[Federal Register Volume 65, Number 3 (Wednesday, January 5, 2000)]
[Proposed Rules]
[Pages 672-680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-203]
[[Page 671]]
Part V
Department of Agriculture
_______________________________________________________________________
Agricultural Marketing Service
_______________________________________________________________________
7 CFR Part 930
Tart Cherries Grown in the States of Michigan, New York, Pennsylvania,
Oregon, Utah, Washington and Wisconsin; Recommended Decision and
Opportunity To File Exceptions; Proposed Rule
Federal Register / Vol. 65, No. 3 / Wednesday, January 5, 2000 /
Proposed Rules
[[Page 672]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 930
[Docket Nos. AO-370-A6; FV98-930-2]
Tart Cherries Grown in the States of Michigan, New York,
Pennsylvania, Oregon, Utah, Washington and Wisconsin; Recommended
Decision and Opportunity To File Written Exceptions to Proposed
Amendment of Marketing Agreement and Order No. 930
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule and opportunity to file exceptions.
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SUMMARY: This recommended decision invites written exceptions on
proposed amendments to the marketing agreement and order for tart
cherries grown in Michigan, New York, Pennsylvania, Oregon, Utah,
Washington and Wisconsin. The amendments were proposed by the Cherry
Industry Administrative Board (Board), which is responsible for local
administration of the order. One amendment would clarify the current
limitation on the number of Board members that may be from, or
affiliated with, a single ``sales constituency'' by amending the
definition of that term. Another would simplify the method used to
establish volume regulations for tart cherries. The proposed amendments
are intended to improve the operation and functioning of the tart
cherry marketing order program.
DATES: Written exceptions must be filed by February 4, 2000.
ADDRESSES: Written exceptions should be filed with the Hearing Clerk,
U.S. Department of Agriculture, room 1081-S, Washington, DC 20250-9200,
FAX number (202) 720-9776. Four copies of all written exceptions should
be submitted and they should reference the docket numbers and the date
and page number of this issue of the Federal Register. Exceptions will
be made available for public inspection in the Office of the Hearing
Clerk during regular business hours.
FOR FURTHER INFORMATION CONTACT: Anne M. Dec, Marketing Order
Administration Branch, Fruit and Vegetable Programs, AMS, USDA, room
2525-S, Washington, D.C. 20250-0200; telephone: (202) 720-2491, or Fax:
(202) 720-5698. Small businesses may request information on compliance
with this regulation by contacting Jay Guerber, Marketing Order
Administration Branch, Fruit and Vegetable Programs, AMS, USDA, P.O.
Box 96456, room 2525-S, Washington, DC 20090-6456; telephone (202) 720-
2491; Fax (202) 720-5698.
SUPPLEMENTARY INFORMATION: Prior document in this proceeding: Notice of
Hearing issued on November 12, 1998, and published in the November 17,
1998, issue of the Federal Register (63 FR 63803).
This administrative action is governed by the provisions of
sections 556 and 557 of Title 5 of the United States Code and,
therefore, is excluded from the requirements of Executive Order 12866.
Preliminary Statement
Notice is hereby given of the filing with the Hearing Clerk of this
recommended decision with respect to the proposed amendment of
Marketing Agreement and Order No. 930, regulating the handling of tart
cherries in Michigan, New York, Pennsylvania, Oregon, Utah, Washington
and Wisconsin (hereinafter referred to as the order), and the
opportunity to file written exceptions thereto. Copies of this decision
can be obtained from Anne M. Dec whose address is listed above.
This action is issued pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601
et seq.), hereinafter referred to as the ``Act,'' and the applicable
rules of practice and procedure governing the formulation of marketing
agreements and orders (7 CFR part 900).
The proposed amendment of Marketing Agreement and Order No. 930 is
based on the record of a public hearing held in Grand Rapids, Michigan
on December 1, 1998, and in Salt Lake City, Utah on December 3, 1998.
Notice of this hearing was published in the Federal Register on
November 17, 1998. The notice of hearing contained proposals submitted
by the Board.
The Board proposed two amendments. One would amend the current
order provision which defines the term ``sales constituency'' in order
to clarify the intent of the Board membership limitation regarding
sales constituency affiliation. The second would simplify the method
used to establish volume regulations for tart cherries.
Also, the Fruit and Vegetable Programs of the Agricultural
Marketing Service (AMS), proposed to allow such changes as may be
necessary to the order, if either or both of the above amendments are
adopted, so that all of its provisions conform with the proposed
amendment.
Eighteen witnesses testified at the hearing. These witnesses
represented tart cherry growers, processors and marketers in Michigan,
Oregon, Washington and Utah. Some witnesses supported the Board's
proposed amendments, while others were opposed to the recommended
changes.
At the conclusion of the hearing, the Administrative Law Judge
fixed February 11, 1999, as the final date for interested persons to
file proposed findings and conclusions or written arguments and briefs
based on the evidence received at the hearing. That date was later
extended to February 26, 1999. Six briefs were filed. Briefs in support
of the proposed amendments were filed by the Cherry Industry
Administrative Board; Michigan grower Cherry Bay Orchards, Inc.; and
CherrCo, Inc. of Ludington, Michigan. Briefs in opposition to one or
both of the proposed amendments were filed by Oregon grower Fruithill,
Inc.; the Oregon Tart Cherry Association; and Washington grower
Washington Tart Cherry.
Material Issues
The material issues of record addressed in this decision are as
follows:
(1) Whether to clarify the current limitation on the number of
Board members that may be from, or affiliated with, a single ``sales
constituency'; and
(2) Whether to simplify the method used to establish volume
regulations for tart cherries.
Findings and Conclusions
The findings and conclusions on the material issues, all of which
are based on evidence presented at the hearing and the record thereof,
are:
Material Issue Number 1--Definition of Sales Constituency
The current order provision which defines the term ``sales
constituency'' should be amended in order to clarify the intent of the
Board membership limitation regarding sales constituency membership or
affiliation.
The tart cherry marketing order, which became effective in 1996,
covers tart cherries grown in Michigan, New York, Pennsylvania, Oregon,
Utah, Washington and Wisconsin. The record indicates that while the
order covers tart cherries grown in seven States, production is not
evenly distributed among those States. To illustrate, the 1998-99 tart
cherry crop was about 340 million pounds. Michigan accounted for 76.4
percent of the production, followed by Utah with 9.6 percent, Wisconsin
with 4.3 percent, Washington with 4.0 percent, New York with 3.9
percent,
[[Page 673]]
Pennsylvania with 1.2 percent, and Oregon with 0.6 percent.
The record evidence is that there are about 41 tart cherry handlers
covered by the program and about 896 growers in the production area. By
State, about 72.5 percent of the growers are in Michigan, 9.9 percent
in New York, 5.3 percent in Utah, 4.5 percent in Wisconsin, 3.6 percent
in Pennsylvania, 2.5 percent in Oregon, and 1.7 percent in Washington.
The program is administered locally by the 18-member Cherry
Industry Administrative Board. Among the Board's responsibilities is
recommending regulations to implement marketing order authorities. For
purposes of Board representation (among other things), the production
area is divided into nine districts. Each district is allocated one to
four Board members. For those districts with more than one member, only
one of those members can be associated with a single ``sales
constituency.'' Five of the nine current districts, including all
districts subject to volume regulation, are allocated more than one
member. Those five districts are Northern Michigan (four members),
Central Michigan (three members), Southern Michigan (two members), New
York (two members), and Utah (two members). The four districts with one
member each are Oregon, Pennsylvania, Washington and Wisconsin. (The
eighteenth Board member is selected to represent the general public,
and need not be from any specific area.)
The term ``sales constituency'' is currently defined in Sec. 930.16
of the order to mean a common marketing organization or brokerage firm
or individual representing a group of handlers or growers. Section
930.20(f) states that not more than one Board member may be from, or
affiliated with, a single sales constituency in those districts having
more than one seat on the Board. Record evidence shows that this
limitation was designed to prevent any single sales organization from
having undue control of Board decision making. Actual control of the
sales function was cited as the defining characteristic of a ``sales
constituency.''
The record further indicates that this limitation was designed to
prevent the recurrence of a problem that existed under a previous
Federal tart cherry marketing order that was in effect from 1971
through 1987. Under the terms of that program, persons affiliated with
a single sales organization could fill a majority of Board member
seats. This could occur even if that organization accounted for less
than a majority of the total volume of tart cherries produced. Under
the terms of the previous order, actions of the Board only required a
simple majority vote. This meant that representatives from a single
sales organization could pass Board actions without the support of
other industry members. Several witnesses testified that the current
order requirement that any action be approved by 12 of 18 Board members
makes the sales constituency limitation far less critical than it was
in the past.
The record shows that the tart cherry industry is comprised of many
different types of organizations with varying functions. At one end of
the spectrum is a group like Cherry Central, Inc. (Cherry Central). The
record indicates that Cherry Central is a federated cooperative with 14
grower cooperative members. Twelve of those cooperatives grow tart
cherries. Other commodities marketed by Cherry Central include sweet
cherries, blueberries and apples. Cherry Central members grow fruit in
Michigan, New York, Utah, Washington, and Wisconsin, as well as in
Florida, Georgia and Indiana.
The record indicates that Cherry Central's purpose is to market and
sell its members' tart cherries and other products. It acts as the sole
sales agent for its members, performing a broad range of sales
activities from advertising to quality control. It employs its own
sales force that is responsible for soliciting customers, dealing with
buyers and negotiating sales. It acts as a single entity in the
marketplace, not differentiating among its members' products.
The record indicates that the sales constituency limitation was
clearly intended to apply to this type of organization. That was the
intent at the time the current order was promulgated when Cherry
Central was identified as the type of organization whose Board
membership should be limited. No witness offered testimony indicating
that such limitation is no longer necessary.
At the other end of the spectrum is an organization known as the
Cherry Marketing Institute (CMI). CMI is an organization established
under Michigan State law, and its members grow tart cherries in a
number of States. CMI's primary function is to conduct generic
promotion activities to expand overall sales of tart cherry products.
It also conducts research in the areas of processing techniques and
product development. CMI activities are funded primarily with tart
cherry grower dollars. CMI is not directly involved in the sales of
tart cherries.
The record indicates that CMI efforts benefit all tart cherry
growers and processors, not only those who contribute to its
operations. At the time the order was promulgated, it was specifically
stated that the sales constituency limitation should not apply to CMI.
No evidence contrary to this view was presented in the current
proceeding.
Another example of an organization that would not constitute a
sales constituency under the current order definition is the Michigan
Agricultural Cooperative Marketing Association (MACMA). The record
indicates that MACMA is another grower organization formed to act on
the behalf of tart cherry growers generally. At one time, MACMA was
involved in negotiating grower prices, but it no longer performs that
function. MACMA's current functions are to collect and disseminate
market information to assist growers in making informed decisions.
Again, the record contains no evidence which would suggest that MACMA's
status under the order should be reconsidered.
Between the two ends of the spectrum is a recently formed federated
cooperative named CherrCo, Inc. (CherrCo). The record indicates that
this organization was not in existence at the time the order became
effective, although preliminary discussions concerning its formation
may have been underway. The record contains varying viewpoints as to
whether CherrCo should be considered as a single sales constituency for
purposes of Board membership under the current order provisions.
The record shows that CherrCo is a federated grower cooperative. It
is comprised of 24 member cooperatives. CherrCo's members account for
75-80 percent of Michigan's tart cherry production, and a significant
portion of the production in New York, Utah, Washington and Wisconsin.
CherrCo currently has no members in Oregon or Pennsylvania. The record
indicates that CherrCo members range in size producing from
approximately 600,000 pounds of tart cherries per year to more than 50
million pounds of tart cherries per year.
The primary function of CherrCo is to establish minimum prices for
tart cherries. Minimum prices are established for various grades and
packs of frozen and hot pack tart cherries, but not for pie fill, dried
cherries, or other products. All CherrCo's members agree to sell their
frozen and hot pack tart cherry products at or above these minimum
prices.
Record evidence further indicates that CherrCo is not directly
involved in the actual sales of its members' products. Instead, each
member individually selects a sales agent. These agents then
[[Page 674]]
work to generate and consummate sales for the individual CherrCo
member, not for CherrCo itself. No cherries are sold under the CherrCo
name, but rather under that of the CherrCo member or the sales agent.
CherrCo members are free to change their sales agents whenever they so
choose.
According to record evidence, competition among CherrCo members is
strong, unlike that of members of other organizations such as Cherry
Central. Cherry Central, for example, works as a single unit to sell
the products of its members, and there is no competition among its
members to secure sales. CherrCo members, on the other hand, compete
with each other, as well as with non-CherrCo members to secure sales of
their products. The record evidence is that while CherrCo members'
sales agents agree to meet the minimum prices established by CherrCo,
there are many other ways that individual companies compete to obtain
sales (that is, other than on the basis of price). These include, for
example, the product mix offered by individual companies. Testimony
indicates that while some CherrCo members offer an extensive mix of
tart cherry and other products, others specialize in a single product
(for example, frozen tart cherries). Other ways individual companies
that belong to CherrCo differentiate themselves are on their own
reputations, on the quality of the products they offer, on any special
services they supply to their customers, and on whether or not their
processing plants are certified to conform with certain sanitation
standards.
The record shows that CherrCo does not perform functions other
sales organizations may. CherrCo does not make any processing or sales
decisions. It does not direct how much its members should produce, what
products they should produce, or for whom. Sales information is treated
as proprietary and is not shared with CherrCo's membership. Information
such as who is selling to whom and at what price is kept confidential.
Witnesses testified that this is unlike the way Cherry Central
operates. In that organization, members share information on customers
and quantities sold.
The record also shows that, in addition to establishing minimum
prices, CherrCo performs other functions for its members. Most of these
functions relate directly to ensuring that its members are complying
with their agreement to abide by the established minimum prices. The
record shows, for example, that CherrCo licenses its sales agents. All
CherrCo members agree to sell only through these licensed sales agents.
In order to become licensed, the sales agents agree to conform to
CherrCo's pricing structure. The record indicates that CherrCo
currently has 10 licensed sales agents, all of which also agree to only
market CherrCo members' products.
CherrCo performs other functions as well, such as collecting
proceeds from sales and distributing them to its members. The record
indicates that subsequent to processing by a CherrCo member, tart
cherries are sent to a storage facility (for example, a freezer). At
that time, the cherries are consigned to CherrCo. On paper, the
cherries belong to CherrCo, although they are not physically in
CherrCo's possession. CherrCo is then informed of any sale by the
member's sales agent and, if the minimum pricing requirements are met,
the cherries are released by CherrCo for movement. CherrCo then bills
the buyer, collects the proceeds, and remits those proceeds to the
pertinent member after subtracting an administrative charge to cover
its expenses.
It was testified that CherrCo employs a staff of four individuals,
including its President. None of these individuals are engaged in
negotiating sales with current or prospective buyers on behalf of
CherrCo members. One employee is responsible for billing, and
disbursing sales receipts. Another monitors sales agreements between
licensed sales agents and buyers, and releases tart cherries for
movement if those agreements conform with CherrCo's minimum pricing
requirements. A third employee tracks the inventory consigned to
CherrCo. The President oversees the day-to-day operations of the
organization and is responsible for member relations. Again, none of
these employees is actively engaged in arranging for the sale of tart
cherry products.
The Board's recommended amendment would revise the current
definition of ``sales constituency'' to specifically exclude an
organization which receives consignments of tart cherries but does not
direct where those cherries are sold. This exclusion would mean that
entities which perform functions and services such as CherrCo would not
be considered sales constituencies, and their representation on the
Board would not be subject to the limitation in Sec. 930.20(f) of the
order.
Witnesses supporting the Board's proposal agreed with the
proponents' intent at the time of the order's promulgation that control
of sales should be the criteria for determining whether an organization
is considered a sales constituency. They also testified that CherrCo is
more akin to CMI than to Cherry Central because its activities benefit
everyone in the tart cherry industry, not just its members. There was
testimony to the effect that limiting representation on the Board by
CherrCo members could disenfranchise many tart cherry growers. That is,
many growers would be deprived of adequate representation on the Board.
This is because such a high percentage of growers are affiliated with
CherrCo. The record indicates this would be particularly true in
certain districts. Several witnesses stated that in District 2--Central
Michigan--almost all tart cherry growers and handlers are affiliated
with CherrCo. Since District 2 has three positions on the Board, this
could result in two vacant seats in a district that produces over 17
percent of the tart cherry crop. A similar situation could exist in
Northern Michigan (District 1), the largest growing area with four
Board positions. Witnesses estimated that growers and handlers
accounting for between 70 and 80 percent of that area's cherries are
affiliated with CherrCo. Limiting those growers and handlers to only
one of the District's four seats may make it more difficult to fill the
remaining positions. The proponents indicated that even if qualified
candidates could be found to serve in those Board positions, it would
not provide equitable representation for the majority of growers in
that district.
Industry witnesses supporting the Board's proposed amendment were
all affiliated with CherrCo in some way. Three witnesses not affiliated
with CherrCo presented opposition testimony. One, a grower/processor in
Oregon, suggested that the current Board is improperly constituted.
This witness believed that CherrCo is indeed a sales constituency as
currently defined under the order. He was opposed to any single
interest group being able to control the Board, and believed the
Board's proposal would allow just that.
The witness suggested two alternatives. One was to prohibit any
sales constituency from having more than half the seats on the Board.
The other would prohibit any industry group (rather than just a sales
constituency) from having more than one seat per district. His stated
objective was to provide the Department with additional methods of
allocating Board membership in ways that would ensure that the
interests of small, remote, independent growers are protected. In the
brief filed by this witness, he recommended that the Board's proposed
amendment be rejected, and that this issue be referred back to the
Board for reconsideration.
[[Page 675]]
A tart cherry grower/handler from Washington had similar concerns
about CherrCo being able to control Board decisions. He suggested that
the current sales constituency limitation be applied to industry groups
like CherrCo. He also proposed that an additional requirement be added
to the order to provide that no sales constituency could have more than
a total of eight members on the Board. In his brief, he further
proposed that limitations on Board membership should apply to all
industry organizations, not only to sales constituencies.
The third witness offering evidence in opposition to the Board's
proposal was a tart cherry grower and handler in Utah. He agreed with
the statements made earlier in this decision that Cherry Central is an
industry group whose membership on the Board should be limited, whereas
CMI is not. He disagreed, however, with the proponents' classification
of CherrCo. His testimony was that CherrCo does perform important sales
functions for its members such as minimum pricing and billing,
collecting and disbursing sales receipts. CherrCo's members have common
economic and proprietary interests. As such, the marketing order needs
to have some provisions to ensure that industry members outside that
organization have a voice in Board deliberations.
This witness suggested that one or more ``at-large'' industry
member positions be added to the Board. These members could be from any
district in the production area. This proposal would provide growers in
districts heavily dominated by CherrCo with an alternative--that is, to
vote for representatives other than those supported by CherrCo
affiliates.
There are many different ways the Board's membership could be
allocated. There are some fundamental issues, however, that the
alternative proposals offered on the record fail to address.
The record shows that there are varying interests among tart cherry
growers and handlers, dependent in large part on the district in which
they are located. One critical difference, of course, is that some of
the districts are subject to volume regulation while others are not.
Other differences among districts include varying growing and marketing
conditions. It is the Department's view that any scheme for Board
membership allocation must ensure that growers in each production
district have fair representation in program matters. As previously
discussed, restrictions on CherrCo's membership on the Board would
impact different growing areas differently. For example, growers in
some of the highest volume producing areas could be prevented from
having adequate representation on the Board. None of the alternatives
proposed adequately address this concern.
Based on record evidence, the Department has determined that the
differences between the functions of an organization such as CherrCo
and other organizations that qualify as sales constituencies under the
current order definition of that term are such that these organizations
should not be considered to be ``sales constituencies'' for the purpose
of the order limitation concerning Board membership.
CherrCo members do not act as a single interest group. Rather, the
interests of individual members are sufficiently diverse to preclude
the need to limit their representation on the Board. Adequate
safeguards exist for ensuring the fair consideration of all industry
segments in implementing the program. These include the geographic
allocation of membership, the super-majority voting requirement for
Board actions, the public rulemaking process followed to implement any
regulatory actions, and the Department's role in overseeing operation
of the program.
For these reasons, the Department is recommending adoption of the
Board's proposed amendment to Sec. 930.16 Sales Constituency. This
section would be amended by adding the following sentence: ``An
organization which receives consignments of cherries and does not
direct where the consigned cherries are sold is not a sales
constituency.''
Material Issue Number 2--Revision of Optimum Supply Formula
The tart cherry marketing order should be amended to simplify the
procedures followed to establish volume regulations.
A principal feature of the tart cherry marketing order is supply
management through the use of volume regulations. The order provides
that production area districts with annual production of less than 15
million pounds of cherries are not subject to volume regulation. Under
this provision, volume regulations have not applied to cherries grown
in Oregon, Pennsylvania, Washington and Wisconsin.
Volume regulations are implemented through the establishment of
free and restricted percentages, that are recommended by the Board and
implemented by the Department through the public rulemaking process.
These percentages are then applied to each regulated handler's
acquisitions in a given season. ``Free market tonnage percentage''
cherries may be marketed in any outlet. ``Restricted percentage''
cherries must be withheld from normal commercial outlets. This can be
accomplished by either placing the cherries into handlers' inventories
or by diverting them. Cherries may be diverted in the orchard or at the
processing plant; placed into a reserve pool; or sold in secondary
markets. These secondary markets include exports (except to North
America or Japan), and new products. Sales of restricted percentage
cherries to these specified exempt markets receive diversion credits
which handlers use to fulfill their restricted obligation.
The record indicates that the primary objective of tart cherry
volume regulations is to balance supplies with market demand, thereby
stabilizing the market and improving grower and processor returns. A
second objective is to encourage market growth by allowing restricted
percentage cherries to be sold in secondary markets (for example, most
export markets). Witnesses attributed much of the improvement in recent
cherry market conditions to the use of volume regulations in the 1997/
98 and 1998/99 seasons.
The order currently sets forth an ``Optimum Supply Formula'' (OSF)
which the Board must follow in its consideration of annual free and
restricted percentages. First, the Board considers the available supply
of tart cherries. This is the sum of the annual crop estimate and the
carry-in supply from previous crop years. The Board next computes the
optimum supply and compares it with the available supply. If the
available supply exceeds the optimum supply, then a surplus exists,
calling for the use of supply controls. The calculated surplus is then
divided by the projected production in the regulated districts to
derive the restricted percentage.
The optimum supply is currently defined as 100 percent of the
average sales of the prior 3 years, to which is added a desirable
carryout inventory not to exceed 20 million pounds (or such other
amount as the Board, with the Secretary's approval, may establish).
According to the record, using 100 percent of prior years' sales may
result in an overstatement of the optimum supply. This is because those
total sales include not only sales to the primary market, but sales of
restricted percentage cherries to secondary markets as well. Currently,
all sales of restricted percentage cherries that receive diversion
credits are included in the total sales figure.
The record shows that including the sales of restricted percentage
cherries in
[[Page 676]]
the optimum supply may understate the projected surplus which would
then result in a higher free percentage than supply and market
conditions warrant. Making too many tart cherries available to be sold
in the primary market could obviate the objectives of supply
management. In the years that tart cherry volume regulations have been
used, this issue has been addressed through use of an adjustment in
order to achieve an optimum supply of cherries in the marketplace. Once
a surplus has been computed (deducting the optimum from the available
supply), sales of restricted percentage cherries to secondary markets
are added back to the surplus as an economic adjustment. The Board's
recommended amendment would revise the order procedures currently used
in calculating the optimum supply. Under its proposal, the optimum
supply would be equal to the 3-year average sales in primary markets
(total sales less sales to markets eligible for diversion credit) plus
the target carryout. It is intended that all sales of restricted
percentage cherries that receive diversion credits would be deducted
from the optimum supply calculation, except as discussed later in this
decision.
The record indicates that this change would simplify current
procedures and make them easier for tart cherry growers and processors
to understand. This would benefit the industry without changing the
actual level of regulation.
The following example was presented at the hearing to illustrate
the change being proposed. The example uses numbers from the 1997 tart
cherry crop. With the exception of the regulated percentages, all
numbers are in million pound units.
------------------------------------------------------------------------
With With
current proposed
approach approach
------------------------------------------------------------------------
U.S. Crop Size................................ 285 285
Carryin....................................... +70 +70
-------------------------
Total Available Supply........................ 355 355
=========================
Optimum Supply Formula
3 Year Average Industry Sales............... 270 270
Adjustment for Diversion Credits............ ........... -23
Target Carryout............................. +0 +0
Optimum Supply.............................. 270 247
Surplus..................................... 85 108
Adjustment for Economic Conditions.......... 23 ...........
Surplus after Adjustment.................... 108 108
Production in Regulated Districts........... 240 240
Regulated Percentage........................ 45% 45%
------------------------------------------------------------------------
While no evidence was received at the hearing in overall objection
to this change, one portion of the proposal did generate some
disagreement. The Board's proposed amendment stated that the optimum
supply volume shall be calculated as ``100 percent of the average sales
of the prior three years, reduced by the sales that represent
dispositions of restricted cherries qualifying for diversion credit,
unless the Board votes to do otherwise * * *'' This last phrase,
``unless the Board votes to do otherwise,'' was objectionable to some
witnesses.
Evidence shows that this phrase is intended to allow the Board a
limited amount of flexibility in recommending free and restricted
percentages appropriate for a specific season. The record shows that
this provision is intended only to enable the Board to revise the
volume of restricted sales it subtracts from total sales in determining
the optimum supply, and only if economic and other conditions warrant
such a revision. This provision would not allow a wholesale change in
the way free and restricted percentages are calculated.
Record evidence indicates that in most years, the Board would be
required to use the optimum supply formula set forth in the order (that
is, 100 percent of average sales reduced by sales of restricted
percentage cherries). Witnesses provided several examples of situations
where a revision in the volume subtracted from total sales might be
needed.
One example given was that of a freeze in another producing
country. Under such a circumstance, reduced supplies from a foreign
source would provide additional marketing opportunities for the U.S.
tart cherry industry. An increased optimum supply (by reducing the
amount of sales of restricted percentage cherries from total sales)
would enable the industry to take advantage of these opportunities.
A second example involved export sales. As previously described,
sales of restricted percentage cherries in certain secondary (or
exempt) markets qualify for diversion credits. Those secondary, exempt
markets are defined through the informal rulemaking process and can
change over time. If those exempt markets are redefined, an adjustment
in the optimum supply would be needed to reflect that change. For
example, sales of restricted percentage cherries to export markets
(except North America and Japan) currently qualify for diversion
credits. If exports were no longer considered a secondary, exempt
market, but part of the primary market, subtracting past years' export
sales from total sales would result in an optimum supply that would
allow too few cherries available for the newly defined primary market.
In this situation, sales of restricted percentage cherries to export
markets would not be subtracted from total sales. On the other hand, if
a new market were designated as a secondary, exempt market, sales to
that new market in previous years might need to be subtracted from
total sales in those years. Otherwise, the optimum supply could allow
too many cherries to enter the primary market.
The record supports allowing the Board some discretion in
determining the amount of sales of restricted percentage cherries it
subtracts from total sales to derive the optimum supply. As shown in
the examples above, that amount could be greater or less than actual
sales of restricted cherries in the defined previous period (three
years).
Witnesses objecting to the Board's proposed amendment believed that
this phrase would give the Board too much discretion in establishing
volume regulations. For example, they believed that the Board could
choose to use an equation to compute free and restricted percentages
that was totally different from that contained in the order.
Additionally, it was believed that the Board could use a different
procedure in establishing its preliminary percentages (done on or about
July 1) than in establishing its final percentages (done by September
15, adjusted for actual production). It was testified that significant
changes in procedures from one season to another, and particularly
within a single season, would be extremely disadvantageous to growers
and processors. This is because industry members make decisions based
on their expectations of what program requirements will be. Constantly
changing these requirements would therefore create chaos rather than
stability in the tart cherry industry.
Based on record testimony, it is clear that this provision is
intended to provide only limited discretion to the Board. The Board
should, with adequate
[[Page 677]]
justification and the Secretary's approval, have the discretion to
adjust the volume of sales of restricted percentage cherries it
subtracts from total sales to derive its annual optimum supply, if such
an adjustment is needed to promote orderly marketing conditions.
Barring an emergency, a major change in economic conditions, or other
like circumstances, the amount subtracted cannot later be changed
within a given season, except as may be necessary to replace any
estimates of sales used at the time preliminary percentages are
recommended with actual figures known at the time final percentages are
established.
Further, the fact that any such adjustment would require the vote
of 12 of the 18 Board members and that such an adjustment would require
the Secretary's approval through the public rulemaking process should
serve as sufficient safeguards to ensure the judicious use of this
discretion.
The proposed amendment to Sec. 930.50(a) of the order which
appeared in the notice of hearing has been changed by the Department to
clarify (for the reasons discussed above) that the discretion provided
by this phrase only pertains to the volume of sales of restricted
percentage cherries that is subtracted from total sales to derive the
optimum supply.
In addition, witnesses proposed one clarifying change in the
language contained in the notice of hearing. As previously indicated,
the optimum supply volume is calculated as 100 percent of the average
sales of the prior three years. The Board's amendment, as set forth in
the notice of hearing, proposed that this total be reduced by sales of
restricted cherries qualifying for diversion credit. However, no time
period was specified for the sales of restricted cherries that were to
be subtracted from the total sales. The record indicates that the same
3-year average should be used for both total sales and the sales of
restricted cherries qualifying for diversion credits. Such language has
been added to Sec. 930.50(a) to clarify this point.
One other change is being made in the language in Sec. 930.50(a) by
the Department. The language in the notice of hearing referred to sales
of ``restricted cherries.'' This phrase has been changed to
``restricted percentage cherries'' since that phrase is defined in
Sec. 930.15 of the order and is a more accurate phrase to use.
For the above reasons, the Department is recommending that
Sec. 930.50(a) be amended to provide that sales of restricted
percentage cherries qualifying for diversion credits be subtracted from
total industry sales in deriving the optimum supply of tart cherries.
The Agricultural Marketing Service proposed to make such changes as
may be necessary to the order to conform with any amendment that may
result from the hearing. No necessary conforming changes have been
identified by the Department.
Small Business Considerations
Pursuant to the requirements set forth in the Regulatory
Flexibility Act (RFA), the AMS has considered the economic impact of
this action on small entities. Accordingly, the AMS has prepared this
initial regulatory flexibility analysis.
The purpose of the RFA is to fit regulatory actions to the scale of
business subject to such actions so that small businesses will not be
unduly or disproportionately burdened. Small agricultural producers
have been defined by the Small Business Administration (SBA) (13 CFR
121.601) as those having annual receipts of less than $500,000. Small
agricultural service firms, which include handlers regulated under the
order, are defined as those with annual receipts of less than
$5,000,000.
Interested persons were invited to present evidence at the hearing
on the probable regulatory and informational impact of the proposed
amendments on small businesses. The record indicates that growers and
handlers would not be burdened by any additional regulatory
requirements, including those pertaining to reporting and
recordkeeping, as a result of these proposed amendments.
The record indicates that during the 1998-99 crop year,
approximately 41 handlers were regulated under Marketing Order No. 930.
In addition, there were about 896 producers of tart cherries in the
production area. Marketing orders and amendments thereto are unique in
that they are normally brought about through group action of
essentially small entities for their own benefit. Thus, both the RFA
and the Act are compatible with respect to small entities.
The 1998-99 tart cherry crop was about 340 million pounds. The
record indicates that of the 41 tart cherry handlers, 12 had processed
tonnage of more than 10 million pounds (or 29 percent of all handlers);
4 had between 5 and 10 million pounds (10 percent); 15 had between 1
and 5 million pounds (37 percent); and the remaining 10 had less than 1
million pounds of processed tonnage (24 percent). Handlers accounting
for 10 million pounds or more would be classified as large businesses.
Thus, a majority of tart cherry handlers could be classified as small
entities. The majority of tart cherry processors are located in
Michigan. Many handle cherries grown in more than one district.
Michigan accounted for 76.4 percent of the production, followed by Utah
with 9.6 percent, Wisconsin with 4.3 percent, Washington with 4.0
percent, New York with 3.9 percent, Pennsylvania with 1.2 percent, and
Oregon with 0.6 percent. By State, about 72.5 percent of the growers
are in Michigan, 9.9 percent in New York, 5.3 percent in Utah, 4.5
percent in Wisconsin, 3.6 percent in Pennsylvania, 2.5 percent in
Oregon, and 1.7 percent in Washington.
Dividing total production by the number of growers, the average
grower produces about 380,000 pounds of cherries annually. With grower
returns of about 20 cents per pound, average revenues would be $76,000.
Thus, it is reasonable to conclude that most tart cherry growers are
small entities.
At 20 cents per pound, a grower would have to produce 2.5 million
pounds of cherries to reach the $500,000 receipt threshold to qualify
as a large producing entity under the SBA's definition. No record
evidence was provided to indicate how many tart cherry growers produce
2.5 million pounds or more. One witness testified, however, that an
estimated 150 growers (about 17 percent of the total number of growers)
produce in excess of 1 million pounds, with the remainder producing
less than that. With a majority of growers producing less than 1
million pounds, it follows that a majority of growers produce less than
2.5 million pounds. This supports the conclusion that the majority of
tart cherry growers are small businesses. By State, however, average
grower size varies considerably. The average grower in Washington
accounts for roughly 910,000 pounds of cherries. Next in size is Utah
with 680,000 pounds, followed by Michigan (400,000 pounds), Wisconsin
(370,000 pounds), New York (150,000 pounds) Pennsylvania (130,000
pounds), and Oregon (100,000 pounds).
This decision recommends two amendments to the tart cherry
marketing order. One would clarify the current limitation on the number
of Board members that may represent a single ``sales constituency.''
The second would simplify the method used to establish volume
regulations for tart cherries.
Definition of Sales Constituency
Section 930.20 of the tart cherry marketing order provides for an
18-member Cherry Industry Administrative Board to assist the Department
in
[[Page 678]]
administering the program. That section also divides the production
area into nine districts for purposes of representation on the Board
and allocates membership among those districts. Five of the nine
current districts, including all districts subject to volume
regulation, are allocated more than one member. Those five districts
are Northern Michigan (four members), Central Michigan (three members),
Southern Michigan (two members), New York (two members), and Utah (two
members). The four districts with one member each are Oregon,
Pennsylvania, Washington and Wisconsin. (The eighteenth Board member is
selected to represent the general public, and need not be from any
specific area.)
Section 930.20 further provides that for those districts allocated
more than one member, only one of those members can be affiliated with
a single sales constituency. Section 930.16 currently defines a sales
constituency to mean a common marketing organization or brokerage firm
or individual representing a group of handlers or growers.
The proposed amendment to Sec. 930.16 would provide that an
organization that receives consignments of cherries but does not direct
where those cherries are sold would not be considered a sales
constituency. The growers and handlers affiliated with such an
organization would not be limited in their representation on the Board.
The record shows that one of the Board's primary responsibilities
is to recommend regulations to implement the marketing order's
authorities relating to supply management, or volume regulation. Volume
regulations benefit all industry members, both large and small, by
matching demand in primary markets with available supplies of tart
cherries. These regulations also serve to expand sales in secondary
markets. The result is improved grower and processor returns.
The record shows that approximately 11 of the current 18 members of
the Board are affiliated in some way with CherrCo, the organization
which raised the question of the intended meaning of the term sales
constituency. Applying the current order limitation on the number of
members representing a single sales constituency to CherrCo would
result in five of the current Board members being declared ineligible
to serve on the Board. All of these members represent regulated
districts--four in Michigan and one in New York.
The record shows that CherrCo is a federated grower cooperative. It
is comprised of 24 member cooperatives. CherrCo's members account for
75-80 percent of Michigan's tart cherry production, and a significant
portion of the production in New York, Utah, Washington and Wisconsin.
CherrCo currently has no members in Oregon or Pennsylvania. The record
indicates that the primary function of CherrCo is to establish minimum
prices for certain tart cherry products. The record indicates that
CherrCo is not directly involved in the actual sales of its members'
products. There is intense competition among its members (as well as
between its members and non-members) to sell tart cherries. The
competition for sales is on the basis of individual handlers'
reputations, on the quality and mix of the products they offer, on any
special services they supply to their customers, and on whether or not
their processing plants are certified to conform with certain
sanitation standards.
Opponents of the Board's proposal believe that not limiting
CherrCo's representation would result in the elimination of certain
safeguards incorporated in the order to preserve the varying interests
of tart cherry growers and processors, especially those outside the
major producing area of Michigan. These safeguards include the
requirement that Board actions be passed by a super-majority (12 of 18
members), that Board representation be allocated among districts, and
that districts accounting for less than 15 million pounds of production
be exempt from volume regulations.
None of these program requirements could be changed by Board action
alone. All would require an order amendment through the formal
rulemaking process, including public hearings and the Department's
analysis of impacts of costs and benefits to small and large growers
and processors. Additionally, record evidence shows that individual
CherrCo members have sufficiently diverse interests to preclude them
from voting alike on all issues before the Board.
Based on the evidence in the record, it is the Department's
conclusion that an organization such as CherrCo should not be
considered a sales constituency. Limiting Board representation by
members of organizations such as CherrCo would be inconsistent with the
proper functioning of the order and would be contrary to the original
intent of the limitation on Board representation. This proposed
amendment should be favorable to both large and small entities.
Revision of the Optimum Supply Formula
A principal feature of the tart cherry marketing order is supply
management through the use of volume regulations. Authority for such
regulations appears in Sec. 930.51 of the marketing order.
Volume regulations are implemented through the establishment of
free and restricted percentages. Such percentages are recommended by
the Board in accordance with Sec. 930.50 of the order, and, if deemed
appropriate, implemented by the Department through the public
rulemaking process. These percentages are then applied to each
regulated handler's acquisitions in a given season. ``Free market
tonnage percentage'' cherries may be marketed in any outlet.
``Restricted percentage'' cherries must be withheld from the primary
market. They may be diverted in the orchard or at the processing plant;
placed into a reserve pool; or sold in secondary markets. These
secondary markets include exports (except to North America or Japan),
and new products. Sales of restricted percentage cherries to these
specified exempt markets receive diversion credits which handlers use
to fulfill their restricted obligation.
The record indicates that the primary objective of tart cherry
volume regulations is to balance supplies with market demand, thereby
stabilizing the market and improving grower and processor returns. A
second objective is to encourage market growth by allowing restricted
cherries to be sold in secondary markets (for example, most export
markets). Witnesses attributed much of the improvement in recent cherry
market conditions to the use of regulation in the 1997/98 and 1998/99
seasons.
The order currently sets forth, in Sec. 930.50, an ``Optimum Supply
Formula'' (OSF) which the Board must follow in its consideration of
annual free and restricted percentages. The optimum supply is currently
defined as 100 percent of the average sales of the prior 3 years, to
which is added a desirable carryout inventory.
The record indicates that using 100 percent of prior years' sales
results in an overstatement of the optimum supply. The record shows
that including the sales of restricted cherries in the optimum supply
understates the projected surplus and results in a higher free
percentage than supply and market conditions warrant. This is because
those total sales include not only sales to the primary market, but to
secondary markets as well.
[[Page 679]]
In the years that tart cherry volume regulations have been used,
this issue has been addressed through use of an adjustment in order to
achieve an optimum supply of cherries in the marketplace. Once a
surplus has been computed (deducting the optimum from the available
supply), the sales to secondary markets are added back to the surplus
as an economic adjustment. The Board's recommended amendment would
revise the procedures currently used in calculating the optimum supply.
Under its proposal, the optimum supply would be equal to the 3-year
average sales in primary markets (total sales less sales to markets
eligible for diversion credit) plus the target carryout. This would
simplify the method of arriving at an optimum supply figure and would
be easier for tart cherry growers and processors to understand.
Therefore, any regulatory impact on growers or handlers would be
minimal or non-existent.
The record evidence supports the conclusion that this amendment
would result in no extra costs to growers or processors in that any
resulting level of volume regulation would be similar to what is
currently in effect and its economic effect on the industry would be
similarly analyzed in each instance. It would benefit industry members
both large and small, however, because the process relating to the
establishment of volume regulations would be less confusing and more
readily understood by industry members. This process is used by growers
and handlers in making seasonal decisions (including those relating to
harvesting cherries). To the extent that this process is more readily
understood, all in the industry should benefit.
The collection of information under the marketing order would not
be affected by these amendments to the marketing order. Current
information collection requirements for Part 930 are approved by OMB
under OMB number 0581-0177.
As with all Federal marketing order programs, reports and forms are
periodically reviewed to reduce information requirements and
duplication by industry and public sector agencies.
The Department has not identified any relevant Federal rules that
duplicate, overlap or conflict with this proposed rule. These
amendments are designed to enhance the administration and functioning
of the marketing order to the benefit of the industry.
Board meetings regarding these proposals as well as the hearing
dates were widely publicized throughout the tart cherry industry, and
all interested persons were invited to attend the meetings and the
hearing and participate in Board deliberations on all issues. All Board
meetings and the hearing were public forums and all entities, both
large and small, were able to express views on these issues. Finally,
interested persons are invited to submit information on the regulatory
and informational impacts of this action on small businesses.
A 30-day comment period is provided to allow interested persons to
respond to this proposal. Thirty days is deemed appropriate so that
this rulemaking may be completed prior to the upcoming season. All
written exceptions timely received will be considered and a grower
referendum will be conducted before these proposals are implemented.
Civil Justice Reform
The amendments proposed herein have been reviewed under Executive
Order 12988, Civil Justice Reform. They are not intended to have
retroactive effect. If adopted, the proposed amendments would not
preempt any State or local laws, regulations, or policies, unless they
present an irreconcilable conflict with the amendments.
The Act provides that administrative proceedings must be exhausted
before parties may file suit in court. Under section 608c(15)(A) of the
Act, any handler subject to an order may file with the Secretary a
petition stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with law and request a modification of the order or to be exempted
therefrom. A handler is afforded the opportunity for a hearing on the
petition. After the hearing the Secretary would rule on the petition.
The Act provides that the district court of the United States in any
district in which the handler is an inhabitant, or has his or her
principal place of business, has jurisdiction to review the Secretary's
ruling on the petition, provided an action is filed not later than 20
days after date of the entry of the ruling.
Rulings on Briefs of Interested Persons
Briefs, proposed findings and conclusions, and the evidence in the
record were considered in making the findings and conclusions set forth
in this recommended decision. To the extent that the suggested findings
and conclusions filed by interested persons are inconsistent with the
findings and conclusions of this recommended decision, the requests to
make such findings or to reach such conclusions are denied.
General Findings
The findings hereinafter set forth are supplementary to the
findings and determinations which were previously made in connection
with the issuance of the marketing agreement and order; and all said
previous findings and determinations are hereby ratified and affirmed,
except insofar as such findings and determinations may be in conflict
with the findings and determinations set forth herein.
(1) The marketing agreement and order, as hereby proposed to be
amended, and all of the terms and conditions thereof, would tend to
effectuate the declared policy of the Act;
(2) The marketing agreement and order, as hereby proposed to be
amended, regulate the handling of tart cherries grown in the production
area in the same manner as, and are applicable only to, persons in the
respective classes of commercial and industrial activity specified in
the marketing agreement and order upon which a hearing has been held;
(3) The marketing agreement and order, as hereby proposed to be
amended, are limited in their application to the smallest regional
production area which is practicable, consistent with carrying out the
declared policy of the Act, and the issuance of several orders
applicable to subdivisions of the production area would not effectively
carry out the declared policy of the Act; and
(4) All handling of tart cherries grown in the production area as
defined in the marketing agreement and order, as hereby proposed to be
amended, is in the current of interstate or foreign commerce or
directly burdens, obstructs, or affects such commerce.
List of Subjects in 7 CFR Part 930
Marketing agreements, Reporting and recordkeeping requirements,
Tart cherries.
Recommended Amendment of the Marketing Agreement and Order
For the reasons set out in the preamble, 7 CFR part 930 is proposed
to be amended as follows:
PART 930--TART CHERRIES GROWN IN THE STATES OF MICHIGAN, NEW YORK,
PENNSYLVANIA, OREGON, UTAH, WASHINGTON AND WISCONSIN
1. The authority citation for 7 CFR part 930 continues to read as
follows:
Authority: 7 U.S.C. 601-674.
2. In part 930, Sec. 930.16 is revised to read as follows:
[[Page 680]]
Sec. 930.16 Sales Constituency.
Sales constituency means a common marketing organization or
brokerage firm or individual representing a group of handlers and
growers. An organization which receives consignments of cherries and
does not direct where the consigned cherries are sold is not a sales
constituency.
3. In Sec. 930.50, paragraph (a) is revised to read as follows:
Sec. 930.50 Marketing policy.
(a) Optimum supply. On or about July 1 of each crop year, the Board
shall hold a meeting to review sales data, inventory data, current crop
forecasts and market conditions in order to establish an optimum supply
level for the crop year. The optimum supply volume shall be calculated
as 100 percent of the average sales of the prior three years, reduced
by the average sales that represent dispositions of restricted
percentage cherries qualifying for diversion credit for the same three
years, unless the Board determines that it is necessary to recommend
otherwise with respect to sales of restricted percentage cherries, to
which shall be added a desirable carryout inventory not to exceed 20
million pounds or such other amount as the Board, with the approval of
the Secretary, may establish. This optimum supply volume shall be
announced by the Board in accordance with paragraph (h) of this
section.
* * * * *
Dated: December 29, 1999.
Kathleen A. Merrigan,
Administrator, Agricultural Marketing Service.
[FR Doc. 00-203 Filed 1-4-00; 8:45 am]
BILLING CODE 3410-02-P