
                                                                                      cleaned and                                                       
                                                                                      sanitized.                                                        
                                                                                      Movement                                                          
                                                                                      within: no                                                        
                                                                                      restrictions.                                                     

[[Page 24762]]

                                                                                                                                                        
    5........................  All other fields  No restrictions.  Tested and, if    Equipment         Not required...  Double tested:   Movement of    
                                located in                          from regulated    movement                           Sampled in       grain testing 
                                definable area                      area, treated     outside                            field at         positive      
                                where no fields                     prior to          regulated area:                    harvest;         restricted;   
                                in risk level 1                     planting only     cleaned and                        composite        grain testing 
                                are located.                        within            sanitized.                         sample prior     negative may  
                                                                    regulated area.   Movement                           to movement.     move under    
                                                                                      within: no                                          certificate.  
                                                                                      restrictions.                                       Safeguard and 
                                                                                                                                          sanitation of 
                                                                                                                                          railcars not  
                                                                                                                                          required.     
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The number of wheat acres that is estimated to fall into the 
various risk categories in the 1996-97 crop season is presented in 
Table 5. The amount of wheat acres in the regulated area is estimated 
to be greatly reduced from the previous years largely due to factors 
affecting the wheat industry as a whole (in particular, the projected 
decline in export demand for U.S. wheat). Wheat acres are estimated to 
decline by 36 percent in the regulated areas of Arizona, an average of 
24 percent in the three affected counties of California, and 20 percent 
each in New Mexico and Texas.

                                        Table 5.--Projected 1997 Regulated Wheat Acreage, by Risk Categories \1\                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          California                                                    
                                                                           ---------------------------------------                                      
                        Risk category                            Arizona      Imperial      Bard/                   New Mexico     Texas     Total acres
                                                                               Valley    Winterhaven     Blythe                                         
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(6)Acres                                                                                                                                                
                                                              ------------------------------------------------------------------------------------------
Restricted Area..............................................        9,200  ...........           40          450        3,239          494       13,423
Surveillance Area............................................      105,800       90,000        3,960        4,050        4,128        3,906      211,844
                                                              ------------------------------------------------------------------------------------------
    Total 1997 Regulated Area................................      115,000       90,000        4,000        4,500        7,367        4,400      225,267
                                                              ==========================================================================================
    1996 Regulated Area......................................      180,000      106,592        8,909       14,000        9,209        5,494      324,204
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimates obtained from the Karnal Bunt Task Force, Arizona.                                                                                        

    Overall, the impact of the Karnal bunt restrictions is likely to be 
lessened for many growers and other individuals, as a large portion of 
the regulated acres falls into the less restrictive surveillance 
category. Additionally, an interim rule published in the Federal 
Register on May 1, 1997 (Docket No. 96-016-19, 62 FR 23620-23628), 
established a new standard for defining regulated areas for Karnal bunt 
based on finding bunted wheat kernals rather than just spores. That 
interim rule substantially reduced the size of the harvested wheat area 
regulated for Karnal bunt, in addition to the market-based decline in 
wheat acres in the regulated areas above. Wheat production can still 
occur on fields in the regulated areas (in restricted category 3), on 
land which was not previously planted with wheat in 1996. Growers who 
choose to plant wheat in these areas are minimally restricted by 
regulations as grain that tests negative for Karnal bunt can move under 
limited permit to designated facilities.
    Approximately 10,000 acres in risk categories 1 and 4 are 
prohibited from planting wheat. The value of wheat production that 
could have been harvested from these fields, calculated at an average 
price for durum wheat before the disease outbreak of $5.50 per bushel, 
would have been less than $6 million.4 The impact on growers 
with fields in these categories, however, is uncertain. While the 
restrictions deny income that could be earned from wheat, they do not 
preclude the planting of other non-host crops, such as barley, alfalfa, 
cotton, and vegetables. In many of the infected areas, especially on 
irrigated operations, wheat is either double-cropped or grown on 
rotation with other non-host crops. The impact on producers in these 
risk categories would therefore be minimized with rotation. Barley 
would likely be grown on these fields: county crop budget data from 
Arizona indicate that, except for barley, the historical net returns 
obtained from wheat production are actually lower than the net returns 
for all other crops.5
---------------------------------------------------------------------------

    \4\ The estimate is based on an average yield of 100 bushels per 
acre for durum wheat produced in the desert Southwest.
    \5\ Other rotational crops include alfalfa hay, sudan hay, 
upland and pima cotton, safflower, and lettuce.
---------------------------------------------------------------------------

    It should be noted that changes in the compensation plan to 
remunerate for certain losses are being developed and will be published 
in a future edition of the Federal Register. Information received 
through public comments and other forums is invaluable in refining 
regulatory policies regarding Karnal bunt. With no prior experience in 
regulating the disease, the improvement of the Karnal bunt program 
requires ongoing input from the public. This process will enable the 
Agency to better protect the wheat growing areas of the United States, 
while causing the least possible disruption to the affected areas.

[[Page 24763]]

VII. Consideration of Alternatives to the Rule

    A number of alternatives to the quarantine were considered by the 
Agency in controlling the disease outbreak. One alternative was to 
limit the scope of the 1996 quarantine by regulating only fields that 
tested positive for Karnal bunt. This option was rejected for the 
following reasons. Karnal bunt was originally detected in many 
certified wheat seed lots produced in Arizona, as well as in some grain 
in storage from a previous harvest. The information available to the 
Agency indicated that seed from the infected lots were planted widely 
in parts of Arizona and California, and in a few counties in Texas and 
New Mexico. This infected seed could not be traced to specific fields 
because the process of seed certification in Arizona allows seed from 
different fields to be commingled in making a seed lot. Because Karnal 
bunt spores can remain viable in soil for as long as 4 to 5 years, and 
because wheat is planted in rotation in the Southwest, the actual 
infestation would not be apparent until fields came into rotation with 
wheat. Moreover, the detection of Karnal bunt spores in some grain in 
storage from the 1993 harvest indicated that the disease had been 
present for at least several years. Given that there is currently no 
feasible soil test, the disease, in this situation, could only be 
detected as wheat is planted. The unknown extent of the infestation in 
Arizona and California necessitated broader control actions than those 
offered by quarantining infected fields. In New Mexico and Texas, where 
wheat acreage planted with suspect seed was limited and the wheat crop 
was immature, regulatory actions were directed at plow-down of those 
fields.
    Another alternative available to the Agency would be not to 
quarantine. This alternative was rejected as it could not be justified 
given the risk of spread of Karnal bunt to uninfected areas and the 
potential for significant losses in the wheat export market. The 
quarantine actions to prevent disease spread serve to instill domestic 
and foreign consumer confidence in the integrity of U.S. wheat. The 
1995-96 Karnal bunt program provided pre-harvest sampling of all wheat 
fields; compensation for losses as a result of Agency actions; and 
remuneration to offset part of the additional costs in handling and 
treating wheat produced in the regulated area (through a millfeed cost 
offset and a cost-share facility clean-up program with grain handlers). 
Without Federal intervention, it is conceivable that farm income of 
wheat producers both within the affected area, and outside the 
regulated area, would have been more negatively impacted. Therefore, it 
is also conceivable that Federal intervention to prevent the spread of 
KB beyond the regulated areas and to identify the KB status of acres 
within the regulated areas may have had a salutary effect on the market 
and a beneficial impact on prices both within and outside the regulated 
areas.
    When the treatment protocols for regulated articles were 
established, few options to the requirements were made available to 
affected wheat growers, handlers, and combine owners. These specific 
protocols were based on the best scientific information available on 
disease management in other countries affected by Karnal bunt. 
Furthermore, the decision to require millfeed treatment, as with other 
treatment requirements, was based on risk assessments that were 
conducted to determine the acceptable level of risk of the various 
modes of transportation of the disease. Compensation is thus being 
considered to offset unanticipated losses and damages caused by the 
regulatory requirements.

VIII. Regulatory Flexibility Analysis--Impacts on Small Entities Within 
the Regulated Area

    The Regulatory Flexibility Act requires that agencies assess the 
impact of regulations on small businesses, organizations, and 
governments. A majority of the firms in the affected area can be 
classified as small based on criteria established by the Small Business 
Administration (SBA). Much of the analysis on impacts discussed in the 
previous sections are therefore applicable to these firms. Unless 
otherwise noted, the SBA's characterization of a small business for the 
categories of interest in this analysis is a firm that employs at most 
500 employees, or has sales of $5 million or less. The SBA defines a 
``small'' wheat producer as having sales of less than $500,000.
    In addition to private businesses that produce and handle grain in 
the regulated area, there were a number of other parties, such as 
governmental and quasi-governmental entities and industry 
organizations, that were also affected by the quarantine. For example, 
farm organizations that represented producer interests were impacted by 
the reduced activity due to a change in farm receipts. Local 
governments may also have experienced a change in the business activity 
level, and thus tax receipts, due to lower farmer spending. Seed 
certification boards are expected to see lower levels of seed 
certification as the demand for seed is reduced. State and county 
departments of agriculture could also have experienced increased 
financial burdens as regulatory responsibilities related to Karnal bunt 
surveillance and protocol monitoring increased on the local level. The 
magnitude of these effects, however, are not quantifiable. The 
information below describes the number of firms affected and provides 
insight into the impact on small entities due to Federal regulations.
    Number of Producers and Acreage in Regulated Area (RA): There were 
5,657 farms in the counties of the RA as reported in 1992 with 
1,501,089 acres.6 About \1/3\ of the reported total acreage 
was irrigated. There were 598 wheat growers in the counties of the RA: 
236 in California (out of 2,236 wheat growers in the State); 310 in 
Arizona; 40 in New Mexico (out of 892 in the State); and 12 in Texas 
(out of 14,877 in the State). Total wheat acreage reported in these 
counties in 1992 was 176,753 acres producing 13.3 million bushels. 
Wheat acreage represented less than 12 percent of total farm acreage.
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    \6\ Source: 1992 Census of Agriculture.
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    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.
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    \7\ Source: Economic Research Service, Characteristics and 
Production Costs of U.S. Wheat Farms, 1989, October, 1993.
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    Of the total 598 wheat farms in the counties of the RA, 577 (or 
96.5 percent) were growing wheat on irrigated fields. Of the 598 wheat 
producers in the RA, 86 percent of producers harvested 499 acres or 
less of wheat. These 514 wheat producers are assumed to be classified 
in the SBA business classification as

[[Page 24764]]

being ``small entities.'' It is assumed that the other 84 growers are 
excluded from this business classification. Wheat growers in the RA 
typically lack on-farm storage.
    Acreage Affected: By 1995/96, the amount of planted wheat acreage 
in the counties of interest had increased; the total number of growers 
in the RA was reported at 882 growers (455 in Arizona, 354 in 
California, 72 in New Mexico, and 1 in Texas), with wheat acreage 
totaling over 300,000 acres. Approximately 145 growers were found to 
have grown KB-positive wheat, and 73 growers were issued plow-down 
orders. As a percentage of the total in the four States of the RA, 
quarantine actions affected less than 3.3 percent of producers, 3.75 
percent of wheat acreage, but almost 8 percent of wheat production.
    Based on the SBA's size definition, 86 percent of producers (514 
out of 598) are assumed to be classified within the small business 
category. Thus, the major part of any impact from Karnal bunt or Karnal 
bunt regulations is assumed to fall on these individuals.
    Harvesters: Harvesting equipment is expensive and specialized for 
many agricultural crops. With a cost of over $130,000 for a new combine 
and only a limited time of use, many wheat growers in the regulated 
area depend on custom operators or ``custom cutters'' to harvest their 
wheat crop. It is estimated that about 390 combines were needed to 
harvest the 1995/96 wheat crop in the regulated area, with much of it 
being supplied by custom cutters. There were probably 20 to 30 firms 
engaged in this business activity (not including individuals who may 
have done some custom cutting of neighboring properties). All firms are 
assumed to be classified in the SBA classification as being a ``small 
business.'' It is assumed that only a few of these firms, namely those 
that were subjected to extensive cleaning and disinfection if they had 
harvested many KB-positive fields, suffered losses to their machinery 
as a result of quarantine actions. Additional losses occurred because 
some harvesters were not allowed to bring their equipment to certain 
States.
    Wheat Seed Dealers: Wheat seed dealers sell seed to growers to 
produce their crop for milling. They also represent seed wheat research 
firms in that they sell wheat seed that is grown to be used as seed for 
the next growing season or for export. This wheat seed is called 
private variety seed as it was developed by a private firm and has a 
plant variety protection ``patent'' on that variety. There are 
approximately 25 to 30 seed marketing firms in the RA; some specialize 
in acquiring seed production from the RA for export. Probably 3 to 4 
seed wheat dealers have over 80 percent of the seed business in the RA. 
These firms were affected by quarantine actions, i.e. by the 
restriction on selling or transferring seed out of the RA. Some of 
these firms derive their income from other enterprises such as 
vegetable production, rather than solely from wheat production and 
marketing. The number of firms that can be classified as ``small'' 
cannot be determined due to the proprietary nature of sales records.
    Seed Wheat Research Firms: Seed wheat research firms take the risk 
and have the expertise to develop new wheat varieties for future use. 
Many develop a relationship with a seed wheat dealer (who is then 
called an ``associate'') to market the developers' specific varieties. 
Seed wheat research firms use seed production in the RA as a basis for 
seed to be used in climates similar to the RA, e.g. the Mediterranean, 
or use production in the RA as seed increases'' to be used in Northern 
climates the following spring. There are approximately 5 to 9 
commercial seed wheat research firms engaged in the RA, with perhaps 3 
to 4 major firms conducting over 70 percent of research activity. Also, 
there are small firms in the RA that specialize in ``seed increases'' 
for varieties being developed by universities, private companies, and 
foreign countries. The number of firms that can be classified as 
``small'' according to SBA standards cannot be determined due to the 
proprietary nature of sales records.
    Custom Haulers: There are approximately 130 to 140 individuals in 
the RA that haul grain from fields directly after harvest to storage 
and load-out locations (referred to as grain handlers). Some of these 
individuals also haul farm machinery from field to field to prepare or 
harvest wheat and other crops. The number of firms that can be 
categorized as a ``small business'' is unknown.
    Grain Handlers: Grain handlers store and unload nonpropagative 
wheat received from growers. Wheat is received by trucks, pickups, and 
farm tractors pulling either grain buggies or farm wagons. Ownership of 
the wheat is usually transferred from the grower to the grain handler. 
It is estimated that there are 92 such assembly sites in the RA (50 in 
Arizona, 33 in California, 8 in New Mexico, and 1 in Texas). Off-farm 
storage capacities are only available on a State-wide basis 
8: Arizona (22.3 million bushels), California (98.04 million 
bushels), New Mexico (15.63 million bushels); and Texas (840.2 million 
bushels). The SBA defines a small grain elevator as one that employs 
fewer than 100 employees. It is estimated that nearly all of the 
elevators in the regulated areas can be classified as ``small.''
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    \8\ Source: Grain and Milling Annual 1996. Off-farm capacities 
may also reflect storage capacities of millers.
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    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.
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    \9\ See footnote 8.
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    Prepared Feed Manufacturers: The number of animal feed 
manufacturers and/or millfeed processors in the Riverside-San 
Bernardino primary metropolitan statistical area (PMSA) is 15, and 
there are 11 in Arizona.10 Only 12 of these 26 
establishments employed over 20 employees. The Riverside-San Bernardino 
PMSA data indicates that the 15 establishments in that area 
collectively employed a total of 600 workers with a $20.5 million 
payroll (8 establishments of the 15 employed more than 20 employees). 
Based on these data, it is estimated that these larger firms employ 
about 62 workers on average and smaller firms had 15 workers per firm. 
Similar data for Arizona show that 4 of the 11 establishments in that 
State employed more than 20 employees. Given these scant data and SBA's 
definition of a ``small business'' in this group (SIC 2048)--i.e., an 
establishment with fewer than 500 employees--it is assumed that all 
firms fall in SBA's ``small'' business category.
---------------------------------------------------------------------------

    \10\  Source: U.S. Department of Commerce, Economics and 
Statistics Administration, Bureau, Bureau of Census, various State 
reports on California and Arizona, Manufacturers--Geographic Area 
Series, 1992.
---------------------------------------------------------------------------

    Feedlots: It is estimated that about 24 feedlots in the RA 
(presumably feeding beef cattle) were affected by the regulations. They 
were found in Arizona (16), New Mexico (3), and California (5). SBA's 
definition of a ``small business'' in this group (SIC 0211) is an 
establishment with sales less than $1.5

[[Page 24765]]

million. No sales data on these firms were available, so it is not 
possible to estimate the number of firms that do not fall in SBA's 
small business category.
    Based on the above information, we have concluded that the majority 
of the impact of Karnal bunt and subsequent regulations falls on small 
businesses. It is conceivable, however, that without Federal 
intervention, individual States and importing countries would place 
their own, perhaps more severe, restrictions on wheat shipments from 
the regulated areas. The 1996 Karnal bunt program provided pre-harvest 
sampling of fields and other measures to ensure the quality of wheat 
from the regulated areas. The use of limited permits for uninfected 
wheat further facilitated the marketing flow of wheat, thereby enabling 
the wheat industry within the regulated areas to be preserved.

IX. Summary and Conclusions

    The imposition of quarantine and emergency actions against Karnal 
bunt was a necessary, short-run measure taken to prevent the artificial 
spread of the disease to other wheat-producing areas in the United 
States. The establishment of Karnal bunt would have had serious adverse 
impact on the wheat export market, as over half of U.S. wheat exports 
are to countries that maintain restrictions against imports from 
countries where Karnal bunt is known to occur. In the absence of 
regulatory action, it is conceivable that farm income both within and 
outside the regulated areas could have been further jeopardized.
    Given the regulatory objective of disease eradication, the 
quarantine measures to control a new disease outbreak such as Karnal 
bunt is necessarily broad due to the lack of information on the extent 
of the outbreak. These actions, enacted after production and marketing 
decisions were in place, undoubtedly had an adverse impact on growers 
and other affected individuals; many were likely unable to recover 
unexpected costs. The loss in market value due to the quarantine is 
estimated at $44 million. The majority of affected individuals and 
firms can be classified as ``small'' based on criteria established by 
the Small Business Administration.
    In order to reduce the economic impact of the quarantine on 
affected wheat growers and other individuals, compensation was provided 
to mitigate certain losses and expenses. The payment of compensation is 
in recognition of the fact that while a large portion of the benefits 
of regulation accrue to others outside the regulated area, the 
regulatory burden falls disproportionately on a small segment of the 
industry. Indeed, it could be argued that without compensation, the 
regulatory actions would not have been economically justified, as the 
costs of disease control that are borne now could have a greater weight 
than benefits that are received in the future.
    Based upon our analysis, we have concluded that our quarantine 
measures were appropriate and justifiable when compared with the 
magnitude of the benefits achieved. Even a 10-percent reduction in 
wheat exports would have a significant effect on wheat sector income. 
It is estimated that a 10-percent decrease in U.S. wheat exports would 
cause a decline in wheat sector income of over $500 million.
    As of April 4, 1997, $39 million in compensation funding has been 
made available to USDA through budget apportionment. While not 
accounting for every loss or expense due to the disease or regulation, 
compensation for loss in value lessened the adverse impact on wheat 
sector income within the regulated areas.
    As more information is obtained on disease prevalence, the number 
of regulated acres are reduced and restrictions for the 1996-97 crop 
season are modified to be commensurate with the level of risk. The 
impact on those that are affected by regulation would also likely be 
reduced; unlike in 1996, the 1997 restrictions on wheat planting are 
known in advance and can, therefore, be taken into account when 
cropping decisions are made.
    Wheat acreage in the regulated areas is projected to decline from 
1995-96 levels, largely due to decreased demand for U.S. wheat exports. 
Less than 5 percent of the acres in the regulated areas is prohibited 
from planting wheat. The impact on farm income due to this prohibition 
is uncertain, as wheat is normally rotated with other crops. Overall, 
the impact of the Karnal bunt restrictions on wheat production in the 
regulated areas is likely to be small, as wheat can still be grown on 
ample, available land that was not planted with wheat in 1996.

    Done in Washington, DC, this 30th day of April 1997.
Donald W. Luchsinger,
Acting Administrator, Animal and Plant Health Inspection Service.
[FR Doc. 97-11718 Filed 5-1-97; 11:27 am]
BILLING CODE 3410-34-P